Question

When government policy moves from a budget surplus to a budget deficit and the trade deficit remains constant: savings will decrease no matter what happens to investment. savings will decrease if investment remains constant. investment will increase if savings also remains constant. investment will decrease if savings also remains constant.

Answer 1

Investment will decline if savings also decline when a government's fiscal policy switches from a budget surplus to a budget deficit and the trade deficit stays steady.

What occurs if there is a budget surplus or deficit for the government?

• A budget deficit occurs when the federal government spends more money than it takes in from taxes in a given year.
• In contrast, the government has a budget surplus when it collects more taxes than it spends in a single year.

What distinguishes a budget surplus from a budget deficit?

A government experiences a budget surplus when its tax revenues exceed its expenditures, a budget deficit when its expenditures exceed its tax revenues, and a balanced budget when the two figures are equal.

How do trade deficits result from budget deficits?

A budget deficit causes interest rates to rise, which raises net capital inflows and currency depreciation, which lowers net exports.

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