Chapter 41, Problem 1FRQ

a.

To determine

The impact of the decrease in real income on the country U current account balance.

Explanation of Solution

If the real income of people is reduced then imports will be reduced. This reduction in imports will reduce the cash outflow from the country which will increase the current account balance.

Therefore, the current account balance of the country U will be more.

Economics Concept Introduction

Real GDP: Real Gross Domestic Product refers to the measure that determines the value of goods and services which are produced in the country within a specific time frame after adjusting for inflation.

b.

To determine

The impact on country U's balance of payment if country C financed an infrastructure spending program by granting loans from the country U.

Explanation of Solution

If country C has spent a huge amount on infrastructure development by using borrowed capital, the deficit of the current account balance will increase.

The interest rate of lending will be high for country C due to high borrowing demands. Countries that were lending money to the country U will prefer lending to China due to high-interest rates which will reduce the amount present in U’ current account.

Also, country C can borrow funds from the US which will decrease the surplus from US’ current account and the deficit will be reduced as the U has lent the money to C at high-interest rates.

Economics Concept Introduction

Real GDP: Real Gross Domestic Product refers to the measure that determines the value of goods and services which are produced in the country within a specific time frame after adjusting for inflation.