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In 2019, Brazil's trade deficit as share of GDP widened. In that year, government deficit as...

In 2019, Brazil's trade deficit as share of GDP widened. In that year, government deficit as share of GDP declined and investment as share of GDP remained constant. What must have happened to private savings as share of GDP?

a.

Private savings as share of GDP must have declined.
b.

Private savings as share of GDP must have increased.
c.

Private savings as share of GDP must have remained constant.
d.

Private savings as share of GDP may have risen or declined, depending on the situation.
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Answer #1

Answer: According to the twin deficit hypothesis

Budget deficit= Saving+Trade deficit-Investment...........(1)

Now, In 2019, Brazil's trade deficit as share of GDP widened. In that year, government deficit as share of GDP declined and investment as share of GDP remained constant. Thus the left hand side of equation 1 falls and on the right hand side, trade deficit has increased and investment remained the same. Thus to balance equation 1, private saving must have declined more than the increase in the trade deficit and only then can the budget deficit falls. Hence the answer will be:

a. Private savings as a share of GDP must have declined.

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