Question

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?

Answer 1

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.