1. Stanford Economics Professor Ronald McKinnon suggested the following strategies for reducing the large current account deficit in the United States:
“..the first order of business in correcting the trade deficit is to reduce the structural fiscal deficit of the U.S. and possibly run with surpluses. The second order of business is to provide incentives — possibly tax incentives — for American households to increase their saving.”
The “structural fiscal deficit” refers to the government budget deficit. So Professor McKinnon is saying we should reduce the government budget deficit, and increase household saving as well. Use the identity derived in the “Funds that Finance Investment” section of the chapter 24 (p. 570) to explain how these policies would reduce the current account deficit.