Other things remaining constant,higher trade deficits in the U.S.will lead to:
A)U.S citizens buying greater foreign securities.
B)an increase in domestic savings in the U.S.
C)a decrease in the demand for U.S.dollars.
D)an increase in funds from abroad.
E)an increase in the standard of living of the U.S residents.

Question

Quizplus · Accepted Answer

Higher trade deficits imply that the U.S is importing more goods than it is exporting. This implies that more dollars are leaving the U.S economy than coming in, leading to a decrease in the demand for U.S dollars. To finance the trade deficit, the U.S will need funds from abroad, which will lead to an increase in foreign investments and inflows of capital, as well as an increase in borrowing. Therefore, Option D is correct. Option A is incorrect because higher trade deficits imply that U.S citizens are buying more foreign goods and services, not foreign securities. Option B is incorrect because higher trade deficits imply that U.S consumers are spending more and saving less. Option C is incorrect because as the trade deficit increases, the demand for dollars decreases, leading to a depreciation of the US dollar, which means foreign currencies become more expensive for American buyers. Option E is incorrect because higher trade deficits often lead to a decrease in the standard of living due to a reduction in domestic manufacturing, loss of jobs, and a subsequent reduction in the availability of products, all of which negatively impact the economy.

Other Things Remaining Constant,higher Trade Deficits in the U