00:01
So the twin deficit is this idea that america has been running a trade deficit and a fiscal government deficit simultaneously for some time.
00:09
So let's think about what both of these things are, right? the trade deficit says that nx is negative, right? that net exports are negative.
00:19
We are importing more than we're exporting, right? but we also know that savings minus investment is equal to net exports through the basic rules of gdp accounting.
00:30
Right if a country is exporting savings to the rest of the world it must also be running an expert surplus as well right the fiscal twin deficit um suggests that t minus g is also negative that is the taxes and the revenues the government raising are insufficient to cover the government spending so what we need in this answer is something that both increases government spending or decreases taxes and also increases imports or decreases exports, right? so some of these we can rule out because they don't affect the official picture, right? for example, a, no fiscal effect.
01:15
If the fed increases reserves, that doesn't affect the government budget balance at all, right? so we can rule out a.
01:23
We can similarly rule out c for the same reason.
01:26
An expansionary monetary policy, might affect things like net exports, but it's not going to affect the government deficit.
01:33
So our remaining options are b, d, and e.
01:38
So what else can we rule out that doesn't have the right fiscal stimulus? so b, an expansionary fiscal policy that increases the budget deficit, has the right sign, right? the government is borrowing more money.
01:50
That's right.
01:51
D, it actually improves the fiscal policy.
01:59
Deficit, right? here we're running a contractionary fiscal policy.
02:04
A contractionary fiscal policy means the government is going to spend less, and that means the deficit will actually decrease, right? it won't worsen, right? and e, the same thing.
02:15
E is another contractionary fiscal policy that decreases the budget deficit.
02:19
That's the opposite of what we want...