Question

2. The European Union and the United States are trading partners. (a) If the current account balance is zero, will an increase in United States real income result in a current account surplus, deficit, or no change

Answer 1

Answer: Deficit

Explanation:

The current account shows the difference between imports and exports as well as net income from outside.

If this balance is zero, it means that imports are equal to exports and income sent abroad equals income recovered from abroad.

If real income in the US was to increase, people would demand more goods and services including more imports. This will shift the current account to a deficit as the imports will surpass the exports.