Question

If domestic savings is less than domestic investment, then:_____.

a. there will be negative foreign investment.
b. a trade surplus must result.
c. reserve assets will increase.
d. the government runs a budget deficit.

Answer 1

If domestic savings is less than domestic investment, it indicates the need for foreign capital, which could increase the trade deficit but does not directly mean the government runs a budget deficit.

Step-by-step explanation:

If domestic savings is less than domestic investment, then there is an implied need for foreign capital to fund the investment surplus.

This could lead to an increase in the trade deficit, as the country would likely import more than it exports to balance the investment needs not covered by domestic savings. Therefore, among the given options, the correct response would be:

'The government runs a budget deficit.'

This is not necessarily the direct outcome of lower domestic savings relative to domestic investment. Instead, if the government is running a budget deficit, it may contribute to the need for increased foreign investment to cover both the private sector investment and the public sector deficit.