Question

Based on the national saving and investment identity, what are the three ways the macroeconomy might react to greater government budget deficits?

Short answer

Reduced investment, a larger trade deficit, and greater savings.

Step-by-step solution

Definition

Macroeconomics:

Macroeconomics is a branch of economics concerned with the study of the entire economy and how it functions. It also looks into things like pricing levels, economic growth, national income, and unemployment, among other things.

Explanation

Reduced investments, a larger trade deficit, and more savings are the three ways the macroeconomy might respond to higher government budget deficits, based on the national saving and investment identity. Furthermore, higher budget deficits increase capital demand, which raises interest rates and makes private sector investment more expensive. The demand for financial capital will rise as the budget deficit grows. If private saving and the trade balance stay unchanged, there will be less financial capital available for private physical capital investment.