Indicate whether the following statements are true false or

Indicate whether the following statements are true, false, or uncertain and explain why. (a) An economy that starts with a positive net international investment position will run a trade balance deficit at some point. (b) The fact that over the past quarter century the United States has run larger and larger current account deficits is proof that American household savings have been shrinking.

Solution

(a) UNCERTAIN . Because it can beTRUE, if there is assumption of no valuation changes . And if the the economy always run trade deficit , then net foreign assets position of the country is constantly growing. This is not optimal as the economy would beneft by reducing accumylation of foreign assets and consume more .

But it can be FALSE, If running constant trade surplus is consistent with positive initial NFA, if the economy ex[eriences negative valuation changes.

(b) FALSE , because Accumulation of a negative current account deficits just requires that some CA surpluses are realized in the future . (Savings will not be shrinking).