Question

Be sure to answer all five parts of this question.

What would happen to the U.S. current account in each of the following​ situations? Choose either fall​ (become more negative or​ smaller), rise​ (become more positive or​ larger), no change​, or uncertain.

​a) If the real dollar exchange rate​ appreciates, the U.S. current account will

A. Rise

B. Fall

C. No change

D. Uncertain

​b) If U.S. disposable income falls​, the U.S. current account will

A. Rise

B. Fall

C. No change

D. Uncertain

​c) If capital flows into the U.S.​, the U.S. current account will

A. Rise

B. Fall

C. No change

D. Uncertain

​d) If the Fed pursues contractionary monetary policy​, the U.S. current account will

A. Rise

B. Fall

C. No change

D. Uncertain

​e) If the U.S. government increases tax rates​, the U.S. current account will

A. Rise

B. Fall

C. No change

D. Uncertain

Answer 1

a) Fall

( lf dollar appreciates , then US goods would seem expensive and foreigne goods would seem cheaper. As a result, exports would fall and imports would rise. Exports represent credit where as imports represent debit in the current account. Therefore, current account would fall.)

b) Rise

( lmports are positively related to income . Rise disposable income increase imports . But a fall in disposable income would be accompanied by an decrease in imports by the Americans. Imports represent debit in the current account. Therefore, current account would rise as result of decrease in debit entry.)

c) No change

( Current account mainly represents a country's exports and imports of goods and services , payments made and received etc . capital inflows and capital outflows are recorded in the capital account.)

d) Rise

( A contractionary monetary policy would result in a fall in US price level. As a result, US goods would appear cheaper and foreign goods would appear expensive. Exports will rise and imports will fall leading to a positive change in the current account.)

e) Rise

( An increase in tax rate would reduce disposable income. Imports are directly related to disposable income. A fall in disposable income would lead to a reduction in imports . aA reduction in imports would lead to a better current account balance.)