Which of the following equals the amount of public saving?
A. The sum of government purchases and government tax revenue, minus transfer payments to households.
B. Government tax revenue minus the sum of government purchases and transfer payments to households.
C. Government transfer payments to households minus the sum of government tax revenue and government purchases.
D. The sum of government tax revenue, government purchases, and government transfer payments to households.
Part 2
A government that collects more in taxes than it spends experiences:
A. an increase in the national debt.
B. a budget surplus.
C. a budget deficit.
D. a budget balance.
The Correct Answer and Explanation is:
Correct Answers:
Part 1:
✅ B. Government tax revenue minus the sum of government purchases and transfer payments to households.
Part 2:
✅ B. A budget surplus.
Detailed Explanation (300+ words):
In macroeconomics, public saving refers to the savings of the government sector. It is essentially the amount of money the government has left after all its spending is subtracted from its tax revenue. The formula to calculate public saving is:
Public Saving = T − G − TR
Where:
- T = Tax revenue collected by the government
- G = Government spending on goods and services
- TR = Transfer payments (such as Social Security, unemployment benefits, etc.)
So, public saving is the portion of tax revenue that remains after the government has paid for its purchases and made transfer payments to households. This corresponds exactly to Option B:
Government tax revenue minus the sum of government purchases and transfer payments to households.
This is the correct expression of public saving.
- Option A incorrectly adds tax revenue to spending and subtracts transfers, which inflates the figure.
- Option C reverses the logic.
- Option D adds all three elements, which doesn’t represent any meaningful economic measure.
Part 2: Budget Outcomes
A budget surplus occurs when a government’s tax revenues exceed its total expenditures (which include both government purchases and transfer payments). In other words:
Budget Surplus = T − (G + TR), when T > (G + TR)
This surplus contributes positively to public saving, and can help reduce the national debt or be used for investment.
On the other hand:
- A budget deficit happens when spending exceeds revenue (T < G + TR).
- A budget balance is when revenue equals expenditures (T = G + TR).
- An increase in the national debt results from sustained budget deficits, not surpluses.
Therefore, when the government collects more in taxes than it spends, it experiences a budget surplus, making Option B the correct answer.
In summary:
- Public saving is best represented by Option B in Part 1.
- A surplus from higher tax revenue than spending corresponds to Option B in Part 2.