Question 1

Suppose a country has the following balance of payments data.
  
(a)Calculate the current account balance.
(b)Calculate the financial account balance.
(c)Calculate the trade balance.
(d)Calculate net factor payments.

Accepted Answer

The answer of Suppose a country has the following balance...

Question 2

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

Accepted Answer

In a small open economy, a reduction in national saving due to an increase in the government budget deficit would lead to a reduction in the current account balance by an amount equal to the decrease in saving, assuming no change in investment. This is because in an open economy, the current account balance is equal to national saving minus investment. If national saving decreases and investment remains constant, the current account balance must decrease by the same amount.

Question 3

In a large open economy like the United States,an increased government budget deficit which reduces national saving

Accepted Answer

An increased government budget deficit reduces national saving, which in turn reduces investment. This is because with lower national saving, there are fewer funds available for investment. Additionally, the reduction in national saving leads to a reduction in the current account balance because there is less money available to purchase foreign goods and invest abroad. Therefore, option B, which states that the increased budget deficit reduces investment and reduces the current account balance, is the correct answer.

Question 4

The United States became a net debtor because

Accepted Answer

A net debtor means that a country owes more to foreigners than it is owed by them. This is usually caused by running consistent current account deficits, where a country is importing more than it is exporting, and therefore accumulating debt to foreign countries.

Question 5

A negative value for the U.S.official reserve assets line in the balance of payments accounts means that

Accepted Answer

The answer of A negative value for the U.S.official reserve...

Question 6

An increase in a small open economy's government budget deficit that reduces national saving and the current account balance causes an

Accepted Answer

An increase in a government budget deficit typically leads to a decrease in national saving, as the government consumes more resources. This decrease in saving leads to an increase in absorption, which is the total amount of goods and services consumed or invested domestically. With higher government spending and reduced saving, the economy absorbs more, leading to an increase in domestic demand and consumption.

Question 7

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?

Accepted Answer

The balance of payments will fall by $2 billion because the Federal Reserve's purchase of yen is an outflow of $3 billion, and the sale of euros is an inflow of $5 billion, resulting in a net outflow of $2 billion.

Question 8

An economic benefit of capital outflows is that they

Accepted Answer

Capital outflows can lead to future income payment inflows since the invested capital can generate profits or dividends that will eventually flow back into the domestic economy. This can contribute to economic growth and development. However, options B, C, and D are not accurate since capital outflows can also reduce domestic investment, increase domestic saving, and potentially lead to job losses due to less available funds for domestic investment and spending.

Question 9

A friend claims that the United States is a net international debtor.The best way of testing this claim is to see whether

Accepted Answer

The claim that the United States is a net international debtor means that the U.S. owes more money to foreign entities than it owes to the U.S. In order to test this claim, we need to look at whether the U.S. is receiving more money from its foreign assets than it is paying out to foreign owners of U.S. assets. Therefore, choice B is the best option as it directly measures the net international investment position of the United States. A, C, and D are not directly related to the claim.

Question 10

If the United States had a financial account deficit of $50 billion,we could say the United States had

Accepted Answer

A financial account deficit indicates that the country is acquiring more foreign assets than it is selling, meaning the U.S. acquired net foreign assets of $50 billion.

Question 11

If there are no net factor payments from abroad and no unilateral transfers,net exports of $10 billion is the same as

Accepted Answer

The answer of If there are no net factor payments...

Question 12

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

Accepted Answer

Net foreign lending is calculated as output minus the sum of government purchases, desired consumption, and desired investment. Here, $35 billion - ($10 billion + $15 billion + $6 billion) = $4 billion.

Question 13

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

Accepted Answer

A decrease in government budget deficit will lead to a decrease in the government's demand for loanable funds, assuming no change in the effective tax rate. This will reduce interest rates which will increase desired national saving as households and firms will save more with lower interest rates. With an increase in national saving, there will be a decrease in domestic spending, including on imported goods which will lead to a decrease in the current account deficit. Therefore, the decrease in the budget deficit will only reduce the current account deficit if it increases desired national saving.

Question 14

A financial account surplus necessarily implies

Accepted Answer

A financial account surplus indicates that a country is receiving more capital inflows than outflows, which typically corresponds to a current account deficit, as the two accounts together must balance out in the balance of payments.

Question 15

If a country has a current account surplus,it also has

Accepted Answer

A current account surplus indicates that a country is exporting more than it is importing, leading to an increase in its net foreign assets.

Question 16

A country's financial account balance decreases if

Accepted Answer

The answer of A country's financial account balance decreases if
...

Question 17

For each of the following transactions,explain what happens to the merchandise trade balance,current account balance,and financial account balance in both the United States and Mexico.The exchange rate is 2 Mexican pesos per U.S.dollar.
(a)A Mexican firm spends 4 million pesos to buy radiology equipment from a U.S.firm.
(b)A U.S.firm buys 20,000 sombreros at 20 pesos each.
(c)Mexican computer firms send 200 programmers to universities in the United States,paying tuition and expenses of $3000 each.
(d)A Mexican entrepreneur gives 50,000 pesos to the United Way of San Antonio,Texas.
(e)Mexican investors buy $10 million worth of 30-year U.S.Treasury bonds.

Accepted Answer

The answer of For each of the following transactions,explain what...

Question 18

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 ________.

Accepted Answer

The current account balance is calculated as credits minus debits, resulting in -$0.6 billion. The financial account balance is the opposite, +$0.6 billion, to maintain the balance of payments.

Question 19

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?

Accepted Answer

When the Federal Reserve buys foreign currencies (in this case, Japanese yen and euros), it is essentially injecting dollars into the foreign exchange market, which increases the supply of dollars. This action is recorded as a debit (a use of funds) in the financial account of the balance of payments. Conversely, when it sells a foreign currency (British pounds in this case), it is taking dollars back in exchange, which decreases the supply of dollars in the foreign exchange market. This action is recorded as a credit (a source of funds) in the financial account. Therefore, buying yen and euros totals $9 billion going out, and selling pounds brings $5 billion in. The net effect is a $4 billion increase in the balance of payments (9 billion out - 5 billion in = 4 billion net outflow, which, in balance of payments terms, is considered a positive increase because it reflects net outflows for currency purchases).

Question 20