Provide whether each of following is True or False. a. A one-time increase in saving and...

Provide whether each of following is True or False. a. A one-time increase in saving and investment rates in an economy will permanently raise Real GDP growth. b. A country’s Fixed Capital Formation (Investment) Rate can never exceed its Domestic Saving Rate. c. A British exporter that is owed a payment in Dollars in 90 days has foreign exchange risk and to hedge that risk should make a 90 day Forward Foreign Exchange contract to deliver Pounds for Dollars. d. In order for a country to achieve a long-run expansion of its Real GDP, it must obtain increases in all economic resources, even when substitution among economic resources is possible.

Solutions

Expert Solution

(a) False because one time investment cannot raise the permanent growth in GDP as long run equilibrium would always be the the same as short run. The new equilibrium would shift aggregate demand to its right but for a short term

(b) False, a country's investment can be more than the savings rate. Lets take a case, when your savings is $1000 and you put the complete savings in bank and earn interest over it. Let say after an year the sum is $1010. You can invest that amount which is more than $1000 or there can be cases when you have some property assets which can be sold out to invest in the economy.

(c) True as Forward exchange rate protects the buyer from fluctuations in the currencies. When British owed a payments for 90 days, it would be beneficial for Britain to take the hedge foreign exchange.

(d) True because one of the factor of increase in GDP comes from efficient use of resources. Efficient use of resources increases the GDP as there are equitable income level in the society which reduces gaps in income level.

Rahul Sunny answered 1 year ago

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