Answer :
Final answer:
In a closed economy with no foreign trade, equilibrium is achieved when government purchases equal saving plus net taxes minus investment, which aligns with the national saving and investment identity. This can be expressed as S + (T - G) = I, where S is savings, T is taxes, G is government spending, and I is investment.
Explanation:
Assuming there is no foreign trade in the economy, equilibrium is achieved when the sum of government spending (G) equates to the sum of private consumption (C), investment (I), and net exports, which in this case would be zero since we are assuming no foreign trade.
This can be expressed in the equation Y = C + I + G + (X - M), where Y represents national income, C is consumption, I is investment, G is government spending, X is exports, and M is imports. In this scenario, since there are no exports or imports to consider, the national income equals consumption plus investment plus government spending.
The correct option in the given choices would be the one that aligns with the national saving and investment identity: Savings + (T - G) = I, which is the basic equation showing the relationship between savings, taxes, government spending, and investment. Therefore, the correct option is (2) saving plus net taxes minus investment because when rearranged, it reflects the identity that S (savings) + (T - G) (net taxes minus government spending) = I (investment).
