Question

In 1998, the Russian government defaulted on its debt payments,leading investors worldwide to raise the preference for U.S government bonds, which are considered very safe. What effect do you think this flight to safety had on the U.S economy? Be sure to note the impact on national saving, domestic investment, net foreign investment, the interest rate, the exchange rate, and the trade balance

Answer 1

Due to default in payments of Russian government on its debt payment, leading investors attracted to U.S. government bonds.This result in decline in net capital outflow of U.S. economy and this decline led to decline in demand for lonable funds. This has also impact on interest rate as demand curve shift left , interest rate declines.The lower interest rate causes decline in national savings of U.S. and increase in domestic investment. Due to lower outflow of net capital net exports are also lowered. Decreased net capital outflow led to decline in supply of dollar in foreign exchange which led to appreciate the dollar hence real exchange rate rises.The trade balance also moves toward deficit.