Question

Consider the following equation:

Hint:

National savings is calculated as \(S=Y-C-G\). If income and consumption remain unchanged, a decrease in government expenditure increases national savings by the same amount.

Answer 1

Correct Answer: 250

Step 1: Recall the formula for national savings.
National savings is given by
\[ S=Y-C-G \]
where \(Y\) is national income, \(C\) is consumption expenditure, and \(G\) is government expenditure.

Step 2: Calculate disposable income.
Disposable income is
\[ Y_d=Y-T \]
Substitute the given values:
\[ Y_d=5000-1000 \] \[ Y_d=4000 \]

Step 3: Calculate consumption expenditure.
Consumption function is
\[ C=250+0.75Y_d \]
Substitute \(Y_d=4000\):
\[ C=250+0.75(4000) \] \[ C=250+3000 \] \[ C=3250 \]

Step 4: Calculate initial national savings.
Initially,
\[ G=1000 \]
Therefore,
\[ S_1=Y-C-G \] \[ S_1=5000-3250-1000 \] \[ S_1=750 \]

Step 5: Calculate new national savings after government expenditure decreases.
Now government expenditure decreases to
\[ G=750 \]
Therefore,
\[ S_2=Y-C-G \] \[ S_2=5000-3250-750 \] \[ S_2=1000 \]

Step 6: Find the increase in national savings.
Increase in national savings is
\[ S_2-S_1=1000-750 \] \[ S_2-S_1=250 \]

Step 7: Final conclusion.
Hence, if government expenditure decreases from \(1000\) to \(750\), national savings increase by
\[ \boxed{250} \]