Question

# 1. Suppose for some country that the Current account is in deficit of \$450 billion. If...

1. Suppose for some country that the Current account is in deficit of \$450 billion. If the Financial account is in a surplus of \$500 billion. Explain clearly what must be the state of the Capital account? (provide both a numerical magnitude with an explanation).

2.Suppose an economy has a long run saving level of \$5billion and the level of investment spending is also the same at \$5billion. If the government in this economy was to raise taxes and lower its spending, explain what is expected to happen, ceteris paribus, to the current account if it is currently in a deficit and why?

3. Suppose a German tourist visiting the US spends \$1000 on a three night hotel in Columbus and pays using her debit card drawn on her German bank account. How would this transaction be reflected in the US BOPA?

1. The sum of current account balance, capital account balance and financial account balance accounts for a country's Balance of payment, which must be equal to 0 in equilibrium.

Current account = - \$450 billion(deficit)

Financial account = \$500 billion(surplus)

As, Capital account+ current account+ financial account = 0

Or, Capital account - 450 +500 = 0

Or, Capital account = - \$50 billion

Therefore, Capital account is in deficit of \$50 billion. This is likely to happen to bring the balance of payment in equilibrium. The deficit in current account and capital account is met by the surplus in financial account.

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