As weâ€™ve seen in this chapter, government policies in one country may have effects in others. Fiscal and
monetary policies affect interest rates both at home and abroad. Yet for the most part, countries decide on
their fiscal and monetary policies independently of other countries. The question is, should this fact lead
1. Credit items in the current account are exports of goods and services and income receipts from
abroad. Debit items in the current account are imports of goods and services, income payments to
2. The current account includes only the trade of currently produced goods and services. Trades of
existing assets are counted in the capital and financial account.
3. The sale of books from the United States to Brazil is a credit item in the U.S. current account.
Offsetting transactions include anything that is a debit item in either the current account or the capital
4. In any period, the net amount of new foreign assets that a country acquires equals its current account
surplus, which in turn must equal its capital and financial account deficit. A country with greater net
5. In a small open economy, saving does not have to be equal to investment. Saving can be used to
finance domestic investment or it can be lent abroad. So saving equals investment plus net exports.
6. A small open economy is likely to run a large current account deficit and to borrow abroad if desired
investment increases substantially or if desired national saving declines substantially. Desired
investment could increase if there is an increase in the expected future marginal product of capital or
a decline in the user cost of capital, both of which would shift the desired investment curve to the