If, in an Open Economy with a Real World Interest

question 99

Multiple Choice

If, in an open economy with a real world interest rate of 5%, an output shock (decline) of 21% occurs followed by a recovery the next year:

• A) no consumption smoothing is possible.
• B) the nation can borrow 20% of GDP in the first year and repay 1% of GDP each year in perpetuity resulting in consumption smoothing.
• C) then no borrowing is possible because of the possibility of exceeding the long-run budget constraint.
• D) the economy would have to forswear all international trade and financial flows.

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Definitions:

Finished Goods

Products that have completed the manufacturing process but have not yet been sold to customers.

Conversion Cost

The combined cost of direct labor and manufacturing overheads incurred to convert raw materials into finished goods.

Equivalent Unit

A concept used in cost accounting to denote a partial completion of a product, quantitatively expressed in terms of the full units of output.

Work In Process

Refers to the materials, labor, and overhead costs that are in the process of being converted into finished products in manufacturing.