Which of the following must be true if saving is equal to investment and there is...

Which of the following must be true if saving is equal to investment and there is a net financial inflow in the circular flow of an open economy? a. There must be a government budget deficit. b. Total leakages must exceed total injections. c. Government expenditures must exceed transfer payments d. Imports must exceed exports.

Expert Solution

Answer: a

There is budget deficit, which means an excess of government expenses over government incomes (such as tax revenue). If there is budget deficit, the government has to take loan from internal source (such as loans from domestic banks) or from external source (such as loans from World Bank). This loans make a financial inflow.

Other options are not appropriate:

Option b: leakage means import and injection means export. Therefore, if import exceeds export there must not be financial inflow but outflow.

Option c: this also doesn’t create financial inflow.

Option d: this is discussed in option b.

Rahul Sunny answered 2 years ago

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