Nanyang Technological University

HE9091 Principles of Economics

July Semester 2021
Tutorial 9 (Student Version)

Question 1

In each part that follows, use the economic data given to find national saving,
private saving, public saving and the national saving rate.

(a) Household saving = 200

Business saving = $400
Government purchases of goods and services = 100
Government transfers and interest payments = 100
Tax collections = 150
GDP = 2200

Private saving = 600

Public Saving = 150-100-100 = -50
National Saving = 550
National saving rate = 550/2200 = .25

(b) Consumption expenditures = 4000

Investment = 1000
Government purchases = 1000
Net exports = 0
Tax collections = 1500
Government transfers and interest payments = 500

Y = C + I + G + NX
GDP=4000 +1000 +1000 =6000
National Saving = T – C – G =1000
National saving rate = .167

Question 2

Use the Saving-Investment diagram for a closed economy to analyze the effect
on the real interest rate and quantity of investment when (a) the government
runs a huge budget surplus and (b) there is an improvement in technology
resulting in new and productive machinery being invented. Analyze each
incident separately.

Question 3

1
An economy using currency called Real has only one commercial bank in the
entire economy. The commercial bank did not keep excess reserves and the
central bank has imposed a required reserve ratio of 9% in the economy.

(a) Explain the first three rounds of the money creation process when
an individual deposited 80,000 Real into the commercial bank.
Determine the total amount of money created by the commercial
bank.

(b) What will be the total amount of money supply in the economy when
the central bank reduces the required reserve ratio to 6%?

Question 4

(a) “The economy cannot achieve growth in the long run by increasing its
money supply”. Explain the validity of this statement in the context of the
Quantitative Equation.

(b) The availability of ATMs may have a favourable effect on the long
term growth of an economy. Explain the validity of this statement using a
money market diagram.