Question

If the budget deficit increases, then a. U.S. residents will want to purchase fewer foreign assets and foreign residents will want to purchase fewer U.S. assets b. U.S. residents will want to purchase more foreign assets and foreign residents will want to purchase more U.S. assets c. U.S. residents will want to purchase fewer foreign assets and foreign residents will want to purchase more U.S. assets d. U.S. residents will want to purchase more foreign assets and foreign residents will want to purchase fewer U.S. assets

Answer 1

Answer: Option (c) is correct.

Step-by-step explanation:

If the budget deficit increases, then U.S residents will want to purchase fewer foreign assets and foreign residents wants to buy more of U.S assets.

The budget deficit in the economy has to be financed either by borrowing or by increasing taxes. This budget deficit occurred because of the tax cuts and higher government spending.

If a country running a budget deficit, which lead to reduction in national saving. We all know that interest rate is determined in the loan market, where savers supply the loans to the private borrowers.

So, if there is a fall in the national saving, this will also impact the supply of loans from savers, which raises the interest rate in an economy.

This will attract the foreign flow of capital. This means that demand for domestic assets increases because of the higher interest rate.

Therefore, U.S. residents will want to purchase fewer foreign assets and foreign residents will want to purchase more U.S. assets.