Question

If a country runs a current account deficit and the government has a balanced fiscal budget, then combined national private savings and domestic investment accounts

A. could be either negative or positive depending on the net international investment position.

B. must be negative.

C. must be balanced.

D. could be either negative or positive depending on the capital account.

E. must be positive.

Answer 1

Ans) Option E :- Must be negative

• If a country runs a current account deficit and the government has a balanced fiscal budget, then combined national private savings and domestic investment accounts must be negative.
• When a fiscal budget is said to be balanced, taxes = government spending
• We know that Net Exports - Net Imports = (Savings - investment ) + (Taxes - Spending of govt)
• Since taxes = spending of govt, Exports - Net Imports = (Savings - investment)
• The net export - imports will be < 0 since the country in deficit.
• Then (savings - investment ) will also be < 0
• Hence combined national private savings and domestic investment accounts will be negative.

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