Consider a two-period eco

Consider a two-period eco

Consider a two-period economy that has at the beginning of period 0 net foreign assets of -100 : In period 0, the country runs a current account decit of 5 percent of GDP, and GDPin both periods is 120. Assume the interest rate in periods 0 and 1 is 10 percent.1. Find the trade balance in period 0, the current account balance in period 0; and thecountry’s external wealth at the beginning of period 1.2 Is the country living beyond its means? To answer this question, nd the country’scurrent account balance in period 1 and the associated trade balance in period 1. Isthis value for the trade balance feasible? [Hint: Keep in mind that since expenditurescannot be negative, the trade balance cannot exceed GDP].3 Now assume that in period 0, the country runs instead a much larger current accountdecit of 10 percent of GDP. Find the country’s external wealth at the end of period0. Is the country living beyond its means? If so, why?. Can a country simultaneously run a trade balance surplus and a current accountdecit?(a) No, because the trade balance and the current account are always equal.(b) Yes, if imports exceed exports, and the country is a big net creditor that earnslarge interest income.1(c) Yes, if exports exceed imports, and the country is a big net creditor that earnslarge interest income.(d) Yes, if exports exceed imports, and the country is a big net debtor paying largeinterest income.(e) Yes, if imports exceed exports, and the country is a big net debtor paying largeinterest income.2. If a country runs a trade balance surplus, will it necessarily be accumulating net foreignassets?(a) No, it will be necessarily running down its net foreign assets.(b) Yes, the change in net foreign assets is equal to the trade balance surplus.(c) Not necessarily. If the country has negative investment income, it might run acurrent account decit in spite of its trade balance surplus.(d) Not necessarily. If the country receive large payments for the work of its citizensabroad, it might run a current account decit in spite of its trade balance decit.(e) None of the above.3. Can a country with positive net foreign assets receive negative investment income?(a) Yes, if the average return on its foreign assets exceeds the average return on itsforeign liabilities.(b) No, investment income cannot be negative.(c) Yes, if the average return on its foreign liabilities exceeds the average return onits foreign assets.(d) Yes, if exports exceed imports.(e) Yes, if imports exceed exports.4. If investment exceeds savings(a) the trade balance is positive(b) the trade balance is negative(c) net foreign assets increase over time(d) net foreign assets fall over time(e) none of the above5. If an American citizen purchases a 100 dollar Italian bottle of wine in a restaurant inBeverly Hills, CA and pays with US dollars, this transaction will show up in the USBalance of Payments as(a) +100 in the current account, -100 in the current account.(b) -100 in the current account, +100 rise in net foreign assets.2(c) -100 in the current account, +100 decline in net foreign assets.(d) none of the above6. If a US citizen receives 20,000 dollars in dividends from a Japanese corporation, andthese funds are deposited in his Citibank account, this transaction will show up in theUS Balance of Payments as(a) +20,000 in the current account, 20,000 rise in net foreign assets.(b) +20,000 in the current account, -20,000 in the current account.(c) +20,000 increase in net foreign assets, 20,000 decline in net foreign assets.(d) +20,000 increase in net foreigh assets, -20,000 in the capital account.(e) -20,000 in the current account, 20,000 rise in net foreign assets.7. If a country has positive net foreign assets then, in the future,(a) the country must run a trade surplus every year.(b) the country must run a trade balance every year(c) the country must run a trade surplus at least one year(d) the country must run a trade decit at least one year(e) the country must run a current account decit every year.

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