Final answer:
The United States became a net debtor because foreigners invested more in the U.S. than Americans invested abroad, primarily due to an increase in the government budget deficit which resulted in a greater demand for financial capital that foreign investors supplied.
Step-by-step explanation:
The United States became a net debtor in the mid-1980s when the government budget deficit increased dramatically, and the federal budget deficit jumped from $79 billion in 1981 to $221 billion in 1986. This scenario resulted in a significant increase in the demand for financial capital, amounting to $142 billion, which was supplied by foreign investors due to an increase of the supply of financial capital from abroad by $152 billion. Consequently, the correct answer to why the United States became a net debtor is: B. Foreigners invested more in the U.S. than Americans invested abroad.
During periods of government budget deficits, if domestic investment and private savings remain unchanged, increased demand for financial capital in the U.S. economy is typically met by foreign investment. This was evident in the mid-1980s, as the U.S. current account balance shifted from a surplus to a deficit. Increases in domestic consumption and trade deficits are generally associated with a growing domestic economy, while a slowdown or recession tends to result in reduced domestic consumption and trade deficits, as seen from 2006 to 2009.