Assume that Costa Rica,a small open economy,has increased the government budget deficit by 10 million colon,reducing the current account balance in the process.All else being equal,you would expect this action to cause

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When the government increases its budget deficit, it is essentially increasing its absorption or demand for goods and services. This puts pressure on the economy's resources and can lead to higher inflation and a higher real interest rate to dampen demand. This, in turn, can discourage saving and increase imports, reducing the current account balance. As a result, we would expect Costa Rica's absorption to increase, which would cause a reduction in the current account balance. Hence, option D is correct. Option A is incorrect because an increase in the deficit is typically associated with a reduction in saving. Option B is incorrect because a higher real interest rate would tend to reduce domestic demand and, therefore, reduce absorption. Option C is incorrect because a reduction in the current account balance is typically associated with an increase in imports, not exports.

Assume That Costa Rica,a Small Open Economy,has Increased the Government