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 ≡ X - M ≡ (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

Quizplus · Accepted Answer

All of the above options would work to reduce a BCA deficit, as reducing government budget deficit (T - G) can increase national savings (S) and reducing domestic investment (I) can reduce imports (M). Increasing national savings (S) can also help reduce imports (M). Therefore, any combination of these actions can help a country reduce its BCA deficit.

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