Question

Initially, a reduction in export subsidies decreases net exports at any given real exchange rate, causing the demand for dollars in the foreign exchange market to decrease. This leads to a decrease in the real exchange rate, which, in turn, decreases imports to negate any decrease in exports, leaving the equilibrium quantity of net exports and the trade deficit unchanged at this point.
However, the reduction in expenditure on export subsidies _________the fiscal deficit, thereby _______public saving.

Answer 1

Answer:

Decreases; increasing

Explanation:

However, the reduction in expenditure on export subsidies decreases the fiscal deficit, thereby increasing public saving.

National savings refers to the sum of public and private savings. Public savings is the government budget balance. An increase in the balance or decrease in deficit implies the public savings increase and also increase in national savings. Then, the decrease in subsidy spending decreases government deficit and increases national savings and supply of loanable funds, so the loanable funds shift to the right.