Question 1

If you know that a country's net foreign investment is positive, what does that tell you about the relationship between the country's national saving and private investment? (Assume that the capital account is zero and net transfers are zero.)

Accepted Answer

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Question 2

Which of the following is true about the occurrence of the twin deficits?
A) They always occur together.
B) They only occur when exchange rates are fixed.
C) They did not occur after 1990 in the United States.
D) They occur consistently in all the economies of the world except the United States.

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Question 3

Use the saving and investment equation to explain why the United States experienced large current account deficits in the late 1990s.

Accepted Answer

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Question 4

The United States is called a debtor nation because
A) it has a large current account deficit and is simultaneously funded by foreign investment.
B) it has a large financial account deficit that is used to fund the current account deficit.
C) it has a large balance of payments deficit that is used to fund the current account deficit.
D) U.S. capital outflows are much greater than U.S. capital inflows.

Accepted Answer

A debtor nation is a country that owes more money to other countries than it owes to its own citizens. The United States has a large current account deficit, meaning it imports more goods and services than it exports, which is funded by foreign investment. This results in the US being called a debtor nation.

Question 5

Explain the relationship between net exports and net foreign investment.

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Question 6

An increase in U.S. federal government budget deficits that raises U.S. interest rates relative to the rest of the world should
A) raise the trade balance.
B) increase net exports.
C) cause the dollar to depreciate.
D) increase the current account deficit.
E) decrease foreign portfolio investment.

Accepted Answer

An increase in U.S. interest rates relative to the rest of the world would make it more attractive for foreigners to invest in U.S. assets, such as stocks and bonds. This would lead to an increase in demand for dollars, causing the dollar to appreciate. However, this would also make U.S. exports more expensive, leading to a decrease in net exports and an increase in the current account deficit.

Question 7

An increase in net foreign investment is possible through a decrease in national saving or a decrease in domestic investment.

Accepted Answer

An increase in net foreign investment is typically associated with an increase in national saving or a decrease in domestic consumption, not a decrease in national saving or a decrease in domestic investment. Higher national saving can provide more resources for investment domestically or abroad, while a decrease in domestic investment could potentially increase net foreign investment if those savings are instead invested in foreign assets.

Question 8

Based on the following information, calculate public saving, net foreign investment, and national income. Assume that the capital account is zero and net transfers are zero.
private saving = $145 billion
exports = $285 billion
imports = $240 billion
consumption = $600 billion
private investment = $125 billion
government purchases = $75 billion

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Question 9

What impact might an increase in the budget deficit have on interest rates and exchange rates?
A) Interest rates and exchange rates increase.
B) Interest rates increase and exchange rates decrease.
C) Interest rates decrease and exchange rates increase.
D) Interest rates and exchange rates decrease.

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Question 10

What two measures of macroeconomic activity are often referred to as the "twin deficits"?
A) net capital flows and net exports
B) the foreign exchange deficit and net foreign investment
C) the budget deficit and the current account deficit
D) the saving-investment deficit and the export deficit

Accepted Answer

The twin deficits refer to the budget deficit and the current account deficit. The budget deficit is the difference between government spending and government revenue, while the current account deficit is the difference between a country's total imports and total exports. Together, these deficits can put pressure on a country's economy and lead to negative consequences such as inflation and a weakened currency.

Question 11

Japan has a fairly high saving rate and the level of saving in Japan is above domestic investment. Use the saving and investment equation to explain what Japan is doing with this excess of saving above domestic investment.

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Question 12

In the United States, domestic investment is greater than national saving.

Accepted Answer

According to the current account identity, which states that Current Account = Savings - Investment, if investment is greater than savings then the current account will be negative indicating a current account deficit. This suggests that the U.S. is borrowing funds from abroad to finance its domestic investment.

Question 13

Based on the following information, calculate public saving, net foreign investment, and national income.
Private saving = $83 billion
Exports = $125 billion
Imports = $130 billion
Consumption = $200 billion
Private investment = $56 billion
Government purchases = $38 billion

Accepted Answer

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Question 14

Investment (I) in the United States may increase with either an increase in national saving or an increase in net foreign investment.

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Question 15

Persistent current account deficits in the United States
A) can be seen as a vote of confidence in the strength of the U.S. economy.
B) cause persistent declines in investment in the United States.
C) cause U.S. investors to accumulate more foreign assets than foreign investors accumulate U.S. assets.
D) will eventually cause the value of the dollar to rise.

Accepted Answer

Persistent current account deficits in the United States can be interpreted as a vote of confidence in the strength of the U.S. economy, as they often reflect the attractiveness of the U.S. as a destination for investment, leading to more capital inflows.

Question 16

How might a budget deficit affect the balance of trade?
A) A budget deficit raises interest rates, which raises exchange rates and increases the balance of trade.
B) A budget deficit raises interest rates, which raises exchange rates and reduces the balance of trade.
C) A budget deficit reduces interest rates, which raises exchange rates and reduces the balance of trade.
D) A budget deficit reduces interest rates, which reduces exchange rates and reduces the balance of trade.

Accepted Answer

A budget deficit means the government is spending more than it is receiving in revenue. In order to cover this gap, the government will need to borrow money, which increases the demand for credit and raises interest rates. Higher interest rates make it more attractive for foreign investors to hold that currency, which drives up its value in the foreign exchange market. This makes exports more expensive and imports cheaper, which leads to a reduction in the balance of trade. Therefore, a budget deficit is likely to raise interest rates, which raises exchange rates and reduces the balance of trade.

Question 17

Does the saving and investment equation imply that a country's national saving must always equal its domestic investment? Explain.

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Question 18

How would a decrease in the U.S. budget deficit affect the exchange rate in the market for dollars?
A) The exchange rate will increase.
B) The exchange rate will decrease.
C) The exchange rate will not be affected by a change in the budget deficit.
D) The impact of the decrease in the budget deficit on the exchange rate cannot be predicted.

Accepted Answer

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Question 19

How does an increase in the budget deficit affect the demand for dollars and the supply of dollars on the foreign exchange market?
A) The demand for dollars falls, and the supply of dollars falls.
B) The demand for dollars rises, and the supply of dollars rises.
C) The demand for dollars rises, and the supply of dollars falls.
D) The demand for dollars falls, and the supply of dollars rises.

Accepted Answer

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Question 20

Saving exceeds domestic investment in Japan, which generates a financial account deficit in Japan's balance of payments.

Accepted Answer

When saving exceeds domestic investment, the difference is typically invested abroad. This generates a financial account deficit in Japan's balance of payments, indicating that Japan is investing more abroad than it is attracting in foreign investment.

Quiz 29: Macroeconomics in an Open Economy

If you know that a country's net foreign investment is positive, what does that tell you about the relationship between the country's national saving and private investment? (Assume that the capital account is zero and net transfers are zero.)

Which of the following is true about the occurrence of the twin deficits?

Use the saving and investment equation to explain why the United States experienced large current account deficits in the late 1990s.

The United States is called a debtor nation because

Explain the relationship between net exports and net foreign investment.

An increase in U.S. federal government budget deficits that raises U.S. interest rates relative to the rest of the world should

An increase in net foreign investment is possible through a decrease in national saving or a decrease in domestic investment.

What impact might an increase in the budget deficit have on interest rates and exchange rates?

What two measures of macroeconomic activity are often referred to as the "twin deficits"?

Japan has a fairly high saving rate and the level of saving in Japan is above domestic investment. Use the saving and investment equation to explain what Japan is doing with this excess of saving above domestic investment.

In the United States, domestic investment is greater than national saving.

Based on the following information, calculate public saving, net foreign investment, and national income. Private saving = $83 billion Exports = $125 billion Imports = $130 billion Consumption = $200 billion Private investment = $56 billion Government purchases = $38 billion

Investment (I) in the United States may increase with either an increase in national saving or an increase in net foreign investment.

Persistent current account deficits in the United States

How might a budget deficit affect the balance of trade?

Does the saving and investment equation imply that a country's national saving must always equal its domestic investment? Explain.

How would a decrease in the U.S. budget deficit affect the exchange rate in the market for dollars?

How does an increase in the budget deficit affect the demand for dollars and the supply of dollars on the foreign exchange market?

Saving exceeds domestic investment in Japan, which generates a financial account deficit in Japan's balance of payments.