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Government expenditure reduce the trade deficit in the long

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Your business has been considering the possibility of establishing a subsidiary in Ireland to produce a product there and export it to the rest of Europe. You have examined the project and have concluded that it will break even (i.e., it will recover all its costs, but will not make a profit in excess of a normal returns on capital). Your company decides to put the project on hold. One day you read in The Economist that: "The Irish government has appointed a new finance minister to deal with the country's chronic trade deficit. The new minister has adopted a program for trade deficit reduction which has only one provision: a permanent reduction in government expenditure

[Q] How can a reduction in the government expenditure reduce the trade deficit in the long run, when prices fully flexible

Reference no: EM132476812

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