Question 1

In the classical model with an open economy,an increase in government purchases always causes complete crowding out.

Accepted Answer

In the classical model with an open economy, complete crowding out occurs only when the economy operates at full employment and when there is no excess capacity. If the economy is not at full employment, an increase in government purchases may lead to an increase in output and employment. Furthermore, if the economy has excess capacity, then an increase in government purchases may lead to an increase in output without causing an increase in the interest rate. Therefore, the statement that an increase in government purchases always causes complete crowding out is false in the classical model with an open economy.

Question 2

In the classical model with an open economy,an increase in the trade deficit as a result of a tax cut,causes a decline in the interest rate,attracting more loanable funds from abroad.

Accepted Answer

In the classical model with an open economy, an increase in the trade deficit, often resulting from a tax cut, would typically lead to an increase in the interest rate. This is because a tax cut can boost domestic consumption and investment, raising the demand for loanable funds, which in turn pushes up the interest rate to balance the demand and supply of loanable funds. Higher interest rates attract more foreign capital, helping to finance the increased trade deficit.

Question 3

When a country runs a trade deficit,&#10;A) it must be running a budget surplus.&#10;B) its imports will become injections instead of leakages.&#10;C) its exports will become leakages instead of injections.&#10;D) foreigners will demand loanable funds from the country.&#10;E) foreigners will supply loanable funds to the country equal to its trade deficit

Accepted Answer

When a country runs a trade deficit, it means it is importing more than it is exporting. To finance this deficit, it needs to borrow from abroad, which means foreigners supply loanable funds to the country equal to its trade deficit. This is because the country needs external financing to cover the gap between its imports and exports.

Question 4

In the classical model with an open economy,an increase in government purchases can affect a country's exchange rate,causing its imports and exports to change.

Accepted Answer

According to the classical model with an open economy, an increase in government purchases will lead to an increase in demand for domestic goods, which in turn can lead to an increase in the exchange rate. A higher exchange rate can make a country's exports more expensive and imports cheaper, which can lead to a decrease in exports and an increase in imports, potentially leading to a trade deficit.

Question 5

In the classical model with an open economy,an increase in government purchases may not cause complete crowding out,but crowding out will be complete worldwide.

Accepted Answer

In an open economy, an increase in government purchases can lead to partial crowding out domestically due to capital inflows from abroad. However, on a global scale, since the world economy is essentially a closed system, the increase in demand for loanable funds will lead to a complete crowding out effect worldwide as the global pool of savings is fixed in the short run.

Question 6

Which of the following is a leakage in an open economy?&#10;A) Planned investment&#10;B) Imports&#10;C) Exports&#10;D) Government purchases&#10;E) Money

Accepted Answer

Imports are considered a leakage in an open economy because they represent spending on goods and services that does not return to the domestic economy, reducing the total demand for domestically produced goods and services.

Question 7

In the classical model,even when a country runs a trade deficit,Say's law holds.

Accepted Answer

In the classical model, Say's Law holds regardless of whether a country runs a trade deficit or surplus. Say's Law states that supply creates its own demand, meaning that all goods and services produced in an economy will always be consumed or invested in. In this model, there is no such thing as an excess supply of goods, and therefore no such thing as a trade deficit.

Question 8

Which of the following is an injection in an open economy?&#10;A) Saving&#10;B) Imports&#10;C) Exports&#10;D) Taxes&#10;E) Money

Accepted Answer

In an open economy, exports are considered injections, as they bring income and money from other countries into the economy.

Question 9

In the classical model,when an open economy has balanced trade,Say's law does not hold.

Accepted Answer

In the classical model, when an open economy has balanced trade, Say's law still holds. Say's law states that supply creates its own demand, implying that there can never be a general overproduction of goods and services in an economy as long as production creates enough income for households to purchase everything that is produced.

Question 10

In the classical model,when an open economy has balanced trade,Say's law holds.

Accepted Answer

In the classical model, when an open economy has balanced trade, Say's law holds. This means that aggregate supply equals aggregate demand, and there is no tendency for overproduction or underproduction in the economy. Balanced trade implies that the value of exports equals the value of imports, and there is no net inflow or outflow of goods and services. In such a situation, Say's law holds, and the economy is said to be in a state of general equilibrium.

Deck 20: Part A: The Classical Model in an Open Economy