Deck 5: Saving and Investment in the Open Economy

Question 1

Suppose a wealthy Canadian donates $10 million to charities in Mexico.Mexican net exports ________ and the current account balance ________.

A)fall; rises
B)rise; rises
C)are unchanged; is unchanged
D)fall; is unchanged

Answer 1

D

Question 2

If the Federal Reserve buys $3 billion worth of Japanese yen and sells $5 billion of euros,how does this affect the official settlements balance?

A)Falls by $2 billion
B)Rises by $2 billion
C)Rises by $3 billion
D)Falls by $5 billion

Answer 2

A

Question 3

If a French company sells 1000 gallons of Perrier to a U.S.company at 5 euros per gallon,and uses the money to buy stock in a Spanish cork company,how does this affect the French balance of payments accounts?

A)Debit: capital and financial account; credit: merchandise trade
B)Debit: merchandise trade; credit: capital and financial account
C)Debit: net investment income from abroad; credit: capital and financial account
D)Debit: merchandise trade; credit: net investment income from abroad

Answer 3

A

Question 4

A country has a current account surplus if

A)the value of its exports exceeds the value of its imports,assuming net income from foreign assets and net unilateral transfers have a value of zero.
B)the value of its net exports of services exceeds the value of its net exports of goods.
C)it receives more income from foreign assets than it pays to foreigners for foreign-owned domestic assets.
D)its capital inflows exceed its capital outflows.

Question 5

If a U.S.firm buys tulips from a Dutch firm and the Dutch firm uses the dollars it gets to buy U.S.stocks,the U.S.trade balance ________ and the U.S.capital and financial account ________.

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

Question 6

Which of the following would be part of the nation's current account?

A)An old house purchased by an American in Italy
B)The purchase of a U.S.Treasury bond by a foreigner
C)The interest an American earns on a British bond
D)A factory built by the Japanese in the United States

Question 7

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?

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 8

The current account balance consists of

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 9

Net exports of goods are known as

A)the balance of payments.
B)the merchandise trade balance.
C)the current account.
D)the capital and financial account.

Question 10

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

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

Question 11

A negative value for the U.S.official reserve assets line in the balance of payments accounts means that

A)U)S.residents have sold more gold to foreigners than they bought.
B)U)S.residents bought more gold from foreigners than they sold.
C)the U.S.central bank has increased its holdings of foreign reserve assets.
D)the U.S.central bank has decreased its holdings of foreign reserve assets.

Question 12

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 ________.

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

Question 13

If all international factor payment flows are investment income,then net investment income from abroad equals

A)net exports.
B)the current account balance.
C)the trade balance.
D)net factor payments from abroad.

Question 14

The official settlements balance equals

A)the sum of the current account and the capital and financial account.
B)the current account minus net unilateral transfers.
C)net investment income from abroad.
D)the net increase in a country's official reserve assets.

Question 15

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 ________.

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

Question 16

Which of the following would be part of the nation's capital and financial account?

A)A night club show seen by an American in Mexico City
B)A dividend from a British equity owned by an American
C)A payment to the Philippine government for the use of military bases in their country
D)One hundred shares of British Petroleum stock purchased by an American

Question 17

If a country's merchandise exports exceed its merchandise imports it has a

A)trade surplus.
B)trade deficit.
C)current account surplus.
D)current account deficit.

Question 18

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

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 19

If the United States sells computers to Russia,and uses the proceeds to buy shares of stock in Russian companies,the U.S.trade balance ________ and the U.S.capital and financial account balance ________.

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

Question 20

If France has a trade deficit,then

A)imports into France exceed exports from France.
B)exports from France exceed imports into France.
C)imports into the United States from France exceed exports from the United States into France.
D)imports into France from the United States exceed exports from France into the United States.

Question 21

Suppose output is $35 billion,government purchases are $10 billion,desired consumption is $15 billion,and desired investment is $6 billion.Net foreign lending would be equal to

A)-$4 billion.
B)-$2 billion.
C)$2 billion.
D)$4 billion.

Question 22

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

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.

Question 23

An economic benefit of capital outflows is that they

A)create future income payment inflows.
B)increase domestic investment.
C)reduce domestic saving.
D)reduce domestic unemployment.

Question 24

For each of the following transactions,explain what happens to the merchandise trade balance,current account balance,and capital and financial account balance in both the United States and Mexico.The exchange rate is 2 Mexican pesos per U.S.dollar.
(a)A Mexican firm spends 4 million pesos to buy radiology equipment from a U.S.firm.
(b)A U.S.firm buys 20,000 sombreros at 20 pesos each.
(c)Mexican computer firms send 200 programmers to universities in the United States,paying tuition and expenses of $3,000 each.
(d)A Mexican entrepreneur gives 50,000 pesos to the United Way of San Antonio,Texas.
(e)Mexican investors buy $10 million worth of 30-year U.S.Treasury bonds.

Question 25

Suppose the current account shows debits of $5.3 billion and credits of $4.7 billion.The current account balance is ________,and the capital and financial account balance is ________.

A)+$0.6 billion; -$0.6 billion
B)+$0.6 billion; +$0.6 billion
C)-$0.6 billion; -$0.6 billion
D)-$0.6 billion; +$0.6 billion

Question 26

Assuming no change in the effective tax rate on capital,a decrease in the government budget deficit will reduce the current account deficit if and only if the decrease in the budget deficit

A)reduces desired national saving.
B)increases desired national saving.
C)reduces desired national investment.
D)increases desired national investment.

Question 27

A country's capital and financial account balance decreases if

A)its current account balance increases.
B)its income payment inflows on foreign assets decrease.
C)its domestic residents working abroad reduce the income they send home to their families.
D)foreigners increase their purchases of its existing assets.

Question 28

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.

Question 29

If there are no net factor payments from abroad and no unilateral transfers,net exports of $10 billion is the same as

A)a current account deficit of $10 billion.
B)a capital and financial account surplus of $10 billion.
C)net acquisition of foreign assets of $10 billion.
D)net foreign borrowing of $10 billion.

Question 30

If the United States had a capital and financial account deficit of $50 billion,we could say the United States had

A)net imports of $50 billion.
B)net foreign borrowing of $50 billion.
C)acquired net foreign assets of $50 billion.
D)a current account deficit of $50 billion.

Question 31

Suppose a country has the following balance of payments data.

(a)Calculate the current account balance.
(b)Calculate the capital and financial account balance.
(c)Calculate the trade balance.
(d)Calculate net factor payments.

Question 32

Suppose a country has the following balance of payments data.

(a)Calculate the current account balance.
(b)Calculate the capital and financial account balance.
(c)Calculate the trade balance.
(d)Calculate net factor payments.

Question 33

In goods market equilibrium in an open economy,

A)the desired amount of exports must equal the desired amount of imports.
B)the desired amount of exports must equal the desired amount of imports less the amount lent abroad.
C)the desired amount of national saving must equal the desired amount of domestic investment.
D)the desired amount of national saving must equal the desired amount of domestic investment plus the amount lent abroad.

Question 34

A capital and financial account surplus necessarily implies

A)a balance of payments surplus.
B)a current account surplus.
C)a current account deficit.
D)an increase in the nation's official reserve assets.

Question 35

An increase in a small open economy's government budget deficit that reduces national saving and the current account balance causes an

A)increase in desired saving.
B)increase in the world real interest rate.
C)increase in exports.
D)increase in absorption.

Question 36

How did the United States become a net debtor in the 1980s? Is our foreign debt a significant problem? Explain.

Question 37

The United States became a net debtor because

A)it ran consistently large current account deficits.
B)it ran consistently large current account surpluses.
C)it lent a lot to people in foreign countries.
D)it provided much foreign aid to other countries.

Question 38

If a country has a current account surplus,it also has

A)a capital and financial account surplus.
B)an increase in its official reserve assets.
C)a balance of payments deficit.
D)an increase in its holding of net foreign assets.

Question 39

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

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 40

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

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 41

If there is an increase in the future marginal product of capital in a small open economy,it causes the current account to ________ and saving to ________.

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

Question 42

Suppose output is $440 billion,government purchases are $40 billion,desired consumption is $320 billion,and net exports are $35 billion.Then desired investment equals

A)$20 billion.
B)$30 billion.
C)$35 billion.
D)$45 billion.

Question 43

A small open economy has a current account balance of zero.A rise in the world real interest rate causes

A)a current account surplus.
B)a capital and financial account surplus.
C)net borrowing from abroad.
D)absorption to exceed income.

Question 44

If there is a decrease in taxes on business firms in a small open economy,it causes the current account to ________ and saving to ________.

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

Question 45

If a freeze destroys much of the crop of an agricultural nation,then

A)the desired investment curve would shift to the left.
B)the desired investment curve would shift to the right.
C)net foreign lending would increase.
D)net foreign lending would decrease.

Question 46

In goods market equilibrium in an open economy,

A)the desired amount of exports must equal the desired amount of imports.
B)the desired amount of exports must equal the desired amount of imports less the amount lent abroad.
C)the desired amount of national saving must equal the desired amount of domestic investment.
D)the desired amount of national saving must equal the desired amount of domestic investment plus the current account balance.

Question 47

An economy is considered a small open economy if it

A)is too small to affect the world real interest rate.
B)has GDP less than 1% of world GDP.
C)doesn't trade internationally.
D)has a zero trade balance.

Question 48

Suppose output is $440 billion,government purchases are $40 billion,desired consumption is $320 billion,and net exports are $35 billion.Absorption is equal to

A)$405 billion.
B)$420 billion.
C)$435 billion.
D)$440 billion.

Question 49

Suppose output is $35 billion,government purchases are $10 billion,desired consumption is $15 billion,and desired investment is $6 billion.Absorption is equal to

A)$25 billion.
B)$31 billion.
C)$35 billion.
D)$39 billion.

Question 50

A small open economy has a current account balance of zero.A rise in its investment demand causes

A)a current account surplus.
B)a capital and financial account deficit.
C)income to exceed absorption.
D)net borrowing from abroad.

Question 51

In a saving-investment diagram for a small open economy

A)the saving curve is vertical at some fixed level of output.
B)the saving curve is horizontal at some fixed interest rate.
C)the real interest rate is fixed at the world real interest rate.
D)equilibrium requires that Sd = Id.

Question 52

When future labor income falls in a small open economy,it causes the current account to ________ and investment to ________.

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

Question 53

When a temporary beneficial supply shock hits a small open economy,it causes the current account to ________ and investment to ________.

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

Question 54

Absorption refers to

A)the total amount of imports purchased by a country.
B)the net amount of imports purchased by a country.
C)total spending by domestic residents,businesses,and governments.
D)GDP less desired consumption,desired investment,and government purchases.

Question 55

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

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

Question 56

Suppose output is $35 billion,government purchases are $10 billion,desired consumption is $15 billion,and net exports are $4 billion.Then desired investment equals

A)$2 billion.
B)$4 billion.
C)$6 billion.
D)$8 billion.

Question 57

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

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

Question 58

Total spending by domestic residents,businesses,and governments is called

A)investment.
B)net domestic purchases.
C)absorption.
D)GDP.

Question 59

A small open economy increases its investment demand.This causes the world real interest rate to ________ and the country's current account balance to ________.

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

Question 60

Suppose output is $35 billion,government purchases are $10 billion,consumption is $15 billion,and net exports are $4 billion.Assume net factor payments equal 0.
(a)Calculate the equilibrium amount of investment.Show your work.
(b)Calculate the equilibrium amount of absorption.Show your work.
(c)Calculate the equilibrium amount of the capital and financial account balance.Show your work.

Question 61

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 net exports equal

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

Question 62

When there are two large open economies,if desired international lending by the domestic country exceeds desired international borrowing by the foreign country,then

A)domestic saving must rise.
B)domestic saving must fall.
C)the world real interest rate must fall.
D)the world real interest rate must rise.

Question 63

In a small open economy,Sd = 200 + 500 rw and Id = 300 - 200 rw.If rw = 0.1,then net exports =

A)-50.
B)-30.
C)30.
D)50.

Question 64

Consider a small open economy with desired national saving of Sd = 1000 + 1000rw and desired investment of Id = 1000 - 500rw.
Calculate national saving,investment,and the current account balance in equilibrium when the real world interest rate is
(a)rw = 0.025.
(b)rw = 0.05.
(c)rw = 0.0.

Question 65

Consider a small open economy in equilibrium with a zero current account balance.What happens to national saving,investment,and the current account balance in equilibrium if
(a)future income rises?
(b)business taxes rise?
(c)government expenditures decline temporarily?
(d)the future marginal product of capital rises?

Question 66

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

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

Question 67

Consider a small open economy in equilibrium.What happens to the real interest rate,national saving,investment,and the current account balance in equilibrium in each of the following situations (each taken separately).Explain which curve shifts and why,and show a diagram explaining your results.(You may assume that none of the shocks is large enough to significantly affect labor supply or labor demand significantly.)
(a)wealth declines
(b)business taxes decline
(c)income rises temporarily

Question 68

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

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

Question 69

When a temporary adverse supply shock hits a large open economy,it causes the current account to ________ and investment to ________.

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

Question 70

What determines the interest rate in a small open economy?

Question 71

In a small open economy,
Sd = $5 billion + ($100 billion)rw,
Id = $10 billion - ($50 billion)rw,
Y = $50 billion,
G = $3 billion,
rw = .06.
(a)Calculate the current account balance.
(b)Calculate net exports.
(c)Calculate desired consumption.
(d)Calculate absorption.

Question 72

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,and output = 5,000,then absorption equals

A)5,100.
B)5,050.
C)4,950.
D)4,900.

Question 73

In a small open economy,describe what happens when an increase in wealth causes national saving to decline.Explain the impact on the real interest rate,saving,investment,net exports,and absorption in equilibrium.

Question 74

Consider a small open economy that is in equilibrium with a current account surplus.
(a)Draw a diagram showing this situation.
(b)Now suppose that future income increases.Show what happens in your diagram.What happens to the world real-interest rate and the equilibrium quantities of saving,investment,and the current-account balance?
(c)Repeat parts (a)and (b)for the case of a large open economy,showing a situation in which the home country initially has a current account surplus.Draw a diagram and describe how the rise in future income in the home country affects all four variables (the world real interest rate and the equilibrium quantities of saving,investment,and the current-account balance)in both countries.

Question 75

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

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 76

A large open economy

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 77

A large open economy reduces its investment demand.This causes the world real interest rate to ________ and the country's current account balance to ________.

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

Question 78

Consider a small open economy in equilibrium with a current account deficit.
(a)Draw a diagram showing this situation.
(b)What happens to national saving,investment,and the current account balance in equilibrium if government expenditures rise temporarily? Show this result in your diagram.

Question 79

When there are two large open economies,if desired international borrowing by the domestic country exceeds desired international lending by the foreign country,then

A)domestic investment must fall.
B)domestic investment must rise.
C)the world real interest rate must fall.
D)the world real interest rate must rise.

Question 80

Consider a small open economy with desired national saving of Sd = 20 + 200rw and desired investment of Id = 30 - 200rw.
Calculate national saving,investment,and the current account balance in equilibrium when the real world interest rate is
(a)rw = 0.025.
(b)rw = 0.05.
(c)rw = 0.0.
(d)Now suppose something causes desired national saving to increase by 10,so that it is now Sd = 30 + 200 .Repeat parts (a),(b),and (c).
(e)Suppose,with desired national saving at its original level of Sd = 20 + 200rw,something causes desired investment to rise by 10,to Id = 40 - 200rw.Repeat parts (a),(b),and (c).