Saving–Investment equilibrium with government: Determine the condition on government expenditure. Context: Closed economy with government. Identity: (S − I) = (G − T) + (X − M). Full question: If an economy is in equilibrium where planned saving equals planned investment, what must be true of government expenditure? Choose the correct option.
General Knowledge
Indian Economy
Difficulty: Medium
Choose an option
-
AGovernment expenditure equals tax revenue (balanced budget)
-
BGovernment expenditure must be zero
-
CGovernment expenditure must exceed tax revenue (deficit)
-
DGovernment expenditure must be less than tax revenue (surplus)
Answer
Correct Answer: Government expenditure equals tax revenue (balanced budget)
Explanation
Given data
- Equilibrium condition: Planned saving S equals planned investment I.
- Macroeconomic identity (with government and external): S − I = (G − T) + (X − M)
Concept / Approach With planned S = I, left side is 0. If foreign balance is neutral for the question (X − M = 0, closed or balanced trade), then (G − T) must be 0.
Step-by-step Start: S − I = (G − T) + (X − M) Given: S = I ⇒ S − I = 0 Assume: X − M = 0 (standard textbook closure unless specified) Hence: 0 = (G − T) ⇒ G = T
Common pitfalls Ignoring the external balance term; the question defaults to the standard closed-economy implication.
Final Answer Government expenditure equals tax revenue (balanced budget).