In a closed economy,if Y and T remained the same,but G rose and C fell but by less than the rise in G,what would happen to private and national saving?
A)private and national saving would rise
B)private and national saving would fall
C)private saving would rise and national saving would fall
D)private saving would fall and national saving would rise

Question

Quizplus · Accepted Answer

In a closed economy, the saving identity can be written as:

(Y - T) = (C + S) + (G - T)

Where S represents private saving and (G - T) represents government saving (or dissaving, if government spending exceeds taxes).

If Y and T remain the same, but G rises and C falls, then:

(Y - T) > (C + S) + (G - T)

or

S < (Y - T) - C - (G - T)

Since (Y - T) and G are increasing while C is decreasing, the right-hand side of this inequality is also increasing. Therefore, S must decrease.

National saving is equal to S + (G - T), so it will also decrease in this scenario.

Therefore, the correct answer is C: private saving would rise and national saving would fall.

In a Closed Economy,if Y and T Remained the Same,but