Explain the relationship between the current account and the capital account in the balance of payments.
What will be an ideal response?
The current account basically shows the position of the United States in terms of trade in goods and services with the rest of the world during a year. The capital account shows the capital flows in the purchase or sale of real and financial assets during a year. The two accounts are interrelated.
A current account surplus basically means that the value of U.S. exports of goods and services was greater than imports of goods and services. This difference in value is financed by Americans lending money abroad or by the purchase of foreign assets. Thus, a current account surplus in the United States is financed by a net capital outflow from the capital account.
By contrast, a current account deficit basically means that the value of U.S. exports of goods and services was less than imports of goods and services. This difference in value is financed by Americans borrowing money from abroad or by selling ownership of American goods and services to foreigners. A current account deficit in the United States is financed by a net capital inflow from the capital account.
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The costs affecting decisions to supply are always
A) accounting costs. B) marginal costs. C) past costs. D) per unit costs. E) non-taxable costs.
Everything else held constant, the vertical section of the supply curve of reserves is lengthened when the
A) discount rate increases. B) discount rate decreases. C) federal funds rate rises. D) federal funds rate falls.
Derived demand means
A) the labor demand curve will be upward sloping. B) labor demand is derived from demand for the product it produces. C) labor demand will shift about in a random fashion. D) labor demand is determined by the supply of labor.
If U.S. securities pay 7 percent interest, and if Great Britain’s securities pay 5 percent interest, then
A. pounds depreciate relative to dollars. B. pounds appreciate relative to dollars. C. Great Britain’s imports will rise. D. Great Britain’s exports will fall.