Question 1

In a large open economy,the home country's saving and investment equations are:
Sd = 200 + 1400rw and Id = 300 - 400rw.
The foreign country's saving and investment equations are:
Sd = 50 + 600rw and Id = 75 - 100 rw.
Calculate the equilibrium world real interest rate,saving and investment in each country,and the current account balance in each country.

Accepted Answer

The answer of In a large open economy,the home country's...

Question 2

If a Japanese company sells 200 VCRs to a French company and uses the money to buy U.S.government bonds,the Japanese merchandise trade balance ________,and the Japanese capital and financial account balance ________.

Accepted Answer

A) rises; rises 
B) rises; falls 
C) falls; falls 
D) falls; rises

Question 3

Consider a small open economy with desired national saving of Sd = 200 + 10,000rw and desired investment of Id = 1,000 - 5,000rw.If rw = 0.05,then a rise in government spending of 50 with no change in private saving causes net exports to become

Accepted Answer

A) 100. 
B) 50. 
C) -50. 
D) -100.

Question 4

Real domestic interest rates would increase in a large open economy if

Accepted Answer

A) there were a temporary negative domestic supply shock. 
B) the government imposed capital controls and the capital and financial account had been in deficit. 
C) foreigners were more willing to save. 
D) there were a temporary negative supply shock abroad in a small open economy.

Question 5

If business taxes rise in a large open economy,it causes the current account to ________ and saving to ________.

Accepted Answer

A) fall; fall 
B) rise; remain unchanged 
C) fall; remain unchanged 
D) rise; fall

Question 6

If a French company exports $2 million of machinery to Italy and French tourists spend $2 million at Italian beaches,the French merchandise trade balance ________,and the French capital and financial account balance ________.

Accepted Answer

A) rises; rises 
B) rises; is unchanged 
C) is unchanged; is unchanged 
D) is unchanged; rises

Question 7

A large open economy increases its desired saving.This causes the world real interest rate to ________ and the country's current account balance to ________.

Accepted Answer

A) fall; fall 
B) remain unchanged; rise 
C) fall; rise 
D) remain unchanged; fall

Question 8

When there are two large open economies,the world real interest rate will be such that

Accepted Answer

A) desired international lending by one country equals desired international borrowing by the other country. 
B) desired international lending will be the same in both countries. 
C) desired international borrowing will be the same in both countries. 
D) desired international lending and borrowing will be zero in both countries.

Question 9

A large open economy

Accepted Answer

A) dominates world trade in one or more products. 
B) is physically larger than all small open economies. 
C) has a larger population than all small open economies. 
D) lends or borrows enough in the international capital market to influence the world real interest rate.

Question 10

Suppose an economy has output of 2100,government spending of 40,consumption of 1600,and absorption of 1940.Calculate the equilibrium values of investment and net exports.

Accepted Answer

The answer of Suppose an economy has output of 2100,government...

Question 11

The current account balance consists of

Accepted Answer

A) the trade balance plus the services balance. 
B) net exports of goods and services,minus net unilateral transfers. 
C) net exports of goods and services,plus investment income from abroad,plus net unilateral transfers. 
D) net exports of goods and services,plus investment income from abroad,plus net unilateral transfers,minus the capital and financial account balance.

Question 12

A friend claims that the United States is a net international debtor.The best way of testing this claim is to see whether

Accepted Answer

A) U)S.foreign liabilities exceeded U.S.foreign income. 
B) U)S.receipts from foreign assets exceeded U.S.payments to foreign owners of U.S.assets. 
C) U)S.official reserve assets were positive or negative. 
D) the United States ran a balance of payments surplus or deficit last year.

Question 13

A large open economy has desired national saving of Sd = 1200 + 1000rw,and desired national investment of Id = 1000 - 500rw.The foreign economy has desired national saving of  = 1300 + 1000rw,and desired national investment of  = 1800 - 500rw.Suppose the foreign country's government increases its spending by 300 and private saving does not change.Then in equilibrium,the foreign country has net exports equal to

Accepted Answer

A) 500. 
B) 350. 
C) -350. 
D) -500.

Question 14

If the United States donates footballs to Japan,how is the transaction recorded on the U.S.balance of payments accounts?

Accepted Answer

A) Debit: merchandise trade; credit: capital and financial account 
B) Debit: capital and financial account; credit: merchandise trade 
C) Debit: net unilateral transfers; credit: merchandise trade 
D) Debit: merchandise trade; credit: net unilateral transfers

Question 15

A large open economy has desired national saving of Sd = 20 + 200rw,and desired national investment of Id = 30 - 200rw.The foreign economy has desired national saving of  = 40 + 100rw,and desired national investment of
  = 75 - 400rw.
(a)Calculate the equilibrium values of rw,CA,CAFor,S,I,SFor,and IFor.
(b)Suppose Sd rises by 45,so that now Sd = 65 + 200rw.Calculate the equilibrium values of rw,CA,CAFor,S,I,SFor,and IFor.
(c)Suppose,with Sd back to Sd = 20 + 200rw,as in part (a),that Id rises by 45,to ?Id = 75 - 200rw.Calculate the equilibrium values of rw,CA,CAFor,S,I,SFor,and IFor.

Accepted Answer

The answer of A large open economy has desired national...

Question 16

Suppose output is $1000 billion,government purchases are $200 billion,desired consumption is $700 billion,and desired investment is $150 billion.Net foreign lending would be equal to

Accepted Answer

A) -$150 billion. 
B) -$50 billion. 
C) $50 billion. 
D) $150 billion.

Question 17

The best weather in a decade has given Australia a bumper wheat crop.Australia is a small open economy.Based on this information alone,you would expect that

Accepted Answer

A) desired investment would decrease. 
B) desired investment would increase. 
C) the current account would increase. 
D) the current account would decrease.

Question 18

If a U.S.company imports 10 Toyotas from Japan at $15,000 each,and the Japanese company buys airline tickets on a U.S.airline with the money,how does this affect the U.S.balance of payments accounts?

Accepted Answer

A) Debit: merchandise trade; credit: capital and financial account 
B) Debit: capital and financial account; credit: merchandise trade 
C) Debit: merchandise trade; credit: services 
D) Debit: services; credit: merchandise trade

Question 19

In a large open economy like the United States,an increased government budget deficit which reduces national saving

Accepted Answer

A) reduces investment and improves the current account balance. 
B) reduces investment and reduces the current account balance. 
C) has no effect on investment,but reduces the current account balance. 
D) has no effect on either investment or the current account balance.

Question 20

Assume that an increase in Costa Rica's government budget deficit reduced desired national saving by 10 million colon.Assuming Costa Rica is a small open economy,you would expect the government's action to

Accepted Answer

A) increase the current account balance by exactly 10 million colon. 
B) increase the current account balance by less than 10 million colon. 
C) reduce the current account balance by exactly 10 million colon. 
D) reduce the current account balance by more than 10 million colon.

Exam 5: Saving and Investment in the Open Economy

If a Japanese company sells 200 VCRs to a French company and uses the money to buy U.S.government bonds,the Japanese merchandise trade balance ,and the Japanese capital and financial account balance .