1.Important Identities in Macroeconomics

I.(a) What idea lies behind the capital formation equation? Why the equation is called so? Explain the term.

(b) Derive the equation from the identity between aggregate expenditures and aggregate income.

II.Imagine a country, where before 2015, the government often had a budget deficit, but the economy as a whole experienced a foreign trade surplus. After 2015, both the government budget and foreign trade account were running deficits.

(a)What does this imply about the relationship that existed between private saving and private domestic investment in the periods before and after 2015? Explain your answer.

(b)What does this imply for the country's net foreign investment? Explain the term and explain the change. The country was a borrow before or after 2015? or in both periods? Give your explanations.

(c)Explain the relation between

(i)net exports and net foreign investment(what types of expenditures do they reflect);

(ii)net foreign investment and net capital inflow.

III.From the identity of injections and leakages derive the uses-of-private-saving identity. Explain this identity.

IV.From the identity of injections and leakages derive the budget deficit financing identity. Explain this identity.