Name: 
 

Chapter 17 - World Markets in Goods and Credit


True/False
Indicate whether the statement is true or false.
 

 1. 
With an international sector real GNP is consumption plus gross investment plus government purchases plus net real asset income from abroad.
 

 2. 
The balance of trade is net exports or imports less exports.
 

 3. 
A higher current account deficit is caused by a declining domestic economy.
 

 4. 
The real current account balance is real national saving less net domestic investment.
 

 5. 
Tariffs and quotas lead to a higher real GDP growth rate in the country imposing them.
 

Multiple Choice
Identify the choice that best completes the statement or answers the question.
 

 6. 
The law of one price:
a.
prohibits price discrimination.
b.
is that markets work to ensure that the same good has the same price in all locations.
c.
is a tax on imports.
d.
prohibits price increases unless firms can show their are unusual circumstances.
 

 7. 
The difference between real GDP in a closed economy and real GNP in a open economy is:
a.
net real asset income from abroad.
b.
net imports.
c.
net international investment position.
d.
the trade balance.
 

 8. 
Real GNP in an open economy is:
a.
the closed economy real output less net real asset income from abroad.
b.
the closed economy real output plus gross real asset income from abroad.
c.
the closed economy real output less gross real asset income from abroad.
d.
the closed economy real output plus net real asset income from abroad.
 

 9. 
Net real asset income from abroad is:
a.
mc009-1.jpg
b.
mc009-2.jpg
c.
mc009-3.jpg
d.
mc009-4.jpg
 

 10. 
Net real foreign investment is:
a.
mc010-1.jpg
b.
mc010-2.jpg
c.
mc010-3.jpg
d.
mc010-4.jpg
 

 11. 
The trade balance is:
a.
mc011-1.jpg
b.
mc011-2.jpg
c.
mc011-3.jpg
d.
mc011-4.jpg
 

 12. 
The balance on the current account:
a.
mc012-1.jpg
b.
mc012-2.jpg
c.
mc012-3.jpg
d.
mc012-4.jpg
 

 13. 
The balance on the current account is:
a.
real GNP less net foreign investment income.
b.
real GNP less net foreign investment.
c.
real GNP less the net international investment position.
d.
real GNP less real domestic expenditure.
 

 14. 
The real current-account balance is:
a.
net real asset income from abroad less trade balance.
b.
trade balance plus the net real asset income from abroad.
c.
trade balance times the net real asset income from abroad.
d.
trade balance less the net real income from abroad.
 

 15. 
The real current account balance equals:
a.
net foreign investments.
b.
real GNP less real domestic expenditure.
c.
the trade balance plus net real asset income from abroad.
d.
all of the above.
 

 16. 
The real current account balance equals:
a.
net foreign investments.
b.
the net international investment position.
c.
the trade balance.
d.
all of the above.
 

 17. 
The real current account balance equals:
a.
the trade balance.
b.
real GNP less real domestic expenditure.
c.
the net international investment position.
d.
all of the above.
 

 18. 
The real current account balance equals
a.
the net international investment position.
b.
the trade balance.
c.
the trade balance plus net real asset income from abroad.
d.
all of the above.
 

 19. 
The trade balance is:
a.
the difference between exports and imports.
b.
real GDP less real domestic expenditure.
c.
the real current-account balance less net real asset income from abroad.
d.
all of the above.
 

 20. 
The trade balance is:
a.
the difference between exports and imports.
b.
real asset income from abroad.
c.
net foreign investment.
d.
all of the above.
 

 21. 
The trade balance is:
a.
the balance on the current account.
b.
real GDP less real domestic expenditure.
c.
net foreign investment.
d.
all of the above.
 

 22. 
The trade balance is:
a.
net foreign investment.
b.
the net international investment position.
c.
the real current-account balance less net real asset income from abroad.
d.
all of the above.
 

 23. 
In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a.
an increase in the MPK.
b.
an increase in home country gross domestic investment.
c.
an increase in borrowing from foreigners.
d.
all of the above.
 

 24. 
In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a.
an increase in the MPK.
b.
an decrease in home country gross domestic investment.
c.
an increase in lending to foreigners.
d.
all of the above.
 

 25. 
In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a.
an decrease in the MPK.
b.
an increase in home country gross domestic investment.
c.
an increase in lending to foreigners.
d.
all of the above.
 

 26. 
In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a.
a decrease in the MPK.
b.
a decrease in gross domestic investment.
c.
an increase in borrowing from foreigners.
d.
all of the above.
 

 27. 
In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:
a.
a larger current account deficit.
b.
a smaller current account deficit.
c.
a lower MPK.
d.
lower domestic gross investment.
 

 28. 
In the market clearing model with world markets for goods and credit, a decrease in technology, A, in the home country causes:
a.
a larger current account deficit.
b.
a smaller current account deficit.
c.
a higher MPK.
d.
higher domestic gross investment.
 

 29. 
The open economy equilibrium business-cycle model predicts that the real current account balance will be:
a.
acyclical.
b.
procyclical.
c.
countercyclical.
d.
exogenous.
 

 30. 
The open economy equilibrium business-cycle model predicts that the real current account balance will be:
a.
the same in expansions and recession.
b.
low in expansions and high in recessions.
c.
high in expansions and low in recessions.
d.
invariant with the business cycle.
 

 31. 
In US data the real current account balance is:
a.
procyclical when the model predicts it will be countercyclical.
b.
procyclical as the model predicts.
c.
countercyclical when the model predicts it will be procyclical.
d.
countercyclical as the model predicts.
 

 32. 
In US data the real current account balance is:
a.
procyclical.
b.
weakly procyclical.
c.
countercyclical.
d.
weakly countercyclical.
 

 33. 
While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a.
a temporary negative shock like a harvest failure.
b.
a less developed country having a low capital stock.
c.
a temporary increase in government purchases as in war time.
d.
all of the above.
 

 34. 
While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a.
a temporary negative shock like a harvest failure.
b.
a less developed country having poor institutions for growth.
c.
a permanent decrease in government purchases.
d.
all of the above.
 

 35. 
While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a.
a temporary positive shock like a good harvest.
b.
a less developed country having a low capital stock.
c.
a permanent decrease in government purchases.
d.
all of the above.
 

 36. 
While according to the model the current account balance will be countercyclical, the balance can also decline due to:
a.
a temporary positive shock like a positive harvest.
b.
a less developed country having a high capital stock.
c.
a temporary increase in government purchases as in war time.
d.
all of the above.
 

 37. 
In the Ricardian case, if the government budget deficit is increased, then the trade balance:
a.
moves toward a deficit too.
b.
moves toward a surplus.
c.
is unaffected.
d.
is exogenous.
 

 38. 
The terms of trade are:
a.
($ per home good)/($ per foreign good).
b.
the number of units of foreign goods that can be imported for each unit of home goods exported.
c.
foreign good per home good.
d.
all of the above.
 

 39. 
The terms of trade are:
a.
($ per home good)/($ per foreign good).
b.
the number of units of home goods that can be exported for each unit of foreign goods imported.
c.
home good per foreign good.
d.
all of the above.
 

 40. 
The terms of trade are:
a.
($ per foreign good)/($ per home good).
b.
the number of units of foreign goods that can be imported for each unit of home goods exported.
c.
home good per foreign good.
d.
all of the above.
 

 41. 
The terms of trade are:
a.
($ per home foreign/($ per home good).
b.
the number of units of home goods that can be exported for each unit of foreign goods imported.
c.
foreign good per home good.
d.
all of the above.
 

 42. 
An increase in the terms of trade:
a.
raises real GDP.
b.
increases consumption.
c.
increases real national saving if the change in terms of trade is less than fully permanent.
d.
all of the above.
 

 43. 
An increase in the terms of trade:
a.
raises real GDP.
b.
decreases consumption.
c.
lowers real national saving.
d.
all of the above.
 

 44. 
An increase in the terms of trade:
a.
reduces real GDP.
b.
increases consumption.
c.
lowers real national saving.
d.
all of the above.
 

 45. 
An increase in the terms of trade:
a.
reduces real GDP.
b.
decreases consumption.
c.
increases real national saving if the change in terms of trade is less than fully permanent.
d.
all of the above.
 

 46. 
A decrease in the terms of trade:
a.
reduces real GDP.
b.
decreases consumption.
c.
decreases real national saving if the change in terms of trade is less than fully permanent.
d.
all of the above.
 

 47. 
A decrease in the terms of trade:
a.
reduces real GDP.
b.
increases consumption.
c.
increases real national saving if the change in terms of trade is less than fully permanent.
d.
all of the above.
 

 48. 
If the government reduces tariffs or quotas on imports, then:
a.
real GDP will increase.
b.
the real current account balance falls.
c.
net domestic investment will rise.
d.
all of the above.
 

 49. 
If the government reduces tariffs or quotas on imports, then:
a.
real GDP will increase.
b.
the real current account balance rises.
c.
net domestic investment will fall.
d.
all of the above.
 

 50. 
If the government reduces tariffs or quotas on imports, then:
a.
real GDP will decrease.
b.
the real current account balance falls.
c.
net domestic investment will fall.
d.
all of the above.
 

 51. 
If the government reduces tariffs or quotas on imports, then:
a.
real GDP will decrease.
b.
the real current account balance rises.
c.
net domestic investment will rise.
d.
all of the above.
 

 52. 
If the government imposes or increases tariffs or quotas on imports, then:
a.
real GDP will decrease.
b.
the real current account balance rises.
c.
net domestic investment will fall.
d.
all of the above.
 

 53. 
If the government imposes or increases tariffs or quotas on imports, then:
a.
real GDP will decrease.
b.
the real current account balance falls.
c.
net domestic investment will rise.
d.
all of the above.
 

 54. 
If the government imposes or increases tariffs or quotas on imports, then:
a.
real GDP will increase.
b.
the real current account balance rises.
c.
net domestic investment will rise.
d.
all of the above.
 

 55. 
If the government reduces tariffs or quotas on imports, then:
a.
real GDP will increase.
b.
the real current account balance falls.
c.
net domestic investment will fall.
d.
all of the above.
 

Short Answer
 

 56. 
What is the real current account balance?
 

 57. 
What are the effects of a permanent increase in technology in the open market clearing model?
 

 58. 
What does the open market clearing model predict about the association of the real current account balance and real GDP growth and what do the data on the US show?
 

 59. 
Does a government budget deficit lead to a real current-account deficit?
 

 60. 
What are the effects of reducing tariffs and quotas in the open market clearing model?
 



 
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