Assignment Questions - Current Account Deficit Case 1. Why has the United States developed such large current account deficits? Slow economic growth, reduced imports and spending in access of income has caused a large deficit in US current account.

2. Is the U.S. current account deficit in 2005 sustainable? Is its continual widening a problem? Is it an economic problem? A political one? Is the United States headed toward crisis? Why or why not? Yes the U.S current account deficit in 2005 would have been sustainable, but the deficit continued to widen. The NIIP went up to 27% in 2011. The continual widening of deficit is a major problem as the interest payments are growing and the capital inflow from abroad is not moving into tradable sectors. If the trade deficit sustained, the US economy will face financial crises. This is a major economic problem because this leads to severe inflation, fall in price of assets like equity and housing and will also slowdown global economy which leads to global recession. This takes US towards global crises as the slowdown or pause in economy would lead to depreciation of the US dollars which in turn will raise the import prices. This rise in import prices would lead to fewer margins and would further lead to unemployment.

3. What, if anything, should the United States do to reduce its current account deficit?
The current account deficit problem can be solved by competing in the global economy by using supply policies in trade. In long run allocate its scarce resources towards the economic activities in which it can most effectively compete in the global economy. Improve the employment opportunities within the country.

4. Is global adjustment to external imbalances likely to occur, and if so, how? What could be done to encourage a smooth adjustment?
Yes global adjustment to external imbalance is likely to