Until Recently China Actively Purchased Us Treasury Securities In Order To Limit

Until recently, China actively purchased US Treasury securities in order to limit the appreciation of its currency. (Currently it is losing foreign reserves). For this question you are asked to read two articles about how the USA should have responded to this strategy. Both are by Paul Krugman, and are posted on the course webpage: China, Japan, America” and Fear-of-China Syndrome”. According to Krugman, should the USA be worried about China suddenly deciding to sell its holdings of US treasury bonds? Why or why not? Do you agree? Why or why not? According to Krugman, how do you explain the fact that since the nancial crisis the US government budget decit has exploded, yet at the same time the US Current Account decit has actually decreased. What happened to the `twin decits’ hypothesis?

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