An autonomous increase in S from a condition of equilibrium in national income and in the trade balance results in the nation's income:
A)rising and its trade balance turning into surplus
B)falling and its trade balance turning into surplus
C)falling and its trade balance turning into deficit
D)rising and its trade balance turning into deficit

Question

Quizplus · Accepted Answer

An autonomous increase in savings (S) from an equilibrium condition implies that at the initial level of income, people are now saving more and consuming less. This reduction in consumption leads to a decrease in aggregate demand, which in turn causes national income to fall. Since imports are a function of national income (people buy fewer goods, including fewer imports), a fall in national income would lead to a reduction in imports. If exports remain constant, this reduction in imports improves the trade balance, potentially turning it into a surplus.

An Autonomous Increase in S from a Condition of Equilibrium