Question

5. What is the impact of costly investment on trade balance in the short run?
(a) It decreases trade balance.
(b) It increases trade balance.
(c) It may decrease or increase trade balance.
(d) It has no impact on trade balance.

6. What is the impact of costly investment on trade balance in the long run?
(a) It decreases trade balance.
(b) It increases trade balance.
(c) It may decrease or increase trade balance.
(d) It has no impact on trade balance.

7. What is the impact of costly investment on current account in the short run?
(a) It decreases current account.
(b) It increases current account.
(c) It may decrease or increase current account.
(d) It has no impact on current account.

8. What is the impact of costly investment on current account in the long run?
(a) It decreases current account.
(b) It increases current account.
(c) It may decrease or increase current account.
(d) It has no impact on current account.

Answer 1

5.

It increases trade balance

Reason: As investment is done by businesses in order to increase output of goods and services, the exports from the economy would increase, leading to an increase in net exports and thus increase in trade balance

6.

It decreases trade balance

Reason: In the long run, as exports increase, the exchange rate would increase. In the long run, an appreciation of currency would lead to a fall in exports and increase in imports, thereby reducing trade balance and putting it back to original equilibrium

7.

It decreases current account

Reason: Since current account = saving - investment, as investment increases, in the short run, it would immediately decrease current account

8.

It increases current account

Reason: In the long run, when benefits of investment start to reap in, business profits and individual incomes would increase, which would lead to increase in consumption and savings. This would lead to an increase in current account