Suppose the federal government is successful in enacting tariffs large enough to eliminate the current account deficit.What would happen to the level of domestic investment?
A)It would not change.
B)It would rise and exceed national saving.
C)It would rise to a level equal to net foreign investment.
D)It would fall to a level equal to national saving.
E)It would rise to a level equal to exports.

Question

Quizplus · Accepted Answer

If the current account deficit is eliminated, it means that exports and imports are now balanced, and there is no net inflow or outflow of capital. This would cause the level of net foreign investment to be zero, and therefore domestic investment would fall to a level equal to national saving. The reason for this is that when there is no net inflow of foreign capital, there is no excess investment funding available beyond what the nation saves domestically. Thus, the level of domestic investment would have to adjust downwards to match national saving.

Suppose the Federal Government Is Successful in Enacting Tariffs Large