Economics

Question 1 1 out of 1 points

If a country's PX/PY in autarky is less than the PX/PY on the world market, as the country

moves to trade, the relative price of good Y will _____ for home consumers. Thus, consumers

with a strong relative preference for good _____ would tend to oppose the movement to trade.

Answer

Selected Answer: decrease; X

Correct Answer: decrease; X


If, for a consumer, MUA/PA is greater than MUB/PB, then the consumer

Answer

Selected Answer: has an incentive to consume relatively more A, which will decrease his/her

MUA.

Correct Answer: has an incentive to consume relatively more A, which will decrease his/her

MUA.


If skilled labor is physically more abundant relative to unskilled labor in country A than in

country B, yet skilled labor is relatively higher priced compared with unskilled labor in country

A than in country B, this phenomenon could be accounted for by

Answer

Selected Answer: demand reversal.

Correct Answer: demand reversal.


If two countries with increasing opportunity costs have identical PPFs but different tastes, the

countries will have

Answer

Selected Answer: different relative commodity prices under autarky, and each country can gain

by exporting the good for which its consumers have the lower relative preference.

Correct Answer: different relative commodity prices under autarky, and each country can gain

by exporting the good for which its consumers have the lower relative preference.


If country A is defined as relatively capital-abundant in relation to country B by the price (or

economic) definition of factor abundance, then the price of labor relative to the price of capital is

______ in country A than in country B, and the Heckscher-Ohlin theorem would suggest that

country A would export relatively ______- intensive goods to country B.

Answer

Selected Answer: higher; labor

Correct Answer: higher; capital


Which one of the following is NOT an assumption made in the Heckscher-Ohlin analysis?

Answer

Selected Answer: imperfect competition

Correct Answer: imperfect competition


A production isoquant shows the various combinations

Answer

Selected Answer: of exports that a country's firms are willing to produce at various terms of

trade.

Correct Answer: of two factors of production that can produce the same amount of output of a

good.


Which of the following does NOTcontribute to a basis for trade between two countries?

Answer

Selected Answer: different absolute factor endowments but the same relative endowments

Correct Answer: different absolute factor endowments but the same relative endowments


Two indifference curves for an individual consumer _____ intersect; two community

indifference curves for a country _____.

Answer

Selected Answer: cannot; can intersect under some circumstances

Correct Answer: cannot; can intersect under some circumstances


In the neoclassical model of trade, the movement of a country from autarky to free trade

generally results in _____ specialization in production, _____ the situation in the Classical

model.

Answer

Selected Answer: partial; unlike

Correct Answer: partial; unlike


Suppose that we are in a two-factor, two-country world where the factors of production are labor

(L) and land (T), the returns to the factors are the wage rate (w) and the rental rate on land (t),

and the countries are country A and country B. In this situation, country A is land-abundant

relative to country B by the physical definition of relative factor abundance if ______, and

country A is land-abundant relative to country B by the price (or economic) definition if ______.

Answer

Selected Answer: (L/T)A < (L/T)B; (w/t)A > (w/t)B

Correct Answer: (L/T)A < (L/T)B; (w/t)A > (w/t)B


If two countries have identical production-possibilities frontiers but different tastes, it is possible

for each country to gain from trade with the other country

Answer

Selected Answer: in the neoclassical model but not in the Classical model.

Correct Answer: in the neoclassical model but not in the Classical model.


Suppose that, in the context of the Edgeworth box diagram in production, there are constant

returns to scale in each of the two industries. One good is relatively labor-intensive in its

production process, and the other good is relatively capital-intensive in its production process. In

considering this Edgeworth box diagram and the PPF that can be derived from it,

Answer

Selected Answer: the PPF will show increasing opportunity costs.

Correct Answer: the PPF will show increasing opportunity costs.


An implication of the Heckscher-Ohlin theorem is that

Answer

Selected Answer: two countries with identical tastes can still have a basis for trade if factor

endowments of the countries differ and if factor intensities of the commodities differ.

Correct Answer: two countries with identical tastes can still have a basis for trade if factor

endowments of the countries differ and if factor intensities of the commodities differ.


If good A costs $10 per unit in country A and $12 per unit in country B, and if transport costs

between A and B for the good are $3 per unit, an economist would say that

Answer

Selected Answer: the good will be a nontraded good.

Correct Answer: the good will be a nontraded good.


The magnification effect refers to the fact that, when a country is opened to trade,

Answer

Selected Answer: the price of the abundant factor rises faster than does the price of the export

good.

Correct Answer: the price of the abundant factor rises faster than does the price of the export

good.


The Stolper-Samuelson theorem suggests that, when a country is opened to international trade,

the relative price of the country's abundant factor of production will ______, and the relative

price of the country's scarce factor of production will ______.

Answer

Selected Answer: rise; fall

Correct Answer: rise; fall


In the Edgeworth box diagram for production,

Answer

Selected Answer: a movement from autarky to trade can be associated with a movement along

the contract curve (or production efficiency locus).

Correct Answer: a movement from autarky to trade can be associated with a movement along

the contract curve (or production efficiency locus).


The equilibrium condition for producers (i.e., the condition that exists when the isocost line is

tangent to an isoquant) is

Answer

Selected Answer: (MPPL/MPPK) = (w/r).

Correct Answer: (MPPL/MPPK) = (w/r).


If relatively capital-abundant country A opens trade with relatively labor-abundant country B,

and if the trade takes place in accordance with the Heckscher-Ohlin theorem, what would be the

consequence for factor prices (w/r) in the two countries?

Answer

Selected Answer: (w/r) falls in A and rises in B

Correct Answer: (w/r) falls in A and rises in B


Suppose that a country's factors of production are completely specific to the industries in which

they are located (i.e., factors in the X industry would contribute nothing to Y output if they were

in the Y industry, and factors in the Y industry would contribute nothing to X output if they were

in the X industry). In addition, suppose that the country has an autarky PX/PY that is greater than

the world PX/PY. In this situation, if the country is opened to international trade, it will

Answer

Selected Answer: export good Y and will obtain gains from exchange (a consumption gain) but

not gains from specialization (a production gain).

Correct Answer: export good Y and will obtain gains from exchange (a consumption gain) but

not gains from specialization (a production gain).


If a country's PX/PY in autarky is less than the PX/PY on the world market, then this country

has a comparative advantage in the _____ good, and, if the country now engages in international

trade and moves along its production-possibilities frontier, its production of the X good will

_____.

Answer

Selected Answer: X; increase

Correct Answer: X; increase


The equilibrium condition for consumer behavior pertaining to goods A and B is

Answer

Selected Answer: (MUB/MUA) = (PB/PA).

Correct Answer: (MUB/MUA) = (PB/PA).


Ignoring the negative sign, the slope of a consumer indifference curve at any given point on the

curve reflects

Answer

Selected Answer: the marginal rate of technical substitution (MRTS) between the factors of

production.

Correct Answer: the marginal rate of substitution (MRS) of the consumer between the two

goods.


If a commodity is classified as labor-intensive at one set of relative factor prices but capital-

intensive at another set of relative factor prices, this situation is known as

Answer

Selected Answer: factor-intensity reversal.

Correct Answer: factor-intensity reversal.


If the demand for traded goods is price-inelastic, the price-specie-flow mechanism will result in

Answer

Selected Answer: gold movements between countries that remove trade deficits and surpluses.

Correct Answer: gold movements between countries that worsen trade deficits and surpluses.


Suppose that, in a Classical constant opportunity costs framework, country A can produce 15

units of wheat if it devotes all of its resources to wheat production and 45 units of clothing if it

devotes all of its resources to clothing production. In a trading situation for this country, if the

world price ratio is Pwheat/Pclothing = 1/3 (or Pclothing/Pwheat = 3), country A would

Answer

Selected Answer: export clothing and import wheat.

Correct Answer: export clothing and import wheat.


If a country's relative price of X (compared to Y) in autarky is greater than the same relative

prices on the world market, then the country has a comparative advantage in good ________, and

it will __________.

Answer

Selected Answer: X; export X and import Y

Correct Answer: Y; export Y and import X


In the Dornbusch-Fischer-Samuelson graph above, a uniform improvement in labor productivity

in all the home country's industries would shift the A schedule ____ and would lead to the export

of a ____ number of goods by the home country.

Answer

Selected Answer: upward; smaller

Correct Answer: upward; greater


In the Classical (Ricardian) analysis,

Answer

Selected Answer: if a country has a comparative advantage in a good, it cannot have an

absolute advantage in the good.

Correct Answer: a country can have a comparative advantage in a good at the same time that it

has an absolute advantage in that good.


During the price-specie-flow adjustment process to a trade imbalance, if demands for goods are

inelastic, then, when the price level _____ in the country with the trade deficit, the value of that

country's exports will _____ as the price-specie-flow process takes place.

Answer

Selected Answer: falls; decrease

Correct Answer: falls; decrease


Suppose that, with constant opportunity costs, Spain can produce 1,000 units of clothing if it

devotes all of its resources to clothing production and 5,000 units of wheat if it devotes all of its

resources to wheat production. If Spain is opened to trade at a world price ratio of 1 wheat:0.3

clothing, Spain will export _____; if the world price ratio is 1 wheat:5 clothing, Spain will

_____.

Answer

Selected Answer: clothing; also export clothing

Correct Answer: wheat; also export wheat


Which of the following policies would NOT be consistent with the Mercantilist balance-of-trade

doctrine?

Answer

Selected Answer: import duties on final products

Correct Answer: payment of high wages to labor


Suppose that, in a Classical model with two goods, Germany can produce 50 units of steel or 30

units of textiles with 1 day of labor, whereas Switzerland can produce 45 units of steel or 45

units of textiles with 1 day of labor. If the exchange rate is fixed at 1 Swiss franc = 1 euro and if

the Swiss wage rate is 10 francs per day, then, in trading equilibrium, German wages

Answer

Selected Answer: must be equal to 10 euros per day.

Correct Answer: can be above, below, or equal to 10 euros per day - the answer cannot be

determined without more information.


As a country moves from autarky to trade, the relative price of the country's import good will

_____ for home consumers, and the relative price of the country's export good _____ for home

consumers.

Answer

Selected Answer: fall; also will fall

Correct Answer: fall; will rise


In Adam Smith's view, international trade

Answer

Selected Answer: was based on absolute cost differences.

Correct Answer: all of the above


The following Classical-type table shows the number of days of labor input required to obtain

one unit of output of each of the three commodities in each of the two countries:

good T good X good Y

United Kingdom 4 days 5 days 3 days

United States 4 days 4 days 2 days

Based on the information provided in the table above, if the U.S. wage rate of $40 per day and

the exchange rate of £1 = $1, what is the upper limit to the wage rate in the United Kingdom that

is consistent with two-way trade between the countries?

Answer

Selected Answer: £32 per day

Correct Answer: £40 per day


The assumption of constant costs of production in the Classical model results in a _____

production-possibilities frontier and, in the case of a small country, ______ specialization in

production when trade takes place.

Answer

Selected Answer: concave-to-the-origin; complete

Correct Answer: linear; complete


In the Dornbusch-Fischer-Samuelson model depicted in the figure above, a shift in tastes and

preferences towards home country goods will cause the _____ schedule to pivot to the _____ and

relative wages in the foreign country to ______.

Answer

Selected Answer: C; right; rise

Correct Answer: C; left; fall


The paradox of Mercantilism reflected that fact that

Answer

Selected Answer: rich countries were comprised of large numbers of poor people.

Correct Answer: rich countries were comprised of large numbers of poor people.


The policy of minimum government interference in or regulation of economic activity,

advocated by Adam Smith and the Classical economists, was known as

Answer

Selected Answer: laissez-faire.

Correct Answer: laissez-faire.


According to the labor theory of value,

Answer

Selected Answer: the value of a good is determined by the amount of labor with which each

unit of capital in an industry works.

Correct Answer: the price of good A compared to the price of good B bears the same

relationship as the relative amounts of labor used in producing each good.


A Mercantilist policymaker would favor which of the following policies or events pertaining to

his/her country?

Answer

Selected Answer: a minimum wage bill to protect workers' standard of living

Correct Answer: an increase in the percentage of factors of production devoted to adding value

to imported raw materials in order to later export the resulting manufactured goods


In the Dornbusch-Fischer-Samuelson model above, a rise in labor productivity in the home

country would cause real national income to _____ in the home country and _____ in the foreign

country.

Answer

Selected Answer: increase; also to increase

Correct Answer: increase; also to increase


In the Mercantilist view of international trade (in a two-country world),

Answer

Selected Answer: both countries could gain from trade at the same time, and the terms of trade

would be of no consequence for the distribution of the gains.

Correct Answer: one country's gain from trade would be associated with a loss for the other

country.


In a Ricardo-type model, if Portugal can produce twice as much wine per day as England but

only 1.5 times as much cloth per day as England, then, if Portuguese wages are 30 euros per day,

the upper limit to English wages per day is _____. (Assume 1 euro = £1.)

Answer

Selected Answer: £45

Correct Answer: £20


If, in a two-commodity, two-country Classical world, Sweden can make a unit of furniture with

10 days of labor and a unit of steel with 15 days labor, whereas Germany can make a unit of

furniture with 12 days of labor and a unit of steel with 12 days labor, then

Answer

Selected Answer: the pretrade price ratios indicate that Germany will export steel.

Correct Answer: the pretrade price ratios indicate that Germany will export steel.


The price-specie-flow mechanism suggested that

Answer

Selected Answer: a surplus country would experience an increase in its money supply and its

price level.

Correct Answer: a surplus country would experience an increase in its money supply and its

price level.


In the price-specie-flow doctrine, a deficit country will _____ gold, and this gold flow will

ultimately lead to _____ in the deficit country's exports.

Answer

Selected Answer: lose; a decrease

Correct Answer: lose; an increase


The following Classical-type table shows the number of days of labor input required to obtain

one unit of output of each of the three commodities in each of the two countries:

good T good X good Y

United Kingdom 4 days 5 days 3 days

United States 4 days 4 days 2 days

Based on the information in the above table, suppose that the wage rate in the United Kingdom is

£30 per day, the wage rate in the United States is $40 per day, and the exchange rate is £1 = $1.

In this situation, the United Kingdom will _____.

Answer

Selected Answer: export good T and import goods X and Y

Correct Answer: export goods T and X and import good Y


Suppose that the nominal tariff rate on final good X is 8 percent and that the weighted average

of the nominal tariff rates on the inputs used in producing good X is 12 percent. In this situation,

the effective rate of protection (ERP) for final good industry X

Answer

Selected Answer: must be less than 8 percent and can be negative.

Correct Answer: must be less than 8 percent and can be negative.


Which one of the following could NOT theoretically be offered to help explain the Leontief

paradox?

Answer

Selected Answer: a relatively strong U.S. demand for relatively labor-intensive goods

Correct Answer: a relatively strong U.S. demand for relatively labor-intensive goods


Other things being equal, which one of the following will cause an increase in the effective rate

of protection (ERP) in the automobile industry?

Answer

Selected Answer: a decrease in the nominal tariff rates on imported inputs used in making

automobiles

Correct Answer: a decrease in the nominal tariff rates on imported inputs used in making

automobiles


Since about 1970, in both developed and developing countries, the ratio of trade to GDP has

_____; over the same time period, in the United States and the European Union, the ratio of

imports from developing countries to total imports _____.

Answer

Selected Answer: increased; also has increased

Correct Answer: increased; also has increased


Which one of the following is NOT an example of making a trade instrument more restrictive

against imports, other things being equal?

Answer

Selected Answer: a shifting of an import good from an administrative classification category

with a high tariff to an administrative classification category with a low tariff

Correct Answer: a shifting of an import good from an administrative classification category

with a high tariff to an administrative classification category with a low tariff


If the Heckscher-Ohlin theorem is valid in practice (and assuming that capital and labor are

treated as the only two factors in the real world), then the Leontief statistic for a labor-abundant

country would be

Answer

Selected Answer: greater than 1.0.

Correct Answer: greater than 1.0.


If relatively labor-abundant country A has a Leontief statistic greater than 1.0 and relatively

capital-abundant country B has a Leontief statistic less than 1.0, this suggests that

Answer

Selected Answer: both countries are conforming to the prediction of the Heckscher-Ohlin

theorem.

Correct Answer: both countries are conforming to the prediction of the Heckscher-Ohlin

theorem.


Suppose that the offshore assembly provisions (OAP) of country A are extended to final good X

that is imported as well as produced domestically. This action will most likely

Answer

Selected Answer: stimulate production in country A of final good X.

Correct Answer: stimulate production in country A of components to final good X.


In the large-country case, an export tax

Answer

Selected Answer: leads to an increase in price in the importing country.

Correct Answer: leads to an increase in price in the importing country.


If the U.S. trade pattern is as indicated by the Leontief test, this would suggest that participation

in trade rather than in autarky by the United States has _____ the real return to U.S. capital and

_____ the real wage of U.S. labor.

Answer

Selected Answer: decreased; has increased

Correct Answer: decreased; has increased


The situation in the United States (and other developed countries) whereby an import good faces

a lower tariff if the good comes from a developing country than if the good comes from a

developed country is known as

Answer

Selected Answer: GSP treatment.

Correct Answer: GSP treatment.


The imposition of an export tax by a home country will lead to _____ in home country

consumer surplus and will _____ in home country producer surplus.

Answer

Selected Answer: an increase; lead to a decrease

Correct Answer: an increase; lead to a decrease


In the case of nonhomogeneous goods, the imposition of an import tariff

Answer

Selected Answer: produces a transfer from consumers to producers in the domestic market.

Correct Answer: taxes the domestic product as well as the import product.


In the general equilibrium graph with a production-possibilities frontier (PPF) and consumer

indifference curves,

Answer

Selected Answer: a tariff reduces both real income and the gains from exchange.

Correct Answer: a tariff reduces both real income and the gains from exchange.


Suppose that a country's unweighted-average (nominal) tariff rate (call it tU) and weighted-

average (nominal) tariff rate (call it tW) are calculated both with and without the inclusion of

prohibitive tariffs, and that the country does in fact have some prohibitive tariffs. In this

situation, the tU that includes the prohibitive tariffs _____ the same as the tU that excludes the

prohibitive tariffs, and the tW that includes the prohibitive tariffs _____ the same as the tW that

excludes the prohibitive tariffs.

Answer

Selected Answer: would not be; would be

Correct Answer: would be; would not be


If increased Heckscher-Ohlin-type trade were the major factor leading to increased income

inequality in the United States, then one would expect that the relative prices of skilled labor-

intensive goods to unskilled labor-intensive goods would have _____ and that nontraded goods

industries would have _____ their use of unskilled labor relative to skilled labor.

Answer

Selected Answer: risen; increased

Correct Answer: risen; increased


An import quota specifies the _____ amount of a good that can be imported into a country; a

step to becoming more protectionist would involve _____ in the quota.

Answer

Selected Answer: maximum; a reduction

Correct Answer: maximum; a reduction


If the capital/labor ratio in import-competing industries in country A is $8,000 per worker and

the capital/labor ratio in A's export industries is $4,000 per worker, then country A's Leontief

statistic is

Answer

Selected Answer: 2.00.

Correct Answer: 2.00.


In the production process of a final good industry, the direct factor requirements per unit of

output will be _____ the total factor requirements per unit of output; if the industry is relatively

capital-intensive when classified by direct requirements, it _____ be relatively capital-intensive

when classified by total requirements.

Answer

Selected Answer: less than; may not necessarily

Correct Answer: less than; may not necessarily


In the United States, in approximately the last 2-3 decades, the supply of highly skilled (HS)

labor relative to less highly skilled (LS) labor has been rising. At the same time, the ratio of HS

labor wages relative to LS labor wages has been _____; therefore, the demand for HS labor

relative to LS labor must have been increasing _____ than the supply of HS labor relative to LS

labor.

Answer

Selected Answer: falling; less rapidly

Correct Answer: rising; more rapidly


Which of the following is NOT an example of a nontariff barrier to the free flow of goods and

services in accordance with comparative advantage?

Answer

Selected Answer: specific duty of $1.00 per unit on each imported item

Correct Answer: specific duty of $1.00 per unit on each imported item


The United States now gives China permanent most-favored-nation (MFN) treatment [or normal

trade relations (NTR)]. This means that the tariff schedules applicable to U.S. imports from

China

Answer

Selected Answer: have the same tariff rates as the rates applicable to other countries to which

the United States grants MFN treatment.

Correct Answer: have the same tariff rates as the rates applicable to other countries to which

the United States grants MFN treatment.


Suppose that, in a real-world situation, a labor-abundant country's tariffs and nontariff barriers

are levied relatively more heavily on labor-intensive goods than on capital-intensive goods. In

this situation, a Leontief two-factor test would, other things being equal, be _____ the country's

adherence to the Heckscher-Ohlin trade pattern, compared with a situation in which trade

barriers were absent.

Answer

Selected Answer: biased toward confirming

Correct Answer: biased toward confirming


If demand reversal is the explanation for the Leontief paradox, this would imply that the demand

by the United States for labor-intensive goods is relatively _____; therefore, U.S. wages would

be relatively _____ compared to wages in U.S. trading partners.

Answer

Selected Answer: low; low

Correct Answer: low; low


In the large-country case, the imposition of an import quota

Answer

Selected Answer: can result in a net gain for the importing country if the government employs

an auction quota system to allocate the restricted imports.

Correct Answer: can result in a net gain for the importing country if the government employs

an auction quota system to allocate the restricted imports.


The Krugman economies-of-scale strategic trade policy model stresses that protection given to a

home firm will, other things being equal, _____ the marginal cost of producing each level of

home output and will _____ the marginal cost of producing each level of foreign output.

Answer

Selected Answer: decrease; also decrease

Correct Answer: decrease; increase


In the Uruguay Round of trade negotiations, the talks originally broke down in 1990 primarily

because of the strong disagreement between the United States and the European Community

with respect to

Answer

Selected Answer: subsidies and protection in agriculture.

Correct Answer: subsidies and protection in agriculture.


The use of a bilateral, item-by-item approach best characterizes which period of trade

negotiations?

Answer

Selected Answer: Reciprocal Trade Agreement negotiations

Correct Answer: Reciprocal Trade Agreement negotiations


In late 2003, the Bush administration unilaterally placed temporary import quotas on several

textile items imported from

Answer

Selected Answer: China.

Correct Answer: China.


The general policy rule that states that the appropriate policies for alleviating a problem are

those policies aimed directly at the source of the problem is called

Answer

Selected Answer: the specificity principle.

Correct Answer: the specificity principle.


Recent investigations of the political economy of trade policy have revealed that

Answer

Selected Answer: industries that would incur relatively large labor adjustment costs appear to

be relatively heavily protected.

Correct Answer: industries that would incur relatively large labor adjustment costs appear to be

relatively heavily protected.


The existence of which type of dumping most likely constitutes the weakest argument for the

imposition of an antidumping duty?

Answer

Selected Answer: persistent dumping

Correct Answer: persistent dumping


Which of the following is generally thought to have established the highest tariffs in U.S.

history?

Answer

Selected Answer: Tariff Act of 1930 (Smoot-Hawley Tariff)

Correct Answer: Tariff Act of 1930 (Smoot-Hawley Tariff)


A tariff placed upon a product in order to offset a foreign export subsidy is called

Answer

Selected Answer: a countervailing duty.

Correct Answer: a countervailing duty.


The optimum tariff rate for a country is that rate which, assuming no retaliation,

Answer

Selected Answer: maximizes the country's welfare.

Correct Answer: maximizes the country's welfare.


An early significant agreement in the negotiations of the Doha Development Agenda that is of

importance to developing countries occurred in

Answer

Selected Answer: antidumping provisions.

Correct Answer: pharmaceuticals pricing.


The World Trade Organization

Answer

Selected Answer: requires its member countries to eliminate all barriers to imports.

Correct Answer: is charged with implementing the agreements reached in the Uruguay Round

of trade negotiations.


The concept of results-based trade policy is

Answer

Selected Answer: consistent with GATT codes and guidelines.

Correct Answer: embodied in the new reciprocity approach to policy.


The first U.S. legislation to authorize adjustment assistance for workers displaced by tariff

reductions was the

Answer

Selected Answer: Trade Expansion Act of 1962.

Correct Answer: Trade Expansion Act of 1962.


The macroeconomic interpretation of a trade deficit for a country utilizes which one of the

following expressions (where Y = national income, C = consumption, I = investment, G =

government spending on goods and services, X = exports, and M = imports)?

Answer

Selected Answer: Y - (C + I + G) = (X - M)

Correct Answer: Y - (C + I + G) = (X - M)


It is not uncommon to find a voting industry minority able to put in place trade policies that

benefit them at the expense of the majority because

Answer

Selected Answer: perceived consumer benefits are less than the cost of voting, leading to

consumer absenteeism at the polls.

Correct Answer: perceived consumer benefits are less than the cost of voting, leading to

consumer absenteeism at the polls.


In the case of economists' definition of dumping, an exporting firm is selling its product at a

_____ price in the importing country than in the exporter's home country, and this suggests that

demand for the exporter's product is _____ in the exporting country than in the importing

country.

Answer

Selected Answer: higher; less elastic

Correct Answer: lower; less elastic


The argument that a tariff can provide temporary protection to an industry so that the industry

can expand, realize economies of scale, and eventually become an export industry is known as

the

Answer

Selected Answer: infant industry argument.

Correct Answer: infant industry argument.


If tariffs are used in an attempt to improve country A's balance of trade, and if exchange rates

are flexible, the imposition of the tariffs will cause _____ in the value of A's currency relative to

other currencies and, as a consequence, A's exports will _____.

Answer

Selected Answer: an increase; decrease

Correct Answer: an increase; decrease


In a two-country world, the terms-of-trade impact of a tariff will definitely improve the welfare

of the tariff-imposing country (assuming no retaliation) if the tariff-imposing country

Answer

Selected Answer: is situated in the inelastic portion of its trading partner's offer curve.

Correct Answer: is situated in the inelastic portion of its trading partner's offer curve.


Suppose that a country's producer subsidy equivalent (PSE) in agriculture is positive and the

country's consumer subsidy equivalent (CSE) for agricultural goods is negative. This situation

suggests that existing policies are working to _____ farmers and _____ consumers of farm

goods.

Answer

Selected Answer: subsidize; to tax

Correct Answer: subsidize; to tax


The graph above shows the demand and marginal revenue curves facing a foreign monopoly

supplier of a good to the home country, as well as the firm's horizontal marginal cost curve when

there is no tariff by the home country (MC) and the marginal cost curve when a specific tariff is

imposed by the home country (MC + T). Assume that average cost (AC) equals marginal cost. In

this situation, the price to home country consumers after the tariff has been imposed is

____________ .

Answer

Selected Answer: $14

Correct Answer: $27


Small groups may gain at the expense of the majority when

Answer

Selected Answer: all of the above

Correct Answer: all of the above


The macroeconomic view of a trade deficit implies that, other things being equal, the imposition

of a tariff will reduce the country's trade deficit

Answer

Selected Answer: only if the tariff leads to increased income in the country relative to the

country's spending.

Correct Answer: only if the tariff leads to increased income in the country relative to the

country's spending.


The successful Uruguay Round of trade negotiations transformed the then-existing sponsoring

agency into the _____, which began operation in _____.

Answer

Selected Answer: WTO; 1995

Correct Answer: WTO; 1995


If a PPP estimate of the dollar/pound exchange rate is $1.61/£ and the current spot rate is

observed to be $1.68/£, you should, viewing the long run,

Answer

Selected Answer: expect the dollar to appreciate against the pound.

Correct Answer: expect the dollar to appreciate against the pound.


Suppose that a speculator notes that the current 3-months forward rate on the euro is $1.26. The

speculator expects that, in 3 months, the euro will have a value of $1.30. In this situation, the

speculator would _____ euros on the forward market, and this activity _____ for the speculator.

Answer

Selected Answer: sell; involves risk

Correct Answer: buy; involves risk


In a setting of flexible exchange rates, suppose that the U.S. citizens decrease their import

purchases from the United Kingdom at the same time that British citizens increase their

purchases of stocks and bonds from the United States. The first action (the U.S. imports) by itself

would lead to _____ of the dollar against the pound; the second action by itself would _____ of

the dollar against the pound.

Answer

Selected Answer: an appreciation; also lead to an appreciation

Correct Answer: an appreciation; also lead to an appreciation


If the equilibrium value of the pound is $1.60 in time period 1, but U.K. prices double between

time periods 1 and 2 while U.S. prices rise by 60 percent, then the (relative) purchasing-power-

parity theory would say that the equilibrium value of the pound in time period 2 is

Answer

Selected Answer: $1.28.

Correct Answer: $1.28.


If a speculator observes that the current 3-months forward rate on Swiss francs is 20¢ = 1 franc,

but he/she expects that the spot rate in 3 months will be 30¢ = 1 franc, then this speculator would

now

Answer

Selected Answer: sell francs on the forward market.

Correct Answer: buy francs on the forward market.


In general, other things being equal, trade creation is more likely to outweigh trade diversion for

a home country forming a customs union with partner countries (i) if the total number of

countries forming the union is _____, and (ii) if the level of tariffs in the home country prior to

the formation of the union is _____.

Answer

Selected Answer: small rather than large; low rather than high

Correct Answer: large rather than small; high rather than low


The Big Mac Index

Answer

Selected Answer: is an absolute PPP index of the international value of the U.S. dollar based

on a single commodity.

Correct Answer: is an absolute PPP index of the international value of the U.S. dollar based on

a single commodity.


Suppose that Mexico trades only with Germany and the United States. Additionally, suppose

that in 1995 the spot rates were 0.2 euro = 1 peso and $0.10 = 1 peso, and that in 2005 the spot

rates were 0.15 euro = 1 peso and $0.12 = 1 peso. If Mexico's trade is 20 percent with Germany

and 80 percent with the United States, calculation of the effective exchange rate for Mexico

indicates that the peso

Answer

Selected Answer: appreciated from 1995 to 2005.

Correct Answer: appreciated from 1995 to 2005.


In the graph below pertaining to good X for country A (where DA is the demand for X by A's

consumers, SA is the supply curve of X from A's home producers, SB is the horizontal supply

curve of X to country A from country B, SC is the horizontal supply curve of X to country A

from country C, and S'B and S'C are the horizontal supply curves from B and C, respectively,

with a tariff in place), suppose that country A, from this initial situation, now forms a customs

union with country C.

If country A formed a customs union with country C rather than with country B, imports of good

X into country A would be the amount _____.

Answer

Selected Answer: Q3Q4

Correct Answer: Q1Q6


If Japan invests overseas because of its high saving rate (in excess of domestic investment

spending), then this investment can cause_____ of the Japanese yen and, thus, a consequent trade

_____ for Japan.

Answer

Selected Answer: a depreciation; deficit

Correct Answer: a depreciation; surplus


In which of the following relationships between the expected future spot rate (E[e]) of a foreign

currency and the current forward rate (efwd) of a foreign currency would a speculator have an

incentive to sell foreign currency in the forward market?

Answer

Selected Answer: E(e) < efwd

Correct Answer: E(e) < efwd


The graph below pertains to good X for country A, where DA is the demand for X by A's




with a tariff in place.

With the tariffs in place for both countries B and C, imports of good X into country A are

represented by distance

Answer

Selected Answer: Q3Q4

Correct Answer: Q3Q4


A simultaneous increase in U.S. demand for German products and decrease in the desire of

German investors to send funds to the United States would, under a flexible exchange rate

system and with other things being equal, lead to _____ of the U.S. dollar against the euro and to

_____ of the euro against the dollar.

Answer

Selected Answer: a depreciation; an appreciation

Correct Answer: a depreciation; an appreciation


A given exchange rate will be more or less the same in all of the world's financial markets

because of

Answer

Selected Answer: currency arbitrage.

Correct Answer: currency arbitrage.


An exporter who is to receive payment in foreign currency in 3 months and who wants to

engage in hedging would _____ the foreign currency on the 3-months forward market in order to

protect himself/herself from _____ of the foreign currency.

Answer

Selected Answer: buy; a depreciation

Correct Answer: sell; a depreciation


If good X from country C faces a 10 percent tariff in country A and a 20 percent tariff in country

B, but if A and B have free trade between each other, then A and B are part of which type of

grouping?

Answer

Selected Answer: economic union

Correct Answer: free-trade area


In considering trade creation and trade diversion in the formation of a customs union between

countries and whether membership in the customs union enhances welfare in a home country,

two general rules are that the customs union is more likely to enhance welfare, other things being

equal, (i) if the union contains a _____ number of countries and (ii) if costs of production in the

partner countries in the case of trade diversion differ _____ from costs of production in the

outside world (the nonmember countries).

Answer

Selected Answer: small rather than large; greatly

Correct Answer: large rather than small; only slightly


Other things being equal, if exchange rates are flexible, and if U.S. consumers increase their

demand for Japanese goods at the same time that Japanese consumers increase their demand for

U.S. goods, then we would expect the dollar to

Answer

Selected Answer: remain unchanged in value relative to the yen.

Correct Answer: The answer is impossible to determine without more information.


The graph below pertains to good X for country A, where DA is the demand for X by A's




with a tariff in place.

Suppose that, from the initial situation where country A's tariff was applied to both countries B

and C, country A now forms a customs union with country B. With this customs union in place,

imports into country A are represented by distance _____.

Answer

Selected Answer: Q3Q4, all of which constitute trade diversion from the noncustoms union

country.

Correct Answer: Q2Q5, only part of which constitute trade diversion from the noncustoms

union country.


In the graph below pertaining to good X for country A (where DA is the demand for X by A's




with a tariff in place), suppose that country A, from this initial situation, now forms a customs

union with country B.

The net welfare effect on country A from the formation of the customs union with country B is

_____.

Answer

Selected Answer: areas (a + c) minus area f

Correct Answer: areas (a + c) minus area f


Which of the following is considered a positive dynamic effect of integration?

Answer

Selected Answer: economies-of-scale effects

Correct Answer: economies-of-scale effects


If U.K. interest rates are higher than Japanese interest rates, then the theory of covered interest

arbitrage would suggest that, in the £/yen exchange markets, the yen would be at a forward

_____ and the pound would _____.

Answer

Selected Answer: premium; be at a forward discount

Correct Answer: premium; be at a forward discount


If two countries remove all tariffs on each other's products and establish a common set of tariffs

against the rest of the world, but they take no further steps toward economic integration, these

two countries have formed

Answer

Selected Answer: a customs union.

Correct Answer: a customs union.


If country A forms a customs union with country B, then

Answer

Selected Answer: countries A and B may especially benefit from the union if substantial

economies of scale exist in some of the A and B industries.

Correct Answer: countries A and B may especially benefit from the union if substantial

economies of scale exist in some of the A and B industries.


In a production-possibilities/indifference curve diagram depicting the movement of a country

from a situation of a uniform tariff against all trading partners to a situation of a customs union

with one trading partner,

Answer

Selected Answer: home production of the country's export good will increase and home

production of the country's import good will also increase after the formation of the customs

union.

Correct Answer: home production of the country's export good will increase, and home

production of the country's import good will decrease after the formation of the customs union.


In Europe's Economic and Monetary Union (EMU), the member countries

Answer

Selected Answer: use a common currency (the euro).

Correct Answer: use a common currency (the euro).


The optimal size of international reserves occurs for a country at the point where the

Answer

Selected Answer: marginal benefit of holding the reserves equals the marginal cost of holding

the reserves.

Correct Answer: marginal benefit of holding the reserves equals the marginal cost of holding

the reserves.


The view that inflation in a country can lead to depreciation of the country's currency and, in

turn, further inflation is known as

Answer

Selected Answer: the purchasing power-parity-problem.

Correct Answer: the vicious circle hypothesis.


According to the theory of optimum currency areas, a country would be a good candidate for

membership in such an area if it had a _____ degree of factor mobility with other potential

member countries of the currency area and if the country were a relatively _____ economy.

Answer

Selected Answer: low; open

Correct Answer: high; open


The post-Bretton Woods international monetary system is generally thought to have been

characterized by all except which of the following features?

Answer

Selected Answer: Real exchange rates have been relatively constant during the period, and so

the system's existence, per se, has not had real economic effects.

Correct Answer: Real exchange rates have been relatively constant during the period, and so

the system's existence, per se, has not had real economic effects.


Other things being equal, a domestic monetary or financial shock (a shift in the LM curve) tends

to produce what relative degree of GDP change for the home country under a situation of flexible

exchange rates compared to a situation of fixed exchange rates?

Answer

Selected Answer: larger change with flexible rates

Correct Answer: larger change with flexible rates


Proponents of fixed exchange rates would find the most support for their position in which of

the following empirical results regarding the relationship between exchange rate variations and

the volume of international trade? (Assume that the empirical tests adequately account for other

factors that influence the trade volume.)

Answer

Selected Answer: no discernible relationship between exchange rate variations and the volume

of trade

Correct Answer: a negative relationship between exchange rate variations and the volume of

trade


A major advantage of the system of flexible exchange rates (as opposed to fixed exchange rates)

is commonly thought to be

Answer

Selected Answer: the strong possibility that the greater exchange rate risk under flexible rates

will increase the volume of international trade.

Correct Answer: the enhanced effectiveness of monetary policy in influencing national income

under flexible exchange rates.


If a country's currency's external value is tied or pegged to the currency values of the country's

leading trading partners, this arrangement is known as a

Answer

Selected Answer: managed float.

Correct Answer: peg against a "basket" of currencies, or a composite.


Two of the convergence criteria pertaining to initial membership in the EMU were that a

country's ratio of government debt to GDP must be _____ and that a country's ratio of

government budget deficit to GDP must _____.

Answer

Selected Answer: 3 percent or less; be 60 percent or less

Correct Answer: 60 percent or less; be 3 percent or less


In its lending to member countries, the International Monetary Fund (IMF)

Answer

Selected Answer: lends whatever amounts member countries may wish to borrow at a zero

interest rate and with no service charge on all loans.

Correct Answer: may increase the difficulty of obtaining loans and may insist on internal

policy changes by borrowing countries as the borrowers ask for additional loans.


In comparing the size of central bank reserves relative to world imports in the 1960-1972 (and

relatively fixed exchange rate) period with the same ratio from 1973 onward (a relatively flexible

exchange rate period), the ratio has been _____ in the more recent period. This result _____

consistent with the theoretical expectation of economists.

Answer

Selected Answer: larger; is not

Correct Answer: smaller; is


In theory, business cycles are _____ likely to be transmitted from one country to another under a

system of fixed exchange rates than under a system of flexible exchange rates. Economists also

generally accept that, theoretically monetary policy is _____ useful for dampening business

cycle activity under a system of fixed exchange rates than under a system of flexible exchange

rates.

Answer

Selected Answer: more; less

Correct Answer: more; less


Under the Bretton Woods system (which was set up at the end of World War II), exchange rates

were

Answer

Selected Answer: permitted to vary 1 percent above or below parity.

Correct Answer: permitted to vary 1 percent above or below parity.


In the Bretton Woods international monetary system, a country's currency, unless its par value

or parity value were officially changed, could not deviate more than _____ from its par value or

parity value. If the country's currency depreciated to its low point in this range, central banks

needed to _____ the currency in the exchange markets in order to keep the currency's value

within the specified range.

Answer

Selected Answer: plus or minus 1 percent; sell

Correct Answer: plus or minus 1 percent; buy


If a country's BP curve is flatter than its LM curve, then an external financial shock of a rise in

interest rates abroad would, under flexible exchange rates, lead to _____ in the home country's

national income. If exchange rates were fixed, this external financial shock would _____ in the

home country's national income.

Answer

Selected Answer: an increase; also lead to an increase

Correct Answer: an increase; lead to a decrease


In the current exchange rate arrangements of IMF members,

Answer

Selected Answer: the European Union countries fix their exchange rates against the U.S.

dollar.

Correct Answer: a substantial number of countries do not have a freely floating exchange rate.


Suppose that, using a system of multiple exchange rates, India wishes to discourage investors

from sending their funds overseas relative to employing the funds in production for export. If the

exchange rate for exports were set at 33 Indian rupees = $1.00, then which of the following

exchange rates for capital transactions potentially would be appropriate for implementing the

strategy?

Answer

Selected Answer: 1 Indian rupee = $0.03

Correct Answer: 1 Indian rupee = $0.02


If virtually all speculators buy a currency just before what would be the cyclical low point in the

currency's value without speculative activity, this speculation is likely to be _____ with respect

to its impact on the cycle's amplitude; if the speculators sell the currency just before what would

otherwise be the high values of the currency during its fluctuations, this speculation is _____ in

its impact.

Answer

Selected Answer: destabilizing; likely to be stabilizing

Correct Answer: stabilizing; also likely to be stabilizing


If a country adopts a currency board arrangement, a result is that the country's money supply

_____ be increased through the purchase of domestic assets from the country's citizens by the

country's central bank; in this arrangement, the country's money supply _____ be increased

through the purchase of foreign assets from the country's citizens by the country's central bank.

Answer

Selected Answer: can; cannot

Correct Answer: cannot; can


If a country has a currency board arrangement (with a 100-percent reserve system) in place, then

the country's money supply can be increased by a _____ by the country's central bank.

Answer

Selected Answer: purchase of foreign (external) assets from domestic citizens

Correct Answer: purchase of foreign (external) assets from domestic citizens


The IS/LM/BP analysis suggests that an external real sector shock, such as a rise in national

income abroad will cause, under fixed exchange rates, a _____ shift in a home country's BP

curve (assuming that short-term financial capital is not perfectly mobile), a _____ in the home

country's balance of payments, and _____ in the home country's national income.

Answer

Selected Answer: rightward; deficit; a decrease

Correct Answer: rightward; surplus; an increase


The Asian crisis of 1997-1998 involved movement of short-term financial capital _____

countries such as Thailand and Malaysia, with a consequent _____ of their currencies, which in

turn caused _____ in the trade balances of other countries of the world.

Answer

Selected Answer: out of; appreciation; a deterioration

Correct Answer: out of; depreciation; a deterioration


Under the Bretton Woods agreement,

Answer

Selected Answer: gold was demonetized as an international reserve asset.

Correct Answer: a country joining the IMF was assigned a quota to be paid in gold and the

country's own currency.


In the current international monetary system, countries

Answer

Selected Answer: must adopt floating exchange rates.

Correct Answer: have considerable latitude in choosing an exchange rate arrangement.

Economics

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