Question 1

In a country where output equals consumption and I and G are zero, a new investment holds the prospect of permanently increasing output and, thus, consumption. Based on this information, which of the following statements is correct?

Accepted Answer

In an open economy, borrowing externally can finance the investment without reducing current consumption, allowing for consumption smoothing.

Question 2

A closed economy that considers an investment opportunity capable of raising production in future years will:

Accepted Answer

To invest in an opportunity capable of raising production in future years, a closed economy will need to cut consumption by the amount of the investment in the first year to achieve greater consumption in the future. This is because investment requires sacrificing some consumption in the present to obtain greater production and consumption in the future.

Question 3

Rather than cut consumption during any year to make a productive investment, ___________ nation that chooses to finance investment and preserve consumption during the first year_______________.

Accepted Answer

An open-economy that finances investment and preserves consumption during the first year can be better off if the rate of return on the investment is greater than the rate of interest. This leads to an increase in total consumption in the long run as the investment generates a return that can be added to future consumption. In a closed-economy, this may still be beneficial, but the impact is not as significant as in an open-economy where trade and investment flows can have a bigger impact. Therefore, option C is the best choice as it provides the most accurate and beneficial statement.

Question 4

The events that transpired in Chile from 2000-07 provide an example of how sovereign wealth funds can be used to:

Accepted Answer

The answer of The events that transpired in Chile from...

Question 5

Sovereign wealth funds are __________that invest the savings of nations into productive and high-return assets.

Accepted Answer

Sovereign wealth funds are state-owned firms that invest the savings of nations into productive and high-return assets.

Question 6

To insure against the effects of a fall in the prices of commodities, _______ countries could save as a precaution and purchase sovereign wealth funds with that money.

Accepted Answer

The answer of To insure against the effects of a...

Question 7

Countries such as Norway are turning toward investing in private companies:

Accepted Answer

Investing in private companies can potentially yield higher rates of return on investments compared to treasury bills or other traditionally safer investments.

Question 8

Sovereign wealth funds are created:

Accepted Answer

The answer of Sovereign wealth funds are created:
...

Question 9

International investments purchased by a nation's government are known as:

Accepted Answer

The investments purchased by a nation's government are known as sovereign wealth funds, which are typically invested in foreign stocks, bonds, and other assets with the goal of earning a long-term return.

Question 10

Some nations use external financial assets as a buffer and a precautionary measure to:

Accepted Answer

Nations use external financial assets as a precautionary measure to reduce or eliminate the need to go into debt to smooth consumption. By holding external financial assets, a country can use them to finance deficits during short-term shocks without having to borrow from foreign sources, which can be costly and increase their vulnerability to financial crises.

Question 11

Investment spending will occur as long as the marginal product of capital:

Accepted Answer

Investment spending depends on the marginal product of capital, which is the additional output produced by each additional unit of capital. As long as the marginal product of capital is greater than the real rate of interest, firms will invest in new capital equipment because they can earn a return on that investment. If the marginal product of capital is falling or less than the real rate of interest, the firm would not invest as the return on investment would be lower than expected.

Question 12

Testing evidence from consumption volatility, researchers have found that until high levels of liberalization are reached:

Accepted Answer

Researchers have found that until high levels of liberalization are reached, financial globalization does not deliver any consumption smoothing benefits. This implies that the benefits of financial globalization are only experienced once a high level of liberalization has been achieved.

Question 13

Investment will occur in an open economy more often than in a closed economy because:

Accepted Answer

In an open economy, investment decisions are not constrained by domestic savings because investors can compare the marginal product of capital in any country with the world real interest rate. This allows for more investment opportunities and decisions.

Question 14

In an open economy, investment can be funded externally, possibly leading to:

Accepted Answer

The answer of In an open economy, investment can be...

Question 15

Some emerging market national governments accumulate _____ for them to serve as a buffer for output shocks.

Accepted Answer

Accumulating foreign currency reserves is a common strategy for emerging market national governments to serve as a buffer for output shocks. This allows them to maintain access to foreign currency to continue importing necessary goods and services even if their own currency decreases in value.

Question 16

Rather than cut consumption during any year to make a productive investment, an open-economy nation that chooses to finance investment and preserve consumption during the first year:

Accepted Answer

By financing investment and preserving consumption during the first year, the nation can potentially earn a return on the investment. As long as the return is greater than the rate of interest, the nation will be better off in the long run. This approach allows for economic growth without sacrificing immediate consumption.

Question 17

The decision rule for making an investment is to do so as long as:

Accepted Answer

The decision rule for making an investment is to invest as long as the marginal product of capital is greater or equal to the world real interest rate. This means that the return on the investment is greater than or equal to the opportunity cost of the funds used to make the investment. Choice A is incorrect because it only considers the productivity of capital, not its cost. Choice B is incorrect because labor is not relevant for the decision to invest. Choice D is also incorrect because the initial level of wealth is not relevant for the decision to invest.

Question 18

If the long-run budget constraint is upheld, an investment expenditure will increase the present value of consumption only if:

Accepted Answer

The long-run budget constraint states that the present value of government spending must be matched by the present value of government revenue. Therefore, if an investment expenditure increases the present value of consumption, it must also increase the present value of output. If the present value of output is not greater than the present value of the investment expenditure, the long-run budget constraint would not be upheld. Therefore, choice B is the correct answer. Choices A, C, and D are not directly related to the long-run budget constraint and do not impact the relationship between investment expenditure and present value of consumption.

Question 19

The discovery of oil in Norway in the 1970s:

Accepted Answer

The discovery of oil in Norway led to an increase in their rates of return on investments due to the revenue generated from selling oil allowing for reinvestment into the economy. While there was an increase in labor and capital stock, there is no evidence to suggest that these were permanent increases. Additionally, while Norway's influence did grow due to their oil production, it is not the best choice as it was not the most direct outcome of the discovery of oil.

Question 20

Full consumption smoothing occurs when:

Accepted Answer

Full consumption smoothing occurs when the ratio of consumption volatility to output volatility is zero, meaning that changes in income do not lead to changes in consumption. This can be achieved through mechanisms such as savings, borrowing, and insurance. Option A is incorrect because it does not take consumption into account. Option B is incorrect because although consumption volatility may be equal to output volatility, this does not guarantee full consumption smoothing. Option D is incorrect because it does not relate to consumption at all.

Quiz 17: Balance of Payments I: the Gains From Financial Globalization