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Name Testbank Chapter 5: The Open Economy

Description Question pool for Testbank Chapter 5: The Open Economy
Instructions
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Multiple Choice 0 points
Question
An “open” economy is one in which:
Answer the level of output is fixed.
government spending exceeds revenues.
the national interest rate equals the world interest rate.
there is trade in goods and services with the rest of the world.
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Question
A country's exports may be written as equal to:
Answer GDP minus consumption minus investment minus government spending.
GDP minus consumption of domestic goods and services minus investment of domestic goods and
services minus government purchases of domestic goods and services.
imports.
GDP minus imports.
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Question
Net exports equal GDP minus domestic spending on:
Answer all goods and services.
all goods and services plus foreign spending on domestic goods and services.
domestic goods and services.
domestic goods and services minus foreign spending on domestic goods and services.
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Question
If domestic spending exceeds output, we ______ the difference—net exports are ______.
Answer import; negative
export; positive
import; positive
export; negative
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Question
The value of net exports is also the value of:
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Answer net investment.

net saving.
national saving.
the excess of national saving over domestic investment.
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Question
If net capital outflow is positive, then:
Answer exports must be positive.
exports must be negative.
the trade balance must be positive.
the trade balance must be negative.
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Question
Net capital outflow is equal to:
Answer national saving minus the trade balance.
domestic investment plus the trade balance.
domestic investment minus national saving.
national saving minus domestic investment.
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Question
Net capital outflow is equal to the amount that:
Answer foreign investors lend here.
domestic investors lend abroad.
foreign investors lend here minus the amount domestic investors lend abroad.
domestic investors lend abroad minus the amount that foreign investors lend here.
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Question
If domestic saving exceeds domestic investment, then net exports are ______ and net capital outflows are ______.
Answer positive; positive
positive; negative
negative; negative
negative; positive
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Question
In a small, open economy, if net exports are negative, then:
Answer domestic spending is greater than output.
saving is greater than investment.
net capital outflows are negative.
imports are less than exports.
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Question
If domestic saving is less than domestic investment, then net exports are ______ and net capital outflows are
______.
Answer positive; positive
positive; negative
negative; negative
negative; positive
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Question
When exports exceed imports, all of the following are true except:
Answer net capital outflows are positive.
net exports are positive.
domestic investment exceeds domestic saving.
domestic output exceeds spending.
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Question
In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals
$25 billion, then net capital outflow equals:
Answer –$25 billion.
–$10 billion.
$10 billion.
$25 billion.
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Question
In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade ______ and
______ net capital outflow.
Answer deficit; negative
surplus; negative
deficit; positive
surplus; positive
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Question
In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade ______ and
surplus; negative
deficit; positive
surplus; positive
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Question
In a small open economy, if domestic saving equals $50 billion and domestic investment equals $50 billion, then
there is ______ and net capital outflow equals ______.
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Answer a trade deficit; $100 billion

balanced trade; $0
a trade surplus; $100 billion
balanced trade; $100 billion
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Question
In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be
financed by:
Answer borrowing from abroad.
lending from abroad.
the domestic government.
the World Bank.
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Question
In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to:
Answer make loans to the government.
make loans to foreigners.
repay the national debt.
repay loans to the Federal Reserve.
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Question
A trade deficit can be financed in all of the following methods except by:
Answer borrowing from foreigners.
selling domestic assets to foreigners.
selling foreign assets owned by domestic residents to foreigners.
borrowing from domestic lenders.
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Question
If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation,
then U.S. net exports ______ and net capital outflows ______.
Answer increase; increase
increase; decrease
decrease; increase
decrease; decrease
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Question
If a U.S. corporation purchases a product made in Europe and the European producer uses the proceeds to
purchase a U.S. government bond, then U.S. net exports ______ and net capital outflows ______.
increase; decrease
decrease; increase
decrease; decrease
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Question
If a U.S. corporation sells a product in Canada and uses the proceeds to purchase a product manufactured in
Canada, then U.S. net exports ______ and net capital outflows ______.
decrease; decrease
do not change; do not change
do not change; increase
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Question
A “small” economy is one in which the:
Answer level of output is fixed.
price level is fixed.
domestic interest rate equals the world interest rate.
domestic saving is less than domestic investment.
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Question
The world interest rate:
Answer is equal to the domestic interest rate.
makes domestic saving equal to domestic investment.
is the interest rate charged on loans by the World Bank.
is the interest rate prevailing in world financial markets.
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Question
In a country with a small open economy, the real interest rate will always be:
Answer above the world real interest rate.
below the world real interest rate.
equal to the world real interest rate.
equal to the world nominal interest rate.
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Question
A small open economy with perfect capital mobility is characterized by all of the following except that:
Answer its domestic interest rate always exceeds the world interest rate.
it engages in international trade.
its net capital outflows always equal the trade balance.
its government does not impede international borrowing or lending.
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Question
Building an economic model based on the assumption of a small open economy is useful because:
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Answer it accurately describes the U.S. economy.

it is more complicated and realistic than a model based on the assumption of a large open economy.
this simplifying assumption can assist our understanding and intuition of open economy
macroeconomics.
it is not possible to build models of large open economies.
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Question
In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic
investment, then there will be a trade ______ and ______ net capital outflow.
Answer surplus; negative
deficit; positive
surplus; positive
deficit; negative
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Question
Exhibit: Saving and Investment in a Small Open Economy
Reference: Ref 5-1
(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r ,
1
then the economy has:
Answer a trade surplus.
balanced trade.
a trade deficit.
negative capital outflows.
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Question
Exhibit: Saving and Investment in a Small Open Economy
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Reference: Ref 5-1
(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r ,
3
then the economy has:
Answer a trade surplus.
balanced trade.
a trade deficit.
positive capital outflows.
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Question
An increase in the trade deficit of a small open economy could be the result of:
Answer an increase in taxes.
an increase in government spending.
a decrease in the world interest rate.
the expiration of an investment tax-credit provision.
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Question
An increase in the trade surplus of a small open economy could be the result of:
Answer a domestic tax cut.
an increase in the world interest rate.
the implementation of an investment tax-credit provision.
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Question
In a small open economy, starting from a position of balanced trade, if the government increases domestic
government purchases, this produces a tendency toward a trade ______ and ______ net capital outflow.
surplus; positive
deficit; positive
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surplus; negative
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Question
In a small open economy, starting from a position of balanced trade, if the government increases the income tax, this
produces a tendency toward a trade ______ and ______ net capital outflow.
surplus; positive
deficit; positive
surplus; negative
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Question
Holding other factors constant, legislation to cut taxes in an open economy will:
Answer increase national saving and lead to a trade surplus.
increase national saving and lead to a trade deficit.
reduce national saving and lead to a trade surplus.
reduce national saving and lead to a trade deficit.
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Question
Starting from a small open economy with balanced trade, if large foreign countries increase their domestic
government purchases, this policy will tend to increase:
Answer investment in the small open economy.
saving in the small open economy.
exports by the small open economy.
imports by the small open economy.
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Question
Starting from trade balance, if the world interest rate falls, then, holding other factors constant, in a small open
economy the amount of domestic investment will _____ and net exports will _____.
increase; decrease
increase, not change
decrease; increase
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Question
If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in
achieving this goal?
Answer increasing taxes
increasing government spending
increasing investment tax credits
imposing protectionist trade policies
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Question
The adoption of an investment tax credit in a small open economy is likely to lead to:
Answer no change in either domestic investment or domestic saving in the small open economy.
an increase in both domestic investment and domestic saving in the small open economy.
an increase in domestic saving but no change in domestic investment in the small open economy.
an increase in domestic investment but no change in domestic saving in the small open economy.
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Question
In a small open economy, policies that increase:
Answer investment tend to cause a trade surplus.
investment tend to cause a trade deficit.
saving do not affect the trade balance.
saving tend to cause a trade deficit.
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Question
In an open economy:
Answer a trade deficit is always good.
a trade deficit is always bad.
a trade deficit may be good or bad.
a trade surplus is always bad.
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Question
A shrinking U.S. budget deficit in the 1990s coincided with a ______ U.S. trade deficit.
Answer shrinking
continuing
nonexistent
stable
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Question
As the U.S. budget deficit shrank in the 1990s, the increase in U.S. national saving was ______ than the
expansionary shift in the U.S. investment function, resulting in a trade ______.
Answer stronger; deficit
stronger; surplus
weaker; deficit
weaker; surplus
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Question
Two reasons why capital may not flow to poor countries are that the poorer countries may:
Answer have economies unlike those described by a Cobb-Douglas production function and not be subject to
diminishing returns to capital.
have already accumulated high levels of capital relative to labor and may already have access to
advanced technologies.
legally prevent the inflow of foreign capital and provide strong legal protection of private property.
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have inferior production capabilities and not enforce property rights.
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Question
Based on a Cobb-Douglas production function and perfect capital mobility, capital should flow to economies where:
Answer capital is relatively scarce.
capital is relatively abundant.
technological production capabilities are inferior.
labor is relatively scarce.
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Question
The nominal exchange rate between the U.S. dollar and the Japanese yen is the:
Answer number of yen you can get for lending one dollar in Japan for one year.
number of yen you can get for one dollar.
price of U.S. goods divided by the price of Japanese goods.
price of Japanese goods divided by the price of U.S. goods.
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Question
The real exchange rate:
Answer measures how many Japanese yen one really gets for a U.S. dollar.
is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price
level.
is equal to the nominal exchange rate multiplied by the foreign price level divided by the domestic price
level.
is the price of a domestic car divided by the price of a foreign car.
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Question
If the number of dollars per yen rises, this is called a(n):
Answer appreciation of the dollar.
appreciation of the yen.
increase in the terms of trade.
decrease in the terms of trade.
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Question
If the real exchange rate is high, foreign goods:
Answer and domestic goods are both relatively expensive.
and domestic goods are both relatively cheap.
are relatively expensive and domestic goods are relatively cheap.
are relatively cheap and domestic goods are relatively expensive.
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Question
If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per
good, then the real exchange rate between Swiss goods and U.S. goods is ______ Swiss goods per U.S. good.
Answer 0.5
2.5
5
10
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Question
When the real exchange rate rises:
Answer exports will decrease but imports will be unaffected.
imports will decrease but exports will be unaffected.
exports will increase and imports will decrease.
exports will decrease and imports will increase.
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Question
If the real exchange rate depreciates from 1 Japanese good per U.S. good to 0.5 Japanese good per U.S. good,
then U.S. exports ______ and U.S. imports ______.
decrease; decrease
increase; decrease
decrease; increase
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Question
If the real exchange rate of a country decreases, then net exports will _____.
Answer be positive
be negative
increase
decrease
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Question
The lower the real exchange rate is, the ______ expensive domestic goods are relative to foreign goods, and the
______ the demand is for net exports.
Answer more; greater
more; smaller
less; greater
less; smaller
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Question
In the small open economy in equilibrium:
Answer saving is fixed and investment is determined by the investment function and the world interest rate.
investment is fixed and saving is determined by the saving function and the world interest rate.
saving is fixed and investment is determined by the trade balance.
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investment is fixed and saving is determined by the trade balance.
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Question
If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis, then the
real exchange rate is determined by the intersection of the ______ net-exports schedule and the ______ line
representing saving minus investment.
Answer downward-sloping; vertical
upward-sloping; vertical
downward-sloping; upward-sloping
upward-sloping; downward-sloping
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Question
The real exchange rate is determined by the equality of:
Answer saving and the demand for net exports.
investment and the demand for net exports.
net capital outflow and the demand for net exports.
the negative value of net capital outflow and the demand for net exports.
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Question
In a small open economy, when the government reduces national saving, the equilibrium real exchange rate:
Answer rises and net exports fall.
rises and net exports rise.
falls and net exports fall.
falls and net exports rise.
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Question
In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net
exports and the real exchange rate ______.
Answer increases; appreciates
increases; depreciates
decreases; appreciates
decreases; depreciates
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Question
In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real
exchange rate:
rises and net exports rise.
falls and net exports fall.
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Question
In a small open economy, if the world interest rate falls, then domestic investment will _____ and the real exchange
rate will _____, holding all else constant.
Answer decrease; decrease
decrease; increase
increase; decrease
increase; increase
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Question
In a small open economy, if the world interest rate increases then the supply of domestic currency on the foreign
exchange market will _____ and the real exchange rate will _____, holding all else constant.
Answer decrease; decrease
decrease; increase
increase; decrease
increase; increase
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Question
In a small open economy, if the government encourages investment, say through an investment tax credit,
investment:
Answer increases and is financed through an increase in national saving.
increases and is financed through an increase in exports.
increases and is financed through an inflow of foreign capital.
does not increase; the interest rate rises instead.
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Question
If the information technology boom increases investment demand in a small open economy, then net exports ______
and the real exchange rate ______.
Answer increase; appreciates
increase; depreciates
decrease; appreciates
decrease; depreciates
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Question
An appreciation of the real exchange rate in a small open economy could be the result of:
Answer an increase in government spending.
an increase in taxes.
a decrease in the world interest rate.
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Question
A depreciation of the real exchange rate in a small open economy could be the result of:
Answer a domestic tax cut.
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an increase in the world interest rate.

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Question
In a small open economy, if the government adopts a policy that lowers imports, then that policy:
Answer raises the real exchange rate and increases net exports.
raises the real exchange rate and does not change net exports.
raises the real exchange rate and decreases net exports.
lowers the real exchange rate.
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Question
In a small open economy, if the government adopts a policy that lowers imports, then the quantity of exports:
Answer remains unchanged.
decreases, but not as much as the quantity of imports decreases.
decreases by exactly the same amount as the quantity of imports decreases.
decreases by more than the quantity of imports decreases.
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Question
An effective policy to reduce a trade deficit in a small open economy would be to:
Answer increase tariffs on imports.
impose stricter quotas on imported goods.
increase government spending.
increase taxes.
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Question
Protectionist policies implemented in a small open economy with a trade deficit have the effect of ______ the trade
deficit and ______ the quantity of imports and exports.
Answer decreasing; decreasing
not changing; decreasing
decreasing; not changing
not changing; not changing
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Question
Protectionist policies in a small open economy do not alter the trade balance because the:
Answer quantity of imports and exports is fixed.
interest rate adjusts to offset any reductions in imports.
exchange rate appreciates to offset the increase in net exports.
level of net capital outflow is fixed by the world interest rate.
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Question
Which of the following would decrease the real exchange rate in a small open economy in the long run?
Answer a personal income tax cut
a reduction in government spending
a tariff on imports
an increase in investment
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Question
Exhibit: Policies Influence Real Exchange Rate
Reference: Ref 5-2
(Exhibit: Policies Influence Real Exchange Rate) Which of the graphs illustrates the impact on the real exchange
rate of contractionary fiscal policies at home?
Answer (A)
(B)
(C)
(D)
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Question
Reference: Ref 5-2
rate of contractionary fiscal policies abroad?
Answer (A)
(B)
(C)
(D)
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Question
16 of 34 6/1/2012 8:48 PM
Reference: Ref 5-2
rate of an increase in investment demand?
Answer (A)
(B)
(C)
(D)
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Question
17 of 34 6/1/2012 8:48 PM
Reference: Ref 5-2
rate of protectionist trade policies?
Answer (A)
(B)
(C)
(D)
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Question
18 of 34 6/1/2012 8:48 PM
Reference: Ref 5-2
rate of an increase in household saving?
Answer (A)
(B)
(C)
(D)
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Question
The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus
the:
Answer foreign inflation rate minus the domestic inflation rate.
domestic inflation rate minus the foreign inflation rate.
foreign exchange rate minus the domestic exchange rate.
domestic interest rate minus the foreign interest rate.
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Question
If a country has a high rate of inflation relative to the United States, the dollar will buy:
Answer less of the foreign currency over time.
more of the foreign currency over time.
the same amount of the foreign currency over time.
an amount of foreign currency determined by the real exchange rate.
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Question
One consequence of high inflation is a(n):
Answer appreciating nominal exchange rate.
appreciating real exchange rate.
depreciating nominal exchange rate.
depreciating real exchange rate.
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Question
If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the
United States is 6 percent and the inflation rate in Japan is 3 percent, the:
Answer dollar will appreciate by 3 percent against the yen.
yen will appreciate by 3 percent against the dollar.
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Question
If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level
rises 6 percent, the real exchange rate will fall:
Answer 0 percent.
8 percent.
10 percent.
12 percent.
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Question
The currencies of countries with high inflation rates relative to the United States have tended to ______, and the
currencies of countries with low inflation rates relative to the United States have tended to ______.
Answer appreciate; appreciate
appreciate; depreciate
depreciate; depreciate
depreciate; appreciate
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Question
If the purchasing-power parity theory is true, then:
Answer the net exports schedule is very steep.
all changes in the real exchange rate result from changes in price levels.
all changes in the nominal exchange rate result from changes in price levels.
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changes in saving or investment influence only the real exchange rate.
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Question
The idea that the amount of any currency that can buy a particular good in one country should be able to buy (after
being exchanged for the local currency) the same quantity of the same good anywhere in the world is called:
Answer the theory of the real exchange rate.
equal currency conversion.
international monetary exchange.
purchasing-power parity.
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Question
If purchasing-power parity holds, then changes in domestic saving will _____ the real exchange rate.
Answer increase
decrease
not change
either increase or decrease
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Question
According to purchasing power-parity, if the dollar price of oil is higher in New York than in London, arbitrageurs will
_____ oil in New York and _____ oil in London to drive _____ the price of oil in New York.
Answer buy; sell; up
buy; sell; down
sell; buy; up
sell; buy; down
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Question
The law of one price is enforced by:
Answer governments.
producers.
consumers.
arbitrageurs.
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Question
The doctrine of purchasing-power parity:
Answer is a completely accurate description of the real world.
would be entirely accurate if only goods were traded.
would be entirely accurate if all consumers had the same preferences.
provides a reason to expect that movements in the real exchange rate will typically be small or
temporary.
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Question
If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1
dollar, then a Big Mac in Cancun, Mexico, should cost:
Answer 2 pesos.
5 pesos.
10 pesos.
20 pesos.
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Question
In a large but open economy, when a fiscal expansion takes place, the interest rate goes up and some investment is
crowded out, and the expansion also causes a trade:
Answer surplus and a fall in the real exchange rate.
deficit and a rise in the real exchange rate.
surplus and a rise in the real exchange rate.
deficit and a fall in the real exchange rate.
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Question
Net capital outflow in a large country:
Answer rises as the real domestic interest rate rises.
declines as the domestic interest rate rises.
depends on the foreign interest rate.
depends only on domestic saving.
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Question
For a closed economy, when net capital outflow is measured along the horizontal axis and the real interest rate is
measured along the vertical axis, net capital outflow is drawn as a:
Answer vertical line at 0.
horizontal line at the world real interest rate.
line that slopes up and to the right.
line that slopes down and to the right.
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Question
For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis
and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a:
Answer vertical line at 0.
horizontal line at the world real interest rate.
line that slopes up and to the right.
line that slopes down and to the right.
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Question
A statement that is generally true about capital in a large open economy is that it is:
Answer perfectly mobile, and the country does not influence world financial markets.
perfectly mobile, and the country influences world financial markets.
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not perfectly mobile, but the country does not influence world financial markets.
not perfectly mobile, but the country influences world financial markets.
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Question
In a large open economy, the real interest rate is determined by:
Answer national saving, the domestic investment function, and the net capital outflow function.
national saving, the domestic investment function, and the net exports function.
the domestic investment function, the net capital outflow function, and the net exports function.
national saving, the domestic investment function, the net capital outflow function, and the net exports
function.
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Question
In a large open economy, the interest rate adjusts so that domestic saving equals:
Answer domestic investment.
net exports.
net capital outflow.
domestic investment plus net capital outflow.
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Question
In a large open economy, the exchange rate adjusts so that net exports equal:
Answer domestic saving.
domestic investment.
net capital outflow.
domestic investment plus net capital outflow.
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Question
Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate.
Answer does not change; increases
increases; increases
increases; decreases
decreases; increases
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Question
In a large open economy, an investment tax credit raises the real interest rate, ______ the trade balance, and
Answer decreases; decreases
increases; increases
decreases; increases
increases; decreases
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Question
In a large open economy, if an import quota is adopted, then:
Answer net exports remain unchanged, as imports and exports decrease by equal amounts, while the real
exchange rate rises.
net exports remain unchanged, as imports and exports decrease by equal amounts, while the real
exchange rate falls.
net exports rise and the real exchange rate rises.
net exports rise and the real exchange rate falls.
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Question
In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest
rate:
Answer rises, while the real exchange rate rises and net exports fall.
rises, while the real exchange rate falls and net exports rise.
falls, while the real exchange rate rises and net exports rise.
falls, while the real exchange rate rises and net exports fall.
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Question
In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange
rate:
and net exports both rise.
and net exports both fall.
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Question
In a small open economy, if consumers shift their preferences toward Japanese cars, then net exports:
Answer fall and the real exchange rate falls.
fall but the real exchange rate remains unchanged.
remain unchanged but the real exchange rate falls.
and the real exchange rate remain unchanged.
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Question
In a small open economy, if the introduction of automatic-teller machines reduces the demand for money, then net
exports:
Answer fall and the real exchange rate falls.
fall but the real exchange rate remains unchanged.
remain unchanged but the real exchange rate falls.
and the real exchange rate remain unchanged.
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Question
Assume that a small open economy gets involved in a global war, in which its government purchases increase and
the rest of the world's government purchases also increase. Then, for the small country, net exports:
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Answer will certainly decrease.

will certainly increase.
may increase or decrease.
will remain the same.
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Question
Assume that some large foreign countries begin to subsidize investment by instituting an investment tax credit.
Then, if world saving does not depend on the interest rate, world investment:
Answer will rise and small country investment will fall.
will rise and small country investment will remain unchanged.
will remain unchanged and small country investment will fall.
and small country investment will both remain unchanged.
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Question
Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit.
Then a small country's real exchange rate:
Answer will fall and its net exports will rise.
will rise and its net exports will fall.
and net exports will both fall.
and exports will both rise.
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Question
If a dollar bought 1,000 Chilean pesos ten years ago and 1,500 pesos now, and inflation for that period was 25
percent in the United States and 100 percent in Chile, then:
Answer the purchasing-power parity theory is correct.
traveling in Chile today costs about the same as it did ten years ago.
traveling in Chile is cheaper now than it was ten years ago.
traveling in Chile is more expensive now than it was ten years ago.
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Question
If the nominal interest rates in the United States and Canada are 8 percent and 12 percent, respectively, the real
interest rates are the same, and the real exchange rate is fixed, then the market's expectation about the number of
Canadian dollars to be received for a U.S. dollar a year from now will be that it will:
Answer decrease by 8 percent.
decrease by 4 percent.
increase by 4 percent.
increase by 5 percent.
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Question
Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the
United States. Then, the U.S. real interest rate:
Answer and net exports will both fall.
will fall and net exports will rise.
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will rise and net exports will fall.

and net exports will both rise.
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Question
Assume that in a small open economy where full employment always prevails, national saving is 300.
a. If domestic investment is given by I = 400 – 20r, where r is the real interest rate
in percent, what would the equilibrium interest rate be if the economy were
closed?
b. If the economy is open and the world interest rate is 10 percent, what will
investment be?
c. What will the current account surplus or deficit be? What will net capital outflow
be?
Answer a. 5 percent
b. 200
c. The trade surplus will be 100. Net capital outflow will be 100.
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Question
Assume that in a small open economy with full employment, consumption depends only on disposable income.
National saving is 300, investment is given by I = 400 – 20r, where r is the real interest rate in percent, and the world
interest rate is 10 percent.
a. If government spending rises by 100, does investment change? What is the
level of investment after the change?
b. Does the trade balance change if G rises by 100? If it changes, does it increase
or decrease, and by how much?
c. Does net capital outflow change if G rises by 100? If it changes, does it
increase or decrease, and by how much?
d. Will the real exchange rate rise, fall, or remain constant as a result of the
change in G?
Answer a. No. 200.

b. Yes. It decreases by 100.
c. Yes. It decreases by 100.
d. It will rise.
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Question
Assume that the following equations characterize a large open economy:
(1) Y = 5,000
(2) Y = C + I + G + NX
(3) C = 1/2(Y – T)
(4) I = 2,000 – 100r
(5) NX = 500 – 500ε
(6) CF = –100r
(7) CF = NX
(8) G = 1,500
(9) T = 1,000
where NX is net exports, CF is net capital outflow, and ε is the real exchange rate.
Solve these equations for the equilibrium values of C, I, NX, CF, r, and ε. (Hint: Substitute equations (9) and (1) into
(3), then substitute (1), (3), (4), (8), and (5) into (2). Then substitute (5) and (6) into (7). Now you have two equations
in r and ε. Check your work by seeing that all of these equations balance given your answers.)
Answer C = 2,000; I = 1,750; NX = –250; CF = –250; r = 2.5 percent; ε = 1.5
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Question
a. In April 1995, Michel Camdessus, managing director of the International Monetary Fund (IMF), criticized U.S.
economic policy for allowing the dollar exchange rate to fall too low. He recommended that the United States reduce
its budget deficit in order to raise the exchange rate. Use the long-run model of a small open economy to illustrate
graphically the impact of reducing the government's budget deficit on the exchange rate and the trade balance. Be
sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the
new long-run equilibrium values.
b. Based on your graphical analysis, explain whether Mr. Camdessus's policy recommendation will work. Specifically
state what happens to the exchange rate and the trade balance as a result of the government budget deficit
reduction.
Answer a.
b. Mr. Camdessus's policy will not have the intended effect. The dollar exchange rate will decline and the
trade balance will move toward surplus.
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Question
a. In September 1995, Patrick Buchanan, a Republican candidate for president, proposed a 10 percent tariff on
Japanese imports to the United States, a 20 percent tariff on Chinese imports to the United States, and an
unspecified “social” tariff on imports from third-world countries. Use the long-run model of a small open economy to
illustrate graphically the impact of these trade policies on the U.S. exchange rate and the trade balance. Assume
that the country starts from a position of trade balance, i.e., exports equal imports. Be sure to label: i. the axes; ii. the
curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.
b. Based on your graphical analysis, explain the predicted impact of Mr. Buchanan's proposed policies. Specifically
state what happens to the exchange rate, the trade balance, the volume of imports, and the volume of exports.
Answer a.
b. Under Mr. Buchanan's policy, the dollar exchange rate would appreciate but the trade balance would
remain unchanged. However, the volume of imports will decrease (because of the tariffs) and the volume of
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exports will decrease by the same amount (because of the appreciation of the exchange rate).
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Question
a. Suppose that governments around the world begin to engage in expansionary fiscal policy (run large budget
deficits) in order to stimulate economic activity in their countries. Use the long-run model of a small open economy to
illustrate graphically the impact of this expansionary fiscal policy by foreigners on the U.S. exchange rate and the
trade balance. Assume that the country starts from a position of trade balance, i.e., exports equal imports. Be sure to
label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new
long-run equilibrium values.
b. Based on your graphical analysis, explain the predicted impact of the foreign expansionary fiscal policy on the
U.S. exchange rate and the U.S. trade balance.
Answer a.
b. The fiscal expansion in the rest of the world would raise the world interest rate and lower domestic
investment. As a result, the exchange rate will depreciate and the trade balance will move toward surplus.
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Question
a. If corporate downsizing and lack of job security cause consumers to spend less and save more, what will be the
impact on the exchange rate and trade balance? Use the long-run model of a small open economy to illustrate
graphically the impact of this decline in consumer confidence on the exchange rate and the trade balance. Assume
the country starts from a position of trade balance, i.e., exports equal imports. Be sure to label: i. the axes; ii. the
curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the new long-run equilibrium values.
b. Based on your graphical analysis, explain the predicted impact of a decline in consumer confidence on the
exchange rate and the U.S. trade balance.
Answer a.
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b. The increase in private saving caused by the loss of consumer confidence will lower the exchange rate
and move the trade balance toward surplus.
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Question
Suppose that the large industrial countries of the world are concerned about the depreciating currencies of a number
of small open economies.
a. What type of fiscal policies must the large industrial countries undertake in
order to promote currency appreciation in the small open economies?
b. Illustrate graphically the impact of the industrial countries' policies on the
exchange rate of the small open economies.
c. What will happen to the trade balance of the typical small open economy,
assuming that it starts from a position of balanced trade?
Answer a. The large economies must execute contractionary fiscal policy (decreasing government spending and/or
increasing taxes) to generate a lower world interest rate.
b. The lower world interest rate increases investment in the small open economy, which reduces the supply
of currency going into the foreign exchange market and increases the exchange rate of the small open
economy.
c. The trade balance of the small open economy will move into deficit.
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Question
Suppose that the International Monetary Fund (IMF) is concerned about currency depreciation in a small open
economy.
29 of 34 6/1/2012 8:48 PM
a. What type of fiscal policy should the IMF propose to the government of the
small open economy to generate a currency appreciation?
b. Illustrate graphically the impact of the IMF proposal on the exchange rate of the
small open economy.
c. What will happen to the trade balance of the small open economy, assuming
that it started from a position of balanced trade?
Answer a. The IMF must propose expansionary fiscal policy, i.e., increasing government spending and/or cutting
taxes. This will decrease saving in the small open economy.
b. The decrease in domestic saving will reduce the supply of currency to the foreign exchange market,
resulting in currency appreciation.
c. The trade balance of the small open economy will move into deficit.
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Question
The government of a small open economy wishes to promote trade policies that will result in currency appreciation.
a. Would protectionist policies (higher tariffs and more quotas) or freer trade policies (tariff reductions and
quota eliminations) be more effective in generating currency appreciation?
b. Illustrate graphically the impact of the trade policy on the exchange rate of the small open economy.
c. What will happen to the trade balance of the small open economy as a result of the trade policies,
assuming that the country started from a position of free trade?
d. What will happen to the quantity of exports and imports as a result of the trade policies?
Answer a. Protectionist policies will result in currency appreciation.

b. The protectionist policies increase the demand for net exports.
c. The trade balance will remain unchanged—still balanced.

d. The volume of exports will decrease (as a result of the currency appreciation), and the volume of imports
will decrease (as a result of the protectionist policies).
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Question
Compare the impact of an increase in the government's budget deficit on investment spending in a small open
economy with an otherwise comparable closed economy. Assume prices are flexible and that factors of production
30 of 34 6/1/2012 8:48 PM
are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.
Answer Investment spending decreases in the closed economy, but does not change in the small open economy. In
the closed economy, the increase in the budget deficit reduces national saving and increases the interest
rate, which decreases private investment spending. In the small open economy, the domestic interest rate
remains unchanged at the world interest rate. Although national saving also declines in the small open
economy, capital inflows make up this shortfall in domestic saving to finance domestic investment.
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Question
Explain why government budget deficits crowd out private investment spending in a closed economy, but crowd out
net exports in a small open economy. Assume prices are flexible and that factors of production are fully employed in
both economies. Assume there is perfect capital mobility for the small open economy.
Answer In the closed economy, the increase in the budget deficit reduces national saving and increases the interest
rate, which crowds out (decreases) private investment spending. In the small open economy, the budget
deficit reduces national saving, which increases the real exchange rate. The increase in the real exchange
rate crowds out (decreases) net exports.
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Question
What determines the real exchange rate and what determines the nominal exchange rate in a small open economy
with perfect capital mobility, fully employed factors of production, and flexible prices?
Answer The real exchange rate adjusts to bring the net exports and net capital outflows into equilibrium. The
nominal exchange rate equals the real exchange rate times the ratio of the foreign price level to the
domestic price level.
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Question
Suppose a new technology is developed that increases investment demand in both a closed economy and in a small
open economy that are in other ways identical. Holding other factors constant, will the quantity of investment
spending increase more in the closed economy or in the small open economy? Explain. Assume prices are flexible
and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the
small open economy.
Answer Investment spending will not change in the closed economy, but will increase in the small open economy. In
the closed economy, there is no change in domestic saving, so the domestic interest rate must rise to keep
investment spending equal to the unchanged domestic saving. In the small open economy, the increase in
investment demand is financed by net capital inflows (a decrease in net capital outflows) at the unchanged
world interest rate. The decrease in net capital outflows raises the real exchange rate and reduces net
exports in the small open economy.
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Question
The real interest rates and real exchange rates are constant and equal in North Country and South Country. The
Fisher equation and purchasing-power parity hold in both countries. If the nominal interest rate is 8 percent in North
Country and 10 percent in South Country, do you expect North Country's nominal exchange rate to appreciate,
depreciate, or remain the same? Explain.
Answer From the Fisher equation, inflation is expected to be higher in South Country than in North Country, since
the nominal interest rate equals the real interest rate plus the expected rate of inflation and the real interest
rate is the same in both countries while the nominal interest rate is higher in South Country. According to
purchasing-power parity, the change in the North Country's nominal exchange rate equals the change in the
real exchange rate (which is constant) plus the difference in inflation rates (foreign inflation minus domestic
inflation). Since South Country's expected inflation is higher, then North Country's nominal exchange rate
should appreciate, i.e., each unit of North Country's currency should exchange for more units of South
Country currency in the future.
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31 of 34 6/1/2012 8:48 PM
Question
In the 2008 global financial crisis, many investors considered the U.S. economy a safe place to move their assets.
What is the predicted impact of this inflow of financial capital to the United States, which is a large open economy, on
the U.S. interest rate and the U.S. exchange rate, holding other factors constant? Illustrate your answer graphically
and explain in words.
Answer
The reduction in net capital outflows reduces the demand for loanable funds, which reduces the domestic
interest rate. The lower domestic interest rate partially offsets some of the initial decrease in net capital
outflows from the United States, but there is an overall decrease in net capital outflows. The reduction in net
capital inflows reduces the supply of dollars in the foreign exchange market and increases the real
exchange rate.
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Question
In times of great economic uncertainty and potential job loss, many consumers may increase their saving as a
precautionary measure. What is the predicted impact of an increase in national saving on the domestic interest rate
and exchange rate in a large open economy, holding other factors constant? Illustrate your answer graphically and
explain in words.
Answer
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The increase in national saving will decrease the domestic interest rate. The lower interest rate will increase
the amount of net capital outflows, which will decrease the domestic exchange rate as the supply of the
domestic currency in the foreign exchange market increases.
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Question
Major improvements in computer information technology and communications in the late 1990s fueled an increase in
investment demand in the United States. What is the predicted impact of this increased investment demand in the
United States, which is a large open economy, on the U.S. interest rate, the U.S. exchange rate, and U.S. net
exports, holding other factors constant? Illustrate your answer graphically and explain in words.
Answer
33 of 34 6/1/2012 8:48 PM
The increase in domestic investment demand will increase the U.S. interest rate. The higher domestic
interest rate will reduce net capital outflows. The reduced supply of dollars in the foreign exchange market
will increase the U.S. exchange rate. The higher real exchange rate makes U.S. exports less competitive
and imports more attractive, reducing U.S. net exports.
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Question
If the money supply in Mexico is increasing much more rapidly than the money supply in the United States, holding
other factors constant, what would you predict will happen to the nominal exchange rate between the Mexican peso
and the U.S. dollar? Explain.
Answer According to the quantity theory, the faster growth rate of money will result in a higher rate of inflation in
Mexico than in the United States. If there is purchasing-power parity, then the percentage change in the
nominal exchange rate equals the percentage change in the real exchange rate plus the difference in the
inflation rates (foreign inflation minus domestic inflation). The higher Mexican inflation will increase the
nominal exchange rate (pesos per dollar), holding other factors constant.
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Question
Compare the impact of increase in investment demand in a small open economy and a large open economy.
Assume prices are flexible, factors of production are fully employed in both countries, and there is perfect capital
mobility in the small open economy.
Answer In the small open economy, the increase in investment demand puts upward pressure on the interest rate,
which attracts capital inflows to fully finance the increased investment demand at the world interest rate.
The increase in capital inflows (decrease in net capital outflows) increases the demand for the domestic
currency in the foreign exchange market, which increases the exchange rate and reduces net exports.
In the large open economy, the increase in investment demand increases the domestic interest rate, which
offsets some of the increase in investment demand. The higher domestic interest rate reduces net capital
outflows and drives up the domestic exchange rate, which reduces net exports. In summary, in the small
open economy, the full increase in domestic investment demand is met at the cost of a reduction in net
exports. In contrast, in the large open economy, not all of the increase in domestic investment demand is
realized, because of the increase in the domestic interest rate. The increase in investment demand also
leads to a reduction in net exports.
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there.” And in this manner Mr Such-a-thing loses his business,
almost without the possibility of recalling it. He longs to discover a
means of disposing of the confessor, but he finds a great difficulty in
accomplishing his purpose. He is disinclined to be churlish to a
person to whom he has confessed himself for years. Still he makes
an effort. He grows cool in his civility, and makes a point of being
always busy on his arrival. Perhaps he has the good luck, at length,
to shake off this pest of his premises; but it is more than probable
that he submits to the terrific infliction for life, his confessor only
leaving him when he is fairly in his grave. I once knew a dreadful
case of confessorship, in which the shopkeeper had the hardihood to
expel his visitant, and by a plan so ingenious that I think it worth
while to advert to it. The shop contained four chairs, including the
confessional, which stood opposite the door. One day when the
confessor arrived, and, as usual, proceeded to his seat, he was a
little surprised in remarking that it was filled to a pretty good height
with parcels of some kind or other. But as this appeared naturally
enough to be caused by a press in the stock of goods, no
observation took place regarding it, and another chair was selected.
However, next day when he again appeared, another chair was
found covered up in a similar manner. The following day, he even
found a third filled with parcels; and on the fourth day the whole were
thus engaged. The confessor now saw that a conspiracy had been
formed to destroy his functions, and to expel him from his ancient
settlements. Like the unhappy antediluvians, who, as the flood
arose, were driven from one spot of earth to another, and at last did
not find a dry piece of ground whereon to rest their foot, so the
unhappy confessor had been driven from chair to chair, till at last he
could not discover a place whereon he could plant himself. A pang of
vexation shot through his heart; a gleam of mingled shame and
indignation passed over his countenance; and, with a last look of
despair, he burst from the shop, and “ne’er was heard of more.”
It must be allowed that some men do not stand so much in need of
confessors, or do not indulge so much in them, as others; but, upon
the whole, it may be taken as a general rule, that no man can
altogether do without such an official. In the fair on-going business of
life, one acts suo more solito, according to one’s regular custom of
trade, or by the common rules of the world. But occasions occur,
where common practice does not furnish a rule. You are in love, and
wish to interest a friend in your passion; you are about to marry, and
require information about arrangements, and also some one to stand
beside you, and pull off your glove, preparatory to the ceremony; you
have a quarrel, and need a third party to tell you that you are in the
right; you are about to enter into some commercial or other
enterprise a little beyond your usual depth, and find it necessary to
fortify your resolution by the sanction of a friend; or you write a poem
or a novel, and require to have somebody to read the manuscript,
and tell you that it is sure of success. In all these cases, the
confessor is indispensable. Without him, you would be crossed in
love; get stranded in the straits of matrimony; permit yourself, after
giving offence and insult, to let off the object of it with impunity for his
remonstrance; break down in your new business scheme; and let
your manuscript waste its sweetness on the desert scrutoire. But
with him all goes smooth.
Upon the whole, it is better that one’s confessor should be a little
poorer, as well as a little more plausible in speech, than one’s self:
he ought to be a man to whom meat and drink are things of some
account—a broken-down Scotch licentiate—an author who has
published respectable books which have never sold; in short, some
idle, poor, servile individual, to whom it is of the last importance to
get a good grazing ground in the back premises of a substantial
trader, upon whom he may revenge that partiality of fortune, which
decrees all the real comforts of life to the mercantile and common-
place, while the real “clever fellows” starve.
But, after all, it must be allowed that there is a great deal of
confessorship in the world, independent of a regard to cake and
pudding. It is in many cases simply a fascination exerted over one
mind by another; in others, the result of that very common failing, the
want of confidence in one’s own resources. Young men—by which, I
mean men in the mason-lodge time of life, say between twenty and
five-and-twenty—are most apt to indulge in confession. They think
friends all in all, and for friends would give up every thing. All
business and duty is to them an episode, only consented to because
it is unavoidable; while the enjoyment of the countenance of their
friends seems the main and true concern of life. Then are the joys of
confession truly relished. Then does the vampire confessor suck
deepest into the vitals of his devotee. Happy delusion—sweet
morning dream—alas! too certain to awake to the conviction that it is
“but a dream!”
A CHAPTER OF POLITICAL ECONOMY,
WRITTEN FOR THE BRITISH PEASANTRY.
The monstrous absurdity, that there is a principle in the economy of

nature by which population increases beyond the means of support,
has been stated by men eminent in various departments of political
economy, and countenanced by individuals in whom the soundest
reasoning and farsightedness might have been expected. There is
not a principle in nature having a tendency to increase population
beyond the means of subsistence, or to overpeople the world. To
suppose that there is, is to impugn the magnificent designs of the
Creator, and to call in question his vigilant and ever-sustaining
providence. When the globe which we inhabit, and all that it sustains
in the animal and vegetable kingdoms, was called into existence,
and sent forth fresh from the hands of its Divine Constructor, certain
fixed principles were ordained and put into unintermitting action, by
which all were to be sustained, and prevented alike from coming to a
stand, or into collision. These principles involved the production and
reproduction of food for man and beast through an incalculable
series of ages; and this process of production was left to be excited
or retarded in a great measure by man, for whose convenience all
subordinate parts were organised, and by whose thinking faculties
the increase or decrease of food was apparently to be proportioned.
In a word, it was left to our free-will whether to cultivate the soil, or
leave it in its rude and unproductive condition.
It has happened in the course of some five or six thousand years
after the creation of the world, that a small island, lying in the seas
which border on the northern part of Europe—a spot of earth so
comparatively small that it may be traversed from one end to the
other in the space of little more than a week—has, by the artificial
state of its society, and a concourse of injudicious regulations,
increased in its population to about seventeen millions of inhabitants;
and because, as must necessarily be the case from the influence of
these regulations, a number of the people are in impoverished
circumstances, and are not so well fed as their neighbours, it has,
forsooth, pleased a few men in this large mass of humanity to
impeach the God of the universe, and to tell us that He creates
millions of thinking beings only to put them to death by starvation.
To show the utter fallacy of this detestable theory, I need only bring
under your notice two simple facts, in which all such vicious and
shallow-minded reasoning finds an insurmountable obstacle to its
establishment. It is a great, a comforting, and an undeniable fact,
that there are immense tracts of land, islands, and even continents,
which till this hour are lying in nearly their primeval state, with the soil
untouched since the beginning of the world. So boundless are these
almost uninhabited territories, so capable are they of sustaining
human life, that, if the proper means were used, they would yield
food, clothing, and a place of residence to more people than all that
the ancient settlements of the human race at present contain. They
could hold all the existing population of the earth, and not be filled.
Canada itself could receive and maintain the whole of the population
of Europe; and the seventeen millions of human beings belonging to
the little island which has raised such alarm, might be transported to
the banks of one of the mighty rivers in the United States, and it
would hardly be known that they had taken up their residence in the
country. “Send us over your whole population (says an American
writer); we have plenty of room for you all, and a hundred millions
more.” But such a gratifying fact as this gives but a faint idea of the
vastness, the capabilities of the world beyond the waters of the
Atlantic. In one of the numbers of the Journal, I presented the
account given by the ingenious naturalist Audubon, of the wild
pigeons of America. Have my readers any recollection of the
extraordinary number of these animals, and the calculation made
regarding the quantity of their daily food? Let me here repeat and
extend the calculation. The number of pigeons seen on the wing by
Audubon, as computed by allowing two pigeons to the square yard,
was one billion, one hundred and fifteen millions, one hundred and
thirty-six thousand, and “as every pigeon (says he) daily consumes
fully half a pint of food, the quantity necessary for supplying this vast
multitude must be eight millions seven hundred and twelve thousand
bushels per day.” The species of food used is the produce of the
trees. We thus find, that by a moderate calculation a single flock of
pigeons in the back woods of America consumes in one day as great
an amount of food, whether by weight or measure, as would support
the whole seventeen millions of people in Great Britain for at least a
week. The mind is lost in wonder in contemplation of so magnificent
a fact. The faculty of thought is bewildered in pondering on so
striking an instance of the astonishing bounty of the great Author of
Nature in providing for the wants of his creatures. Where, where,
may we then ask, have the predicters of famine been examining the
sources of food for man? On what have their eyes and their thoughts
been fixed, that they have passed over this prospect of inexhaustible
plenty? It would seem that they have never looked beyond the
confines of that little spot of land in the ocean, which I have alluded
to, and whose superabundant thousands require only to be
transferred to that division on the earth’s surface holding out food,
raiment, and residence for their gratuitous acceptance, in order that
society may right itself.
The above is the first fact I have to offer in the elucidation of this
important question; and I maintain, in direct opposition to those who
have taken a contrary view of the subject—among whom I am sorry
to include persons otherwise distinguished for the clearness and
comprehensiveness of their views of the social compact—that until
the whole earth has been peopled, and until it can hold no more, it
cannot rationally be said that the means of subsistence are
inadequate for the wants of the population. These means are no
more inadequate than that the produce of a kitchen-garden is
insufficient to support the family to which it belongs; and if this family
be prevented from seeking its subsistence beyond its garden walls,
and so be half starved, their miserable case is exactly parallel with
that of this over-populated island. Remove, I would say, all
restrictions of a certain description; do not unnaturally foster
population either in a particular part of the country, or at a particular
time; let mankind alone: and, in the same manner that fluids find
their level, so will the redundant population of Great Britain and
Ireland be profitably dispersed over territories hitherto untrodden by
the footsteps of civilised men.
My second fact is more hypothetical, but not less obvious to our
understanding. It is an old proverbial expression, that “necessity is
the mother of invention.” Now, in this sentiment we discover one of
the wisest provisions of Providence. It is only by necessity that
mankind, in a savage state, are compelled to hunt, or otherwise toil,
for their subsistence. The same feeling predominates through all the
ramifications of civilised society. In proportion as the necessities of
men spur them on to seek out new means of subsistence, so do
these new means of subsistence open upon their view. If we cast a
retrospective glance upon those steps which society has traced from
its infancy to manhood—from a state of barbaric rudeness to a
condition of luxury and splendour—we invariably find that all
improvements have originated in the wants of the people; and that,
in proportion as they increased in number, so did they whet their
invention, and contrive additional means of support. It is from this
cause that Scotland, for instance, had no greater overplus of food
when it had only a million of inhabitants than it has now, when it
supports nearly three times the number. Nay, it had much less food
in proportion when it had only a million of people; and hence it is
proved that mankind, by their inventions and improvements, greatly
increase the means of support beyond the point at which they
formerly stood. The power of seeking out, or inventing, new means
of subsistence, just as the old ones are perceived to be inadequate,
has been actively at work since the beginning of time, and will
operate for the benefit of our race as long as sun and moon endure.
It is in the exercise of this transcendent faculty of the human mind
that we see the beneficence of the Creator in providing unseen
means of subsistence; and it is in it that we find the cheering hope,
that at no period, however distant, even when the whole earth shall
have been covered with inhabitants, shall mankind languish for lack
of food. As they go on increasing in number, so will they go on
perfecting their contrivances; every succeeding generation may
labour under some new difficulty, but so will it be endowed with the
faculty of releasing itself from it.
THE DRAMA.
Theatricals are said to be losing public favour in almost every place

where they are known, and public writers are puzzled to account for
it.
When the buckle-trade declined some years ago, the cause was at
once seen to be the ascendency of buttons. But it would appear that
the cause of the decline of theatricals, though almost equally
obvious, is more a subject of dispute. It is only so because the
subject is larger, and composed of more parts. We think, however,
that a little discussion will suffice to show, with equal clearness, what
causes the failure of dramatic amusements, as a part of the great
system of public entertainment.
Taking the middle of the last century as a period when dramatic
exhibitions were generally well attended, let us inquire what there
was in the condition and circumstances of the theatre at that period
to have rendered this a matter of course. We reply at once, that
plays were then as well written, as well got up, and as well acted, as
any picture was then painted, or any novel or poem written. The
drama was at that time on a perfect level with, or perhaps even
superior to, the current literature of the day, or any other instrument
of public amusement which existed. Nor was it beneath the standard
of the general manners of society. It exhibited, in a gross enough
manner, the vices of the age; but the people whose vices were
exhibited were rendered insensible by those very vices to the
grossness of the scene.
The theatre is now in quite a different condition from what it was in
then. Whether owing to the want of legislative enactments, which
might encourage literary men in writing for the theatre, or to some
other cause, our dramatic entertainments are now of a character
much beneath or behind the age. Our acting plays are either the old
stock, displeasing us with the exhibition of obsolete vices; or modern
trash, full of exaggerated character and sentiment, trusting for
success, perhaps, to romantic scenery and machinery; or literal
transcripts of nursery fables. Our drama, overlooking some better
qualities, is, in a great measure, a compound of childishness,
indecency, buffoonery, and, to no small extent, of profanity; in every
point of view fifty years in taste behind our current fictitious literature,
which, in itself, is susceptible of great amendment.
In Great Britain the drama has always appealed to the less serious
and virtuous part of the community. At the time of the civil war, and
after the re-establishment of the theatre at the Restoration, it was
altogether a Cavalier thing, and, like the Cavalier party in general,
too apt to make debauchery a mark of rectitude in politics. This
character it has never entirely shaken off. With the exception of a
certain number of mawkish and tawdry aphorisms scattered over our
modern plays, they still maintain, in some measure, their old war
against the decencies and proprieties of life. The truth is, the theatre
has become so exclusively resorted to by a less serious part of the
community, that it could hardly attempt to conciliate the other class,
lest, in the vain effort, it lose the customers it has.
If the players thus produce an article of entertainment inferior both
in talent and in taste to the other things which compete for the
business of amusing the public, it is not to be wondered at that their
houses are deserted. For the crown which at present purchases a
night’s entertainment at the theatre to one member of a family—an
entertainment partly childish, perhaps, and almost certain to be
somewhat immoral—that whole family can be supplied for a whole
month with the best literary productions of the day from a circulating
library, or it can purchase a single volume, which not only gives it
rational entertainment and instruction for several nights, but remains
a constant and ready instrument for repeating this entertainment and
instruction whenever it is required. If we coolly reflect on the
respective reputations which the drama and literature bear in the
world, we will find that only a certain number of people wish well to
the former, while the latter is an object of almost universal
attachment and national pride. The fact is, that the drama has shut
itself out by its own misconduct from the sympathies of half the
public, if not a much larger portion. It is still dabbling in the low vices
and mean order of feelings which prevailed in the reign of George
the Second, or else in the nursery tales which lulled our cradles;
while literature, shooting far ahead, is replete with the superior
virtues and extensive benevolences of the present age. And not only
does literature compete with the stage. Music, and other
accomplishments of private life, are also now resorted to, for the
purpose of furnishing an innocent amusement to the family circle—
an amusement less attractive, perhaps, than the theatre, which, with
all its errors, has still a powerful inherent charm, but preferred,
nevertheless, as making up in simplicity, harmlessness, and
cheapness, what it wants in the power of excitement.
When we speak of the stupidity and bad taste of the plays, we do
not enumerate all the disadvantages of the theatre. As if every thing
connected with the establishment were doomed to be of the same
order, we find the players also exciting disgust in all well-regulated
minds by the strange code of morality which they have been pleased
to set up for themselves. Of course, we do not shut our eyes to the
numerous instances of respectable and well-behaved actors, which
occur nowhere, perhaps, so frequently as in the minor capital which
we inhabit. But, as we remarked in a former paper, we must not have
great generalities ruined or broken down by unimportant exceptions.
Taken as a whole, the players are a more dissolute fraternity than
the members of any other profession; while some of them, ranking
as the very highest in professional merit, commit transcendent
breaches of the most sacred moral laws, as if to show how
independent they are of all the rules of decent society. We would not
gratify the wretched vanity which perhaps is one of the principal
causes of those errors, by mentioning particular cases; but they are
too notorious to require being specified. It is sometimes set forward
as a plea for the extenuation of those offences, that the life of a
player is more beset with temptations than any other. But what an
argument is here against the whole system of play-acting! Another
plea is, that the public has no business with any thing but the public
appearance of a player—has no right to think of their private lives; as
if a person doing all he can to destroy the safeguards of domestic
happiness by action and example, were to be equally well treated by
society, as a person who does what is in his power to contribute to
its happiness. Society must, in the eyes of these pleaders, be a
slavish thing indeed, if it is supposed that it must patiently submit to
every insult and injury which it may please the sublime caprice of a
buffoon to inflict upon it. And is the player judged less leniently than
an offender in any other walk of life? When a tradesman commits an
outrage on public decency, is he cherished on account of it by
society? Is he not scouted for it, exactly as the player is, or, we
should rather say, ought to be—for it can hardly be said that he is
ever condemned for his offences by the regular friends of the stage,
though the theatre is, on his account, still more resolutely abstained
from by the good, who abstained from it before.
If the players thus debase themselves by the impurity of their lives,
and thereby render themselves unfit to be looked upon or listened to
by the majority of society—if they continue to represent dramas
suited to the taste of a past age, or else adapted only to the
sympathies of children—if they persist in retaining about their whole
system vicious forms of speech, indelicate gestures, and a code of
moral feeling and action, all of which have long been pronounced
intolerable in good society, how can they expect their theatres to be
so prosperous as they once were, more especially when purer and
better modes of entertainment are every where rising into
competition with them? The person who pens these thoughts is by
no means an enemy to theatricals in the abstract. With the most
respectful deference to those who see in dramatic entertainments an
express hostility to the divine law, he retains the conviction that they
might be rendered as good and innocent a means as any other for
producing that great end—the diversion of the public mind by
amusement from the follies and vices of absolute vacuity. He does
not consider the theatre, or any other amusement, so much with a
reference to the good which it may do, as with respect to the evil
which it may prevent. It is clear, however, that the really good and
pure can never become the friends of the theatre, so long as it
remains unreformed. There must be a combination among the
virtuous actors to exclude the vicious from their body. A number of
antiquated and absurd fashions of the stage must be brought nearer
to the standard of ordinary natural life. And the best literary men of
the day must be encouraged by legislative enactments to produce a
crop of new plays with a stronger moral bent than the generality of
those now existing. Till all this is done, and the theatre become as
noted in public fame for a friendliness to what is good, as it has
hitherto been for the reverse, it must be content to occupy its present
degraded place amongst our prevailing modes of public
entertainment.
RECOGNITIONS.
“Dignus vindice nod-us.”——
If you be a person that have lived for a long time in any large town,
you must have ere this felt the dreadful inconvenience of knowing
and being known by every body. The courtesy of society demands
that, on meeting any one in the street, of whom you have the
slightest acquaintance, you must not “affect to nod,” like Alexander,
but give a real bona fide nod, or, if you please, a bow, as a mark of
respect or regard—a practice which leads to a thousand
disagreeable sensations in the day, till at last you almost resolve that
your progress shall be like that of a British war-chariot—cutting
right and left, without regard to man, woman, or child. It is not that
you have any abstract disinclination to pay this tribute to friendship; it
is the frequency and the iteration of the thing that annoys you. You
could tolerate, perhaps, a certain number of nods in the day—I
would willingly compound for twenty—and it would be all very well if
you only met a friend on the street once in the month or so. But this
is not the way of it: you cannot be abroad two hours (supposing that
you are of long standing in the town) without meeting fifty people and
upwards, to whom you must “vail your haughty head,” and, what is
worst of all, the half of these are people whom you met and nodded
to yesterday, and the day before, and every day before that again,
back to the creation of the world. With many of these persons, your
acquaintance at first was of the very slightest nature. You met the
man in a steam-boat, and had your respective names mentioned by
a friend. You left a room one day as he was entering, and you were
introduced, and, after exchanging only three words, made a friendly
bow to each other, and parted. Perhaps he was introduced to you
passingly on the street by some person to whom you had been
introduced several years before, in the same transient way, by an
individual whose acquaintance of you was originally of so slight a
character that you had even then forgot for some years how it
commenced. Your reminiscences upon the whole subject are a
Generation of Shadows, traced back to Nothing. Possibly you sat
next to him one night, “consule Planco,” at a mason-lodge, and to
this blessed hour have never so much as learned his name. When it
happens that you do not see or meet these acquaintances for six
months after your first rencontre, the affair has by that time got cool
enough to justify you mutually in cutting each other. But in most
cases it happens quite differently. On the very morning, perhaps,
after having scraped acquaintance with a merry fellow in some
promiscuous company, you meet him going abroad, like yourself, to
his place of business. As nothing of the world, or its concerns, has
as yet got between you and your recollections of last night’s
conviviality, you pull up with him for a minute, shake hands, laugh
cordially in each other’s faces, hope each other is quite well after
yesternight’s business, remark what a deal of fun there was, what a
deuced funny fellow that was who sung the comic songs, and so
forth; and then, with another cordial shake of each other’s hands,
you part off, each to the serious duties of the day. Unfortunately, it
happens that this new acquaintance of yours has to go to his place
of business exactly at the same time in the morning with yourself,
and that your places of residence and business are co-relatively in
opposite situations. It is, therefore, your doom to cross each other’s
path regularly every morning at ten minutes before ten, for all the
rest of your natural lives. Your eyes begin to open upon this
appalling fact on the second day. You meet your man then, exactly at
the same spot as on the morning before; when, the conviviality of the
penult evening being totally spent, both in respect of its effect on
your mind, and as a subject of conversation, you stand in an agony
of a minute’s duration, talking to each other of you know not what,
till, fortunately, perhaps, a friend comes up who is going your way,
and you hook yourself upon him, and take a hurried leave of your
new acquaintance. Next morning you content yourself with shaking
your friend by the hand cordially without stopping. Next morning,
again, the affair has degenerated into a laughing nod. Next, it is an
ordinary nod; at which point it continues ever after, till it is evident to
both of you, as you approach each other, that you are beginning to
be fairly tired of existence, and wish, mutually, that it were all well
over with you, so far as this breathing world is concerned, and the
whole affair hushed up in the silence of the grave.
It is not alone in the monotony of this system of recognition that
the misery lies. You are also put to a great deal of pain and difficulty,
in many cases, by the rank of the individuals to be recognised. Every
man of the world has occasion to be brought into contact now and
then with persons superior to himself, but who do not scruple to
make themselves familiar with him in his own house or place of
business. Now, the plague is, how to treat these people on the
street. If their rank be very far above your own, the case is
comparatively easy; for a bow, with an elevation of the hat, is readily
awarded on your part, and graciously received on his. But should his
place in society be just a little above your own, or such as you
expect to attain very speedily—or should he be just a little longer
started in the general race of prosperity than yourself—then it is
perplexing indeed. Man has no antipathy to the brother worms who
are so far beneath his own level as never to be brought into contrast
with him. A nobleman is quite at his ease with his tailor. But it is very
different with the individuals who are just a little lower than
ourselves, and liable to be confounded with us. We could tolerate the
profanum et ignobile vulgus itself, rather than the people whose
manners and circumstances in life are but one step beneath our
own. Hence, one is liable to perpetual grievances on the street,
through, what he thinks, the forwardness of some people, and the
haughtiness of others. Alternately cutting and cut, on he goes, in a
state of unhappiness beyond all description. Sometimes he avoids
recognizing, through fear of its being offensive, a person who was
fondly anxious to have his nod, and takes it very ill that he does not
get it. Sometimes he is in the reverse predicament, and proffers a
condescending bow, or intends to do so, to one who, putting quite a
different construction on their respective degrees of consequence,
coolly overlooks him.
In short, what with one thing and another, walking on the street is
an exceedingly disagreeable exercise. For my part, having been long
connected with the city I inhabit, I am obliged to take a thousand
ingenious expedients in order to get along with any degree of
comfort. For one thing, I would sooner walk some miles barefooted
over broken glass, than parade on the principal streets of the city at
high twelve. If I were to attempt a passage that way, I might go as I
have been told Oechlenschlager the Danish poet does through the
streets of Copenhagen, my hat in my hand, and my body in a
perpetual inclination. I have to seek all possible kinds of by-ways,
through alleys profound and obscure; and when I cross a
thoroughfare, it is with the same dogged straight-forward look with
which a man swims across a dangerous river. When I do happen, in
a moment of facility or confidence, to venture upon an open street, I
have all kinds of expedients for avoiding and diminishing the pains of
recognition. When you see an acquaintance approaching, you must
consider the relative circumstances. Much depends on the place of
meeting—much on the time—much on the crowded or empty state of
the streets, and much, of course, on the degree of your intimacy with
him, and the distance of time since you last met. If it be a vacant
street, and not a business time of the day, and six months since you
last met him, you are in for a quarter of an hour’s palaver as sure as
you live, and hardly even a parting then, unless you can either of you
manage to get up a good witticism, under cover of which you may
escape. If the street be crowded, and the time a busy one, you are
tolerably safe, even although it should have been a twelvemonth
since you met before. In this case, you fly past with a hurried nod,
which seems to say, “We are busy just now, but will have another
opportunity of stopping to speak.” This is a nod of adjournment, as it
were, and it is one of great satisfaction to both parties, for both
argue, of course—though they don’t put that into the nod—that, as it
is a twelvemonth since they last met, it may be another before they
meet again. Should you meet a man in a vacant street, even in the
busiest part of the day, then the former circumstance annuls the
latter, and you must stand and deliver, even although you be too late
for an appointment of the most interesting character. On the other
hand, if you meet your man in the leisurely part of the day, in a
crowded street, you get off with a nod, pretending to yourself that
you are carried away by the current. Sometimes you may not take
advantage of your good fortune in this last case, but so bring it about
that you get into collision with your friend, and begin a conversation.
In this case, even although you have only asked him how he does—
not caring in the least what he has to answer—and though you
positively have not another idea to interchange with him, he finds it
necessary to disengage himself from the throng in order to reply. You
now get upon the curb-stone, or upon the causeway, where, of
course, you have no more advantage from the crowded state of the
street than a fish has of a river after it has been thrown upon the
bank. You are now in the same predicament as if you had met your
friend in the same cool part of the day in a perfectly empty street,
and therefore, when he has answered your precious question as to
his health, you are as fairly in for a quarter of an hour of wretched,
bald, wishy-washy conversation about all kinds of nothings that you
don’t care one farthing about, as ever you were in your life. The only
thing that can now save you is either a joke to laugh yourselves
asunder upon, a crowd raised at a distant part of the street by some
such matter as a child ridden over by a coach, or else, what is not a
bad means of separation, though sometimes dangerous, you cut off
one grievous encumbrance by taking on another; that is, you see
another friend coming up your way, and, pretending you have
something to say to him, shake off the old love and take on with the
new: in which case it is not improbable that you spend longer time at
the end of the street with this last individual than you might have had
to spend with the former one if you had continued with him, and only
given the other man a passing nod; but, of course, that is all the
fortune of war, and, having done what seemed best under the
circumstances, you must rather blame fate than your own
imprudence. Consider well, however, in such a case, whether you
are likely to get soonest off with the new or the old love; for if you
take on with a bore of ten minutes’ power, in order to get off with one
of only five, merely because he is going your way, and promises no
interruption in the first instance, you may only fall into Scylla, seeking
to avoid Charybdis.
After all, as in every matter arising from the affairs of this world, a
great deal of our happiness, so far as it is concerned by the system
of recognition, lies with ourselves. If we are prudent, and take
counsel from experience, we may avoid much of this nodding and
bowing misery which would otherwise fall to our share. A man, for
instance, should not be always goggling and staring about him;
otherwise he will be sure to fall in with flying nods, which he could as
well dispense with, if he does not even hit some person, perhaps, on
the other side of the way, who, not having seen him for a long time,
thinks it is duty—Lord confound him!—to come across the
Hellespont of mud, and shake the spirits out of him with half an hour
of tediousness and common-place. When you debouch from your
door, never look along the street in the direction you are not to travel,
or ten to one but you see some one who, having the infelicity, poor
devil, to catch your eye, must put himself on to a canter to come up
to you; and so you get mutually entangled, perhaps for half the day. I
give this caution with a particular emphasis; for I have observed that
nine out of every ten men look back in the way described, as if it
were one of the involuntary motions or inclinations of human nature.
As you are walking along, never cast your regards upon any one
coming obliquely across the street, or in all probability you are shot
dead by an eye of your acquaintance, which, if it had not hit you,
would have passed on innocuous. The eye is the principal mischief
in all these cases. A man is often snared by that part of him, and
dragged a hundred yards along a dirty street, for all the world like a
silly salmon hooked by the nose, and laid, after half a mile of tugging
and hauling, exhausted on the shore. Keep your eye well to yourself,
and you are tolerably safe; for of this you may be assured, no man
will come up to attract your attention, unless he be a country cousin,
who was just looking about for you. Every mother’s son of them is
actuated by the same principles with yourself, and is glad to escape
all the nodding he can. So reciprocal is this feeling, that many
persons whom you are taking means to avoid, will, if you observe
them narrowly, be found to be doing all they can to assist in the
process. If you pretend, for instance, that you cannot see that
gentleman there coming aslant the way, on account of the intense
brightness of the sun, you will see out at the tail of your eye that he
is pretending to be as much put about by the sunshine as yourself,
and is doing all he can to shade his eyes from Phœbus and you,
exactly in the same fashion with yourself. If you walk, as you ought
to do, with your eyes fixed below what painters call the point of sight,
but suddenly raise them for a moment, in order to look about you, it
is ten to one but you see your very bosom friend—your confessor—
the man whom you wear in your heart of hearts—in the act of
sneakingly withdrawing his eye from your countenance, for the
purpose of getting past you unnoticed. Take no scorn on account of
these things, but put it all down rather to the strength of friendship;
for can there be any stronger test of that sentiment, than the desire
of saving those whom we love from any thing that is disagreeable to
them?
It has been already remarked, that if you be in the regular habit of
meeting and nodding to a person every now and then, the system is
kept up till death do you part. On the other hand, if you can avoid
seeing a person for some considerable time, the nod becomes
efféte, and you ever after see, as if you saw not, each other.
Sometimes, however, one gets a great relief in the midst of a fixed
and hopeless nodding acquaintance, by happening to meet once
more at the social board in some friend’s house, when you re-
invigorate the principle, gather fresh intimacy, and perhaps, after all,
take refuge from the unnecessary monotony of nodding terms in a
serious friendship.
If you can help yourself by this means, it may be all very well,
though certainly it is rather hard that one should be forced into an
intimacy with a man merely because he crosses your path rather
oftener than the most of your other slight acquaintances. The best
way, however, to lessen this part of the evils of life, is to walk with as
little circumspection as possible. So ends my preachment about
Recognitions.
THE LADYE THAT I LOVE.
Were I a doughty cavalier,

On fire for high-born dame,
To win her smile, with sword and spear,
I’d seek a warrior’s fame;
But since no more stern deeds of blood
The gentle fair may move,
I’ll woo in softer—better mood,
The ladye that I love.
For helmet bright with steel and gold,

And plumes that flout the sky,
I’ll bear a mind of hardier mould,
And thoughts that sweep as high.
For scarf athwart my corslet cast,
With her fair name y-wove,
I’ll have her pictured in my breast—
No mettled steed through battle-throng,

Shall bear me bravely on,
But pride shall make my spirit strong,
Where honours may be won:
Among the great of mind and heart,
My prowess I will prove;
And thus I’ll win, by gentler art,
R. C.

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