Suppose, for example, that the government wants to reduce the trade deficit without changing the level of output, so it uses a combination of depreciation and fiscal contraction. What happens to priva...

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Suppose, for example, that the government wants to reduce the trade deficit without changing the level of output, so it uses a combination of depreciation and fiscal contraction. What happens to priva...

Suppose, for example, that the government wants to reduce the trade deficit without changing the level of output, so it uses a combination of depreciation and fiscal contraction. What happens to private saving, public saving and investment?

business economics

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Answer 1

Answer #1

To reduce trade deficit different tools are used such as

1.depreciation(also known as devaluation of currency or reducing exchange rate)

2.Supply side policy

3.Deflationary fiscal policy

In a closed economy it is said the S=I i.e., saving =investment.therefore from here we can understand that whatever is the savings the investment will same as that

And we also know that current account = saving-investment. And when there is trade deficit in that situation the import is greater than exports.

So by all these we can understand that if government use depreciation as a tool and does not reduce it output and increases it export then private savings will increase and which also increase the net factor income from abroad in terms of investment and so on.

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Answer 2

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Suppose, for example, that the government wants to reduce the trade deficit without changing the level of output, so it uses a combination of depreciation and fiscal contraction. What happens to priva...

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Suppose, for example, that the government wants to reduce the trade deficit without changing the level of output, so it uses a combination of depreciation and fiscal contraction. What happens to priva...