In the floating exchange rate system, government officials must intervene in the foreign
exchange market to keep the exchange rate from fluctuating.
Answer:
The official settlements balance is the sum of the capital account balance and the public
current account balance.
Answer:
The Montreal Protocol bans international trade in endangered species.
Answer:
Evidence suggests that depth and speed of reforms did not matter for the success of
transition in the formerly socialist countries.
Answer:
A competitive producer supplies an additional unit of a good as long as the price is
greater than the per unit cost.
Answer:
The WTO does not permit any deviation from the MFN principle, even for the
developing countries.
Answer:
Triangular arbitrage does not cause the cross rate between two foreign currencies to be
consistent with the dollar exchange rates of these two currencies.
Answer:
The community indifference curves illustrate the technological capabilities of a country.
Answer:
The law of one price does not hold closely for most products that are traded
internationally, including nearly all manufactured products.
Answer:
Purchasing power parity theory is a better guide to short-run movements in exchange
rates than to long-run movements in exchange rates..
Answer:
According to the Rybczynski theorem, in a two-good world, with constant product
prices, growth in a country’s endowment of any one input results in an increase in the
production of the good which does not use this input intensively.
Answer:
An unhedged international investment has a speculative element to it, and it is called a
covered international investment.
Answer:
Although financial capital is relatively mobile as an input, it is subject to a ‘home bias’
in which people prefer to invest within their own country.
Answer:
An increase in individual income will lead to an inward shift of the demand curve for a
commodity.
Answer:
In a two-commodity world, balanced growth in a country always decreases its
willingness to trade because the country becomes self-sufficient in the production of
both the goods.
Answer:
The one-dollar, one-vote metric implies that every dollar of gain or loss is just as
important as every other dollar of gain or loss, regardless of who the gainers or losers
are.
Answer:
As of 2011, which of the following Balkan states was closest to qualifying for EU
membership?
a. Serbia
b. Bosnia
c. Croatia
d. Albania
Answer:
The figure given below illustrates the impact of an export subsidy as imposed by a large
country. No imports are permitted.
The production effect of the export subsidy is shown by area(s):
a. b.
b. d.
c. (d + i + j).
d. (b + f + g).
Answer:
The figure given below represents the domestic market for wheat in a small country.
Imports of wheat are prohibited.
The cost to the government of paying the subsidy is:
a. $1.2 billion.
b. $3 billion.
c. $600 million.
d. $2.2 billion.
Answer:
Which of the following countries was refused a second installment of its loan from the
IMF in late 1990s for not meeting the conditions for fiscal reform as determined by the
IMF?
a. The United States
b. Thailand
c. Mexico
d. Russia
Answer:
Consider a country that has an official settlements balance surplus and is experiencing
upward pressure on the exchange rate value of its currency. Which of the following will
NOT be true in this context?
a. The central bank of this country must intervene to buy foreign currency and sell
domestic currency.
b. Its balance sheet will show an increase in official international reserve holdings.
c. Its balance sheet will show an increase in its liabilities.
d. For the regular bank that is involved in the intervention transaction, the central bank
decreases the bank’s deposits at the central bank.
Answer:
Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S.
dollar. However, the present situation in the foreign exchange market is conducive for
the British pound to depreciate with respect to the U.S. dollar. A fully sterilized
intervention in the foreign exchange market by the British government is expected to
cause:
a. the British money supply to fall.
b. the British money supply to rise.
c. the British money supply to remain unchanged.
d. Britain to gain official international reserves.
Answer:
Using actual market exchange rates and comparable short-term interest rates for the
major currencies:
a. uncovered interest parity is easier to test than covered interest parity.
b. we see that covered interest parity holds better between the currencies of countries
that impose broad capital controls.
c. we see that deviations from uncovered interest parity occur only during times of
crisis.
d. we see that covered interest parity usually holds well.
Answer:
The law of one price works better if:
a. transportation costs for the product are close to zero.
b. there is incomplete information.
c. there are few buyers and sellers.
d. the governments of the trading countries implement adequate trade barriers.
Answer:
Which of the following statements reflects a situation in which there are external
benefits?
a. John paints his house and cleans his paintbrushes in the stream.
b. John pays 5 percent of his income as taxes.
c. John’s decision to get vaccinated for smallpox reduces the chances that his neighbor
Pete will get smallpox.
d. John sells his car to his neighbor Pete at half the first-hand price.
Answer:
In the short-run, following the opening of trade:
a. workers in the country can change jobs but will receive the same wage.
b. workers will suffer from lower wages but land owners will benefit from higher rents.
c. all groups tied to declining sectors of the economy will suffer from lower returns.
d. gross output remains constant.
Answer:
The figure given below shows the post-trade production and consumption points in
country Y. AB is the production-possibility curve of country Y. I1 is the community
indifference curve of country Y. Country Y imports:
a. 40 gallons of wine.
b. 60 pounds of cheese.
c. 50 gallons of wine.
d. 80 pounds of cheese.
Answer:
Monetary policy is most effective in influencing aggregate demand:
a. under a freely floating exchange-rate system.
b. under a fixed exchange-rate system with sterilization.
c. under a fixed exchange-rate system without sterilization.
d. when there is low capital mobility.
Answer:
In the figure given below AB is the production-possibility curve of Canada. In the
absence of trade, the price ratio is 1 bushel of wheat/bale of cotton as shown by the line
PQ. The international price ratio is 0.25 bushels of wheat/bale of cotton as shown by the
line RS. I1 and I2 are the pre-trade and the post trade community indifference curves of
Canada respectively. After Canada engages in free trade, it will import:
a. a. 60 bales of cotton.
b. b. 40 bales of cotton.
c. c. 30 bushels of wheat.
d. d. 80 bushels of wheat.
Answer:
During the Great Depression in the 1930s, world prices of most primary products
plummeted. This caused many countries to turn toward:
a. exporting manufacturing goods.
b. importing agricultural goods.
c. import-substituting industrialization.
d. exporting agricultural goods.
Answer:
The monetary approach predicts that an increase in the money supply by 12 percent in
both China and Thailand will:
a. result in an appreciation of the Thai baht against the Yuan.
b. result in a depreciation of the Thai baht against the Yuan.
c. have no effect on the baht per Yuan exchange rate.
d. lower the volume of trade between Thailand and China.
Answer:
A(n)_____ is a tax on imports that is stipulated as a money amount per unit.
e. specific tariff
f. ad valorem tariff
g. effective tariff
h. optimal tariff
Answer:
Explain why very few of the many international commodity cartels that have been
formed since World War I have survived.
Answer:
What kind of progress was made by developing countries to break into world markets
for their exports of manufactures?
Answer:
Suppose that the dollar-yen spot exchange rate is $0.05/ and the 90-day forward
exchange rate is $0.06/. Assuming that covered interest parity holds, are Japanese
interest rates higher or lower than U.S. interest rates? Explain why.
Answer:
‘A country that initially has a floating exchange rate and a high inflation rate can use a
shift to a fixed exchange rate as part of its effort to lower its inflation rate.’ Is the
statement correct? Why or why not?
Answer:
Why is our ability limited in using economic fundamentals to predict exchange rate
movements for short periods into the future? Why is there some success in predicting
exchange rates in the long run?
Answer:
In your opinion do government policies to stabilize real domestic production have a
larger role to play in the IS-LM-FE model or in the monetary approach to the balance of
payments? Why? (Note: This question is an extension of the analysis. It is not covered
explicitly in the book.)
Answer:
In the presence of free trade, how are the effects of economic growth different for a
large country than for a small country?
Answer:
With free trade the United States imports about half of its steel consumption from
Brazil. What would be the impact on the United States of an export subsidy on steel
provided by the Brazilian government? Would it be beneficial for the U.S. if they
impose an equal amount of countervailing duty on the import of steel? Why or why
not?
Answer: