Which one of the factors is not likely to be associated with the large US trade...

Which one of the factors is not likely to be associated with the large US trade deficit:

a. Low savings rate in the US

b. High spending rate, relative to income levels in the US

c. Low investment opportunity in the US

d. High value of the US dollar

please explain!

Solutions

Expert Solution

Answer 18. We can solve the question by evaluating all the factors which aremost likely associated with the large US trade deficit. To start with, a large trade deficit is a result of the US importing more than what it exports to its trade partners. In other words, the consumption demand for goods and services in the US is higher than what US can produce (in a cost effective manner as compared to its trade partners). The consumption demand is higher due to the low savings rate in the US (Option A), which encourages the US citizens to consume more rather than save. Further, given the low savings rate in the US, a consumer can easily finance his/her consumption at lower interest rates and which leads to high spending rate, relative to income levels in the US (Option C). Also, imports are relatively cheaper for the US given the high value of the US dollar in the foreign exchange market (Option D) which in turn makes exports less competitive and again is associated with trade deficit.

We are thus left with Option c (low investment opportunity in the US) which is the least likely factor to be associated with the large US trade deficit. This is because, trade deficit actually enables the trading partners to finance the deficit by lending or investing in the country which runs a deficit and the US has abundant investment opportunities wherein its trading partners invest. So the answer is Option c

Rahul Sunny answered 1 year ago

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