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If a country has a current account deficit, this is often referred to as a situation where the country is spending beyond its means. What does this phrase mean in terms of the simple Keynesian model? Does the existence of the current account deficit imply that the country as a whole is a dissaver (i.e., that saving is actually negative)? Why or why not?

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019

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Related questions

41.Which of the following is a valid statement about the Keynesian and classical models of the macroeconomy?

A. Fiscal policy will affect output in the Keynesian model, but only the price level in the classical model.

B. The economy adapts quickly to demand shocks under the Keynesian model, but not under the classical model.

C. A sharp decrease in the value of a nation's currency will lead to higher price levels in the Keynesian model, but not in the classical model.

D. Increases in autonomous expenditure will increase aggregate demand in the Keynesian model, but not in the classical model.

E. An increase in the productive capacity of an economy will result in greater output in both the Keynesian and classical models.

42. Suppose the government spends $500M on a project that has absolutely no value to the country. Which statement about this project is correct?

A. If taxes were raised $500M to fund this project, the Keynesian model predicts that this will have no net effect on output in the economy.

B. If the government raised the money for this project by printing $500M in bonds and selling them to the Fed, the effect is exactly the same as if they sold the bonds to households.

C. The project will increase aggregate supply because it will increase the total quantity of goods and services supplied in the economy.

D. If the marginal propensity to save in the economy is equal to 0.25, the Keynesian model predicts that this project will result in a $2000M increase in GDP.

E. Under the assumptions of the classical model, the result of this project will be increased in both the price level and equilibrium GDP.

43. A particular economy has a consumption of $400M, a government deficit of $100M, taxes of $250M, and income of $800M. Which of the following statements must be true?

A. If the investment is zero, there is no foreign trade imbalance.

B. If the trade surplus is $50M, the investment will be equal to $100M.

C. If the capital account surplus is $50M, the investment will be equal to $100M.

D. If the trade surplus is $100M, there will be an investment.

E. None of the above statements is necessarily true.

44. Which piece of information would be least useful in trying to predict the effect of a $700M increase in government spending on equilibrium GDP?

A. marginal propensity to save

B. The slope of the aggregate supply curve

C. Whether taxes are raised to pay for the spending increase

D. The current level of structural unemployment

E. Whether the bonds used to finance the spending were sold to households or to the Fed

45.Which of the statements relating to full employment and full capacity is false?

A. At full employment there is no frictional unemployment; at full capacity, there is no structural unemployment.

B. The full-employment level of output is less than the full capacity level of output.

C. At full employment there is no cyclical unemployment; at full capacity, there is no frictional unemployment.

D. A government spending increase will result in increased output and price levels at full employment, but only increased price levels at full capacity.

E. In the long run, an economy that starts at full capacity will move to full employment.

46. What would be the effect of a law requiring that government spending equal tax revenues in each year?

A. Fiscal policy would be completely eliminated as a tool to control the macroeconomy.

B. Monetary policy would be completely eliminated as a tool to control the macroeconomy.

C. Fluctuations in GDP would become less severe.

D. The government spending multiplier would be effectively set to 1.0.

E. The marginal propensity to consume would be cut in half.

47.The total value of T-bonds, including T-notes and T-bills, in existence at any point in time, is:

A. The federal government spending deficit.

B. The trade deficit.

C. Less than government spending.

D. Necessarily less than GDP.

E. The national debt.

48. Which of the following would be a valid statement about a government plan to eliminate a trade deficit

A. A decrease in the trade deficit will decrease investment in the country.

B. An effective strategy would be to increase the money supply and increase the value of the national currency.

C. An effective strategy would be to increase interest rates and increase the value of the national currency.

D. This could be achieved through dramatically increasing aggregate supply.

E. The increase in net exports will result in a decrease in aggregate demand.

49. Crowding out has the effect(s) of:

A. Reducing the effectiveness of monetary policy if crowding out occurs in financial markets.

B. Decreasing the value of a nation’s currency if the crowding out occurs in financial markets.

C. Increasing the effectiveness of fiscal policy if the crowding out occurs in financial markets and increasing the effectiveness of monetary policy if the crowding out occurs in product markets.

D. Decreasing the effectiveness of fiscal policy if the crowding out occurs in financial markets and decreasing the effectiveness of both fiscal and monetary policy if the crowding out occurs in product markets.

E. Increasing the price of government bonds if the crowding out occurs in financial markets.

50. Which of the following will make crowding out in credit markets more severe?

A. A steep investment demand curve

B. A global credit market

C. Tax increases

D. A steep supply curve in the loanable funds market

E. None of the above

Consider the following unit labor requirements for two countries, Essos and Westeros, within the context of the Ricardian model of trade, where the two goods are food 1 (F) and horses (H) (you may assume that bushels and horses are equivalent units). Please see attached screenshot for data. 

(a) Which country has an absolute advantage in food? In horses? Why?

(b) Which country has the comparative advantage in food? In horses? Why?

(c) Assume that there is autarky, and both goods are produced in each country. What is the relative price of food in terms of horses in each?

(d) Now assume that there is free trade, and the free trade relative price falls exactly between the autarky prices you derived in part. Graph this trading equilibrium in terms of relative supply and relative demand.

(e) Demonstrate, numerically, the gains from trade in Essos and Westeros (hint: rely on trade as an indirect method of production).

(f) Let the price of food, PF = 10 gold coins, and the price of horses, PH = 9 gold coins. Calculate the relative wage of the Westerosi to Essosi.

(g) What do you observe about the relative wage compared to relative productivities? What does this imply? **

 

1. What does the term s*Y represent in the capital-accumulation equation of Solow growth model?

a) The labor-income share of GDP.

b) Net investment.

c) Gross investment.

d) The net change in the capital stock from one year to the other.

2. In the Solow growth model, suppose that the savings rate is 25%, the depreciation rate is 10%, the current capital stock is 10 trillion $ and current output of a country is 4 trillion $. What will the capital stock of this country be in the following period?

a) 10 trillion $.

b) 11 trillion $.

c) We cannot tell since we are not given information about technological progress.

d) We cannot tell since population growth is not known.

3. Consider a country which starts with a capital stock below its steady-state level in the Solow model (without technological change). Why is growth slowing down over time for this country?

a) Population growth is becoming stronger over time since the population is growing, which makes it harder to accumulate high levels of capital per capita.

b) A country cannot maintain the same savings rate forever, so investment must decrease at some point.

c) The more capital there is, the more of it depreciates. As the country becomes richer, it becomes ever harder to replace depreciated capital.

d) There are diminishing returns to the factor capital. Thus investment, capital and GDP per capita grow by ever smaller amounts as the country becomes richer.

4. Suppose Pakistan has a higher savings rate than Iran. Both start out with the same capital per worker. All other parameters are the same for both countries (population growth and depreciation rate). The Solow growth model (without technological change) predicts that...

a)

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