Question

Suppose the economy of the large country of Hendrix is currently experiencing economic growth and has a trade deficit. Consider the possible effects of this economic growth on the trade balance and place them in the appropriate category. Likely to occur during economic growth Likely to occur during economic growth and increase the trade deficit and decrease the trade deficit Not likely to occur during economic growth Answer Bank imports increase imports decrease government borrowing increases private savings decrease private savings increase government borrowing decreases

Answer 1

Answer:

Likely to occur during economic growth and increase in trade deficit	Government borrowing decreases, saving rate increases, import increases
Likely to occur during economic growth and decrease in trade deficit	Government borrowing decreases, saving rate increases, import decreases
Not likely to occur during economic growth	Government borrowing increases, saving rate decreases

During economic growth, government has to do a lot for borrowing because the rate of return on capital is high in private sector than the government sector. Hence, private sector is not willing to purchase government bonds and thus government borrowing decreases.

Saving rate increases during economic growth because people find a way to invest money where they can get higher return. In other words, the opportunity cost of consumption becomes very high. Hence, people prefer to defer consumption and save more in current time.

Trade deficit = import - export. Thus when trade deficit increased, import must be increasing and vice versa.