REVIEW QUESTIONS

1. List the categories of transactions that appear in a country's current account. What is the current account balance? What is the relationship between the current account balance and net exports?

2.

3. A U.S. publisher sells $200 worth of books to a resident of Brazil. By itself, this item increases the U.S. current account balance. Describe some off­setting transactions that could ensure that the U.S. current account and financial account balances would continue to sum to zero.

4. How do a country's current account and financial account balances affect its net foreign assets? If country A has greater net foreign assets per citizen than does country B, is country A necessarily better off than country B?

investment, I^d, plus the amount lent abroad. The amount lent abroad equals the current account balance, which (if we assume that net factor payments and unilateral trans­fers are zero) also equals net exports, NX.

NX = Y -(C^d + I^d + G) (5.6)

An alternative way of writing the goods market equilib­rium condition, this equation states that net exports must equal the country's output, Y, less its desired absorption, C^d ₊ ι^d ₊ G.

5. Explain why, in a small open economy, (a) national saving does not have to equal investment, and (b) output does not have to equal absorption.

6. Generally, what types of changes in desired saving and desired investment lead to large current account deficits in a small open economy? What factors lead to these changes in desired saving and desired investment?

7. In a world with two large open economies, what determines the world real interest rate? What rela­tionship between the current accounts of the two countries is satisfied when the world real interest rate is at its equilibrium value?

8. How does an increase in desired national saving in a large open economy affect the world real interest rate? How does an increase in desired investment affect it? Why do changes in desired saving or invest­ment in large open economies affect the world real interest rate but changes in desired saving or invest­ment in small open economies do not?

9. Under what circumstances will an increase in the government budget deficit affect the current account balance in a small open economy? In the cases in which the current account balance changes, by how

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