Gleb Sazenkov (ADE AR)
1. Using the information in this chapter, label each of the following statements true, false or uncertain.
a. The national income identity implies that budget deficits cause trade deficits.
False. Actually, if we look at the formula of our Y we can see that we don’t have anything there that could tell us that budget deficit can cause a trade deficit.
Y = C + I + G + (X-IM/e) If we have a budget deficit, so our NX will be affected and probably they could be lower than before, but we have to say that it is not necessarily that it will cause a trade deficit.
b. Opening the economy to trade tends to increase the multiplier because an increase in expenditure leads to more exports.
False. Actually, if we look at the formula Y = C + I + G + (X-IM/e), we can see that if we increase our G it does not affect anyhow on our exports, which actually depends positively on Y* (foreign income) and negatively depends on the real exchange rate, but there is nothing from government expenditure.
If the trade deficit is equal to zero, then the domestic demand for goods and the demand for domestic goods are equal.
True. Actually, in an open economy, according to the formula the demand for domestic goods is equal to
C+I+G-(IM/e)+X, but if our trade deficit is equal to 0, we have X=IM/e, in other words our imports equals to our exports. As a result we have C+I+G, and the domestic demand for goods and the demand for domestic goods are identical.
d. A real depreciation leads to an immediate improvement in the trade balance.
Uncertain. Actually, if we have a Marshall-Lender condition, we can say that our trade balance will be improved by a real depreciation. Because if our real exchange rate goes down our NX goes up, that will improve our trade balance.
But if we don’t have that condition, we can see, that if the real exchange rate goes down, our (IM/e) goes up and as a result our NX will decrease so, it will negatively