Question

Suppose the U.S. government cuts back on government spending and increases taxes in an effort to reduce the budget deficit. What would be the effect of these changes on the U.S. balance of payments?

a. There would be no change because the balance of payments always equals zero.
b. There would be an increase in the current account and an increase in the capital account.
c. There would be a decrease in the current account and a decrease in the capital account.
d. There would be a decrease in the current account and an increase in the capital account.
d. There would be an increase in the current account and a decrease in the capital account.

Answer 1

d. There would be a decrease in the current account and an increase in the capital account.

Step-by-step explanation:

The balance of payment in accounting typically comprises of capital account and current account, it is used for the recording of business transactions between two countries. Capital accounts are used to record any trade between two countries relating to financial assets and liabilities.

The current account is used to record trades relating to import and export of goods and services in a country.

Hence, if the U.S. government cuts back on government spending and increases taxes in an effort to reduce the budget deficit. The effect of these changes on the U.S. balance of payments is that there would be a decrease in the current account because it has no effect on the value of assets and liabilities, thereby affecting the export and import of goods and services.

Also, there would be an increase in the capital account due to the fact that the government tends to borrow more and seeks foreign investors.