Consider an economy with a corn producer, some consumers, and a government. In a

ID: 1167697 • Letter: C

Question

given year, the corn producer grows 30 million bushels of corn ad the market price for corn

is $5 per bushel. Of the 30 million bushels produced, 20 million are sold to consumers,

5 million are stored in inventory, and 5 million are sold to the government to feed the

army. The corn producer pays $60 million in wages to consumers and $20 million in

taxes to the government. Consumers pay $10 million in taxes to the government, receive

$10 million on interest on government debt, and receive $5 million in Social Security

payments from the government. The prots of the corn producer are distributed to the

consumers.

Calculate private disposable income, private sector saving, government saving,

national saving, and the government decit. Is the government in a budget surplus

or decit?

(1) Private disposable income = Income of consumers - tax paid

= $(60 + 10 + 5 - 10) million

= $65 million

(2) Private sector saving = Disposable Income - consumption

= $[65 - (5 x 20)] million

= - $35 million (Dissavings)

(3) Government saving = taxes - expenditures

= $(20 + 10) mill - ($5 x 5) mill - $10 mill - $5 mill

= - $10 mill (Dissavings)

(4) National saving = private saving + government saving

= $( - 35 - 10) mill = - $45 mill Dissavings

(5) Government dissavings means a budget deficit of $45 million.