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    Question

    If the fiscal deficit of an economy be 3% of GDP and if

    the current account deficit also be 3% of GDP in a particular year for that economy, then its aggregate saving must be equal to aggregate investment. The above statement is
    A True Correct Answer Incorrect Answer
    B False Correct Answer Incorrect Answer
    C Not necessarily true Correct Answer Incorrect Answer
    D Not necessarily false Correct Answer Incorrect Answer

    Solution

    The given statement is true. Fiscal deficit is equal to the borrowings made by the government and current account deficit signifies the excess of imports over exports. Borrowings of government will increase money supply by 3% and the current account deficit will decrease money supply by 3%. So, the economy will be at equilibrium and AD = AS or S = I.  

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