Question 1

Consider a small open economy with desired national saving of S^d = 200 + 10,000r^w and desired investment of I^d = 1000 - 5000r^w.If r^w = 0.05,then a rise in government spending of 50 with no change in private saving causes net exports to become A)100. B)50. C)-50. D)-100.

Accepted Answer

The initial net exports are calculated as S^d - I^d = (200 + 10,000*0.05) - (1000 - 5000*0.05) = 700 - 750 = -50. With a rise in government spending of 50, net exports decrease by 50, resulting in -100.

Question 2

Due to a change in the regulatory structure of a small open economy,the desired capital stock becomes higher for both private investment and government investment.Increased government investment spending is financed by borrowing,not by higher taxes.If both desired investment and government spending rise at the same time,will there be "twin deficits"?

Accepted Answer

The answer of Due to a change in the regulatory...

Question 3

A large open economy has desired national saving of S^d = 1200 + 1000r^w,and desired national investment of I^d = 1000 - 500r^w.The foreign economy has desired national saving of = 1300 + 1000r^w,and desired national investment of = 1800 - 500r^w.Suppose the foreign country's government increases its spending by 300 and private saving does not change.Then in equilibrium,the foreign country has net exports equal to A)500. B)350. C)-350. D)-500.

Accepted Answer

The answer of A large open economy has desired national...

Question 4

Assuming no change in the effective tax rate on capital,an increase in the government budget deficit will reduce the current account deficit if and only if the increase in the budget deficit
A)reduces desired national saving.
B)increases desired national saving.
C)reduces desired national investment.
D)increases desired national investment.

Accepted Answer

An increase in the government budget deficit means that the government is spending more than it is receiving in revenue. This can lead to a decrease in national saving as the government is borrowing more from domestic and foreign lenders, leading to an increase in interest rates and a decrease in private investment. Lower investment can lead to a reduction in imports, which in turn will reduce the current account deficit. Therefore, when the increase in the budget deficit reduces desired national saving, the current account deficit will reduce as well.

Question 5

In a large open economy like the United States,an increased government budget deficit which reduces national saving
A)reduces investment and improves the current account balance.
B)reduces investment and reduces the current account balance.
C)has no effect on investment, but reduces the current account balance.
D)has no effect on either investment or the current account balance.

Accepted Answer

An increased government budget deficit reduces national saving because the government is spending more than it is taking in, which leads to a decrease in investment. A decrease in investment will also reduce the current account balance since there will be less investment in the production of goods and services which can be exported. Therefore, choice B is the best answer.

Question 6

An increase in a small open economy's government budget deficit that reduces national saving and the current account balance causes an
A)increase in desired saving.
B)increase in the world real interest rate.
C)increase in exports.
D)increase in absorption.

Accepted Answer

An increase in a government budget deficit typically leads to a decrease in national saving, as the government is saving less or borrowing more. This, in turn, increases domestic absorption (or spending), including on imports, which can reduce the current account balance. The other options do not directly result from an increase in a government budget deficit in the context provided.

Question 7

Consider a large open economy.What are the effects,in equilibrium,on the world real interest rate,domestic national saving,domestic investment,the domestic current account balance,foreign national saving,foreign investment,and the foreign current account balance in each of the following scenarios? Show a diagram to illustrate your results.
(a)current income rises in the foreign country
(b)the future marginal product of capital rises in the domestic country
(c)wealth rises in the foreign country

Accepted Answer

The answer of Consider a large open economy.What are the...

Question 8

In a large open economy,the home country's saving and investment equations are: S^d = 200 + 1400 r^w and I^d = 300 - 400 r^w. The foreign country's saving and investment equations are: S^d = 50 + 600r^w and I^d = 75 - 100 r^w. Calculate the equilibrium world real interest rate,saving and investment in each country,and the current account balance in each country.

Accepted Answer

The answer of In a large open economy,the home country's...

Question 9

Suppose the government of a large open economy reduces its spending,so that national saving increases.The result is
A)a decrease in the foreign country's net exports.
B)an increase in the real interest rate.
C)an increase in the foreign country's net exports.
D)a decrease in investment.

Accepted Answer

The answer of Suppose the government of a large open...

Question 10

What were the principal causes of the U.S.government budget deficits of the 1980s? How did these budget deficits lead to the twin deficits? According to the Ricardian equivalence proposition,should twin deficits arise as a result of tax cuts?

Accepted Answer

The answer of What were the principal causes of the...

Question 11

Assume that an increase in Costa Rica's government budget deficit reduced desired national saving by 10 million colon.Assuming Costa Rica is a small open economy,you would expect the government's action to
A)increase the current account balance by exactly 10 million colon.
B)increase the current account balance by less than 10 million colon.
C)reduce the current account balance by exactly 10 million colon.
D)reduce the current account balance by more than 10 million colon.

Accepted Answer

In a small open economy, the government's budget deficit increases the demand for loanable funds, which leads to an increase in the interest rate. As a result, the currency appreciates, making exports more expensive and imports cheaper, leading to a reduction in net exports. The reduction in net exports is precisely equal to the increase in national saving, which is 10 million colon in this case. Therefore, the current account balance would reduce by 10 million colon, as stated in option C.

Question 12

Consider a large open economy that has a positive current account balance.
(a)Suppose the domestic government increases the tax rate on firm revenues.Draw a diagram to explain the effects on the world real interest rate,saving in each country,investment in each country,and the current account balance in each country in equilibrium.Explain your work.
(b)In addition to the tax increase in part (a),suppose now that the foreign government increases lump-sum taxes on individuals.Draw a new diagram to incorporate the overall effects of both tax changes and explain the effects (from the initial equilibrium with neither tax change)on the world real interest rate,saving in each country,investment in each country,and the current account balance in both countries.Explain your work.

Accepted Answer

The answer of Consider a large open economy that has...

Question 13

Suppose the government of a small open economy reduces its spending,so that national saving increases.The result is
A)an increase in the real interest rate.
B)an increase in net exports.
C)a decrease in the real interest rate.
D)an increase in investment.

Accepted Answer

In a small open economy, an increase in national saving leads to an increase in net exports because the excess savings are lent abroad, increasing the supply of loanable funds in the global market, which can lead to a trade surplus.

Question 14

The government of a small open economy announces a tax cut of $100 this year,combined with a tax increase of $110 next year,when the interest rate is 10%.What are the effects of this change on the world real interest rate,national saving,investment,and the current account balance in equilibrium when
(a)Ricardian equivalence holds?
(b)Ricardian equivalence does not hold?

Accepted Answer

The answer of The government of a small open economy...

Question 15

Consider a large open economy that has a zero current account balance.What are the effects on the world real interest rate,national saving,investment,and the current account balance in equilibrium if
(a)future income rises?
(b)business taxes decline?
(c)government purchases decline?
(d)the future marginal product of capital declines?

Accepted Answer

The answer of Consider a large open economy that has...

Question 16

Assuming no change in the effective tax rate on capital,a decrease in the government budget deficit will reduce the current account deficit if and only if the decrease in the budget deficit
A)reduces desired national saving.
B)increases desired national saving.
C)reduces desired national investment.
D)increases desired national investment.

Accepted Answer

An decrease in the government budget deficit will reduce the amount of government borrowing and therefore decrease demand for loanable funds. This will lead to a decrease in interest rates and an increase in private investment, which will increase desired national saving. As a result, the current account deficit will decrease.

Question 17

A large open economy has desired national saving of S^d = 1200 + 1000 r^w,and desired national investment of I^d= 1000 - 500r^w.The foreign economy has desired national saving of = 1000 + 1000r^w,and desired national investment of = 1800 - 500r^w.Calculate the equilibrium values of r^w,CA,CA_For,S,I,S_For,and I_For.

Accepted Answer

The answer of A large open economy has desired national...

Question 18

A large open economy has desired national saving of S^d = 20 + 200r^w,and desired national investment of I^d = 30 - 200r^w.The foreign economy has desired national saving of = 40 + 100r^w,and desired national investment of = 75 - 400r^w. (a)Calculate the equilibrium values of r^w,CA,CA_For,S,I,S_For,and I_For. (b)Suppose S^d rises by 45,so that now S^d = 65 + 200r^w.Calculate the equilibrium values of r^w,CA,CA_For,S,I,S_For,and I_For. (c)Suppose,with S^d back to S^d = 20 + 200r^w,as in part (a),that I^d rises by 45,to I^d = 75 - 200r^w.Calculate the equilibrium values of r^w,CA,CA_For,S,I,S_For,and I_For.

Accepted Answer

The answer of A large open economy has desired national...

Quiz 5: Saving and Investment in the Open Economy

Consider a small open economy with desired national saving of Sd = 200 + 10,000rw and desired investment of Id = 1000 - 5000rw.If rw = 0.05,then a rise in government spending of 50 with no change in private saving causes net exports to become

Assuming no change in the effective tax rate on capital,an increase in the government budget deficit will reduce the current account deficit if and only if the increase in the budget deficit

In a large open economy like the United States,an increased government budget deficit which reduces national saving

An increase in a small open economy's government budget deficit that reduces national saving and the current account balance causes an

Suppose the government of a large open economy reduces its spending,so that national saving increases.The result is

What were the principal causes of the U.S.government budget deficits of the 1980s? How did these budget deficits lead to the twin deficits? According to the Ricardian equivalence proposition,should twin deficits arise as a result of tax cuts?

Assume that an increase in Costa Rica's government budget deficit reduced desired national saving by 10 million colon.Assuming Costa Rica is a small open economy,you would expect the government's action to

Suppose the government of a small open economy reduces its spending,so that national saving increases.The result is

Assuming no change in the effective tax rate on capital,a decrease in the government budget deficit will reduce the current account deficit if and only if the decrease in the budget deficit

Consider a small open economy with desired national saving of S^d = 200 + 10,000r^w and desired investment of I^d = 1000 - 5000r^w.If r^w = 0.05,then a rise in government spending of 50 with no change in private saving causes net exports to become