Chapter 17.4

Question 1

Consequences of persistent current account deficits

Answer 1

Depreciating exchange rate
Possible need for higher interest rate to attract foreign investments
Foreign ownership of domestic assets
Increasing levels of debt
Cost of paying interest on loans
Fewer imports of needed capital goods
Poor international credit ratings
Painful demand management policies
Possibility of lower economic growth
Lower standard of living in the future

Question 2

Credit rating

Answer 2

A ranking showing how likely a borrower is to repay their loans in full and on time

Question 3

Policies to correct persistent current account deficits

Answer 3

Expenditure reducing policies
Expenditure switching policies
Trade protection
Depreciation
Supply-side policies

Question 4

Expenditure reducing policies

Answer 4

Policies that try to influence the level of imports and exports by reducing domestic expenditures and aggregate demand

Question 5

Disadvantages of expenditure reducing policies

Answer 5

May cause a recession, and higher interest rates may lead to currency appreciation

Question 6

Expenditure switching policies

Answer 6

Policies that attempt to switch consumption away from imported goods

Question 7

Marshall-Lerner condition

Answer 7

If the sum of the PEDs for imports and exports is greater than 1, devaluation/depreciation will improve the trade balance
If the sum of the two PEDs is less than 1, devaluation/depreciation will worsen the trade balance
If the sum of the two PEDs is equal to 1, devaluation/depreciation will leave the trade balance unchanged

Question 8

J-curve effect

Answer 8

When the trade balance worsens immediately after a devaluation/depreciation of currency, but then begins to improve

Question 9

Consequences of persistent current account surpluses

Answer 9

Low domestic consumption
Insufficient domestic investment
Appreciation of the domestic currency
Reduced inflation
Employment
Reduced export competitiveness
Possibility of retaliation by trading partners