There is an intimate relationship between a country's BCA and how the country finances its domestic investment and pays for government expenditures. 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

Quizplus · Accepted Answer

A country's BCA is determined by the relationship between its savings rate (S), investment rate (I), and its government budget deficit (T-G). Therefore, in order to reduce a BCA deficit, any combination of reducing the government budget deficit (T-G), increasing savings rate (S), or reducing investment rate (I) would be necessary. Choice D is the correct answer as it includes all possible options.

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