Question

If the economy booms in the United States while going into recession in other countries, the US trade deficit will tend to ________.

a. increase

b. decrease

c. remains the same

Short answer

The correct option is option (a): increase.

Step-by-step solution

Uneven economic growth and trade deficit 

A trade deficit occurs when the imports of goods or services are greater than exports.

When trading partners experience uneven economic growth, there is a deficit in imports in those countries which experience recession. The financial activities slow down in these countries, and the purchasing power of the people decreases.

Trade deficit in boom

When the US economy experiences a boom and the purchasing power of the people in the country improves, import increases. However, the trading partner experiences recession and the purchasing power of the people in these countries deteriorate. Consequently, imports in these countries decrease.

Thus, the net effect due to the economic boom in the US and recession in other countries is an increase in imports and a decrease in exports from the US.

The trade deficit will tend to increase.