27) Which of the following is a reason the European Union is considered an imperfect economic
union?
A) Factors of production are not allowed to move freely between member countries.
B) Not all members of the union have adopted the euro.
C) Almost all markets are heavily regulated.
D) Products and services are not allowed to move freely between member countries.
28) The move toward economic union raises the issue of how to make a coordinating bureaucracy
accountable to the citizens of member nations. Which of the following offers a solution to this
problem?
A) a common market
B) a free trade area
C) a customs union
D) a political union
29) ________ has no barriers to trade between member countries, includes a common external
trade policy, and allows factors of production to move freely between members.
A) An economic union
B) A common market
C) A customs union
D) A full political union
30) ________ entails even closer economic integration and cooperation than a common market.
A) A customs union
B) A free trade area
C) An economic union
D) A political union
31) Country X and Country Y reach an agreement to boost bilateral trade. They agree to remove all
barriers to the trade of goods and services. They, however, are free to determine their own trade
policies with regard to nonmembers. Which level of economic integration is this an example of?
A) a customs union
B) an economic union
C) a common market
D) a free trade area
32) Which feature of a customs union differentiates it from a free trade area?
A) harmonization of members’ tax rates
B) a common currency
C) a common external trade policy toward nonmembers
D) ability of factors of production to move freely between members
33) Three countries agree to remove barriers to trade between member countries and adopt a
common external trade policy toward nonmembers. They also agree to allow people and other
factors of production to move freely across their borders. Which level of economic integration is
this an example of?
A) bonded market
B) customs union
C) free trade area
D) common market
34) ________ eliminates trade barriers between member nations, adopts a common external
policy, and permits factors of production to move freely between member countries but it also
requires a common currency, harmonization of members’ tax rates, and a common monetary and
fiscal policy.
A) A free trade area
B) A common market
C) An economic union
D) A customs union
35) Linking neighboring countries economically and making them interdependent
A) increases the potential for violent conflict.
B) creates increased political tensions.
C) leads to dilution of cultures.
D) creates incentives to increase political cooperation as well.
36) Why doesn’t Great Britain use the euro as its national currency?
A) It would have to convert its economic structure to the euro.
B) It would have to relinquish control of its monetary policy to the EU.
C) It would have to change its financial markets operations.
D) It would have to obtain approval from the U.S. Federal Reserve.
37) A political benefit of economic integration is that it
A) enables participants to achieve gains from the free flow of trade.
B) enables participants to achieve gains from the free flow of investment.
C) allows countries to specialize in the production of goods and services that they can produce
most efficiently.
D) reduces the potential for violent conflict.
38) Which of the following explains why economic integration has never been easy to achieve or
sustain, despite the strong economic and political arguments in support?
A) No country has shown significant improvement because of economic integration.
B) Countries fear a reduction of their political weight in the world because of economic
integration.
C) Linking neighboring economies and making them increasingly dependent on each other creates
little incentive for political cooperation.
D) While a nation as a whole may benefit significantly, certain groups may lose.
39) ________ occurs when high-cost domestic producers are replaced by low-cost producers
within the free trade area.
A) Trade deficit
B) Trade diversion
C) Trade creation
D) Trade distortion
40) Which of the following occurs when lower-cost external suppliers are replaced by higher-cost
suppliers within the free trade area?
A) efficiency gain
B) trade diversion
C) trade deficit
D) trade creation
41) Country A and Country B entered into a free trade agreement recently. After this, Country A
starts importing heavy machinery from Country B. Country A previously imported such
machinery at lower rates from another country. Which of the following has occurred in this
scenario?
A) trade creation
B) efficiency gain
C) trade deficit
D) trade diversion
42) To ensure that a free trade agreement does not result in trade diversion, which of the following
has to come within the scope of the WTO?
A) nontariff barriers
B) services
C) energy markets
D) tax rates
43) ________ may also occur when higher-cost external producers are replaced by lower–cost
external producers within the free trade area.
A) Trade creation
B) A customs union
C) Trade diversion
D) A common market
44) Which of the following is a concern of some economists regarding regional integration?
A) The benefits of regional integration are determined by the extent of trade diversion.
B) The benefits of regional integration may have been oversold, while the costs have been ignored.
C) A regional free trade agreement will benefit the world only if the amount of trade it diverts
exceeds the amount it creates.
D) The costs of regional integration will be exceedingly high with little chance that the benefits
will outweigh the costs.
45) In theory, WTO rules should ensure that a free trade agreement
A) does not result in trade creation.
B) does not result in trade diversion.
C) results in trade creation.
D) results in trade diversion.
46) The European Community was established by the
A) Treaty of Rome signed in 1957.
B) Maastricht Treaty signed in 1992.
C) Maastricht Treaty of 1994.
D) Single European Act of 1987.