Question

Why do most economists worry about the US current deficit?

Why does globalization set constraints on governments' capacity to raise the revenues?

Explain the IMF moral hazard theory.

Answer 1

1.The US's current deficit was highest in the world as of 2017(£462billions).It shows how much Americans are borrowing from the rest of the world and how much they are lending to the rest of the world. The current deficit is high because of the high trade deficit (Imports>Exports). Economists are worried about the current account deficit because it might be difficult for the US to finance these deficits in the long run,espescially with such a low savings rate.

2.Globalization set constraints on government's capacity to raise revenues because the government can't put much restriction on trade(high tariffs and quotas),which reduces the amount of revenue created from international trade.Moreover,the government has to liberalize foreign investment (it can't charge higher taxes).

3.It has been argued than IMF's financing can lead to moral hazard,as the knowledge of IMF's financing being available at the time of a crisis makes the crisis even more likely to occur.IMF's presence lowers the pressure on government to pursue sustainable and sound fiscal policies.