Deck 4: Saving and Investment in Closed and Open Economies

Question 1

When a U.S.firm sells a good abroad for,say,100 euros (assume $1=1euro),U.S.net exports increase by $100.These $100 in exports can be accounted for as $100 increase in capital outflow because ________.

A)if the 100 euros are kept in the foreign bank,the U.S.firm is giving a loan to that bank
B)if the U.S.firm uses the 100 euros to buy a share of stock in a foreign firm,the firm is supplying U.S.capital to that foreign firm
C)if the U.S.firm uses the proceeds to build a new factory in that country,it is supplying U.S.capital to that country
D)all of the above
E)none of the above

Answer 1

all of the above

Question 2

The real interest rate ________.

A)is the cost of borrowing not adjusted for inflation
B)keeps the market for saving and consumption in equilibrium
C)describes the real benefit of saving
D)all of the above
E)none of the above

Answer 2

describes the real benefit of saving

Question 3

Government saving refers to ________.

A)tax revenues minus transfers minus government purchases
B)tax revenues plus transfers minus government consumption
C)the saving rate times transfers
D)national plus private saving
E)none of the above

Answer 3

tax revenues minus transfers minus government purchases

Question 4

Which of the following is a correct statement?

A)Wealth can increase even if there is no saving.
B)An increase in net foreign assets always increases wealth.
C)Low U.S.national saving is the principal cause of the trade deficits the U.S.has run since the 1980s.
D)The U.S will be a net debtor nation for the foreseeable future.
E)all of the above

Question 5

The real interest rate ________.

A)is the cost of borrowing adjusted for inflation
B)keeps the market for saving and investment in equilibrium
C)describes the real benefit of saving
D)all of the above
E)none of the above

Question 6

Government saving refers to ________.

A)tax revenues minus transfers minus government consumption minus government investment
B)the government's tax receipts minus its outlays
C)national saving minus private saving
D)all of the above
E)none of the above

Question 7

Which of the four government policies to stimulate saving is essential? That is,which policy can on its own,regardless of the other policies,determine the level of the national saving rate?

Question 8

A foreign bank receives a deposit of $10,000 from a U.S.citizen.As a result,there is a net capital outflow from the U.S. ,if ________.

A)the bank buys a U.S.-made computer
B)the bank buys a bond issued by a U.S.company
C)the bank keeps the $10,000 in a vault
D)all of the above
E)none of the above

Question 9

Increases in ________ typically lead to decreases in private saving.

A)the interest rate
B)disposable income
C)autonomous consumption
D)all of the above
E)none of the above

Question 10

Private saving refers to ________.

A)after-tax income minus consumption expenditures
B)a flow variable which adds to the stock of wealth
C)the private saving rate times disposable income
D)all of the above
E)none of the above

Question 11

Private saving refers to ________.

A)disposable income minus consumption expenditure
B)total expenditure minus purchases of capital goods
C)taxes plus consumption minus income
D)consumption expenditure divided by disposable income
E)none of the above

Question 12

Consumption expenditures are a function of ________.

A)the real interest rate
B)disposable income
C)autonomous consumption
D)all of the above
E)none of the above

Question 13

When a U.S.firm sells a good abroad for,say,100 euros (assume $1.5=1euro),U.S.net exports increase by $150.These $150 in exports can be accounted for as $150 increase in capital outflow because ________.

A)private consumption in the foreign country increases by $150
B)if the U.S.firm uses the 100 euros to buy a share of stock in a foreign firm,the firm is supplying U.S.capital to that foreign firm
C)if the U.S.firm uses the proceeds to buy a U.S.bond,capital investment in the foreign country has increased
D)all of the above
E)none of the above

Question 14

Increases in ________ typically lead to decreases in consumption

A)the interest rate
B)disposable income
C)autonomous consumption
D)all of the above
E)none of the above

Question 15

In the model for desired saving,autonomous is roughly synonymous with ________.

A)policy-determined
B)endogenous
C)intended
D)inflation-adjusted
E)exogenous

Question 16

How can the U.S.federal government induce increases in the national saving rate?

A)implementing a value added tax
B)lowering the capital gains tax
C)reducing budget deficits
D)all of the above
E)none of the above

Question 17

If a U.S.citizen deposits $10,000 in a foreign bank,and the bank uses the $10,000 to buy assets in the U.S. ,then ________.

A)the U.S.has experienced a net capital outflow
B)the U.S.has experienced an increase in net exports
C)the foreign economy has experienced a net capital outflow
D)the foreign economy has experienced an increase in net exports
E)none of the above

Question 18

Net capital outflows ________.

A)are also known as net foreign investment
B)are positive if saving is greater than investment
C)are also known as the trade balance
D)all of the above
E)none of the above

Question 19

How can the U.S.federal government induce increases in the national saving rate?

A)by lowering the sales tax
B)by levying taxes on individual retirement (IRA)accounts
C)by reducing budget deficits
D)all of the above
E)none of the above

Question 20

Why is it important,for an open economy,that investment not be consistently higher than saving?

Question 21

A budget deficit ________.

A)may have stimulative effects on economic activity in the short run
B)contributes to lower interest rates in the long run
C)is likely to increase future productive capacity in the long run
D)all of the above
E)none of the above

Question 22

In an economy open to international trade ________.

A)saving equals investment in equilibrium
B)saving is the difference between net exports and investment
C)saving equals investment as long as the economy has no exports
D)saving equals investment as long as NX=0
E)none of the above

Question 23

If government cuts taxes ________.

A)national saving goes up
B)the equilibrium interest rate would decrease
C)discretionary income goes up
D)all of the above
E)none of the above

Question 24

The domestic real interest rate (r)for a given country must be the same as the world real interest rate (r^w)________.

A)only if capital is not perfectly mobile
B)because with no barriers to capital flows,if r^w > r domestic residents would just lend abroad putting upward pressures on the domestic rate until both rates equal each other
C)because with no barriers to capital flows,if r^w < r domestic residents would only lend to foreigners putting downward pressures on the domestic rate until both rates equal each other
D)all of the above
E)none of the above

Question 25

In an economy open to international trade ________.

A)saving is the difference between net exports and consumption
B)saving equals investment as long as the domestic real interest rate is equal to the world real interest rate
C)the domestic real interest rate should equal the world real interest rate as long as the economy is relatively small
D)all of the above
E)none of the above

Question 26

In the model of the open economy with perfect capital mobility,________ is an exogenous variable.

A)Y
B)C
C)I
D)S
E)r

Question 27

In the long run,if government increases spending ________.

A)interest rates decrease
B)it crowds out private investment
C)saving increases
D)all of the above
E)none of the above

Question 28

________ typically lead to increases in ________.

A)decreases in interest rates;investment
B)increases in disposable income;consumption
C)increases in autonomous investment;investment
D)all of the above
E)none of the above

Question 29

Increases in ________ typically lead to decreases in ________.

A)the interest rate;saving
B)disposable income;consumption
C)autonomous consumption;consumption
D)all of the above
E)none of the above

Question 30

How does a decline in the real interest rate cause an increase in investment?

Question 31

In the long run,larger budget deficits lead to ________.

A)higher saving levels
B)a fall in investment
C)lower interest rates
D)all of the above
E)none of the above

Question 32

"Crowding out" refers to the decrease in ________ that may result from an increase in government spending.

A)private investment
B)imports
C)private saving
D)all of the above
E)none of the above

Question 33

The domestic real interest rate (r)for a given country must be the same as the world real interest rate (r^w)________.

A)if perfect capital mobility is assumed
B)because with no barriers to capital flows,if r^w > r domestic residents would just borrow abroad putting upward pressures on the domestic rate until both rates equal each other
C)because with no barriers to capital flows,if r^w < r domestic residents would only lend to foreigners putting downward pressures on the domestic rate until both rates equal each other
D)all of the above
E)none of the above

Question 34

In the equation S =
-
- C
-
,which of the following is an endogenous variable?

A)r
B)
C)
D)all of the above
E)none of the above

Question 35

If taxes are reduced,will most people save more or less than before? Does national saving rise or fall? Explain.

Question 36

In an economy open to international trade ________.

A)saving is net exports added to investment
B)saving equals investment as long as NX=0
C)the domestic real interest rate should equal the world real interest rate as long as there is perfect capital mobility
D)all of the above
E)none of the above

Question 37

In an open economy,Y = C + I + G + NX.From this we may infer that ________.

A)output is greater in an open economy than in a closed economy
B)the condition for goods market equilibrium is that S = I + G + NX
C)net exports can be zero only if the domestic real interest rate is equal to the world real interest rate
D)if saving is greater than zero,NX cannot be zero
E)none of the above

Question 38

Ceteris paribus,in a closed economy,if consumers become more optimistic ________.

A)autonomous consumption would decrease
B)the equilibrium interest rate should increase
C)saving should increase
D)all of the above
E)none of the above

Question 39

An investment tax credit ________.

A)is designed to incentivize higher capital stock expenditures at any given interest rate
B)may lead to increases in autonomous investment
C)may put upward pressure on the interest rate
D)all of the above
E)none of the above

Question 40

Ceteris paribus,in a closed economy,if consumers become more pessimistic ________.

A)autonomous consumption will fall
B)investment will fall
C)saving will increase
D)all of the above
E)none of the above

Question 41

Which of the following would lead domestic investment to rise?

A)an increase in government spending throughout the world
B)an increase in world taxes
C)an increase in world autonomous consumption
D)all of the above
E)none of the above

Question 42

Suppose consumption is $500 billion,investment is $120 billion,government purchases equal $90 billion,and net exports are negative $20 billion.The saving rate
Is ________.

A)20%
B)83.3%
C)14.5%
D)3%
E)none of the above

Question 43

In an economy open to international trade where the interest rate at which saving and investment would be equal is ________ the world real interest rate ________.

A)above;a trade deficit ensues
B)below;there is a net capital outflow
C)above;there is a net capital inflow
D)all of the above
E)none of the above

Question 44

Saving-Investment Diagram
Based on the Saving-Investment Diagram,if the domestic real interest rate is indicated by B,then ________.

A)the value of net exports is zero
B)the diagram represents a closed economy
C)the world real interest rate is indicated by A
D)the difference between values F and E measures the net capital inflow
E)none of the above

Question 45

In a small open economy,goods market equilibrium occurs when desired saving minus desired investment equals net exports.Explain.

Question 46

Saving-Investment Diagram
Based on the Saving-Investment Diagram,if the difference between values G and E measures the net capital outflow,then ________.

A)the difference between values G and E measures the trade surplus
B)the difference between values H and D measures the trade surplus
C)the domestic real interest rate is indicated by B
D)desired saving has decreased
E)none of the above

Question 47

Suppose an economy has a GDP of $10 trillion,and that its national saving rate is 20%.If investment is 25% of GDP,the value of net exports is ________.

A)negative $500 billion
B)$4.5 trillion
C)negative $250 billion
D)$2 trillion
E)none of the above

Question 48

Suppose GDP is $800 billion,net taxes equal $150 billion,government purchases are $160 billion,investment is $120 billion,and net exports are $5 billion.The private saving rate
Is ________.

A)19%
B)16%
C)21%
D)18%
E)none of the above

Question 49

Saving-Investment Diagram
Based on the Saving-Investment Diagram,if the world real interest rate is indicated by C,then ________.

A)the difference between values H and D measures the net capital outflow
B)the difference between values H and D measures the trade deficit
C)the domestic real interest rate is indicated by B
D)the difference between values H and F measures the trade deficit
E)none of the above

Question 50

Saving-Investment Diagram
Based on the Saving-Investment Diagram,if the world real interest rate declines from A to C,then the change in net exports is measured by the difference between values ________.

A)G and E
B)H and G plus E and D
C)H and G minus E and D
D)G and F plus F and E
E)none of the above

Question 51

Saving-Investment Diagram
Based on the Saving-Investment Diagram,if the difference between values G and E measures the net capital outflow,then ________.

A)the difference between values G and E measures the trade deficit
B)the difference between values H and D measures the trade deficit
C)the domestic real interest rate is indicated by C
D)desired investment has increased
E)none of the above

Question 52

If there is a decline in world autonomous consumption ________.

A)domestic investment would decline
B)the domestic real interest rate would fall
C)net exports would go up
D)all of the above
E)none of the above

Question 53

Saving-Investment Diagram
Based on the Saving-Investment Diagram,if the world real interest rate is indicated by A,then ________.

A)the difference between values G and E measures the trade surplus
B)the difference between values G and F measures the trade surplus
C)the domestic real interest rate is indicated by B
D)desired saving has decreased
E)none of the above

Question 54

Saving-Investment Diagram
Based on the Saving-Investment Diagram,if the difference between values G and E measures the net capital outflow,then ________.

A)the difference between values H and E measures the trade deficit
B)the difference between values F and D measures the trade surplus
C)the domestic real interest rate is indicated by A
D)the difference between values F and E measures the trade deficit
E)none of the above

Question 55

Saving-Investment Diagram
Based on the Saving-Investment Diagram,the difference between values H and E could measure the net capital inflow,if ________.

A)the difference between values H and D measures the trade surplus
B)the domestic real interest rate is indicated by A
C)desired saving has increased
D)desired investment has decreased
E)none of the above

Question 56

Which of the following would lead domestic investment to rise?

A)a decline of government spending throughout the world
B)an increase in world taxes
C)a decrease in world autonomous consumption
D)all of the above
E)none of the above

Question 57

If there is a decline in world autonomous consumption ________.

A)the domestic real interest rate would fall
B)domestic investment would rise
C)net exports would fall
D)all of the above
E)none of the above

Question 58

If the world real interest rate were to fall below the rate at which domestic saving and investment would be equal ________.

A)saving would be greater than investment so the economy would be running a trade deficit
B)investment would be greater than saving so the economy would be running a trade deficit
C)investment would be greater than saving so the economy would be running a trade surplus
D)saving would be greater than investment so the economy would be running a trade surplus
E)none of the above

Question 59

In an economy open to international trade where the interest rate at which saving and investment would be equal is ________ the world real interest rate ________.

A)above;a trade surplus ensues
B)below;a trade deficit ensues
C)above;there is a net capital outflow
D)below;there is a net capital inflow
E)none of the above

Question 60

If desired saving increases in a small open economy,net exports (net capital outflow)rise.What happens to net exports if desired saving rises in most of the world's economies at the same time?

Question 61

Suppose the world economy is divided into two halves.In Region A,all economies experience a decrease in desired saving,while desired saving is unchanged in Region B.If there is open trade and perfect capital mobility across the two regions,which of the following is true?

A)Actual saving in Region B has increased.
B)Actual investment in Region A has increased.
C)Region A's imports from Region B have decreased.
D)all of the above
E)none of the above

Question 62

The concept of twin deficits refers to ________.

A)the phenomenon of simultaneous trade and government budget deficits
B)the phenomenon of simultaneous government and private budget deficits
C)the phenomenon of simultaneous state and federal budget deficits
D)all of the above
E)none of the above

Question 63

If there is a decrease in world investment ________.

A)domestic saving would rise
B)net exports would decrease
C)domestic output would go up
D)all of the above
E)none of the above

Question 64

If we observe an economy in which desired saving has changed,but there has been no change in actual investment,we may infer that ________.

A)net exports have changed
B)actual saving has changed
C)the domestic real interest rate has not changed
D)all of the above
E)none of the above

Question 65

When an economy becomes attractive to global investors,sparking a capital inflow,one result is often a decrease in net exports.Why?

Question 66

If policymakers in an open economy want to increase the wealth of their citizens,should they seek to increase saving,or to increase investment? Explain.

Question 67

In an open economy,an increase in saving might not cause an increase in domestic investment.Why not? Does that mean that an increase in saving is undesirable?

Question 68

An increase in autonomous investment in a small open economy will cause ________.

A)a trade surplus to shrink
B)a trade deficit to increase
C)lower net capital outflows
D)all of the above
E)none of the above

Question 69

If there is a decrease in world taxes ________.

A)domestic investment would fall
B)net exports would increase
C)domestic interest rates would go up
D)all of the above
E)none of the above

Question 70

Suppose the world economy is divided into two halves.In Region A,all economies experience a decrease in desired saving,while desired saving is unchanged in Region B.If there is open trade and perfect capital mobility across the two regions,which of the following is true?

A)Actual investment in Region B has increased.
B)There is a net capital flow from Region B to Region A.
C)Actual investment in Region A has increased.
D)all of the above
E)none of the above

Question 71

Which of the following is an exogenous variable in the model of a small open economy,but an endogenous variable in the model of a large open economy?

A)
B)C
C)Y
D)NX
E)G

Question 72

If we observe an economy in which desired saving has changed,but there has been no change in actual investment,we may infer that ________.

A)this is a closed economy
B)this is a large economy
C)the trade balance has changed in the same direction as the change in desired saving
D)all of the above
E)none of the above

Question 73

The saving-investment analysis for large open economies is somewhat more complicated than the analysis for small open economies mainly because ________.

A)there is more information to keep track of for larger economies
B)there are more unknowns in larger economies
C)a larger economy may actually affect the world economy
D)all of the above
E)none of the above

Question 74

If we observe an economy in which desired saving has changed,but there has been no change in actual investment,we may infer that ________.

A)this is a closed economy
B)this is a large economy
C)the world real interest rate has not changed
D)all of the above
E)none of the above

Question 75

If there is a decrease in world investment ________.

A)domestic investment would fall
B)net capital outflow would increase
C)the domestic interest rate would go up
D)all of the above
E)none of the above

Question 76

Which of the following is true of a small open economy,but not of a large open economy?

A)Net exports are unlikely to be close to zero.
B)The domestic real interest rate is equal to the world real interest rate.
C)Changes in desired investment result in changes in the trade balance.
D)Changes in desired investment result in changes in actual investment.
E)none of the above

Question 77

An increase in autonomous investment in a small open economy will cause ________.

A)a trade surplus to shrink
B)a trade deficit to shrink
C)higher net capital outflows
D)all of the above
E)none of the above

Question 78

A small open economy would typically enjoy a higher trade balance if,in the domestic economy,________.

A)autonomous consumption expenditures decrease
B)taxes go up
C)government spending decreases
D)all of the above
E)none of the above

Question 79

A small open economy would typically enjoy a higher trade balance if,in the domestic economy,________.

A)autonomous consumption expenditures increase
B)taxes decrease
C)government spending decreases
D)all of the above
E)none of the above

Question 80

If there is an increase in world taxes ________.

A)domestic investment would fall
B)net exports would increase
C)the domestic interest rate would go down
D)all of the above
E)none of the above