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Current Account and Trade Balance
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If the U.S. experiences an increase in real income, which of the following is the most likely underlying cause for a potential current account deficit?

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Choose the Best Answer

A

Increased consumer spending on imports due to higher disposable income

B

Decreased exports to the European Union because of a stronger dollar

C

A reduction in domestic production leading to higher unemployment

D

Government policies aimed at reducing tariff barriers on imports

Understanding the Answer

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Answer

When the U. S. experiences an increase in real income, people generally have more money to spend. This often leads to higher demand for goods and services, including imports from other countries. As Americans buy more foreign products, the value of imports rises, which can create a current account deficit.

Detailed Explanation

When people earn more money, they tend to spend more. Other options are incorrect because Some might think that a stronger dollar means we sell less to other countries; It's easy to think that less production means less income.

Key Concepts

Current Account Deficit
Real Income and Consumer Behavior
Trade Balance
Topic

Current Account and Trade Balance

Difficulty

medium level question

Cognitive Level

understand

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