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Savings Equal Investment quiz

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  • What is the key macroeconomic identity relating household savings and firm investment?
    The key identity is that household savings equals investment by firms in the economy.
  • How is 'savings' defined in macroeconomics?
    Savings is the portion of current income not consumed by households.
  • What does 'investment' mean in the context of macroeconomics?
    Investment refers to resources devoted by firms to increase future output, such as factories and machinery.
  • What is the expenditure approach formula for calculating GDP?
    GDP (Y) is calculated as consumption (C) plus investment (I) plus government purchases (G) plus net exports (NX): Y = C + I + G + NX.
  • In a closed economy, what value does net exports (NX) take?
    In a closed economy, net exports (NX) are zero because there is no trade with other countries.
  • How do you solve for investment (I) in a closed economy using the GDP equation?
    Investment (I) equals GDP (Y) minus consumption (C) minus government purchases (G): I = Y - C - G.
  • What does the equation Y - C - G represent in a closed economy?
    Y - C - G represents national savings, which is the total income left after consumption and government purchases.
  • How is national savings related to investment in a closed economy?
    In a closed economy, national savings equals investment: National Savings = Investment.
  • How can national savings be broken down?
    National savings can be divided into private savings (by households) and public savings (by the government).
  • How do you calculate private savings?
    Private savings is calculated as income (Y) minus consumption (C) minus taxes (T): Private Savings = Y - C - T.
  • How do you calculate public savings?
    Public savings is the government's tax revenue minus its spending: Public Savings = T - G.
  • What does a government budget surplus indicate?
    A budget surplus means the government's tax revenue exceeds its spending, resulting in positive public savings.
  • What does a government budget deficit indicate?
    A budget deficit means the government spends more than it collects in taxes, resulting in negative public savings.
  • How does the savings-investment identity change in an open economy?
    In an open economy, investment equals national savings plus net capital inflow (from net exports): Investment = National Savings + Net Capital Inflow.
  • What happens when a country imports more than it exports?
    When imports exceed exports, the country experiences a net capital inflow, borrowing from abroad to finance domestic investment.