Multiple Select QuestionSelect all that applyForeigners buying large quantities of U.S. assets result in which of the following?Multiple select question.Decreased consumption of foreign-made goodsA surplus on the U.S. capital and financial accountAn increase in the U.S. trade deficitThe weakening of the U.S. dollar
Question
Multiple Select QuestionSelect all that applyForeigners buying large quantities of U.S. assets result in which of the following?Multiple select question.Decreased consumption of foreign-made goodsA surplus on the U.S. capital and financial accountAn increase in the U.S. trade deficitThe weakening of the U.S. dollar
Solution
The correct answers are:
- A surplus on the U.S. capital and financial account
- An increase in the U.S. trade deficit
Explanation:
When foreigners buy large quantities of U.S. assets, they are essentially investing in the U.S. This results in a surplus on the U.S. capital and financial account because the capital and financial account tracks the net change in ownership of foreign assets.
An increase in the U.S. trade deficit can also occur. This is because when foreigners invest in the U.S., they need to obtain U.S. dollars. This increases the demand for U.S. dollars, which can lead to an appreciation of the U.S. dollar. A stronger dollar makes U.S. exports more expensive and imports cheaper, which can lead to an increase in the trade deficit.
The other two options are not necessarily correct:
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Decreased consumption of foreign-made goods: This is not necessarily true. The purchase of U.S. assets by foreigners does not directly affect the consumption of foreign-made goods.
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The weakening of the U.S. dollar: This is the opposite of what would likely happen. As explained above, the purchase of U.S. assets by foreigners would likely lead to an appreciation of the U.S. dollar, not a weakening.
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