International Finance Exam 2

Consider the IS-LM curves for an economy with flexible exchange rates. A decrease in the foreign interest rate will result in the: -LM curve shifting to the left. -IS curve shifting to the left. -IS curve shifting to the right. -LM curve shifting to the right.

-IS curve shifting to the left.

Suppose that a country has external wealth of $1 billion in 2014. What is the future value of this external wealth at the end of 2016, assuming a world interest rate of 10% per annum and no additions or subtractions to external wealth from trade balance surpluses or deficits during the period? $0.812 billion $1.1 billion $1.2 billion $1.21 billion

1.21 billion

If a nation experiences an output shock and wishes to borrow to smooth consumption, how much of the loss is the nation able to borrow and still maintain the long-run budget constraint? -A nation in such a position is better off not to borrow because it might get into financial trouble. -20% of the output shock -100% of the output shock -A nation can absorb a proportion of the shock equal to 1/(1 + r*), where r* is the world long-run real interest rate.

A nation can absorb a proportion of the shock equal to 1/(1 + r*), where r* is the world long-run real interest rate.

Consumption (personal consumption expenditures)8,000 Investment (gross private domestic investment)1,300 Government consumption (government expenditures)2,100 Exports900 Imports1,750 NFIA+45 Net unilateral transfers+20 Based on the NUT, economists could say that: a. Mexicans in Canada have sent a lot of income home. b. Canadians abroad have sent a lot of income home. c. Canada has given away more foreign aid than it has received. d. Canada has a balance of payments deficit.

Canadians abroad have sent a lot of income home.

The circular flow concept of a closed economy helps to explain why: a. unemployment is not a problem in a closed economy—only in an open economy. b. firms are able to earn profits. c. GDP, GNI, and GNE are equal. d. nominal GDP is always higher than real GDP.

GDP, GNI, and GNE are equal.

the relationship between GNI and GDP is: A)GNI - GDP = factor income receipts from foreign sources - payments of income to foreign factors (by domestic firms). B)GDP is equal to GNI within the nation. C)GDP is always less than GNI because of domestic transfer payments. D)GNI includes transfers and gifts from the rest of the world; GDP does not.

GNI - GDP = factor income receipts from foreign sources - payments of income to foreign factors (by domestic firms).

When a closed economy is compared with an open economy, what situation exists? a. GDP is always higher than GNE in an open economy because some goods remain unsold into the next accounting period. b. In a closed economy, because there are no exports or imports, no international transfers, and no service payments, GDP, GNE, GNI, and GNDI are all equal. c. Exports and imports are monitored and controlled, so there is never a trade imbalance in a closed economy. d. Economic activity is directed entirely by the state in an open economy.

In a closed economy, because there are no exports or imports, no international transfers, and no service payments, GDP, GNE, GNI, and GNDI are all equal.

When comparing monetary and fiscal policy under fixed and floating exchange rate regimes, which of the following statements is FALSE? -In a floating exchange rate regime, an expansionary monetary policy is effective in stimulating spending and depreciating the currency. -In a fixed exchange rate regime, an expansionary monetary policy is effective in stimulating spending; it has no impact on the currency value or the trade balance. -In a floating exchange rate regime, an expansionary fiscal policy is effective in stimulating spending, though there may be crowding out effects due to higher rates of interest and currency appreciation. -In a fixed exchange rate regime, an expansionary fiscal policy is effective in stimulating spending, as long as the parallel expansionary monetary policy keeps exchange rates stable.

In a fixed exchange rate regime, an expansionary monetary policy is effective in stimulating spending; it has no impact on the currency value or the trade balance

When there is a temporary shock to output (positive or negative), what happens to consumption in an open economy? A)It is unchanged. B)It changes by exactly the same amount as output. C)It changes by more than the temporary output gain or loss by a factor of (1 + r*) / r*. D)It changes by less than the temporary output gain or loss by a factor of r* / (1 + r*).

It changes by less than the temporary output gain or loss by a factor of r* / (1 + r*).

What is the present value of a nation's net external wealth? -It is gold, plus outstanding currency, plus foreign currency reserves in the nation. -It is the average real income per capita times the average work span times the rate of economic growth. -It is the sum (discounted to the present) of future trade deficits or surpluses. -It is the present and future real GDP discounted to present value.

It is the sum (discounted to the present) of future trade deficits or surpluses.

If interest rates rise and foreign income falls, what will happen to output, ceteris paribus? -It is uncertain what will happen. -It will stay the same. -It will fall. -It will rise.

It will fall.

Assuming that investment (I) and government purchases (G) are zero, then the basic model of an open economy (where C = consumer spending; S = saving; T = taxes; X - M = exports - imports; and Q = GDP) is: I + S = G + T. Q - C = X - M. C + I + G = Q. I = S.

Q - C = X - M.

Which of the following factors is NOT part of the current account of a country? -exports -imports -unilateral transfers -Social Security contributions

Social Security contributions

If the demand for money increases, what happens in the IS-LM framework? -The LM curve shifts left. -The IS curve shifts left. -The LM curve shifts right. -The IS curve shifts right.

The LM curve shifts left.

If the supply of money increases, what happens in the IS-LM framework? -The IS curve shifts left. -The LM curve shifts left. -The LM curve shifts right. -The IS curve shifts right.

The LM curve shifts right.

Which of the following is NOT an assumption belonging to the long-run budget constraint model? -The economy is a price taker and is small and open. -The economy can borrow or lend unlimited amounts at the world real interest rate. -The government has a balanced budget. -Prices are perfectly flexible.

The government has a balanced budget.

If domestic income falls, what must happen to keep the trade balance the same? -Domestic income must fall. -The domestic price level must fall. -Foreign income must rise. -The real exchange rate must fall.

The real exchange rate must fall.

When Norway began producing oil, which of the following events did NOT occur? A)There was an increase in Norway's capital stock. B)There was an increase in foreign investment in Norway. C)There was a decline in consumption to finance the investment. D)There was a current accounts deficit in Norway.

There was a decline in consumption to finance the investment.

Assume that the economy is in equilibrium. If the interest rate falls, what sequence of events will return the economy to equilibrium? -Bond prices rise, causing foreign investment to flow in, causing the exchange rate to fall (appreciate). -Total spending falls, unemployment rises, government transfers increase, inflation rises, and the exchange rate falls (appreciates). -Total spending rises as investors move funds into foreign assets, causing the exchange rate to rise (depreciate), and the trade balance increases, causing output to rise. -Savers save more to replace lost interest earnings, consumption falls, imports rise, and the trade balance falls, causing output to fall.

Total spending rises as investors move funds into foreign assets, causing the exchange rate to rise (depreciate), and the trade balance increases, causing output to rise.

Assuming that all transactions are recorded, if the United States has an overall deficit (-) in its current account, what is the implication for the balances of the other accounts (capital and financial)? a. Their difference (FA - KA) must be equal to zero. b. Their difference (FA - KA) is equal to the deficit (-) in the current account. c. When added (FA + KA), they must be in surplus (+) by exactly the same amount. d. When added (FA + KA), they will be in deficit by exactly the same amount.

When added (FA + KA), they must be in surplus (+) by exactly the same amount.

Which of the following is a general rule for how demand shocks affect the IS curve? -Demand shocks are usually rare and have little effect. -When any exogenous variable works to increase demand, IS shifts to the right and, conversely, when any exogenous variable works to decrease demand, IS shifts to the left. -When any exogenous variable works to increase demand, IS shifts to the left and conversely, when any exogenous variable works to decrease demand, IS shifts to the right. -Demand shocks will always show up as changes in the expected real exchange rate.

When any exogenous variable works to increase demand, IS shifts to the right and, conversely, when any exogenous variable works to decrease demand, IS shifts to the left.

The long-run budget constraint says that: A)a country will be able to borrow in perpetuity. B)a country will have to always balance its budget in the short-run. C)a country's expenditure must equal its production. D)a country's expenditure can be higher than its production.

a country's expenditure must equal its production.

The two-period budget constraint tells us: A)a creditor country can afford future deficits "on average." B)a creditor country cannot afford future deficits "on average." C)a debtor country cannot afford future deficits "on average." D)a debtor country can afford future deficits "on average."

a creditor country can afford future deficits "on average."

With expected inflation equal to zero in the model, investment activity for an economy is: -limited to the rate of growth of nominal GDP minus the inflation rate. - a negative function of the nominal rate of interest. - a positive function of the nominal rate of interest. - constant in the face of differing nominal rates of interest.

a negative function of the nominal rate of interest.

When the total value of foreign assets owned by the home nation is less than the total value of home assets owned by foreigners, we say a nation is: -close to financial collapse. -a net debtor to the rest of the world. -a net creditor to the rest of the world. -under pressure to get help from the IMF.

a net debtor to the rest of the world.

To simplify the analysis of demand shocks in an open, two-economy, short-run model, we assume all of the following EXCEPT: -fixed prices and wages. -a positive trade balance. -fixed levels of government spending and taxes; foreign GDP and foreign rates of interest are fixed and given. -no net unilateral transfers or foreign factor income.

a positive trade balance.

In addition to government purchases or changes in taxes, demand shocks in the economy can increase or decrease GDP, leading to a fall or rise in the trade balance. Which of the following would NOT represent a demand shock? -a change in household wealth leading to a rise in consumption expenditures -an increase in technology, causing investment spending to rise -a rise in inflation -a change in the marginal propensity to import, causing imports to rise

a rise in inflation

In an open economy, investment can be funded externally, possibly leading to: A)very unstable consumer spending, which may lead to recession. B)unsustainable debt. C)foreign control of domestic corporations. D)a simultaneous increase in income and smooth consumption, with adherence to the long-run budget constraint.

a simultaneous increase in income and smooth consumption, with adherence to the long-run budget constraint.

When calculating gross national disposable income in an open economy, we adjust gross national expenditure by: -subtracting exports and adding back imports. -adding in net income earned from foreign sources, plus the trade balance, plus net unilateral transfers from abroad. -subtracting depreciation, payroll taxes, and indirect business taxes, while adding in subsidies. -taking out net factor income from abroad and subtracting net unilateral transfers.

adding in net income earned from foreign sources, plus the trade balance, plus net unilateral

Which of the following methods can a country use to accumulate precautionary savings? -a reduction in unemployment benefits -an increase in taxes -a reduction of government expenses -an accumulation of foreign exchange reserves by central banks

an accumulation of foreign exchange reserves by central banks

If one nation experiences a gain in its external wealth due to valuation effects only, the other nations in the world combined will experience: -no change in external wealth. -an equal decline in external wealth. -an increase in the interest they earn. -an equal gain since all currencies are worth more.

an equal decline in external wealth.

The primary driving force behind changes in external wealth is: -irresponsible investment and lax government regulation. -an imbalance between a nation's total income and its total spending. -a change in the value of stocks and bonds. -financial innovation that creates -different kinds of assets, which may then obscure their true value.

an imbalance between a nation's total income and its total spending.

It is better to invest in a country whose shocks: A)are positively correlated with yours. B)are independent of yours. C)are negatively correlated with yours. D)are common to yours.

are negatively correlated with yours.

A nation that runs a current account deficit will also: -suffer a lack of capital resources. -be a net importer of assets. -increase its external wealth. -be a net exporter of assets.

be a net exporter of assets.

Nations can lower risk via asset diversification. How do nations engage in diversification? -by restricting all investment to domestic capital -by buying private insurance against devaluation -by investors relying on mutual funds instead of choosing their own stocks -by directing some investment activities abroad and some domestically

by directing some investment activities abroad and some domestically

It can be shown using the IS-LM-FX model that a temporary expansion in the supply of money is effective in: -raising rates of interest. -combating temporary downturns in the economy. -raising the rate of unemployment. -increasing consumer confidence.

combating temporary downturns in the economy.

Every point on an open-economy IS curve represents: -combinations of interest rates and the supply of money, which result in equilibrium in the money market. -combinations of interest rates and levels of production, which result in equilibrium in the goods market and the forex market. -combinations of interest rates and levels of production, which result in equilibrium in the goods market. -combinations of interest rates and levels of production, which result in equilibrium in the money market, the goods market, and the forex market.

combinations of interest rates and levels of production, which result in equilibrium in the goods market and the forex market.

In national accounts data, which is the largest share of GNEs?A)consumption B)investment C)government consumption D)All are roughly equal in size.

consumption

Whenever U.S. government spending increases, thereby increasing the demand for real money balances and the rate of interest, the currency will appreciate and there is a potential for: -a Republican backlash. -crowding out. -overshooting. -recession.

crowding out.

When the real exchange rate decreases in the United States, then there is a(n) ______ in U.S. demand for U.S. goods and a(n) _________ in U.S. demand for Mexican goods. -increase; decrease -decrease; decrease -increase; increase -decrease; increase

decrease; increase

In the financial account, when there is a current account surplus, there must be a(n) _____ in either the capital or the financial account balance. equal change (no net flow) surplus (inflow of funds) deficit (outflow of funds) balance (no net flow)

deficit (outflow of funds)

From 1970-2008, the U.S. current account moved further into _______, and it was accompanied by a corresponding _____ in the financial account. A)surplus; deficit B)deficit; surplus C)surplus; shortfall D)balance; surplus

deficit; surplus

The MPC shows the relationship between: -disposable income and consumer spending. -saving and investing. -inflation and unemployment. -interest rates and investment.

disposable income and consumer spending.

Crowding out of fiscal expansion can be avoided if: -the policy is only temporary. -the monetary authorities undertake a contractionary stance. -exchange rates are flexible. -exchange rates are fixed.

exchange rates are fixed.

In the case of the United States, the long-run budget constraint is eased somewhat by: A)increasing debt and increasing wealth at the same time. B)figuring in the capital gain differential and an interest rate differential on external assets and liabilities. C)the surprising shrinking trade deficit of the United States. D)the shrinkage of the U.S. national debt.

figuring in the capital gain differential and an interest rate differential on external assets and liabilities.

Testing evidence from consumption volatility, researchers have found that until high levels of liberalization are reached: -financial globalization delivers a large measure of consumption smoothing benefits. -financial globalization results in less government debt and a higher standard of living. -financial globalization does not deliver any consumption smoothing benefits. -financial globalization intensifies problems in nations with backward financial systems.

financial globalization does not deliver any consumption smoothing benefits.

The exorbitant privilege for the United States implies that: A)the United States can lend money to people at low interest rates. B)U.S. investments abroad often earn very low interest rates. C)foreigners' investments in the United States earn them less income than the U.S. investments abroad. D)foreigners' investments in the United States earn them more income than the U.S. investments abroad.

foreigners' investments in the United States earn them less income than the U.S. investments abroad.

An open economy has: A)greater ability to smooth its consumption because of the absence of domestic shocks. B)greater ability to smooth its consumption because of the ability to borrow internationally. C)less ability to smooth its consumption because of the lower marginal product of capital. D)less ability to smooth its consumption to weak links present in the financial system.

greater ability to smooth its consumption because of the ability to borrow internationally.

A deficit in the financial account means that the nation has: a. saved more than it has invested. b. produced more than it has consumed. c. imported more assets than it has exported. d.exported more assets than it has imported.

imported more assets than it has exported.

A Keynesian model is one in which prices are sticky: -so that they never depend on the money supply. -in the short run only. -in the short run and in the long run. -in the long run only.

in the short run only

The difference between gross national income and gross domestic product is: a. income earned abroad by residents minus income paid to foreign factors of production. b. total indirect employee costs such as health or retirement insurance. c. income earned in addition to salaries, commissions, and bonuses. d. income not subject to taxation such as capital gains, illegal earnings, or casual earnings.

income earned abroad by residents minus income paid to foreign factors of production.

Investment will occur in an open economy more often than in a closed economy because: A)investment decisions have fewer constraints because investors and borrowers will compare the marginal product of capital in any nation with the world real interest rate. B)without information, investors often make poor investment decisions. C)governments like to subsidize overseas investment for domestic firms. D)international financial organizations prefer to lend for international investments rather than domestic ones.

investment decisions have fewer constraints because investors and borrowers will compare the marginal product of capital in any nation with the world real interest rate.

Rather than cut consumption during any year to make a productive investment, an open-economy nation that chooses to finance investment and preserve consumption during the first year: -must repay the investment 10 times over because of compounding. -is better off if the return is greater than the rate of interest. -is subject to criticism for policies that favor rich investors. -is always worse off.

is better off if the return is greater than the rate of interest.

Investment spending will occur as long as the marginal product of capital: A)is rising. B)is falling. C)is greater than the real rate of interest. D)is greater than the increase in consumer spending.

is greater than the real rate of interest.

A sudden stop in credit availability: -is usually manageable if the nation has sufficient reserves to cover imports. -is very unlikely to happen in practice. -is usually very disruptive and necessitates major cuts in expenditures. -affects primarily large industrial nations.

is usually very disruptive and necessitates major cuts in expenditures.

Whenever there is a deficit in the current account, GNDI is: a. equal to GNE only if there is no domestic investment spending. b. less than GNE. c. greater than GNE. d. equal to GNE.

less than GNE.

If production functions are identical, low-income nations have a ____ capital per worker than high-income nations, _____ labor productivity, and a ____ marginal product of capital. A)lower; lower; higher B)lower; higher; higher C)lower; lower; lower D)higher; higher; lower

lower; lower; higher

Net transfers of income from foreign sources play a ____ role in the donor countries, but often play a _____ role in the economies of the recipient nations. -major; minor -neutral; significant -minor; major -significant; neutral

minor; major

When the expected real rate of interest declines, ceteris paribus, we expect: -individuals will steer clear of equity markets. -more investment projects will be undertaken. -firms will borrow less and cut back on their investment projects. -lenders will need to lower their average default rate to maintain their profit margins.

more investment projects will be undertaken.

In an open economy, in the long run, permanent shocks to GDP: -are always contentious during an election year. -are rare but cannot be ignored. -indicate that taxes need to be raised. -must be dealt with by making permanent changes in consumption.

must be dealt with by making permanent changes in consumption.

If investment exceeds national savings, then the current account: a. must be negative. b. must be zero. c. must be positive. d. Not enough information is provided to answer the question.

must be negative

Income paid to factors is called: A)national income. B)value added. C)net exports. D)the current account.

national income.

The key lesson from the LRBC model is that: -nations may lend externally, but it is dangerous to borrow. -nations can safely run trade deficits as long as they can cover the interest each year. -nations must balance their current account year by year. -nations must maintain a balance between the present value of deficits and the present value of surpluses that satisfies the LRBC.

nations must maintain a balance between the present value of deficits and the present value of surpluses that satisfies the LRBC.

Net national saving is related to the balance on the current account in the following way: -domestic investment = net national saving = the balance on the current account - gross domestic product - gross national expenditure. -net national saving = domestic investment + the balance on the current account. -net national saving = domestic investment - the balance on the current account. -net national saving + the balance on the current account + domestic investment = gross domestic product.

net national saving = domestic investment + the balance on the current account.

The time gap between a nation's decision to implement a corrective economic policy and the actual results of the policy is known as the: -inside lapse. -inside lag. -outside lag. -outside lapse.

outside lag.

The present value of GDP: A)equals GNE. B)equals GNE only when the country begins with positive initial wealth. C)equals GNE only when the country begins with negative initial wealth. D)plus the present value of initial wealth must equal the present value of GNE.

plus the present value of initial wealth must equal the present value of GNE.

To fund private investment without borrowing from abroad, a nation may have access to: A)private saving (Y - C). B)government saving (G - T). C)private saving (C - Y). D)unilateral transfer outflows.

private saving (Y - C).

If low-income nations purchase sovereign wealth funds, in effect they are: A)providing scarce investment funds to other nations, causing a transfer from poor to rich. B)increasing the risk of default. C)just delaying the inevitable drop in consumption. D)treating corporations as tools of government policy.

providing scarce investment funds to other nations, causing a transfer from poor to rich.

Under a fixed exchange rate regime, an expansionary fiscal policy would ____ interest rates and GDP, which would cause ____ pressure on the exchange rate, forcing the monetary authority to undertake a(n) ______ monetary policy. -lower; downward (appreciation); expansionary -lower; upward (depreciation); contractionary -raise; downward (appreciation); expansionary -raise; upward (depreciation); contractionary

raise; downward (appreciation); expansionary

The balance on the financial account summarizes transactions in: a.goods, services, and bartered items. b.government transfers of currency. c. real estate, stocks, bonds, investment, and any financial asset. d. accounting services provided by the big-eight accounting firms.

real estate, stocks, bonds, investment, and any financial asset.

A nation's external wealth is defined as: -rest of the world (ROW) assets owned by the home nation minus home assets owned by foreigners. -home assets owned by foreigners minus ROW assets owned by the home nation. -home assets owned by foreigners plus ROW assets owned by the home nation. -home assets owned by foreigners, minus home assets owned by domestic entities, minus liabilities owned by domestic entities.

rest of the world (ROW) assets owned by the home nation minus home assets owned by foreigners

Considering only the goods and forex markets, as the economy adjusts to lower rates of interest and equilibrium is restored, the level of GDP will: -decline very gradually. -fall. -become unstable. -rise.

rise

The LM curve shows that, with a fixed supply of money, as GDP rises, the demand for money will ____ and the rate of interest will ____. rise; rise fall; rise fall; fall rise; fall

rise; rise

When a domestic investor sells a foreign asset to a foreigner, the financial account: a. falls. b. stays the same. c. rises. d. Not enough information is provided to answer the question.

rises

When disaster strikes a country and destroys infrastructure and businesses, it is likely that: -the current account will move into a deficit. -investment will decline. -savings will decline and the current account will move into a surplus. -savings will decline and the current account will move into a deficit.

savings will decline and the current account will move into a deficit.

External wealth can be increased in three ways. Which of the following is NOT a way for a nation to increase its external wealth? -selling assets to the rest of the world (ROW) -exporting more and importing less, thus increasing the current account balance -having the good fortune to hold assets that appreciate in value (capital gain) -receiving forgiveness of debt, foreign aid, or grants

selling assets to the rest of the world (ROW)

If the central bank increases its interest rate, then the IS curve of the domestic economy will: -not shift at all. -shift to the left because U.S. -exports will decrease and imports will increase. -become unstable. -shift to the right.

shift to the left because U.S. -exports will decrease and imports will increase.

When a disaster destroys a family's home, the family can make use of all the following solutions, EXCEPT: A)accept gifts or donations from friends. B)accept gifts or donations from charitable organizations. C)apply for a loan or seek insurance payouts. D)take over the next undamaged property in the vicinity.

take over the next undamaged property in the vicinity.

An assumption of the intertemporal model that is often not met in low-income nations is: A)that the economy is always at full employment. B)that prices are flexible. C)that a nation can borrow or lend any amount in international markets at the prevailing world real rate of interest. D)that the government of the nation has a balanced budget.

that a nation can borrow or lend any amount in international markets at the prevailing world real rate of interest.

Which group of nations has the least correlation between savings and domestic investment? -the European Union -developed countries across the world -All nations have the same correlation. -emerging economies

the European Union

The total economic activity in a nation is an important measure. Economists use three approaches to measure key indicators. Which is a method that economists do NOT use to measure economic activity? a. the expenditure approach, using the idea that the total economic activity is equal to the combined purchases of the various sectors b. the accounting approach, using the idea that total private sales have to equal total private production c. the income approach, measuring income received by factors of production d. the product approach, which measures GDP from a production standpoint

the accounting approach, using the idea that total private sales have to equal total private production

Net factor income from abroad is defined as: a.taxes paid on income earned outside the country. b. the difference between what foreign firms pay U.S. factors of production hired to produce foreign GDP and what U.S. firms pay foreign factors of production hired to produce U.S. GDP. c. the difference between foreign GDP and U.S. GDP. d. the difference between foreign national income and U.S. national income.

the difference between what foreign firms pay U.S. factors of production hired to produce foreign GDP and what U.S. firms pay foreign factors of production hired to produce U.S. GDP.

Along the IS curve, which of the following markets are in equilibrium? -the goods, money, and forex markets -the money and forex markets -the goods and forex markets -the goods and money markets

the goods and forex markets

When we measure the impact of exchange rate changes on a nation's trade balance, the bilateral exchange rates explain only part of the change. To assess the overall change, we need to calculate: -a nation's marginal propensity to consume imports. -the movement over time of the trade balance along with long-run expectations of the exchange rate. -the home multilateral exchange rate, or real effective exchange rate. -a nation's income versus income changes in the rest of the world.

the home multilateral exchange rate, or real effective exchange rate.

The long-run budget constraint for a nation is: A)GDP minus taxes to run the government. B)equal to GDP divided by the population. C)the level of external debt, offset by the sum of the present value of future trade surpluses taken to infinity. D)determined by its ability to lure international investment and capital inflows.

the level of external debt, offset by the sum of the present value of future trade surpluses taken to infinity.

The rule for making an investment is to do so as long as: -the marginal product of labor is positive (ΔQ/ΔL > 0). -the marginal product of capital is greater than or equal to the world real interest rate (ΔQ/ΔK ≥ r*). -the marginal product of capital is positive (ΔQ/ΔK > 0). -the initial level of wealth is equal to zero.

the marginal product of capital is greater than or equal to the world real interest rate (ΔQ/ΔK ≥ r*).

The balance on the current account equals the negative of the balance on the financial account, plus: -the trade balance. -net factor income from abroad. -net unilateral transfers. -the negative of the balance on the capital account.

the negative of the balance on the capital account.

The U.S. current account deficit, which has persisted for over 20 years, has resulted in a(n): financial account deficit. financial account surplus. the overall balance of payments deficit. capital account deficit.

the overall balance of payments deficit.

If the long-run budget constraint is upheld, an investment expenditure will increase the present value of consumption only if: -the present value of exports is greater than the present value of imports. -output is increasing faster than the growth of population. -the present value of debt is equal to zero. -the present value of output is greater than the present value of the investment expenditure.

the present value of output is greater than the present value of the investment expenditure.

The change in external wealth from period N - 1 to N is equal to: A)the balance on the current account minus the balance on the financial account (FA). B)the trade balance (deficit or surplus) plus interest (earned or paid) on external debt or wealth. C)a nation's domestic income plus net foreign factor income. D)the balance on the current account plus the balance on the capital account.

the trade balance (deficit or surplus) plus interest (earned or paid) on external debt or wealth.

A nation's net income from interest is: A)the domestic interest rate minus the world interest rate. B)the world interest rate times external assets. C)the world interest rate times external liabilities. D)the world interest rate times external wealth.

the world interest rate times external wealth.

The total demand line will shift whenever: -output changes. -the MPC increases. -aggregate supply increases. -there is an exogenous change in one of its components (C, I, G, or X).

there is an exogenous change in one of its components (C, I, G, or X).

Your text has a discussion of various ways nations can skew income, production, and price-level data. Why would any nation choose to do so? -to avoid paying its debts -to avoid lower credit ratings or ease concerns of foreign investors -to keep the rich from getting richer -to increase its external wealth

to avoid lower credit ratings or ease concerns of foreign investors

Aggregate supply is the same thing as: -total national spending. -a supply shock. -total domestic production. -aggregate demand.

total domestic production.

Events such as wars not financed by increases in taxes, such as the U.S. Afghanistan and Iraq wars: -add to the instability of the international economy and create large spikes in GDP growth. -can be paid for by transfers and gifts from sympathetic allies. -usually involve international borrowing and an increase in external debt. -can be financed by increasing discount operations, thereby avoiding tax increases.

usually involve international borrowing and an increase in external debt.

Whenever economic shocks are asymmetric, affecting only one nation among all the nations that are mutual investors, asset diversification: A)will have substantial benefits in lessening the shocks and smoothing consumption. B)will have no measurable benefits in lessening shocks. C)will probably backfire as one nation gains while the other loses. D)creates a tense atmosphere in which profits take precedence over human welfare.

will have substantial benefits in lessening the shocks and smoothing consumption.