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Macroeconomics: Policy and Practice, 2e (Mishkin)
Chapter 4 Saving and Investment in Closed and Open Economies
4.1 Relationship Between Saving and Wealth
1) Private saving refers to ________.
A) disposable income minus consumption expenditure
B) total expenditure minus purchases of capital goods
C) taxes plus consumption minus income
D) consumption expenditure divided by disposable income
E) none of the above
2) Private saving refers to ________.
A) after-tax income minus consumption expenditures
B) a flow variable which adds to the stock of wealth
C) the private saving rate times disposable income
D) all of the above
E) none of the above
3) Government saving refers to ________.
A) tax revenues minus transfers minus government purchases
B) tax revenues plus transfers minus government consumption
C) the saving rate times transfers
D) national plus private saving
E) none of the above
4) Government saving refers to ________.
A) tax revenues minus transfers minus government consumption minus government investment
B) the government’s tax receipts minus its outlays
C) national saving minus private saving
D) all of the above
E) none of the above
5) How can the U.S. federal government induce increases in the national saving rate?
A) by lowering the sales tax
B) by levying taxes on individual retirement (IRA) accounts
C) by reducing budget deficits
D) all of the above
E) none of the above
6) How can the U.S. federal government induce increases in the national saving rate?
A) implementing a value added tax
B) lowering the capital gains tax
C) reducing budget deficits
D) all of the above
E) none of the above
7) Net capital outflows ________.
A) are also known as net foreign investment
B) are positive if saving is greater than investment
C) are also known as the trade balance
D) all of the above
E) none of the above
8) When a U.S. firm sells a good abroad for, say, 100 euros (assume $1=1euro), U.S. net exports
increase by $100. These $100 in exports can be accounted for as $100 increase in capital outflow
because ________.
A) if the 100 euros are kept in the foreign bank, the U.S. firm is giving a loan to that bank
B) if the U.S. firm uses the 100 euros to buy a share of stock in a foreign firm, the firm is
supplying U.S. capital to that foreign firm
C) if the U.S. firm uses the proceeds to build a new factory in that country, it is supplying U.S.
capital to that country
D) all of the above
E) none of the above
9) When a U.S. firm sells a good abroad for, say, 100 euros (assume $1.5=1euro), U.S. net
exports increase by $150. These $150 in exports can be accounted for as $150 increase in capital
outflow because ________.
A) private consumption in the foreign country increases by $150
B) if the U.S. firm uses the 100 euros to buy a share of stock in a foreign firm, the firm is
supplying U.S. capital to that foreign firm
C) if the U.S. firm uses the proceeds to buy a U.S. bond, capital investment in the foreign
country has increased
D) all of the above
E) none of the above
10) If a U.S. citizen deposits $10,000 in a foreign bank, and the bank uses the $10,000 to buy
assets in the U.S., then ________.
A) the U.S. has experienced a net capital outflow
B) the U.S. has experienced an increase in net exports
C) the foreign economy has experienced a net capital outflow
D) the foreign economy has experienced an increase in net exports
E) none of the above
11) A foreign bank receives a deposit of $10,000 from a U.S. citizen. As a result, there is a net
capital outflow from the U.S., if ________.
A) the bank buys a U.S.-made computer
B) the bank buys a bond issued by a U.S. company
C) the bank keeps the $10,000 in a vault
D) all of the above
E) none of the above
12) Which of the following is a correct statement?
A) Wealth can increase even if there is no saving.
B) An increase in net foreign assets always increases wealth.
C) Low U.S. national saving is the principal cause of the trade deficits the U.S. has run since the
1980s.
D) The U.S will be a net debtor nation for the foreseeable future.
E) all of the above
13) Which of the four government policies to stimulate saving is essential? That is, which policy
can on its own, regardless of the other policies, determine the level of the national saving rate?
14) Why is it important, for an open economy, that investment not be consistently higher than
saving?
4.2 Saving, Investment, and Goods Market Equilibrium in a Closed Economy
1) The real interest rate ________.
A) is the cost of borrowing not adjusted for inflation
B) keeps the market for saving and consumption in equilibrium
C) describes the real benefit of saving
D) all of the above
E) none of the above
2) In the model for desired saving, autonomous is roughly synonymous with ________.
A) policy-determined
B) endogenous
C) intended
D) inflation-adjusted
E) exogenous
3) The real interest rate ________.
A) is the cost of borrowing adjusted for inflation
B) keeps the market for saving and investment in equilibrium
C) describes the real benefit of saving
D) all of the above
E) none of the above
4) Consumption expenditures are a function of ________.
A) the real interest rate
B) disposable income
C) autonomous consumption
D) all of the above
E) none of the above
5) Increases in ________ typically lead to decreases in consumption
A) the interest rate
B) disposable income
C) autonomous consumption
D) all of the above
E) none of the above
6) Increases in ________ typically lead to decreases in private saving.
A) the interest rate
B) disposable income
C) autonomous consumption
D) all of the above
E) none of the above
7) Increases in ________ typically lead to decreases in ________.
A) the interest rate; saving
B) disposable income; consumption
C) autonomous consumption; consumption
D) all of the above
E) none of the above
8) In the equation S = – – C – , which of the following is an endogenous variable?
A) r
B)
C)
D) all of the above
E) none of the above
9) ________ typically lead to increases in ________.
A) decreases in interest rates; investment
B) increases in disposable income; consumption
C) increases in autonomous investment; investment
D) all of the above
E) none of the above
10) How does a decline in the real interest rate cause an increase in investment?
4.3 Response to Changes in Saving and Investment in a Closed Economy
1) Ceteris paribus, in a closed economy, if consumers become more pessimistic ________.
A) autonomous consumption will fall
B) investment will fall
C) saving will increase
D) all of the above
E) none of the above
2) Ceteris paribus, in a closed economy, if consumers become more optimistic ________.
A) autonomous consumption would decrease
B) the equilibrium interest rate should increase
C) saving should increase
D) all of the above
E) none of the above
3) If government cuts taxes ________.
A) national saving goes up
B) the equilibrium interest rate would decrease
C) discretionary income goes up
D) all of the above
E) none of the above
4) In the long run, if government increases spending ________.
A) interest rates decrease
B) it crowds out private investment
C) saving increases
D) all of the above
E) none of the above
5) “Crowding out” refers to the decrease in ________ that may result from an increase in
government spending.
A) private investment
B) imports
C) private saving
D) all of the above
E) none of the above
6) In the long run, larger budget deficits lead to ________.
A) higher saving levels
B) a fall in investment
C) lower interest rates
D) all of the above
E) none of the above
7) A budget deficit ________.
A) may have stimulative effects on economic activity in the short run
B) contributes to lower interest rates in the long run
C) is likely to increase future productive capacity in the long run
D) all of the above
E) none of the above
8) An investment tax credit ________.
A) is designed to incentivize higher capital stock expenditures at any given interest rate
B) may lead to increases in autonomous investment
C) may put upward pressure on the interest rate
D) all of the above
E) none of the above
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9) If taxes are reduced, will most people save more or less than before? Does national saving rise
or fall? Explain.
4.4 Saving, Investment, and Goods Market Equilibrium in an Open Economy
1) The domestic real interest rate (r) for a given country must be the same as the world real
interest rate (rw) ________.
A) if perfect capital mobility is assumed
B) because with no barriers to capital flows, if rw > r domestic residents would just borrow
abroad putting upward pressures on the domestic rate until both rates equal each other
C) because with no barriers to capital flows, if rw < r domestic residents would only lend to
foreigners putting downward pressures on the domestic rate until both rates equal each other
D) all of the above
E) none of the above
2) In the model of the open economy with perfect capital mobility, ________ is an exogenous
variable.
A) Y
B) C
C) I
D) S
E) r
3) The domestic real interest rate (r) for a given country must be the same as the world real
interest rate (rw) ________.
A) only if capital is not perfectly mobile
B) because with no barriers to capital flows, if rw > r domestic residents would just lend abroad
putting upward pressures on the domestic rate until both rates equal each other
C) because with no barriers to capital flows, if rw < r domestic residents would only lend to
foreigners putting downward pressures on the domestic rate until both rates equal each other
D) all of the above
E) none of the above
4) In an economy open to international trade ________.
A) saving equals investment in equilibrium
B) saving is the difference between net exports and investment
C) saving equals investment as long as the economy has no exports
D) saving equals investment as long as NX=0
E) none of the above
5) In an economy open to international trade ________.
A) saving is net exports added to investment
B) saving equals investment as long as NX=0
C) the domestic real interest rate should equal the world real interest rate as long as there is
perfect capital mobility
D) all of the above
E) none of the above
6) In an economy open to international trade ________.
A) saving is the difference between net exports and consumption
B) saving equals investment as long as the domestic real interest rate is equal to the world real
interest rate
C) the domestic real interest rate should equal the world real interest rate as long as the economy
is relatively small
D) all of the above
E) none of the above
7) In an open economy, Y = C + I + G + NX. From this we may infer that ________.
A) output is greater in an open economy than in a closed economy
B) the condition for goods market equilibrium is that S = I + G + NX
C) net exports can be zero only if the domestic real interest rate is equal to the world real interest
rate
D) if saving is greater than zero, NX cannot be zero
8) Suppose an economy has a GDP of $10 trillion, and that its national saving rate is 20%. If
investment is 25% of GDP, the value of net exports is ________.
A) negative $500 billion
B) $4.5 trillion
C) negative $250 billion
D) $2 trillion
E) none of the above
9) Suppose consumption is $500 billion, investment is $120 billion, government purchases equal
$90 billion, and net exports are negative $20 billion. The saving rate is ________.
A) 20%
B) 83.3%
C) 14.5%
D) 3%
E) none of the above
10) Suppose GDP is $800 billion, net taxes equal $150 billion, government purchases are $160
billion, investment is $120 billion, and net exports are $5 billion. The private saving rate is
________.
A) 19%
B) 16%
C) 21%
D) 18%
E) none of the above
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4.5 Saving, Investment, and the Trade Balance in a Small Open Economy
1) In an economy open to international trade where the interest rate at which saving and
investment would be equal is ________ the world real interest rate ________.
A) above; a trade surplus ensues
B) below; a trade deficit ensues
C) above; there is a net capital outflow
D) below; there is a net capital inflow
E) none of the above
2) In an economy open to international trade where the interest rate at which saving and
investment would be equal is ________ the world real interest rate ________.
A) above; a trade deficit ensues
B) below; there is a net capital outflow
C) above; there is a net capital inflow
D) all of the above
E) none of the above
3) If the world real interest rate were to fall below the rate at which domestic saving and
investment would be equal ________.
A) saving would be greater than investment so the economy would be running a trade deficit
B) investment would be greater than saving so the economy would be running a trade deficit
C) investment would be greater than saving so the economy would be running a trade surplus
D) saving would be greater than investment so the economy would be running a trade surplus
E) none of the above
Saving-Investment Diagram