Having some trouble understanding 18 and 19 1s Which one of the factors is least
ID: 2816983 • Letter: H
Question
Having some trouble understanding 18 and 19 1s Which one of the factors is least likely to be associated with the large US trade eficit A. low savings rate in the US B. low investment opportunity in the US C. high spending rate, relative to income levels in the US D, high value of the US dollar in the foreign exchange market 9 The Chinese government holds á t20% of the US Treasury securities. If the US trade deficit with China increases, the most likely impact of this will be to: A) Increase the Chinese share in the US treasury market. B) Decrease the Chinese share in the US treasury market. C) It will have no impact on the Chinese share in the US treasury market..Explanation / Answer
Answer 18. We can solve the question by evaluating all the factors which are most likely associated with the large US trade deficit. To start with, a large trade deficit is a result of the US importing more than what it exports to its trade partners. In other words, the consumption demand for goods and services in the US is higher than what US can produce (in a cost effective manner as compared to its trade partners). The consumption demand is higher due to the low savings rate in the US (Option A), which encourages the US citizens to consume more rather than save. Further, given the low savings rate in the US, a consumer can easily finance his/her consumption at lower interest rates and which leads to high spending rate, relative to income levels in the US (Option C). Also, imports are relatively cheaper for the US given the high value of the US dollar in the foreign exchange market (Option D) which in turn makes exports less competitive and again is associated with trade deficit.
We are thus left with Option B (low investment opportunity in the US) which is the least likely factor to be associated with the large US trade deficit. This is because, trade deficit actually enables the trading partners to finance the deficit by lending or investing in the country which runs a deficit and the US has abundant investment opportunities wherein its trading partners invest. So the answer is Option B.
Answer 19. Let us first understand here that when a country runs trade deficits with its trading partners, the deficit (current account) needs to be funded through foreign borrowings (lending to or investments in the US through the capital account) in order to have a balance of payments. Thus, in case the US trade deficit with China increases (US net imports from China increase), the most likely impact of this will be that China will finance this trade deficit by lending to the US or investing in the US. So the correct answer here is Option A (Increase the Chinese share in the US treasury market).
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