Consider the goods market framework discussed in this unit, during a boom, holding exchange rate constant, we can expect Group of answer choicestrade balance to increase and budget balance to decreaseboth trade balance and budget balance to be negativeboth trade balance and budget balance to increasetrade balance to decrease and budget balance to increase
Question
Consider the goods market framework discussed in this unit, during a boom, holding exchange rate constant, we can expect Group of answer choicestrade balance to increase and budget balance to decreaseboth trade balance and budget balance to be negativeboth trade balance and budget balance to increasetrade balance to decrease and budget balance to increase
Solution
During a boom, we can generally expect the trade balance to decrease and the budget balance to increase. Here's why:
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Trade Balance: A boom usually means that the economy is doing well, people have more disposable income and are spending more. This increased spending often goes towards both domestic and imported goods. If the spending on imported goods increases more than the spending on exported goods, the trade balance (exports - imports) will decrease.
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Budget Balance: During a boom, more people are employed and businesses are making more profits. This leads to higher tax revenues for the government (from income tax, corporate tax, etc.). At the same time, the government usually doesn't need to spend as much on things like unemployment benefits. As a result, the budget balance (government revenue - government spending) tends to increase.
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