Final answer:
If savings equals investment and the country has a trade surplus, then the correct option is c. The country has a fiscal surplus.
Step-by-step explanation:
Answer:
If savings equals investment and the country has a trade surplus, then the correct option is c. The country has a fiscal surplus.
Step-by-step explanation:
The national saving and investment identity equation is:
Savings + (trade deficit) + (government budget surplus) = Investment
When the country has a trade surplus, it means that its exports are greater than its imports, resulting in a positive trade balance. This increases the quantity supplied in the financial capital market and reduces the trade deficit component of the equation.
If savings and investment are equal, and the trade deficit component decreases due to a trade surplus, the remaining component that needs to adjust to maintain the equation balance is the government budget surplus. Therefore, the country must have a fiscal surplus.
For example, if a country has $100 billion in savings and the trade surplus is $20 billion, we can rearrange the equation as:
$100 billion + (0 - $20 billion) + (government budget surplus) = $100 billion
Rearranging the equation, we can determine that the government budget surplus is equal to $20 billion, which indicates a fiscal surplus.