Suppose that the US, a large country decides to rapidly reduce its current account deficit by restricting

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Question:

Suppose that the US, a large country decides to rapidly reduce its current account deficit by restricting its trade of goods and services with the rest of the world. Assume that this policy brings financial autarchy to the US.

What is the effect of the US financial autarchy on the real interest rate of other countries? Illustrate your answer on the S, I graph of all the countries except for the U.S. (the Rest-of-the-World) before and after financial autarchy in the U.S.

According to our model of intertemporal consumption, will this shock benefit or hurt U.S. consumers if all are net borrowers like their country? Why? Explain your answer by drawing the IBC and the optimal choice of a U.S. representative consumer, a net borrower, before and after this decision. Does the U.S. as a country benefit or lose from financial autarchy? Explain.

According to our model of intertemporal consumption, will this shock benefit or hurt will Rest-of-the- World consumers if they are not lenders? Explain your answer by drawing the IBC and the optimal choice of a Rest-of-the-World representative consumer, a net lender, before and after this decision. Does the Rest-of-the-World as a group benefit or lose from financial autarchy in the U.S.? Explain.

What kind of countries would benefit from this shock?

Could a country that previously ran a CA deficit switch to running a CA surplus because of this shock? Explain.

Could a country that ran a CA surplus switch to running a CA deficit because of this shock? Explain.

(No credit for the following question, but think about it). Suppose that, because of populistic pressures, each country in the world decides to stop trading goods and services with each other.

7. Under these circumstances, is there any way for countries with a net foreign debt to repay their foreign liabilities? Explain.