Question

Consider the following particulars of the U.S. national accounts.

Particulars	Amount ​($ in​ million)
Gross domestic product	550
Consumption by domestic residents	400
Investment by domestic residents	275
Government expenditure	250

Foreign investment into the U.S. is

▼

a. equal to

b. more than

c. less than

U.S. investment in foreign countries.

The investment by foreign countries into the U.S. increases due to a recent change in the economy.

Which of the following could have been the possible​ change?

A.

A fall in the real interest rate.

B.

A rise in the real interest rate.

C.

An increase in net exports.

D.

An increase in investment in foreign countries by the U.S.

Answer 1

We can see that the gross domestic product is 550 but the absorption, C+I+G, is arrived at 875. This indicates that domestic investment in foreign countries is out done by the foreign investment in domestic country. Therefore the correct choice is option B, more than

investment by foreign countries in the United States will increase only when there is an increase in the real interest rate because investors will find a greater return in investing in the United States. Select option B