Suppose the economy is described by the following simple model:
Y = C + G
C = a + b×Yd
Yd = (1 - t)×Y
a. Give an expression that relates private saving Sp to disposable income. This is called the saving function.
b. What is the relationship be between private saving and the government budget deficit? (Hint: refer back the the discussion in Chapter 2 concerning the relationship between saving and investment.)
c. Solve for the values of Sp and the budget deficit; that is, derive an expression for each that is a function only of the exogenous variable G and the constants in the model. Are your expressions consistent with your answer to Part b?