Crowding Out in Open Economy
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Questions and Answers

What happens to the trade deficit when public savings decrease by 25 due to an increase in government spending by 25?

  • The trade deficit becomes zero
  • The trade deficit decreases
  • The trade deficit remains unchanged
  • The trade deficit increases (correct)

    • Why is there no complete crowding out of investment spending in the open economy when government spending increases?

  • Because r is endogenous
  • Because r is exogenous (correct)
  • Because investment spending always increases government spending
  • Because government spending always increases investment

    • What happens to the domestic real exchange rate when government spending increases, ceteris paribus?

  • It decreases, making exports more attractive
  • It decreases, making imports more attractive
  • It increases, making exports less attractive (correct)
  • It increases, making exports more attractive

    • What is the effect of the increase in government spending on the attractiveness of foreign goods to domestic consumers?

    <p>They become more attractive (A)</p> Signup and view all the answers

    What happens to exports when government spending increases, ceteris paribus?

    <p>They decrease, making the trade deficit increase (D)</p> Signup and view all the answers

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