An increase in the government budget deficit will not lead to a current account deficit if domestic investment declines.

Question

Quizplus · Accepted Answer

A higher government budget deficit can lead to a current account deficit as the government may need to borrow from foreign sources to finance its spending. However, if domestic investment declines at the same time, there may be less demand for imports, which can offset the impact of increased government borrowing on the current account balance. Therefore, an increase in the government budget deficit will not necessarily lead to a current account deficit if other factors, such as domestic investment, are taken into account.

An Increase in the Government Budget Deficit Will Not Lead