In an open economy, as long as the long-run budget constraint is upheld, a nation may:
A) run a trade deficit during temporary shocks and run a trade surplus during temporary gains in output, keeping consumption stable.
B) save during temporary shocks and borrow during temporary gains.
C) forgo borrowing to maintain financial stability, allowing consumption to fluctuate.
D) save even if it is just a little during each period.

Question

Quizplus · Accepted Answer

Running a trade deficit during temporary shocks and running a trade surplus during temporary gains in output allows a nation to keep consumption stable while still maintaining the long-run budget constraint. This approach allows for flexibility in responding to economic shocks and fluctuations, without sacrificing financial stability in the long term. Options B, C, and D are not necessarily mutually exclusive with option A, but option A is the most directly related to the concept of an open economy and the long-run budget constraint.

In an Open Economy, as Long as the Long-Run Budget