chapter 6

Question 1

It studies the effective use of scarce resources from the
perspective of individual firms and consumers.

Answer 1

Microeconomics

Question 2

It studies how economies’ overall levels of
employment, production, and growth are determined.

Answer 2

Macroeconomics

Question 3

Macroeconomics emphasizes four aspects of economic life:

Answer 3

Unemployment

Saving

Trade imbalances

Money and the price level

Question 4

essential tools for studying the
macroeconomics of open, interdependent economies.

Answer 4

national income accounts and the balance of
payments accounts

Question 5

Records all the expenditures that contribute to a
country’s income and output

Answer 5

National income accounting

Question 6

Helps us keep track of both changes in a country’s
indebtedness to foreigners and the fortunes of its
export- and import-competing industries

Answer 6

Balance of payments accounting

Question 7

The value of all final goods and services produced by
a country’s factors of production and sold on the
market in a given time period

Answer 7

Gross national product (GNP)

Question 8

It is the basic measure of a country’s output.

Answer 8

Gross national product (GNP)

Question 9

GNP is calculated by adding up the market value of
all expenditures on final output:

Answer 9

Consumption

Investment

Government purchases

Current account balance

Question 10

The amount consumed by private domestic residents

Answer 10

Consumption

Question 11

The amount put aside by private firms to build new
plant and equipment for future production

Answer 11

Investment

Question 12

The amount used by the government

Answer 12

Government purchases

Question 13

The amount of net exports of goods and services to
foreigners

Answer 13

Current account balance

Question 14

It is earned over a period by its factors of production.

Answer 14

National Income

Question 15

It must equal the GNP a country generates over some
period of time.

One person’s spending is another’s income (i.e., total spending
must equal total income).

Answer 15

National Income

Question 16

Adjustments to the definition of GNP:

Answer 16

Depreciation of capital

Net unilateral transfers of income

Indirect business taxes

Question 17

Adjustments to the definition of GNP:

It reduces the income of capital owners.

Answer 17

Depreciation of capital

Question 18

Adjustments to the definition of GNP:

It must be subtracted from GNP (to get the net national product).

Answer 18

Depreciation of capital

Question 19

Adjustments to the definition of GNP:

They are part of a country’s income but are not part of its product.

Answer 19

Net unilateral transfers of income

Question 20

Adjustments to the definition of GNP:

They must be added to the net national product.

Answer 20

Net unilateral transfers of income

Question 21

Adjustments to the definition of GNP:

They are sales taxes.

Answer 21

indirect business taxes

Question 22

Adjustments to the definition of GNP:

They must be subtracted from GNP.

Answer 22

Indirect business taxes

Question 23

It measures the volume of production within a
country’s borders.

Answer 23

Gross Domestic Product (GDP)

Question 24

It equals GNP minus net receipts of factor income
from the rest of the world.

Answer 24

Gross Domestic Product (GDP)

Question 25

It does not correct for the portion of countries’ production carried out using services provided by foreign-owned capital.

Answer 25

Gross Domestic Product (GDP)

Question 26

National Income Accounting for an Open Economy

Answer 26

Y = C + I + G + EX – IM where: Y is GNP C is consumption I is investment G is government purchases EX is exports IM is imports

Question 27

The portion of GNP purchased by the private sector to fulfill current wants

Answer 27

Consumption

Question 28

The part of output used by private firms to produce future output

Answer 28

Investment

Question 29

Any goods and services purchased by federal, state, or local governments

Answer 29

Government Purchases

Question 30

It is the sum of domestic and foreign expenditure on the goods and services produced by domestic factors of production: Y = C + I + G + EX – IM

Answer 30

The National Income Identity for an Open Economy

Question 31

In a closed economy, EX = IM =

Question 32

The difference between exports of goods and services and imports of goods and services

Answer 32

Current account (CA) balance

Question 33

CA > 0

Answer 33

CA surplus

Question 34

CA < 0

Answer 34

CA deficit

Question 35

measures the size and direction of international borrowing.

Answer 35

Current account

Question 36

A country’s current account balance equals the change in its _

Answer 36

net foreign wealth.

Question 37

CA balance is equal to the difference between national income and domestic residents’ spending:

Answer 37

Y – (C+ I + G) = CA

Question 38

WHAT is goods production less domestic demand.

Answer 38

CA balance

Question 39

WHAT is the excess supply of domestic financing. Example: Agraria imports 20 bushels of wheat and exports only 10 bushels of wheat (Table 12-1). The current account deficit of 10 bushels is the value of Agraria’s borrowing from foreigners, which the country will have to repay in the future.

Answer 39

CA balance

Question 40

The portion of output, Y, that is not devoted to household consumption, C, or government purchases, G.

Answer 40

National saving (S)

Question 41

It always equals investment in a closed economy.

Answer 41

National saving (S)

Question 42

A closed economy can save only by building up its _ An open economy can save either by building up its _

Answer 42

capital stock (S = I). capital stock or by acquiring foreign wealth (S = I + CA).

Question 43

A country’s CA surplus is referred to as its

Answer 43

net foreign investment.

Question 44

The part of disposable income that is saved rather than consumed

Answer 44

Private saving (Sp)

Question 45

Sp = I + CA – Sg = I + CA – (T – G) = I + CA + (G – T) T is the government's “income” (its net tax revenue) Sg is government savings (T-G)

Answer 45

Private saving (Sp)

Question 46

It measures the extent to which the government is borrowing to finance its expenditures.

Answer 46

Government budget deficit (G – T)

Question 47

accounts keep track of both its payments to and its receipts from foreigners.

Answer 47

country’s balance of payments

Question 48

Every international transaction automatically enters the balance of payments twice:

Answer 48

once as a credit (+) and once as a debit (-).

Question 49

Three types of international transactions are recorded in the balance of payments:

Answer 49

Exports or imports of goods or services Purchases or sales of financial assets Transfers of wealth between countries

Question 50

They are recorded in the capital account.

Answer 50

Exports or imports of goods or services Purchases or sales of financial assets Transfers of wealth between countries

Question 51

A U.S. citizen buys a $1000 typewriter from an Italian company, and the Italian company deposits the $1000 in its account at Citibank in New York. the U.S. trades assets for ? This transaction creates the following two offsetting entries in the U.S. balance of payments: ?

Answer 51

for goods. It enters the U.S. CA with a negative sign (-$1000). It shows up as a $1000 credit in the U.S. financial account.

Question 52

A U.S. citizen pays $200 for dinner at a French restaurant in France by charging his Visa credit card. U.S. trades assets for ? This transaction creates the following two offsetting entries in the U.S. balance of payments: ?

Answer 52

for services It enters the U.S. CA with a negative sign (-$200). It shows up as a $200 credit in the U.S. financial account.

Question 53

A U.S. citizen buys a $95 newly issued share of stock in the United Kingdom oil giant British Petroleum (BP) by using a check drawn on his stockbroker money market account. BP deposits the $95 in its own U.S. bank account at Second Bank of Chicago. US trades assets for ? This transaction creates the following two offsetting entries in the U.S. balance of payments: ?

Answer 53

for assets It enters the U.S. financial account with a negative sign (-$95). It shows up as a $95 credit in the U.S. financial account.

Question 54

A U.S. bank forgives $5000 in debt owed to it by the government of Bygonia. This transaction creates the following two offsetting entries in the U.S. balance of payments: ?

Answer 54

It enters the U.S. capital account with a negative sign (-$5000). It shows up as a $5000 credit in the U.S. financial account.

Question 55

Any international transaction automatically gives rise to two offsetting entries in the balance of payments resulting in a fundamental identity: Current account + financial account + capital account = 0

Answer 55

Fundamental Balance of Payments Identity

Question 56

The Fundamental Balance of Payments Identity Any international transaction automatically gives rise to two offsetting entries in the balance of payments resulting in a fundamental identity: ?

Answer 56

Current account + financial account + capital account = 0

Question 57

The balance of payments accounts divide exports and imports into three categories:

Answer 57

Merchandise trade Services Income

Question 58

Exports or imports of goods

Answer 58

Merchandise trade

Question 59

Payments for legal assistance, tourists’ expenditures, and shipping fees

Answer 59

Services

Question 60

International interest and dividend payments and the earnings of domestically owned firms operating abroad

Answer 60

Income

Question 61

It records asset transfers and tends to be small for the United States.

Answer 61

The Capital Account

Question 62

It measures the difference between sales of assets to foreigners and purchases of assets located abroad.

Answer 62

The Financial Account

Question 63

A loan from the foreigners with a promise that they will be repaid

Answer 63

Financial inflow (capital inflow)

Question 64

A transaction involving the purchase of an asset from foreigners

Answer 64

Financial outflow (capital outflow)

Question 65

The Financial Account

Answer 65

Financial inflow (capital inflow) Financial outflow (capital outflow)

Question 66

Data associated with a given transaction may come from different sources that differ in coverage, accuracy, and timing.

Answer 66

The Statistical Discrepancy

Question 67

This makes the balance of payments accounts seldom balance in practice.

Answer 67

Statistical Discrepancy

Question 68

Account keepers force the two sides to balance by adding to the accounts a WHAT

Answer 68

Statistical Discrepancy

Question 69

It is very difficult to allocate this discrepancy among the current, capital, and financial accounts.

Answer 69

Statistical Discrepancy

Question 70

Official Reserve Transactions

Answer 70

Central bank Official international reserves Official foreign exchange intervention Official settlements balance (balance of payments)

Question 71

The institution responsible for managing the supply of money

Answer 71

Central bank

Question 72

Foreign assets held by central banks as a cushion against national economic misfortune

Answer 72

Official international reserves

Question 73

Central banks often buy or sell international reserves in private asset markets to affect macroeconomic conditions in their economies.

Answer 73

Official foreign exchange intervention

Question 74

The book-keeping offset to the balance of official reserve transactions

Answer 74

It is the sum of the current account balance, the capital account balance, the nonreserve portion of the financial account balance, and the statistical discrepancy. Example: The U.S. balance of payments in 2000 was -$35.6 billion, that is, the balance of official reserve transactions with its sign reversed.

Question 75

The book-keeping offset to the balance of official reserve transactions

Answer 75

Official Settlements Balance

Question 76

Official Settlements Balance

Answer 76

It is the sum of the current account balance, the capital account balance, the nonreserve portion of the financial account balance, and the statistical discrepancy. Example: The U.S. balance of payments in 2000 was -$35.6 billion, that is, the balance of official reserve transactions with its sign reversed.

Question 77

signal that it is running down its international reserve assets or incurring debts to foreign monetary authorities.

Answer 77

country with a negative balance of payments

Question 78

WHAT is the world’s biggest debtor.

Answer 78

The United States is the world’s biggest debtor. However, the United States has the world’s largest GNP.

Question 79

A country’s GNP is equal to the WHAT

Answer 79

income received by its factors of production.

Question 80

equal to GNP less net receipts of factor income from abroad, measures the output produced within a country’s territorial borders.

Answer 80

GDP

Question 81

In a closed economy, WHAT must be consumed, invested, or purchased by the government.

Answer 81

GNP

Question 82

In an open economy, WHAT equals the sum of consumption, investment, government purchases, and net exports of goods and services.

Answer 82

GNP

Question 83

All transactions between a country and the rest of the world are recorded in its WHAT

Answer 83

balance of payments accounts.

Question 84

The current account equals the WHAT

Answer 84

country’s net lending to foreigners.

Question 85

domestic investment plus the current account.

Answer 85

National saving

Question 86

Transactions involving goods and services appear in WHAT

Answer 86

CURRENT ACCOUNT OF THE BOP

Question 87

international sales or purchases of assets appear in the WHAT

Answer 87

FINANCIAL ACCOUNT

Question 88

records asset transfers and tends to be small in the United States.

Answer 88

capital account

Question 89

WHAT must be matched by an equal surplus in the other two accounts of the balance of payments, and any current account surplus by a deficit somewhere else.

Answer 89

current account deficit

Question 90

International asset transactions carried out by central banks are included in the WHAT

Answer 90

financial account.