1) Briefly explain whether you agree with the following statement:
Solution
At 2.4% of GDP, the US current account deficit (CAD) stands at - $113451 million as on
November 2014. The government debt which is used to finance fiscal deficit of the government
hovers around 102% of GDP! As of now, the US runs a huge (CAD) with its key trading partners
such as China. To meet its payment obligation, the US sells treasury bills and obtains dollars
from countries like China. These dollars can then be used to finance the federal fiscal deficit.
To see if this is a problem or not, is a matter of perspective. Those who believe it is not a
problem suggest that US dollar is a reserve currency and since all the debt is held in fiat currency
(USD), it is not likely that US will default on its debt. US can keep on printing dollars and
finance its deficit by sellings treasury biils. Those who do not agree with this perspective,
suggest that the growing bill on account of interest payments on debt will harm US economy as
it will lead to an increase in tax rates in future..
1) Briefly explain whether you agree with the following statement.pdf
1. 1) Briefly explain whether you agree with the following statement:
Solution
At 2.4% of GDP, the US current account deficit (CAD) stands at - $113451 million as on
November 2014. The government debt which is used to finance fiscal deficit of the government
hovers around 102% of GDP! As of now, the US runs a huge (CAD) with its key trading partners
such as China. To meet its payment obligation, the US sells treasury bills and obtains dollars
from countries like China. These dollars can then be used to finance the federal fiscal deficit.
To see if this is a problem or not, is a matter of perspective. Those who believe it is not a
problem suggest that US dollar is a reserve currency and since all the debt is held in fiat currency
(USD), it is not likely that US will default on its debt. US can keep on printing dollars and
finance its deficit by sellings treasury biils. Those who do not agree with this perspective,
suggest that the growing bill on account of interest payments on debt will harm US economy as
it will lead to an increase in tax rates in future.
