32) Discuss the effects of government deficits on the current account.
33) Explain how government deficits fell yet current account surpluses remained the same in the
EU prior to adopting the euro. Also explain this in the context of the “twin deficits” theory.
34) Explain the concept of Ricardian equivalence.
35) Assume:
C = 40 + 0.8(Y – T)
G = 10
I = 20
T = 0, where T are taxes.
(a) Calculate Y at equilibrium.
(b) Calculate C, I, and G at equilibrium.
(c) Now assume,
EX = 5 + 4EP /P
IM = 10 + 0.1 (Y – T) – 3EP /P
E = 3
P = 1.5
P = 2
Find equilibrium Y.
36) Fill in the following table.
37) What can one learn from the following figure?
38) Assume:
C = 50 + 0.6 (Y – T)
G = 15
I = 15
T = 2
(a) Calculate Y at equilibrium
(b) Calculate C
(c) Assume
EX = 4 + 3EP /P
IM = 8 + 0.1 (Y – T) – 2EP /P
E = 3
P = 1
P = 1.5
Find equilibrium Y.
39) Fill in the following table.
40) Fill in the following table.
Answer:
13.3 The Balance of Payments Accounts
1) Every international transaction automatically enters the balance of payments
A) once either as a credit or as a debit.
B) twice, once as a credit and once as a debit.
C) once as a credit.
D) twice, both times as debit.
E) the times, once as a credit, onces as a debit, and once as an exchange.
2) The official settlements balance or balance of payments is the sum of
A) the current account balance, the capital account balance, the non reserve portion of the
financial account balance, the statistical discrepancy.
B) the current account balance and the capital account balance.
C) the current account balance, the capital account balance, the non reserve portion of the
financial account balance.
D) the current account balance and the non reserve portion of the financial account balance.
E) the current account balance and the interest in all investments.
3) An American buys a Japanese car, paying by writing a check on an account with a bank in
New York. How would this be accounted for in the balance of payments?
A) current account, a Japanese good import
B) current account, a U.S. good import
C) financial account, a U.S. asset import
D) financial account, a U.S. asset export
E) a current account as a U.S. good import and a financial account, a U.S. asset export
4) The United States issues a $10,000 debt forgiveness to Argentina. How is this accounted for in
the balance of payments?
A) financial account, U.S. asset import
B) current account, Argentina transfer payment
C) current account, U.S. service export
D) financial account, U.S. asset export
E) current account, Argentina good import
5) A U.S. citizen buys a newly issued share of stock in England, paying for his order with a
check, which the British company deposits in its own U.S. bank account in New York. How is
this transaction accounted for in the balance of payments?
A) financial account, U.S. asset export
B) current account, U.S. service import
C) current account, British good export
D) financial account, British asset import
E) financial account, U.S. asset import
6) You travel to Paris and pay for a $100 dinner with your credit card. How is this accounted for
in the balance of payments?
A) current account, French service import
B) current account, U.S. good export
C) financial account, U.S. asset export
D) financial account, U.S. asset import
E) financial account, French asset export
7) The German government carries out an official foreign exchange intervention in which it uses
dollars held in an American bank to buy French currency from its citizens. How is this accounted
for in the balance of payments?
A) current account, French good export
B) current account, German good import
C) financial account, French asset export
D) financial account, German asset export
E) financial account, German asset import
8) The earnings of a Spanish factory with British owners are
A) counted in Spain’s GDP.
B) part of Britain’s GNP.
C) only counted in Britain’s GDP.
D) only part of Spain’s GNP.
E) counted in Britain’s GDP and are a part of Spain’s GNP.
9) The services British capital provides in Spain are a service export from Britain
A) therefore they are subtracted from British GDP in calculating British GNP.
B) therefore they are added to Spanish GDP in calculating Spanish GDP.
C) therefore they are added to British GDP in calculating British GNP.
D) therefore they are added to Spanish GNP in calculating Spanish GDP.
E) therefore they are subtracted from Spanish GNP.
10) Unilateral transfers between countries are
A) long-term loans.
B) only international gifts, never payments that do not correspond to the purchase of any good,
service, or asset.
C) part of the current account but not a part of national income.
D) known for reducing the income of capital owners.
E) the difference between Y and GNP if the identity Y = C + I + G + CA holds exactly.
11) Which of the following statements about the central bank is TRUE?
A) Only the central bank may hold foreign reserves and intervene officially in exchange markets.
B) Central banks have little power to alter macroeconomic conditions.
C) Today, central banks’ reserves consist largely of gold.
D) The Federal Reserve holds only a small level of official reserve assets other than gold.
E) Central banks never inject money into the economy.
12) How do we allocate statistical discrepancy among the current, capital, and financial
accounts?
A) We have no way of knowing exactly how to allocate this discrepancy.
B) Depend on the degree of certainty by which we attribute to these accounts.
C) Divide it evenly amongst the three accounts.
D) Depend on the convention adopted by the specific financial institution.
E) Statistical discrepancy signals human errors made when dealing with financial accounts.
13) Which of the following is TRUE about current cost method and market value method?
A) They are used by the BEA to place current values on foreign indirect investments.
B) These methods lead to the same valuations.
C) Based on the current cost method, the BEA’s 2009 estimate of U.S. net foreign wealth was
$2,737.86 billion.
D) The current cost method is preferred by the BEA.
E) Foreign direct investments of the U.S. are valued at their original purchase price.
14) What types of international transactions are recorded in the balance of payment accounts?
15) “The Balance of payments is always balances.” Discuss.
16) “The balance of payments is seldom in balance in practice.” Discuss.
17) How does an economy’s central bank manage the supply of money through official reserve
transactions?
18) How can changes in the market price of wealth previously acquired alter a country’s net
foreign wealth?
19) Discuss the two different methods the Bureau of Economic Analysis (BEA) uses to place
current values on foreign direct investments.
20) Consider how the United States balance of payments accounts are affected when U.S. banks
forgive two billion in debt owed to them by the government of Argentina.
21) What can one learn from Figure 13-3 from the text, shown below?