Question 1

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

An increase in the domestic supply of loanable funds will lead to a decrease in the equilibrium interest rate, which will cause a decrease in international borrowing. However, the quantity of loanable funds used in the country will not necessarily change, as it depends on the demand for loanable funds from domestic borrowers, which is not given in the question. Therefore, choice A is the best answer.

Question 2

Which of the following is CORRECT?

Accepted Answer

The answer of Which of the following is CORRECT?
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Question 3

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

Accepted Answer

When the world real interest rate falls, lenders will receive less return on their loans. Thus, a country that is an international lender may decrease the amount of its lending in order to maintain its desired rate of return.

Question 4

All of the following are a current account transaction EXCEPT

Accepted Answer

A current account transaction refers to the trade of goods and services, as well as income flows between countries. Therefore, options A, B, and D all relate to the trade of goods and/or services, which is a type of current account transaction. Option C, on the other hand, refers to investing abroad, which is a capital account transaction, not a current account transaction.

Question 5

The private sector balance is equal to ________.

Accepted Answer

The private sector balance, also known as the saving-investment balance, is the difference between saving and investment in the private sector. Therefore, the correct option is C, which states that the private sector balance is equal to saving minus investment. Option A is incorrect because net taxes can include taxes on individuals or businesses, which would affect the private sector balance differently. Option B is incorrect because investment is included in the private sector balance equation, not subtracted from it. Option D is incorrect because it does not take into account the saving component.

Question 6

The current account balance is equal to

Accepted Answer

The current account balance is equal to net exports (the difference between a country's exports and imports) plus net interest income (the difference between the interest income a country receives from abroad and the interest payments it makes to foreign entities) plus net transfers (the difference between transfers received from abroad and transfers sent abroad).

Question 7

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 equated to the sum of the government sector balance (government savings minus its investments) and the private sector balance (private savings minus private investments). This relationship highlights how the external balance (net exports) is linked to the internal balances of both the government and private sectors.

Question 8

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 9

The country of Pimm exports $500 billion worth of goods and services and imports $400 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 exports minus imports plus net interest income and net transfers. Here, it is $500 billion (exports) - $400 billion (imports) - $50 billion (net interest income) + $0 (net transfers) = $50 billion.

Question 10

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 does not affect the equilibrium quantity of loanable funds used domestically because the country is an international lender and the interest rate is determined on the world market. However, the increase in supply means the country has more funds available for international lending, thus its international lending increases.

Question 11

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 equal to net taxes (T) minus government expenditure (G).

Question 12

Which of the following are included in the U.S. current account balance?
I.exports to Japan
II.interest payments made to Canada
III.transfer payments made to Israel

Accepted Answer

The U.S. current account balance includes all three items: exports to other countries (like Japan), interest payments made to foreign investors (such as those in Canada), and transfer payments (like those made to Israel). These components reflect trade in goods and services, income from foreign investments, and transfers, all of which are part of the current account.

Question 13

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.

Question 14

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 the difference between national saving (S) and investment (I). Therefore, the equation that represents the private sector balance is S - I.

Question 15

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 current account is the sum of net exports (exports minus imports of goods and services), net income (primary and secondary income), and net transfers. Since net interest and net transfers are $0, and the 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, the current account surplus is $1 billion.

Question 16

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

An increase in the domestic demand for loanable funds will shift the demand curve for loanable funds to the right, leading to an increase in both the equilibrium quantity of loanable funds used in the country and the country's international borrowing. Therefore, option C is the correct answer.

Question 17

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

Accepted Answer

If net interest and net transfers are zero, and a country's exports exceed its imports, the country has a surplus in the current account. The current account includes the trade balance (exports - imports), as well as net income and net transfers. Therefore, if exports exceed imports and there is no net income or net transfers, the current account must be in surplus.

Question 18

The government sector balance is equal to ________.

Accepted Answer

The government sector balance measures the difference between the government's revenue (net taxes) and spending (government purchases of goods and services), so the correct formula is net taxes minus government purchases of goods and services.

Question 19

Which of the following statements is TRUE?

Accepted Answer

A is correct because if private saving is greater than private investment, then the excess saving has to go somewhere, and typically it goes into the financial markets where it is used to finance private investment, resulting in a surplus for the private sector.

B is correct because if private investment is greater than private saving, then the excess investment has to be financed from somewhere, and typically it comes from borrowing or selling assets, resulting in a deficit for the private sector.

C is correct because if private investment is greater than private saving, then the excess investment must be financed from somewhere, and typically it comes from borrowing from either the government or the net export sector, resulting in a surplus for either of them.

Question 20

Net exports equals

Accepted Answer

The answer of Net exports equals
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Quiz 9: The Exchange Rate and the Balance of Payments

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 .