Three Means By Which A Current Account Deficit Analysis

Q 1. Describe three means by which a current account deficit in a developing country is financed
When there is trade deficit, trade in goods and services and net flows from transfers and investment income are taking more money out of the economy than is flowing in. Aggregate demand will fall.
It has to be repaid dissolving the following assets country holds
1. Foreign exchange deposits country has earned through the trade
2. Inward remittances done by nationals of that country staying abroad
3. Cash / Gold reserves
4. If any of the above is not present then taking short term loan from World bank or IMF

Q 2. What option do countries like the United States, Japan, and Australia have to finance or cover a current account deficit that is not
Since these developed countries have credible economy and most nations believe in their fundamentals and they have their independent central banks free to print money by buying the government securities it is possible for these countries to print money yet avoid remarkable devaluation of the currency.
Most developed countries have this option because they have their central banks which can issue currency.
Germany and France do not have this option because they have given up their right to have their own currency and central bank at the time of participating in European union. EU central bank can issue Euro but it is not Combodia and Ghana don’t have as much credibility of their currency. If their central banks try to print currency, it will lose its credibility.

Q3. How can a central bank influence the supply and demand for money in a country’s economy? Why do the amount and price of money matter? Describe some of the connections between a country’s money supply and its international balance of payments
Interest Rates
Central bank can determine the rate at which it can lend the money to the commercial banks in the nation. Lower these rates the borrowing is easier for the businesses. But in recession in some countries like Japan, even making the interest rates 0, enough borrowers are not found.
4. Central banks purchase government securities from the commercial banks in turn releasing the assets of the commercial banks to allow them to lend more money.
5. Quantitative easing program – In the crisis like the Lehman brother crisis the stock markets and the overall GDP of all the nations reduce and people tend to withdraw the money from the stock market sending them crashing down.
Governments of countries in crisis issues number of securities. Commercial banks purchase government securities. Central bank’s governor obliges government by purchasing those securities from banks. Thus commercial banks have money to lend. This the money supply in the market. Theoretically, companies use this money to invest producing more goods services and bringing back belief of the people investing into stock and stop the stocks