current account deficit

• What is the biggest component of the current account?

  The trade balance
• How does a current account deficit typically impact aggregate demand (AD)?

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

  Net exports are negative
• What are the potential negative side effects of AD shifting to the left 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 the easiest way for a country to control a financial account surplus?

  Issue more debt
• How might investors react if a country continues to accumulate debt to finance a current account deficit?

  They may lose confidence
• What could happen if investors lose confidence in a country's ability to repay its debt?

  Investors may pull away from buying debt
• What can be a consequence of a country not being able to finance its current account deficit?

  A currency crisis
• If the UK has a large current account deficit financed by borrowing, what action might investors take that could lead to a currency crisis?

  Sell the pound
• What is the potential impact of a currency crisis on individuals with savings in the affected country?

  Their savings lose value
• According to the text, what severe consequence can a large current account deficit lead to if debt is perceived to be out of control?

  An economic crisis
• How does importing more than exporting affect the supply of a country's currency?

  Increases the supply
• If the UK has a large current account deficit, how does this affect the supply of the pound, according to the text?

  Increases supply of the pound
• How does an increased supply of a currency typically affect its exchange rate?

  Puts downward pressure on it
• What does 'widc' stand for in the context of exchange rates and trade?

  It's not defined in the text
• What is the theoretical impact of a weaker exchange rate on exports and imports?

  Exports become cheaper, imports more expensive
• What is a potential sign if a country has a current account deficit?

  A lack of competitiveness
• For a country like the UK without a big exporting base, what is a likely consequence of a weaker exchange rate?

  Higher import prices
• What is stagflation?

  Increased inflation and reducing growth
• When is financing a current account deficit by issuing debt not much of an issue?

  When the deficit is small
• According to the text, what is the most severe consequence of a large current account deficit?

  A potential currency crisis
• What is a major issue that can arise if a current account deficit becomes a very large percentage of GDP?

  Potential for economic crisis