Q1. The portion of the national debt held by foreigners is known as the external debt.

Background

Topic: National Debt and Its Components

This question tests your understanding of the terminology used to describe different parts of a country's national debt, specifically the portion held by foreign entities.

Key Terms:

• National Debt: The total amount of money that a country's government has borrowed and not yet repaid.

• External Debt: The part of the national debt owed to foreign creditors.

Step-by-Step Guidance

1. Recall the definitions of national debt and its subdivisions (public, private, external, internal).

2. Consider what "external" means in the context of debt—does it refer to domestic or foreign holders?

3. Think about why a country might distinguish between debt held by its own citizens versus foreign investors.

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Q2. The basic problem caused by “crowding out” is an expected increase in interest rates.

Background

Topic: Fiscal Policy and Crowding Out

This question examines your understanding of the "crowding out" effect, which is a potential consequence of government borrowing.

Key Terms:

• Crowding Out: When increased government spending leads to higher interest rates, which can reduce private investment.

• Interest Rates: The cost of borrowing money, typically expressed as a percentage.

Step-by-Step Guidance

1. Recall what happens to the demand for loanable funds when the government borrows more.

2. Think about the effect of increased demand for funds on equilibrium interest rates in the loanable funds market.

3. Consider how higher interest rates might impact private sector borrowing and investment.

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Q3. The budget philosophy which most closely reflects the U.S. economic behavior is the “cyclically balanced budget.”

Background

Topic: Fiscal Policy and Budget Philosophies

This question tests your knowledge of different government budget philosophies and which one aligns with U.S. fiscal practices.

Key Terms:

• Cyclically Balanced Budget: A budget philosophy where the government aims to balance its budget over the business cycle, not necessarily every year.

• Other Budget Philosophies: Annually balanced budget, functional finance, etc.

Step-by-Step Guidance

1. Review the definitions of the main budget philosophies (annual, cyclically balanced, functional finance).

2. Consider how the U.S. government typically manages deficits and surpluses over time.

3. Think about whether the U.S. aims for a balanced budget every year or over longer periods.

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Q4. Our current national debt is approximately $1.3 Trillion.

Background

Topic: National Debt Figures

This question checks your awareness of the current magnitude of the U.S. national debt.

Key Terms:

• National Debt: The total amount owed by the federal government to creditors.

Step-by-Step Guidance

1. Recall the most recent estimates of the U.S. national debt (check your textbook or reliable sources for the latest figures).

2. Compare the figure given in the question to the actual value.

3. Consider whether $1.3 trillion is a reasonable estimate for the current national debt.

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Q5. Our public debt is now almost equal to our GDP.

Background

Topic: Debt-to-GDP Ratio

This question tests your understanding of the relationship between the national (public) debt and the country's Gross Domestic Product (GDP).

Key Terms:

• Public Debt: The portion of the national debt owed by the government to creditors outside the government itself.

• GDP: The total value of all goods and services produced within a country in a given year.

• Debt-to-GDP Ratio: A measure of a country's debt compared to its economic output.

Step-by-Step Guidance

1. Recall the approximate size of the U.S. public debt and GDP.

2. Calculate or estimate the debt-to-GDP ratio using the formula:

3. Determine if the ratio is close to 100% (i.e., debt nearly equals GDP).

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Q6. Per your textbook, as a tool of fiscal policy, temporary tax cuts have proven to be equal to or better than permanent tax cuts.

Background

Topic: Fiscal Policy – Temporary vs. Permanent Tax Cuts

This question examines the effectiveness of temporary versus permanent tax cuts as tools for influencing economic activity.

Key Terms:

• Fiscal Policy: Government policy regarding taxation and spending to influence the economy.

• Temporary Tax Cuts: Tax reductions set to expire after a certain period.

• Permanent Tax Cuts: Tax reductions with no set expiration date.

Step-by-Step Guidance

1. Recall the arguments for and against temporary versus permanent tax cuts in stimulating aggregate demand.

2. Consider how consumer and business expectations might differ with temporary versus permanent changes.

3. Think about what empirical evidence or textbook conclusions say about the effectiveness of each type.

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Q7. A free-trade advocate would be in opposition to the phrase, “Do what you do best and trade for the rest.”

Background

Topic: Free Trade and Comparative Advantage

This question tests your understanding of the principles of free trade and the concept of comparative advantage.

Key Terms:

• Free Trade: International trade left to its natural course without tariffs, quotas, or other restrictions.

• Comparative Advantage: The ability of a country to produce a good at a lower opportunity cost than another country.

Step-by-Step Guidance

1. Interpret the phrase “Do what you do best and trade for the rest” in the context of comparative advantage.

2. Consider whether a free-trade advocate would support or oppose this principle.

3. Recall the main arguments made by free-trade proponents regarding specialization and trade.

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Q8. For Mexico, “remittances” represent an export of labor and are one of their leading sources of external revenue for that country.

Background

Topic: International Flows – Remittances

This question examines your understanding of remittances and their economic significance for countries like Mexico.

Key Terms:

• Remittances: Money sent by migrants to their home country, often considered a major source of foreign exchange.

• Export of Labor: When citizens work abroad and send earnings back home.

Step-by-Step Guidance

1. Recall what remittances are and how they are classified in the balance of payments.

2. Consider the importance of remittances for Mexico’s economy compared to other sources of external revenue.

3. Think about whether remittances can be considered an "export" of labor.

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Q9. If the British pound exchange rate is 0.722 per U.S. dollar, a box of English tea costing $4.75 US dollars would have an expected pound price of (ceteris paribus):

Background

Topic: Exchange Rates and Currency Conversion

This question tests your ability to convert prices between currencies using exchange rates.

Key Formula:

Step-by-Step Guidance

1. Identify the given values: , pounds per USD.

2. Set up the conversion formula:

3. Multiply to find the price in pounds, but stop before calculating the final value.

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Q10. A Volvo is priced at $42,177 in Ft. Worth. The same Volvo can be purchased directly through a Swedish broker for 264,107 Swedish Kroner (ceteris paribus). With price being the only relevant variable, at which of the following exchange rates would you be better off purchasing the car in Ft. Worth?

Background

Topic: Purchasing Power and Exchange Rates

This question tests your ability to compare prices in different currencies using exchange rates to determine the better deal.

Key Formula:

Step-by-Step Guidance

1. For each exchange rate option, calculate the dollar price of the Volvo in Sweden:

2. Compare the calculated price to (Ft. Worth price).

3. Determine at which exchange rate(s) the Swedish price is higher than the Ft. Worth price, but stop before the final comparison.

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Q11. If the EURO is 1.32 per U.S. Dollar on Tuesday and 1.27 on Wednesday, then we could say that the U.S. Dollar has _________ relative to the EURO and U.S. exports would likely ________ .

Background

Topic: Exchange Rate Movements and Trade Effects

This question tests your understanding of currency appreciation/depreciation and its impact on exports.

Key Terms:

• Appreciation: When a currency increases in value relative to another.

• Depreciation: When a currency decreases in value relative to another.

Step-by-Step Guidance

1. Compare the exchange rates: a decrease from 1.32 to 1.27 Euros per USD means each dollar buys fewer Euros.

2. Determine whether the dollar has appreciated or depreciated.

3. Recall how a weaker dollar affects U.S. exports (makes them more or less competitive abroad).

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