How could a greater budget deficit increase the trade deficit?What happens to the multiplier if there is an increase in the marginal propensity to consume?What would likely happen to the level of economic activity if the government took the necessary steps to reduce the deficit significantly in a relatively short period of time?When is the most appropriate time to reduce the deficit?

Answered: How could a greater budget deficit…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter19: International Finance And The Foreign Exchange Market

Section: Chapter Questions

Problem 10CQ

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How could a greater budget deficit increase the trade deficit?
What happens to the multiplier if there is an increase in the marginal propensity to consume?
What would likely happen to the level of economic activity if the government took the necessary steps to reduce the deficit significantly in a relatively short period of time?
When is the most appropriate time to reduce the deficit?

Expert Solution

Introduction:

A budget in the economy is used to represent the financial health of the country. A budget is the financial statement of the country total income and expenditure during a given period of time.

A budget deficit means the expenditure in the economy are greater than the income generated in the economy.

Trade represents the import and export activities undertaken by the economy during a given period of time.

Trade deficit refers to the situation where the imports of the country is greater than the export of the country.

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