effect of persistent CAD on economy (1 Viewer)

[wgy182]

1. Explain how a sustained increase in the Current Account Deficit could affect an economy?

From the eco textbook, it said several risks include growth of foreign liabilities and constrain economic growth.

I don't get how increased levels of foreign liabilities will make lenders more reluctant to lend to aus or invest in Aus?

Also how does CAD constrain eco growth? Doesn't it improve eco growth because there will be more investment so employment goes up and consumption?



2. "Discuss two economic benefits to Australia of an appreciation of the $A."

Thanks in advance
Sorry for the large amounts of questions lately

 

[Cleavage]

1. The more foreign liabilities the Australian economy has, the more externally unstable it becomes (discussed more in detail in economic issues), which then dissuade foreign investors from investing. This is because the more externally unstable an economy becomes, the greater the perceived risk of loosing investment return.

CAD can constrain growth, as Australia seeks to borrow more from overseas to service the deficit. Australia then needs to borrow to service the outstanding debt, which creates a 'debt cycle'. As a government response, the RBA can tighten interest rates, to attract foreign investment which can neutralize the current account deficit. The sideffect of contractionary monetary policy is of course a slowdown in economic activity and growth.

2. Benefits of appreciating AUD; Consumers have greater purchasing power for foreign imports & Costs less to service Australia's foreign debt (I'll let you discuss both)

Which economics textbook do you use

 

[wgy182]

Thanks man, I understand now
I use tim Dixon eco textbook. What about you?

 

[Cleavage]

Thanks man, I understand now
I use tim Dixon eco textbook. What about you?

My teacher bought Tim Dixon 2014, so we've just started using them too. I've also got Tim Riley, good for stats and graphs (which Tim Dixon isn't good for)