If the government started with a budget deficit and moved to a surplus, which statement would best describe the effects of these changes?
A) Domestic investment would rise, and the trade balance would move towards surplus.
B) Domestic investment would rise, and the trade balance would move towards deficit.
C) Domestic investment would fall, and the trade balance would move towards surplus.
D) Domestic investment would fall, and the trade balance would move towards deficit.

Question

Quizplus · Accepted Answer

When the government moves from a budget deficit to a surplus, it means they are collecting more revenue than they are spending, which means there is a decrease in government demand for goods and services. This decrease in demand will lead to lower interest rates, which will encourage domestic investment to rise. Additionally, having a budget surplus implies that the government is not borrowing as much, which in turn leads to a stronger currency. A stronger currency will lead to cheaper imports, and expensive exports, ultimately leading to a trade balance that moves towards surplus.

If the Government Started with a Budget Deficit and Moved