Question 1

Consider a small open economy with desired national saving of Sd = 200 + 10,000rw and desired investment of Id = 1,000 - 5,000rw.If rw = 0.05,then net exports equal
A)100.
B)50.
C)-50.
D)-100.

Accepted Answer

Net exports (NX) is equal to the difference between total saving and investment: NX = Sd - Id. 
Substituting the given values: 
NX = (200 + 10,000*0.05) - (1,000 - 5,000*0.05) 
NX = 750 - 750 
NX = -50

Therefore, the correct answer is C, which is -50. The negative value indicates a trade deficit or an excess of imports over exports.

Question 2

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.

Accepted Answer

When desired international lending by the domestic country exceeds desired international borrowing by the foreign country, the excess supply of loanable funds on the global market will lead to a decrease in the world real interest rate to equilibrate the market.

Question 3

In a small open economy,Sd = 200 + 500 rw and Id = 300 - 200 rw.If rw = 0.1,then net exports =
A)-50.
B)-30.
C)30.
D)50.

Accepted Answer

Net exports (NX) can be calculated using the formula:

NX = Sd - Id

Substituting the given values, we get:

NX = (200 + 500 rw) - (300 - 200 rw)
NX = (200 + 500 x 0.1) - (300 - 200 x 0.1)
NX = 50

Therefore, the correct answer is B) -30.

Question 4

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.

Accepted Answer

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

Question 5

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 6

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

Accepted Answer

When a large open economy increases its desired saving, it creates a surplus of funds, leading to a reduction in the world real interest rate. This occurs due to an increase in the supply of loanable funds, pushing the interest rate down. As a result of the fall in the world real interest rate, the country's currency will appreciate, making its exports more expensive leading to a decline in the current account balance. Therefore, the answer is option C, fall in the world real interest rate and a rise in the country's current account balance.

Question 7

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 8

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 9

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

Accepted Answer

A temporary adverse supply shock in a large open economy typically leads to a decrease in production, which can cause exports to fall and imports to potentially increase as the country may need to bring in more goods to meet its needs. This results in the current account falling. Additionally, the adverse supply shock can lead to higher production costs and lower profitability for firms, which in turn reduces the incentive for investment, causing investment to fall as well.

Question 10

What determines the interest rate in a small open economy?

Accepted Answer

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

Question 11

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.

Accepted Answer

The answer of In a small open economy,
Sd = $5...

Question 12

Consider a small open economy with desired national saving of Sd = 200 + 10,000rw and desired investment of Id = 1,000 - 5,000rw.If rw = 0.05,and output = 5,000,then absorption equals
A)5,100.
B)5,050.
C)4,950.
D)4,900.

Accepted Answer

First, we need to calculate the actual national saving and investment:

National saving = Sd = 200 + 10,000rw = 200 + 10,000(0.05) = 700
Investment = Id = 1,000 - 5,000rw = 1,000 - 5,000(0.05) = 750

Since national saving is less than investment, this economy has a saving-investment gap of:

Saving-investment gap = Id - Sd = 750 - 700 = 50

Therefore, absorption in this economy is equal to:

Absorption = output + saving-investment gap = 5,000 + 50 = 5,050

Hence, the answer is B.

Question 13

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 14

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 15

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.

Accepted Answer

When there are two large open economies, the world real interest rate will equalize the desired international lending by one country with the desired international borrowing by the other country. This is because in an open economy, individuals, firms and the government can borrow or lend in international markets. As a result, the world real interest rate will adjust so that the demand for international funds, which is driven by the desire of countries to invest in projects with the highest expected return, matches the supply of international funds, which is driven by the desire of countries to save. This implies that if one country desires to lend more, it will do so by offering lower interest rates, while if another country desires to borrow more, it will have to pay higher interest rates in order to attract international funds. Ultimately, the world real interest rate will settle at a level that equilibrates the demand and supply of international funds, such that desired international lending by one country equals desired international borrowing by the other country.

Question 16

A large open economy
A)dominates world trade in one or more products.
B)is physically larger than all small open economies.
C)has a larger population than all small open economies.
D)lends or borrows enough in the international capital market to influence the world real interest rate.

Accepted Answer

A large open economy is characterized by its ability to participate significantly in the international capital market, which means it is able to lend or borrow enough to affect the world real interest rate. While a large open economy may dominate world trade in one or more products, its size and population are not necessarily larger than smaller open economies.

Question 17

A large open economy reduces its investment demand.This causes the world real interest rate to ________ and the country's current account balance to ________.
A)rise; fall
B)rise; rise
C)fall; rise
D)fall; fall

Accepted Answer

A reduction in investment demand will cause a decrease in the domestic real interest rate. Since the world real interest rate is higher than the domestic rate, investors will shift their funds to other countries that offer higher returns. This will lead to an increase in capital outflow and a decrease in capital inflow, causing the country's current account balance to improve (i.e., rise).

Question 18

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 19

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.

Accepted Answer

When desired international borrowing by the domestic country exceeds desired international lending by the foreign country, the demand for loanable funds increases relative to the supply, leading to an increase in the world real interest rate.

Question 20

Consider a small open economy with desired national saving of Sd = 20 + 200rw and desired investment of Id = 30 - 200rw.
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.
(d)Now suppose something causes desired national saving to increase by 10,so that it is now Sd = 30 + 200  .Repeat parts (a),(b),and (c).
(e)Suppose,with desired national saving at its original level of Sd = 20 + 200rw,something causes desired investment to rise by 10,to Id = 40 - 200rw.Repeat parts (a),(b),and (c).

Accepted Answer

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

Quiz 5: Saving and Investment in the Open Economy

Consider a small open economy with desired national saving of Sd = 200 + 10,000rw and desired investment of Id = 1,000 - 5,000rw.If rw = 0.05,then net exports equal

When there are two large open economies,if desired international lending by the domestic country exceeds desired international borrowing by the foreign country,then

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

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.

A large 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 a temporary adverse supply shock hits a large open economy,it causes the current account to and investment to .

What determines the interest rate in a small open economy?

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.

Consider a small open economy with desired national saving of Sd = 200 + 10,000rw and desired investment of Id = 1,000 - 5,000rw.If rw = 0.05,and output = 5,000,then absorption equals

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.

When there are two large open economies,the world real interest rate will be such that

A large open economy

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

When there are two large open economies,if desired international borrowing by the domestic country exceeds desired international lending by the foreign country,then