Question 1

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

Accepted Answer

An increase in taxes on business firms typically leads to a decrease in domestic investment demand. In a small open economy, this can lead to an increase in the current account balance, as less investment means more of the domestic saving is available for lending abroad. However, the equilibrium quantity of saving remains unchanged because it is determined by domestic factors such as income and interest rates, which are not directly affected by the tax increase on firms.

Question 2

Consider a small open economy with desired national saving of S^d = 20 + 200r^w and desired investment of I^d = 30 - 200r^w. Calculate national saving,investment,and the current account balance in equilibrium when the real world interest rate is (a)r^w = 0.025. (b)r^w= 0.05. (c)r^w= 0.0. (d)Now suppose something causes desired national saving to increase by 10,so that it is now S^d = 30 + 200r^w.Repeat parts (a),(b),and (c). (e)Suppose,with desired national saving at its original level of S^d = 20 + 200r^w,something causes desired investment to rise by 10,to I^d = 40 - 200r^w.Repeat parts (a),(b),and (c).

Accepted Answer

The answer of Consider a small open economy with desired...

Question 3

Consider a small open economy in equilibrium with a current account deficit.
(a)Draw a diagram showing this situation.
(b)What happens to national saving,investment,and the current account balance in equilibrium if government expenditures rise temporarily? Show this result in your diagram.

Accepted Answer

The answer of Consider a small open economy in equilibrium...

Question 4

What determines the interest rate in a small open economy?

Accepted Answer

The answer of What determines the interest rate in a...

Question 5

Consider a small open economy with desired national saving of S^d = 200 + 10,000r^w and desired investment of I^d = 1000 - 5000r^w.If r^w = 0.05,then net exports equal A)100. B)50. C)-50. D)-100.

Accepted Answer

Net exports (NX) can be calculated as NX = S - I, where S is national saving and I is investment.

S1U1P1dS1S1P0 = 200 + 10,000(0.05) = 700 
I1U1P1dS1S1P0 = 1000 - 5000(0.05) = 750

NX = S - I = 700 - 750 = -50

Therefore, the net exports equal -50, which means that the economy is a net importer. The correct choice is C.

Question 6

Consider a small open economy in equilibrium with a zero current account balance.What happens to national saving,investment,and the current account balance in equilibrium if
(a)future income rises?
(b)business taxes rise?
(c)government expenditures decline temporarily?
(d)the future marginal product of capital rises?

Accepted Answer

The answer of Consider a small open economy in equilibrium...

Question 7

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

Accepted Answer

Absorption is defined as the sum of national saving and investment in an economy. Therefore, we can calculate absorption as follows: Absorption = S^d + I^d Absorption = (200 + 10,000r^w) + (1000 - 5000r^w) Absorption = (200 + 10,000*0.05) + (1000 - 5000*0.05) Absorption = 5050 Therefore, the absorption in this economy is 5050. The correct answer is B.

Question 8

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

Accepted Answer

An increase in the future marginal product of capital makes investment more attractive, leading to higher investment today. This increases the demand for funds, which can lead to a current account deficit (fall). However, in a small open economy, saving is determined by factors like income and not directly by investment opportunities, so it remains unchanged.

Question 9

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.

Accepted Answer

A freeze that destroys much of the crop of an agricultural nation would likely lead to a decrease in the nation's income from exports, as there would be less agricultural produce to sell internationally. This decrease in income could lead to a reduction in the resources available for lending to foreign entities, hence net foreign lending would decrease.

Question 10

In a small open economy, S^d = $5 billion + ($100 billion)r^w, I^d = $10 billion - ($50 billion)r^w, Y = $50 billion, G = $3 billion, r^w = .06. (a)Calculate the current account balance. (b)Calculate net exports. (c)Calculate desired consumption. (d)Calculate absorption.

Accepted Answer

The answer of In a small open economy, S^d = $5...

Question 11

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

Accepted Answer

A decrease in taxes on business firms typically leads to an increase in investment demand. In a small open economy, this can lead to an increase in the demand for foreign capital to finance the additional investment, which can result in a deterioration of the current account (i.e., the current account falls). However, the equilibrium amount of saving in the economy remains unchanged because the change in taxes directly affects investment rather than saving behavior.

Question 12

Consider a small open economy in equilibrium.What happens to the real interest rate,national saving,investment,and the current account balance in equilibrium in each of the following situations (each taken separately).Explain which curve shifts and why,and show a diagram explaining your results.(You may assume that none of the shocks is large enough to significantly affect labor supply or labor demand significantly.)
(a)wealth declines
(b)business taxes decline
(c)income rises temporarily

Accepted Answer

The answer of Consider a small open economy in equilibrium.What...

Question 13

Consider a small open economy that is in equilibrium with a current account surplus.
(a)Draw a diagram showing this situation.
(b)Now suppose that future income increases.Show what happens in your diagram.What happens to the world real interest rate and the equilibrium quantities of saving,investment,and the current account balance?
(c)Repeat parts (a)and (b)for the case of a large open economy,showing a situation in which the home country initially has a current account surplus.Draw a diagram and describe how the rise in future income in the home country affects all four variables (the world real interest rate and the equilibrium quantities of saving,investment,and the current account balance)in both countries.

Accepted Answer

The answer of Consider a small open economy that is...

Question 14

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

Accepted Answer

A temporary beneficial supply shock increases output, which can lead to an increase in exports, improving the current account. Investment remains unchanged as the shock is temporary and does not affect long-term expectations.

Question 15

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

Accepted Answer

When a small open economy increases its desired saving, it does not affect the world real interest rate because the economy is too small to influence global markets. However, increased saving reduces domestic consumption and investment demand, leading to a rise in the country's current account balance as it exports more than it imports.

Question 16

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.

Accepted Answer

Given the bumper wheat crop, Australia is likely to export more, increasing its exports and thus improving its current account balance.

Question 17

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

Accepted Answer

When future labor income falls in a small open economy, individuals are likely to save more in anticipation of lower future earnings, leading to a rise in the current account as the economy saves more or spends less on imports. Investment, however, is determined by global factors in a small open economy and remains unchanged by changes in domestic labor income expectations.

Question 18

In a small open economy,S^d = 200 + 500r^w and I^d = 300 - 200r^w.If r^w = 0.1,then net exports = A)-50. B)-30. C)30. D)50.

Accepted Answer

The answer of In a small open economy,S^d = 200...

Question 19

In a small open economy,describe what happens when an increase in wealth causes national saving to decline.Explain the impact on the real interest rate,saving,investment,net exports,and absorption in equilibrium.

Accepted Answer

The answer of In a small open economy,describe what happens...

Question 20

Consider a small open economy with desired national saving of S^d = 1000 + 1000r^w and desired investment of I^d = 1000 - 500r^w. Calculate national saving,investment,and the current account balance in equilibrium when the real world interest rate is (a)r^w = 0.025. (b)r^w = 0.05. (c)r^w = 0.0.

Accepted Answer

The answer of Consider a small open economy with desired...

Quiz 5: Saving and Investment in the Open Economy

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 .

Consider a small open economy in equilibrium with a current account deficit. (a)Draw a diagram showing this situation. (b)What happens to national saving,investment,and the current account balance in equilibrium if government expenditures rise temporarily? Show this result in your diagram.

What determines the interest rate in a small open economy?

Consider a small open economy with desired national saving of S^d = 200 + 10,000r^w and desired investment of I^d = 1000 - 5000r^w.If r^w = 0.05,then net exports equal

Consider a small open economy with desired national saving of S^d = 200 + 10,000r^w and desired investment of I^d = 1000 - 5000r^w.If r^w = 0.05,and output = 5000,then absorption equals

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 .

If a freeze destroys much of the crop of an agricultural nation,then

In a small open economy, S^d = $5 billion + ($100 billion)r^w, I^d = $10 billion - ($50 billion)r^w, Y = $50 billion, G = $3 billion, r^w = .06. (a)Calculate the current account balance. (b)Calculate net exports. (c)Calculate desired consumption. (d)Calculate absorption.

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 .

When a temporary beneficial supply shock hits a small open economy,it causes the current account to and investment to .

A small open economy increases its desired saving.This causes the world real interest rate to and the country's current account balance to .

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

When future labor income falls in a small open economy,it causes the current account to and investment to .

In a small open economy,S^d = 200 + 500r^w and I^d = 300 - 200r^w.If r^w = 0.1,then net exports =

In a small open economy,describe what happens when an increase in wealth causes national saving to decline.Explain the impact on the real interest rate,saving,investment,net exports,and absorption in equilibrium.

Consider a small open economy with desired national saving of S^d = 1000 + 1000r^w and desired investment of I^d = 1000 - 500r^w. Calculate national saving,investment,and the current account balance in equilibrium when the real world interest rate is (a)r^w = 0.025. (b)r^w = 0.05. (c)r^w = 0.0.

Quiz 5: Saving and Investment in the Open Economy

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 ________.

Consider a small open economy in equilibrium with a current account deficit. (a)Draw a diagram showing this situation. (b)What happens to national saving,investment,and the current account balance in equilibrium if government expenditures rise temporarily? Show this result in your diagram.

What determines the interest rate in a small open economy?

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

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

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 ________.

If a freeze destroys much of the crop of an agricultural nation,then

In a small open economy, Sd = $5 billion + ($100 billion)rw, Id = $10 billion - ($50 billion)rw, Y = $50 billion, G = $3 billion, rw = .06. (a)Calculate the current account balance. (b)Calculate net exports. (c)Calculate desired consumption. (d)Calculate absorption.

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 ________.

When a temporary beneficial supply shock hits a small open economy,it causes the current account to ________ and investment to ________.

A small open economy increases its desired saving.This causes the world real interest rate to ________ and the country's current account balance to ________.

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

When future labor income falls in a small open economy,it causes the current account to ________ and investment to ________.

In a small open economy,Sd = 200 + 500rw and Id = 300 - 200rw.If rw = 0.1,then net exports =

In a small open economy,describe what happens when an increase in wealth causes national saving to decline.Explain the impact on the real interest rate,saving,investment,net exports,and absorption in equilibrium.

Consider a small open economy with desired national saving of Sd = 1000 + 1000rw and desired investment of Id = 1000 - 500rw. Calculate national saving,investment,and the current account balance in equilibrium when the real world interest rate is (a)rw = 0.025. (b)rw = 0.05. (c)rw = 0.0.

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 .

Consider a small open economy with desired national saving of S^d = 200 + 10,000r^w and desired investment of I^d = 1000 - 5000r^w.If r^w = 0.05,then net exports equal

Consider a small open economy with desired national saving of S^d = 200 + 10,000r^w and desired investment of I^d = 1000 - 5000r^w.If r^w = 0.05,and output = 5000,then absorption equals

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 .

In a small open economy, S^d = $5 billion + ($100 billion)r^w, I^d = $10 billion - ($50 billion)r^w, Y = $50 billion, G = $3 billion, r^w = .06. (a)Calculate the current account balance. (b)Calculate net exports. (c)Calculate desired consumption. (d)Calculate absorption.

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 .

When a temporary beneficial supply shock hits a small open economy,it causes the current account to and investment to .

A small open economy increases its desired saving.This causes the world real interest rate to and the country's current account balance to .

When future labor income falls in a small open economy,it causes the current account to and investment to .

In a small open economy,S^d = 200 + 500r^w and I^d = 300 - 200r^w.If r^w = 0.1,then net exports =

Consider a small open economy with desired national saving of S^d = 1000 + 1000r^w and desired investment of I^d = 1000 - 500r^w. Calculate national saving,investment,and the current account balance in equilibrium when the real world interest rate is (a)r^w = 0.025. (b)r^w = 0.05. (c)r^w = 0.0.