"Sharp contractions in a country's output and employment invariably result from a crisis in which the country suddenly loses access to all foreign sources of funds." Explain how the current account identity necessitates these contractions
What will be an ideal response?
S - I = CA (Current Account Identity)
Imagine that a country is running a current account deficit (i.e. borrowing from abroad) a certain amount of its GNP when foreign lenders suddenly become scared of default and cut off all new loans. This action causes the current account balance to be at least 0 due to either a rise in saving or a fall in investment (or a combination of both). The required sharp fall in aggregate demand necessarily depresses the country's output dramatically.
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Indicate whether the statement is true or false
In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from
A) owning municipal bonds. B) making real estate loans. C) making personal loans. D) owning common stock.