Budget Deficit Query!

CFA Level I Economics
#1

Que - If the government is running a budget deficit, which of the following relationships are least likely to occur in the economy at the same time?

Exports relative to imports; Savings relative to investment A) exports < imports; private savings < private investment B) exports > imports; private savings < private investment C) exports < imports; private savings > private investment The correct answer was B) exports > imports; private savings < private investment My understanding is in the equation: (G-T) = (S-I) - (X-M), if there is a budget deficit which means G-T < 0, it means 1) either (S-I) < (X-M) 2) or S-I <0 and X-M >0 We can definitely rule option A out but how can we rule option C out here? In fact, B is most likely to occur if there is budget deficit as described in 2) above, isn’t it?

#2

Not sure if this is the correct reasoning here but :

if there is a budget deficit, government expenditure exceeds tax revenue so G-T>0 which implies (S-I) > (X-M). Hence if the public sector is running a deficit, to ensure balance :

[1] Net private savings must exceed net exports (S-I) > (X-M)

[2]Private savings must exeed private investments S>I so we can eliminate c

[3] when a country spends more than it earns, it must borrow the difference from abroad, or sell foreigners some assets. This produces a current account deficit. (X-M) <0 or X < M, hence we can eliminate a

#3

Thanks, Alladin!

I got my mistake. G - T should be greater than 0.