Quiz #1

a trade surplus

(See Exhibit 1: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r1, then the economy has:

a trade deficit.

(See Exhibit 1: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r3, then the economy has:

domestic interest rate equals the world interest rate.

A "small" economy is one in which the:

GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services.

A country's exports may be written as equal to:

its domestic interest rate always exceeds the world interest rate.

A small open economy with perfect capital mobility is characterized by all of the following except that:

borrowing from domestic lenders

A trade deficit can be financed in all of the following ways except by:

There is a trade in goods and services with the rest of the world.

An "open" economy is one which:

an increase in government spending

An increase in the trade deficit of a small open economy could be the result of:

an increase in the world interest rate.

An increase in the trade surplus of a small open economy could be the result of:

weaker; deficit

As the U.S. budget deficit shrank in the 1990s, the increase in U.S. national saving was ______ than the expansionary shift in the U.S. investment function, resulting in a trade ______.

this simplifying assumption can assist our understanding and intuition of open economy macroeconomics.

Building an economic model based on the assumption of a small open economy is useful because:

reduce national saving and lead to a trade deficit.

Holding other factors constant, legislation to cut taxes in an open economy will:

Domestic spending is greater than output.

I'm a small open economy if net exports are negative, then:

do not change; do not change

If a U.S. corporation sells a product in Canada and uses the proceeds to purchase a product manufactured in Canada, then U.S. net exports ______ and net capital outflows ______.

increase; increase

If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports ______ and net capital outflows ______.

Positive; positive

If domestic saving exceeds domestic investment, then net exports are _____ and net capital outflows are _____.

Import; negative

If domestic spending exceeds output, we _____ the difference ---net exports are _____.

The trade balance must be positive.

If net capital outflow is positive, then:

increasing taxes

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal:

equal to the world real interest rate.

In a small open economy with perfect capital mobility, the real interest rate will always be:

Borrowing from abroad

In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:

make loans to foreigners

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to:

-$10 billion

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:

Deficit ; negative

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade _____ and ____ net capital outflow.

surplus; positive

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade ______ and ______ net capital outflow.

investment tend to cause a trade deficit.

In a small open economy, policies that increase:

deficit; negative

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade ______ and ______ net capital outflow.

a trade deficit may be good or bad.

In an open economy:

saving is fixed, and investment is determined by the investment function and the world interest rate.

In the small open economy in equilibrium:

National saving minus domestic investment.

Net Capital outflow is equal to:

All goods and services.

Net Exports equal GDP minus domestic spending on:

Domestic investors lead abroad minus the amount that foreign investors lend here.

Net capital outflow is equal to the amount that:

increase; decrease

Starting from a trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _____ and net exports will _____.

is the interest rate prevailing in world financial markets.

The world interest rate:

Domestic investment exceeds domestic saving.

When exports exceed imports, all of the following are true except: