The most common method used by the government to control negative externalities is

When the Fed purchases government bonds it _____ reserves and ____ the money supply.

A) decreases; increases B) increases; decreases C) decreases; decreases D) increases; increases

Consider a small open economy that is in equilibrium with a current account surplus

(a) Draw a diagram showing this situation. (b) Now suppose that future income increases. Show what happens in your diagram. What happens to the world real interest rate and the equilibrium quantities of saving, investment, and the current account balance? (c) Repeat parts (a) and (b) for the case of a large open economy, showing a situation in which the home country initially has a current account surplus. Draw a diagram and describe how the rise in future income in the home country affects all four variables (the world real interest rate and the equilibrium quantities of saving, investment, and the current account balance) in both countries.