Question

Question 1

A country’s exporters would want the country’s government to have a balanced budget because:

a.)	the savings will shift to the right, increasing interest rates and the demand for dollars, raising the exchange rate, making the country’s exports cheaper, and giving exporters an advantage over foreign competitors.
	b.) the savings curve will shift to the right, reducing interest rates and the demand for dollars, lowering the exchange rate, making the country’s exports cheaper, and giving exporters an advantage over foreign competitors.
	c.)the savings curve will shift to the left, increasing interest rates and the demand for dollars, raising the exchange rate, making the country’s exports cheaper, and giving exporters an advantage over foreign competitors.
	d.) the savings curve will shift to the right, increasing interest rates and the demand for dollars, lowering the exchange rate, making the country’s exports cheaper, and giving exporters an advantage over foreign competitors.

Question 2:

Rating agencies rate countries on the perceived riskiness of investing in their economies. Standard and Poor’s, one of the main rating agencies, downgraded the credit rating for some countries' Treasury bonds in 2011. According to the text, if Canada is now perceived as riskier:

	a.)fewer investors will be willing to invest in Canada. Net capital outflows will rise, shifting the I + NCO curve to the right, causing the equilibrium interest rate to rise.
	b.)fewer investors will be willing to invest in Canada. Net capital outflows will rise, shifting the I + NCO curve to the left, causing the equilibrium interest rate to fall.
	c.)more investors will be willing to invest in Canada. Net capital outflows will fall, shifting the I + NCO curve to the left, causing the equilibrium interest rate to rise.
	d.)more investors will be willing to invest in Canada. Net capital outflows will fall, shifting the I + NCO curve to the left, causing the equilibrium interest rate to fall.

Answer 1

Answer to question number 1 is option B. A balanced budget will shift the saving curve to the right which will reduce the rate of interest and increase capital outflow. This will reduce the rate of exchange so that domestic exports become cheaper and imports will become expensive which will benefit exporters.

Answer to question number 2 is option A. Saving is equals to investment + net capital outflow. When net capital outflow is increased, investment + net capital outflow function shifts right wards and this raises the rate of interest.