Final answer:
Running a fiscal deficit can negatively impact a country's trade balance by making exports more expensive and imports cheaper due to currency appreciation. It also increases reliance on external financing and can limit funds available for private investment, potentially harming economic growth.
Step-by-step explanation:
When a country with excess investment relative to savings begins to run a fiscal deficit, it can impact the trade balance, external financing needs, and exchange rates in various ways. A fiscal deficit occurs when a government spends more than it receives in revenue. In response to this deficit, the country may have to seek additional financing, often from foreign lenders.
This inflow of foreign capital can lead to an appreciation of the country's currency, making exports more expensive and imports cheaper, thereby potentially worsening the trade balance. Over time, if the fiscal deficit continues, the country may experience an increased reliance on external financing. This can lead to vulnerability to foreign investors' sentiments, potentially causing sharp currency depreciations if they decide to pull out their funds. Additionally, the finance borrowed to cover the deficit is often no longer available for private investment, which can have a detrimental effect on economic growth.