Question

1. If there is a drop in private domestic savings, the following will happen:

-causes the trade deficit to worsen

-decreases the need for foreign financial capital to meet domestic investment needs

-causes the trade deficit to improve

-increases the need for foreign financial capital to meet domestic investment needs

-None of these

2.Military assistance from the US govt to, say, NATO, fits into which current account category?

  Financial Capital

None of these

Unilateral transfer

Service Category

Merchandise Trade Transfer

3. A current account deficit means that,

  the country borrows from abroad

  None of these

  the country saves more

  the country saves less

the country lends to other countries

Answer 1

1) if there is a drop in private domestic savings then with the help of following identity we can find out what will happen

Taxes–Government Spending+ Savings–Investment= Trade Balance

Now in the savings decrease then the left hand side of the equation decrease in value. To match this and balance the equation the right hand side of the equation has to decrease in value. Hence, trade balance decreases. In other words A drop in private domestic savings will cause the trade deficit to worsen.

Hence, first option is correct.

2) military assistance from the US government to NATO fits INTO UNILATERAL TRANSFER CATEGORY OF THE CURRENT ACCOUNT.

Hence, third option is correct.

3) from the above given equation we can see that if the current account deficit is there it means that the right hand side is negative, then it also implies that National Savings is less than the investment because the left hand side of the Equation is also negative.

Hence, a current account deficit means that the country saves less.

Therefore, Fourth option is correct.