The largest portion of the
Current Account is international trade in goods. For the US, this account is tracked by the US
Census Bureau (somewhat strangely). Use
a web search or search within the US Census Bureau homepage for “US trade in
goods with world seasonally adjusted.” What
is the most current full year balance?
What does this balance mean in terms of exports and imports?
Household finances are similar
in some ways to a nation’s international transactions.
Suppose a household consumes
(spends) more than its income. What are
3 legal ways it can finance this deficit?
Give an example of each.
How can a nation that runs a
persistent Current Account deficit finance its excess consumption?
A nation with a large current
account deficit is consuming more than it produces or living beyond its
means. Is this necessary bad? What is your judgment for the United States?
If the central bank does not
intervene in the foreign exchange markets (the RA balance is zero), briefly
explain why CA + KA = FA (see Exhibit 16-3).
Suppose that the US current
account deficit must be reduced. Explain
in terms of CA ? (S – I) + (T – G) what must be done to reduce the current
account deficit. Why will this be
difficult? (Hint: It may be helpful to think about the
household that has been living beyond its means, perhaps by borrowing on credit
With the following problems, we begin to
integrate the 3-sector model. These
problems follow from the examples in Martinsen, chapter 17, pages 566 and
567. For each economic condition, insert
a new supply or demand curve and insert arrows to demonstrate that the
statement accords with the theory.
An increase in aggregate demand
for a nation’s goods and services, such as would occur if the government
increased spending, normally causes an increase in the amount produced and a
higher average price level.
An increase in a nation’s
supply of goods and services, as would occur if the oil prices fell in the
world market, tends to raise the amount sold per time period and lowers the
nation’s average price level. Greater
output creates more jobs which reduces the unemployment rate.
An increase in borrowing demand,
as would occur if the government borrows more money to finance the budget
deficit, causes the real risk-free interest rate and the equilibrium quantity
of real loanable funds per period of time to rise.
An increase in the supply of a
nation’s real loanable funds, as would occur if the central bank engaged in
open market purchases of financial securities, reduces the real risk-free
interest rate and increases the quantity of real loanable funds per period of
An increase in the demand for a
nation’s currency, as would arise if foreigners wished to increase purchases of
domestic goods, raises both its international value (exchange rate) and
equilibrium quantity per period of time.
An increase in the supply of a
nation’s currency, as would occur if the central bank engages in open market
purchases, lowers the exchange rate and raises the equilibrium quantity per
period of time.
Suggested weight: 8%
Here’s one that not yet
introduced in the text but will become important. A decrease in the real interest rate
encourages borrowing and spending by households (C) and firm’s (I) thereby
increasing real GDP.