Japan once argued that the main reason the United States had large trade deficits during the 1980s and 1990s were because of its large federal government budget deficit. If the United States wanted to reduce its trade deficit, Japan said, then the United States should reduce its budget deficit. Use the twin-deficit identity to answer the following questions:

a. Explain what also would have to hold for there to be a direct relationship between budget deficit changes and trade deficit changes.

b. Is it possible to account for a reduction in the federal government budget deficit and a simultaneous increase in the current account deficit? Explain.

c. Is it possible to reduce the federal government budget deficit, maintain the same level of net private saving (i.e., S_pI), and still experience an increase in the current account deficit? Explain.