Question 1

Suppose X - M = net exports; T - G = government sector balance; and S - I = private sector balance. What relationship exists among these variables?

Accepted Answer

The answer of Suppose X - M = net exports;...

Question 2

If the world real interest rate falls, then a country that is an international lender

Accepted Answer

When the world real interest rate falls, the return on lending money internationally decreases, making it less attractive for a country that is an international lender to lend money. Therefore, the country is likely to decrease the amount of its lending.

Question 3

A small country is an international borrower and its domestic supply of loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's international borrowing ________.

Accepted Answer

When a small country's domestic supply of loanable funds increases, it relies less on international borrowing because it can fund more investments domestically. The equilibrium quantity of loanable funds used in the country does not change because it is determined by the world interest rate, which is unaffected by changes in a small country's loanable funds supply.

Question 4

X is exports, M is imports, T is net taxes, G is government expenditure, C is consumption expenditure, S is saving, and I is investment. Which of the following equations represents the private sector balance?

Accepted Answer

The private sector balance is represented by the difference between savings (S) and investment (I), which reflects the net financial position of the private sector in an economy.

Question 5

The country of Pimm exports $500 billion worth of goods and services and imports $500 billion worth of goods and services. Net interest income paid abroad is $50 billion and net transfers are $0. The current account balance is

Accepted Answer

The current account balance is calculated as the sum of the trade balance (exports minus imports), net income from abroad (such as interest and dividends), and net current transfers from abroad. In this case, the trade balance is $0 ($500 billion exports minus $500 billion imports), net interest income paid abroad is -$50 billion, and net transfers are $0. Therefore, the current account balance is $0 - $50 billion + $0 = -$50 billion. However, since none of the provided options is -$50 billion, and assuming a possible typo or misunderstanding in the interpretation of the question or options, the closest match under the assumption of seeking a positive balance or an oversight in the sign would be option A, $50 billion, but this technically represents a misunderstanding of the given values.

Question 6

A small country is an international borrower and its domestic demand for loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's international borrowing ________.

Accepted Answer

When a small country's domestic demand for loanable funds increases, it will need to borrow more from the international market to meet this increased demand, leading to an increase in both the equilibrium quantity of loanable funds used in the country and the country's international borrowing.

Question 7

Net exports equals

Accepted Answer

The answer of Net exports equals
...

Question 8

A country has a government sector deficit and a private sector surplus. If the government sector deficit increases, and the private sector surplus decreases, then

Accepted Answer

The answer of A country has a government sector deficit...

Question 9

X is exports, M is imports, T is net taxes, G is government expenditure, C is consumption expenditure, S is saving, and I is investment. The government sector balance is equal to

Accepted Answer

The government sector balance is calculated as net taxes (T) minus government expenditure (G), which is represented by the formula T - G. This reflects the net financial position of the government, indicating whether it has a surplus (if T > G) or a deficit (if T < G).

Question 10

Which of the following is CORRECT?

Accepted Answer

The answer of Which of the following is CORRECT?
...

Question 11

If net interest and net transfers are zero, and a country's exports exceed its imports, the country definitely has

Accepted Answer

When a country's exports exceed its imports, it means the country is selling more goods and services to the rest of the world than it is buying. This results in a trade surplus, which is a component of the current account. Since net interest and net transfers are zero, the trade surplus directly contributes to a current account surplus.

Question 12

Which of the following statements is TRUE?

Accepted Answer

All the statements are correct and reflect basic principles of national accounting. A) describes a situation where the private sector is saving more than it is investing, indicating a surplus. B) describes the opposite scenario, where the private sector is investing more than it is saving, indicating a deficit. C) is based on the sectoral balances approach, which states that if one sector (in this case, the private sector) spends more than its income (a deficit), another sector must save the equivalent amount, leading to a surplus in the government or foreign sector.

Question 13

Which of the following statements is INCORRECT?

Accepted Answer

The private sector balance is correctly defined as private saving minus private investment, not the other way around. This balance indicates the net savings of the private sector after accounting for its investment spending.

Question 14

The private sector balance is equal to

Accepted Answer

The private sector balance is defined as saving minus investment, representing the net saving of the private sector.

Question 15

The government sector balance is equal to

Accepted Answer

The government sector balance, often referred to as the government budget balance, is calculated as net taxes (taxes minus transfer payments) minus government purchases of goods and services. This reflects the difference between what the government collects in taxes (after giving back in the form of transfers) and what it spends.

Question 16

A net exports deficit or surplus equals

Accepted Answer

Net exports deficit or surplus is essentially the difference between what a country exports and what it imports. This balance can be viewed as the sum of the government sector balance (government savings minus its investment) and the private sector balance (private savings minus private investment). When a country exports more than it imports, it has a surplus, and when it imports more than it exports, it has a deficit. This relationship is captured by the sectoral balances approach, which states that the sum of the balances of the private sector, government sector, and foreign sector (net exports) must equal zero.

Question 17

A small country is an international borrower if its real interest rate without foreign borrowing is ________ the world real interest rate.

Accepted Answer

A small country is considered an international borrower if its real interest rate without foreign borrowing is higher than the world real interest rate. This is because, in such a scenario, it can benefit from borrowing at the lower world rate, thereby reducing its cost of borrowing.

Question 18

A small country is an international lender and its domestic supply of loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's international lending ________.

Accepted Answer

When a small country's domestic supply of loanable funds increases, it typically does not affect the equilibrium quantity of loanable funds used domestically because the country's interest rate is determined by the world interest rate. However, the increase in supply means the country has more funds available for lending, thus its international lending increases.

Question 19

If net interest and net transfers are $0, and a nation's purchases of foreign goods and services are $3.5 billion while its sales of goods and services to foreigners are $4.5 billion

Accepted Answer

The nation has a $1 billion surplus in its current account because its sales of goods and services to foreigners ($4.5 billion) exceed its purchases of foreign goods and services ($3.5 billion) by $1 billion.

Question 20

The private sector surplus or deficit equals

Accepted Answer

The private sector surplus or deficit equals saving minus investment. This is because when the private sector saves more than it invests, it runs a surplus; conversely, when it invests more than it saves, it runs a deficit.

Quiz 9: The Exchange Rate and the Balance of Payments