Question

All else equal, if the United States’ next president is a fiscal conservative that pushes through...

All else equal, if the United States’ next president is a fiscal conservative that pushes through a balanced budget,

  • A. interest rates should rise.
  • B. the current account deficit should be reduced.
  • C. the current account deficit will likely get larger.
  • D. the economy should expand more rapidly.
  • E. none of the above.
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Homework Answers

Answer #1

In a balanced budget, Government Spending= Taxes

According to National Income Identity in an open Economy,

Taxes–Government Spending+ Savings–Investment= Exports–Imports

If the Next United States President is fiscal conservative that pushes through a balanced budget, then the Taxes rise upto the level of Government Spending, this leads to an increase in the value left hand side of the equation above. If the value of left hand side Increases, the value of right hand side must Increase. Thus, Either Exports Increase or imports Decrease or both. This ultimately leads to a reduction in Current Account Deficit.

Thus, Option B is correct.

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