Final answer:
In a closed economy, a decrease in government spending while holding other factors constant increases the government budget surplus and thus national savings, potentially reducing the trade deficit.
Step-by-step explanation:
In a closed economy, if output (Y), consumption (C), and taxes (T) remain the same, a decrease in government spending (G) would lead to an increase in national savings because the government budget deficit would decrease. According to the equation S + (T-G), where S is private savings and (T-G) is the public savings or government budget surplus, a reduction in G, while keeping T constant, would increase the budget surplus. Consequently, if investments (I) do not change, a higher budget surplus (larger T-G, assuming T remains the same) implies that domestic capital increases and national savings rise. This could then lead to a decrease in the need for foreign capital, suggesting a possible reduction in the trade deficit. However, it's important to remember the ceteris paribus assumption; in reality, other economic variables may adjust as well.