MC question 1-5

Section A 1. We have the following information about an open economy with a flexible exchange rate regime: Private consumption=80; Private savings=10; Net Taxation=20; Government spending=30, Net investment =10; Exports =30. (a) If Current Account deficit = 10 then there is excess demand in the goods market (b) If Capital Account deficit = 10 then there is excess demand in the goods market (c) If Current Account surplus = 10 then there is excess supply in the goods market (d) If Capital Account surplus = 10 then there is excess supply in the goods market 2. In an open economy with perfect capital mobility the marginal propensities to consume and invest are equal to 0.8 and 0.1 correspondingly. The government adjusts its spending to proportional taxes and the marginal income tax rate is 0.3. The marginal propensity to import is 0.06. What is the size of the multiplier? (a) 1 (b) 2.5 (C) 5 (d) 10 3. What is the effect of an increase in the corporate tax rate in a small open economy when profits are fully reinvested and there is no balanced budget constraint? (a) A parallel shift of the IS schedule leftwards (b) The IS schedule becomes flatter (c) The IS schedule becomes steeper (d) The IS schedule remains intact 4. A small open economy with fixed exchange rate policy faces an increase in international price level. What impact will it have on demand for foreign currency and supply of liquid assets, if price elasticity of demand for imported goods is greater than unity? (a) An increase in both demand for foreign currency and supply of liquid assets (b) An increase in demand for foreign currency and a decrease in the supply of liquid assets (c) A decrease in both demand for foreign currency and supply of liquid assets (d) A decrease in demand for foreign currency and an increase in the supply of liquid assets 5. Consider a small open economy with full capital control and flexible exchange rate regime. Prices and wages are fixed and the initial equilibrium is at point lilo/0,11,). A recession abroad will lead to a new internal and external equilibria at point: A 009) () () () () 0003 d