Chapter 18, Problem 1QAP

a)

To determine

The current U.S. trade deficit is the result of unusually high investment, not the result od a decline in national saving is true or false.

Explanation of Solution

It is False because of rising demand on both domestic and imported products as savings decline. As there are some goods which U.S. does not produce? Even there are some products they imports even a country produce domestically due to the large demand from home country.

Economics Concept Introduction

Introduction: A trade deficit occurs when the imports of a nation surpass its exports for a given period of time. The demand for import rises due to many factors like increase in the preference for the particular product, low cost of producing output as compare with home country.

b)

To determine

The national identity implies that budget deficits cause trade deficits is true or false

Explanation of Solution

It is False Since an increase in the budget deficit would lead to an increase in the trade deficit, we cannot infer from the identity of the national income accountants. We have to make the prediction using our model.

Economics Concept Introduction

Introduction: The identity of national income says that consumption expenditures, plus investment expenditures, plus government spending, plus exports, minus imports, that provides give gross domestic product.

c)

To determine

The opening the economy to trade tends to increase the multiplier because an increase in expenditure leads to more exports is true or false.

Explanation of Solution

It is False because Expenditure changes will now be shared between domestic and international products.

Economics Concept Introduction

Introduction: An impact in economics where an increase in spending causes an increase in national income and consumption that is greater than the amount spent initially. For instance, if a business builds a factory, it will hire construction workers and their suppliers as well as those employed in the factory.

d)

To determine

If the trade deficit is equal to zero, then the domestic demand for goods and the demand for domestic goods are equal is true or false.

Explanation of Solution

It is true, if the trade deficit is equal to zero, then the domestic demand for goods and the demand for domestic goods are equal. Countries have a favorable balance of trade when exports exceeds imports.

Economics Concept Introduction

Introduction: A trade deficit occurs, when a nation imports more than it exports. A trade gap is neither necessarily positive nor poor inherently. A trade deficit may be a symbol of a healthy economy, and may lead to stronger economic growth for the deficit nation in the future under some conditions.

e)

To determine

A real depreciation leads to an immediate improvement in the trade balance is true or false.

Explanation of Solution

It is False as Econometric evidence suggests that a real depreciation does not result in immediate trade balance change. Trade balance usually increases six to twelve months after a true depreciation.

Economics Concept Introduction

Introduction:  Domestic currency depreciation means a decline in the value of the domestic currency in foreign currency terms.

f)

To determine

A small open economy can reduce its trade deficit through fiscal contraction at a small cost in output than can a large open economy is true or false.

Explanation of Solution

It is true; a small open economy can minimize its trade deficit through fiscal contraction at a smaller cost in output than can a large open economy.

Economics Concept Introduction

Introduction: In a small open economy, equilibrium occurs when saving equals investment; however, there is equilibrium in a open large economy when saving less desired investment equals net exports.

g)

To determine

The experience of the United States in the 1990s shows that real exchange rate appreciations lead to trade deficits and real exchange rate depreciations lead to trade surpluses is true or false.

Explanation of Solution

It is true, the history of the United States in the 1990s indicates that real currency appreciations lead to trade deficits and real depreciation of the exchange rate leads to trade surpluses.

Economics Concept Introduction

Introduction: In general terms, appreciation reflects an improvement in the value of an asset over time. The rise may occur for a variety of reasons, including increased demand or declining supply, or due to inflation or interest rate changes.

h)

To determine

The decline in real income can lead to a decline in imports and thus a trade surplus is true or false.

Explanation of Solution

It is true; a decline in real income can lead to a decline in imports because people prefer to buy more when income of the people increases where as fall in real income discourage to purchase and when a country reduce the volume of import then it can have a trade surplus foe a home country.

Economics Concept Introduction

Introduction:  A trade surplus is one of the economic indicator that reflect a healthy trade balance, in which exports of a nation outweigh its imports.