The acceleration of inflation that characterizes many economic ...

[JGIBBSON]

The acceleration of inflation that characterizes many economic populist movements is usually the result of
 
  A) a rapid increase in the demand for exports.
  B) the printing of money to finance government budget deficits.
  C) current account deficits.
  D) import substitution policies.

Question 2

Explain why current account deficits may or may not be harmful to a country.
 
  What will be an ideal response?

[Melissahxx]

Answer to Question 1

B

Answer to Question 2

On the positive side, a current account deficit enables more investment than would be possible otherwise, and since higher investment is correlated with higher living standards, the current account deficit might be interpreted as beneficial. In addition, the capital inflows associated with current account deficits are an implicit vote of confidence by foreigners. On the negative side, capital inflows that occur with a current account deficit increase the stock of foreign-owned assets inside the home country, raising the possibility that a change in investor expectations about the economy's future can lead to a sudden surge in capital outflows. In the worst case scenario, capital flight is followed by a depletion of international reserves and a financial crisis.

[JGIBBSON]

Thank you

[Melissahxx]

No problemo