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Chapter 19A Macroeconomic Theory of the Open EconomyMULTIPLE CHOICE1. Over the past two decades, the United States hasa. generally had, or been very near to a trade balance.b. had trade deficits in about as many years as it has trade surpluses.c. persistently had a trade deficit.d. persistently had a trade surplus.ANSWER: c. persistently had a trade deficit.TYPE: M DIFFICULTY: 1 SECTION: 19.02. Many U.S. business leaders argue that the current state of U.S. net exports is the result ofa. U.S. export subsidies.b. free trade policies of foreign governments.c. unproductive U.S. workers.d. unfair foreign competition.ANSWER: d. unfair foreign competition.TYPE: M DIFFICULTY: 1 SECTION: 19.03. If a country’s imports are greater than its exp orts, the country is said to have aa. trade surplus.b. trade deficit.c. comparative advantage.d. absolute advantage.ANSWER: b. trade deficit.TYPE: M DIFFICULTY: 1 SECTION: 19.04. The open-economy macroeconomic model includesa. only the market for loanable funds.b. only the market for foreign-currency exchange.c. both the market for loanable funds and the market for foreign-currency exchange.d. neither the market for loanable funds or the market for foreign-currency exchange.ANSWER: c. both the market for loanable funds and the market for foreign-currency exchange.TYPE: M DIFFICULTY: 1 SECTION: 19.05. The open-economy macroeconomic model examines the determination ofa. output growth rate and the real interest rate.b. unemployment and the exchange ratec. output growth rate and the inflation rate.d. the trade balance and the exchange rate.ANSWER: d. the trade balance and the exchange rate.TYPE: M DIFFICULTY: 1 SECTION: 19.06.The open-economy macroeconomic model takesa. GDP, but not the price level as given.b. the price level, but not GDP as given.c. both the price level and GDP as given.d. the price level and GDP as variables to be determined by the model.ANSWER: c. both the price level and GDP as given.TYPE: M DIFFICULTY: 1 SECTION:509510 Chapter 19/A Macroeconomic Theory of the Open Economy7. In an open economy, the market for loanable funds equates national saving witha. domestic investment.b. net capital outflow.c. the sum of national consumption and government spending.d. the sum of domestic investment and net capital outflow.ANSWER: d. the sum of domestic investment and net capital outflow.TYPE: M DIFFICULTY: 1 SECTION: 19.18. In an open economy, the market for loanable funds equates national saving witha. domestic investment.b. net capital outflow.c. national consumption minus domestic investment.d. None of the above are correct.ANSWER: d. None of the above are correct.TYPE: M DIFFICULTY: 1 SECTION: 19.19. In the open-economy macroeconomic model, the market for loanable funds identity can be written asa. S = Ib. S = NCOc. S = I + NCOd. S + I = NCOANSWER: c. S = I + NCOTYPE: M DIFFICULTY: 1 SECTION: 19.110. In the open-economy macroeconomic model, the supply of loanable funds comes froma. national saving.b. private saving.c. domestic investment.d. the sum of domestic investment and net capital outflow.ANSWER: a. national saving.TYPE: M DIFFICULTY: 1 SECTION: 19.111. In the open-economy macroeconomic model, the demand for loanable funds comes froma. domestic investment.b. net exports.c. net capital outflowd. the sum of net capital outflow and domestic investment.ANSWER: d. the sum of net capital outflow and domestic investment.TYPE: M DIFFICULTY: 1 SECTION: 19.112.The purchase of a capital asset adds to the demand for loanable fundsa. only if the asset is located at home.b. only if the asset is located abroad.c. whether the asset is located at home or abroad.d. None of the above is correct.ANSWER: c. whether the asset is located at home or abroad.TYPE: M DIFFICULTY: 1 SECTION: 19.1Chapter 19/A Macroeconomic Theory of the Open Economy 511 13. Jack and Jill are co-owners of the U.S. firm Wells Petroleum. Jack borrows money to build an oil well in Texas. Jillborrows money to build an oil well in Venezuela.a. Both Jack and Jill's purchase of capital count as demand for loanable funds in the U.S. market.b. Neither Jack nor Jill's purchase of capital count as demand for loanable funds in the U.S. market.c. Jack's purchase of capital counts as demand for loanable funds in the U.S. market; Jill's purchase does not.d. Jill's purchase of capital counts as demand for loanable funds in the U.S. market; Jack's purchase does not. ANSWER: a. Both Jack's and Jill's purchase of capital count as demand for loanable funds in the U.S. market. TYPE: M DIFFICULTY: 2 SECTION: 19.114. A higher real interest rate raises the quantity ofa. domestic investment.b. net capital outflow.c. loanable funds demanded.d. loanable funds supplied.ANSWER: d. loanable funds supplied.TYPE: M DIFFICULTY: 2 SECTION: 19.115. A lower real interest rate decreases the quantity ofa. loanable funds demanded.b. loanable funds supplied.c. domestic investment.d. net capital outflow.ANSWER: b. loanable funds supplied.TYPE: M DIFFICULTY: 1 SECTION: 19.116. An increase in the real interest ratea. discourages people from saving and so increases the quantity of loanable funds demanded.b. discourages people from saving and so decreases the quantity of loanable funds demanded.c. encourages people to save and so increases the quantity of loanable funds supplied.d. encourages people to save and so decreases the quantity of loanable funds supplied.ANSWER: c. encourages people to save and so increases the quantity of loanable funds supplied.TYPE: M DIFFICULTY: 1 SECTION: 19.117. A fall in the real interest rate encourages investment and soa. increases the quantity of loanable funds demanded.b. decreases the quantity of loanable funds demanded.c. increases the quantity of loanable funds supplied.d. decreases the quantity of loanable funds supplied.ANSWER: a. increases the quantity of loanable funds demanded.TYPE: M DIFFICULTY: 1 SECTION: 19.118. An increase in real interest rates in the United Statesa. discourages both U.S. and foreign residents from buying U.S. assets.b. encourages both U.S. and foreign residents to buy U.S. assets.c. encourages U.S. residents to buy U.S. assets, but discourages foreign residents from buying U.S. assets.d. encourages foreign residents to buy U.S. assets, but discourages U.S. residents from buying U.S. assets. ANSWER: b. encourages both U.S. and foreign residents to buy U.S. assets.TYPE: M DIFFICULTY: 1 SECTION: 19.1512 Chapter 19/A Macroeconomic Theory of the Open Economy19. Which of the following would be consistent with an increase in the U.S. real interest rate?a. a Swiss bank purchases a U.S. bond instead of the German bond they had considered purchasing.b. firms decide since interest rates are higher to do more investment spending.c. Brad decides to put less money in his savings account than he had planned to.d. All of the above are consistent.ANSWER: a. a Swiss bank purchases a U.S. bond instead of the German bond they had considered purchasing. TYPE: M DIFFICULTY: 1 SECTION: 19.120. An increase in the U.S. real interest rate inducesa. Americans to buy more foreign assets, which increases U.S. net capital outflow.b. Americans to buy more foreign assets, which reduces U.S. net capital outflowc. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.d. foreigners to buy more U.S. assets, which increases U.S. net capital outflow.ANSWER: c. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.TYPE: M DIFFICULTY: 2 SECTION: 19.121. In an open economy, the demand for loanable funds comes froma. only those who want to borrow funds to buy domestic capital goods.b. only those who want to borrow funds to buy foreign assets.c. those who want to borrow funds to buy either domestic capital goods or foreign assets.d. neither those who want to borrow funds to buy domestic capital goods nor those who want to borrow funds tobuy foreign assets.ANSWER: c. those who want to borrow funds to buy either domestic capital goods or foreign assets.TYPE: M DIFFICULTY: 1 SECTION: 19.122.In an open economy the supply of loanable funds comes froma. national savings. Demand comes from only domestic investment.b. national savings. Demand comes from domestic investment and net capital outflow.c. Only net capital outflow. Demand for loanable funds comes from national savings.d. domestic investment and net capital outflow. Demand for loanable funds comes from national savings. ANSWER: b. national savings. Demand comes from domestic investment and net capital outflow.TYPE: M DIFFICULTY: 2 SECTION: 19.123. If the quantity of loanable funds supplied is greater than the quantity demanded, thena. there is a shortage of loanable funds and the interest rate will fall.b. there is a shortage of loanable funds and the interest rate will rise.c. there is a surplus of loanable funds and the interest rate will fall.d. there is a surplus of loanable funds and the interest rate will rise.ANSWER: c. there is a surplus of loanable funds and the interest rate will fall.TYPE: M DIFFICULTY: 2 SECTION: 19.124. If there is a surplus of loanable funds, the quantity demanded isa. greater than the quantity supplied and the interest rate will rise.b. greater than the quantity supplied and the interest rate will fall.c. less than the quantity supplied and the interest rate will rise.d. less than the quantity supplied an the interest rate will fall.ANSWER: d. less than the quantity supplied an the interest rate will fall.TYPE: M DIFFICULTY: 2 SECTION: 19.1Chapter 19/A Macroeconomic Theory of the Open Economy 51325. If there is a shortage of loanable funds,a. the demand for loanable funds will shift right so the interest rate rises.b. the supply of loanable funds will shift left so the interest rate falls.c. there will be no shifts of the curves, but the interest rate rises.d. there will be no shifts of the curves, but the interest rate falls.ANSWER: c. there will be no shifts of the curves, but the interest rate rises.TYPE: M DIFFICULTY: 1 SECTION: 19.126. Which of the following would make both the equilibrium interest rate and the equilibrium quantity of loanable fundsincrease?a. The demand for loanable funds shifts right.b. The demand for loanable funds shifts left.c. The supply of loanable funds shifts right.d. The supply of loanable funds shifts left.ANSWER: a. The demand for loanable funds shifts right.TYPE: M DIFFICULTY: 2 SECTION: 19.127. Which of the following would make the equilibrium interest rate increase and the equilibrium quantity of fundsdecrease?a. The supply of loanable funds shifts right.b. The supply of loanable funds shifts left.c. The demand for loanable funds shifts right.d. The demand for loanable funds shifts left.ANSWER: b. The supply of loanable funds shifts left.TYPE: M DIFFICULTY: 2 SECTION: 19.128. At the equilibrium interest rate in the open economy macroeconomic model, the amount that people want to saveequals the desired quantity ofa. net capital outflow.b. domestic investment.c. net capital outflow plus domestic investment.d. foreign currency supplied.ANSWER: c. net capital outflow plus domestic investment.TYPE: M DIFFICULTY: 1 SECTION: 19.129. In an open economy,a. net capital outflow = imports.b. net capital outflow = net exports.c. net capital outflow = exports.d. None of the above is correct.ANSWER: b. net capital outflow = net exports.TYPE: M DIFFICULTY: 1 SECTION: 19.1514 Chapter 19/A Macroeconomic Theory of the Open EconomyFor the following four questions refer to the figure below:30. The loanable funds market is in equilibrium ata. 2 percent, 10.b. 3 percent, 20.c. 4 percent, 30.d. None of the above is correct.ANSWER: b. 3 percent, 20.TYPE: M DIFFICULTY: 1 SECTION: 19.131. In the figure shown, if the real interest rate is 4 percent, the quantity of loanable funds demanded isa. 10, and the quantity supplied is 20.b. 10, and the quantity supplied is 30.c. 30, and the quantity supplied is 10.d. 30, and the quantity supplied is 20.ANSWER: b. 10, and the quantity supplied is 30.TYPE: M DIFFICULTY: 1 SECTION: 19.132. In the figure shown, if the real interest rate is 2 percent, there will be aa. surplus of 10.b. surplus of 20.c. shortage of 10.d. shortage of 20.ANSWER: d. shortage of 20.TYPE: M DIFFICULTY: 1 SECTION: 19.133. In the figure shown, if the real interest rate is 2 percent, there will be pressure fora. the real interest rate to rise.b. the demand for loanable funds curve to shift right.c. the supply for loanable funds curve to shift left.d. All of the above are correct.ANSWER: a. the real interest rate to rise.TYPE: M DIFFICULTY: 1 SECTION: 19.1Chapter 19/A Macroeconomic Theory of the Open Economy 51534. Net exports are positive, thena. exports are greater than imports.b. net capital outflow is negative.c. Both of the above are correct.d. Neither of the above is correct.ANSWER: a. exports are greater than imports.TYPE: M DIFFICULTY: 1 SECTION: 19.135. If net exports are negative, thena. net capital outflow is positive, so foreign assets bought by Americans are greater than American assets boughtby foreigners.b. net capital outflow is positive, so American assets bought by foreigners are greater than foreign assets bought byAmericans.c. net capital outflow is negative, so foreign assets bought by Americans are greater than American assets boughtby foreigners.d. net capital outflow is negative, so American assets bought by foreigners are greater than foreign assets boughtby Americans.ANSWER: d. net capital outflow is negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.TYPE: M DIFFICULTY: 2 SECTION: 19.136. In the market for foreign currency exchange in the open economy macroeconomic model, the amount of net capitaloutflow represents the quantity of dollarsa. supplied for the purpose of selling assets domestically.b. supplied for the purpose of buying assets abroad.c. demanded for the purpose of buying U.S. net exports of goods and services.d. demanded for the purpose of importing foreign goods and services.ANSWER: b. supplied for the purpose of buying assets abroad.TYPE: M DIFFICULTY: 2 SECTION: 19.137. In the open economy macroeconomic model net capital outflow is equal to the quantity ofa. dollars supplied in the foreign exchange market.b. dollars demand in the foreign exchange market.c. funds supplied in the loanable funds market.d. None of the above is correct.ANSWER: a. dollars supplied in the foreign exchange market.TYPE: M DIFFICULTY: 1 SECTION: 19.138. Net capital outflow is equal toa. national saving minus the trade balance.b. domestic investment plus national saving.c. national saving minus domestic investment.d. domestic investment minus national saving.ANSWER: c. national saving minus domestic investment.TYPE: M DIFFICULTY: 2 SECTION: 19.139. The value of net exports equals the value ofa. national saving.b. public saving.c. national saving – net exports.d. national saving – domestic investmentANSWER: d. national saving – domestic investmentTYPE: M DIFFICULTY: 2 SECTION: 19.1516 Chapter 19/A Macroeconomic Theory of the Open Economy40. Which of the following is included in the demand for dollars in the market for foreign-currency exchange in the open-market macroeconomic model?a. A firm in Kenya wants to buy wheat from a U.S. firm.b. A Japanese bank desires to purchase U.S. Treasury securities.c. An U.S. citizen wants to buy a bond issued by a Mexican corporation.d. All of the above are correct.ANSWER: a. A firm in Kenya wants to buy wheat from a U.S. firm.TYPE: M DIFFICULTY: 3 SECTION: 19.141.Which of the following is included in the supply of dollars in the market for foreign-currency exchange in the open-economy macroeconomic model?a. A retail outlet in Afghanistan wants to buy watches from a U.S. manufacturer.b. A U.S. bank loans dollars to Blair, a U.S. resident, who wants to purchase a new car made in the United States.c. A U.S. based mutual fund wants to purchase stocks issued by a Polish company.d. All of the above are correct.ANSWER: c. A U.S. based mutual fund wants to purchase stocks issued by a Polish company.TYPE: M DIFFICULTY: 3 SECTION: 19.142. Which of the following would tend to shift the supply of dollars in foreign-currency exchange in the open-marketmacroeconomic model to the right?a. The exchange rate rises.b. The exchange rate falls.c. The expected rate of return on U.S. assets rises.d. The expected rate of return on U.S. assets falls.ANSWER: d. The expected rate of return on U.S. assets falls.TYPE: M DIFFICULTY: 2 SECTION: 19.143. Which of the following would tend to shift the supply of dollars in foreign-currency exchange market of the open-economy macroeconomic model to the left?a. The exchange rate rises.b. The exchange rate falls.c. The expected rate of return on U.S. assets rises.d. The expected rate of return on U.S. assets falls.ANSWER: c. The expected rate of return on U.S. assets rises.TYPE: M DIFFICULTY: 2 SECTION: 19.144. The real exchange rate equals the relativea. price of domestic and foreign currency.b. price of domestic and foreign goods.c. rate of domestic and foreign interest.d. None of the above is correct.ANSWER: b. price of domestic and foreign goods.TYPE: M DIFFICULTY: 1 SECTION: 19.145. Net capital outflow = net exports implies thata. the supply of dollars equals the demand for dollars in the foreign-currency exchange market.b. national saving equals domestic investment.c. the volume of exports equals the volume of imports.d. All of the above are correct.ANSWER: a. the supply of dollars equals the demand for dollars in the foreign-currency exchange market. TYPE: M DIFFICULTY: 1 SECTION: 19.1Chapter 19/A Macroeconomic Theory of the Open Economy 517 46.In the market for foreign-currency exchange in the open-economy macroeconomic model, a higher U.S. realexchange rate makesa. U.S. goods more expensive relative to foreign goods and reduces the quantity of dollars supplied.b. U.S. goods more expensive relative to foreign goods and reduces the quantity of dollars demanded.c. foreign goods more expensive relative to U.S. goods and reduces the quantity of dollars supplied.d. foreign goods more expensive relative to U.S. goods and reduces the quantity of dollars demanded. ANSWER: b. U.S. goods more expensive relative to foreign goods and reduces the quantity of dollars demanded. TYPE: M DIFFICULTY: 1 SECTION: 19.147. The price that balances supply and demand in the market for foreign-currency exchange in the open-economymacroeconomic model is thea. nominal exchange rate.b. nominal interest rate.c. real exchange rate.d. real interest rate.ANSWER: c. real exchange rate.TYPE: M DIFFICULTY: 1 SECTION: 19.148. In the open-economy macroeconomic model, the real exchange rate is determined in the market where dollars areexchanged for foreign currency by the equality of the supply of dollars, which comes froma. U.S. national saving and the demand for dollars for U.S. net exports.b. U.S. net capital outflow and the demand for dollars for U.S. net exports.c. domestic investment and the demand for U.S. net exports.d. foreign demand for U.S. goods and U.S. demand for foreign goods.ANSWER: b. U.S. net capital outflow and the demand for dollars for U.S. net exports.TYPE: M DIFFICULTY: 2 SECTION: 19.149. When the real exchange rate for the dollar appreciates, U.S. goods becomea. less expensive relative to foreign goods, which makes exports rise and imports fall.b. less expensive relative to foreign goods, which makes exports fall and imports rise.c. more expensive relative to foreign goods, which makes exports rise and imports fall.d. more expensive relative to foreign goods, which makes exports fall and imports rise.ANSWER: d. more expensive relative to foreign goods, which makes exports fall and imports rise.TYPE: M DIFFICULTY: 2 SECTION: 19.150. When the real exchange rate for the dollar depreciates, U.S. goods becomea. less expensive relative to foreign goods, which makes exports rise and imports fall.b. less expensive relative to foreign goods, which makes exports fall and imports rise.c. more expensive relative to foreign goods, which makes exports rise and imports fall.d. more expensive relative to foreign goods, which makes exports fall and imports rise.ANSWER: a. less expensive relative to foreign goods, which makes exports rise and imports fall.TYPE: M DIFFICULTY: 2 SECTION: 19.151. If the real exchange rate for the dollar is above the equilibrium level, the quantity of dollars supplied in the foreign-currency exchange market isa. greater than the quantity demanded and the dollar will appreciate.b. greater than the quantity demanded and the dollar will depreciate.c. less than the quantity demanded and the dollar will appreciate.d. less than the quantity demanded and the dollar will depreciate.ANSWER: b. greater than the quantity demanded and the dollar will depreciate.TYPE: M DIFFICULTY: 2 SECTION: 19.1518 Chapter 19/A Macroeconomic Theory of the Open Economy52. If the real exchange rate for the dollar is below the equilibrium level, the quantity of dollars supplied in the foreign-currency exchange market isa. less than the quantity demanded and the dollar will appreciate.b. less than the quantity demanded and the dollar will depreciate.c. greater than the quantity demanded and the dollar will appreciate.d. greater than the quantity demanded and the dollar will depreciate.ANSWER: a. less than the quantity demanded and the dollar will appreciate.TYPE: M DIFFICULTY: 2 SECTION: 19.153. In the open-economy macroeconomic model, the quantity of dollars demanded in the foreign-currency exchangemarketa. depends on the real exchange rate. The quantity of dollars supplied in the foreign-exchange market depends onthe real interest rate.b. depends on the real interest rate. The quantity of dollars supplied in the foreign-exchange market depends onthe real exchange rate.c. and the quantity of dollars supplied in the foreign-currency exchange market depend on the real exchange rate.d. and the quantity of dollars supplied in the foreign-currency exchange market depend on the real interest rate. ANSWER: a. depends on the real exchange rate. The quantity of dollars supplied in the foreign-exchange market depends on the real interest rate.TYPE: M DIFFICULTY: 3 SECTION: 19.154.The theory of purchasing-power parity implies that the demand curve for foreign-currency exchange isa. downward sloping.b. upward sloping.c. horizontal.d. vertical.ANSWER: c. horizontal.TYPE: M DIFFICULTY: 2 SECTION: 19.155. The variable that links the market for loanable funds and the foreign-currency exchange market isa. net capital outflow.b. national saving.c. exports.d. domestic investment.ANSWER: a. net capital outflow.TYPE: M DIFFICULTY: 2 SECTION: 19.256. Which of the following is correct in an open economy?a. S = Ib. S = NX + NCOc. S = NCOd. S = I + NCOANSWER: d. S = I + NCOTYPE: M DIFFICULTY: 1 SECTION: 19.257. In the open-economy macroeconomic model, the key determinant of net capital outflow is thea. nominal exchange rate.b. nominal interest rate.c. real exchange rate.d. real interest rate.ANSWER: d. real interest rate.TYPE: M DIFFICULTY: 1 SECTION: 19.258. When the U.S. real interest rate falls, owning U.S. assets isa. less attractive and so U.S. net capital outflow rises.b. less attractive and so U.S. net capital outflow falls.c. more attractive and so U.S. net capital outflow rises.d. more attractive and so U.S. net capital outflow falls.ANSWER: a. less attractive and so U.S. net capital outflow rises.TYPE: M DIFFICULTY: 1 SECTION: 19.259. Ceteris paribus, if the Canadian real interest rate were to increase, Canadian net capital outflowa. and net capital outflow of other countries would rise.b. and net capital outflow of other countries would fall.c. would rise, while net capital outflow of other countries would fall.d. would fall, while net capital outflow of other countries would rise.ANSWER: d. would fall, while net capital outflow of other countries would rise.TYPE: M DIFFICULTY: 1 SECTION: 19.260. In the open-economy macroeconomic model, which of the following would make Mexico’s net capital outflowdecrease?a. a decrease in U.S. interest ratesb. a decrease in Mexican interest ratesc. an appreciation of the Mexican peso.d. None of the above is correct.ANSWER: a. a decrease in U.S. interest ratesTYPE: M DIFFICULTY: 2 SECTION: 19.261. In the open-e conomy macroeconomic model, if a country’s interest rate increases, its net capital outflowa. and the real exchange rate increase.b. and the real exchange rate decrease.c. increases and the real exchange rate decreases.d. decreases and the real exchange rate increases.ANSWER: d. decreases and the real exchange rate increases.TYPE: M DIFFICULTY: 2 SECTION: 19.262. In the open-economy macroeconomic model, if the supply of loanable funds increases, net capital outflowa. and the real exchange rate increase.b. and the real exchange rate decrease.c. increases and the real exchange rate decreases.d. decreases and the real exchange rate increases.ANSWER: c. increases and the real exchange rate decreases.TYPE: M DIFFICULTY: 3 SECTION: 19.263. In the open-economy macroeconomic model, if the supply of loanable funds increases, the interest ratea. and the real exchange rate increase.b. and the real exchange rate decrease.c. increases and the real exchange rate decreases.d. decreases and the real exchange rate increases.ANSWER: b. and the real exchange rate decrease.TYPE: M DIFFICULTY: 2 SECTION: 19.2The following three questions are based on the figure below:64.National saving is represented by thea. demand curve in panel a.b. demand curve in panelc.c. supply curve in panel a.d. supply curve in panel c.ANSWER: c. supply curve in panel a.TYPE: M DIFFICULTY: 1 SECTION: 19.265. Domestic investment plus net capital outflow is represented by thea. demand curve in panel a.b. demand curve in panelc.c. supply curve in panel a.d. None of the above is correct.ANSWER: a. demand curve in panel a.TYPE: M DIFFICULTY: 1 SECTION: 19.266. At an interest rate of 3 percent, the diagram indicates thata. there is a surplus in the market for foreign currency exchange.b. national saving equals domestic investment.c. net capital outflow + domestic investment = national saving.d. the market for foreign-currency exchange the quantity of dollars supplied equals the quantity of dollarsdemanded.ANSWER: c. net capital outflow + domestic investment = national saving.TYPE: M DIFFICULTY: 1 SECTION: 19.267. Because a government budget deficit representsa. negative public saving, it increases national savings.b. negative public saving, it decreases national savings.c. positive public saving, it increases national savings.d. positive public saving, it decreases national savings.ANSWER: b. negative public saving, it decreases national savings.TYPE: M DIFFICULTY: 1 SECTION: 19.3。