CFA Level I · CFA Level I Exam · International Trade
A country's national income identity shows that its current account balance equals national saving minus domestic investment. If the government increases its budget deficit while private saving and investment stay unchanged, the current account balance will most likely:
The current account will most likely move toward a larger deficit. The current account balance equals private saving minus investment plus the government fiscal balance. A bigger budget deficit reduces national saving, so with private saving and investment unchanged the current account deteriorates.
- Amove toward a larger deficitCorrect
- Bbe unchanged
- Cmove toward a larger surplus
Explanation
The current account equals (private saving minus investment) plus (government saving, i.e. the fiscal balance). A larger budget deficit lowers government saving. With private items fixed, the current account falls, becoming a larger deficit.
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