Question 1

In an open economy, if domestic citizens decide to save more, then the domestic real interest rate will ______ and the level of capital investment in the country will _____, holding other factors constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Accepted Answer

As domestic citizens decide to save more, more loanable funds are available to borrowers and domestic real interest rates fall, causing capital investment to increase.

Question 2

In an open economy, an increase in the government's budget deficit will ______ the domestic real interest rate and ______ the level of capital investment in the country, holding other factors constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Accepted Answer

An increase in the government's budget deficit leads to higher demand for funds in the loanable funds market, which leads to an increase in the domestic real interest rate. This increase in the interest rate makes it more expensive for firms to borrow funds for investment, leading to a decrease in the level of capital investment in the country. Therefore, an increase in the government's budget deficit would increase the domestic real interest rate and decrease the level of capital investment, holding other factors constant.

Question 3

In an open economy, a decrease in the government's budget deficit will ______ the domestic real interest rate and ______ the level of capital investment in the country, holding other factors constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Accepted Answer

When the government's budget deficit decreases, it means that the government is borrowing less money which decreases the demand for loanable funds. This causes the domestic real interest rate to decrease. A lower interest rate encourages more capital investment because it reduces the cost of borrowing, thus increasing the level of investment. Therefore, a decrease in the government's budget deficit will decrease the domestic real interest rate and increase the level of capital investment, holding other factors constant.

Question 4

Which of the following equations is equivalent to the equation S - NX = I?
A) S + KI = I
B) S - I = KI
C) S - KI = NX
D) S + I = NX - KI

Accepted Answer

This follows from the accounting identity NX + KI = 0 and the equation S − I = NX. We know NX = −KI and −NX = KI, so by substitution, S + KI = I.

Question 5

The sum of national saving and capital inflows from abroad must equal:
A) domestic investment in new capital goods.
B) capital outflows.
C) aggregate demand.
D) the trade deficit.

Accepted Answer

According to the national income accounting identity, national saving (S) plus capital inflows (CI) must equal domestic investment in new capital goods (I): S + CI = I. This identity reflects the fact that in a closed economy, national saving is the source of funds for investment, while in an open economy, capital inflows from abroad can supplement domestic saving to finance investment. Therefore, the correct answer is A, which reflects this identity.

Question 6

If domestic saving is less than domestic investment, then a country will have a ______ and positive net capital ______.
A) trade deficit; outflows
B) trade deficit; inflows
C) trade balance; inflows
D) trade surplus; outflows

Accepted Answer

If a country's domestic saving is less than its domestic investment, it means that the country is spending more than it is saving. This leads to a trade deficit, as the country will need to import capital from abroad to finance its investment. This is reflected in the positive net capital inflows, as capital is flowing into the country from abroad to finance the investment. Therefore, option B is the correct answer.

Question 7

Benefits of net capital inflows to a country include all of the following EXCEPT:
A) a larger pool of total savings.
B) a higher rate of investment in new capital.
C) a potentially higher growth rate.
D) interest and dividend payments owed to foreign investors.

Accepted Answer

Interest and dividend payments owed to foreign investors represent an outflow of resources from the country and thus are not a benefit. The other choices are all potential benefits of net capital inflows.

Question 8

During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to:
A) an inability of U.S. companies to compete in the international market.
B) a decline in private saving that resulted from an upsurge in consumption.
C) a decline in national saving caused largely by rapidly rising government budget deficits.
D) a worldwide recession that made it difficult for American companies to sell their products abroad.

Accepted Answer

The trade deficit ballooned during the 1980s due to a decline in national saving caused largely by rapidly rising government budget deficits. This decreased the amount of funds available for investment and led to increased borrowing from foreign sources, which in turn increased the trade deficit.

Question 9

If domestic saving is greater than domestic investment, then a country will have a ______ and positive net capital ______.
A) trade deficit; outflows
B) trade deficit; inflows
C) trade surplus; inflows
D) trade surplus; outflows

Accepted Answer

If domestic savings is greater than domestic investment then capital inflows are negative (there are capital outflows). This follows from the equation S + KI = I. Since KI is negative, NX must be positive (there must be a trade surplus), as is shown by the equation NX + KI = 0.

Question 10

The U.S. trade deficit has been mainly caused by:
A) production of inferior goods in the U.S.
B) unfair trade restrictions imposed by other countries on imports.
C) a low rate of national saving.
D) cheap labor in other countries.

Accepted Answer

The U.S. trade deficit is mainly caused by a low rate of national saving, which leads to a dependence on foreign borrowing to finance domestic consumption and investment. This in turn leads to an increase in imports and a decrease in exports, resulting in a trade deficit. Production of inferior goods, unfair trade restrictions, and cheap labor in other countries can also contribute to the trade deficit, but they are not the main causes.

Quiz 15: Aggregate Demand, Aggregate Supply, and Inflation

In an open economy, if domestic citizens decide to save more, then the domestic real interest rate will __ and the level of capital investment in the country will _, holding other factors constant.

In an open economy, an increase in the government's budget deficit will the domestic real interest rate and the level of capital investment in the country, holding other factors constant.

In an open economy, a decrease in the government's budget deficit will the domestic real interest rate and the level of capital investment in the country, holding other factors constant.

Which of the following equations is equivalent to the equation S - NX = I?

The sum of national saving and capital inflows from abroad must equal:

If domestic saving is less than domestic investment, then a country will have a and positive net capital .

Benefits of net capital inflows to a country include all of the following EXCEPT:

During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to:

If domestic saving is greater than domestic investment, then a country will have a and positive net capital .

The U.S. trade deficit has been mainly caused by: