Explain why economies with financial account surpluses usually ...

[newbem]

Explain why economies with financial account surpluses usually have current account deficits.
 
  What will be an ideal response?

Question 2

Why are the long-run effects of an increase in aggregate demand on price and output different from the short-run effects?
 
  What will be an ideal response?

[Beatricemm]

Answer to Question 1

An economy will have a current account deficit if it is importing more than it is exporting in goods and services. This deficit must be financed by foreign investment in the economy (capital inflows) that exceeds capital outflows. As a result, the current account deficit must be accompanied by a financial account surplus.

Answer to Question 2

The long-run effects differ from the short-run effects of an increase in aggregate demand because the long-run and the short-run aggregate supply curves differ. With a vertical LRAS, changes in AD only affect the price level, not real GDP. With an upward sloping SRAS, changes in AD impact both the price level and real GDP.