Why do governments prefer to avoid excessive current account ...

[Jkov05]

Why do governments prefer to avoid excessive current account surpluses? Or, why are growing domestic claims to foreign wealth ever a problem?
 
  What will be an ideal response?

Question 2

In general, the development of underground economic activity ________ economic efficiency
 
  A) hinders
  B) has no effect
  C) aides
  D) hard to tell, sometime hinders, sometimes aides
  E) spikes

[trog]

Answer to Question 1

For a given level of national saving, an increased current account surplus implies lower investment in domestic plant and equipment. A few reasons why: first, the returns to domestic savings may be easier to tax than those on assets abroad; second, an addition to the home capital stock may reduce domestic unemployment and therefore lead to higher national income; third, domestic investment by one firm may have beneficial technological spillover effects on other domestic producers that the investing firm does not capture. In addition, the country may in the future find itself unable to collect the money it is owed. Furthermore, countries with large surpluses can become targets for discriminatory protectionist measures by trading partners with external deficits.

Answer to Question 2

A

[Jkov05]

Thank you

[trog]

No problemo