Economics, Student Value Edition (7th Edition)
7th Edition
ISBN: 9780134739229
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Question
Chapter 29, Problem 29.4.7PA
To determine
A current account deficit.
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Why is a nation with a current account deficit a borrower at that point in time?
International Finance and the Exchange Rate - End of Chapter Problem
At a family gathering, one of your cousins says, "We spend so much more on imports than other countries spend on our exports.
It isn't fair, and we should raise tariffs on imports to reduce how much we buy from other countries."
How might you explain to your cousin that current account deficits aren't necessarily a sign of economic troubles to come?
Our current account deficits mean we obtain cheaper goods than we could otherwise.
Most economists agree that an unequal bilateral trade balance is nothing to worry about.
Contrary to common belief, the current account deficit does not suggest that we are living beyond our means.
The flip side of the current account deficit is a financial account surplus, which could enhance future growth if the
foreign spending it entails is directed toward high-quality investments.
Catherin Mann (2006), “The Current Account and the Budget Deficit: A Disaggregated Perspective,” in Kopcke, Tootell, and Triest (eds.), The Macroeconomics of Fiscal Policy, MIT Press
In the article, Mann notes that the foreign financing of the US current account deficit has increasingly taken the form of foreigners purchasing US Treasury bonds.
She is concerned that the increase of foreign holdings of US Treasury bonds may worsen the US current account deficit in the future. Which of the following statements is inconsistent with her reasons behind the concern?
a. As global interest rates starts to climb, the overall payments on interest-bearing liabilities (including US Treasury bonds) will rise.
b. The interest paid on US government debt (ie, US Treasury bonds) will be increasingly paid to foreign holders, setting up a negative feedback loop between fiscal deficit and current account deficit.
c. The greater the US current account deficit, the larger the risk of eventual, sharp…
Chapter 29 Solutions
Economics, Student Value Edition (7th Edition)
Ch. 29 - Prob. 29.1.1RQCh. 29 - Prob. 29.1.2RQCh. 29 - Prob. 29.1.3RQCh. 29 - Prob. 29.1.4PACh. 29 - Prob. 29.1.5PACh. 29 - Prob. 29.1.6PACh. 29 - Prob. 29.1.7PACh. 29 - Prob. 29.1.8PACh. 29 - Prob. 29.1.9PACh. 29 - Prob. 29.1.10PA
Ch. 29 - Prob. 29.1.11PACh. 29 - Prob. 29.2.1RQCh. 29 - Prob. 29.2.2RQCh. 29 - Prob. 29.2.3RQCh. 29 - Prob. 29.2.4RQCh. 29 - Prob. 29.2.5PACh. 29 - Prob. 29.2.6PACh. 29 - Prob. 29.2.7PACh. 29 - Prob. 29.2.8PACh. 29 - Prob. 29.2.9PACh. 29 - Prob. 29.2.11PACh. 29 - Prob. 29.2.12PACh. 29 - Prob. 29.2.13PACh. 29 - Prob. 29.2.14PACh. 29 - Prob. 29.3.1RQCh. 29 - Prob. 29.3.2RQCh. 29 - Prob. 29.3.3RQCh. 29 - Prob. 29.3.4PACh. 29 - Prob. 29.3.5PACh. 29 - Prob. 29.3.6PACh. 29 - Prob. 29.3.7PACh. 29 - Prob. 29.3.9PACh. 29 - Prob. 29.3.10PACh. 29 - Prob. 29.4.2RQCh. 29 - Prob. 29.4.5PACh. 29 - Prob. 29.4.6PACh. 29 - Prob. 29.4.7PACh. 29 - Prob. 29.4.8PACh. 29 - Prob. 29.5.1RQCh. 29 - Prob. 29.5.2RQCh. 29 - Prob. 29.5.3RQCh. 29 - Prob. 29.5.4PACh. 29 - Prob. 29.5.5PACh. 29 - Prob. 29.5.6PACh. 29 - Prob. 29.5.7PACh. 29 - Prob. 29.1RDECh. 29 - Prob. 29.2RDECh. 29 - Prob. 29.3RDECh. 29 - Prob. 29.4RDECh. 29 - Prob. 29.5RDECh. 29 - Prob. 29.1CTE
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- Explain the relationship between a current account deficit or surplus and the flow of funds.arrow_forwardUnited States currently runs a significant trade deficit with the rest of the world. Research an academic journal article regarding some of our trade balances with specific countries and share what you find. For example, with whom do we run the largest deficits, with whom do we have surpluses, etc.? Do you think it is a problem if we run a trade deficit? Why or why not? In answering, keep in mind what impact a trade deficit has on other parts of our balance of payments.arrow_forwardWhat is current account deficit? List down, with detailed explanations, what causes current account deficit in the economy.arrow_forward
- The data in Table 12-1 end in 2011. Visit the U.S. Bureau of Economic Analysis at bea.gov to find information for the latest full calendar year (or for the last four quarters). What is the latest estimate of the size of the annual U.S. current account deficit in billions of dollars?arrow_forwardYou have the following annual figures for the New Zealand economy. Investment expenditure $42.5 billion Government savings -$1.7 billion The current account balance is not zero. In fact the current account deficit is $6.0 billion. What is New Zealand's actual private sector savings figure? $____billion (use 1 d.p.).arrow_forwardSuppose that a nation has a current account deficit of 80 million dollars and a financial account surplus of 20 million dollars. How would the central banks’ foreign reserves change ?( Answer the question based on the assumption that there is no change in financial account). Now suppose that foreigners purchased 80 million worth of domestic assets. How would this affect the balance of payments accounts and central banks’ reserves?Please explain.arrow_forward
- You have the following annual figures for the New Zealand economy. Investment expenditure $40.6 billion Net Exports $3.6 billion Net Foreign Income -$9.5 billion The current account balance is equal to $____billon (use 1 d.p. and a negative sign if the balance you have calculated is a deficit). New Zealand domestic savings is equal to $____billon (use 1 d.p.). Suppose that the government introduces a policy that bans foreign investment in New Zealand. If that happens then (everything else held constant) we would expect to see the current account balance -rise -remain the same. -fall -become harder to predict Suppose that along with the above policy, the government also wishes to see investment levels maintained. If that is to occur, what else must be happening in the economy? - The Government must raise taxes. - Firms must be offered incentives to invest. - New…arrow_forwardHow does a fiscal expansion affect the real exchange rate and net exports?arrow_forwardSome economists argue that the current account deficit in the United States is less problematic than current account deficits in other parts of the world. Identify possilbe reasons why the current account deficit in the United States may be less problematic than current account deficits in other nations. The United States benefits from currency arbitrage. The U.S. economy has a fixed exchange rate policy. In the United States, the current account deficit is offset by a surplus in the capital account. The United States borrows in a currency it controls. The current account deficit is relatively small as a share of GDP, compared with countries facing debt crises. The United States tends to earn more on its foreign investments than foreigners earn on their investments in the United States.arrow_forward
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