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Q. Why do governments prefer to avoid current account deficits that are too large?
Answer: A current account debit may possibly pose no problem if the borrowed funds are channeled into productive domestic investment projects that pay for themselves with the revenue they generate in the future. Though sometimes large current account deficits represent temporarily high consumption resulting from misguided government policies or some other malfunctioning of the economy occasionally the investment projects that draw on foreign funds may be badly planned and so on. In such cases the government strength wish to reduce the current account deficit immediately rather than face problems in repaying its foreign debt in the future.
Explain how the money markets of two countries are linked through the foreign exchange market. Answer: The financial policy actions by the Fed affect the U.S. interest rate al
Q. Why are prices of factors of production not equalized? Answer: Again this statement may not or may be argued to be true. On the other hand, the growth and large volume in
Q. How did countries use their policy tools to regain internal and external balance after the first oil shock of 1973? Answer: Seeing that the recession deepened over 1974 an
Explain Integration of International Trade and Foreign Investment
What are the government's fiscal policy options for a recessionary gap caused by cost-push inflation? Use the aggregate demand-aggregate supply model to show the impact of these p
Q . Now the monopolist discovers that it will export as much as it likes of its steel at the world price of $5/ton. It will thus expand for- export production up to the point whe
Q. Explain how an increase in government spending would affect the DD-AA schedule in the short run. Answer: A raise in government spending will raise aggregate demand, which wi
Revisions of Conventional Trade Theory
Explain why Relative PPP is useful when comparing countries that base their price levels on different product baskets. Answer: For instance If the U.S price level increase by
Q. "Trade liberalization could precede capital account liberalization." Discuss. Answer: It is probably true. The issue is associated to the theory of second best and
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