b)In a closed economy, savings and investments are interacted Who are savers and investors in this closed economy? • How does financial (capital and money) market work? • How does crowding out happen? Briefly discuss, by using 1, S, G, T, X, M, how the scenario change when the economy is OPEN. .
Q3) Spacely Sprockets' short-run cost curse is: C(q. K) – 2542 + 15K, where g is the number of ? Sprockets produced and K is the number of robot hours Spacely hires. Currently, Spacely hires 10 robot hours per period. The short-run marginal cost curve is: MC(q. K) = 502 If Spacely receives $250 for every sprocket he produces, what is his profit maximizing output level? Calculate Spacely's profits.

B)

An important controversy in macroeconomics relates to the relationship between saving and investment. Many economists before J.M. Keynes were generally of the view that saving and investment are generally not equal; they are equal only under condition of equilibrium. Besides, they thought that equality between saving and investment is brought about by changes in the rate of interest. Keynes in his famous work “General Theory of Employment, Interest and Money” put forward the view that saving and investment are always equal.

This gave rise to a severe controversy in economics as to whether saving and investment are always equal or they are generally unequal. This controversy has now been resolved, and there is general agree­ment among the economists about the correct relationship between saving and investment.

Mod­ern economists use the concepts of saving and investment in two different senses. In one sense, saving and investment are always equal, equilibrium or no equilibrium. In the second sense, saving and investment are equal only in equilibrium; they are unequal under conditions of disequilibrium. We shall explain below in detail the relationship between saving and investment in these two different senses.

When in a certain year there is net addition to the stock of capital, investment is said to have taken place. It is worth mentioning here that by investment we do not mean the stock of capital but the net addition to the stock of capital i.e., investment is a flow concept. Of course, addition to the stock of capital is made through the flow of investment. In every year stock of capital expands through net investment.

On the other hand, by saving we mean the part of the income which has not been spent on consumer goods and services. In other words, saving is the difference between income and consumption expenditure. It is worth noting that in consumption expenditure all types of expenditure are not included. If an individual spends a part of his income on providing irrigation facilities, on buying tools and machinery, then that expenditure is not the consumption expenditure, it is in fact an investment expenditure.

In order to obtain the saving, we have only to deduct the consumption expenditure from income and not the investment expenditure. When an individual makes investment expenditure he is deemed to spend his saved income on investment. For instance, if a farmer’s annual income is Rs. 10,000 and he spends Rs. 6,000 on consumer goods and services and spends Rs. 1,000 on the construction of a well for his fields, and another Rs. 1,000 on building a drainage system for his fields and providing fencing, then his saving would be 10 – 6 = Rs. 4 thousands