In a long-run model of a small open economy,deficit reduction
I: leads initially to increased net exports.
II: eventually leads to lower foreign debt and increased consumption.
A) I is true; II is not.
B) II is true; I is not.
C) Both I and II are true.
D) Neither I nor II is true.

Question

In a long-run model of a small open economy,deficit reduction 
I: leads initially to increased net exports.
II: eventually leads to lower foreign debt and increased consumption.
A) I is true; II is not.
B) II is true; I is not.
C) Both I and II are true.
D) Neither I nor II is true.

Quizplus · Accepted Answer

Deficit reduction in a small open economy initially increases net exports by reducing domestic consumption and investment, leading to a trade surplus. Over time, this surplus helps pay down foreign debt, eventually allowing for increased consumption as the economy stabilizes.

In a Long-Run Model of a Small Open Economy,deficit Reduction