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16. If a country runs a current account deficit and the government has a balanced fiscal...

16. 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. must be positive.
  • B. could be either negative or positive depending on the net international investment position.
  • C. must be balanced.
  • D. could be either negative or positive depending on the capital account.
  • E. must be negative.
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Answer #1

Option E :- 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.

Consider the equation,

[Imports - Exports] = [Savings - investment] + [Tax - Spending]

[Imports - Exports] = [Savings - investment] + 0 (Since in in balanced fiscal budget, tax = spending)

[Imports - Exports] = [Savings - investment]

We have [Imports - Exports] < 0 in account deficit

Then [Savings - investment] < 0

Thus combined national private savings and domestic investment accounts is negative

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