Chapter 5 Econ

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.

A

A country's 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.

A

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 financial account surplus. C) net borrowing from abroad. D) absorption to exceed income.

A

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.

A

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.

A

Assuming no change in the effective tax rate on capital, an increase in the government budget deficit will reduce the current account deficit if and only if the increase in the budget deficit A) reduces desired national saving. B) increases desired national saving. C) reduces desired national investment. D) increases desired national investment.

A

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.

A

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) Decrease in financial account; increase in merchandise trade B) Decrease in merchandise trade; increase in financial account C) Decrease in net investment income from abroad; increase in financial account D) Decrease in merchandise trade; increase in net income from abroad

A

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.

A

If the Federal Reserve buys $3 billion worth of Japanese yen and sells $5 billion of euros, how does this affect the balance of payments? A) Falls by $2 billion B) Rises by $2 billion C) Rises by $3 billion D) Falls by $5 billion

A

If there's an increase in the future marginal product of capital in a large 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

A

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

A

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.

A

Suppose the government of a large open economy reduces its spending, so that national saving increases. The result is A) a decrease in the foreign country's net exports. B) an increase in the real interest rate. C) an increase in the foreign country's net exports. D) a decrease in investment.

A

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.

A

The goods market equilibrium condition in an open economy shows that A) NX = Sd - Id. B) Sd = NX - Id. C) Sd = Id - NX. D) Sd = Id.

A

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

A

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.

A

n a large open economy, the home country's saving and investment equations are: Sd = 200 + 700rw and Id = 300 - 200rw. The foreign country's saving and investment equations are: Sd = 50 + 300rw and Id = 75 - 50rw. In equilibrium, the world real interest rate = A) 0.10. B) 0.20. C) 0.25. D) 0.40.

A

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.

B

A large country imposes capital controls that prohibit foreign borrowing and lending by domestic residents. The country is currently running a financial account surplus. The imposition of the capital controls will cause A) net exports to decrease. B) real domestic interest rates to rise. C) real world interest rates to rise. D) desired national saving to fall.

B

A small 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

B

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.

B

Consider a small open economy with desired national saving of Sd = 200 + 10,000rw and desired investment of Id = 1000 - 5000rw. If rw = 0.05, and output = 5000, then absorption equals A) 5100. B) 5050. C) 4950. D) 4900.

B

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 financial account balance ________. A) rises; rises B) rises; is unchanged C) is unchanged; is unchanged D) is unchanged; rises

B

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 financial account balance ________. A) rises; rises B) rises; falls C) falls; falls D) falls; rises

B

If the Federal Reserve buys $3 billion worth of Japanese yen, $6 billion of euros, and sells $5 billion of British pounds, how does this affect the balance of payments? A) Falls by $4 billion B) Rises by $4 billion C) Rises by $9 billion D) Falls by $5 billion

B

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. financial account balance ________. A) rises; rises B) rises; falls C) falls; falls D) falls; rises

B

If there is an increase in taxes on business firms in a small open economy, it causes the current account to ________ and the equilibrium quantity of saving to ________. A) fall; fall B) rise; remain unchanged C) fall; remain unchanged D) rise; fall

B

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.

B

In a small open economy, Sd = 200 + 500rw and Id = 300 - 200rw. If rw = 0.1, then net exports = A) -50. B) -30. C) 30. D) 50.

B

Net exports of goods are known as A) the balance of payments. B) the merchandise trade balance. C) the current account. D) the financial account.

B

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.

B

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.

B

Suppose output is $35 billion, government purchases are $10 billion, desired consumption is $15 billion, and desired investment is $6 billion. Desired savings is equal to A) $2 billion. B) $10 billion. C) $14 billion. D) $16 billion.

B

Suppose the government of a small open economy reduces its spending, so that national saving increases. The result is A) an increase in the real interest rate. B) an increase in net exports. C) a decrease in the real interest rate. D) an increase in investment.

B

The difference between the current account balance and net exports is A) the capital account. B) net unilateral transfers plus net factor payments from abroad. C) adjustments in net foreign assets. D) income receipts from foreign assets.

B

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

B

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

B

Which of the following transactions would not be included in the current account of the home country? A) A consumer good is imported into the home country. B) A home country resident makes a deposit in a foreign bank. C) A foreign student pays tuition to a university in the home country. D) A home country resident receives income on his or her foreign assets.

B

A 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.

C

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. In equilibrium, the foreign country has net exports equal to A) 500. B) 350. C) -350. D) -500.

C

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. The equilibrium world real interest rate equals A) 0.05. B) 0.10. C) 0.15. D) 0.20.

C

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

C

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

C

A large open economy's real interest rate will decrease if A) the expected future marginal product of domestic capital rises. B) the expected future marginal product of foreign capital rises. C) there is a temporary positive domestic supply shock. D) there is a temporary negative domestic supply shock.

C

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.

C

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.

C

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 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.

C

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.

C

Consider a small open economy with desired national saving of Sd = 200 + 10,000rw and desired investment of Id = 1000 - 5000rw. If rw = 0.05, then net exports equal A) 100. B) 50. C) -50. D) -100.

C

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 financial account balance ________. A) rises; rises B) rises; is unchanged C) is unchanged; is unchanged D) is unchanged; rises

C

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) Decline in merchandise trade; increase in financial account B) Decline in financial account; increase in merchandise trade C) Decline in merchandise trade; increase in services D) Decline in services; increase in merchandise trade

C

If the United States donates footballs to Japan, how is the transaction recorded on the U.S. balance of payments accounts? A) Decline in merchandise trade; increase in financial account B) Decline in financial account; increase in merchandise trade C) Decline in net unilateral transfers; increase in merchandise trade D) Decline in merchandise trade; increase in net unilateral transfers

C

If the United States had a 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.

C

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 financial account surplus of $10 billion. C) net acquisition of foreign assets of $10 billion. D) net foreign borrowing of $10 billion.

C

If there is a decrease in taxes on business firms in a small open economy, it causes the current account to ________ and the equilibrium amount of saving to ________. A) fall; fall B) rise; remain unchanged C) fall; remain unchanged D) rise; fall

C

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

C

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.

C

In a two-economy model of the United States and another large economy made up of the rest of the world, if desired saving by the rest of the world declined A) U.S. investment would increase. B) U.S. saving would decrease. C) the world real interest rate would increase. D) the world real interest rate would decrease.

C

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.

C

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.

C

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 net income from abroad, plus net unilateral transfers. D) net exports of goods and services, plus net income from abroad, plus net unilateral transfers, minus the financial account balance.

C

Total spending by domestic residents, businesses, and governments is called A) investment. B) net domestic purchases. C) absorption. D) GDP.

C

When future labor income rises in a large open economy, it causes the current account to ________ and investment to ________. A) fall; rise B) rise; remain unchanged C) fall; fall D) rise; rise

C

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.

C

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

C

A large country imposes capital controls that prohibit foreign borrowing and lending by domestic residents. The country is currently running a financial account deficit. The imposition of the capital controls will cause A) net exports to increase. B) real domestic interest rates to rise. C) real world interest rates to fall. D) desired national saving to fall.

D

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.

D

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

D

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 financial account deficit. C) income to exceed absorption. D) net borrowing from abroad.

D

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

D

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

D

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.

D

Consider a small open economy with desired national saving of Sd = 200 + 10,000rw and desired investment of Id = 1000 - 5000rw. If rw = 0.05, then a rise in government spending of 50 with no change in private saving causes net exports to become A) 100. B) 50. C) -50. D) -100.

D

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

D

If a country has a current account surplus, it also has A) a 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.

D

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.

D

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 income from abroad.

D

If business taxes rise in a large 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

D

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.

D

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.

D

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

D

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.

D

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.

D

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 ________. 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

D

Suppose the development of the European Union leads to greater investment in Europe. You'd expect A) a recession in Europe. B) a decline in the world real interest rate. C) a rise in the current account in Europe. D) an increase in the world real interest rate.

D

The balance of payments equals A) the sum of the current account and the 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.

D

When future labor income falls in a large open economy, it causes the current account to ________ and investment to ________. A) fall; rise B) rise; remain unchanged C) fall; fall D) rise; rise

D

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.

D

Which of the following would be part of the nation's 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

D