Question 1

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

Accepted Answer

The United States has a trade deficit, meaning that it imports more goods and services than it exports. This leads to a situation where domestic investment exceeds national saving, with the difference being made up by borrowing from other countries.

Question 2

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

Accepted Answer

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Question 3

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 4

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 5

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 6

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 can lead to higher interest rates, which in turn can increase the value of the currency and reduce the competitiveness of exports. This can lead to a decrease in the balance of trade, as exports become more expensive for foreign buyers and imports become cheaper for domestic consumers. Therefore, the correct choice is B - a budget deficit raises interest rates, which raises exchange rates and reduces the balance of trade.

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

If net exports are positive for China, it must be true that China is experiencing net outflows of capital.

Accepted Answer

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Question 9

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.

Accepted Answer

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Question 10

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) lead to a current account deficit.
E) decrease foreign portfolio investment.

Accepted Answer

An increase in U.S. interest rates relative to the rest of the world due to higher federal government budget deficits will attract foreign investment and cause an appreciation of the U.S. dollar relative to other currencies. This increase in the value of the dollar makes U.S. exports relatively more expensive and imports relatively cheaper, leading to a current account deficit.

Question 11

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 excess savings can be used to finance investments abroad, which leads to a financial account deficit in the balance of payments. This is currently the case in Japan, where the high level of savings has led to a persistent financial account deficit.

Question 12

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 13

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.

Accepted Answer

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Question 14

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 trade balance
D) the saving-investment deficit and the export deficit

Accepted Answer

The two measures often referred to as the "twin deficits" are the budget deficit (the amount by which government spending exceeds government revenue) and the trade balance (the difference between a country's exports and imports of goods and services).

Question 15

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

Accepted Answer

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Question 16

Explain the relationship between net exports and net foreign investment.

Accepted Answer

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Question 17

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 18

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

The answer of Based on the following information, calculate public...

Question 19

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

Accepted Answer

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Question 20

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.

Accepted Answer

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Quiz 29: Macroeconomics in an Open Economy

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

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

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

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

Persistent current account deficits in the United States

How might a budget deficit affect the balance of trade?

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

If net exports are positive for China, it must be true that China is experiencing net outflows of capital.

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

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

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

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

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.

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

Explain the relationship between net exports and net foreign investment.

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.)

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.

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