Question 1

In the two-period SOE model with production, suppose that the real interest rate if there were no trade is greater than the world real interest rate. If the economy is initially closed, and then
Becomes open

Accepted Answer

A) net exports will be negative. 
B) net exports will be positive. 
C) output will increase. 
D) investment will fall. 
E) government spending will rise.

Question 2

In the two-period SOE model with production, an increase in labour supply

Accepted Answer

A) causes output to decline. 
B) causes investment to increase. 
C) causes investment to decline. 
D) causes consumption to increase. 
E) causes the current account surplus to decline.

Question 3

In the two period SOE model with production, if there is good news about future total factor productivity

Accepted Answer

A) the current account surplus decreases. 
B) the current account surplus increases. 
C) current output declines. 
D) current output increases. 
E) investment declines.

Question 4

In the two-period model with default, if the nation defaults on its debts in the future period

Accepted Answer

A) it bears a cost v. 
B) the central bank must bail out the government. 
C) collateral is seized. 
D) there are no consequences. 
E) it faces a higher interest rate.

Question 5

Absorption can be defined as

Accepted Answer

A) GDP/NX. 
B) I/GDP. 
C) X - M. 
D) C + I + G. 
E) the quantity of foreign produced goods absorbed through domestic spending.

Question 6

International trade has increased for which of the following reasons?

Accepted Answer

A) Governments went against mainstream economic ideas. 
B) higher costs of transporting goods between countries 
C) the development of more efficient world financial markets 
D) better monetary policy 
E) more government spending on goods and services

Question 7

In a two-period SOE model with production, an increase in current domestic total factor productivity

Accepted Answer

A) increases domestic output and decreases the current account surplus. 
B) decreases domestic output and decreases the marginal product of capital. 
C) decreases domestic output and decreases the current account surplus. 
D) decreases domestic output and increases the current account surplus. 
E) increases domestic output and increases the current account surplus.

Question 8

In a two-period SOE model with production, an anticipated future increase in domestic total factor productivity

Accepted Answer

A) has no effect on domestic output and decreases the current account surplus. 
B) increases domestic output and increases the current account surplus. 
C) has no effect on domestic output and increases the current account surplus. 
D) increases domestic output and decreases the current account surplus. 
E) increases domestic output with no change in the current account surplus.

Question 9

For Canada

Accepted Answer

A) trade with the rest of the world is negligible. 
B) a small open economy assumption is realistic. 
C) trade with the rest of the world has fallen since the 1950s. 
D) a small open economy assumption is not realistic. 
E) small open economy models are irrelevant.

Question 10

In the two-period SOE model, if the current account surplus is initially positive and the real interest rate decreases, then

Accepted Answer

A) the current account surplus must fall. 
B) the current account deficit must rise. 
C) the current account surplus must rise. 
D) the current account deficit may rise or fall. 
E) the current account deficit must fall.

Question 11

Suppose goods produced domestically and abroad are identical. The small open economy (SOE) imposes a tariff t on imported goods, and the rest of the world imposes a tariff t on goods exported
From the SOE. Then

Accepted Answer

A) trade declines between the SOE and the rest of the world. 
B) economic welfare declines. 
C) aggregate output stays the same, but domestic demand shifts from imports to domestically produced goods. 
D) aggregate output increases, because the SOE wins the trade war. 
E) there is no effect, except on prices.

Question 12

Current account deficits may not be undesirable for the domestic economy as it

Accepted Answer

A) helps domestic consumers to smooth consumption over time. 
B) leads to lower interest rates. 
C) causes the domestic currency to appreciate. 
D) leads to more government spending. 
E) leads to lower taxes.

Question 13

GATT is

Accepted Answer

A) the Government Agreement on Trade with Thailand. 
B) the General Authority to Tax and Trade. 
C) the Government Agreement on Taxes and Tariffs. 
D) the General Agreement on Tariffs and Trade. 
E) the Great Authority to Trade and Tax.

Question 14

In a two-period model, as long as wealth effects are small, an increase in the world real interest rate

Accepted Answer

A) decreases consumption and increases the current account surplus. 
B) increases consumption and decreases the current account surplus. 
C) increases consumption and increases the current account surplus. 
D) increases investment. 
E) decreases consumption and decreases the current account surplus.

Question 15

The national present-value budget constraint states that

Accepted Answer

A) the present value of consumption plus the present value of government spending is equal to the present value of total income. 
B) savings equals investment. 
C) government spending equals taxes in present value terms. 
D) the credit market clears. 
E) assets equal liabilities for the central bank.

Question 16

In the two-period SOE model with production, an increase in current taxes

Accepted Answer

A) reduces the current account surplus. 
B) increases future taxes. 
C) reduces output. 
D) increases the current account surplus. 
E) reduces future taxes.

Question 17

If current taxes increase, then

Accepted Answer

A) there is no effect on the current account surplus. 
B) government spending must fall. 
C) the current account surplus rises. 
D) the current account surplus falls. 
E) government spending must rise.

Question 18

In the two-period SOE model, a decrease in current income

Accepted Answer

A) reduces the current account surplus. 
B) leaves C + G unchanged. 
C) increases C + G. 
D) increases the current account surplus. 
E) results in no change in the current account surplus.

Question 19

In the two-period SOE model with production, if the SOE closes off trade with the rest of the world

Accepted Answer

A) this makes output go up only if the government reduces spending. 
B) this makes output go up if the real interest rate goes down. 
C) this makes output go up if the real interest rate goes up. 
D) this must make output go down. 
E) this must make investment go up.

Question 20

In a two-period model with default, if the market interest rate is low, then

Accepted Answer

A) the income effect is larger than the substitution effect. 
B) there is more inflation. 
C) there is no effect on the nation's default decision. 
D) default is less likely. 
E) default is more likely.

Exam 15: Inflation: Phillips Curves and Neo-Fisherism

In the two-period SOE model with production, suppose that the real interest rate if there were no trade is greater than the world real interest rate. If the economy is initially closed, and then Becomes open