The long-run budget constraint dictates that:
A) the present value of trade balances is zero taken to infinity.
B) the present value of wealth is equal to zero taken to infinity.
C) the present value of wealth is exactly offset by the present value of trade balances.
D) if the present value of wealth is positive, the nation cannot afford future trade deficits on average.

Question

Quizplus · Accepted Answer

The long-run budget constraint states that the present value of a nation's wealth must be exactly offset by the present value of its trade balances. This means that if a nation's present value of wealth is positive, it can afford future trade deficits on average. If the present value of wealth is negative, it cannot afford future trade surpluses on average. Choice A is incorrect because the long-run budget constraint does not dictate that the present value of trade balances is zero. Choice B is incorrect because the long-run budget constraint does not dictate that the present value of wealth is equal to zero. Choice D is incorrect because it reverses the actual relationship between the present value of wealth and the ability to afford future trade deficits.

The Long-Run Budget Constraint Dictates That