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

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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Homework Answers

Answer #1

According to National Income Identity,

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

If the fiscal budget is balanced, it means Taxes= Government Spending

Thus, above equation becomes:

Savings–Investment= Exports–Imports

Since country Runs a current account deficit, it means Exports–Imports<0

If Right hand side of an equation is Negative, Left hand side of the equation must also be negative.

Thus,( Savings– Investment )<0.

Therefore, Combined National Private Savings or Domestic investment Account must be negative.

Hence, Option E is correct.

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