Which of the following statements is TRUE about the historical relationship between the trade deficits and government budget deficits?
A) There is no relationship between trade deficits and budget deficits.
B) There is a positive relationship between trade deficits and budget deficits.
C) There is a negative relationship between trade deficits and budget deficits.
D) A relationship exists only when there is a balanced budget.

Question

Quizplus · Accepted Answer

There is a positive relationship between trade deficits and budget deficits. When a country runs a trade deficit, it means that it is importing more goods and services than it is exporting. This means that there will be a greater demand for foreign currency to pay for these imports, which in turn leads to an outflow of currency from the domestic economy. This can put pressure on a country's balance of payments, causing a depreciation in the value of the domestic currency. To combat this, the government may intervene by increasing spending or decreasing taxes, leading to an increase in the budget deficit.

Which of the Following Statements Is TRUE About the Historical