Assuming no change in the effective tax rate on capital,an increase in the government budget deficit will reduce 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 than it is receiving in revenue. This can lead to a decrease in national saving as the government is borrowing more from domestic and foreign lenders, leading to an increase in interest rates and a decrease in private investment. Lower investment can lead to a reduction in imports, which in turn will reduce the current account deficit. Therefore, when the increase in the budget deficit reduces desired national saving, the current account deficit will reduce as well.

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