1. When the United States gives foreign aid to developing nations in Africa, which balance of payments account is affected?

current account

financial account

reserve account

foreign exchange account

2. Suppose that the equilibrium interest rate in the U.S. market for loanable funds is 3 percent prior to any international capital flows in the United States. In Japan, the equilibrium interest rate in the Japanese market for loanable funds is 7 percent. If lenders in both nations believe that loans to foreigners are just as good as loans to their own citizens, we would expect:

capital to flow from the United States to Japan, making interest rates rise in Japan and interest rates fall in the United States.

capital to flow from Japan to the United States, making interest rates fall in Japan and interest rates rise in the United States.

capital to flow from Japan to the United States, making interest rates rise in Japan and interest rates fall in the United States.

capital to flow from the United States to Japan, making interest rates fall in Japan and interest rates rise in the United States.

3. In the absence of international capital flows, the equilibrium interest rate in the U.S. market for loanable funds is 3 percent, while in Germany it is 7 percent. International borrowing and lending between the United States and Germany may result in a common interest rate of ________ and ________.

5 percent; capital inflows to the United States matching the capital outflows from Germany

3 percent; massive capital inflows from Germany into the United States

4 percent; capital outflows from the United States matching the capital inflows into Germany

7 percent; massive capital inflows from the United States into Germany

4. If asset owners in Japan and the United States consider Japanese and U.S. assets as good substitutes for each other and if the U.S. interest rate is 5 percent while the Japanese interest rate is 2 percent:

financial inflows will reduce the U.S. interest rate.

financial outflows will reduce the Japanese interest rate.

the interest rate gap between the United States and Japan will grow.

financial inflows will increase the U.S. interest rate.