ECON305 chap 17&18

Assuming that the current account balance ​(CA​) and trade balance ​(NX​) move closely​ together, the impact on the trade balance of an increase in saving of ​$74 billion and a decrease in investment of ​$39 billion is ___

$113 billion. (add them)

If a country faces a capital account​ deficit, then which of the following measures should be taken to reach a​ balance?

A deterioration of the current account balance. ​Initially, the country was in capital account deficit i.e. the country used to lend to the rest of the world and​ hence, it had a current account surplus. A deterioration of the current account balance means people will save less and invest more.​ Hence, the country borrows from abroad or lends less and this will help lead to a balance of the capital account.

Assuming the​ Marshall-Lerner condition is​ satisfied, which of the following policy decisions will increase both production ​(Y​) and total net exports ​(NX​)?

A reduction in the real exchange rate will help on both the trade and the output fronts. It reduces the trade deficit and increases output. Depending on the initial situation and the relative effects of the depreciation on output and trade​ balance, the government may need to complement the depreciation with either an increase or a decrease in government spending.

Which of the following statements is true? A: If there are no statistical discrepancies, countries with current account surpluses must receive net capital inflows B: If there are no statistical discrepancies, countries with current account deficits must receive net capital inflows. C: Statistical discrepancies are always positive for countries with current account surpluses D: Statistical discrepancies are always positive for countries with current account deficits. E: The current account and the capital account always add up to zero in practice.

B

In an​ economy, saving ​(S​) is 280280​, taxes ​(T​) are 632632​, government spending ​(G​) is 696696 and investment ​(I​) is 258258. A deterioration in the government budget balance of 4848 must be reflected​ in: A. a revised current account balance ​(CA​) to negative 90−90. B. an increase in private saving ​(S​) to 328328. C. a decrease in investment ​(I​) of 4848. D. any of the above.

D.

If following a current account​ surplus, the government resorts to currency appreciation, then there will be a decrease in investments less than the decrease in savings.

Following the current account​ surplus, the government will appreciate the​ currency, due to which there is a fall in demand for domestic goods as they become more expensive.​ Hence, there is an increase in imports leading to a current account deficit and a decrease in investment less than the decrease in savings.

if the trade deficit is equal to zero

Imports are equal to exports. Demand for domestic goods is equal to domestic demand for goods.

Initially, a depreciation in the real exchange rate ​(ε​) may cause net exports ​(NX​) to decline as the effect of the depreciation is reflected much more in prices than in quantities. Over​ time, the trade balance improves beyond its initial level because foreign buyers respond to the decrease in export prices. The above scenario can be graphically explained by graphing net exports over time. This representation is referred to as the​ ____.

J-Curve

Professor Blanchard discusses inflation in Spain and in the Eurozone. He states that macroeconomic adjustments in Spain would be easier if inflation in the Eurozone were higher​ because

Spain would not need to rely on deflation to become more competitive.

Suppose the domestic currency depreciates ​(E​ falls). Assume that P and ​P* remain constant. Which of the following is​ true? As a​ result, what will happen to the world demand for domestic​ goods? What does this imply about the domestic unemployment​ rate?

The relative price of domestic goods falls; World demand for domestic goods will rise; The domestic unemployment rate will fall in the short run.

Suppose Country A witnesses an increase in the price of imports and no significant change in exports.​ However, over​ time, there is a substantial improvement in the trade balance. Which of the following could be a possible reason for such an effect on trade​ balance?

There is a currency depreciation and the​ Marshall-Lerner condition holds later.

Consider an economy with a trade deficit ​(NX<​0) and with output equal to its natural level. Suppose​ that, even though output may deviate from its natural level in the short​ run, it returns to its natural level in the medium run. Assume that the natural level is unaffected by the real exchange rate. What must happen to the real exchange rate over the medium run to eliminate the trade deficit​ (i.e., to increase NX to​ 0)? Consider national income​ identity: Y​ = C+I+G+NX. Assume again that output returns to its natural level in the medium run. If NX increases to​ 0, what must happen to domestic demand in the medium​ run? What government policies are available to reduce domestic demand in the medium​ run?

There must be a real depreciation; Domestic demand must fall; Either reduce G​, or increase T​, or both

If domestic inflation is higher than foreign​ inflation, but the domestic country has a fixed exchange​ rate, what happens to the real exchange rate over​ time? Assume that the​ Marshall-Lerner condition holds. What happens to the trade balance over​ time?

There will be real appreciation over time; The trade balance will worsen.

A country can have a current account deficit and no trade deficit.

True. The current account is made up of the trade balance, the net income balance and net transfers received. If the sum of the net income balance and net transfers received is negative as a whole, the current account can be in deficit if even if the trade balance is zero.

A decrease in production ​(Y​) can improve the trade​ balance; exports may remain unchanged but imports decrease.

When a​ country's output​ decreases, exports, which depend on what happens in the rest of the​ world, may remain the same.​ However, imports come down with​ output, and the trade balance improves

________ in the real exchange rate will have the same effect on the trade balance as an increase in foreign output ​(Y*​).

a decrease

There is ____ correlation between the real exchange rate and exports.

a negative

there is ____ correlation between foreign income and exports

a positive

Professor Blanchard explains how expansionary monetary policy in advanced economies can cause investors​ "to look for other places to​ go." Such accommodative monetary policy in advanced economies would then be expected to have which of the following​ effects?

a reduction in the policy rate in advanced economies and capital inflows for emerging market economies

A decrease in the real exchange rate leads to _____ in imports

an decrease

An increase in domestic income leads to ____ in imports

an increase

The equilibrium level of output ____ the same as the level of output at which trade is balanced.

could be

A budget deficit, everything else constant, will lead to a(n) _______ in national savings. This will, everything else constant, lead to a ________. This means the country will become a ______ with the rest of the world .

decrease; current account deficit; net debtor.

An increase in government spending leads to an increase in output and increases trade ____

deficit

The real exchange rate appreciates when:

either the nominal exchange rate increases and/or the ratio of domestic to foreign prices increases.

The goods market of an open economy is in equilibrium when domestic output or production​ is:

equal to the demand for domestic goods.

the ​"sum of the current account​ balances" in the​ world:

equal zero

A real appreciation means that domestic goods become less expensive relative to foreign goods.

false

A real depreciation leads to an immediate improvement in the trade balance.

false

Although the export ratio can be larger than one—as it is in Singapore—the same cannot be true of the ratio of imports to GDP.

false

Given the definition of the exchange rate adopted in this​ chapter, if the dollar is the domestic currency and the euro the foreign​ currency, a nominal exchange rate of 0.75 means that 0.75 dollars is worth 0.75 euros.

false

If the dollar is expected to appreciate against the​ yen, uncovered interest parity implies that the U.S. nominal interest rate must be greater than the Japanese nominal interest rate.

false

Opening the economy to trade tends to increase the multiplier because an increase in expenditure leads to more exports

false

The fact that a rich country like Japan has such a small ratio of imports to GDP is clear evidence of an unfair playing field for U.S. exporters to Japan.

false

The nominal exchange rate and the real exchange rate always move in the same direction

false

The nominal exchange rate in this chapter is defined as the domestic currency price of a unit of foreign currency.

false

Uncovered interest parity implies that interest rates must be the same across countries.

false

The national income identity implies that budget deficits cause trade deficits.

false. An increase in the budget deficit will lead to an increase in the trade​ deficit, but we​ can't conclude that from the national income accounting identity. We have to use our model to make that prediction.

The current U.S. trade deficit is the result of unusually high​ investment, not the result of a decline in national saving.

false. The current account deficit can result from unusually high investment or unusually low saving or a combination of both. The U.S. current account deficit is the result of unusually low saving.

If the dollar is expected to depreciate against the​ yen, uncovered interest parity implies that the U.S. nominal interest rate will be _______ than the Japanese nominal interest rate.

higher

An appreciation of the exchange rate, holding everything else constant, will lead to:

higher imports and lower exports, reducing the trade balance.

Given the real exchange​ rate, you can expect the relative price of domestic goods in terms of foreign goods to _____ when the foreign price level decreases.

increase

As domestic output increases, imports _____, and exports _______, so net exports _______.

increase; are unaffected; decrease.

Opening the economy to trade tends to

lower the multiplier because an increase in expenditure leads to more imports

A decrease in the real exchange rate can increase savings by increasing ______

output

The effect of government spending on output in an open economy is _____ than it would be in a closed economy

smaller than

In an open​ economy, you must differentiate between the demand for domestic goods and the domestic demand for goods​ by:

subtracting the value of imports in terms of domestic goods.

Professor Blanchard discusses the slowdown in growth in emerging market economies. He attributes part of this slowdown to a​ "trade effect." This trade effect represents which of the​ following?

the effects of the slowdown in growth in advanced economies which causes a reduction in emerging market​ economies' exports

The current account balance and the ______ typically move closely together.

trade balance

A decline in real income can lead to a decline in imports and thus a trade surplus.

true

A small open economy can reduce its trade deficit through fiscal contraction at a smaller cost in output than can a large open economy.

true

If the trade deficit is equal to​ zero, then the domestic demand for goods and the demand for domestic goods are equal.

true

The Marshall-Lerner condition is the condition under which a real depreciation (a decrease in ε) leads to an increase in net exports (NX).

true

The experience of the United States in the 1980s shows that real exchange rate appreciations lead to trade deficits and real exchange rate depreciations lead to trade surpluses.

true

The nominal exchange rate and the real exchange rate usually move in the same direction.

true

if there are no statistical​ discrepancies, countries with current account deficits must receive net capital inflows.

true