For many years now the United States has been running large

For many years now, the United States has been running large current account deficits. What do you know about the capital account for the United States, and what you predict to happen to the value of the dollar in the future?

Solution

By balance of ayments equality, a current account deficit is balanced by a capital account surplus.

A capital account surplus means that investment by foreigners in the country is more than the country\'s foreign investments abroad. Higher foreign investment in the country means demand for dollar goes up, which leads to an increase in value of dollar, leading to dollar appreciation.