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 isSolution
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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