Question 1

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.

Accepted Answer

A surplus in the current account represents a positive balance of trade, meaning that a country is exporting more than it is importing. This leads to an inflow of foreign currency, which can be used to invest in foreign assets or repay foreign debt. In this scenario, if there is a surplus of $5 billion in the current account, it means that the capital account must have a deficit of $5 billion to balance the overall balance of payments. This is because a surplus in the current account represents a net outflow of funds, while a deficit in the capital account represents a net inflow of funds.  Therefore, option A is correct.

Question 2

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.

Accepted Answer

When there is a rise in investment demand, the country will need to borrow capital from abroad to finance this investment, resulting in net borrowing from abroad. This will lead to a capital account deficit, as more capital flows out of the country than in. However, the current account balance does not necessarily change, as any increase in imports to support the investment is offset by an increase in exports due to increased production. Therefore, the current account can remain balanced even as the capital account is in deficit.

Question 3

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

Accepted Answer

The answer of A small open economy increases its investment...

Question 4

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.

Accepted Answer

If an economy's output exceeds absorption, it means that it has a surplus of goods. In order to dispose of this surplus, the country will export these goods, which will lead to a current account surplus.

Question 5

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.

Accepted Answer

The current account balance consists of transactions related to trade in goods and services, while the capital account balance consists of transactions related to financial assets and liabilities. By definition, every transaction generates a credit and a debit of equal magnitude, meaning that in each period, the current account balance and the capital account balance must sum to zero (except for measurement errors). Therefore, answer A is the correct choice.

Question 6

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.

Accepted Answer

The answer of You just read that forecasters predict Canada...

Question 7

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.

Accepted Answer

The answer of If Canada acquired net foreign assets of...

Question 8

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.

Accepted Answer

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

Question 9

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.

Accepted Answer

Net exports (NX) in this case can be calculated as follows:

Output (Y) = Consumption (C) + Government Purchases (G) + Investment (I) + Net Exports (NX)

35 billion = 15 billion + 10 billion + 6 billion + NX

NX = 4 billion (exports minus imports)

Since the question asks for net foreign lending, we need to flip the sign of the net exports. Therefore, net foreign lending would be -$4 billion, which corresponds to choice D.

Question 10

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.

Accepted Answer

The answer of Sweetland economy's GDP is $2000 billion, desired...

Question 11

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.

Accepted Answer

Absorption refers to the total spending by domestic residents, businesses, and governments, which includes consumption, investment, and government expenditures. Therefore, option C is the correct choice. Options A, B, and D are incorrect as they do not reflect the complete definition of absorption.

Question 12

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.

Accepted Answer

The best way of testing whether Canada is a net international debtor is to see whether Canadian receipts from foreign assets exceeded Canadian payments to foreign owners of Canadian assets. This is because a net international debtor is a country that owes more to foreign entities than it is owed by foreign entities. Therefore, looking at the balance between the payments and receipts from foreign assets will give an indication of Canada's net position.

Question 13

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.

Accepted Answer

Absorption is the sum of all expenditures in the economy, including consumption (C), investment (I), government purchases (G), and net exports (NX). 
Absorption = C + I + G + NX

Given: 
Output = Y = $35 billion 
Government purchases = G = $10 billion 
Desired consumption = C = $15 billion 
Desired investment = I = $6 billion

Substitute the given values into the absorption formula to get: 
Absorption = C + I + G + NX 
Absorption = $15 billion + $6 billion + $10 billion + NX 
Absorption = $31 billion + NX

Since we are not given information about net exports, we cannot solve for NX. Therefore, the answer is B, $31 billion, which is the sum of consumption, investment, and government purchases.

Question 14

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.

Accepted Answer

In an open economy, the goods market equilibrium is characterized by the equality of desired national saving and desired domestic investment plus the amount lent abroad. This is because national saving can be used for domestic investment or lending abroad, which affects the balance of payments and the level of imports and exports. Therefore, option D is the correct choice. Options A and B are not correct because they only consider the balance of trade, without taking into account capital flows. Option C also neglects the impact of international capital movements.

Question 15

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.

Accepted Answer

Using the equation for GDP: 
Y = C + I + G + NX 
where Y = output, C = desired consumption, I = desired investment, G = government purchases, and NX = net exports (which is assumed to be zero in this problem). 
Substituting in the numbers given: 
35 billion = 15 billion + 6 billion + 10 billion + 0 
Rearranging to solve for desired savings: 
S = Y - C - I - G 
S = 35 billion - 15 billion - 6 billion - 10 billion 
S = 4 billion 
So desired savings is $4 billion. However, this is not one of the answer choices. The closest answer choice is B, which is $10 billion. This suggests that there may be an error in the problem statement or answer choices.

Question 16

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.

Accepted Answer

A small open economy is characterized by a high degree of openness to international trade and investment, but its size is too small to affect the world real interest rate. This means that changes in domestic spending or income do not significantly impact the global interest rate, and so the economy must adjust to the world real interest rate. Government size, net exports, and balance of payments are not defining characteristics of a small open economy.

Question 17

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.

Accepted Answer

In goods market equilibrium in an open economy, the desired amount of national saving must equal the desired amount of domestic investment plus the current account balance. This is because national saving equals domestic investment plus the current account balance, where the current account balance is equal to the difference between exports and imports. Therefore, choice D is correct. Choices A and B are incorrect because they do not take into account the role of national saving and domestic investment. Choice C is incorrect because it does not account for the role of net exports in determining the current account balance.

Question 18

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.

Accepted Answer

The answer of For a small open economy, an increase...

Question 19

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.

Accepted Answer

Historically, Canada has had a current account surplus, meaning that the value of Canadian exports exceeded the value of imports. However, this has not always been the case and there have been periods of current account deficits. Additionally, Canada has not always had a capital account deficit and the balance of Canadian-owned assets versus foreign-owned assets has fluctuated over time.

Question 20

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.

Accepted Answer

The answer of A small open economy has a current...

Quiz 5: Saving and Investment in the Open Economy

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

A small open economy has a current account balance of zero. A rise in its investment demand causes

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

An economy in which output exceeds absorption

Which of the following statement is true?

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

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

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

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

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

Absorption refers to

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

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

In goods market equilibrium in an open economy,

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 small open economy is an economy that

In goods market equilibrium in an open economy,

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

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

A small open economy has a current account balance of zero. A rise in the world real interest rate causes