1.Define the two categories of saving in the economy.

2.Your friend owns a business that he works by himself. He produces about 25 units of output per hour. He wants to be able to produce twice as many outputs per hour, so he buys a second machine. He notices that he can only produce 10 more units of outputan hour.Using your knowledge of the production process (under the production function in growth theory), explain to your friend what you think has happened when he added more capital to his production process.

3.Suppose that the federal budget of ECON 1202, a hypothetical economy, exhibited a surplus equal to 0.6 percent of GDP in 2008, but moved to a deficit of 0.4 percent of GDP in 2009. Assume some observers want to blame the deficit solely on tax cuts, but others argued that the deficit grew because of the recession suffered in 2008-2009. Evaluate the validity of the second argument.