1. Assume a government decides to implement a new tax policy, resulting in a smaller budget deficit. Based on the national savings and investment identity, this would result in some combination of private investment, private savings, and/or trade deficit.

a. Higher; lower; higher

b. Higher; lower; lower

c. Lower; higher; higher

d. Lower; higher; lower

2. Consider a country that runs a government budget surplus of $10 million and a trade deficit of $2 million. If private investment equals $20 million, which of the following is correct?

a. The demand of financial capital is $20 million and private savings equal $8 million

b. The supply of financial capital is $32 million, so private savings equals $32 million

c. The demand of financial capital is $32 million, so private savings equals $32 million

d. The supply of financial capital is $22 million and private savings equals $12 million

3. During the mid-1980s, economists would call the budget deficit and the trade deficit the "twin deficits". However, when we analyze the movement of those variables through time, we know that they don't always move together. What can help explain why the budget deficit and the trade deficit don't move in lockstep?

a. The presence of investment and private savings in the savings and investment identity, which respond to changes in deficits as well

b. A larger budget deficit can generate an inflow of foreign capital which will weaken the exchange rate and prevent trade deficits.

c. The fact that investment and private savings stay constant when the budget deficit and the trade deficit change

4. Which of the following is not a possible consequence of chronic large budget deficits?

a. The country's currency might appreciate rapidly due to fears of default and increased supply and decreased demand for the currency

b. Aggregate demand may shift too far to the right, causing inflation

c. The country's ability to repay their international debt may decrease, leading international investors to withdraw their funds

d. A country may default on their debt, resulting in bank failures, falling Aggregate Demand, and deep recessions

5. Assuming that the Ricardian equivalence holds completely true, what would be the impact of a $10 million increase in the government surplus of a country?

a. Private savings would decrease by exactly $10 million, so private investment and trade balance would stay constant

b. The sum of private savings, trade surplus and private investment would increase by exactly $10 million

c. The trade surplus would decrease by exactly $10 million, so private savings and private investment would stay constant

d. The trade deficit would increase by exactly $10 million, so private savings and private investment would stay constant