Question 1

In the two-period real intertemporal small open economy (SOE) endowment model, which of the following is TRUE about the world real interest rate $$r$$?

Accepted Answer

It is exogenous and taken as given by the SOE.

Question 2

Suppose a country has a current account deficit ($$CA \u003c 0). $$According to the SOE model, what does this imply about the country's economic behavior?

Accepted Answer

The country is borrowing from the rest of the world.

Question 3

Given the national present-value intertemporal budget constraint $$C + G + \frac{C' + G'}{1 + r} = Y + \frac{Y'}{1 + r}$$, what does the term $$\frac{C' + G'}{1 + r}$$ represent?

Accepted Answer

Future period consumption and government spending discounted to present value.

Question 4

If a nation defaults on its debt, what are the immediate consequences according to the limited commitment model?

Accepted Answer

The nation is denied access to world credit markets in the current period and suffers a penalty $$v in $$the future period.

Question 5

Which of the following conditions increases the likelihood of sovereign default in the SOE model?

Accepted Answer

High national debt, high real interest rates, and small future penalties from defaulting.

Question 6

In the SOE model with production and investment, what is the relationship between the current account ($$CA) $$and the capital account ($$KA) in $$the balance of payments?

Accepted Answer

$$CA + KA = 0$$

Question 7

Suppose the world real interest rate $$r$$ increases. For a nation that is a net borrower ($$CA \u003c 0$$), what is the predicted effect on its current account according to the SOE model?

Accepted Answer

The current account surplus will increase (deficit will shrink).

Question 8

A Canadian tourist spends €100 on wine in a Parisian bar, paid with a Canadian credit card. How is this transaction recorded in Canada's balance of payments?

Accepted Answer

CA outflow and KA inflow.

Question 9

Which of the following equations correctly represents the consumer's lifetime budget constraint in the two-period SOE model?

Accepted Answer

$$C + \frac{C'}{1 + r} = Y - T + \frac{Y' - T'}{1 + r}$$

Question 10

If a country experiences an increase in current total factor productivity, what is the predicted effect on its current account and capital account?

Accepted Answer

Current account rises, capital account falls.

Question 11

In the SOE model, what happens to the equilibrium output and current account when there is a temporary increase in government spending?

Accepted Answer

Equilibrium output does not change, current account falls.

Question 12

Which of the following best describes the effect of the Ukraine War on the world real interest rate according to the Real Intertemporal Closed Economy Model?

Accepted Answer

The world real interest rate increases due to global excess demand.

Question 13

If the limited commitment constraint binds and the nation does NOT default, which of the following intertemporal budget constraints applies?

Accepted Answer

$$C + G + \frac{C' + G'}{1 + r} = Y + \frac{Y'}{1 + r} - B$$

Question 14

Which of the following is a plausible reason why Japan, despite a high government debt-to-GDP ratio, was not perceived as likely to default compared to Greece?

Accepted Answer

Japan was perceived as better at collecting taxes and controlling government expenditure.

Question 15

In the SOE model with production and investment, if $$Y \u003c C + I + G$$, what does this imply about net exports ($$NX) $$and the current account ($$CA$$)?

Accepted Answer

$$NX \u003c 0$$ and $$CA \u003c 0$$

Question 16

A nation is considering whether to default on its debt. According to the model, default will occur if:

Accepted Answer

$$B(1 + r) \u003e v$$

Question 17

If a nation is a lender ($$CA \u003e 0$$), what is the effect of an increase in the world real interest rate $$r on $$its current account surplus?

Accepted Answer

The effect is ambiguous due to offsetting income and substitution effects.

Question 18

Which of the following best describes the capital account entry when a foreign resident purchases a domestic government bond?

Accepted Answer

It is recorded as a capital inflow.

Question 19

Suppose a country experiences an anticipated increase in future total factor productivity. What is the immediate effect on the current account and capital account?

Accepted Answer

Current account falls, capital account rises (capital inflow).

International Trade in Goods and Assets: Two-Period Real Intertemporal Small Open Economy Models

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