Why is a balance-of-payments deficit not necessarily good or bad if it occurs in one given year, but potentially very harmful if maintained over a number of years?
What will be an ideal response?
Balance of payments as a single event are neither good nor bad, they simply occur given the current economic conditions. However, persistent deficits result in the drawing down of official reserves. Since reserves are a finite amount, a country with persistent balance deficits may have to take drastic measures to equalize its economy. Policies to correct the balance of payments can cause difficult macroeconomic adjustments, trade barriers and other restrictions or a major depreciation of the currency. For these reasons, balance-of-payments deficits are to be avoided over a number of years.
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Which of the following theorems predicts that trade benefits the abundant factors of a country and harms the scarce factors?
A) The Stolper-Samuelson theorem. B) The Rybczynski theorem. C) The Heckscher-Ohlin theorem. D) None of the above.
Assume Congress enacts a $500 billion increase in spending and a $500 billion tax increase to finance the additional government spending. The result of this balanced-budget approach is a:
a. $500 billion decrease in aggregate demand. b. $500 billion increase in aggregate demand. c. $1,000 billion increase in aggregate demand. d. $1,000 billion decrease in aggregate demand.
If workers become more productive, which of the following would happen in the labor market?
a. Labor supply would increase. b. Labor supply would decrease. c. Labor demand would increase and labor supply would decrease. d. Labor demand would decrease and so would labor supply. e. Labor demand would increase.
You have gone to the bank to borrow money for one year. The nominal annual interest rate is 7.5%. The real rate of interest is 4%. Over the course of the year, overall prices increased by 4%. This rate of inflation hurt the _____ because the actual rate of inflation was _____ than the anticipated rate of inflation.
Fill in the blank(s) with the appropriate word(s).