EBK MACROECONOMICS
10th Edition
ISBN: 9780134896571
Author: CROUSHORE
Publisher: VST
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Chapter 5, Problem 6RQ
To determine
To explain: The changes in the desired saving and desired investment that results in large current account deficits and the factors that result in these changes.
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Students have asked these similar questions
Describe three means by which a current account
deficit in a developing country
is financed. (By "financed," I mean "paid for," "covered"
or "balanced" in
accounting terms. "Increase exports" or "decrease
imports" are not correct
answers since they refer to future actions a country
may take, not to how a
current account deficit is balanced/financed today.)
In open economies, policy makers are motivated by the goal of internal balance and external balance. Internal balance requires the full employment of a country’s resources and domestic price level stability, while external balance is attained when a country’s current account is neither so deeply in deficit nor so strongly in surplus.
a. Discuss the government actions to avoid price-level instability resulted from under-and overemployment.
b. Discuss the problems with excessive current account deficits and problems with excessive current account surplus.
Explain why a nation with a current account deficit is a net external borrower, while a nation with a current account surplus is a net external lender.
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Similar questions
- Now consider a small open economy, assuming domestic output is held constant and the country initially has a current account deficit. Explain the impact of an increase in government spending on the current account using both words and graphs.arrow_forwardDiscuss the following statement: “It’s true that running a current account deficit for a developing country is a bad thing”arrow_forwardExplain how changes in various economic factors affect a country's current account balance.arrow_forward
- In which of the following circumstances should a small open economy run a trade deficit? Select all correct answers. An oil-producing country that recognizes demand for oil will be lower in the future due to climate change Low fertility and increased life expectancy boosts the saving rate O A devastating earthquake reduces the country's industrial capacity O A policy reform boosts productivity growtharrow_forwardA government finds itself in the following situation: a government budget deficit of $900; total domestic savings of $2000, and total domestic physical capital investment of $1300. According to the national saving and investment identity, if investment increases by $200 while the government budget deficit decreases by $100 and savings remain the same, what will happen to the current account balance?arrow_forwardIf domestic investment increases, and there is no change in the amount of private and public saving, what must happen to the size of the trade deficit?arrow_forward
- Describe the factors that affect saving and investment and determine the current account balance in a small open economy.arrow_forwardA Current account deficit often raises the opposition of protectionists who think that a current account deficit is a bad signal, and a current account surplus is always good. Do you agree with the above statement? Explain why. Provide the example with the illustration.arrow_forwardPeople sometimes worry that American trade with other countries will lead to large U.S. trade deficits and the movement of massive amounts of American capital out of the country. This worry is unfounded because countries cannot a) have both current account and financial account deficits at the same time. b) increase savings at the same time that a trade deficit grows. c) spend more than they earn. d) invest more than they save.arrow_forward
- When there are two large open economies in the world, if capital goods become relatively cheaper compared to consumption goods in the foreign country, the world real interest rate will and the home country's current account will fall; rise fall; fall rise; rise rise; fallarrow_forwardConsider a world with only two countries (i.e., two large open economies), the home country and the foreign country. Both countries have a zero current account balance initially. When answering the following questions, clearly label the lines and show the changes in the graph provided below. Give an intuitive explanation for the effects in each case. (a) What are the effects on the world equilibrium interest rate, national saving, investment, and the current account balance in each country if home future labour income increases?arrow_forwardAssume an economy has a large current account deficit. Indicate the causes and consequences of it in the long run.arrow_forward
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