EC340: Homework 7

What is the balance of payments identity? a FA + KA = -CA b GDP = Y c GDP = C + I + G + X d FA * KA = CA

a FA + KA = -CA

In our model of trade deficits, what tradeoff does a firm face when choosing how much to invest today? a Higher investment means producing less today in order to produce more tomorrow b Higher investment means producing more today in order to make more profit tomorrow c Higher investment means producing more today in order to make more profit today d Higher investment has no impact on future production

a Higher investment means producing less today in order to produce more tomorrow

If, at Home, people expect our (relatively) high rates of (current period) innovation will make production in the future easy and cheap (when compared to the rest of the world's future production), then in the present, a If possible, Home will run a trade deficit b If possible, Home will run a trade surplus c Producers will want to increase prices d Producers will invest less today

a If possible, Home will run a trade deficit

In the model of trade deficits in class, relative prices were defined as the a Price of consumption today in terms of consumption tomorrow b Price of consuming one good in terms of the other c Price of one good compared to a basket of goods d Price of one good in the Home country vs Foreign country

a Price of consumption today in terms of consumption tomorrow

If a country exports future consumption, then in the present a The country imports current-period consumption, so it runs a trade deficit b The country imports current-period consumption, so it runs a trade surplus c The country exports current-period consumption, so it runs a trade deficit d The country exports current-period consumption, so it runs a trade surplus

a The country imports current-period consumption, so it runs a trade deficit

If the sum of a country's financial and capital accounts is positive, then we can be sure that a The country is running a current account deficit b The country is running a current account surplus c There is no clear relationship between these three accounts

a The country is running a current account deficit

In our model of trade deficits, if there are decreasing returns to investment, then a The intertemporal PPF is concave to the origin, like the PPF of the HO model b The intertemporal PPF is a straight line, like the PPF of the Ricardian model c The intertemporal PPF is convex to the origin d The intertemporal PPF is upward sloping

a The intertemporal PPF is concave to the origin, like the PPF of the HO model

True/False: The balance of payment is an accounting identity a True b False

a True

In the figure below, green diagonal line represents the interest rate in the global economy in a two-period world after the US opens up to trade. Point A is the autarky equilibrium of the economy. The Y-axis represents consumption/production tomorrow and the X-axis represents consumption/production today. Assume that the decisions of agents in the US have no effect on world interest rates. If the US PPF contracts downward (becomes less steep), then the US current (trade) account today a Will become more positive b Will become more negative c Will remain unchanged d Not enough information to determine

a Will become more positive

A country imports present consumption when the autarky relative price of present consumption (price of current consumption over price of future consumption) is a higher than the world relative price b lower than the world relative price c equal to the world relative price d None of these

a higher than the world relative price

If Rw, the interest rate in the rest of the world, is greater than Rc, the autarky interest rate in country C, when the country opens up to trade with the rest of the world, Country C will shift a great proportion of consumption towards a the future, since the opportunity cost of consuming today increases b the future because the opportunity cost of consuming today decreases c the present, since the opportunity cost of consuming today increases d the present because the opportunity cost of consuming today decreases

a the future, since the opportunity cost of consuming today increases

Consumption smoothing implies that if consumers suddenly expect to have higher income in the future then a they will want to increase consumption today b they will want to increase their savings rate today c producers will not want to produce as much in the future d fewer investors will want to invest in the country

a they will want to increase consumption today

If a country buys a foreign asset, the transaction is counted as... a A positive financial account entry b A negative financial account entry c The sign of the entry is dependent on the flow of goods d No entry is made into any account

b A negative financial account entry

According to our model of trade deficits, the US current account deficit can be interpreted as a Reducing US welfare b A sign of US economic health and optimism c A sign of US economic decline d (A) and (C) e All of the above

b A sign of US economic health and optimism

Which of the following could possibly explain an increase in the trade deficit? a A downward revision in future productivity expectations b An upward revision in future productivity expectations c An increase in preferences for future consumption d A decrease in comparative advantage in manufacturing

b An upward revision in future productivity expectations

If the European Central Bank purchases Mexican pesos, then a There is a negative entry in Mexico's financial account b There is a positive entry in Mexico's financial account c There is a positive entry in the EU's financial account d (A) and (C) are correct e All of the above

b There is a positive entry in Mexico's financial account

A trade deficit exists in the current period when a country is a an importer of future consumption and exporter of current consumption b an importer of current consumption and exporter of future consumption c an importer of future consumption and exporter of future consumption d an importer of current consumption and exporter of current consumption

b an importer of current consumption and exporter of future consumption

Overall (on average), has the US trade deficit trended higher or lower since 1980? a lower (less negative) b higher (more negative) c On average there has been no trend (flat)

b higher (more negative)

If the US purchases more imports than exports, this will result in a The US central bank increasing the money supply b The US government raising taxes c A foreign entity buying a US asset using US currency d A foreign central increasing their (foreign currency) money supply

c A foreign entity buying a US asset using US currency

Which of the following would be consistent with the hypothesis that US productivity growth is causing trade deficits: a Increases in stock prices over and above current earnings b Increased consumption as a ratio of GDP c Both d Neither

c Both

In our model of trade deficits, we assume that a The more firms invest in the current period, the lower revenues will be in the future b The more firms invest in the current period, the lower production will be in the future c Each marginal unit of investment today generates fewer additional future units of production d Additional units of investment lead to greater productivity of labor rather than capital e (A) and (B) are correct

c Each marginal unit of investment today generates fewer additional future units of production

In our model of trade deficits, what role does investment play in production? a Investment today is necessary for production today b More investment today leads to higher revenue today c Investment today allows for more production in future d (A) and (B) are true e All of the above

c Investment today allows for more production in future

Which of the following fall into the Financial Account? a Revenue from goods sales b Tax Revenue c Revenue from the sale of assets d All of the above e None of the above

c Revenue from the sale of assets

Which of the following statement(s) is(are) consistent with the model of trade deficit we studied in class? a Higher trade deficits are always a good idea b Higher trade deficits are never a good idea c The ability to run a trade deficit if desired must be welfare improving d Bad trade agreements increase trade deficits e (B) and (D)

c The ability to run a trade deficit if desired must be welfare improving

What is the Trade Account? a The value of exports b The value of imports c The value of exports minus imports d The value of all production in a country

c The value of exports minus imports

In our model, Home runs a trade deficit when its autarky interest rate is a lower than the world rate b the same as the world rate c higher than the world rate d There's relation between interest rates and trade deficits

chigher than the world rate

Which of the following would affect the US financial account a A Chinese firm buying US treasury notes b A German firm buying a US factory c A US firm buying US treasury notes d (A) and (B) e All of the above

d (A) and (B)

In the figure below, the green diagonal line represents the interest rate in the global economy in a two-period world after the US opens up to trade. Point A is the autarky equilibrium of the economy. The Y-axis represents consumption/production tomorrow and the x-axis represents consumption/production today. In the current period, the US is: a Running a trade deficit b Running a joint capital and financial account (asset) surplus c Running a trade surplus d (A) and (B) are true e There is not enough information in this chart to determine

d (A) and (B) are true

In our model of trade deficits, the real interest rate measures a The additional amount of future consumption that must be given up to consume more today b The additional amount of present consumption that must be given up to consume more today c The additional amount of present production given up to fund (through investment) an additional unit of future production d (A) and (C) are true e All of the above

d (A) and (C) are true

Which of the following is a possible cause of the large US trade deficit over the past three decades: a A continuously weakening US economy b Continuous productivity growth in the US c Demographic changes abroad d (B) and (C) e All of the above

d (B) and (C)

A country's current account is comprised of a The trade account b Income from investment abroad (e.g. dividends) c Foreign aid and dues paid to international organizations d (a) and (b) e All of the above

e All of the above

Which of the following is a possible cause of the large US trade deficits over the past three decades: a The increasing importance of college attendance (hint: think human capital investment) b Increasing productivity growth in the US c An aging population in foreign countries d (B) and (C) e All of the above

e All of the above