Why is it important, for an open economy, that investment not be consistently higher than saving?
What will be an ideal response?
When investment is higher than saving, the difference is a net capital inflow. The extra investment that is financed by foreigners is an addition to their wealth, rather than an increase in the wealth of domestic citizens. The income from such investment must be paid to the foreign owners, thus is not available to contribute to domestic income and saving. The source of the capital inflow is a continual excess of imports over exports (negative trade balance). Imports are being financed through the sale of assets to foreigners. It is not so much investment but consumption that is unsustainably high; saving is unsustainably low.
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An industrial union can obtain a wage higher than the competitive level
a. without any change in total employment b. at the cost of a reduction in total employment c. and achieve higher total employment as well d. and achieve the same or higher total employment e. thus increasing the quantity of labor demanded
The risk premium of a financial asset is the:
A. additional price that must be paid for riskier investments. B. rate that compensates for risk. C. rate that compensates for the risk of inflation. D. same as the discount rate.