Question

Consider the following data for a closed​ economy: Y​ = ​$12 trillion C​ = ​$8 trillion G​ = ​$2 trillion Spublic​ = ​$negative 0.50 trillion T​ = ​$2 trillion Now suppose that government purchases increase from ​$2 trillion to ​$2.60 trillion but the values of Y and C are unchanged. What must happen to the values of S and​ I? A. S and I increase by ​$0.60 trillion. B. S and I drop by ​$0.60 trillion. C. S increases by ​$0.60 trillion and I drops by ​$0.60 trillion. D. S drops by ​$0.60 trillion and I increases by ​$0.60 trillion.

Answer 1

Answer:

B. S and I drop by ​$0.60 trillion.

Explanation:

We know that

Y = C + I + G

$12 trillion = $8 trillion + I + $2 trillion

$12 trillion = $10 trillion + I

So, I = $12 trillion - $10 trillion

       = $2 trillion

As the government purchases increase from $2 trillion to $2.60 trillion

and the rest of the things remain the same.  

So New I = $12 trillion - $8 trillion - $2.60 trillion

               =  $1.4 trillion

So, the difference would be equals to

= $2 trillion - $1.4 trillion

= $0.6 trillion

The $0.6 trillion reflect fall in the investment  

And the saving and the investment are equal to each other

Hence, the B option is the right answer