Deck 5: Saving and Investment in the Open Economy

Question 1

If the Bank of Canada buys $3 billion worth of Japanese yen,$4 billion of German marks,and $2 billion of French francs,and sells $5 billion of British pounds,how does this affect the official settlements balance?

A)falls by $4 billion
B)rises by $4 billion
C)rises by $9 billion
D)falls by $5 billion

Answer 1

rises by $4 billion

Question 2

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 Canada from France exceed exports from Canada into France.
D)imports into France from Canada exceed exports from France into Canada.

Answer 2

imports into France exceed exports from France.

Question 3

Which of the following statements is true?

A)The world as a whole has a current account surplus.
B)The world as a whole has a current account balance.
C)The world as a whole has a balance of payment surplus.
D)The world as a whole has a current account deficit.

Answer 3

The world as a whole has a current account deficit.

Question 4

Canada's balance of payment accounts

A)are a record of all Canadian international transactions.
B)are part of the national income accounting.
C)show a flow of funds into Canada as credit and the flow of funds out of Canada as debit.
D)all of the above.

Question 5

The official settlements balance equals

A)the sum of the current account and the capital 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.

Question 6

The world as a whole has a current account deficit because

A)some countries export less than they import.
B)there are statistical discrepancies.
C)the United States and China have current account deficit.
D)income from assets held abroad is misreported.

Question 7

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

Question 8

If a country's merchandise exports exceed its merchandise imports,

A)it has a trade surplus.
B)it has a trade deficit.
C)it has a current account surplus.
D)it has a current account deficit.

Question 9

If a French company sells 1000 gallons of Perrier to a Canadian company at 25 francs 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)debit: capital account;credit: merchandise trade
B)debit: merchandise trade;credit: capital account
C)debit: net investment income from abroad;credit: capital account
D)debit: merchandise trade;credit: net investment income from abroad

Question 10

The merchandise trade balance is a country's

A)exports of goods.
B)net exports of goods.
C)exports of goods and services.
D)net exports of goods and services.

Question 11

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.

Question 12

If a Canadian company imports 10 Toyotas from Japan at $15,000 each,and the Japanese company buys airline tickets on a Canadian airline with the money,how does this affect the Canadian balance of payments accounts?

A)debit: merchandise trade;credit: capital account
B)debit: capital account;credit: merchandise trade
C)debit: merchandise trade;credit: services
D)debit: services;credit: merchandise trade

Question 13

Suppose a wealthy Saudi Arabian prince donates 2000 camels to the San Diego Zoo.The Canadian trade balance ________ and the current account balance ________.

A)falls;rises
B)rises;rises
C)is unchanged;is unchanged
D)falls;is unchanged

Question 14

If Canada donates footballs to Japan,how is the transaction recorded on the Canadian balance of payments accounts?

A)debit: merchandise trade;credit: capital account
B)debit: capital account;credit: merchandise trade
C)debit: net unilateral transfers;credit: merchandise trade
D)debit: merchandise trade;credit: net unilateral transfers

Question 15

Suppose the current account shows debits of $4.7 billion and credits of $5.3 billion.The current account balance is ________,and the capital 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

Question 16

A capital 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.

Question 17

Which of the following would be part of the nation's capital account?

A)a nightclub show seen by a Canadian in Mexico City
B)a dividend from a British equity owned by a Canadian
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 a Canadian

Question 18

If a Canadian firm buys stereos from a Japanese firm and the Japanese firm uses the dollars it gets to buy Canadian Treasury bonds,what items are recorded in the Canadian balance of payments accounts?

A)credit the trade account;credit the capital account
B)credit the trade account;debit the capital account
C)debit the trade account;debit the capital account
D)debit the trade account;credit the capital account

Question 19

Which of the following would be part of the nation's current account?

A)an old house purchased by a Canadian in Croatia
B)the purchase of a Canadian Treasury bond by a foreigner
C)the interest a Canadian earns on a British bond
D)a factory built by the Japanese in Canada

Question 20

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 factor payments from abroad.

Question 21

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.

Question 22

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

Question 23

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.

Question 24

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

Question 25

Which of the following statement is true?

A)In each period,except for measurement errors,the current account balance and the capital account balance must sum to zero.
B)In each period,except for measurement errors,the sum of the current account balance and the capital account balance must be positive.
C)In each period,except for measurement errors,the sum of the current account balance and the capital account balance must be negative.
D)In each period,except for measurement errors,the sum of the current account balance and the capital account balance may be positive or negative.

Question 26

When a current account has a surplus of $5 billion,it means that

A)the capital account must have a deficit of $5 billion.
B)next exports must be negative.
C)net foreign lending is negative.
D)net acquisition of foreign assets is negative.

Question 27

You just read that forecasters predict Canada will run a current account deficit in 2004.From this you would infer that Canada will also

A)run a capital account deficit in 2004.
B)decrease its official reserve assets.
C)run a balance of payments surplus.
D)decrease its holding of net foreign assets.

Question 28

An economy in which output exceeds absorption

A)will send goods abroad and have a current account surplus.
B)is a net importer with a current account deficit.
C)is a net borrower in the international market.
D)will have a capital account deficit.

Question 29

For a small open economy,an increase in the world real interest rate would necessarily

A)increase net foreign lending.
B)decrease net exports.
C)decrease the current account balance.
D)worsen the balance of payments.

Question 30

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

Question 31

A friend claims that Canada is a net international debtor.The best way of testing this claim is to

A)see whether Canadian foreign liabilities exceeded Canadian foreign income.
B)see whether Canadian receipts from foreign assets exceeded Canadian payments to foreign owners of Canadian assets.
C)see whether Canadian official reserve assets were positive or negative.
D)see whether Canada ran a balance of payments surplus or deficit last year.

Question 32

Sweetland economy's GDP is $2000 billion,desired consumption spending $1200 billion,desired investment spending $500 billion,and government purchases $400 billion.The Sweetland economy's absorption is

A)$2000 billion.
B)$1200 billion.
C)$2100 billion.
D)-$100 billion.

Question 33

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.

Question 34

Which of the following statements about the Canadian balance of payment is true?

A)Historically,Canada has for the most part had a current account surplus.
B)Canada has always had a capital account deficit.
C)Canadians' ownership of foreign assets has always been greater than foreigners' ownership of Canadian assets.
D)Canada has always maintained a current account balance.

Question 35

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.

Question 36

A small open economy is an economy that

A)has a small government.
B)has a very low net exports.
C)is too small to affect the world real interest rate.
D)has a negative balance of payments.

Question 37

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.

Question 38

If Canada acquired net foreign assets of $50 billion in one year,this would be the equivalent of

A)net imports of $50 billion.
B)net foreign borrowing of $50 billion.
C)a capital account deficit of $50 billion.
D)a current account deficit of $50 billion.

Question 39

If there are no 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 capital account surplus of $10 billion.
C)net acquisition of foreign assets of $10 billion.
D)net foreign borrowing of $10 billion.

Question 40

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.

Question 41

When future labour 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

Question 42

If there is an increase in taxes on business firms in a small open economy,it causes the current account to ________ and saving ________.

A)fall;fall
B)rise;remain unchanged
C)fall;remain unchanged
D)rise;fall

Question 43

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

Question 44

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

Question 45

When a temporary adverse 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

Question 46

If there is 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

Question 47

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.

Question 48

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

Question 49

A large 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

Question 50

When future labour 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;remain unchanged
D)rise;rise

Question 51

The main difference between the small open economy and the large open economy is that

A)the former faces a fixed international real interest rate,but the latter can influence it.
B)the former can influence the international real interest rate,but the latter cannot.
C)the former cannot maintain a large current account deficit,but the latter can.
D)the former can maintain a large current account deficit,but the latter cannot.

Question 52

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

Question 53

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.

Question 54

A large open economy is an economy

A)that has a large government sector.
B)that has a positive net exports.
C)that is large enough to affect the world real interest rate.
D)that has a positive balance of payments.

Question 55

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.

Question 56

You have just read in the newspaper that a hurricane has destroyed Guatemala's coffee crop for this year.Guatemala is a small open economy.Based on this information alone,you would expect that

A)desired investment would fall in Guatemala.
B)desired investment would increase in Guatemala.
C)net foreign lending by Guatemala would increase.
D)net foreign lending by Guatemala would decrease.

Question 57

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.

Question 58

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

Question 59

An innovation will enable Haitian sugar cane farmers to harvest the sugar cane twice as efficiently in the future.Haiti is a small open economy.Based on this information alone,you would expect that

A)desired saving would increase.
B)net foreign borrowing would increase.
C)net exports would increase.
D)the current account balance would go further into surplus.

Question 60

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 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.

Question 61

A group of Japanese tourists visits Banff National Park in Alberta and spends $20,000 on goods and services in Canada.This will

A)reduce the Canadian current account by $20,000.
B)increase the Canadian current account by $20,000.
C)have no change in the Canadian current account.
D)increase Canadian imports.

Question 62

If Ricardian equivalence does NOT hold,a budget deficit arising from a tax cut will

A)have no effect on national saving.
B)have no effect on the current account.
C)increase national saving.
D)increase consumption.

Question 63

Suppose GDP is $20 billion and the desired absorption is $16 billion.What are the net exports?

A)$10 billion
B)$4 billion
C)$36 billion
D)$1 billion

Question 64

An increase in the number of international students in Canada

A)has no effect on the Canadian current account.
B)decreases the Canadian current account.
C)decreases Canadian imports.
D)increases the Canadian current account.

Question 65

If the Ricardian equivalence is true,a tax cut will

A)increase the current account surplus.
B)decrease the current account surplus.
C)have no effect on the current account.
D)increase national saving.

Question 66

Assume that Costa Rica,a small open economy,has increased the government budget deficit by 10 million colon,reducing the current account balance in the process.All else being equal,you would expect this action to cause

A)an increase in desired saving in Costa Rica.
B)an increase in the real world interest rate.
C)an increase in exports by Costa Rica.
D)an increase in Costa Rica's absorption.

Question 67

If Ricardian equivalence proposition is true,a budget deficit resulting from a tax cut will have

A)no effect on government expenditures.
B)no effect on current account because it does not affect national saving.
C)no effect on current account because people expect to pay lower taxes in the future.
D)no effect on current account because people expect to increase their consumption.

Question 68

Which of the following is true for the foreign direct investment (FDI)and Canadian direct investment abroad (CDIA)?

A)Although FDI has been historically lower than CDIA in Canada,the trend has recently changed in favour of FDI.
B)Canadians now own a smaller amount of foreign companies than foreigners own of Canadian companies.
C)Although CDIA has been historically lower than CDIA,the trend has recently changed in favour of CDIA.
D)FDI has always been greater than CDIA in Canada.

Question 69

Which of the following is the true description of the impacts of a temporary positive oil price shock on an oil-importing country like the U.S.?

A)National saving and current account surplus increase.
B)National saving decreases but current account surplus increases.
C)National saving increases but current account surplus decreases.
D)National saving and current account surplus decrease.

Question 70

Suppose desired consumption is $10 billion and desired investment is $3 billion.If GDP is $25 billion and government purchases are $2 billion,the desired foreign lending is

A)$10 billion.
B)$12 billion.
C)$13 billion.
D)$15 billion.

Question 71

Assuming no change in the effective tax rate on capital,an increase in the government budget deficit will raise 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.

Question 72

Suppose desired consumption is $10 billion and desired investment is $3 billion.If GDP is $25 billion and government purchases are $2 billion,the desired national saving is

A)$12 billion.
B)$15 billion.
C)$14 billion.
D)$13 billion.

Question 73

Suppose a country has the following balance of payments data:
Merchandise exports100
Merchandise imports130
Service exports60
Service Imports50
Investment income receipts75
Investment income payments100
Transfers to other countries15
Increase in home country assets abroad130
Increase in foreign assets in home country190
a.Calculate the current account balance.
b.Calculate the capital account balance.
c.Calculate the trade balance.
d.Calculate net factor payments.

Question 74

Suppose desired consumption $11 billion,desired investment $1 billion,and government purchases of goods and services $4 billion.If the desired foreign lending in this economy is $4 billion,what is the GDP?

A)$20 billion
B)$16 billion
C)$12 billion
D)$10 billion

Question 75

Which of the following is true when the expected future marginal product of capital increases?

A)The investment and the current account rise.
B)The investment rises but the current account declines.
C)The investment and the current account declines.
D)The investment declines but the current account rises.

Question 76

The term "twin deficits" refers to a situation in which there exists

A)a budget deficit as well as a current account deficit.
B)a budget deficit as well as a capital account deficit.
C)a budget deficit as well as a balance of payment deficit.
D)a current account deficit as well as a capital account deficit.

Question 77

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.

Question 78

Suppose GDP is $20 billion,desired consumption $11 billion,desired investment $1 billion,and government purchases of goods and services $4 billion.What is the desired absorption in this economy?

A)$31 billion
B)$36 billion
C)$21 billion
D)$16 billion

Question 79

Justin spends his holidays in Mexico,where he spends $2500.This will

A)reduce the Canadian current account by $2500.
B)increase the Canadian current account by $2500.
C)have no change in the Canadian current account.
D)increase Canadian exports by $2500.

Question 80

In a large open economy like the United States,an increased government budget deficit that 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.