Author Question: Both the trade and budget balance were in roughly zero until the 1980s when the budget deficit ... (Read 61 times)

faduma · **on:** Jun 30, 2018

Both the trade and budget balance were in roughly zero until the 1980s when the budget deficit increased dramatically and the U.S. trade deficit increased dramatically.

However, during the late 1990s the budget deficit shrankin fact, moving to surplusat the same time that the U.S. trade deficit increased significantly. Since 2000, the budget deficit has increased significantly, particularly after 2008.What is the relationship between a country's trade balance and its stance as a borrower or lender? Historically, has the U.S. been a net lender or net borrower? Why do you think that this is? Do you think that the U.S. budget situation might have anything to do with this?

Question 2

In the quantity theory of money, the assumption that aggregate output is fixed is based on the view that ________.

A) wages and prices are perfectly flexible in the long run
B) the velocity of money is constant in the short run
C) the demand for real money balances is proportional to income
D) changes in the quantity of money lead to proportional changes in the price level
E) none of the above

aburgess · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Countries that run trade deficits must borrow from other countries to pay for this. Thus, countries that run trade deficits are net borrowers. The huge budget deficits in the U.S. coupled with its high levels of consumption (and low savings) have led it to becoming the largest debtor nation in the world. Large trade deficits have occurred during the same time that the U.S. has also been running large budget deficits, indicating that there may well be some cause and effect between the two.

Answer to Question 2

A