From 2001 to 2004,the U.S.government went from a budget surplus to a budget deficit.According to the open-economy macroeconomic model,this should have decreased
A)both the supply of loanable funds and the supply of dollars in the market for foreign-currency exchange.
B)neither the supply of loanable funds nor the supply of dollars in the market for foreign-currency exchange.
C)the supply of loanable funds but not the supply of dollars in the market for foreign-currency exchange.
D)the supply of dollars in the market for foreign-currency exchange,but not the supply of loanable funds.

Question

Quizplus · Accepted Answer

A budget deficit reduces national savings, which decreases the supply of loanable funds. It also reduces the supply of dollars in the foreign exchange market as the government borrows more, affecting the trade balance.