Consider a small open economy that is in equilibrium with a current account surplus
(a) Draw a diagram showing this situation.
(b) Now suppose that future income increases. Show what happens in your diagram. What happens to the world real interest rate and the equilibrium quantities of saving, investment, and the current account balance?
(c) Repeat parts (a) and (b) for the case of a large open economy, showing a situation in which the home country initially has a current account surplus. Draw a diagram and describe how the rise in future income in the home country affects all four variables (the world real interest rate and the equilibrium quantities of saving, investment, and the current account balance) in both countries.
(b) The increase in future income shifts the desired saving curve to the left, so the new equilibrium quantity of saving declines, the equilibrium quantity of investment does not change, the current account balance declines, and the world real interest rate does not change.
(c) In a large open economy, the increase in future income in the home country shifts the desired saving curve to the left, which causes the world real interest rate to rise to restore equilibrium. In the home country, the equilibrium quantity of saving declines and the equilibrium quantity of investment declines. In the foreign country, the equilibrium quantity of saving rises, the equilibrium quantity of investment declines, so the current account balance increases (or the current account deficit declines). Since the current account balance increases in the foreign country, it decreases in the domestic country.
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Two identical firms that share a market and produce a homogenous good will find the Bertrand Oligopoly LEAST attractive because
A) Cartels generate the highest joint profit. B) a Cournot Oligopoly will generate more profit than a Bertrand Oligopoly. C) they want to avoid a price war that leads to profit erosion and P = MC. D) All of the above.
When diminishing marginal returns set in, marginal product is
a. positive and increasing b. positive and decreasing c. negative and increasing d. negative and decreasing e. zero
The price for labor is the wage rate. What happens to the supply of labor if wages increase?
a. It increases. b. It decreases. c. It does not change. d. Uncertain-economic theory has no answer to this question.
In the mid-1990s, Coke introduced a new soda in the soft drink market. Coke then used a new advertising campaign to associate the new soda with youth and strength. Coke was trying to:
A. shift the demand curve for competing soft drinks to the left. B. create a perfectly competitive market for soft drinks. C. maximize its per unit costs through advertising. D. lower the market price of soft drinks.