Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 29: Problem 6

Section 29.4 states that "the budget surpluses of the late 1990 s occurred at a time of then-record current account deficits." Holding everything else constant, what would the likely effect have been on domestic investment in the United States during those years if the current account had been balanced instead of being in deficit?

Short Answer

Expert verified
If the current account had been balanced instead of being in deficit, domestic investment in the United States during the late 1990s would likely have been higher, as more resources would have been available domestically.

Step by step solution

01

Understanding the Current Account

The current account represents a country's net income over a period of time. There are mainly three components: the trade balance, net income from abroad, and net current transfers. A deficit in the current account means that the country is spending more on foreign trade, income, and transfers than it is earning.
02

Link Between Budget Surpluses and Current Account Deficits

In the late 1990s, the U.S had budget surpluses but current account deficits. With a budget surplus, the government spends less than it earns, freeing up resources that can be used elsewhere in the economy. However, a current account deficit implies that money is flowing out of the country to finance foreign spending, which could lead to a reduction in domestic investment.
03

Effect on Domestic Investment of Balanced Current Account

If the current account had been balanced, it implies that there would not have been a net outgoing of resources. It would mean the U.S was spending as much as it was earning from foreign transactions. As a result, there would be no need for domestic money to flow out to finance foreign spending. More available resources at home could have led to increased domestic investment if other economic factors remained constant.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

In 2016, domestic investment in Japan was 23.4 percent of GDP, and Japanese national saving was 27.2 percent of GDP. What percentage of GDP was Japanese net foreign investment?

What is meant by a policy channel?

Suppose that the current exchange rate between the dollar and the euro is \(€ 0.85=\$ 1 .\) If the exchange rate changes to \(€ 0.90=\$ 1\), has the euro appreciated or depreciated against the dollar? Briefly explain.

If a country saves more than it invests domestically, what must be true of its net foreign investment?

If we know the exchange rate between Country A's currency and Country B's currency and we know the exchange rate between Country B's currency and Country Cs currency, then we can compute the exchange rate between Country A's currency and Country C's currency. a. Suppose the exchange rate between the Japanese yen and the U.S. dollar is currently \(¥ 115=\$ 1\) and the exchange rate between the British pound and the U.S. dollar is \(£ 0.75=\$ 1 .\) What is the exchange rate between the yen and the pound? b. Suppose the exchange rate between the yen and the dollar changes to \(¥ 120=\$ 1\) and the exchange rate between the pound and the dollar changes to \(£ 0.70=\$ 1\). Has the dollar appreciated or depreciated against the yen? Has the dollar appreciated or depreciated against the pound? Has the yen appreciated or depreciated against the pound?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free