A country in fiscal balance with a trade surplus will most likely:
- sell assets to foreigners to reduce the imbalance.
- increase the imbalance by lending to foreign countries.
- have an excess of domestic saving relative to investment spending.
Solution
Solution
C is correct.
B is incorrect. A country with a trade surplus will decrease the imbalance by lending to foreign countries.
Explain the 2nd statement.
we already have the increased trade surplus that means it is imbalance now we know we need to offset the increase of trade surplus by capital deficit, so by the means of increasing capital deficit or we may say by increasing the lending abroad what are we doing? we are decreasing the imbalance between the current and capital account.
hope it helps!