AP Econ Module 41 Capital Flows Balance Payments - Sunny Hills ...

3. The financial account was previously known as the 5. '*4rich ofthe following will increase the demand for loanable
a. gross narional producr. funds in a country?
b. capiral arcount. a. economic growth
c. trade deficit. b. decreased investment opportunicies
d. invescment account. c. a recession
e. trade balance- d. decreased private savings lates
4. The trade balance includes which ofthe following?
I. imports and expora ofgoods
U. imports and exports ofservices
IIL net capital flows
a. I only
b. II only
c. III only
d. I and II only
e. I,II, and III
Tackle the Test Free-Response Ouestions
e govemment budget surpluses
1 a- How would a dectease in real income in the United States 2. Use rwo correcdy labeled side-by-side graphs ofthe loanable
affect the U S. current account balance? Explain. funds market in the United Srates and China ro show how a
b. Suppose China decides that it needs a huge program of higher inreresc rare in the Unired Stares will lead to capital
infrastructure spending, which it willfinance by borrowing. flows between the two counrries. Onyour graphs, be sure to
How will this program affect the U.S. balaace ofpayments? labd the starting and ending interesr rates and the size ofrhe
Explain. capital inflows and outflows.
Answor (4 poirb)
'| point The curent account balance will lncrease (or move toward a surplus).
1 polnt The decreas€ in income will cause imporb b dscrease.
1 point The increase in lnfiasfuctjre spending in China yi,ill reducs ttls surplus
ln the u.S, flnanciai account and reduce ih8 deficlt in the U.S. current account.
1 point Because China is financing te progEm by b0nowing, lt ls llkely
that other countriss will increase thelr lending h China, decreasing fieir
lending to fie United Shtes.llrese capihl outflows trom the United States will
roduce the U.S. surplus in fie linancial account and reduce the delicit in fte
curTent account.
420 s e c t io n 8 The Open Economy: lnternational Trade and Financo