Assuming no change in the effective tax rate on capital,an increase in the government budget deficit will raise the current account deficit if and only if the increase in the budget deficit
A)reduces desired national saving.
B)increases desired national saving.
C)reduces desired national investment.
D)increases desired national investment.

Question

Quizplus · Accepted Answer

An increase in the government budget deficit means that the government is spending more money than it is generating through revenue. One way the government can finance this deficit is by borrowing money, which increases the demand for credit and drives up interest rates. This, in turn, reduces desired national saving since households and businesses have to pay more to borrow money, leaving them with less money to save. As a result, the current account deficit increases.

Assuming No Change in the Effective Tax Rate on Capital,an