When there are large federal budget deficits, the trade deficit tends to shrink. a. True O b. False

8:12 O YTB Output, Y Output, Y 3 A' ZZ' B Trade deficit NX ZZ • Summary: - An increase in domestic demand leads to an increase in domestic output but leads also to a deterioration of the trade balance. An increase in foreign demand leads to an increase in domestic output and an improvement in the trade balance. Implications: - Shocks to demand in one country affect all other countries. Economic interactions complicate the task of policy makers. Policy coordination is not so easy to achieve. 1 Q 4 ...

In periods of rapid U.S. growth, the rapid growth usually adds to large U.S. trade deficits by: O increasing U.S. national income, which increased U.S. imports. O reducing real interest rates in the United States. O increasing U.S. national income, which decreased U.S. exports. O increasing U.S. tax revenues and reducing the Federal budget deficit.

g. Use a figure to explain the potential effectiveness of fiscal policy to spur on the economy under a fixed exchange rate. Diagram is given below, to answer this question consult the textbook chapter-7] 1 OUP, Y