Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 5, Problem 4AP
To determine
Effect on foreign’s country’s current account, investment and world interest rate due to increase budget deficit.
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Now consider a small open economy, assuming domestic output is held constant and the country initially has a current account deficit. Explain the impact of an increase in government spending on the current account using both words and graphs.
A government finds itself in the following situation: a government budget deficit of $900; total domestic savings of $2000, and total domestic physical capital investment of $1300. According to the national saving and investment identity, if investment increases by $200 while the government budget deficit decreases by $100 and savings remain the same, what will happen to the current account balance?
The figure below shows the flow of goods, services, and payments between Kenya (home country) and the rest of the world.
with reference to the figure, explain;
a) How does the bottom portion, showing the international flow of investments and capital differs from the upper portion.
b) The relationship between a current account deficit or surplus and the flow of funds.
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- Table 23.7 provides some hypothetical data on macroeconomic accounts for three countries represented by A. B, and C and measured in billions of currency units. In Table 23.7, private household saving is SH, tax revenue is T, government spending is G, and investment spending is Calculate the trade balance and the net inflow of foreign saving for each country. State whether each one has a trade surplus or deficit (or balanced trade). State whether each is a net lender or borrower internationally and explain.arrow_forwardImagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1% of Germany’s GDP; private savings is 20% of GDP; and physical investment is 18% of GDP. a. Based on the national saving and investment identity, what is the current account balance? b. If the government budget surplus falls to zero, how will this affect the current account balance?arrow_forwardExplain why an increase in national saving (S) relative to investment (I) may lead to a current account surplus under flexible exchange rates.arrow_forward
- A country finds itself in the following situation: a government budget deficit of $700; total domestic savings of $1470, and total domestic physical capital investment of $2100. According to the national saving and investment identity, what is the current account deficit?arrow_forwardWhen there are two large open economies in the world, if capital goods become relatively cheaper compared to consumption goods in the foreign country, the world real interest rate will and the home country's current account will fall; rise fall; fall rise; rise rise; fallarrow_forwardDescribe three means by which a current account deficit in a developing country is financed. (By "financed," I mean "paid for," "covered" or "balanced" in accounting terms. "Increase exports" or "decrease imports" are not correct answers since they refer to future actions a country may take, not to how a current account deficit is balanced/financed today.)arrow_forward
- Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of $100 billion, total domestic savings of $1,500 billion, and total domestic physical capital investment of $1,600 billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by $50 billion, while the budget deficit and national savings remain the same?arrow_forwardJapan has run large current account surpluses for much of the past two decades, yet no one ever asks if these surpluses are sustainable. Why are surpluses treated differently than deficits?arrow_forwardExplain the relationship between a current account deficit or surplus and the flow of funds.arrow_forward
- of An increase in government budget deficits will necessarily be associated with an worsening of the current account balance. True Falsearrow_forward“A country with current account deficit indicates a sign of weakness while a country with current account surplus indicates a sign of strength in terms of economic growth” Do you agree with the above statement? Justify your answer.arrow_forwardYou have the following annual figures for the New Zealand economy. Investment expenditure $40.6 billion Net Exports $3.6 billion Net Foreign Income -$9.5 billion The current account balance is equal to $____billon (use 1 d.p. and a negative sign if the balance you have calculated is a deficit). New Zealand domestic savings is equal to $____billon (use 1 d.p.). Suppose that the government introduces a policy that bans foreign investment in New Zealand. If that happens then (everything else held constant) we would expect to see the current account balance -rise -remain the same. -fall -become harder to predict Suppose that along with the above policy, the government also wishes to see investment levels maintained. If that is to occur, what else must be happening in the economy? - The Government must raise taxes. - Firms must be offered incentives to invest. - New…arrow_forward
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