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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

In the late 1990s, the U.S. government moved from a budget deficit to a budget surplus and the trade deficit in the U.S. economy grew substantially. Using the national saving and investment identity, what can you say about the direction in which saving on/or investment must have changed in this economy?

To determine

The direction of changes made in savings and investment when the government starts moving into the budget surplus.

Explanation

Trade deficits are defined as the imports are greater than exports. It is considered as the important measure for international trade where there exists an outflow of domestic currency to foreign markets.

As the government has the budget surplus, the national investment identity must be equated which can be seen as done below:

  Supply of financial capital=S+(MX)Demand of financial capital= I+(GT)

Hence,

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