Question

1.

Assume a country is open. Given this information, which of the following must occur?

Group of answer choices

S + T = I + G + NX.

S + T = I + G.

Demand for domestic goods will be less than the domestic demand for goods.

Demand for domestic goods will be equal to the domestic demand for goods.

Demand for domestic goods will be greater than the domestic demand for goods.

2.

A tax cut will cause which of the following when a liquidity trap situation exists?

Group of answer choices

Output will not change.

Output will decrease.

The interest rate will decrease.

Output will increase.

The interest rate will increase.

Answer 1

Q1:

Given the country is open, it means that the country can involve in cross-country trade. In such case the macroeconomic equation becomes: S+T= I+G+NX. Therefore option 1 must be true incase of given assumptions.

Q2:

When there is a liquidity trap situation, a tax cut will lead to increase in output. During a liquidity trap monetary policy becomes ineffective, so the only way to get out of this trap is through expansionary fiscal policy. Therefore option 4 is correct.

Thank you.