The economy of Delphinia is characterized by the following:
Private consumption spending: $400 billion
Government spending: $176 billion
Tax revenue: $206 billion
Transfers: $20 billion
Private Investment spending: $140 billion
Exports: $20 billion
Imports: $34 billion
a. Using the information above, calculate the following:
i. GDP
ii. Private savings
iii. Budget balance – indicate whether the government runs surplus or deficit
iv. National savings
v. Net capital inflow
vi. Derive the Savings–Investment Spending (SI) Identity for the economy of Delphinia.
b. Draw the Loanable Market Model (LMM) if the current interest rate is 3.5% and the equilibrium quantity of loanable funds is $140 billion. What is the relationship between the S-I identity and the LMM?
c. The government decided to invest $20 billion into several infrastructure projects.
i. Where can the government get the necessary $20 billion?
ii. Explain how this will affect the budget balance.
iii. Show this change on the LMM graph from b.
iv. Explain how this will impact the equilibrium interest rate and the private investment spending (what is the name of this effect?).