Page 462 - Krugmans Economics for AP Text Book_Neat

3. The financial account was previously known as the 5. Which of the following will increase the demand for loanable
a. gross national product. funds in a country?
b. capital account. a. economic growth
c. trade deficit. b. decreased investment opportunities
d. investment account. c. a recession
e. trade balance. d. decreased private savings rates
e. government budget surpluses
4. The trade balance includes which of the following?
I. imports and exports of goods
II. imports and exports of services
III. net capital flows
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III

Tackle the Test: Free-Response Questions

1. a. How would a decrease in real income in the United States 2. Use two correctly labeled side-by-side graphs of the loanable
affect the U.S. current account balance? Explain. funds market in the United States and China to show how a
b. Suppose China decides that it needs a huge program of higher interest rate in the United States will lead to capital
infrastructure spending, which it will finance by borrowing. flows between the two countries. On your graphs, be sure to
How will this program affect the U.S. balance of payments? label the starting and ending interest rates and the size of the
Explain. capital inflows and outflows.

Answer (4 points)
1 point: The current account balance will increase (or move toward a surplus).
1 point: The decrease in income will cause imports to decrease.
1 point: The increase in infrastructure spending in China will reduce the surplus
in the U.S. financial account and reduce the deficit in the U.S. current account.
1 point: Because China is financing the program by borrowing, it is likely
that other countries will increase their lending to China, decreasing their
lending to the United States. These capital outflows from the United States will
reduce the U.S. surplus in the financial account and reduce the deficit in the
current account.

420 section 8 The Open Economy: Inter national Trade and Finance