In 2005,Hurricane Katrina hit New Orleans and the Louisiana and Texas coasts, causing damages estimated at around $81 billion, the costliest natural disaster in U.S. history. Federal government agencies spent millions of dollars on aid and rebuilding.
a. What would you expect to happen to the federal budget deficit as a result of this expenditure?
b. What would you expect to happen to net capital outflow for the United States?
c. As discussed in the Making the Connection, the magnitude of the cost of the Japanese rebuilding efforts, coupled with the size of the Japanese national debt, could affect the ability of Japan to continue to borrow internationally. Did Hurricane Katrina create similar worries in the United States? Briefly explain.