Hey guys i just wanted to clear things up for my upcoming exam..
Would a budget deficit cause a rise in the CAD, such as Rudds stimulus package.
Wouldnt this lead to a rise in consumer spending, leading to a greater demand on imports..worsening our Balance on goods and services?
Budget deficit would cause a rise in CAD. It may lead to consumer spending, but it won't always lead to greater demand on imports. And furthermore, balance on goods and services is a minor attribute to the CAD. It's mostly from the returns of net foreign debt and liabilities, which is shown on the current account.
This means that generally, with budget deficit, there will be a rise in CAD, and the debt trap scenario becomes more imminent. Also, it's good to note that CAD has other effects such as loss of confidence in foreign investors and lenders. This will lead to a decrease in inflow of capital and funds --> Australia will be in trouble, being unable to close the gap between the domestic savings and production.
I think what you are trying to say is that households will have more aggregate demand as aggregate supply increases ( which is aggregate income, which = AD) and that it is POSSIBLE to further worsen the CAD if the households were to buy more imported goods with this extra income.
