Question

Holding other factors constant, legislation to cut taxes in an open economy will: a. increase national saving and lead to a trade surplus. b. increase national saving and lead to a trade deficit. c. reduce national saving and lead to a trade surplus. d. reduce national saving and lead to a trade deficit.

Answer 1

The correct option is (d); reduce national saving and lead to a trade deficit.

What is trade deficit?

When a nation purchases more than it exports, a trade deficit results. Although very big deficits can hurt the economy, a trade deficit is neither fundamentally fully positive nor harmful.

Some key features of trade deficit are-

• When a nation purchases more than it exports, a trade deficit results.
• A nation with a trade deficit, also referred to as a negative trade balance, has spent more money than it has made in its foreign trade with other nations.
• The amount of imports and exports a nation makes can affect that nation's GDP, currency value, rate of inflation, and interest rates. The amount of imports and the size of the trade deficit can both hurt a nation's currency.
• A trade imbalance results when domestic consumers purchase more foreign goods than domestic manufacturers sell to overseas consumers, which lowers GDP.
• The trade deficit can be improved by consume less and save more.

To know more about the causes of the trade deficit, here

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