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Chapter 14: Q.7 (page 319)

Explain in your own words why there is likely to be a relationship between federal budget deficits and U.S. international trade deficits.

Short Answer

Expert verified

Federal budget deficits increases and decreaseand the U.S. international trade deficits increases and decreases respectively.

Step by step solution

01

Introduction

A rise in the federal budget deficit in a year infers an expansion in the getting necessity of the federal government.

02

Explanation

Whenever the public authority's interest for reserves rises, it pushes the loan costs in the nation up. As homegrown financing costs rise, outsiders track down putting resources into the U.S. more appealing. Thus, unfamiliar financial backers request more dollars. The developing interest in the dollar prompts dollar appreciation. Thus, commodities of merchandise decline and imports of products ascend in the U.S. Consequently, the U.S. import/export imbalance rises.

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Most popular questions from this chapter

Why might nations' governments earn lower-than-anticipated revenues from asset sales if all governments offered similar assets for sale simultaneously? (Hint: What would happen to asset supplies and market clearing prices if all governments sought to sell substantial numbers of the same types of assets?)

Suppose that the share of U.S. GDP going to domestic consumption remains constant. Initially, the federal government was operating with a balanced budget, but this year it has increased its spending well above its collections of taxes and other sources of revenues. To fund its deficit spending, the government has issued bonds. So far, very few foreign residents have shown any interest in purchasing the bonds.

a. What must happen to induce foreign residents to buy the bonds?

b. If foreign residents desire to purchase the bonds, what is the most important source of dollars to buy them?

A fraction of the funds borrowed by the federal government between 2008 and 2015 were utilized to fund public investments in a number of solar power companies that produced little output and halted operations. These concerns provided no repayments to the government. In what sense might this fraction of deficit spending arguably have imposed a "burden" on future generations?

Analyze the macroeconomic effects of government budget deficits.

Take a look at the most recent years of data on the net public debt displayed in Figure 14-3, and then examine the most recent years of data on federal budget deficits shown in Figure 14-2. Why do you suppose that the net public debt as a percentage of GDP has grown more slowly recently than was the case between 2008 and 2015 ?
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