What were some of the consequences of the large current account deficits that the U.S. ran over a long period of time that culminated in the crisis that began in 2007?
What will be an ideal response?
The housing boom of the 2000s and the consumption spree and low savings rates of many Americans; housing finance became awash with funds, consumer credit was easy to get, and American lifestyles were indirectly financed by their access to savings from abroad. Because the current account deficits persisted for so long, they encouraged the gradual accumulation of problems that eventually became extremely severe. Financial market regulators were not prepared for the large inflows of foreign capital and did not recognition the danger of these inflows. Firms receiving funds felt pressure to make loans to increase earnings to make interest payments. Interest rates were depressed and encouraged borrowing. Easy access to home loans increased housing demand and home prices, which encouraged even more borrowing and building, adding to the housing bubble.
You might also like to view...
Faced with a decrease in the demand for its product, a monopolist will lower prices and maintain output at its previous level if
A) the gain in profit is less than the increase in real wages paid. B) the gain in profit is less than the decrease in real wages paid. C) the gain in profit is less than the menu costs. D) the gain in profit is greater than the increase in menu costs.
Keynesians believe ________
A) that economies move quickly to their long run equilibrium levels B) that the government should pursue active policies to stabilize economic fluctuations C) that the long run is more important than short-run fluctuations D) all of the above E) none of the above
If First Interstate Bankcorp has demand deposits of $8 billion, actual reserves of $1.4 billion, and the reserve requirement is 15%, the bank's excess reserves are
A. $100 million. B. $200 million. C. $400 million. D. $800 million.
Those economists who attempt to explain why wages and prices do not freely adjust would most likely be
A) real business cycle theorists. B) new classical economists. C) new Keynesian economists. D) new growth theorists. E) none of the above