Question 1
The United States account deficit was financed by a capital account surplus which included components such as banking loans, monetary movements, investments and loans.
Question 2
The terms negative international investment position in chapter 12 meant that the nation had become a debtor. That is to imply that the country’s external financial assets and liabilities had a negative value in its statement, which indicates that the United States owed other nations (Krugman 76).
Question 3
Although serving cost may increase, it may not have any effect on the balance of payment accounting since this is a stipulated and fixed recording. Most international trade is negated out by capital account transactions. As a consequence, an increase in the outstanding deficits will occur.
Question 4
If global investors decide on not increasing the Unites States assets portfolio, the balance of payment will increase pushing up international debt too. Consequently, this will increase the burden of paying the debt, which reduces the national income too. Although the increase may not be realized immediately, the effect will gradually affect domestic borrowing (Krugman 91).
Question 5
If the situations in third and fourth questions occurred, the domestic borrowing would be significantly affected and national income will reduce, in the long run, subsequently affecting the total international trade.
Question 6
The author thinks that a decline in the dollar will have a negative effect on international debts and any new international trade. This will be attributed to a rise in foreign currency (Kragh 136).
Question 7
The author further thinks that a higher growth rate in other countries would lower the US current account deficit because the dollar will lose ground on its value, raising its nation’s foreign debt.
Question 8
Mann thinks that a decrease in trade barriers would help in lowering the current trade deficit because such policies will expand business transactions and increase the flow of both the dollar and foreign currency.
Question 9
A low household savings rate can contribute to a high current account deficit because much money will be out in the market leaving little for expenditure, which is crucial for economic growth (Kragh 125).
Question 10
For the last 15 years, household savings have decreased significantly, which can be attributed to the increase in the price of local and international commodities, leading to an increase in domestic spending. A high expenditure subsequently leaves households will less money to save.
Question 11
The reason it is dangerous for a country to experience a current account deficit is because the situation is similar to living on borrowed money or consuming future resources today. This is dangerous because consumption and borrowing will go up each day until it is unsustainable.
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