Que - If the government is running a budget deficit, which of the following relationships are least likely to occur in the economy at the same time?
Exports relative to imports; Savings relative to investment
A) exports B) exports imports; private savings C) exports private investment
The correct answer was B) exports imports; private savings
My understanding is in the equation: (G-T) = (S-I) - (X-M), if there is a budget deficit which means G-T 1) either (S-I) 2) or S-I 0
We can definitely rule option A out but how can we rule option C out here? In fact, B is most likely to occur if there is budget deficit as described in 2) above, isn’t it?作者: jim8z3 时间: 2013-4-28 09:15
Not sure if this is the correct reasoning here but :
if there is a budget deficit, government expenditure exceeds tax revenue so G-T0 which implies (S-I) (X-M). Hence if the public sector is running a deficit, to ensure balance :
[1] Net private savings must exceed net exports (S-I) (X-M)
[2]Private savings must exeed private investments SI so we can eliminate c
[3] when a country spends more than it earns, it must borrow the difference from abroad, or sell foreigners some assets. This produces a current account deficit. (X-M)作者: Beatnik 时间: 2013-4-28 09:15
Thanks, Alladin!
I got my mistake. G - T should be greater than 0.
