Question

In: Economics

In a large open economy, an investment tax credit raises the real interest rate, ______ the...

In a large open economy, an investment tax credit raises the real interest rate, ______ the trade balance, and
______ net capital outflow.
a. decreases; decreases
b. increases; increases
c. decreases; increases
d. increases; decreases

Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the
United States. Then, the U.S. real interest rate:
a. and net exports will both fall.
b. will fall and net exports will rise.
c. will rise and net exports will fall.
d. and net exports will both rise.

What determines the distribution of national income between labor and capital in a competitive, profitmaximizing
economy with constant returns to scale?
a. the relative quantity of labor to capital
b. the interest rate
c. the ratio of public saving to private saving
d. the marginal productivity of labor relative to the marginal productivity of capital

Solutions

Expert Solution

(1) (a)

Higher US interest rate decreases capital outflow and increases capital inflow, thereby decreasing net capital outflow. Since net capital outflow equals trade balance, lower net capital outflow decreases trade balance.

(2) (c)

Higher investment demand in US will shift investment and IS curve rightward, increasing interest rate. Since interest rate and net exports are inversely related, it means net exports will fall.

(3) (d)

In equilibrium, MPL / wage rate = MPK / Rental rate, as per neoclassical theory.


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