ECON 340 MSU EXAM II QUESTIONS AND VERIFIED
ANSWERS
Consider the following statements
i) Higher expected future income means people want to consume more today
ii) Predicted high future productivity implies higher expected future income - Answers -
Both are true
The world has two periods: today and tomorrow. The US opens up to trade with the rest
of the world. The new interest rate in the global economy is lower than the interest rate
in the US under autarky. Relative to its consumption pattern under autarky, the US will -
Answers - C
Invest more today
Consume a higher share of total income today today and a lower share in the future
(save less today)
US companies observe an increasing percent of the population attending college, likely
increasing the future productivity of their workforce, and spurring present-day
investment in order to adjust to the increasing marginal product of labor. What effect will
this have on the US current account deficit in the present? - Answers - The current
account deficit will likely increase
US manufacturers receive news that profits from current-period investments will be
taxed at a higher rate. What effect will this have on the present US current account
deficit?
NOTE: A decrease in the current account deficit means the current account becomes
less negative. - Answers - The current account deficit will likely decrease (become less
negative)
Which of the following would be consistent with the hypothesis that US productivity
growth is causing trade deficits: - Answers - A
Increases in stock prices over and above current earnings
B
Increased consumption as a ratio of GDP
Evaluate the following statement using the model of trade deficits we learned in class:
"Our country's trade deficit means that future generations will have to pay other
countries back and will have less to consume than if we ran a balanced trade account".
ANSWERS
Consider the following statements
i) Higher expected future income means people want to consume more today
ii) Predicted high future productivity implies higher expected future income - Answers -
Both are true
The world has two periods: today and tomorrow. The US opens up to trade with the rest
of the world. The new interest rate in the global economy is lower than the interest rate
in the US under autarky. Relative to its consumption pattern under autarky, the US will -
Answers - C
Invest more today
Consume a higher share of total income today today and a lower share in the future
(save less today)
US companies observe an increasing percent of the population attending college, likely
increasing the future productivity of their workforce, and spurring present-day
investment in order to adjust to the increasing marginal product of labor. What effect will
this have on the US current account deficit in the present? - Answers - The current
account deficit will likely increase
US manufacturers receive news that profits from current-period investments will be
taxed at a higher rate. What effect will this have on the present US current account
deficit?
NOTE: A decrease in the current account deficit means the current account becomes
less negative. - Answers - The current account deficit will likely decrease (become less
negative)
Which of the following would be consistent with the hypothesis that US productivity
growth is causing trade deficits: - Answers - A
Increases in stock prices over and above current earnings
B
Increased consumption as a ratio of GDP
Evaluate the following statement using the model of trade deficits we learned in class:
"Our country's trade deficit means that future generations will have to pay other
countries back and will have less to consume than if we ran a balanced trade account".
