Suppose that the economy is in equilibrium, with a trade deficit and with saving greater than investment.According to the circular-flow model, what is the state of the government's budget?

Question

Quizplus · Accepted Answer

In the circular-flow model, if the economy has a trade deficit (imports > exports) and saving is greater than investment, it implies that the government's budget must be in deficit to balance the national accounting equation (S - I = G - T + X - M). Here, G is government spending, T is taxes, X is exports, and M is imports. Since saving is greater than investment (S > I) and there is a trade deficit (X < M), for the equation to hold, government spending must be greater than taxes collected (G > T), indicating a budget deficit.

Suppose That the Economy Is in Equilibrium, with a Trade