Assume that an increase in Costa Rica's government budget deficit reduced desired national saving by 10 million colon.Assuming Costa rice is a small open economy,you would expect the government's action to
A)increase the current account balance by exactly 10 million colon.
B)increase the current account balance by less than 10 million colon.
C)reduce the current account balance by exactly 10 million colon.
D)reduce the current account balance by more than 10 million colon.

Question

Quizplus · Accepted Answer

In a small open economy, a reduction in national saving due to an increase in the government budget deficit would lead to a reduction in the current account balance by an amount equal to the decrease in saving, assuming no change in investment. This is because in an open economy, the current account balance is equal to national saving minus investment. If national saving decreases and investment remains constant, the current account balance must decrease by the same amount.

Assume That an Increase in Costa Rica's Government Budget Deficit