International Economics (Mcgraw-Hill Series in Economics) 16th Edition

Chapter 1 International Economics Is Different Overview The introduction to the subject of international economics has three major purposes: 1. Show that international economics addresses important and interesting current events and issues. 2. Show why international economics is special. 3. Provide a broad overview of the book. We begin with four controversies that show the importance of

Suggested answer to case study discussion question Trade Is Important: For most countries during the past several decades, trade has become more important in the economy. A countrys total international trade (exports and imports) has risen as a percentage of national GDP for most countries. Whatever the effects of international trade,

Chapter 10 Arguments for and against Protection Overview This chapter has three purposes: To present a framework and a rule for evaluating arguments offered in favor of limiting imports, to apply the framework and rule to several prominent arguments for protection, and to examine the political processes that result in government policies toward

Suggested answer to case study discussion question How Sweet It Is (or Isnt): For a U.S. company that makes jelly beans in the United States, U.S. policies that limit sugar imports increase sugar prices and raise the cost of obtaining the key input into its production. The U.S. firm would like

Chapter 11 Pushing Exports Overview Chapters 8 through 10 focused on government policies toward imports, with little attention to government policies and business practices in the exporting countries. This chapter shifts to looking at various practices and policies that can increase exports, as well as the effects of these export-promoting activities on importing

Suggested answers to case study discussion questions Antidumping in Action: American steel firmsreacted to increasing steel imports in 2013 by filing a number of new dumping cases. There are at least two reasons that most of these cases would not lead to the imposition of antidumping duties. First, the American steel

Chapter 12 Trade Blocs and Trade Blocks Overview This chapter examines two types of trade barriers that are intended to discriminate between foreign countries. A trade bloc has lower or no barriers for trade between its members, while they maintain higher barriers for trade with outside countries. A trade embargo or trade block places

Suggested answer to case study discussion question Postwar Trade Integration in Europe: The EU had 28 member countries as of 2014. There are four groups of countries that could be candidates the join the EU. First, there are several relatively high-income Western European countries, including Switzerland, Norway, and Iceland, that are

Chapter 13 Trade and the Environment Overview We begin the chapter with two provocative questions. First, is free trade anti-environment? We argue that it is not. There is no reason to think that trade generally promotes production or consumption of products that cause large harm to the environment. Surprisingly, the incentive to relocate

Suggested answers to end of chapter questions and problems 1. There are two effects. First, rising production and consumption bring rising pollution if the techniques used to produce and consume are unchanged. Second, rising income brings increased demand for pollution control because a cleaner environment is a normal good. As Figure

Chapter 14 Trade Policies for Developing Countries Overview This chapter examines trade issues affecting developing countries. It begins by noting differences between high-income developed or industrialized countries and low- and medium-income developing countries, as well as differences among the developing countries. Some developing countries are growing quickly, while others are stagnating or declining. The

Suggested answer to case study discussion question Special Challenges of Transition: The international economics of the situation probably favor a country like Ukraine reorienting itself toward the European Union. Ukrainian export producerswill benefit from better access to buyers in high-income European countries. Competition with productive firms and demanding buyers in these

Chapter 15 Multinationals and Migration: International Factor Movements Overview This chapter provides a survey of the economics of foreign direct investment (FDI) and the economics of labor migration. Foreign direct investment is a flow of funding provided by an investor (usually a firm) to establish or acquire a foreign company or to finance

Suggested answers to case study discussion questions CEMEX: A Model Multinational from an Unusual Place: CEMEX saw sufficient internalization advantages to conclude that CEMEX wanted to own its operations in Spain, Colombia, and the Philippines, rather than licensing local independent producers. Negotiating such licenses probably would have been costly, and the

Chapter 16 Payments among Nations Overview This chapter begins the discussion of international finance and macroeconomicsthe subject of the rest of the book. Its major purpose is to show how the balance of payments accounts for international transactions and how the different balances (or sub-balances) can be interpreted. It also presents the international

Suggested answers to end of chapter questions and problems 1. National saving (S) equals private saving plus government saving (or dissaving if the government budget is in decit). For this country, national saving equals $678 billion (or $806 $128). The current account balance equals the di'erence between national saving and

Chapter 17 The Foreign Exchange Market Overview The purpose of this chapter is to present the foreign exchange market and exchange rates, with an emphasis on spot exchange rates. Foreign exchange is the act of trading different countries' moneys. An exchange rate is the price of one money in terms of another. The

Suggested answers to case study discussion questions Brussels Sprouts a New Currency: : As a Japanese citizen, you start with Japanese yen. When you travel to each of these countries, you will need some local currency to spend during your travel. You are probably happy that the euro exists. Before the

Chapter 18 Forward Exchange and International Financial Investment Overview This chapter presents the uses of forward foreign exchange rates and the returns and risks of international financial investments, both covered and uncovered. It begins by noting that in many situations people or organizations are exposed to exchange rate risk, because the value of the

Suggested answers to case study discussion questions The Worlds Greatest Investor: Because Mr. Bessent expected that the yen was going to lose value during the next months, he wanted to establish positions in which he was short the yen. Here are some possible actions he could have taken to establish yen

Chapter 19 What Determines Exchange Rates? Overview Since the general shift to floating exchange rates in the early 1970s, exchange rates between the U.S. dollar and other major currencies have been variable or volatile. The charts at the beginning of the chapter suggest three types of variability. First, there are long-term trends in

Suggested answers to case study discussion questions PPP from Time to Time: In the 1950s and 1960s, the major countries had fixed exchange rates between their currencies, and these countries generally had rather low inflation rates. In this setting any deviations from PPP were rather small and slow to develop. Essentially,

Chapter 2 The Basic Theory Using Demand and Supply Overview This chapter indicates why we study theories of international trade and presents the basic theory using supply and demand curves. Trade is important to individual consumers, to workers and other factor owners, to firms, and therefore to the whole economy. The box Trade

Chapter 20 Government Policies toward the Foreign Exchange Market Overview The first half of this chapter examines types of government policies toward the foreign exchange market and provides analysis of government intervention and exchange controls. The second half examines the actual policies that governments have adopted during the past 145 years. Government policies toward the

Suggested answers to end of chapter questions and problems 1. In a clean oat, the government allows the exchange-rate value of its currency to be determined solely by private (or nonocial) supply and demand in the foreign exchange market. The government takes no direct actions to inuence exchange rates. In

Chapter 21 International Lending and Financial Crises Overview International capital movements can bring major gains both to the lending or investing countries and to the borrowing countries, through intertemporal trade and through portfolio diversification for the lenders/investors. But international lending and borrowing sometimes is not well-behaved financial crises are recurrent. This chapter examines both

Suggested answers to questions and problems 1. Disagree. Borrowing from foreign lenders provides a net gain to the borrowing country, as long as the money is used wisely. For instance, as long as the money is used to finance new capital investments whose returns are at least as large as the

Chapter 22 How Does the Open Macroeconomy Work? Overview This chapter provides a framework and model for analyzing international macroeconomics. We judge the performance of a national economy against two objectives. Internal balance involves both full employment and price stability or an acceptable rate of inflation. External balance involves a reasonable and sustainable

Suggested answers to end of chapter questions and problems 1. Mexico. The United States and Mexico have close trading ties, with most of Mexicos exports destined for the United States. If national production and income increase in the United States, the relatively large increase in Mexican exports to the United

Chapter 23 Internal and External Balance with Fixed Exchange Rates Overview This chapter presents the analysis of the macroeconomy of a country that has a fixed exchange rate. As noted in the introduction, this analysis is important because some countries currently have fixed exchange rates or floating rates that are so heavily managed

Suggested answer to case study discussion question A Tale of Three Countries: (a) If Germany had raised taxes in 1991, then the story probably would have turned out better. If Germany raised taxes, then more of the eort to restrain the excessive growth and overheating of the German economy would have

Chapter 24 Floating Exchange Rates and Internal Balance Overview This chapter presents the analysis of the macroeconomy of a country that has a floating exchange rate. If government officials allow the exchange rate to float cleanly, then the exchange rate changes to achieve external balance. With floating exchange rates monetary policy exerts strong influence on

Suggested answers to case study discussion questions Why Are U.S. Trade Deficits So Big?: First, if U.S. private saving decreases, then the United States will need additional financial capital inflows to fund the government budget deficit and domestic real private investment. With increased financial capital inflows, the trade deficit tends to

Chapter 25 National and Global Choices: Floating Rates and the Alternatives Overview This chapter provides a capstone to the discussion of international finance and international macroeconomics by examining the choice between fixed and floating exchange rates. Much of the discussion examines this choice from the point of view of a single country, but

Suggested answer to case study discussion question What Role for Gold?:Probably not. Internal balance is achieved by maintaining a reasonable level (and growth rate) of GDP so that the county has a reasonable (probably fairly low) unemployment rate and an acceptable (probably fairly low) rate of product price ination. Macroeconomic shocks hit a

Chapter 3 Why Everybody Trades: Comparative Advantage Overview This chapter extends the analysis of international trade to consider trade in a multiple-product economy. An economy composed of two products is useful to bring out insights about international trade. This general equilibrium approach explicitly shows the effects of resource reallocations between industries. The chapter

Suggested answer to case study discussion question Mercantilism: Older than SmithAnd Alive Today: Key features of mercantilism include that it places most value on domestic production and exports, that it deemphasizes domestic consumption and denigrates general imports of products, and that it views international trade as a zero-sum activity. The proponents

Chapter 4 Trade: Factor Availability and Factor Proportions Are Key Overview This chapter continues the analysis of international trade in a two-product economy. It picks up from the end of Chapter 3, where it was noted that the assumption of constant marginal cost and the implication that countries will completely specialize in producing

Suggested answers to end of chapter questions and problems 1. Disagree. The HecksherOhlin theory indicates that two countries will trade with each other because of dierences in their relative endowments of the various factors that are needed to produce the products. Each country will export products that use its relatively abundant factors

Chapter 5 Who Gains and Who Loses from Trade? Overview This chapter has two major purposes. First, it examines the implications for factor incomes of trade that follows the Heckscher-Ohlin (H-O) theory. Second, it examines the empirical evidence on the Heckscher-Ohlin theory and some of its implications. The implications of H-O trade for factor incomes

Suggested answer to case study discussion question The Leontief Paradox: Leontiefs results appeared to directly contradict the Heckscher-Ohlin theory. The United States, a relatively physical capital-abundant country and a relatively labor-scarce country, exported relatively labor-intensive products and imported relatively capital-intensive products. There are several di"erent scienti#c responses to such an empirical result.

Chapter 6 Scale Economies, Imperfect Competition, and Trade Overview Standard trade theory presented in Chapters 3-5 is based on perfect competition, with constant returns to scale at the level of the individual firm and constant or increasing cost of expanding production at the level of the industry. Comparative advantage predicts that countries will

Suggested answers to end of chapter questions and problems 1. Disagree. The HeckscherOhlin theory indicates that countries should export some products (products that are intensive in the countrys abundant factors) and import other products (products that are intensive in the countrys scarce factors). HeckscherOhlin theory predicts the pattern of interindustry trade.

Chapter 7 Growth and Trade Overview This chapter has two major purposes. First, it shows how the Heckscher-Ohlin model can be used to analyze economic growth and its impact on international trade. Second, it examines additional aspects of technological progress and its relationship to international trade. Growth in a country's production capabilities shifts the country's

Suggested answer to case study discussion question The Dutch Disease and Deindustrialization: There are several reasons that developments in energy products are prominent as examples of Dutch disease. First, the discovery of major new energy sources, especially new sources of recoverable oil and natural gas, is itself newsworthy. Second, the discoveries

Chapter 8 Analysis of a Tariff Overview This chapter starts the analysis of government policies that limit imports, by examining the tariff a government tax on imports. Early in the chapter, the first in a series of boxes on Global Governance introduces the World Trade Organization (WTO), created in 1995, which subsumed the General

Suggested answer to case study discussion question They Tax Exports, Too:There are a number of possible reasons that a country would limit the export of a product like cotton. First, if the government uses a tax, it would gain revenue. Second, the limit on exports would tend to force additional sales

Chapter 9 Nontariff Barriers to Imports Overview This chapter has four major purposes: 1. Present analysis of an import quota and a voluntary export restraint (VER), for both a small importing country and a large one. 2. Provide an overview of other nontariff barriers (NTBs) to imports. 3. Explore the relative sizes of the economic costs

Suggested answers to case study discussion questions VERs: Two Examples: In 1981 the U.S. government forced the Japanese government to impose a voluntary export restraint, so that total Japanese automobile exports in 1981 had to be 8 percent less than the total exports in 1980. The Japanese government told Honda (and

Free trade may lead to more pollution because: a. with free trade the size of the economy increases resulting in higher production and consumption. b. competition among nations invariably leads to less restrictive pollution standards. c. the countries may not specialize in the production of the goods in which they have comparative advantage. d.

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. If the countries engage in free trade, Beta will: a. import both food and drink. b. import

Fixed exchange rates are likely to be changed at some point over time. Answer: TRUE TRUE TRUE Firms in a given industry are affected by the tariff imposed on the product they sell, but not by the tariffs imposed on their purchased inputs. Answer: FALSE FALSE FALSE In a customs union, members remove all trade barriers among themselves

By mid-2014, the U.S. government had approved multiple LNG export facilities so natural gas exports from the U.S. have increased significantly. Answer: FALSE FALSE FALSE Tariffs and quotas are one-size-fits-all measures that work as tools to internalize external effects. Answer: FALSE FALSE FALSE The net economic gains from free trade are usually negative. Answer: FALSE FALSE FALSE Within a country, a tariff

In the floating exchange rate system, government officials must intervene in the foreign exchange market to keep the exchange rate from fluctuating. Answer: FALSE FALSE FALSE The official settlements balance is the sum of the capital account balance and the public current account balance. Answer: FALSE FALSE FALSE The Montreal Protocol bans international trade in endangered species. Answer: FALSE FALSE FALSE Evidence suggests

The infant industry argument is valid if the present value of the stream of national benefits is less than the present value of the stream of national costs. Answer: FALSE FALSE FALSE Banks open branches in countries where profits are taxed less and their books of accounts are less scrutinized. Answer: TRUE TRUE TRUE A foreign resident increasing

NAFTA has not only eliminated all tariffs and nontariff barriers to trade within the member countries but also allows free human migration across the countries. Answer: FALSE FALSE FALSE A large amount of intra-industry trade is not compatible with the comparative-advantage theory of trade. Answer: TRUE TRUE TRUE Arbitrage is the act of buying at one place and

Assume that a large capital-abundant country trades only two goods with the rest of the world, medical equipment and corn. Medical equipment is relatively capital-intensive. An increase in the country's endowment of capital will cause the price of medical equipment relative to the price of corn to: a. rise. b. fall. c. stay

The impact of economic growth on a country's willingness to trade is determined solely by the extent of the shift of its production-possibility curve. Answer: FALSE FALSE FALSE Hedging a position exposed to exchange-rate risk is the act of reducing or eliminating a net asset or net liability position in the foreign currency. Answer: TRUE TRUE TRUE Internal

The value of price elasticity of demand for a normal commodity is negative because it indicates: a. the inverse relationship between the price and the quantity demanded for the commodity. b. that the value of the consumer surplus is negative for a normal good. c. that the changes in quantity demanded are much

A rise in the domestic product of an economy deteriorates its current account balance. Answer: TRUE TRUE TRUE Increases in a country's endowments of factors of production increase current output, but do not contribute to long-run economic growth. Answer: FALSE FALSE FALSE If Canada has a current 90 day forward exchange rate value for its currency that is

In a two-country two-commodity model, if a country has higher labor productivity in producing both the goods, it must produce and export both the goods to the other country. Answer: FALSE FALSE FALSE The production effect of a tariff measures the welfare gain of domestic producers who can sell their product at a higher

Suppose the dollar per pound exchange rate is $2 per pound while the dollar per Swiss franc exchange rate is 50 cents per franc. From the given information we can conclude that the Swiss franc per pound exchange rate is: a. 1 franc per pound. b. too low. c. too high. d. 4 francs

The figure given below represents the domestic market for wheat in a small country. Imports of wheat are prohibited. Following the imposition of a $20 per bushel export subsidy to the country's wheat exports, the country consumed _____ bushels of wheat, and exported _____ bushels of wheat. a. 40; 110 b. 60; 90 c.

Political risk is the possibility that the government of the host country will alter its policies in ways that harm the multinational enterprise. Answer: TRUE TRUE TRUE Contractionary monetary policy will shift the LM curve to the right. Answer: FALSE FALSE FALSE The net national gain from trade can be measured by the change in consumer and producer

Which of the following arises when the knowledge that IMF rescue packages are possible leads lenders to be less careful about their international lending practices? a. Global contagion b. Moral hazard c. Debt overhang d. Debt restructuring Answer: B B B Which of the following is true of the developing countries a. Almost half of the exports by developing

Which of the following was a criterion to participate in the European Monetary Union? a. The country's inflation rate must be less than or equal to 1.5 percentage points above the average inflation rate for the three lowest inflation EU countries. b. The country's budget deficit must be lesser than 10 percent

Most or all of the mark-up revenue from a quota will be captured by the government if the government auctions off import licenses. Answer: TRUE TRUE TRUE New technology developed by a multinational corporation in one of its research facilities in a leading developed country can be transferred within the corporation to the affiliates in

Small open economies are probably more vulnerable to contagion than large and relatively closed economies. Answer: TRUE TRUE TRUE Relatively high costs of converting natural gas to LNG will increase the price of natural gas in the U.S. and reduce consumption of natural gas in the U.S. Answer: FALSE FALSE FALSE It has been observed that trade within MERCOSUR

The price elasticity of demand measures the responsiveness of consumers to changes in the price of a product. Answer: TRUE TRUE TRUE If a country's currency is a reserve currency, then intervention in the foreign exchange market to maintain a pegged exchange rate is unnecessary. Answer: FALSE FALSE FALSE Research supports the claim that there are significant compliance

Assume a country that produces only cloth and paddy. Cloth production requires significant amounts of labor and capital, but relatively less land. Assume that paddy production requires relatively less labor and capital, but relatively large amounts of fertile arable land. If there is an increase in the country's endowments of

A country's balance of payments records: a. the prices that a country pays for its imports and the prices that the country receives for its imports. b. the flows of value between that country's residents and residents of the rest of the world during a period of time. c. capital gains and losses

In Heckscher-Ohlin theory, differences in _____ across countries are considered to be the basis for comparative advantage. a. consumer tastes and preferences b. factor endowments c. production technologies d. economic freedom Answer: B B B The table given below shows the number of labor hours required to produce 1 umbrella and 1 bushel of corn in the U.K.

Suppose country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'w' is the wage rate

While international trade will benefit both the importing and exporting country in a two-country world, the gains from trade in the exporting country must be greater than the gains from trade in the importing country. Answer: FALSE FALSE FALSE Free trade can be expected to cause a decrease in the real incomes of the

Which of the following is true of mercantilism? a. Mercantilists believed that free trade is always beneficial for the trading nations. b. Mercantilists believed that under free trade each of the trading countries benefit equally. c. Mercantilists believed that a nation does not benefit directly from its exports. d. Mercantilism believed that national well-being

According to the factor-price-equalization theorem, free trade between any two countries equalizes: a. product prices as well as the prices of individual factors of production between the countries. b. product prices between the countries but not the prices of individual factors of production. c. product prices between the countries and factor prices within

In the absence of trade, a country produces at a point where its production-possibility curve is tangent to the highest possible community indifference curve. Answer: TRUE TRUE TRUE If markets are perfectly competitive, the free-trade price of a good in an importing country is expected to be lower than the pre-trade price of the

Making effective monetary policy for the euro zone should be a relatively easy task for the European Central Bank (ECB) since the euro member countries are very similar. Answer: FALSE FALSE FALSE Just before the Asian crisis, Thailand had large current account deficits. Answer: FALSE FALSE FALSE Monetary policies adopted by a country do not affect its trading

A country's nonofficial financial account balance equals its net foreign investment. Answer: FALSE FALSE FALSE The Bretton Woods conference led to the creation of the International Monetary Fund (IMF). Answer: TRUE TRUE TRUE The assignment rule says that, with fixed exchange rates, fiscal policy should be used to stabilize the balance of payments and monetary policy should be used

The figure given below shows the market for shoes in the U.S. The domestic price line with tariff lies above the international price line. Dd and Sd are the domestic demand and supply curves of shoes respectively. The tariff revenue of the U.S. government is shown by area _____. a. a b. (a

In 2010, _____ dollarized to escape from hyperinflation. a. Zimbabwe b. Argentina c. El Salvador d. Palau Answer: A A A The figure given below represents the U.S. market for steel imports from Korea. The Korean government provides an export subsidy of $25 per ton, and Korean firms use the subsidy to reduce their export price to the

Suppose that the training, skills, and attitudes received by employees in the computer gaming development industry have positive spillover effects as workers leave the industry and move to other jobs. The specificity rule suggests that the best way to achieve more employment in this industry is to: a. impose a tariff

The figure given below shows the market for computers in the U.S. The domestic price line inclusive of the tariff lies above the international price line. Dd and Sd are the domestic demand and supply curves of computers respectively. Under free-trade the U.S. imported _____ computers, but following the imposition of

Adam Smith's theory of absolute advantage is based on the labor theory of value. Answer: TRUE TRUE TRUE Since the 1980s, the United States has been the dominant net lender in the world. Answer: FALSE FALSE FALSE From 2004 to 2014, global foreign exchange trading more than doubled. Answer: TRUE TRUE TRUE In a currency swap two parties agree to exchange flows

World Trade Organization rules allow a government to take actions to control environmental damage caused by its own firms' production. Answer: TRUE TRUE TRUE According to the Heckscher-Ohlin theory, if the proportion of labor to capital in a country is greater than the proportion of labor to capital in the rest of the world,

The formation of a trade bloc necessarily improves well-being worldwide because it is a step toward free trade. Answer: FALSE FALSE FALSE In the long run, a country with a relatively high inflation rate tends to have a depreciating currency. Answer: TRUE TRUE TRUE Externalities are direct benefits or costs accruing to individuals or groups of individuals who were

In an economic union, member countries do not have free flow of factors of production but have a common internal policy. Answer: FALSE Answer: FALSE Answer: FALSE A bank deposit in Germany denominated in euros is a Eurocurrency deposit. Answer: FALSE Answer: FALSE Answer: FALSE Intra-industry trade in differentiated products is negligible between countries that are

In the Plaza Agreement, the United States agreed to reduce its fiscal deficit. Answer: FALSE Answer: FALSE Answer: FALSE If additional domestic production will lead to positive spillover effects, then an import tariff that increases domestic production would better adhere to the specificity rule than would a government subsidy to domestic production. Answer:

Which of the following theories correctly predicts that a country will export those goods that use the country's abundant factor(s) intensively and import those goods that use the country's scarce factor(s)? a. a. The theory of absolute advantage b. b. The theory of comparative advantage c. c. The Heckscher-Ohlin theory d. d. The theory

International capital-flow shocks tend to be less disruptive with floating exchange rates than with fixed exchange-rates. Answer: FALSE FALSE FALSE Too much of a good is produced if some external benefits of producing or consuming it are ignored by the private decision makers. Answer: FALSE FALSE FALSE Gains from joining a trade bloc will be higher if the

Which of the following indicates the difference between the volume of exports and imports of a product? a. Net trade b. Intra-industry trade c. Total trade d. Terms of trade Answer: A A A Suppose the domestic supply (QS U.S.) and demand (QD U.S)for bicycles in the United States are given by the following set of equations: QS U.S.

The table given below shows the number of labor hours required to produce 1 umbrella and 1 bushel of corn in the U.K. and the Rest of the World. Which of the following statements is true? a. The United Kingdom has a comparative advantage in the production of corn. b. The United

A central bank can sterilize the increase in the money supply that results from an intervention to defend a fixed exchange rate by selling domestic government bonds. Answer: TRUE Answer: TRUE Answer: TRUE Proposals for reform of antidumping policy include restricting its use to cases where predatory dumping is plausible, accounting for consumer

Foreign Direct Investment (FDI) refers to: a. the flow of funding provided by an investor or lender to establish or acquire a foreign company or to expand or finance an existing foreign company that the investor owns and controls. b. the hot money that an investor needs to get registered in a foreign

Everything else remaining unchanged, the effect of domestic spending shocks on a country with a floating exchange rate differs depending on: a. whether sterilized intervention is used or not. b. the mobility of capital across countries. c. the current trade balance situation of the country. d. the interest rate differential between the country and

An increase in government spending will: a. shift the IS curve to the left. b. shift the IS curve to the right. c. increase the slope of the IS curve. d. shift the LM curve to the right. Answer: B B B Assume a two-country two-good two-input model where the following relationships hold: (K/L)U.S. > (K/L)ROW (K/L)automobiles > (K/L)shoes

Unlike a tariff, quotas do not allow domestic monopolists to assert their monopoly pricing powers. Answer: FALSE FALSE FALSE Forward exchange contracts are used for hedging but not for speculating. Answer: FALSE FALSE FALSE In a two-country two-good model, the opening of trade will necessarily lead to complete specialization in the production of one good by one country

_____ purchasing power parity states that a bundle of tradable products will have the same cost in different countries if the cost is stated in the same currency. a. Full b. Partial c. Relative d. Absolute Answer: D D D Under a floating exchange rate regime with a low degree of capital mobility, if the domestic government uses

Monetary policy under a fixed exchange rate regime will be: a. more effective than fiscal policy. b. more powerful with high capital mobility than with low capital mobility. c. likely to cause large and persistent deficits. d. constrained and relatively ineffective. Answer: D D D The covered interest differential is _____ the sum of the forward premium on

Under a floating exchange rate system, an increase in the international demand for electronic appliances manufactured in Japan will result in: a. Deflation in the Japanese economy. b. An increase in Japan's trade deficit with other countries. c. An appreciation of the yen vis--vis other currencies. d. A depletion of international reserves held by

A major reason why agricultural products are heavily subsidized in the European Union is because farmers have strong political lobbies. Answer: TRUE TRUE TRUE With floating exchange rates, the negative effects of international trade shocks on internal balance are worsened by the effects of the resulting change in the exchange rate. Answer: FALSE FALSE FALSE Speculating in a position