A government official announces a new policy. The country wishes to eliminate its trade deficit, but will strongly encourage financial investment from foreign firms. Explain why such a statement is self-contradictory.

Suppose that you are a government official in charge of your country’s fiscal policy. The country maintains a flexible exchange rate system. You are asked by your country’s citizens to use fiscal policy alone to expand the country’s output and to reduce its trade deficit simultaneously. Use the IS-LM diagram to answer the following

A) Is it possible for you to obtain these two goals using only fiscal policy?

B) Suppose instead that you were in charge of the country's money supply. Is it possible for you to obtain these goals using monetary policy?

C)Now suppose that the country has a fixed exchange rate system. Is it possible to use either monetary and fiscal policy to lower the trade deficit and expand national output simultaneosly?

How do foreign governments encourage foreign investment? Discuss.

a) Trade deficits occur when S+T>I+G

b) Trade deficits occur when S+T < I +G

c) Can be caused by government budget deficits or levels of investment that exceed private savings

d) Both b and c are correct