In recent years, the United States has had a very large deficit in the balance o

Question

In recent years, the United States has had a very large deficit in the balance of trade on current account. Some critics have argued that this deficit has been a drag on economic growth in recent years. Some of those critics have argued that we ought to re-visit our country's commitment to free trade policies while other critics have argued that there are alternative ways to influence the balance of trade problems.


a. What is a "balance of trade on current account"? Currently, which is larger, exports or imports?


b. Why would this deficit be considered a "drag" on the national income? Any multiplier effects?


c. What are "managed" floating exchange rates?


d. Graph the exchange rate between the US dollar (US$) and the euro of the European Monetary Union (Please put dollars on the horizontal axis and euros/dollar on the vertical axis. Assume the current exchange rate is Euro.60 = US$1.00) Explain the effect of lowering the discount rate (by the Federal Reserve) on the market value of the dollar relative to the euro.

Explanation / Answer

2)Y = G + Nx +I +C Nx is Export -Import, so trade deficit has direct effect on National Income. Trade deficit does not multiplier but in open economy the Keynesian G multiplier involves export and import seaparately such that import is part of consumption with MPM as marginal propensity to import. 3)A managed currency is an exchange rate that is basically floating in the foreign exchange markets but is subject to intervention from time to time by the monetary authorities, in order to resist fluctuations that they consider to be undesirable.

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