a What is it called when the government runs a deficit at th

a). What is it called when the government runs a deficit at the same time that the country is running a current account deficit? b). The interest rate spread- the difference between the interest rate on a safe asset and the interest rate on a risky asset- can be seen as a measure of aggregate financial________?

Solution

(a) This is called a Twin Deficit gap. The economy experiences both a budget deficit as well as a current account (trade) deficit.

(b) This is a measure of aggregate financial market risk premium.