Question

1. Why are some economists concerned that the United States borrows too much from abroad?

2. Explain why you agree or disagree with each of the following statements:

a. "A nation's currency will depreciate if its inflation rate is less that that of its trading partners."

b. " A nations whose interest rate falls more rapidly than that of other nations can expect the exchange value of its currency to depreciate."

c. "A nation whose economy grows more slowly than its major trading partners can expect the exchange value of its currency to appreciate."

d. "A nation's currency will appreciate if its interest rate rises relative to that of its trading partners and its income level falls relative to that of its trading partners."

-If the exchange rate changes from $1.70 = 1 pound to $1.68 = 1 pound, what does this means for the dollar? For the pound? What if the exchange rate changes from $1.70 = 1 pound to $1.72 pound?

Answer 1

1. The US has a high amount of public debt. The debt-to-GDP ratio of the country was 104.17% in 2015, which is very high. High debt may have various potentially negative consequences on the economy. Some of these potential consequences are:

• Because of this high level of government debt, the USA needs to pay a high amount of interest payment. This creates a situation of perpetual debt-cycle. Also, this can create a potential debt crisis similar to Greece.
• High-interest payment leaves less funds with the government to spend on infrastructure or the social sector. This lowers the competitiveness of the economy.
• High debt can shake the confidence of the government in US Treasury securities.
• High government debt can reduce the confidence of investors on the US dollar which can result in depreciation in US dollar and which can widen the trade deficit of the country.
• The government might have to raise taxes or reduce spending to bridge the deficit. Either of these policies can have negative consequences on the economy.