Question

a. Many people believe trade deficits are a serious problem and need to be eliminated. (i) Explain the three actions the Fed could take to reduce the trade deficit in the U.S., and explain carefully how these actions would result in a reduced trade deficit. Answer:

Answer 1

The trade deficit in America is an economic measure of trade where it's imports is more than its exports. In U.S the trade deficit increased for the current period year 2018 to 2019. It widened to USD 55.5 billion in October'2018 from an upwardly revised USD 54.6 billion in the month of September; and compared with expectations in market of a USD 54.9 billion gap. FED could reduce it by:

-- Save more and consume less: When US households or the government decreases consumption the imports will fall and it will require less borrowing from abroad to pay for consumption. Thus by encouraging saving more and decreasing consumption FED can close the government imbalance.

-- Depreciate the exchange rate: A weaker dollar makes exports cheaper and imports more expensive; thus assist the FED to correct the trade imbalance

--Tax capital inflows: When the FED imposes tax on (non-foreign direct investment) capital inflows that increases with inflow size could decrease excessive borrowing for consumption and thus FED can reduce deficit.