Macroeconomics 9th Edition Abel Test Bank 1

Macroeconomics 9th Edition
Abel Test Bank
Full download at link:
Test Bank: https://testbankpack.com/p/test-bank-for-macroeconomics-

9th-edition-abel-bernanke-croushore-0134167392-9780134167398/
Solution Manual: https://testbankpack.com/p/solution-manual-for-

macroeconomics-9th-edition-abel-bernanke-croushore-0134167392-
9780134167398/
Macroeconomics, 9e (Abel/Bernanke/Croushore)
Chapter 5 Saving and Investment in the Open Economy
5.1 Balance of Payments Accounting
1) Which of the following transactions would not be included in the current account of the home
country?
A) A consumer good is imported into the home country.
B) A home country resident makes a deposit in a foreign bank.
C) A foreign student pays tuition to a university in the home country.
D) A home country resident receives income on his or her foreign assets.
Answer: B
Diff: 2
Topic: Section: 5.1
Question Status: New
1
Copyright © 2017 Pearson Education, Inc.
2) Net exports of goods are known as
A) the balance of payments.
B) the merchandise trade balance.
C) the current account.
D) the financial account.
Answer: B
Diff: 1
Topic: Section: 5.1
Question Status: Revised
3) If a country's merchandise exports exceed its merchandise imports it has a

A) trade surplus.
B) trade deficit.
C) current account surplus.
D) current account deficit.
Answer: A
Diff: 1
Topic: Section: 5.1
Question Status: Previous Edition
4) If France has a trade deficit, then

A) imports into France exceed exports from France.
B) exports from France exceed imports into France.
C) imports into the United States from France exceed exports from the United States into France.
D) imports into France from the United States exceed exports from France into the United States.
Answer: A
Diff: 1
Topic: Section: 5.1
2
5) If all international factor payment flows are investment income, then net investment income
from abroad equals
A) net exports.
B) the current account balance.
C) the trade balance.
D) net income from abroad.
Answer: D
Diff: 1
Topic: Section: 5.1
6) If the United States donates footballs to Japan, how is the transaction recorded on the U.S.
balance of payments accounts?
A) Decline in merchandise trade; increase in financial account
B) Decline in financial account; increase in merchandise trade
C) Decline in net unilateral transfers; increase in merchandise trade
D) Decline in merchandise trade; increase in net unilateral transfers
Answer: C
Diff: 2
Topic: Section: 5.1
7) If the United States sells computers to Russia, and uses the proceeds to buy shares of stock in
Russian companies, the U.S. trade balance ________ and the U.S. financial account balance
________.
A) rises; rises
B) rises; falls
C) falls; falls
D) falls; rises
Answer: B
Diff: 2
Topic: Section: 5.1
8) The current account balance consists of

A) the trade balance plus the services balance.
B) net exports of goods and services, minus net unilateral transfers.
C) net exports of goods and services, plus net income from abroad, plus net unilateral transfers.
D) net exports of goods and services, plus net income from abroad, plus net unilateral transfers,
minus the financial account balance.
Answer: C
Diff: 1
Topic: Section: 5.1
3
9) The difference between the current account balance and net exports is
A) the capital account.
B) net unilateral transfers plus net factor payments from abroad.
C) adjustments in net foreign assets.
D) income receipts from foreign assets.
Answer: B
Diff: 1
Topic: Section: 5.1
10) If a U.S. firm buys tulips from a Dutch firm and the Dutch firm uses the dollars it gets to buy
U.S. stocks, the U.S. trade balance ________ and the U.S. financial account ________.
A) rises; rises
B) rises; falls
C) falls; falls
D) falls; rises
Answer: D
Diff: 2
Topic: Section: 5.1
11) If a U.S. company imports 10 Toyotas from Japan at $15,000 each, and the Japanese
company buys airline tickets on a U.S. airline with the money, how does this affect the U.S.
A) Decline in merchandise trade; increase in financial account
B) Decline in financial account; increase in merchandise trade
C) Decline in merchandise trade; increase in services
D) Decline in services; increase in merchandise trade
Answer: C
Diff: 2
Topic: Section: 5.1
12) Suppose a wealthy Canadian donates $10 million to charities in Mexico. Mexican net exports
________ and the current account balance ________.
A) fall; rises
B) rise; rises
C) are unchanged; is unchanged
D) fall; is unchanged
Answer: D
Diff: 2
Topic: Section: 5.1
4
13) If a French company exports $2 million of machinery to Italy and French tourists spend $2
million at Italian beaches, the French merchandise trade balance ________, and the French
financial account balance ________.
A) rises; rises
B) rises; is unchanged
C) is unchanged; is unchanged
D) is unchanged; rises
Answer: B
Diff: 2
Topic: Section: 5.1
14) If a French company sells 1000 gallons of Perrier to a U.S. company at 5 euros per gallon,
and uses the money to buy stock in a Spanish cork company, how does this affect the French
A) Decrease in financial account; increase in merchandise trade
B) Decrease in merchandise trade; increase in financial account
C) Decrease in net investment income from abroad; increase in financial account
D) Decrease in merchandise trade; increase in net income from abroad
Answer: A
Diff: 2
Topic: Section: 5.1
15) If a Japanese company sells 200 VCRs to a French company and uses the money to buy U.S.
government bonds, the Japanese merchandise trade balance ________, and the Japanese
financial account balance ________.
A) rises; rises
B) rises; falls
C) falls; falls
D) falls; rises
Answer: B
Diff: 2
Topic: Section: 5.1
16) Which of the following would be part of the nation's current account?
A) An old house purchased by an American in Italy
B) The purchase of a U.S. Treasury bond by a foreigner
C) The interest an American earns on a British bond
D) A factory built by the Japanese in the United States
Answer: C
Diff: 2
Topic: Section: 5.1
5
17) A country has a current account surplus if
A) the value of its exports exceeds the value of its imports, assuming net income from foreign
assets and net unilateral transfers have a value of zero.
B) the value of its net exports of services exceeds the value of its net exports of goods.
C) it receives more income from foreign assets than it pays to foreigners for foreign-owned
domestic assets.
D) its capital inflows exceed its capital outflows.
Answer: A
Diff: 1
Topic: Section: 5.1
18) Which of the following would be part of the nation's financial account?
A) A night club show seen by an American in Mexico City
B) A dividend from a British equity owned by an American
C) A payment to the Philippine government for the use of military bases in their country
D) One hundred shares of British Petroleum stock purchased by an American
Answer: D
Diff: 2
Topic: Section: 5.1
19) If a French company exports $2 million of machinery to Italy and French tourists spend $2
million at Italian beaches, the Italian current account balance ________, and the Italian financial
account balance ________.
A) rises; rises
B) rises; is unchanged
C) is unchanged; is unchanged
D) is unchanged; rises
Answer: C
Diff: 2
Topic: Section: 5.1
20) The balance of payments equals

A) the sum of the current account and the financial account.
B) the current account minus net unilateral transfers.
C) net investment income from abroad.
D) the net increase in a country's official reserve assets.
Answer: D
Diff: 1
Topic: Section: 5.1
6
21) A negative value for the U.S. official reserve assets line in the balance of payments accounts
means that
A) U.S. residents have sold more gold to foreigners than they bought.
B) U.S. residents bought more gold from foreigners than they sold.
C) the U.S. central bank has increased its holdings of foreign reserve assets.
D) the U.S. central bank has decreased its holdings of foreign reserve assets.
Answer: C
Diff: 2
Topic: Section: 5.1
22) If the Federal Reserve buys $3 billion worth of Japanese yen and sells $5 billion of euros,
how does this affect the balance of payments?
A) Falls by $2 billion
B) Rises by $2 billion
C) Rises by $3 billion
D) Falls by $5 billion
Answer: A
Diff: 2
Topic: Section: 5.1
23) If the Federal Reserve buys $3 billion worth of Japanese yen, $6 billion of euros, and sells $5
billion of British pounds, how does this affect the balance of payments?
A) Falls by $4 billion
B) Rises by $4 billion
C) Rises by $9 billion
D) Falls by $5 billion
Answer: B
Diff: 2
Topic: Section: 5.1
24) Suppose the current account shows debits of $5.3 billion and credits of $4.7 billion. The
current account balance is ________, and the financial account balance is ________.
A) +$0.6 billion; -$0.6 billion
B) +$0.6 billion; +$0.6 billion
C) -$0.6 billion; -$0.6 billion
D) -$0.6 billion; +$0.6 billion
Answer: D
Diff: 2
Topic: Section: 5.1
7
25) A financial account surplus necessarily implies
A) a balance of payments surplus.
B) a current account surplus.
C) a current account deficit.
D) an increase in the nation's official reserve assets.
Answer: C
Diff: 1
Topic: Section: 5.1
26) If the United States had a financial account deficit of $50 billion, we could say the United
States had
A) net imports of $50 billion.
B) net foreign borrowing of $50 billion.
C) acquired net foreign assets of $50 billion.
D) a current account deficit of $50 billion.
Answer: C
Diff: 1
Topic: Section: 5.1
27) A country's financial account balance decreases if

A) its current account balance increases.
B) its income payment inflows on foreign assets decrease.
C) its domestic residents working abroad reduce the income they send home to their families.
D) foreigners increase their purchases of its existing assets.
Answer: A
Diff: 1
Topic: Section: 5.1
28) If a country has a current account surplus, it also has

A) a financial account surplus.
B) an increase in its official reserve assets.
C) a balance of payments deficit.
D) an increase in its holding of net foreign assets.
Answer: D
Diff: 2
Topic: Section: 5.1
8
29) If there are no net factor payments from abroad and no unilateral transfers, net exports of $10
billion is the same as
A) a current account deficit of $10 billion.
B) a financial account surplus of $10 billion.
C) net acquisition of foreign assets of $10 billion.
D) net foreign borrowing of $10 billion.
Answer: C
Diff: 1
Topic: Section: 5.1
30) An economic benefit of capital outflows is that they

A) create future income payment inflows.
B) increase domestic investment.
C) reduce domestic saving.
D) reduce domestic unemployment.
Answer: A
Diff: 2
Topic: Section: 5.1
31) The United States became a net debtor because

A) it ran consistently large current account deficits.
B) it ran consistently large current account surpluses.
C) it lent a lot to people in foreign countries.
D) it provided much foreign aid to other countries.
Answer: A
Diff: 1
Topic: Section: 5.1
32) A friend claims that the United States is a net international debtor. The best way of testing
this claim is to see whether
A) U.S. foreign liabilities exceeded U.S. foreign income.
B) U.S. receipts from foreign assets exceeded U.S. payments to foreign owners of U.S. assets.
C) U.S. official reserve assets were positive or negative.
D) the United States ran a balance of payments surplus or deficit last year.
Answer: B
Diff: 2
Topic: Section: 5.1
9
33) Suppose output is $35 billion, government purchases are $10 billion, desired consumption is
$15 billion, and desired investment is $6 billion. Net foreign lending would be equal to
A) -$4 billion.
B) -$2 billion.
C) $2 billion.
D) $4 billion.
Answer: D
Diff: 3
Topic: Section: 5.1
34) 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.
Answer: B
Diff: 1
Topic: Section: 5.1
35) Assume that an increase in Costa Rica's government budget deficit reduced desired national
saving by 10 million colon. Assuming Costa rice 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.
Answer: C
Diff: 2
Topic: Section: 5.1
36) 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.
Answer: D
Diff: 2
Topic: Section: 5.1
10
37) 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.
Answer: B
Diff: 2
Topic: Section: 5.1
38) Suppose a country has the following balance of payments data.
(a) Calculate the current account balance.

(b) Calculate the financial account balance.
(c) Calculate the trade balance.
(d) Calculate net factor payments.
Answer:
(a) -60
(b) 60
(c) -20
(d) -40
Diff: 2
Topic: Section: 5.1
11
39) Suppose a country has the following balance of payments data.

(b) Calculate the financial account balance.
(c) Calculate the trade balance.
(d) Calculate net factor payments.
Answer:
(a) -70
(b) 70
(c) -40
(d) -30
Diff: 2
Topic: Section: 5.1
12
40) For each of the following transactions, explain what happens to the merchandise trade
balance, current account balance, and financial account balance in both the United States and
Mexico. The exchange rate is 2 Mexican pesos per U.S. dollar.
(a) A Mexican firm spends 4 million pesos to buy radiology equipment from a U.S. firm.
(b) A U.S. firm buys 20,000 sombreros at 20 pesos each.
(c) Mexican computer firms send 200 programmers to universities in the United States, paying
tuition and expenses of $3000 each.
(d) A Mexican entrepreneur gives 50,000 pesos to the United Way of San Antonio, Texas.
(e) Mexican investors buy $10 million worth of 30-year U.S. Treasury bonds.
Answer:
(a) U.S. merchandise trade balance and current account rise $2 million, financial account
declines by $2 million; Mexican merchandise trade balance and current account decline by 4
million pesos, financial account rises by 4 million pesos.
(b) U.S. merchandise trade balance and current account decline by $200,000, financial account
rises by $200,000; Mexican merchandise trade balance and current account rise by 400,000
pesos, financial account declines by 400,000 pesos.
(c) U.S. merchandise trade balance is unchanged, current account balance rises by $600,000,
financial account declines by $600,000; Mexican merchandise trade balance is unchanged,
current account balance falls by 1.2 million pesos, financial account rises by 1.2 million pesos.
(d) U.S. merchandise trade balance is unchanged, current account balance rises by $25,000,
financial account declines by $25,000; Mexican merchandise trade balance is unchanged, current
account balance declines by 50,000 pesos, financial account rises by 50,000 pesos.
(e) No change in any accounts in either country.
Diff: 2
Topic: Section: 5.1
41) Suppose an economy has output of 2100, government spending of 40, consumption of 1600,
and absorption of 1940. Calculate the equilibrium values of investment and net exports.
Answer: Since absorption = C + I + G, then 1940 = 1600 + I + 40, so I = 1940 - 1640 = 300.
Net exports = Y - absorption = 2100 - 1940 = 160.
Diff: 2
Topic: Section: 5.1
42) How did the United States become a net debtor in the 1980s? Is our foreign debt a significant
problem? Explain.
Answer: In the 1980s, the United States ran large current account deficits, which had to be
financed by net foreign borrowing. But the foreign debt doesn't represent a significant problem
because it remains small relative to our GDP and because it is mostly in the form of portfolio
investment rather than direct investment. But it is worrisome that the increased foreign debt
hasn't been accompanied by a rise in our capital stock.
Diff: 2
Topic: Section: 5.1
13
5.2 Goods Market Equilibrium in an Open Economy
1) In goods market equilibrium in an open economy,

A) the desired amount of exports must equal the desired amount of imports.
B) the desired amount of exports must equal the desired amount of imports less the amount lent
abroad.
C) the desired amount of national saving must equal the desired amount of domestic investment.
D) the desired amount of national saving must equal the desired amount of domestic investment
plus the amount lent abroad.
Answer: D
Diff: 2
Topic: Section: 5.2
2) The goods market equilibrium condition in an open economy shows that

A) NX = Sd - Id.
B) Sd = NX - Id.
C) Sd = Id - NX.
D) Sd = Id.
Answer: A
Diff: 1
Topic: Section: 5.2
3) In goods market equilibrium in an open economy,

A) the desired amount of exports must equal the desired amount of imports.
B) the desired amount of exports must equal the desired amount of imports less the amount lent
abroad.
C) the desired amount of national saving must equal the desired amount of domestic investment.
D) the desired amount of national saving must equal the desired amount of domestic investment
plus the current account balance.
Answer: D
Diff: 2
Topic: Section: 5.2
4) Total spending by domestic residents, businesses, and governments is called

A) investment.
B) net domestic purchases.
C) absorption.
D) GDP.
Answer: C
Diff: 1
Topic: Section: 5.2
14
5) Absorption refers to
A) the total amount of imports purchased by a country.
B) the net amount of imports purchased by a country.
C) total spending by domestic residents, businesses, and governments.
D) GDP less desired consumption, desired investment, and government purchases.
Answer: C
Diff: 1
Topic: Section: 5.2
6) Suppose output is $1000 billion, government purchases are $200 billion, desired consumption
is $700 billion, and desired investment is $150 billion. Net foreign lending would be equal to
A) -$150 billion.
B) -$50 billion.
C) $50 billion.
D) $150 billion.
Answer: B
Diff: 2
Topic: Section: 5.2
$15 billion, and net exports are $4 billion. Then desired investment equals
A) $2 billion.
B) $4 billion.
C) $6 billion.
D) $8 billion.
Answer: C
Diff: 2
Topic: Section: 5.2
$15 billion, and desired investment is $6 billion. Desired savings is equal to
A) $2 billion.
B) $10 billion.
C) $14 billion.
D) $16 billion.
Answer: B
Diff: 2
Topic: Section: 5.2
15
$15 billion, and desired investment is $6 billion. Absorption is equal to
A) $25 billion.
B) $31 billion.
C) $35 billion.
D) $39 billion.
Answer: B
Diff: 2
Topic: Section: 5.2
is $320 billion, and net exports are $35 billion. Then desired investment equals
A) $20 billion.
B) $30 billion.
C) $35 billion.
D) $45 billion.
Answer: D
Diff: 2
Topic: Section: 5.2
is $320 billion, and net exports are $35 billion. Absorption is equal to
A) $405 billion.
B) $420 billion.
C) $435 billion.
D) $440 billion.
Answer: A
Diff: 2
Topic: Section: 5.2
12) Suppose output is $35 billion, government purchases are $10 billion, consumption is $15
billion, and net exports are $4 billion. Assume net factor payments equal 0.
(a) Calculate the equilibrium amount of investment. Show your work.
(b) Calculate the equilibrium amount of absorption. Show your work.
(c) Calculate the equilibrium amount of the financial account balance. Show your work.
Answer:
(a) I = Y - (C + G + NX) = 35 - (15 + 10 + 4) = 6.
(b) Absorption = C + I + G = 15 + 6 + 10 = 31.
(c) FA = -NX = -4.
Diff: 2
Topic: Section: 5.2
16
5.3 Saving and Investment in a Small Open Economy
1) An economy is considered a small open economy if it

A) is too small to affect the world real interest rate.
B) has GDP less than 1% of world GDP.
C) doesn't trade internationally.
D) has a zero trade balance.
Answer: A
Diff: 2
Topic: Section: 5.3
2) In a saving—investment diagram for a small open economy

A) the saving curve is vertical at some fixed level of output.
B) the saving curve is horizontal at some fixed interest rate.
C) the real interest rate is fixed at the world real interest rate.
D) equilibrium requires that Sd = Id.
Answer: C
Diff: 1
Topic: Section: 5.3
3) A small open economy has a current account balance of zero. A rise in the world real interest
rate causes
A) a current account surplus.
B) a financial account surplus.
C) net borrowing from abroad.
D) absorption to exceed income.
Answer: A
Diff: 2
Topic: Section: 5.3
4) A small open economy has a current account balance of zero. A rise in its investment demand
causes
A) a current account surplus.
B) a financial account deficit.
C) income to exceed absorption.
D) net borrowing from abroad.
Answer: D
Diff: 2
Topic: Section: 5.3
17
5) A small open economy increases its investment demand. This causes the world real interest
rate to ________ and the country's current account balance to ________.
A) rise; fall
B) remain unchanged; rise
C) rise; rise
D) remain unchanged; fall
Answer: D
Diff: 2
Topic: Section: 5.3
6) A small open economy reduces its desired saving. This causes the world real interest rate to
________ and the country's current account balance to ________
A) fall; fall
C) fall; rise
Answer: D
Diff: 2
Topic: Section: 5.3
7) A small open economy increases its desired saving. This causes the world real interest rate to
________ and the country's current account balance to ________.
A) fall; fall
C) fall; rise
Answer: B
Diff: 2
Topic: Section: 5.3
8) When a temporary beneficial supply shock hits a small open economy, it causes the current
account to ________ and investment to ________.
A) fall; fall
B) rise; remain unchanged
C) fall; remain unchanged
D) rise; fall
Answer: B
Diff: 2
Topic: Section: 5.3
18
9) When future labor income falls in a small open economy, it causes the current account to
________ and investment to ________.
A) fall; rise
D) rise; rise
Answer: B
Diff: 2
Topic: Section: 5.3
10) If there is an increase in the future marginal product of capital in a small open economy, it
causes the current account to ________ and saving to ________.
A) fall; rise
D) rise; rise
Answer: C
Diff: 2
Topic: Section: 5.3
11) If there is a decrease in taxes on business firms in a small open economy, it causes the
current account to ________ and the equilibrium amount of saving to ________.
A) fall; fall
D) rise; fall
Answer: C
Diff: 2
Topic: Section: 5.3
12) If there is an increase in taxes on business firms in a small open economy, it causes the
current account to ________ and the equilibrium quantity of saving to ________.
A) fall; fall
D) rise; fall
Answer: B
Diff: 2
Topic: Section: 5.3
19
13) If a freeze destroys much of the crop of an agricultural nation, then
A) the desired investment curve would shift to the left.
B) the desired investment curve would shift to the right.
C) net foreign lending would increase.
D) net foreign lending would decrease.
Answer: D
Diff: 2
Topic: Section: 5.3
14) The best weather in a decade has given Australia a bumper wheat crop. Australia is a small
open economy. Based on this information alone, you would expect that
A) desired investment would decrease.
B) desired investment would increase.
C) the current account would increase.
D) the current account would decrease.
Answer: C
Diff: 2
Topic: Section: 5.3
15) 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 net exports equal
A) 100.
B) 50.
C) -50.
D) -100.
Answer: C
Diff: 2
Topic: Section: 5.3
desired investment of Id = 1000 - 5000rw. If rw = 0.05, and output = 5000, then absorption
equals
A) 5100.
B) 5050.
C) 4950.
D) 4900.
Answer: B
Diff: 2
Topic: Section: 5.3
20
17) In a small open economy, Sd = 200 + 500rw and Id = 300 - 200rw. If rw = 0.1, then net
exports =
A) -50.
B) -30.
C) 30.
D) 50.
Answer: B
Diff: 2
Topic: Section: 5.3
18) What determines the interest rate in a small open economy?

Answer: The world real interest rate is determined by the aggregate supply of saving and
demand for investment in the international capital market. Changes in domestic saving or
investment in a small open economy do not affect the interest rate.
Diff: 2
Topic: Section: 5.3
19) In a small open economy,

Sd = $5 billion + ($100 billion) rw,
Id = $10 billion - ($50 billion) rw,
Y = $50 billion,
G = $3 billion,
rw = .06.
(b) Calculate net exports.
(c) Calculate desired consumption.
(d) Calculate absorption.
Answer:
(a) $4 billion
(b) $4 billion
(c) $36 billion
(d) $46 billion
Diff: 2
Topic: Section: 5.3
21
20) Consider a small open economy with desired national saving of Sd = 20 + 200rw and desired
investment of Id = 30 - 200rw.
Calculate national saving, investment, and the current account balance in equilibrium when the
real world interest rate is
(a) rw = 0.025.
(b) rw = 0.05.
(c) rw = 0.0.
(d) Now suppose something causes desired national saving to increase by 10, so that it is now Sd
= 30 + 200rw. Repeat parts (a), (b), and (c).
(e) Suppose, with desired national saving at its original level of Sd = 20 + 200rw, something
causes desired investment to rise by 10, to Id = 40 - 200rw. Repeat parts (a), (b), and (c).
Answer:
(a) S = 25, I = 25, CA = 0.
(b) S = 30, I = 20, CA = 10.
(c) S = 20, I = 30, CA = -10.
(d) rw = 0.025: S = 35, I = 25, CA = 10.
rw = 0.050: S = 40, I = 20, CA = 20.
rw = 0.000: S = 30, I = 30, CA = 0.
(e) rw = 0.025: S = 25, I = 35, CA = -10.
rw = 0.050: S = 30, I = 30, CA = 0.
rw = 0.000: S = 20, I = 40, CA = -20.
Diff: 2
Topic: Section: 5.3
21) Consider a small open economy with desired national saving of Sd = 1000 + 1000rw and
desired investment of Id = 1000 - 500rw.
Calculate national saving, investment, and the current account balance in equilibrium when the
real world interest rate is
(a) rw = 0.025.
(b) rw = 0.05.
(c) rw = 0.0.
Answer:
(a) S = 1025, I = 987.5, CA =37.5.
(b) S = 1050, I = 975, CA = 75.
(c) S = 1000, I = 1000, CA = 0.
Diff: 2
Topic: Section: 5.3
22
22) In a small open economy, describe what happens when an increase in wealth causes national
saving to decline. Explain the impact on the real interest rate, saving, investment, net exports,
and absorption in equilibrium.
Answer: With the saving curve shifting to the left in a small open economy, in equilibrium,
saving declines, but investment and the real interest rate are unchanged. Since NX = S - I, NX
declines. Since absorption equals output minus net exports, and net exports decline, then
absorption increases.
Diff: 2
Topic: Section: 5.3
23) Consider a small open economy in equilibrium with a zero current account balance. What
happens to national saving, investment, and the current account balance in equilibrium if
(a) future income rises?
(b) business taxes rise?
(c) government expenditures decline temporarily?
(d) the future marginal product of capital rises?
Answer:
(a) Saving curve shifts left, so S falls, I is unchanged, CA falls.
(b) Investment curve shifts left, so S is unchanged, I falls, CA rises.
(c) Saving curve shifts right, so S rises, I is unchanged, CA rises.
(d) Investment curve shifts right, so S is unchanged, I rises, CA falls.
Diff: 2
Topic: Section: 5.3
23
24) Consider a small open economy in equilibrium. What happens to the real interest rate,
national saving, investment, and the current account balance in equilibrium in each of the
following situations (each taken separately). Explain which curve shifts and why, and show a
diagram explaining your results. (You may assume that none of the shocks is large enough to
significantly affect labor supply or labor demand significantly.)
(a) wealth declines
(b) business taxes decline
(c) income rises temporarily
Answer:
(a) The decline in wealth causes desired consumption to decline today and in the future; with no
decline in current income, desired saving increases, so the desired saving curve shifts right. The
world real interest rate is unchanged, so investment is unchanged, saving increases, and the
current account balance increases.
(b) A decline in business taxes leads to a decline in the user cost of capital, increasing the
desired capital stock and thus desired investment. As a result, the desired investment curve shifts
right. In equilibrium, the world real interest rate is unchanged, so saving is unchanged,
investment increases and the current account balance declines.
(c) A temporary increase in income causes desired saving to increase, as people will only spend
part of the increase in income currently. In equilibrium, the shift to the right in the desired saving
curve does not affect the world real interest rate or investment, but saving rises as does the
current account balance.
Diff: 2
Topic: Section: 5.3
24
25) Consider a small open economy that is in equilibrium with a current account surplus.
(a) Draw a diagram showing this situation.
(b) Now suppose that future income increases. Show what happens in your diagram. What
happens to the world real interest rate and the equilibrium quantities of saving, investment, and
the current account balance?
(c) Repeat parts (a) and (b) for the case of a large open economy, showing a situation in which
the home country initially has a current account surplus. Draw a diagram and describe how the
rise in future income in the home country affects all four variables (the world real interest rate
and the equilibrium quantities of saving, investment, and the current account balance) in both
countries.
Answer:
(b) The increase in future income shifts the desired saving curve to the left, so the new
equilibrium quantity of saving declines, the equilibrium quantity of investment does not change,
the current account balance declines, and the world real interest rate does not change.
(c) In a large open economy, the increase in future income in the home country shifts the desired
saving curve to the left, which causes the world real interest rate to rise to restore equilibrium. In
the home country, the equilibrium quantity of saving declines and the equilibrium quantity of
investment declines. In the foreign country, the equilibrium quantity of saving rises, the
equilibrium quantity of investment declines, so the current account balance increases (or the
current account deficit declines). Since the current account balance increases in the foreign
country, it decreases in the domestic country.
Diff: 2
Topic: Section: 5.3
26) Consider a small open economy in equilibrium with a current account deficit.
(a) Draw a diagram showing this situation.
(b) What happens to national saving, investment, and the current account balance in equilibrium
if government expenditures rise temporarily? Show this result in your diagram.
Answer: The diagram must have an initial equilibrium with the quantity of investment
exceeding the quantity of national saving, so that the current account balance is negative. The
temporary rise in government expenditures causes the desired national saving curve to shift to
the left. In equilibrium, national saving declines, investment is unchanged (because the world
real interest rate is unchanged), and the current account balance declines.
Diff: 2
Topic: Section: 5.3
25
5.4 Saving and Investment in Large Open Economies
1) A large open economy

A) dominates world trade in one or more products.
B) is physically larger than all small open economies.
C) has a larger population than all small open economies.
D) lends or borrows enough in the international capital market to influence the world real interest
rate.
Answer: D
Diff: 1
Topic: Section: 5.4
2) When there are two large open economies, the world real interest rate will be such that
A) desired international lending by one country equals desired international borrowing by the
other country.
B) desired international lending will be the same in both countries.
C) desired international borrowing will be the same in both countries.
D) desired international lending and borrowing will be zero in both countries.
Answer: A
Diff: 1
Topic: Section: 5.4
3) When there are two large open economies, if desired international lending by the domestic
country exceeds desired international borrowing by the foreign country, then
A) domestic saving must rise.
B) domestic saving must fall.
C) the world real interest rate must fall.
D) the world real interest rate must rise.
Answer: C
Diff: 2
Topic: Section: 5.4
4) When there are two large open economies, if desired international borrowing by the domestic
country exceeds desired international lending by the foreign country, then
A) domestic investment must fall.
B) domestic investment must rise.
C) the world real interest rate must fall.
D) the world real interest rate must rise.
Answer: D
Diff: 2
Topic: Section: 5.4
26
5) A large open economy reduces its investment demand. This causes the world real interest rate
to ________ and the country's current account balance to ________.
A) rise; fall
B) rise; rise
C) fall; rise
D) fall; fall
Answer: C
Diff: 2
Topic: Section: 5.4
6) A large open economy increases its desired saving. This causes the world real interest rate to
________ and the country's current account balance to ________.
A) fall; fall
C) fall; rise
Answer: C
Diff: 2
Topic: Section: 5.4
7) In a two-economy model of the United States and another large economy made up of the rest
of the world, if desired saving by the rest of the world declined
A) U.S. investment would increase.
B) U.S. saving would decrease.
C) the world real interest rate would increase.
D) the world real interest rate would decrease.
Answer: C
Diff: 2
Topic: Section: 5.4
8) When a temporary adverse supply shock hits a large open economy, it causes the current
account to ________ and investment to ________.
A) fall; fall
D) rise; fall
Answer: A
Diff: 2
Topic: Section: 5.4
27
9) When future labor income falls in a large open economy, it causes the current account to
A) fall; rise
C) fall; fall
D) rise; rise
Answer: D
Diff: 2
Topic: Section: 5.4
10) When future labor income rises in a large open economy, it causes the current account to
A) fall; rise
C) fall; fall
D) rise; rise
Answer: C
Diff: 2
Topic: Section: 5.4
11) If there's an increase in the future marginal product of capital in a large open economy, it
causes the current account to ________ and saving to ________.
A) fall; rise
D) rise; rise
Answer: A
Diff: 2
Topic: Section: 5.4
12) If business taxes rise in a large open economy, it causes the current account to ________ and
saving to ________.
A) fall; fall
D) rise; fall
Answer: D
Diff: 2
Topic: Section: 5.4
28
13) A large country imposes capital controls that prohibit foreign borrowing and lending by
domestic residents. The country is currently running a financial account surplus. The imposition
of the capital controls will cause
A) net exports to decrease.
B) real domestic interest rates to rise.
C) real world interest rates to rise.
D) desired national saving to fall.
Answer: B
Diff: 2
Topic: Section: 5.4
14) A large country imposes capital controls that prohibit foreign borrowing and lending by
domestic residents. The country is currently running a financial account deficit. The imposition
of the capital controls will cause
A) net exports to increase.
B) real domestic interest rates to rise.
C) real world interest rates to fall.
D) desired national saving to fall.
Answer: D
Diff: 3
Topic: Section: 5.4
15) Real domestic interest rates would increase in a large open economy if
A) there were a temporary negative domestic supply shock.
B) the government imposed capital controls and the capital and financial account had been in
deficit.
C) foreigners were more willing to save.
D) there were a temporary negative supply shock abroad in a small open economy.
Answer: A
Diff: 2
Topic: Section: 5.4
16) A large open economy's real interest rate will decrease if

A) the expected future marginal product of domestic capital rises.
B) the expected future marginal product of foreign capital rises.
C) there is a temporary positive domestic supply shock.
D) there is a temporary negative domestic supply shock.
Answer: C
Diff: 2
Topic: Section: 5.4
29
17) Suppose the development of the European Union leads to greater investment in Europe.
You'd expect
A) a recession in Europe.
B) a decline in the world real interest rate.
C) a rise in the current account in Europe.
D) an increase in the world real interest rate.
Answer: D
Diff: 2
Topic: Section: 5.4
18) A large open economy has desired national saving of Sd = 1200 + 1000rw, and desired
national investment of Id = 1000 - 500rw. The foreign economy has desired national saving of
= 1300 + 1000rw, and desired national investment of = 1800 - 500rw. The
equilibrium world real interest rate equals

A) 0.05.
B) 0.10.
C) 0.15.
D) 0.20.
Answer: B
Diff: 2
Topic: Section: 5.3
= 1300 + 1000rw, and desired national investment of = 1800 - 500rw. In equilibrium,
the foreign country has net exports equal to

A) 500.
B) 350.
C) -350.
D) -500.
Answer: C
Diff: 2
Topic: Section: 5.3
30
20) In a large open economy, the home country's saving and investment equations are: Sd = 200
+ 700rw and Id = 300 - 200rw. The foreign country's saving and investment equations are: Sd =
50 + 300rw and Id = 75 - 50rw. In equilibrium, the world real interest rate =
A) 0.10.
B) 0.20.
C) 0.25.
D) 0.40.
Answer: A
Diff: 3
Topic: Section: 5.4
21) A large open economy has desired national saving of Sd = 20 + 200rw, and desired national
investment of Id = 30 - 200rw. The foreign economy has desired national saving of = 40 +
100rw, and desired national investment of = 75 - 400rw.
(a) Calculate the equilibrium values of rw, CA, CAFor, S, I, SFor, and IFor.
(b) Suppose Sd rises by 45, so that now Sd = 65 + 200rw. Calculate the equilibrium values of rw,
CA, CAFor, S, I, SFor, and IFor.
(c) Suppose, with Sd back to Sd = 20 + 200rw, as in part (a), that Id rises by 45, to Id = 75 -
200rw. Calculate the equilibrium values of rw, CA, CAFor, S, I, SFor, and IFor.
Answer:
(a) In equilibrium, Sd + = Id + so that 60 + 300rw = 105 - 600rw, or 900rw = 45, so
rw = 0.05. Using this in the formulas, we get S = 30, I = 20, CA = 10, SFor = 45, IFor = 55, and
CAFor = -10.
(b) Now 900rw = 0, so rw = 0.0. Using this in the formulas, we get S = 65, I = 30, CA = 35, SFor
= 40, IFor = 75, and CAFor = -35.
(c) Now 900rw = 90, so rw = 0.10. Using this in the formulas, we get S = 40, I = 55, CA = -15,
SFor = 50, IFor = 35, and CAFor = 15.
Notice that the current account may swing from positive to negative, depending on the value of
the real interest rate.
Diff: 2
Topic: Section: 5.4
31
22) A large open economy has desired national saving of Sd = 1200 + 1000 rw, and desired
= 1000 + 1000rw, and desired national investment of = 1800 - 500rw. Calculate the
equilibrium values of rw, CA, CAFor, S, I, SFor, and IFor.

Answer: In equilibrium, Sd + = Id + so that 2200 + 2000 rw = 2800 - 1000rw, or
3000rw = 600, so rw = 0.2. Using this in the formulas, we get S = 1400, I = 900, CA = 500, SFor
= 1200, IFor = 1700, and CAFor = -500.
Diff: 2
Topic: Section: 5.4
23) In a large open economy, the home country's saving and investment equations are:
Sd = 200 + 1400 rw and Id = 300 - 400 rw.
The foreign country's saving and investment equations are:
Sd = 50 + 600rw and Id = 75 - 100 rw.
Calculate the equilibrium world real interest rate, saving and investment in each country, and the
current account balance in each country.
Answer: Worldwide savings equals 200 + 1400 rw + 50 + 600 rw = 250 + 2000 rw. Worldwide
investment equals 300 - 400 rw + 75 - 100 rw = 375 - 500rw. Setting worldwide saving equal to
worldwide investment gives: 250 + 2000 rw = 375 - 500 rw, so 2500 rw = 125, so rw = 125/2500
= 0.05. Plugging into the original equations gives Sd = 200 + 1400 rw = 200 + (1400 × 0.05) =
270, Id = 300 - 400rw = 300 - (400 × 0.05) = 280, CA = S - I = 270 - 280 = -10. In the foreign
country, Sd = 50 + 600rw = 50 + (600 × 0.05) = 80, Id = 75 - 100 rw = 75 - (100 × 0.05) = 70,
CA = S - I = 80 - 70 = 10.
Diff: 3
Topic: Section: 5.4
32
24) 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?
Answer:
(a) rw rises, S falls, I falls, CA falls.
(b) rw rises, S rises, I rises, CA falls.
(c) rw falls, S rises, I rises, CA rises.
(d) rw falls, S falls, I falls, CA rises.
Diff: 2
Topic: Section: 5.4
25) 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
Answer:
(a) The foreign savings curve shifts right, causing rw to fall. Domestic economy: S falls, I rises,
CA falls. Foreign economy: SFor rises, IFor rises, CAFor rises (because CA falls).
(b) The domestic investment curve shifts right, causing rw to rise. Domestic economy: S rises, I
rises, CA falls (because CAFor rises). Foreign economy: SFor rises, IFor falls, CAFor rises.
(c) The foreign savings curve shifts left, causing rw to rise. Domestic economy: S rises, I falls,
CA rises. Foreign economy: SFor falls, IFor falls, CAFor falls (because CA rises).
Diff: 2
Topic: Section: 5.4
33
26) 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.
Answer:
(a) The increased tax rate on firm revenues increases the tax-adjusted user cost of capital, thus
reducing desired investment in the domestic country. To restore equilibrium, the world real
interest rate must decline. In equilibrium, both saving and investment in the domestic country are
lower; while in the foreign country, saving is lower but investment is higher. The lower saving
and higher investment in the foreign country mean that the current account balance is lower in
the foreign country. Because the sum of the two countries' current account balances must be
zero, the lower foreign current account balance means that the domestic country's current
account balance must be higher.
(b) If Ricardian Equivalence holds, then all the answers are the same as in part (a). If Ricardian
Equivalence does not hold, then the foreign tax increase would increase desired foreign saving
and reduce the world real interest rate even more than in part (a). Compared with the initial
equilibrium, both domestic saving and investment are lower and foreign investment is higher.
The effect on foreign saving is ambiguous, as the effect of the tax change in part (a) reduces it
but the tax change in part (b) increases it. As a result, the current account balance in the foreign
country is ambiguous, as is the current account balance in the domestic country.
Diff: 2
Topic: Section: 5.4
5.5 Fiscal Policy and the Current Account
1) 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
Answer: B
Diff: 1
Topic: Section: 5.5
34
2) 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
Answer: A
Diff: 1
Topic: Section: 5.5
3) 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.
Answer: C
Diff: 2
Topic: Section: 5.5
4) 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.
Answer: D
Diff: 2
Topic: Section: 5.5
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
A) 100.
B) 50.
C) -50.
D) -100.
Answer: D
Diff: 2
Topic: Section: 5.3
35
6) 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.
Answer: B
Diff: 2
Topic: Section: 5.5
7) 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.
Answer: B
Diff: 2
Topic: Section: 5.5
8) 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.
Answer: A
Diff: 2
Topic: Section: 5.5
36
= 1300 + 1000rw, and desired national investment of = 1800 - 500rw. 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.
Answer: D
Diff: 3
Topic: Section: 5.3
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?
Answer: The principal causes of the U.S. federal government budget deficits of the 1980s were a
reduction in government revenue (in part because of the Economic Recovery Tax Act of 1981)
and increased military spending. The twin deficits arose because the increased government
budget deficit reduced national saving, leading to a current account deficit. According to the
Ricardian equivalence proposition, a government budget deficit created by a tax cut will have no
real economic effects because it will not affect saving. According to this theory the government
budget deficit and the trade deficit are independent events.
Diff: 2
Topic: Section: 5.5
11) 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"?
Answer: Desired saving shifts left, desired investment shifts right, so the current account
balance declines; there are twin deficits.
Diff: 2
Topic: Section: 5.5
37
12) 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?
Answer:
(a) No effect on any of the variables.
(b) Real world interest rate unchanged, national saving declines (private saving rises, but not as
much as government saving declines), investment is unchanged, and the current account balance
declines.
Diff: 2
Topic: Section: 5.5
38

Macroeconomics 9th Edition Abel Test Bank 1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Macroeconomics 9th Edition Abel Test Bank 1

Uploaded by

Copyright:

Available Formats

Macroeconomics 9th Edition

Abel Test Bank

Full download at link:

Test Bank: https://testbankpack.com/p/test-bank-for-macroeconomics-

Solution Manual: https://testbankpack.com/p/solution-manual-for-

5.1 Balance of Payments Accounting

3) If a country's merchandise exports exceed its merchandise imports it has a

4) If France has a trade deficit, then

8) The current account balance consists of

20) The balance of payments equals

27) A country's financial account balance decreases if

28) If a country has a current account surplus, it also has

30) An economic benefit of capital outflows is that they

31) The United States became a net debtor because

38) Suppose a country has the following balance of payments data.

(a) Calculate the current account balance.

(a) Calculate the current account balance.

1) In goods market equilibrium in an open economy,

2) The goods market equilibrium condition in an open economy shows that

3) In goods market equilibrium in an open economy,

4) Total spending by domestic residents, businesses, and governments is called

1) An economy is considered a small open economy if it

2) In a saving—investment diagram for a small open economy

18) What determines the interest rate in a small open economy?

19) In a small open economy,

1) A large open economy

16) A large open economy's real interest rate will decrease if

equilibrium world real interest rate equals

the foreign country has net exports equal to

100rw, and desired national investment of = 75 - 400rw.

equilibrium values of rw, CA, CAFor, S, I, SFor, and IFor.

5.5 Fiscal Policy and the Current Account

You might also like