Explain why increasing the government budget deficit can decrease ...

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Explain why increasing the government budget deficit can decrease investment spending.
 
  What will be an ideal response?

Question 2

Refer to Figure 4-4. What is the value of consumer surplus at a price of 18?
 
  A) 60 B) 120 C) 180 D) 240

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Answer to Question 1

Saving must equal investment in the economy; that is, S = I. Saving in the economy is equal to the sum of private saving plus public saving or
S = Sprivate + Spublic, and because saving must equal investment we get:
I = Sprivate + Spublic.
Interpreting this expression, the larger saving is in the economy, the larger investment. One way to increase saving is to increase public saving. Public saving is
Spublic = T - G - TR. The budget deficit is defined as the difference between taxes (T) and government spending plus transfers. When the expression for public saving is negative, the government is running a deficit. When this occurs, the total amount of saving in the economy falls. Since the total amount of saving in the economy equals investment, investment falls.

Answer to Question 2

A

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