The effect of a budget deficit in this economy include the following points:
- Real interest rate would increase.
- Real exchange rate would increase.
- Trade balance is a deficit.
What is trade deficit?
Trade deficit can be defined as the amount of money by which the cost of all imports in a particular country exceeds the value of its exports. This ultimately implies that, a trade deficit only occurs when the imports in a country is greater than exports within a given time period.
Based on the graph representing the net capital outflow (in billion of dollars) shown in the image attached below, we can logically deduce the following true statements:
- The economy is experiencing a balanced budget.
- The budget deficit and national saving will decrease.
- The above leads to a fall in supply of loanable funds.
In conclusion, the effect of a budget deficit in this economy include the following points:
- Real interest rate would increase.
- Real exchange rate would increase.
- Trade balance is a deficit.
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