Homework SourseHow does a decrease in the supply of foreign funds affect th
How does a decrease in the supply of foreign funds affect the U.S. balance of payments?
How does a decrease in the supply of foreign funds affect the U.S. balance of payments?
How does a decrease in the supply of foreign funds affect the U.S. balance of payments?
How does a decrease in the supply of foreign funds affect the U.S. balance of payments?
Solution
Balance of payments (BOP) has 3 sections: Current account, capital account and Statistical discrepancy.
If supply of foreign funds decrease, capital account (which records all inflows and outflows of foreign capital) decreases. That means, demand for dollar goes down compared to foreign currency, so dollar depreciates.
A depreciating dollar makes the price of US exportables lower and price of imports higher. Lower exportable price increases the export demand from US and lowers the import demand. Higher exports and lower exports increase net exports, which increases the current account.
