Economics Q97 Multiple Choice Questions

Option : B
Explanation : The fundamental relationship between saving, investment, the fiscal balance, and the trade balance is S = I + (G – T) + (X – M). Given the levels of output and investment spending, a decrease in saving (increase in consumption) must be offset by either a decrease in the fiscal deficit or a decrease in net exports. Decreasing the fiscal deficit is not one of the choices, so a decrease in net exports and corresponding decrease in net capital outflows (decreased lending to foreigners and/or decreased purchases of assets from foreigners) is the correct response.