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Question 3
If the current account of the euro zone is in surplus by 38bn, its capital- and financial
account is in surplus by 38bn, and errors and omissions are a negative 81bn, what
has happened to foreign exchange reserves?
a. They have increased by 5bn.
Feedback: Incorrect.
Page reference: 43, 45
b. They remain unchanged.
Feedback: Incorrect.
Page reference: 43, 45
*c. They have decreased by 5bn.
Feedback: Correct. The overall balance is negative, which means that residents have
sent more money abroad than they received. In that case the monetary authorities
make up the difference, bringing domestic money home by selling some of their
foreign exchange reserves. (This is according to data from European Central Bank
(ECB) for 2007.)
Page reference: 43, 45
d. They have decreased by 38bn.
Feedback: Incorrect.
Page reference: 43, 45
Question 4
In Borduria, consumption is 750, the government budget deficit is 20, total fiscal
revenues equal 440, the current account is in surplus by 10, and total private saving
equals 220. Which ONE of the following is true?
Feedback: Y = C + I + G + X Z
C = 750
G = T + government budget deficit (G-T) = 440 + 20 = 460
X Z = 10
(S-I) + (T-G) = (X-Z)
220 - I -20 = 10
I = 190
GDP = Y = 750 + 190 + 460 + 10 = 1410
Net private saving = S I = 220 190 = 30 answer d. is the correct answer
Page reference: 37, 40
Question 5
In the circular flow of spending, which ONE of the following items does NOT
constitute an increase of the flow of spending/income?
a. Government purchases of goods and services.
Feedback: Incorrect. Review Figure 2.3.
Page reference: 36
b. Business investment spending.
Feedback: Incorrect. Review Figure 2.3.
Page reference: 36
*c. Spending on imported goods.
Feedback: Correct. Review Figure 2.3. This is spending on other countries goods,
not for domestic goods!
Page reference: 36
d. Government spending on transfers.