International Finance Theory and Policy
by Steven M. Suranovic

Finance 6

Finance 6

Finance Questions 6 2-3


1. Suppose the hypothetical country of Avalon has a current account deficit of $20 billion this year. From the two scenarios listed in each part below, identify which scenario would make this deficit more worrisome to an economic analyst and which scenario would be less worrisome. Briefly explain why.

A. Scenario 1: Avalon's GDP is $80 billion dollars per year.
Scenario 2: Avalon's GDP is $800 billion per year.

B. Scenario 1: Avalon is a net debtor country.
Scenario 2: Avalon is a net creditor country.

C. Scenario 1: Avalon's annual consumption spending is 50% of GDP
Scenario 2: Avalon's annual consumption spending is 90% of GDP

D. Scenario 1: Avalon's GDP grew 1% last year
Scenario 2: Avalon's GDP grew 10% last year

International Finance Theory and Policy - Chapter 6: Last Updated on 1/6/08