If a local newspaper reported that the Malaysian government will shore up the sliding ringgit by working to cut record budget a
nd trade deficits, a) According to the model in this chapter, would a reduction in the budget deficit reduce the trade deficit? Would it raise the value of the ringgit? Explain.
b) Suppose that a reduction in the budget deficit made international investors more confident in the Malaysian economy. How would this increase in confidence affect the value of ringgit? How would it affect the trade deficit?
Yes, if we low our expenses by lowering the budget, the trade deficit will automatically be reduced. The reason is that if we lower the imports by saving money due to low budget so the trade deficit will be reduced. Trade deficit occurs when the export are less than import. In other worlds, if a country earns less and spend more, this is known as trade deficit.
If a reduction in the budget deficit made international investors more confident in the Malaysian economy so these investors invest money in various sectors of the country and bring money to the country which increases foreign reserves and the value of ringgit increases and also increase the exports which decreases trade deficit.
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