An increase in a small open economy's government budget deficit that reduces national saving and the current account balance causes an
A)increase in desired saving.
B)increase in the world real interest rate.
C)increase in exports.
D)increase in absorption.

Question

Quizplus · Accepted Answer

An increase in a government budget deficit typically leads to a decrease in national saving, as the government consumes more resources. This decrease in saving leads to an increase in absorption, which is the total amount of goods and services consumed or invested domestically. With higher government spending and reduced saving, the economy absorbs more, leading to an increase in domestic demand and consumption.

An Increase in a Small Open Economy's Government Budget Deficit