BOP test

Question 1

What are the consequences of a current account deficit?

Answer 1

Lower AD
Lower exchange rate
Debt burdens

Question 1

Chains of reasoning for lower AD caused by a current account deficit

Answer 1

(X-M) is a component of AD
Trade balance (X-M) would be negative
would cause AD to decrease
Less growth
More unemployment

Question 2

Chains of reasoning for debt burdens caused by a current account deficit

Answer 2

Patterns of borrowing observed by investors
Less confidence
Pull away from lending
Investors will move away from the country
Sell the currency
Currency crisis

Question 3

Chains of reasoning for lower exchange rate caused by a current account deficit

Answer 3

Downward pressure on the exchange rate
Importing more means selling more of if its currency to buy others
Increased supply of the currency

Question 4

Evaluation of lower exchange rate being a consequence of CA deficit

Answer 4

Although it could correct the deficit (WPIDEC)
It is more likely to cause stagflation due to an increase in cost of production for firms as raw materials imported would be more expensive
Reducing growth

Question 5

EVALUATION for debt burdens burdens being a consequence of current account deficit

Answer 5

Only a problem if the current account deficit balloons out of proportion
Large percentage of GDP
The debt burden will seem to be out of control

Question 6

What is the borrowing figure for the UK?

Answer 6

132 billion £

Question 7

What is a current account deficit?

Answer 7

When net imports is greater than net exports

Question 8

What are the causes of current account deficits?

Answer 8

Low productivity, low investment, over-consumption

Question 9

Diagram for CA deficit lowering AD

Answer 9

PL Y axis
RGDP x axis
AD sifts to the left
MULTIPLIER

Question 10

Diagram for CA deficit lowering AD

Answer 10

P£ in $ on Y axis
Q£ on x axis
S shifts outwards