Question

Which of the following statements best describes the relationship between a country's balance of trade and its government budget?

ppreciate against foreign currencies, leading to an increase in imports and balance of trade surplus.  

A balanced budget leads to stable domestic interest rates and increased exports, causing a balance of trade surplus.  

The government budget does not affect exports or imports and therefore does not affect the balance of trade.  

A budget deficit tends to increase domestic interest rates, leading to an increase in imports and a balance of trade deficit.

Answer 1

Answer : "A balanced budget leads to stable domestic interest rates and increased exports, causing a balance of trade surplus."

=> This is because government budget and its spending will infuse capital in the economy, thus increase the production, reduce interest rates and increase in the exports and create a positive balance of trade.

Likewise, if the government spending reduces it will raise the interest rates which cuts production and exports and increases import, thus creating a adverse balance of trade.

==============