Question Details

A budget deficit leads to a shortfall in domestic savings relative to investment because 


1. "While some in the U.S. put the trade deficit down to failing U.S. competitiveness, or protectionist policies abroad, he claims its genesis lies in the budget deficit, and the consequent shortfall in U.S. domestic saving relative to investment." 
Explain how the U.S. budget deficit could be responsible for the U.S. trade deficit. The U.S. budget deficit raises interest rates which 
a) increases capital inflows which bids up the value of the U.S. dollar which lowers exports and raises imports 102 
b) increases capital inflows which bids down the value of the U.S. dollar which lowers exports and raises imports 
c) decreases capital inflows which bids up the value of the U.S. dollar which lowers exports and raises imports 
d) decreases capital inflows which bids down the value of the U.S. dollar which lowers exports and raises imports 
2. "Looking at the data, some people might say the balance of payments has 'improved' radically, from a $7 billion current account deficit three years ago to surpluses of $4 billion and $2 billion in the last two years. It is this ongoing current account surplus which led the optimists to predict that the dollar should appreciate." Appreciation of the dollar would require a flexible exchange rate and a surplus in the 
a) capital account b) current account c) balance of trade d) balance of payments 
"The link between the current and capital accounts is often misunderstood. Leaving aside the relatively small influence of central-bank intervention in foreign exchange markets, any deficit or surplus on capital account must be matched by an equal and opposite surplus or deficit on current account. It follows that, as long as the U.S. is to be a capital importer, it must have ......" 
3. Central-bank intervention refers to Fed 
a) prohibition of capital outflows b) open market bond sales or purchases 
c) taxation of foreign exchange transactions 
d) sales or purchases of U.S. dollars on the foreign exchange market 
4. This clipping is best completed with 
a) a balance of trade deficit b) a current account deficit 
c) a balance of payments deficit d) a balance of payments surplus 
"While some in the U.S. put the trade deficit down to failing U.S. competitiveness or protectionist policies abroad, some economists claim that its genesis lies in the budget deficit, and the consequent shortfall in U.S. domestic savings relative to investment." 
5. A budget deficit leads to a shortfall in domestic savings relative to investment because 
a) saving falls because the interest rate falls 
b) savers buy government bonds instead of private bonds 
c) saving falls because of concern about the size of the deficit 
d) investment falls because of concern about the size of the deficit 
6. A budget deficit creates a trade deficit because a budget deficit causes the interest rate to 
a) rise, increasing capital inflows which bids up the value of the dollar 
b) rise, decreasing capital inflows which bids down the value of the dollar 
c) fall, increasing capital inflows which bids up the value of the dollar 
d) fall, decreasing capital inflows which bids down the value of the dollar



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