Chapter 5
In a large open economy like the United States, an increased government budget deficit which reduces national saving
reduces investment and reduces the current account balance.
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
$405 billion
Given the following: Current account balance (CA) = 300 Financial account balance (FA) = -285 What is the amount of statistical discrepancy in the balance of payments accounting? Statistical discrepancy (SD) =
-15
Consider two large open economy, the home economy and the foreign economy. Which of the following lowers the world real interest rate (rw)?
A decrease in the domestic expected marginal product of capital.
Given the following data: Desired Investment Id: $150 Current Account Balance CA: $550 Net Exports NX: $550 Domestic Output Y: $1,200 Government Expenditure G: $200 Calculate the value of Desired Consumption 'Cd': Calculate the value of domestic absorption:
Cd: 300 Da: 650
Identify how the following transaction would enter the U.S. balance of payments accounts. Do not be concerned with possible offsetting transactions. Transaction: The U.S. government sells Upper F minus 16 fighter planes to a foreign government..
Current Account
Assuming zero net unilateral transfers, how is the current account balance related to net exports?
Current Account Balance = Net Exports + Net income from abroad
The diagram to the right shows the current account balance as a percentage of nominal GDP for the U.S. from 1959 to 2004. Which of the following is not a plausible explanation for the trend in this data?
Greater demand for U.S. exports.
In an open economy you find that desired savings Sd is exactly equal to desired investment. What must be true with respect to the current account balance 'CA'?
It's equal to 0
The goods market equilibrium condition for a small open economy, assuming zero net unilateral transfers and zero net factor payments, is
Net Exports = Y - Absorption or Desired Savings = Desired Investment + Net Exports
Here are some balance of payments data (without pluses and minuses): Exports of goods: 90 Imports of goods: 115 Service exports: 80 Service imports: 60 Income receipts from abroad: 130 Income payments to foreigners: 140 Increase in home country's ownership of assets abroad: 160 Increase in foreign ownership of assets in home country: 200 Increase in home reserve assets: 35 Increase in foreign reserve assets: 40 Assuming that unilateral transfers equal zero, find each of the following.
Net Exports: -5 Current Account Balance: -15 Financial Account Balance: 40 Balance of Payments: -5 Statistical Discrepancy: -25
Given the following data: Desired Investment Id: $250 Current Account Balance CA: $500 Net Factor Payments from abroad NFP: $50 Calculate the value of Net Exports 'NX': Calculate the value of Desired Savings Sd:
Nx: $450 Sd: $750
Which is an incorrect statement about the balance of payments accounts?
The financial account measures a country's trade in currently produced goods and services.
What is the key difference that determines whether an international transaction appears in the current account or the financial account?
Trade in currently produced goods and services is entered in the current account, trade in assets is entered in the financial account.
A financial account surplus necessarily implies
a current account deficit.
If the United States had a financial account deficit of $50 billion, we could say the United States had
acquired net foreign assets of $50 billion.
Supporters of the twin-deficits idea claim that an increase in the budget deficit reduces ______ and that, if the change in fiscal policy does not affect the tax treatment of investment, this necessarily reduces ______.
desired national saving; net exports
In a small open economy, national saving _____ investment and output _____ absorption.
does not have to equal; does not have to equal
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. financial account ________.
falls; rises
The "twin deficits" refer to: the _____ and the _____
government budget deficit; current account deficit
If France has a trade deficit, then
imports into France exceed exports from France.
An economy is considered a small open economy if it
is too small to affect the world real interest rate.
The United States became a net debtor because
it ran consistently large current account deficits.
A country's financial account balance decreases if
its current account balance increases.
The current account balance consists of
net exports of goods and services, plus net income from abroad, plus net unilateral transfers.
An American publisher sells $200 worth of books to a resident of Brazil. By itself, this item is a _____ item in the U.S. current account. Offsetting transactions that would ensure that the U.S. current account and the financial account balances would continue to sum to zero include:
positive any negative item in the financial account
In goods market equilibrium in an open economy,
the desired amount of national saving must equal the desired amount of domestic investment plus the current account balance.
The balance of payments equals
the net increase in a country's official reserve assets.
In a saving-investment diagram for a small open economy
the real interest rate is fixed at the world real interest rate.
We distinguish between small open economies and large open economies based on:
their influence on the world interest rate.
Absorption refers to
total spending by domestic residents, businesses, and governments.
If a country's merchandise exports exceed its merchandise imports it has a
trade surplus
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
$6 billion.
Suppose the current account shows debits of $5.3 billion and credits of $4.7 billion. The current account balance is ________, and the financial account balance is ________.
-$0.6 billion; +$0.6 billion
It country A has greater net foreign assets per citizen than does country B, is country A necessarily better off than country B?
No; total national wealth is what matters
In a world with two large open economies, in equilibrium, desired international lending by one country must equal desired international _____ by the other country. The equilibrium real world interest rate is determined by the point at which the current account balance of one country equals the _____ balance of the other country.
borrowing; financial account
In a large open economy, an increase in desired national saving causes the world real interest rate to _____, and an increase in desired investment causes the world real interest rate to _____.
decline; increase
A large current account deficit is most likely to come about when desired investment _____ substantially and if desired national saving _____ substantially.
increases; declines
How do a country's current account and financial account balances affect its net foreign assets? The net amount of new foreign assets that a country acquires equals its current account _____, which in turn must equal its financial account _____.
surplus; deficit
