If the government started with a budget deficit and moved to a surplus, which of the following best describes the effects of these changes?
A)Domestic investment would rise, and the trade balance would move towards surplus.
B)Domestic investment would rise, and the trade balance would move towards deficit.
C)Domestic investment would fall, and the trade balance would move towards surplus.
D)Domestic investment would fall, and the trade balance would move towards deficit.

Question

Quizplus · Accepted Answer

If the government moves from a budget deficit to a budget surplus, it means the government is collecting more revenue than it is spending. This would lead to a decrease in the government's demand for funds in the market, which can reduce interest rates. Lower interest rates can increase domestic investment. Moreover, as domestic investment increases, it can lead to an increase in economic activity and an increase in demand for goods and services. This, in turn, can lead to higher exports, which can improve the trade balance and move it towards a surplus. Therefore, domestic investment would rise, and the trade balance would move towards surplus.

If the Government Started with a Budget Deficit and Moved