There is an intimate relationship between a country's BCA and how the country finances its domestic investment and pays for government expenditures.This relationship is given by BCA $\equiv$ X - M $\equiv$ (S - I)+ (T - G).Given this,in order for a country to reduce a BCA deficit,which of the following must occur?
A)For a given level of S and I, the government budget deficit (T - G) must be reduced.
B)For a given level of I and (T - G), S must be increased.
C)For a given level of S and (T - G), I must fall.
D)All of the above would work to reduce a BCA deficit.

Question

There is an intimate relationship between a country's BCA and how the country finances its domestic investment and pays for government expenditures.This relationship is given by BCA  $\equiv$ X - M  $\equiv$ (S - I)+ (T - G).Given this,in order for a country to reduce a BCA deficit,which of the following must occur?
A)For a given level of S and I, the government budget deficit (T - G) must be reduced.
B)For a given level of I and (T - G), S must be increased.
C)For a given level of S and (T - G), I must fall.
D)All of the above would work to reduce a BCA deficit.

Quizplus · Accepted Answer

All three options listed in the answer choices will work to reduce a BCA deficit.
A) Reducing government budget deficit (T - G) will decrease the amount of foreign borrowing needed to finance government expenditures, reducing the outflow of funds in a country's BCA equation.
B) An increase in savings (S) will lead to a decrease in imports and increase in domestic investment, both of which will improve a country's BCA.
C) A decrease in investment (I) will lead to a decrease in imports and may decrease the outflow of funds in a country's BCA equation.

There Is an Intimate Relationship Between a Country's BCA and How