Building an Economic Model Based on the Assumption of a Small

question 73

Multiple Choice

Building an economic model based on the assumption of a small open economy is useful because:

• A) it accurately describes the U.S. economy.
• B) it is more complicated and realistic than a model based on the assumption of a large open economy.
• C) this simplifying assumption can assist our understanding and intuition of open economy macroeconomics.
• D) it is not possible to build models of large open economies.

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Definitions:

Earnings Rate

The return on an investment or project expressed as a percentage of the cost, often used to measure profitability.

Present Value Factor

A multiplier used to determine the present value of a future cash flow, taking into account a specific discount rate.

Annuity

An investment vehicle providing a constant flow of payments to the owner, usually utilised as a source of income for retired people.

Net Cash Flow

The variance between the cash coming into and going out of a business within a set timeframe.