A large federal budget deficit will not lead to a current account deficit if private saving ________ or domestic investment ________.
A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question

Quizplus · Accepted Answer

A large federal budget deficit can lead to a current account deficit if it causes national saving to decrease or if it leads to an increase in investment demand, thereby requiring more foreign capital. However, if private saving increases, it can offset the decrease in public saving due to the budget deficit, reducing the need for foreign capital. Similarly, if domestic investment decreases, it also reduces the need for foreign capital. Therefore, an increase in private saving or a decrease in domestic investment can prevent a current account deficit in the presence of a large federal budget deficit.

A Large Federal Budget Deficit Will Not Lead to a Current