Question

Refer to Figure 14-1. Suppose the economy is operating at point m on curve A. The decision to move to point p

I. requires a sacrifice of current consumption.

II. requires a sacrifice of future consumption.

III. adds to the economy’s capital stock assuming depreciation remains at a level corresponding to point m.

IV. enables the economy to increase both its consumption and investment in the future.

Select one:

a. I and II only

b. I and III only

c. I, III, and IV only

d. I, II, III, and IV

Answer 1

Answer-B

The short-term and small deficits in the ba

lance of payments are quite likely in a

wide range of internationa

l transactions. Since such

deficits do not seriously

injure the economy or the economic status

of the country, they do not call for

immediate corrective actions. More importantly, intermittent short-term changes

in domestic economic policies

with a view to removing th

e short-term deficit in

the balance of payments may do more

harm than good to the economy by causing

dislocations in the process of re-allo

cation of resources. This may cause short-

term fluctuations in .the economy. The s

hort-term deficits of smaller magnitude

are, therefore, not a matter of serious concern for the policy-makers. But, a

chronic deficit of larger magnitude has

a wide range of economic and political

implications. A chronic deficit indicates

either a country

turning an eternal

borrower or depletion of its foreign exch

ange and gold reserves. Such a country

loses its international liquidity and credib

ility.