Read the following popular argument in the U.S. political as well as economics circles. "Private saving goes either toward financing the budget deficit or financing investment. It does not take a genius to conclude that reducing the budget deficit leaves no more saving available for investment."
(a) Explain why this statement sounds correct based on the equilibrium condition in the goods market (in a closed economy): investment= private saving+ public saving. What are the policy implications of the statement?
(b) Explain and show why the statement is wrong based on IS-LM analysis. What are the policy implications?