Deck 15: International Trade in Goods and Assets

Question 1

A current account deficit is

A) good because a country wants to own the others.
B) bad because every country should have a surplus.
C) good because it allows to smooth consumption.
D) it does not matter.

Answer 1

good because it allows to smooth consumption.

Question 2

In a two-period model with production,an increase in current domestic total factor productivity

A) increases domestic output and increases the current account surplus.
B) increases domestic output and decreases the current account surplus.
C) decreases domestic output and increases the current account surplus.
D) decreases domestic output and decreases the current account surplus.

Answer 2

increases domestic output and increases the current account surplus.

Question 3

In a two-period model,holding everything else constant,an increase in future taxes

A) unambiguously increases the current account surplus.
B) unambiguously decreases the current account surplus.
C) has an uncertain effect on the current account surplus.
D) has no effect on the current account surplus, as long as Ricardian equivalence holds.

Answer 3

has no effect on the current account surplus, as long as Ricardian equivalence holds.

Question 4

When current account deficits are used to finance investment spending,such deficits may be self-correcting because

A) they promote more responsible government policies.
B) the resulting increase in the capital stock over time shifts the output supply curve to the right.
C) the resulting increase in the capital stock over time shifts the output demand curve to the right.
D) the resulting increase in national indebtedness increases labor demand.

Question 5

In a two-period model with default,the nation defaults on its debt in the current period if

A) the market interest rate is high, the cost of defaulting is low, and national debt is high.
B) the market interest rate is low, the cost of defaulting is low, and national debt is high.
C) the market interest rate is high, the cost of defaulting is high, and national debt is low.
D) the market interest rate is low, the cost of defaulting is high, and national debt is low.

Question 6

In a two-period model with default,if the market interest rate is low,then

A) default is more likely
B) there is no effect on the nation's default decision.
C) default is less likely.
D) the income effect is larger than the substitution effect.

Question 7

In a two-period model,holding everything else constant,an increase in current taxes

A) unambiguously increases the current account surplus.
B) unambiguously decreases the current account surplus.
C) has an uncertain effect on the current account surplus.
D) has no effect on the current account surplus, as long as Ricardian equivalence holds.

Question 8

In a two-period model with production,a permanent increase in domestic government spending

A) increases domestic output and increases the current account surplus.
B) increases domestic output and decreases the current account surplus.
C) decreases domestic output and increases the current account surplus.
D) decreases domestic output and decreases the current account surplus.

Question 9

In a two-period model,holding everything else constant,an increase in current-period income

A) unambiguously increases the current account surplus.
B) unambiguously decreases the current account surplus.
C) has an uncertain effect on the current account surplus.
D) has no effect on the current account surplus.

Question 10

A small open economy is an economy

A) in which both imports and exports are less than 5% of GDP.
B) whose firms and consumers are individually, but not collectively price takers.
C) whose firms and consumers are collectively, but not individually price takers.
D) whose firms and consumers are individually and collectively price takers.

Question 11

In a two-period model,as long as wealth effects are small,an increase in the world real interest rate

A) increases consumption and increases the current account surplus.
B) increases consumption and decreases the current account surplus.
C) decreases consumption and increases the current account surplus.
D) decreases consumption and decreases the current account surplus.

Question 12

Ricardian equivalence suggests that government budget deficits generated by decreases in current taxes

A) increase the current account surplus.
B) decrease the current account surplus.
C) have no effect on the current account surplus.
D) have unpredictable effects on the current account surplus.

Question 13

The current account surplus is not

A) the trade balance.
B) the excess of national savings over investment.
C) private saving less government deficit.
D) output less taxes and trade deficit.

Question 14

In a two-period model with production,an anticipated future increase in domestic total factor productivity

A) increases domestic output and increases the current account surplus.
B) increases domestic output and decreases the current account surplus.
C) has no effect on domestic output and increases the current account surplus.
D) has no effect on domestic output and decreases the current account surplus.

Question 15

In a two-period model with default,if the nation defaults on its debts in the future period

A) there are no consequences.
B) it bears a cost v.
C) collateral is seized.
D) it faces a higher interest rate.

Question 16

Including investment and production in the two-good,two-period model with trade

A) allows the country to equalize absorption and output demand.
B) renders terms of trade endogenous.
C) allows the country to react to changes in the interest rate.
D) allows the government to run budget deficits.

Question 17

In a two-period model,holding everything else constant,an increase in government spending

A) unambiguously increases the current account surplus.
B) unambiguously decreases the current account surplus.
C) has an uncertain effect on the current account surplus.
D) has no effect on the current account surplus.

Question 18

In a two-period model with production,an increase in the world real interest rate

A) increases domestic output and increases the current account surplus.
B) increases domestic output and decreases the current account surplus.
C) decreases domestic output and increases the current account surplus.
D) decreases domestic output and decreases the current account surplus.

Question 19

In a two-period model with production,a temporary increase in domestic government spending

A) increases domestic output and increases the current account surplus.
B) increases domestic output and decreases the current account surplus.
C) decreases domestic output and increases the current account surplus.
D) decreases domestic output and decreases the current account surplus.

Question 20

In a two-period model with production,a shock that shifts the output demand curve to the right,and does not shift the output supply curve

A) causes an increase in the current account surplus and an increase in real output.
B) causes no change in the current account surplus and an increase in real output.
C) causes a decrease in the current account surplus and no change in real output.
D) causes a decrease in the current account surplus and an increase in real output.

Question 21

In a two-period model with production,a decrease in the world real interest rate

A) increases the current account surplus and increases real output.
B) reduces the current account surplus and increases real output.
C) increases the current account surplus and reduces real output.
D) reduces the current account surplus and reduces real output.

Question 22

The behavior of investment and real GDP in the United States after the 1990s

A) is not consistent with the two-period model with production.
B) is consistent with the effects of an increase in the government deficit in the two-period model with production.
C) is consistent with the effects of an increase in optimism about future total factor productivity in the two-period model with production.
D) is consistent with the effects of a decrease in the government deficit in the two-period model with production.

Question 23

In the two-period model with production,an increase in anticipated future total factor productivity

A) has no effect on domestic output, but reduces the current account surplus.
B) increases domestic output and increases the current account surplus.
C) reduces domestic output, and increases the current account surplus.
D) has no effect on domestic output, but increases the current account surplus.