Causes and consequences of current account defecit

• How does a current account deficit potentially lower aggregate demand in an economy?

  It often results in a negative trade balance
• What is the largest component of the current account?

  The trade balance
• If a country has a current account deficit, what is implied about its trade balance?

  It likely has a negative trade balance
• In the aggregate demand equation, what does a negative trade balance (X-M) imply?

  It pulls down aggregate demand (AD)
• What are the potential negative side effects of a leftward shift in the AD curve due to a current account deficit?

  Lower growth and higher unemployment
• How do countries often finance current account deficits?

  By running financial account surpluses
• What is a common method to control a financial account surplus?

  Issuing more debt
• What are some ways a country can issue more debt to finance a current account deficit?

  Selling government and corporate bonds, company shares
• What may happen if a country continuously racks up debt to finance its current account deficit?

  Investors may lose confidence
• Why might investors lose confidence in a country that keeps issuing debt?

  Due to concerns about repayment ability
• What could happen if investors start pulling away from buying debt in a country with a current account deficit?

  Worries about financing the deficit arise
• How might fear of a country defaulting on its debt affect its currency?

  It leads to selling the currency
• What is the consequence of selling a country's currency due to fears of default?

  A massive currency crisis
• What happens to individuals holding debt, savings, or money in a country experiencing a currency crisis?

  It will lose value
• How can a currency crisis lead to a broader financial and economic crisis?

  Inability to finance the current account deficit
• Under what condition is a currency crisis a potential consequence of a current account deficit?

  When the deficit balloons out of proportion
• According to the speaker, what concern existed in the UK in 2015 regarding its current account deficit?

  It may not be sustainably financed by debt
• How can a current account deficit put downward pressure on a country's exchange rate?

  By increasing the currency supply
• Why does importing more than exporting increase the supply of a country's currency?

  More currency is sold to buy foreign goods
• In the context of the UK having a large current account deficit, what effect does this have on the pound-dollar exchange rate?

  Downward pressure on the pound
• What is the theoretical effect of a weaker exchange rate on a current account deficit?

  It may partially correct the deficit
• What does "WIDC" stand for in the context of exchange rates and trade?


  The text does not define WIDC
• How might a weaker exchange rate theoretically correct a current account deficit?

  Exports become cheaper, imports more expensive
• Why might a weaker exchange rate not correct a current account deficit in a country with a lack of competitiveness?

  No guarantee of increased export demand
• For a country like the UK without a large exporting base, what is the likely consequence of a weaker exchange rate?

  Higher import and raw material prices
• What is stagflation?

  Increased inflation and reducing growth
• Why is a weaker exchange rate potentially harmful for countries without a strong exporting base?

  Potential stagflation and increased costs
• When is financing a current account deficit by issuing debt not a significant issue?

  When the deficit is a small GDP proportion
• What makes a large current account deficit particularly problematic?

  Potential for a currency and economic crisis
• What is the most severe consequence of a large current account deficit and out-of-control debt?

  A potential currency and economic crisis