RQ_Solution_%28Ch_12%29

RQ_Solution_%28Ch_12%29 - ECMC61 Chapter 12 Review...

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ECMC61 – Chapter 12 Review Questions Answer Key Question 1: Chapter 12, Problems #6 A government might concern about a large CA surplus or a large CA deficit: A CA surplus or deficit is a situation which may not be sustainable in the long run. A CA deficit implies the country is borrowing from abroad. In order to repay the foreign debt, the country must run a CA surplus in the future unless today’s borrowing is used to improve productive capacity in order to have a higher national income tomorrow. A persistent CA deficit implies an accumulation of foreign debts, and it is possible that the country may not able to repay its foreign borrowings A CA surplus implies the country is investing abroad. A country cannot run a CA surplus on a persistent basis because a persistent CA surplus can only be achieved if the country’s consumption is lower than its income on a persistent basis the country is not maximized its well-being. If a country runs a CA surplus, this also implies the country is a net creditor.
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RQ_Solution_%28Ch_12%29 - ECMC61 Chapter 12 Review...

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