Other things being equal, an increase in the current account deficit could result from

Question

Quizplus · Accepted Answer

An increase in the government's budget deficit would lead to an increase in the current account deficit because the government would need to finance its deficit by borrowing from other countries, thus increasing the demand for foreign capital and causing a current account deficit. The other choices are not likely to have a direct impact on the current account deficit. An increase in private saving could actually reduce the current account deficit if it leads to higher domestic investment, which in turn could increase exports. A fall in domestic investment could also reduce the current account deficit if it leads to lower imports. A rise in the budget surplus could indicate higher taxes or lower spending, which could reduce aggregate demand and lead to lower imports and a smaller current account deficit.

Other Things Being Equal, an Increase in the Current Account