What would happen to the U.S. current account in each of the following? situatio

Question

What would happen to the U.S. current account in each of the following? situations? Choose either fall?(become more negative or? smaller), rise? (become more positive or? larger), no change?,or uncertain.

A)If the real dollar exchange rate? appreciates, the U.S. current account will

B)If U.S. disposable income falls?, the U.S. current account will

C)If capital flows into the U.S.?, the U.S. current account will

D) If the Fed pursues contractionary monetary policy?, the U.S. current account will

E)If the U.S. government increases tax rates?, the U.S. current account will

Explanation / Answer

A) fall, bcoz exports become costlier, imports become cheaper due to exchange rate appreciation

B) rise, bcoz import demand falls, so current account improves

C) fall,the effect of capital inflows is similar to effect of decrease in interest rates.

Capital inflows are associated with increased consumption & investment spending. & So current account deficit widens

D) fall, as restrictive monetary policy leads to ex rate appreciation, thus weaker current account.

E) rises, as increased tax rates will lead to fall in disposable income , hence marginal propensity to import will fall, current account improves

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