In a two-good,two-period model with trade,an increase in domestic government spending

Question

Quizplus · Accepted Answer

An increase in government spending will increase domestic demand for goods, leading to an increase in output. However, if the increased demand is satisfied by importing goods, then the current account surplus will decrease as more imports lead to a higher trade deficit. Therefore, an increase in domestic government spending will lead to an increase in domestic output and decrease the current account surplus.

In a Two-Good,two-Period Model with Trade,an Increase in Domestic Government