Question

In: Economics

National savings in US is equal to 40 billion dollars. Suppose US is an open economy...

National savings in US is equal to 40 billion dollars. Suppose US is an open economy and the real interest rate on Canada bonds increases. All else equal, what would we expect to happen to US investment and net capital outflow? Select one:

a. Net capital outflow decreases and US investment increases.

b. Net capital outflow increases and US investment increases.

c. Net capital outflow increases and US investment decreases.

d. Net capital outflow decreases and US investment decreases.

Solutions

Expert Solution

Ans: The correct option is (C)

When the real interest rate on Canadian bonds increases, the investors in USA would like to divert their investment from USA to Canada in search of high real interest rate. It means, people would invest their money in Canadian bonds which are paying high real interest rate as compared to investment products in USA. Therefore, the net capital outflow increases from USA to Canada.

As the funds (Savings) goes into Canada, the funds (Savings) available in USA decreases to make loans and investment. So, the supply of loanable funds decreases and investment level decreases in the country.


Related Solutions

9. In a small open economy if exports equal $16 billion and imports equals $19 billion,...
9. In a small open economy if exports equal $16 billion and imports equals $19 billion, then there is a trade ________ and ________ net capital outflows. a. deficit; negative b. surplus; positive c. surplus; negative d. deficit; positive 10. Costco chooses to pay its workers a median salary of $20 an hour, even though the federal minimum wage is currently set at $7.25 an hour. This would be an example of: a. efficiency wage theory. b. adverse selection c....
Suppose in an economy, household savings equal 4000, firm savings (undistributed profits) equal 800, the government...
Suppose in an economy, household savings equal 4000, firm savings (undistributed profits) equal 800, the government has a deficit of 2500, and investment is 3500. What must the trade deficit be? What is the savings of the ROW? Explain how the trade deficit and the government budget deficit are connected (‘twin deficits”). You can refer to the US as an example.
The identity between national savings and investment holds only in a(n): open economy. closed economy. shrinking economy. growing economy.
The identity between national savings and investment holds only in a(n): open economy. closed economy. shrinking economy. growing economy.
Suppose the real GDP of an economy is $560 billion dollars andits unemployment rate is...
Suppose the real GDP of an economy is $560 billion dollars and its unemployment rate is 8%.If the natural rate of unemployment is estimated at 5%, what is the value of the country’s potential GDP (LAS) in billions of dollars? Enter your response below rounded to 1 decimal place.
6. In a small open economy, desired national saving, S d = $10 billion + ($100...
6. In a small open economy, desired national saving, S d = $10 billion + ($100 billion)rw ; desired investment, Id =$15 billion-($100 billion)rw ; output, Y= $50 billion; government purchases, G = $10billion; world real interest rate, rw =0.03 a. Find the economy’s national saving, investment, current account surplus, net exports, desire consumption, and adsorption. b. Owing to a technological innovation that increases future productivity, the country’s desired investment rises by $2 billon at each level of the world...
Consider a hypothetical economy with autonomous consumption spending equal to 100 billion dollars, a marginal propensity to consume of 0.8
  Consider a hypothetical economy with autonomous consumption spending equal to 100 billion dollars, a marginal propensity to consume of 0.8, private investment spending of 160 billion dollars, government spending of 140 billion dollars, a balanced budget, and balanced trade (i.e. exports and imports are equal). Write a short essay comparing the effects (1) on the government budget and (2) on the equilibrium level of income in the economy of (i) a 5 billion dollar increase in government spending and...
Explain what happens to a small open economy when foreign governments decrease their national savings. What...
Explain what happens to a small open economy when foreign governments decrease their national savings. What happens to the following variables: i. world interest rate ii. domestic interest rate iii. domestic investment iv. domestic national savings v. trade balance (or net exports)
Suppose that, for a given year, national saving in a country (an open economy) equals 200,...
Suppose that, for a given year, national saving in a country (an open economy) equals 200, private consumption in final goods and services equals 100, and government consumption in final goods and services equals 20. In addition, firms invested 75 in final goods and services and spent 25 in intermediate goods. Households invested 50 in the domestic stock market. What is the level of output in this country in this year? And what is the balance of the current account?...
Consider savings and investment in a small, open economy model. Suppose the exogenous world interest rate...
Consider savings and investment in a small, open economy model. Suppose the exogenous world interest rate determines the investment. a) Draw the demand and the supply of loanable funds. What determines the net exports, NX (or net capital outflow) in this open economy? b) Show the impact of a fiscal policy change at home (an increase in G or a decrease in taxes) on savings, investment and net export (NX) with the help of a graph in this model. c)...
Suppose the economy produces real GDP of $40 billion when unemployment is at its natural rate.
5. The slope and position of the long-run aggregate supply curve Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The size of the labor force The quantity of physical capital The price level The inflation rate Suppose the economy produces real GDP of $40 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT