Question

Assume that a country with excess investment relative to savings begins to run a fiscal deficit. Explain the likely impacts on the trade balance, the country's external financing needs, and its exchange rate.

1. If savings equals investment and the country has a trade surplus, then:
a. The money supply is unchanged
b. Total taxes equal total government spending
c. The country has a fiscal surplus
d. The country has a fiscal deficit

Answer 1

A fiscal deficit can impact the trade balance, external financing needs, and exchange rate of a country with excess investment relative to savings.

Step-by-step explanation:

The impacts of a fiscal deficit on the trade balance, external financing needs, and exchange rate of a country with excess investment relative to savings can be explained as follows:

1. If the country starts running a fiscal deficit, it means that the government is spending more than it is collecting in taxes. This will result in an increase in government borrowing, which can lead to a rise in the trade deficit as more investment funds need to come from abroad to finance the deficit.
2. The country's external financing needs will increase as it relies more on foreign capital to finance its fiscal deficit. This means that the country will need to attract more foreign investment and borrow more from other countries to meet its financing needs.
3. The exchange rate of the country's currency may be affected by the fiscal deficit. If the country needs to attract more foreign investment and borrow from other countries, it may lead to a depreciation of its currency in relation to other currencies. This can make the country's exports cheaper and imports more expensive.