Suppose the United States has no exports The only imports of the US are 200 Mercedes Benz cars worth...........

Economics- Phase (I & II) Investment Function

Suppose the United States has no exports. The only imports of the US are 200 Mercedes Benz cars worth US$50,000 each from Germany. Germany has no imports and only exports those 200 cars to the US. Neither the US nor Germany trade with any other countries or engage in any transactions with other countries. Which one of the following statements must be true?

The US has a capital account deficit.

Germany has a current account deficit

Germans are buying US assets.

The exchange rate of US Dollars per Euros (the currency in Germany) is bigger than 1.

छोटे Courses बड़े Results

Master Investment Function

Prepare through Micro-courses

Try Now

Explanation:

The US has a current account deficit. In order to finance the current account deficit, they need to have a capital account surplus. Since the US doesn’t engage in any financial transactions with other countries, having a capital account surplus implies that Germans are buying US assets. In fact, if there is no statistical discrepancy, Germany needs to buy $100 million more in US assets than the US is buying in German assets. These $100 million are like a loan from Germany to the US, and the US uses this money to buy the Mercedes Benzes.