Suppose that the economy is in equilibrium with the government budget in surplus and with saving is greater than investment.According to the circular flow model,
A)imports must exceed exports
B)imports must be less than exports
C)imports must equal exports
D)imports could be greater than or equal to exports
E)it is impossible to determine anything about imports and exports using the given information

Question

Quizplus · Accepted Answer

If saving is greater than investment, then there is excess saving in the economy. This implies that there is an excess supply of funds available for investment, which will cause interest rates to fall. As interest rates fall, the cost of borrowing decreases, making exports relatively cheaper for foreigners, which can lead to an increase in exports. At the same time, the lower interest rates also make imports relatively more expensive for domestic residents, which can lead to a decrease in imports. Therefore, imports must be less than exports to maintain the equilibrium in the circular flow model.

Suppose That the Economy Is in Equilibrium with the Government