Deck 16: International Trade in Goods and Assets

Question 1

In the two-period SOE model, the current account surplus is equal to

A) output minus consumption minus government spending.
B) output plus consumption minus government spending.
C) output minus consumption plus government spending.
D) savings plus investment.
E) output plus consumption plus government spending.

Answer 1

A

Question 2

In the two-period SOE model

A) there is no government.
B) the consumption of the government and private consumers is treated as a national choice.
C) government spending is exogenous.
D) Ricardian equivalence does not hold.
E) there is no trade with the outside world.

Answer 2

B

Question 3

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.
E) that is open to ideas.

Answer 3

D

Question 4

In the two-period SOE model, a decrease in current income

A) increases the current account surplus.
B) reduces the current account surplus.
C) results in no change in the current account surplus.
D) increases C + G.
E) leaves C + G unchanged.

Question 5

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.
E) bad because it permits consumption smoothing.

Question 6

If current taxes increase, then

A) the current account surplus rises.
B) the current account surplus falls.
C) there is no effect on the current account surplus.
D) government spending must rise.
E) government spending must fall.

Question 7

In a small open economy model

A) domestic producers have monopoly power.
B) real interest rates are set by central banks.
C) domestic economic agents cannot affect world real interest rates.
D) the domestic government takes account of the behaviour of foreign governments.
E) the government cannot affect economic outcomes.

Question 8

In the two-period SOE model, if future income decreases

A) C + G decreases.
B) C + G stays the same.
C) the current account surplus stays the same.
D) the current account surplus decreases.
E) the current account surplus increases.

Question 9

One of the reasons why the growth in world trade has occurred is due to

A) more stable political environments.
B) countries are getting more prosperous.
C) the income inequality gap is narrowing among countries.
D) barriers to trade have been relaxed.
E) economies have become more materialistic.

Question 10

In the two-period SOE model, if the real interest rate decreases and the current account is initially in deficit, then

A) the current account surplus stays the same.
B) the current account surplus falls.
C) the current account deficit falls.
D) the current account surplus rises.
E) the current account deficit stays the same.

Question 11

In the two-period SOE model, equal increases in current and future income imply that

A) the current account surplus increases.
B) we can't say what happens to the current account surplus.
C) the current account surplus decreases.
D) C + G decreases.
E) there is no change in the current account surplus.

Question 12

For Canada,

A) a small open economy assumption is realistic.
B) a small open economy assumption is not realistic.
C) small open economy models are irrelevant.
D) trade with the rest of the world is negligible.
E) trade with the rest of the world has fallen since the 1950s.

Question 13

International trade has increased for all of the following reasons except

A) better monetary policy.
B) the cost of transporting goods has gone down.
C) international trade agreements.
D) more integrated world financial markets.
E) more efficient credit markets.

Question 14

One of the reasons why the growth in world trade has occurred is due to

A) more stable political environments.
B) countries are getting more prosperous.
C) the income inequality gap is narrowing among countries.
D) the cost of transporting goods and services has fallen dramatically.
E) economies have become more materialistic.

Question 15

GATT is

A) the Government Agreement on Trade with Thailand.
B) the General Agreement on Tariffs and Trade.
C) the General Authority to Tax and Trade.
D) the Government Agreement on Taxes and Tariffs.
E) the Great Authority to Trade and Tax.

Question 16

The national present-value budget constraint states that

A) government spending equals taxes in present value terms.
B) savings equals investment.
C) the credit market clears.
D) assets equal liabilities for the central bank.
E) the present value of consumption plus the present value of government spending is equal to the present value of total income.

Question 17

International trade has increased for which of the following reasons?

A) the financial crisis
B) Brexit
C) the cost of transporting goods has gone down
D) the Asian crisis
E) NAFTA was repealed

Question 18

The following are all trade agreements:

A) ECB, Fed, and GM.
B) UK, US, and EU.
C) GATT, EU, and BU.
D) EU, NAFTA, and GATT.
E) NAFTA, DNC, and EU.

Question 19

International trade has increased for which of the following reasons?

A) The development of more efficient world financial markets.
B) Higher costs of transporting goods between countries.
C) More government spending on goods and services.
D) Better monetary policy.
E) Governments went against mainstream economic ideas.

Question 20

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.
E) the negative of the current account deficit.

Question 21

In the two-period SOE model, if the current account surplus is initially positive and the real interest rate decreases, then

A) the current account deficit may rise or fall.
B) the current account surplus must rise.
C) the current account deficit must rise.
D) the current account surplus must fall.
E) the current account deficit must fall.

Question 22

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.
E) there is more inflation.

Question 23

Absorption refers to

A) the quantity of imports that is absorbed into the domestic economy.
B) the amount of government spending that is absorbed into the domestic economy.
C) the amount of transfer payments from the federal government that is absorbed into the domestic economy.
D) the quantity of aggregate output that is absorbed into the domestic economy.
E) the amount of current period income that is used to purchase domestic aggregate output.

Question 24

In a two-period SOE 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.
E) is engineered by the government.

Question 25

The key effect of the current account surplus is

A) to smooth consumption for the nation as a whole.
B) to destabilize the economy.
C) to smooth aggregate output.
D) to improve fiscal policy.
E) to constrain the central bank.

Question 26

In the two-period model with default, default can be prevented because

A) collateral can be seized.
B) no one will lend of a country that might default.
C) default can be too costly, so a country does not choose it.
D) a country does not want to reveal itself to be a bad borrower.
E) the government makes it illegal.

Question 27

Absorption can be defined as

A) C + I + G.
B) I/GDP.
C) X - M.
D) GDP/NX.
E) the quantity of foreign produced goods absorbed through domestic spending.

Question 28

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.
E) the government does not act in the interest of consumers.

Question 29

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.
E) increase output.

Question 30

In the two-period model with default,

A) default occurs when consumption is high.
B) default occurs when the real interest rate is low.
C) default occurs when investment is high.
D) default occurs when government spending is high.
E) default occurs when government spending is low.

Question 31

In two-period SOE 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.
E) increase aggregate consumption and have no effect on the current account surplus.

Question 32

In the two-period model with default, default will occur when

A) the government debt is larger than the total taxes.
B) the government surplus is smaller than national income.
C) the government debt is smaller than the discounted value of the future penalty from defaulting.
D) the government debt is larger than the discounted value of the future penalty from defaulting.
E) the government surplus is smaller than the discounted value of the future penalty from defaulting.

Question 33

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) increases the present value of taxes.
E) has no effect on the current account surplus, as long as Ricardian equivalence holds.

Question 34

In a two-period SOE model, holding everything else constant, an increase in current 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) must reduce the present value of taxes.
E) has no effect on the current account surplus.

Question 35

If consumption increases, and government spending decreases by an equal amount, and investment stays the same,

A) absorption goes up.
B) absorption stays the same.
C) absorption goes down.
D) the economy is closed.
E) the government surplus must go down.

Question 36

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) increases the present value of taxes.
E) has no effect on the current account surplus.

Question 37

In the two-period model with default,

A) there is no default in equilibrium.
B) there is never default in the future period.
C) there is always default.
D) the government commits to never default.
E) private sector economic agents can default, but the nation never defaults as a whole.

Question 38

In the two-period model with default,

A) a country will default on its debts because of asymmetric information.
B) a country has a limited commitment problem.
C) a country will always default in equilibrium.
D) default occurs because of monetary policy.
E) a country will never default in equilibrium.

Question 39

In the 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.
E) the central bank must bail out the government.

Question 40

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) increases investment.
E) decreases consumption and decreases the current account surplus.

Question 41

In the two-period SOE model with production, an increase in current taxes

A) reduces output.
B) increases the current account surplus.
C) reduces the current account surplus.
D) increases future taxes.
E) reduces future taxes.

Question 42

In the two-period SOE model with production, the destruction of part of the nation's capital stock

A) causes the current account surplus to increase.
B) causes output to increase.
C) causes investment to decline.
D) causes investment to increase.
E) causes the current account surplus to decline.

Question 43

In the two-period SOE model with production, a country that wants to reduce its current account surplus should

A) increase current taxes.
B) increase government spending.
C) reduce current taxes.
D) increase future taxes.
E) reduce government spending.

Question 44

In a two-period SOE 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.
E) increases domestic output with no change in the current account surplus.

Question 45

In a two-period SOE 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.
E) decreases domestic output and decreases the marginal product of capital.

Question 46

In a two-period SOE model with production, a negative total factor productivity shock abroad

A) increases foreign output and increases domestic output.
B) decreases foreign output and decreases domestic output.
C) increases foreign output and decreases domestic output.
D) decreases foreign output and increases domestic output.
E) decreases foreign output and leaves domestic output unchanged.

Question 47

In the two-period SOE model with production, an increase in labour supply

A) causes consumption to increase.
B) causes output to decline.
C) causes the current account surplus to decline.
D) causes investment to decline.
E) causes investment to increase.

Question 48

In a two-period SOE model with production, an increase in the capital stock

A) can eliminate the current account deficit in the long run.
B) increases domestic output and decreases consumption.
C) decreases domestic output and increases the current account surplus.
D) decreases domestic output and decreases the current account surplus.
E) has no impact on domestic consumption.

Question 49

When a country runs a current account deficit to finance an increase in domestic investment expenditures, it causes

A) taxes to rise.
B) an increase in capital stock and future productive capacity.
C) consumption smoothing over time.
D) a government deficit to occur.
E) the real interest rate to increase.

Question 50

An increase in total factor productivity in a closed economy

A) increases labour demand, increases the real wage, increases output and decreases the real interest rate.
B) increases labour demand, increases the real wage, increases output and increases the real interest rate.
C) increases labour demand, decreases the real wage, decreases output and increases the real interest rate.
D) increases labour demand, decreases the real wage, decreases output and decreases the real interest rate.
E) decreases labour demand, increases the real wage, increases output and decreases the real interest rate.

Question 51

In the two-period SOE model with production, total gross domestic product is equal to

A) net exports plus investment plus government spending plus consumption.
B) investment plus taxes plus disposable income plus the current account surplus.
C) consumption minus investment plus government spending plus net exports.
D) net exports minus investment plus government spending plus consumption.
E) the government surplus plus the current account surplus.

Question 52

Current account deficits may not be undesirable for the domestic economy as it

A) leads to more government spending.
B) leads to lower interest rates.
C) helps domestic consumers to smooth consumption over time.
D) causes the domestic currency to appreciate.
E) leads to lower taxes.

Question 53

In the two-period SOE model with production, if the SOE closes off trade with the rest of the world,

A) this must make output go down.
B) this must make investment go up.
C) this makes output go up if the real interest rate goes up.
D) this makes output go up if the real interest rate goes down.
E) this makes output go up only if the government reduces spending.

Question 54

In the two-period SOE model with production, suppose that the real interest rate if there were no trade is greater than the world real interest rate. If the economy is initially closed, and then becomes open,

A) net exports will be positive.
B) output will increase.
C) net exports will be negative.
D) investment will fall.
E) government spending will rise.

Question 55

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 labour demand.
E) interest rates decline.

Question 56

An increase in total factor productivity has different effects in an open economy relative to a closed economy because

A) the real interest rate does not change in the open economy.
B) the change in the real interest rate involves a substitution effect only in the open economy.
C) the real interest rate does not change in the closed economy.
D) the real interest rate decreases in the open economy and increases in the closed economy.
E) it is a positive income effect in the closed economy and a negative one in the open economy.

Question 57

In the two period SOE model with production, if there is good news about future total factor productivity,

A) current output declines.
B) current output increases.
C) investment declines.
D) the current account surplus decreases.
E) the current account surplus increases.

Question 58

In a two-period SOE model with production, the government expenditure multiplier

A) is larger in an open economy because net exports fall.
B) is larger in an open economy because net exports are unaffected.
C) is smaller in an open economy because net exports fall.
D) is smaller in an open economy because net exports increase.
E) is larger in an open economy because net exports increase.

Question 59

In a two-period SOE model with production, an 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.
E) increases domestic output with no change in the current account surplus.

Question 60

In the 19?? century, Canada had a period of significant current account deficits, which contributed to economic growth. These deficits most notably

A) financed consumer spending.
B) allowed for a substantial increase in government spending's share of GDP.
C) financed construction of railroads.
D) financed the development of land-grant universities.
E) financed lower taxes.

Question 61

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

A) reduces investment.
B) increases the current account surplus.
C) increases output.
D) increases employment.
E) reduces output.

Question 62

In the two-period SOE model with production and investment, the total government expenditure multiplier is

A) zero.
B) greater than one.
C) less than one.
D) two.
E) one.

Question 63

In the two-period SOE model with production and investment, an increase in the capital stock

A) reduces output.
B) increases investment.
C) decreases investment.
D) increases output.
E) reduces the current account surplus.

Question 64

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

A) increases output.
B) reduces the current account surplus.
C) increases the current account surplus.
D) leaves output unchanged.
E) lowers investment.

Question 65

What would be the impact of a persistent increase in total factor productivity on domestic aggregate output, consumption, investment, and the current account surplus?