Suppose that the economy is in equilibrium with a trade deficit and that saving is greater than investment.According to the circular flow model,the government's budget
A)must be in deficit
B)must be in surplus
C)must be balanced
D)could be in a surplus or a deficit
E)could be in balance or a deficit

Question

Quizplus · Accepted Answer

The fact that saving is greater than investment implies that the economy is not generating enough domestic demand to absorb all the goods and services produced domestically. This situation often leads to a trade deficit, as imports enter the economy to satisfy the excess demand that cannot be met domestically. To finance this trade deficit, the economy must attract capital from abroad, either through borrowing or selling assets. This leads to an outflow of financial resources from the economy to the rest of the world. To balance this outflow and maintain economic equilibrium, the government's budget must be in deficit, in order to inject a sufficient amount of demand into the economy. This means that the government must spend more than it collects in taxes, which will boost demand and offset the excess saving.

Suppose That the Economy Is in Equilibrium with a Trade