1. The U.S. economy experienced large trade deficits in the 1980s and 1990s and tremendous economic growth in the mid- and late-1990s.

a) Trade deficits have an effect on inflation. Explain the relationship between trade deficits and investment verbally and mathematically using the concept of the balance of payments.

b) Explain verbally the relationship between investment and long-term economic growth, and describe the relationship graphically in an AD/AS graph.