Question

In 2019, the US government imposed higher tariff rates on imports from many other countries. At the same time, the government's budget deficit increased. If investment and private savings remained unchanged in 2019, the US trade deficit

	a.	must have declined.
	b.	must have increased.
	c.	must have remained unchanged.
	d.	may have gone up or down, depending on the situation.

Answer 1

Answer: We know that according to the twin deficit hypothesis, Budget deficit= Saving+ trade deficit - investment. Now,

In 2019, the US government imposed higher tariff rates on imports from many other countries, as a result of which trade deficit= import - export declined as due to high tariff rate, level of import falls. However at the same time, the government's budget deficit increased and investment and private saving remained unchanged. Now from the twin hypothesis, if private saving and investment remained unchanged and budget deficit has increased, then trade deficit will definitely increase.

Hence the answer will be:

b. Must have increased.