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Suggested answers to end of chapter questions and problems
1. National saving (S) equals private saving plus government saving (or
dissaving if the government budget is in decit). For this country,
2. Disagree, at least as a general statement. One meaning of a current account surplus is that
the country is exporting more goods and services than it is importing. One might easily
judge that this is not good—the country is producing goods and services that are
exported, but the country is not at the same time getting the imports of goods and services
3. Saving can be used to make investments. The country can use its
national saving to make domestic real investments in new production
capital (buildings, machinery, and software), new housing, and
additions to inventories or it can use its national saving to invest in
4. Disagree. If the country has a surplus (a positive value) for its official settlements
balance, then the value for its official reserves balance must be a negative value of the
124
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
5. Transaction c contributes to a surplus in the current account because it
is an export of merchandise that is paid for through an item in the
6. a. CA = If, so if net foreign investment increases, then the value of the current account
increases.
b. If both exports (a positive item) and imports (a negative item) increase by $10 billion, the
c. CA = Y E, so the combination of an increase in production (Y) by $100 billion and an
d. The transport equipment is an export of goods, so it is a positive item in current account.
7. Disagree. A shift to saving more would tend to increase the surplus, not
reduce it. The current account balance equals net foreign investment,
8. a. Goods and services balance: $330 198 + 196 204 = $124
b. Change in official reserve assets (net) = official settlements balance = $23.
9. a. A capital in-ow (a credit or positive item in the country’s nancial
account or in its transactions in o4cial international reserve assets)
can provide nancing for a current account decit. Yes, this item can
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
b. No, this item is not a nancing item. Residents receiving income from
c. Yes, this item can provide nancing. The start-up companies have a
10. a. The current account balance is exports of goods and services, minus imports of goods and
services, plus income received from foreigners, minus income paid to foreigners, plus net
b. The goods and services balance is a surplus of $40 million (= 200 – 160). There is no
value of income paid to foreigners that can change this into a goods and services deficit.
c. The country is a net borrower from the rest of the world if its current account balance is
11. a. The U.S. international investment position declines—an increase in
b. The U.S. international investment position rises—an increase in private
c. The U.S. international investment position is unchanged. The
12. a. International investment position (billions): $30 + 20 + 15 40 25 = $0.
b. A current account surplus permits the country to add to its net claims on foreigners. For
this reason the country's international investment position will become a positive value.
126
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
