International - Tests

8/2/2019 International - Tests

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ECO 3330 Fall 2009WestonI Multiple Choice (3 pts. each)

'" 1 . Which of the following is not likely to be a commonly ob,y"ed aspect of globalization?(a) Movement of goods across international boundaries.(b) Movement of capital across international boundaries. vi Z~ Movement of land across international boundaries. '2 __.p cxr-. Q..S.l.- 0- ~~ .'" ' - .d) Multinational ownership of productive facilities.( e) Ambiguity about the nationality of manufactured products. /\ , ' * 2. One way to quantify the degree of globalization is to calculate world trade as a percentage ofworld GDP. By this measure we know that -a) -time I'll!" HO gl6~HlJi2ati9Q "pti] th@ late 1989~.C]) we only recently surpassed a degree of globalization that existed in 1914.( c ) ! ; lo l :; la J io lt tt i6 i i pettIHH~ ii' "9mw 1 S 5 0(d) globali~6tioii Las ~eeH 6een~aeiQg SiRC8 19Hi.Brad and Angelina are married. Angelina hates to cook, while Brad hates to wash dishes.Angelina agrees to wash the dishes if Brad will cook. This arrangement illustrates(a) the Leontief Paradox .. ~(b) the Compensation Principle.~) econo:1ues of scale. XG D the gains from trade.Mthe decline of Western civilization.

,/~ 4. If every individual were required to be absolutely self-sufficientQliving standards would fall.(b) living standards would rise.(c) living standards would fall for some people, but for others, they would rise.(d) ,*itjug standards MJUld be unchanged.(e) it is impossible know how living standards would be affected.

I CO e 5. /In Peru one unit of labor can produce 50 units of food or 100 units of oil. InBrazil one unitof labor will produce 75 units of food or 25 units of oil. Who has which advantage in what?(a) Peru has absolute advantage and comparative advantage in both goods. -C- ~< J U Brazil has absolute advantage and comparative advantage in both goods. y ~ ~

-_ .....@Peruhastheabsoluteandcomparativeadvantagein oil. ~~ 1 " D Ice. C : ! ) , 1 .(d) Brazil has the absolute and comparative advantage in oil. - = r o _ : : : - - - u - I - - = " 1 : : ; - " ) = = - = - - - 2 . - - r - - - : J / Z . I(e) Peru has the absolute, but not the comparative advantage in oil. IT(1 ) Brazil has the absolute, but not the comparative advantage in oil.

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YaII6. In Botswana one unit of labor can produce 60 units of wheat or 200 diamonds. In Zimbabwe

one unit of labor can produce 20 units of wheat or 20 diamonds. Does Zimbabwe havecomparative advantage in anything? v..J 0d Yes, in wheat. \) G 2 ." t : : I ~) - ._ : : c . I (b) Yes, in diamonds. Z: z..r=. 2-0I~\/ (c) Yes, in both goods.

/ (d) No. Botswana has comparative advantage in both goods.u ._ :.Q _ . ,

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Inquestion #6, what is Botswana's opportunity cost of producing a unit of wheat? I(a) 200 diamonds. \ v :S ~d ::.3.33 (\ Y_"\ L . . . - c\~~3.33 diamonds. (00..6(c) 1.0 diamonds. ofP' c...,:,~T 0 1 . . 1 V\~'--\--.:.._ . ' < O I . .> - - . . . . . \-r ~ ....._ ~ 0 - ' : :(d) .30 diamonds. " .--~.~ c\.\"l'J~~ I . fc , "'c~'-T

r-c ~ c,......,3. 33In question #6, can Botswana benefit from trading with Zimbabwe?~ Yes, if Zimbabwe will sell a unit of wheat for less than 3.33 diamonds.(b)--YeE, Q " t 0; 0 IY of Z i Olbabwe w i U ~el1 t'I bU'Hl (;If wheat for 1ess than J diamond ..(c) Yes, but only if Zimbabwe will sell a unit of wheat forless than 0.30 diamonds.(d) Yes but only if Zimbabwe will sell diamonds for Jess than .30 units of wheat.(e) 1 . 1 0 F"e~"'hiIIg costs l l lore in ZiMlbabwe.

J 9. How can a nation have comparative advantage in producing a good, even though they haveno absolute advantage?(a) Because their labor is more efficient.(b) Because of the natural advantages of geography and climate.oBecause they can produce that good at less sacrifice to themselves than can other. nations.(d) They cannot.

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, ..,...r- ( . '1 , . ' - " ' ~_" .....-,n :D .,_,._ _---- ____11. According to the Heckscher-Ohlin version of the theory, a nation's comparative advantage is

determi ned by ~~ ! c. '---h.__,,>c c-b ,--,_, , - . . . : > r ~(a) labor productivity.(b) the type of policies its government pursues.J/ (c) the exchange rate.4' I1i\ relative factor abundance. I . . ~ , . . ' , , - , c: "- ~g \;...;\~ " , . . . . . . . ) - C - - " " ' " " ~ r->..4... ~~ \ o...--cl.

c. J 1 ;'12. The nation of Urbano has 100 million workers living on 100 square miles of land. The nation, ~ ' " If",.~ ofE! Campo has 1 million workers living on 10 square miles of land. From this we know(\dlvJofw.uUl I .

2.- - :: L that Urbano IS leD ~...,_ l tiL-'-"\ (a) re ~~ -. _~J . \ < : > 0 t.. ,,___.,

D.s:....pO '"'" (2)-relatively labor abundant compared to El Campo.,


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~', C> - '" c:\.' \ l; . < : . ~ ~.l""" ,,\..\ "', 0 ' 0 0 \ _ \ I r\OI : " ' Jo-r- I - '" 1,(, '< ' ., ... (-0 ,'\.Ol,.vi. . .t . -e I ,t,,~, '(.....~ ... .' . '.. . 2 : . . ~ 14. Inproblem #13 what will happen when Australia and the Netherlands enter into free trade? -.:..i It-' i:.,."; , . r - . O~ (a ) reR t~ aAd wageE w ill rise ju bG tR Aatieffli. ~,..r->. ' t '---L-oJavf '" (b) r@AtEaBa wage s will f ' . ! i1 l iR \ ;Jeth nations. .-' ~ ~...~ (c ) ten ts w in rise and w age .. w ill fa ll if l b e th f l ll :riens . p-.~(}C'_'_""-~(d) reats will fall andwages wjll rjse iA eG',R aatiens.oustralian land rents will rise, while Dutch rents will fall.(f) Aasti alian land J eJJts Vi ill fall, whlle Dutch J elllS w illrise.(g) nq_thing \\ 'ill happen to rentE is eiti ' ler sati 'OlA, s rnee 1 f t t ' ! o i~I: l iOn hadeo:fgood.

, * , , " 1 5 . How does the average c~tizen have the know l.edge to buy things from the na tions that havecomparative advantage 111 producing those things?(a) He doesn't. That's why it is important for governments to regulate trade and direct

industries into desirable directions. By comparing the prices of goods of comparable quality ..(c) -By lo oking u p the compara t iYe 8\'hantdge tables on the W 10 website.(d ) S he '" e d 'db' t; th is is way eo.[8I)'oaO)need s te lai.e eOQfSeS in If l teBitt t ia na l !S cm IOlI i1cs .

j 16. The Stolper-Samuelson theorem says that after two nations move from autarky to free trade(a) every citizen of both nations becomes better off.(b) every citizen of both nations becomes worse off.(c) owners of the scarce factor in both nations become better off.(2) owners of the abundant factor in both nations become better off.(e) capitalists in both nations become better off.(f) laborers in both nations become better off.

J 17. The US imports a large amount of clothing from Asia. International trade theory wouldpredict that as a result of this in the US ~ ' ; '% t ~ Q A ' ts . .J . - . .o clothing price have fallen, while wages in the clothing sector have fallen.(b) clothing price have risen, while wages in the clothing sector have fallen.(c) c othin rice hav fallen(d) c

18. The Leontief paradox is(a) the theoretical result that workers can get poorer as a result of free trade, even though the

nation as a whole gets richer.(b) the theoretical result that a nation may have a comparative advantage in producing a

good, even though it is a high cost producer.(c) the empirical 0bservati all that it costs more per year to consu rners to save jnbs by

blocking free trade than the jobs pay.0the empirical observation that the U.S. is a net importer of goods that are produced

capital-intensi vel y.(e) a famous mathematical puzzle that was thought unsolvable until Chinese students wereallowed into Russian universities; this demonstrates the benefits of allowing the free flow

of knowledge.

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/19. Economies ofscale are an advantage to a firm because firms having economies of scale(a) can always monopolize their market.(b) will receive higher prices than finns without economies of scale.(c) can take advantage of cheap labor. will have average costs that decrease as pr?duction increases; this gives them an edge inprice competition. -t::. }.....r'\. - c ~ \ \Ctn ,(: .....\ Q.:;,.I P~~t:>9(b) it provides an argument against free trade.(c) it shows why, when trade is opened up among nations, a few large finns take over

everythi j19 .(d) it shows why nations with low wages end up producing products developed in the rich

world."./ (e) it explains the compensation principle.

21. Which of the following trade patterns is best explained by increasing returns to scale?(a) Honduras exports bananas to the OS, while the US exports airplanes to Honduras.(b) Pakistan exports clothing to the US while the US exports airplanes to Pakistan.~ Mexico exports beef to the US while the US exports airp.lane to Mexico. 9 Y Japan exports ca~) to the US while the US exports airplanes to Japan., J

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22. A tariff is(a) a chewy Turkish candy.() a tax on imported goods.(c) a quantity restriction on exported goods(d) a quantity restriction on imported goods, _ o-.c,\.)' (. ~~

, ,-I- ' ..JWhat is the biggest difference between a tariff and a quota in terms of their economic impact?(a) nsfer

/ 24. The effective rate ofprotection on the domestic value added to a good will be greater than thenominal tariff rate if(a) the product being protected is made entirely with domestic inputs.(b) the product being protected is subject to economies of scale.(c) the product being protected is made wi th a large portion of imported inputs that are

j subject to the same tari if as that product.e the .product being protected is made wi th a large portion of imported inputs that are notsubj eel to a tan ff.

(e) FALSE. The effective rate of protection refers (0how a quota can be mademathematically equivalent to a tariff.

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J 25. Which of the following best expresses the "infant industry" argument? Even when a nation has a potential comparative advantage in some area, a young finnmay need to go through a costly "learning by doing" stage, during which it needs to beprotected if it is to survive.

(b) Most new businesses are profitable ill [he first few years, and this can be guaranteed by aprotective tariff.(c) Infant industries appear to be innocent but they are really instruments of exploitationu sed by international capitalists that grow to be multinational conglomerates.

(d) It is a good idea to focus on producing products used by infants because this willguarantee future markets for all sorts of goods as these infants grow to be adults.

J 26. Which of the following best sums up the eDects ora subsidy compared to the effects ofat r u : i . f ?(a) Subsidies encourage domestic producers to be inefficient, while tariffs do not.(b) Subsidies increase the world price of the good, while tariffs have no effect on the world

price.' ( There i(@ deadweight l~due to lost consumption with subsidies, but the subsidyrequires expenditure by the government which must be financed by taxpayers.(d) Subsidies have no trade distorting impact.

(e) There is no difference._) 27. U.S. trade restrictions limiting the sale of clothing from low-wage nations such as Bangladesh

and Haiti()1 helps protect the high wages of U.S. workers; and at the same time help promoteeconomic prosperity in the low-wage nations.

~ protects U. S. consumers at the expense 0f foreign producers.~ raises the US standard ofliving., even though it will harm the standard ofliving in the

low-wage nations.~ increases per capita income in the U.S. by allowing specialization to the areas of

comparative advantage.~reduces the standard of living in the U. S . and in the low-wage nations by interfering withspecialization to the areas of comparative advantage.

J 28. Tbe US experience with voluntary export restraints (YERs) on Japanese car makers in the1980s suggests that trade restrictions(a) significantly increase the number of jobs available in the importing nation.~ are effective in protecting certain selected jobs, but at a high cost to consumers.(c) are effective in protecting certain selected jobs, and the cost to consumers is insign ificant.(d) are completely ineffective IIIprotecting jobs.( e) benefit the importi ng nation as a whole, even if all indi vidua Is within the nation lose from

them.

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I 29. Tariff escalation refers to(a) the frequently observed pattern of increasing retaliatory tariffs that occurs during a tradewar.

(b) the fact that tariffs increase not only the prjce of import s but also the price of domesticgoods that compete with imports.@ tariff structures in which the nominal tariff rate is greater the mo!~ p~cessed is the good;this has the impact of giving a high effectjve rate of protection to domestic processors ofimported raw materials.

(d) the fact that ad valorem tariffs increase automatically when the price of an importincreases, since ad valorem tariffs are a percentage of the value of the import.

\_i ,,-30. What is the connection between domestic farm price supports and agricultural trade barriers?~ TR @ )' 'Both protect domestic consumers from lower quality foreign food.~ They both increase the average real income of Americans.0lf you have domestic price supports you also need trade barriers; otherwise foreignproducers will be attracted by the high prices, and the increased supply will defeat the

goal of higher farm prices.(d) There is no connection. Farm price supports are domestic policy, while trade barriers arepart of foreign policy.


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Indicate whether the following statements are TRUE or FALSE (1 pt. each) and EXPLAIN\VHy (4 pts.each) (What is the relevant concept or principl e? How does it apply"]

1. According to international trade theory US labor unions are unwittingly actingagainst the interests of their members when they oppose free trade, because thetheory says unambiguously that everyone in a nation gains from trade.

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For Possible Partial Credit (up to 2 pts. per question)Choose up to ten multiple choice questions and justify your answer.Suggested strategy: {l) Choose questions that you are not very sure of. This is not extra credit.If you get a question right you get tbe full four points but no more. (2) Some questions revolvearound the definition of a concept or an application of a concept. 1 1 1 these questions try toidentify the relevant concept. State the definition. Show how it applies or does not apply. (3) Ifyou cannot defend you answer positively, use a negative approach, i.e., explain why youeliminated the other possibilities. (4) If the question seems unclear or ambiguous, explain whyyou think this is so .

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Distribution of Scores905- 1280s - 1370s - 2605- 1

ECO 3330Weston Exam 1 - AnswersMultiple Choice (percentage of the class who missed)l.c (18) 2.b (18) 3.d (11) 4.a (21) 5.c (7) 6.a (14)7.b (7) 8.a (l8) 9.c (4) 10.c (0) ll.d (4) 12.b (36) 13.c (4)14.e (0) 15.b (7) 16.d (0) 17.a (36) 18.d (11)19.d (0) 20.a (29) 21.d (7) 22.b (0) 23.d (29) 24.d (21)25.a (0) 26.c (7) 27.e (7) 28.b (11) 29.c (21) 30.c (4)

Fal l 2009

Questions Missed with Alarming FrequencyMy usual arbitrary cutoff is 50%. Since no question was missed by more than 36% of theclass, either you did very well, or I made the test too easy.True/False and Explain1. False. According to the Stolper/Samuelson theorem, in a move from autarky tofree trade the abundant factor in each nation gains while the scarce factor loses. If

the US is relatively labor poor compared to, say, China and India, opening uptrade with these nations could harm labor, even after accounting for the benefitsof cheap imports.2. False. According to the Compensation Principle when a nation moves fromautarky to free trade the total gains to the winners (i.e., the higher factor payments

times the number of people receiving these payments) exceed the total losses tothe losers. Thus it would, in principle, be possible to tax the winners tocompensate the losers, and the winners would still come out ahead.


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Fall 2009CO 3330Weston Exam 2Multiple Choice (3 pts. each)I. A nations overall balance of international payme

Capital Account + Errors and Omissions)(a) balances only in equilibrium.(b) is balanced only when the exchange rate is appropriately adjusted.() is always in balance by definition.(d) can not ever be in balance in the real world.

2. The overall U.S. balance of payments must balance because(a) current account deficits automatically cause the exchange rate to weaken. every transaction involves a corresponding payment; hence every credit generates a debitand vice versa.

(c) this is required by the accounting rules of the International Monetary Fund.(d) exports of goods automatically create imports.(e) FALSE. The United States runs a chronic balance of payments deficit.

3. Which of the following balance of payments entries is a credit (+) in the US account?(a) The import of a good."(b) The purchase of a foreign bond. ~(c) Sending money to one's family abroad. '?


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9 . If a nation's GD P grows faster than the GD P of its trading partners, all other things beingequal we would expect to see the nation to have ~"i\7a growing trade surplus. 'I t c-~I ~ ~ .st..J'"'\ ~ a growing trade deficit. . 1

balanced trade. ~ ~ ~'-.9-(d) fill ovcra l l bttitiItCC o f payments deftcit.( e) an O'lera I I h a 1a nee of paym en!S SlIll'WS.

7. Which of the following could no/logically be a very good explanation for the large JapaneseCurrent account surpluses in the 1980's and 1990's?(a) High private saving in Japan.(b) Extremely low interest rates in Japan compared to the U S .(c) A balanced government budget.(2) Having comparative advantage in all traded goods and services.

8. Which of the following best helps to explain the large U S Current Account deficits in theearly 21 st century?(a) The U.S. government budget surplus.(b) The lack ofpolitical will to enact protective measures that would "level the playing

field" .(C) The willingness of foreign governments to buy US government securities.(d ) Excess saving by US households.(e) All of the above.(f) None of the above.

10. If a nation's investment exceeds its national (private + government) saving, the Balance of~e C" t- ~ ~ / ~ ,--. . .c-r-.c.. . . .a.. ._ i < \ - "-=", c:_(9will necessarily be in deficit because the excess investment and government spending

must: be financed somehow.tI1) might be in deficit if interest rates are high enough to attract foreign lending.~ might be in surplus because the investment will make manufacturing more efficient.f I . J will be unaffected, since the Current Account is a record of international not domestictransactions.

II. Which of the following statements best expresses a possible problem with a nation having atrade deficit?9 I Q When a good is produced domestically we get the good and we keep the money. Whenwe import a good we get the good, but foreigners get the money.

- f ! S ) If a nation imports more than it exports that is a loss, the same as a business whose costsexceed its revenues. For a nation to earn a profit it must have a trade surplus.@While ~rade deficits allow a nation to absorb a higher standard of living than it produces,this depends largely on the willingness of foreigners to support this through lending orgifts. Ifforeign lending stops abruptly it can cause serious disruptions.(d) There is no need to be concerned with trade deficits. The world will always need the USto be the consumer of last resort.

12. If the exchange rate changes from 1001$ to 901$ the dollar has(a) ~t l eHgt l t c l l cd and Japa l iese goods are now dleaper to Americans.(b) strerrgthened f lHEI Japane~e goods are now more expensive to Americans.C & weakened and Japanese goods are now cheaper to Americans.(]) weakened and Japanese goods are 11m\! more expensive to Americans.

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13. All other things being equal a stronger dollar would be expected to(i) lead to a larger current account deficit. )


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21. The motivation for exchange rate speculation is to(a) profit from discrepancies in exchange rates between financial centers.b avoid exchange rate risk.profit from exchange rate risk.gain more than the difference in interest rates between two nations.

19. Foreign currency options(a) give choices or options about which currencies to buy.(b) commit traders to exchange one currency for another at a future date.(c) can only be used by hedgers, not by speculators.~ can only be used by speculators, not by hedgers.~ give someone the right t~ OJ:.gJ1 a foreign currency at a specified price at some future

date. ......"'\.\.-- - ., . ._ .~ \~~20. The motivation for exchange rate hedging is to

(a) profit from discrepancies in exchange rates between financial centers.(tl) avoid exchange rate risk.fc) profit from exchange rate risk.(d) gain more than the difference in interest rates between two nations.

22. ~e biggest impact of exchange rate arbitrageurs is that'@they contribute to the establishment of uniform exchange rates.(b) they cause exchange rates to deviate from purchasing power parity.(c) their irrational herd-like behavior causes exchange rates to be excessively volatile.(d) they permit hedgers to avoid exchange rate risk.

'~ 23. What must be made equal for uncovered interest rate parity to hold?(a) The po\>ler of both currencies to purchase goods and services.(b) The inflation rates in both nations.~ The interest rates in both nations.~ The rate of return on ~ssets in both nations includin~ the reward or p.enalty re~ulting from~ny expected change m the exchange rate over the time that the foreign asset IS held.

~ The spot and forward exchange rates.24. If interest rates are higher in the UK than in the US, covered interest rate arbitrage would beexpected tooesult in pounds selling forward at a discount (fewer dollars per pound than the current

spot rate).(b) result in pounds selling forward at a premium (more dollars per pound than the current

spot rate)." Q t Q provide risk-free profits for speculators.( i l 5 - cause US and UK interest rates to become equal.

25. The idea underlying the concept of Purchasing Power Parity (PPP) is(a) transportation costs are so low they can be ignored.(b) all currencies should be pegged to each other at rates established by experts.@ the value of a currency is determined by what it will buy.(d) the value ofa currency depends on interest rates in the issuing nation compared to

interest rates elsewhere.

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j 26. If soybeans cost $10 per bushel in the US while costing_Wer bushel in the UK, according toabsolute Purchasing Power Parity the exchange rate should be(~(b) .50$/..(~.

~27. A reason that we do not observe absolute PPP is that

(a) most nations fix their exchange rates at over-valued levels.~ most nations fix their exchange rates at under-valued levels. many goods and services are not traded internationally; thus we lack the arbitrage process

that would result in absolute PPP.(d) it is a ridiculous theory. This was proved by Marshall and Lerner.(e) FALSE. We do observe absolute PPP.

28. If inflation is expected in the US over the next year, while no inflation is expected in Japan,then relative PPP would cause us to expect{abthe dollar to weaken against the yen over the next year.~ the dollar to strengthen against the yen over the next year.('l} no change in the dollar/yen exchange rate.(~ inflation in Europe due to triangular arbitrage.

29. The ability of a devalued or depreciated currency to reduce a trade deficit is stronger iflS l . . the nation's manufacturers use a significant portion of imported inputs.W'enough time is allowed to pass so that contracts can expire < ) domestic demand for imports and foreign demand for exports is very inelastic.(d) FALSE. Weakened currencies are a major cause of deficits.

30. The J-curve refers to(a) the futility of devaluation as a way to reduce a trade deficit because of the willingness ofJapanese firms to accept lower profits.() the empirical observation that a trade deficit tends to increase before decreasing, in

response to a currency devaluation. ""\"\ (\..Q__. ~(c) the relationship between spot and forward exchange rates.(d) the theoretical relationship between national saving, investment, and the trade balance .

.. 31. Under the gold standard, exchange rates were determined by~. foreign exchange speculators.(b) demands and supplies of imports and exports....(c) international capital flows.~ the International Monetary Fund.~the rate at which governments redeemed their currencies for gold.

32. Central banks practice sterilization when they(a) increase interest rates in a trade deficit nation in order speed up the adjustment process.(b) increase the required reserve ratio so that banks are unable to lend any further.~ run all coins and bills that have been in general circulation under ultra-violet lamps.~ counteract monetary flows caused by trade imbalances in order to keep the domestic

money supply at some desired level.

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33. According to Hunte's adjustment mechanism if a nation has a trade deficit der a gold.~andard~) the deficit will persist indefinitely.(b) the currency will weaken causing imports to become more expensive and exports to

become cheaper. This wil! cause the deficit to self-correct.(c) the currency will strengthen causing imports to become more expensive and exports tobecome cheaper. This will cause the deficit to self-correct.id) gold will flow into the country. This will cause a general prosperity, and no one willcare about the deficit:.~gol~ will. flow out of the .cou~try. Th.is wi~1~aus~ the domestic ~'al~eof gold to increase,which wili cause domestic pnces to fall. 1111sWill make the nation s exports cheaper and

it will make domestic goods more attractive than imports. The combination of moreexports and less imports will reduce the deficit.~'j,~a~ ~d

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Fo r possib le pa rtia l c red it (u p to 2 pts . pe r qu estio n.)Choo se up to ten q ue sti o n s an d j u sti fy y ou r answ er.S uggested stra tegy : (I) Choo se qu estions tha t yo u are no t v ery su re o f. Th is is no t extra c red it. I fyo u ge t a questio n righ t yo u get the fu ll fou r po ints b u t no m ore . (2) S om e questions rev olvea ro u nd th e d ef in itio n o f a concept o r an applica tion o f a concept . In th e se qu estio ns try toid entify the re levant concept. S ta te th e d ef inition. S how how it applie s o r do es no t apply . (3) Ifyo u canno t d e fend y o u answ er positiv ely , u se a nega tiv e approach , i.e ., expla in w hy yo ue lim ina ted th e o th er po ssib ilitie s . (4) I d E - the uestion seems unclear 0ambiguous, explain whyy ou th ink th is is so . ~ tier--'-i F -Y) ~c"~e b .~ ;~ ~c :::P ~ o_S) .~~" '~

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ECO 3330Weston Exam 2 - AnswersMultiple Choice (percentage of the class who missed)I.c (4) 2.b (4) 3.e (0) 4.d (77) S.c (0) 6.d (26)7.d (26) 8.c (8) 9.b (46) 10.a (8) 11.c (0) 12.d (4)13.a (8) 14.b (16) IS.b (0) 16.a (0) 17.d (4) 18.c (35)19.e (0) 20.b (0) 21.c (4) 22.a (12) 23.d (12) 24.a (58) 2S.c (8)26.e (0) 27.c (8) 28.a (0) 29.b (16) 30.b (4) 31.e (27) 32.d (4)33.e (0)

Fall 2009Distribution of scores90s - 1780s-6705- 460s -- I

Questions Missed with Alarming Frequency4. The Current Account = the Balance of Trade + Net unilateral transfersThe Current Account = - Financial Account. So if the Balance of Trade = -$600 billion and theCurrent Account = -$400 billion, then unilateral transfers must = = +$200 billion.24. Covered interest rate parity is an equilibrium condition relating the forward rate and the spotrate, for a given interest rate difference between the two nations. The basic idea of interest rateparity is that the Return of Foreign Assets (including the expected change in the exchange rate)must equal the return on domestic assets, or there is an arbitrage opportunity. In the case ofcovered interest rate parity people placing their wealth in foreign assets are hedging bypurchasing forward contracts to eliminate exchange rate risk. If the UK has higher interest ratesthan the U S , unless the pound sells forward at a discount, the total return on UK assets will begreater than the return on domestic assets, since people putting their wealth into UK assets willget a premium when they redeem their pounds for dollars. (See my handout: "Covered InterestParity".)


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EC03330 0 GWeston Final Exam . - 1 \ 1Multiple Choice (2 pts. each) I J \I. One way to quantify the degree of globalization is to ca ClYte rid trade as a percentage of

world GOP. By this measure we know that(a) there was no globalization unti l the late 1980 s .~ we only recently surpassed a degree of globalization that existed in 1914.(c) globalization peaked around 1850 .(d) globalization has been decreasing since 1946.

Fall 2009

J 2. A utarky is(a) government by an autocrat.(b) a free market with no government interference.~ the absence of any international trade.{{fj a tariff on automobiles.(e) a steam powered middle-eastern boat.

3. A nation gains from specializing to its area of comparative advantage and trading for otherthings because, compared to autarky, trade allows the nation to(a) better compete with its trading partners.(b) make the most money.m create more jobs.use its scarce resources to acquire more of what it wants.exploit nations that have no comparative advantage.

4. Can a nation lose its comparative advantage in making cars when it becomes very good atv.... .. h writing software?

"'J ~Q (() Ne, beCaU6(l..ffiak-il}g-ear~ta5-l'tetfl.tJtg-ttrdo-w1th ";Fif~J'Ig--seftware.,


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7. In Peru I unit o f labo r can prod u ce 50 u nits o f fo od o r 10 0 u nits o f o il. In Brazil I u nit o flab o r prod u ces 25 units o f e ith e r goo d . W ho has compa ra tiv e ad vantage in prod u cing w hichgood? . f(~ -:: 5'D~ lC O 0.(a ) Peru 1 1 1 bo th go od s. ~ c y . . 2.5"t1(b ) Pe ru in fo o d , B raz il in oil. ~ "Iz '2 .( ! ; ) Brazil in fo od , Pe ru in o il.(d ) B raz il in bo th go od s. .p.. z . . -'B : 1 /1 . r-

1 . . \ 0

8 . In qu estion #7 how is it po ssib le fo r Pe ru to gain b y trad ing w ith B raz il?(a ) They can ge t eve ry th ing ch eape r b y b uy ing it from B raz il, s ince Brazil h as low er co sts .( 1 i ) They can ge t m o re fo od w ith the ir lab o r by spec ia liz ing in o il pro du c tion and trad ing the

o il fo r B raz ilian foo d.( c )-- . ,11l-e-y.-can-get-mQ fe-ei- l -w-it lol - fheir- laboryspeciattzi r rg in fo o d productiorrarrd tra d ing th e.food-fer-Brazilian oil .(d ) They can't. Pe ru can pro du ce eve ry th ing mo re ef fic iently than B raz il.

9 . In qu estio n #7 how is it po ssib le fo r B raz il to gain by trad ing w ith Pe ru ?(a) ~~tle fS fi.e m-l2@ fH -f tfM f I t}~b Je--sln'Ce -th ey "lra v e l!!ordaburembudl&HTl t hem .o They can ge t m ore o il w ith the ir lab o r b y spec ia liz ing in fo o d prod u c tio n and trad ing th efoo d fo r Pe ru v ian o il.( c) l= i.u l, ,-e an-g et-m ore -fc md w ith th eir Ia lJ 01 15 Y Sp ec ia liZ ing h i' 0 11 pro du ctio n a nd tra ding th e

o il fo r Peru v ian foo d .(d ) They can't. S ince Peru is m ore e ffic ient in prod u c ing ev ery th ing, if B raz il opens u p trad e

w ith Peru , B razilian pro du cers w ill b e d riv en ou t o f b u siness .10 . ln qu estio n #7 Peru can ga in f rom trad ing only if B razil is w illing to accept

(a ) le ss th an one foo d pe r o il. tf ~ ICO"-(b ) le ss th an Y l o il pe r foo d. S O ' -(c ) le ss th an one o il per fo od .@ le ss than 2 o il pe r fo o d .(e ) FALSE . Compa ra tiv e adv antage a ssu re s tha t the re is a lw ays a gain from trad ing.O JD


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13. S u ppo se A u s tra l ia is re la tiv e ly land rich compa red to B anglad esh . If th e pro ces s o fm anu fac tu r ing textile s is re la tiv e ly lab o r intensiv e , and th e pro ces s o f w hea t grow ing isre la tiv ely land intens iv e, th e H ecksch er-O h lin the ory w ou ld pred ic t th at A ustra lia will expor t- G) whea t .( b) te xtile s.(c ) im po ss ib le to say \ ...ith ou t info rm atio n a bo ut th e re la tiv e ab und ance o f capita l.(d ) FALSE . H ecksch e r-O hlin is ab o u t th e d is trib u tion o f the ga ins f rom trad e , no t th e

pa tte rns o f tra de .14. In prob lem # 13 w ha t w i II h appen w hen A ustra lia and th e B angla de sh ente r into f re e trad e?

(a ) rents and w ages will r ise in b oth na tio ns .(b ) rents and w ages w ill fa ll in b o th na tio ns .(c ) rents w ill ris e and w ages w ill f a ll in b o th na tio ns .(d ) rents w ill fall a nd w ages w ill r ise in b o th na tio ns .@ A ustra lian land re nts w ill rise, w hile B anglad esh i rents will fal l .(f) A us tra lian land rents w ill f a ll , w hile B anglad esh i rents w ill rise .(g) no th ing w ill h appen to rents in e ith e r na tio n, s ince land is a non-trad ed good .

Ii 15. A theo re tic a l rea son fo r th inking th a t trad e w ith Ch ina w ill red u ce U S w ages is@ th e fa cto r-pric e e qu aliz atio n th eo re m.(b ) th e H eeksch e r-O h lin th eo rem .(ej--R.icargg's Ltl:w.(d) the c om pe ns atio n p rin cip le .(e ) ..th e la w o f c O H 1pa ra tiv e 6Sv6Rt age .(f)' r A L SE . Ther e iSfteJtlting iii intoff lf t t iemal 1Iade th em y to sa p pO l1 t hi s .

I~ 16 . The Compensation Principle say s th a t in m ov ing from au ta rky to f re e inte rna tio na l trad e(a ) it .is.necessary to -c om pe ns ate th e l-o se rs .(b ) th e ga ins and lo s se s exac tly c om pensa te each o th e r .( c }. . . .th e lo se rs lo se m ore th an th e w inne rs ga in.( g ) th e w inne rs w in m ore th an th e lo se rs lo se .(e ) th e na tion a s a w ho le ga ins , e ven if ev e ry ind iv id u a l lo se s .

i 17. The Stolper-Samuelson theorem say s th a t a f te r tw o na tio ns m ov e f rom au ta rky to free trad e(a ) ev e ry c itizen o f b o th na tio ns b ecom es b e tte r o ff .(b ) ev e ry c itizen o f b o th na tio ns b ecom es w orse o f f .(c ) ow ners o f th e sca rce fa c to r in b o th na tions be com e b e tte r o f f . ow ners o f th e ab u ndant fa c to r in b o th na tions b ecom e b e tte r o f f .(e ) c apita lis ts in b o th na tio ns b ecom e b e tte r o f f .(f) la b o re rs in b o th na tio ns b ecom e b e tte r o f f

18 . The "L eontie f Pa ra dox" re fe rs to th e su rpris ing em piric a l o b se rva tio n in 1951 t ha t(a ) sm all na tio ns ga in m ore f rom trad e th an la rge na tio ns .(b ) th e v a lu e o f U S im po rts w as grow ing fa s te r th an th e v a lu e o f U S expo rts .(c ) in th e S o v ie t U nion w eakening th e ru b le cau sed an inc re a se in th e Cu rrent a c co unt

defici t .(d ) th e co st to consum ers o f pro tec ting jo b s in th e au to j ndu stry is m uch grea te r tha n th e

w ages ea rned in th e sav ed jo b s .G ) U S im po rts w ere m ore capita l intensiv e th an U S expo rts .

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-19. A maj or difference between a tari ff and a quota is that a tariff

(a) will reduce imports, but a quota generally will not.(b) can easily be repealed, but a quota cannot.@ typically generates ta~vel!ue, while a quota does not.m reduces the ability of foreigners to buy a nation's exports, while a quota does not.(e) FALSE. There is no significant difference between tariffs and quotas; this is

demonstrated by the fact that they can be made mathematically equivalent in a diagram.20 . If the US were to remove all tariffs and quotas on imported sugar, then

~ consumer surplus would be unaffected.~ consumer surplus would increase.(c) producer surplus would be unaffected.(d) producer surplus would increase.(e) the su m of producer and eon sum er s urpl us wou Id decrease.

v 21. The main significance of economies of scale for international trade theory is that....t provides another reason, in addition to factor endowments, for specialization and trade.(b) it provides an argument against free trade.(c) it shows why, when trade is opened lip among nations, a few large firms take overeverything,(d) it shows why nations with low wages end up producing products developed in the rich

world.J 22. The effective rate ofprotection of a tarrwill be greater than the nominal rate of protection if

~ the product being protected is made entirely with domestic inputs.Q i) the product being protected is made mostly with imported goods that have no tariffs.(c) the product being protected is subject to economies of scale.(d) FALSE. The effective rate of protection refers to how a quota can be made

mathematically equivalent to a tariff.~ 23. Wh ich of the following best sums up the effects of a subsidy compared to the effects of a

tariff? ---(a) There are no deadweight losses due to higher domestic costs with a subsidy.(br-Strbsid ies-haveno-trade distortirrg'tm pact.~ Ulere--is ne-ti-i#ereH@4>etweeo-sub&id.ies.an4-tru:iffs.(S) There is no deadweight loss due to lost consumption with subsidies, but there is also no

government revenue ..j 24. What is the connection between domestic farm price supports and agricultural trade barriers?

(a) They both protect domestic consumers from lower quality foreign food.(b) They both increase the average real income of Americans. If you have domestic price supports you also need trade barriers; otherwise foreign

producers will be attracted by the high prices, and the increased supply will defeat thegoal of higher farm prices.

(d) There is no connection. Farm price supports arc domestic policy, while trade barriers arepart of foreign policy.

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25. Which of the following best expresses the "infant industry" argument? Even when a nation has a potential comparative advantage in some area, a young firmmay need to go through a costly "learning by doing" stage, during which it needs to beprotected if it is to survive.

(b) Most new businesses are profitable in the first few years, and this can be guaranteed by aprotective tariff.

(c) Infant industries appear to be innocent, but they are really instruments of exploitationused by international capitalists that grow to be multinational conglomerates.(d) It is a good idea to focus on producing products used by infants because this will

guarantee future markets for all sorts of goods as these infants grow to be adults.

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26. The US experience with voluntary export restraints (YERs) on Japanese car makers in the1980s suggests that trade restrictions(a) significantly increase the number of jobs available in the importing nation.(g) are effective in protecting certain selected jobs, but at a high cost to consumers.(c) are effective in protecting certain selected jobs, and the cost to consumers is insignificant.(d) are completely ineffective in protecting jobs.(e) benefit the importing nation as a whole, even if all individuals with in the nation lose fromthem.

27. A nations overall balance of international payments(a) balances only in equilibrium.(b) is balanced only when the exchange rate is appropriately adjusted.@ is always in balance by definition.(d) can not ever be in balance in the real world.

28. Which of the following is a credit in the US balance of payments? ~ > The sale of an airliner to a Japanese airline.(b) A Salvadorian working in a US restaurant sends money home to his f ami ly .(c) A US bank pays interest to a European with a US saving account.(d) The US government buys Argentine government securities.(et-A-H~o-f-t-he--alJove.

29. If a nation's GDP grows faster than the GDP of its trading partners, all other things beingequal we would expect to see the nation to have(a) a growing trade surplus.(E ) a growing trade deficit.(c) balanced trade.(d) an overall balance of payments deficit.(e) an overall balance of payments surplus.

30. How is it possible for a nation to absorb more goods and services than it produces?(a) It is not possible.(b) It must save more than it invests.(c) It must produce more than it saves.(d) The government must take control of production. ' ) ) Itmust borrow, draw down savings held in foreign accounts, or receive gifts from abroad.


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31. With floating exchange rates an increase in the foreign demand for US financial assets, suchas US government securities, would be expected to~ weaken the dollar.Q 1 ) strengthen the dollar.(c) have no effect on the strength of doliar.(d) be self-sterilizing.(e) cause many US banks to denominate their accounts in foreign currencies (the reverseEurodollar effect).

32. The spot foreign exchange rate is~ the rate at which one money can be exchanged for another on any given day.( b ) the exchange rate in a particular location, such as Zurich or London. These often differ.(c) is the premium paid to arbitrageurs who spot a discrepancy in the rates in t"WOor more

different locations.(d) the interest payment that is built into a currency swap. If you 'II spot me 100 Euros today

I'll gladly repay you 105 Euros a year from today.33. Theforward foreign exchange rate is(a) the exchange rate betv....en the dollar and a weighted basket of leading currencies, such as

the Yen, the Pound, and the Euro.(b) the rate established overnight in markets in different time zones. This becomes the

starting rate when exchanges open in the morning. For example London determines theforward rate for New York, while Tokyo determines the forward rate for London.

(c) the interest rate that is built into a loan of a foreign currency.@an exchange rate agreed upon today that is to be paid at a specified date in the future.34. According to absolute Purchasing Power Parity, if one dollar exchanges for 100 Yen, and a

small computer costs $1200 in the U.S., in Japan the same computer should cost(a) 100(b) 1200 \~~O'C(c) 12,000(2 ) 120,000(e) Cannot determine from this information.

35. The underlying reason for expecting to observe Purchasing Power Parity isfa ) pe rsis te flt a ev ia tio Q s v io la te I~ 4F ru le s.

eviations create profit opportunities, which lead to arbitrage.herwise nations will have trade imbalances.e OJ~lyreason for.d~manding fOf~igncurr~~cy is to dem~nd foreign-goods.\ 9 9 there IS no reason; It IS an unexplained empirical observation.

\ 36. If US inflation rates are greater than European inflation rates we would expect to seeW the Dollar strengthen against the Euro.~ the Dollar weaken against the Euro.(c) no change in the Dollar/Euro exchange rate.(d) depreciation of the Dollar against the Euro in New York, but not in Europe.


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37. What is the theoretical reason for expecting to observe uncovered interest rate parity?c a . ) . The value ofa currency ultimately depends on the power of that currency to buy goodsand services.

(b) Differences in interest rates create an opportunity for profit; thus, people will move fundsfrom one country to another until interest rates are equal. For a given expected future exchange rate, differences in interest rates create anopportunity for profit; thus, funds will move to the high interest rate country changing thespot exchange rate until the total return on both countries' assets is equalized.

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43. The .l-curve refers to(a) the futility of devaluation as a 'way to reduce a trade deficit because of the willingness of

Japanese firms to accept lower profits. the empirical observation that a trade deficit tends to increase before decreasing, inresponse to a currency devaluation.

(c) the relationship between spot and forward exchange rates.(d) the impact of lower exchange rates on export sales due to imported inputs.

44. Depreci~tion ofa nation's curr~nc~' might "" b: effective ,in reduci~. ~_~"adedeficit if(a) foreign .demand fo~ th~ natlon.s e~ports ISh~ghly elastic. 11/ l(b) domestic demand for Imports IS highly elastic.@ domestic demand for imports is highly inelastic.(d) False. Depreciation will always reduce a deficit.(e) False. There is no reason to expect depreciation to reduce a deficit in the first place.

J 45. Which one of the following is an advantage of floating exchange rate system?e monetary authority has control over the domestic money supply.change rate stability.mination of large financial flows due to arbitrageurs and speculators.(clj---l'[ ade dctkits are tmpossible.

46. Which one of the following is an advantage of a fixed rate exchange system based on a gold~d?~~tle monetary authority has control over the domestic money supply.~ Exchange rate stability.~ Freedom from inflation or deflation originating abroad.ttl) The value of currencies remains at the Purchasing Power Parity level.

47. Which of the following is a drawback to a fixed exchange rate system?(a) It only works with a complete set of price and wage controls.~ It makes international business riskier and more complicated.'W It requires the government to maintain suff icient reserves of generally acceptable assetsin order to defend the fixed rate.(d) It requires that a nation's money b e backed by gold.

48. Central banks practice sterilization when they(a) change the discount rate in the opposite direction of bank rates in order to cancel interest

rate changes cause by foreign lending or borrowing.) increase the required reserve ratio so that banks are unable to lend any further.() counteract monetary flows caused by trade imbalances in order to keep the domesticmoney supply at some desired level.

(d) run all coins and bills that have been in general circulation under ultra-violet lamps.'" 49. Which of the following is an advantage to the US of running a current account deficit?r . a ) The unemployment rate is lower.

(b) The economy is stimulated by higher prices.~The- U S iltcreases-its-future elafm.s-(-}fl-fflr-e-igfl--Ettttput.

The US enjoys a higher standard of living than i t produces.(e) There is no advantage to a current account deficit.

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~!50. According to the Classical Adjustment Mech .trade surplus would acquire reserves th an.lsm, under the Gold Standard a nation with as, us causing(a)-sa-appreciating exchange rate.(b) fldepreeiating exchange rate.( S ) an increased money suppl .. .(d) . .. . y, nSIn.gprices, and a decreasing surplusan Increased money su I f II" ..( ). d. ppy, amg prices, and an increasing surplus

e Increase wealth .. GddFor possible partial credit (up to lpt. per question.)Choose up to ten questions and justify ..Suggested strategy. (I) Cho .. youthranswer. (On this page and the back if.needed.). .ose questions at you are not f his iyou get a question right you get the full f .. b very sure a . T IS IS not extra credit. Ifaround the definition of a concept a . mnl _ P O I ? t S ut no more. (2) Some questions revolveidentify the relevant concept. State~: : : X I~~tlon of a conce~t. In ~hese questions try toyou cannot defend you answer positivel imtion. S~ow how It applies or does not apply. (3) Ifeliminated the other possibilities (4) If~h use a n~gatlve approach, i.e., explain why youyou think this is so. . e question seems unclear or ambiguous, explain why

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