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Last year, the Congress passed (and the President signed into law) a reduction in taxes that was not offset with commensurate reductions in government spending. Use national income accounting to demonstrate the effect of a reduction in tax revenues on the current account balance (net exports), assuming no (net) effect of tax cuts on savings or investment. (15 points) 1.
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Ans. Net exports is a very major part of National Income. A decrease in taxes would lead to more discretionary income with the people and thus the demand for imports would tend to increase , increase in imports would lead to a decrease in Net Exports which would inturn Worsen the Current Account Deficit ie Current Account Balance would decrease.

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