Which of the following is TRUE of the relationship between U.S. trade deficits and federal government budget deficits?
A) Increases in the budget deficit tend to be associated with increases in the trade deficit.
B) Increases in the budget deficit tend to be associated with reductions in the trade deficit.
C) Increases in the budget deficit are always associated with increases in the trade deficit.
D) Increases in the budget deficit are always associated with reductions in the trade deficit.

Question

Quizplus · Accepted Answer

Increases in government spending, which can contribute to a budget deficit, can increase demand for imports, which can lead to an increase in the trade deficit. Additionally, if the government finances its deficit by borrowing from foreign countries, it can also increase the trade deficit. However, there is not necessarily a direct causal relationship between the two deficits and other factors such as changes in exchange rates and global economic conditions can also impact the trade deficit. Therefore, it is not accurate to say that increases in the budget deficit always lead to increases or reductions in the trade deficit.

Which of the Following Is TRUE of the Relationship Between