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:
A large amount of intra-industry trade is not compatible with the
comparative-advantage theory of trade.
Answer:
Arbitrage is the act of buying at one place and selling at another place in order to profit
from the price differences that exist between the two places.
Answer:
Members of a free trade area not only remove barriers among themselves but also
engage in free trade with the non-member countries.
Answer:
Expansionary fiscal policy will cause the IS curve to shift to the right.
Answer:
The key to the assignment rule is that one powerful government policy tool can be used
to achieve both external balance and internal balance.
Answer:
Trade makes some people absolutely better off and others absolutely worse off in each
of the trading countries. However, the gainers and losers in the short-run are somewhat
different from those in the long-run, because more adjustment can occur in the
long-run.
Answer:
One way that quantitative easing can work is through depreciation of the country’s
currency.
Answer:
According to the gravity model, countries that share a common language trade more
with each other.
Answer:
A tariff imposed by a small country hurts the tariff imposing country but the rest of the
world gains.
Answer:
With perfect capital mobility, the LM and FE curves are both horizontal.
Answer:
The Single European Act that came into effect in 1992 removed restrictions on people
working in other member countries but retained restrictions on the flows of financial
investments across the member countries.
Answer:
According to the assignment rule, if a country has excessive inflation and a balance of
payments surplus, it should ease monetary policy and tighten fiscal policy.
Answer:
In the long-run, gainers and losers from trade are defined by the product sector they are
employed in, rather than the factors of production they own.
Answer:
According to the Stolper-Samuelson theorem and the Heckscher-Ohlin theory, the
opening of trade will ultimately lead to lower real wages in a land-abundant country.
Answer:
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, the price of food will:
a. rise in Alpha and fall in Beta.
b. rise in both the countries.
c. fall in both the countries.
d. fall in Alpha and rise in Beta.
Answer:
Suppose the domestic supply (QS) and demand (QD) for skateboards in the United
States are given by the following set of equations:
QS = ‘“60 + 3P
QD = 390 ‘“ 2P
If the U.S. engages in free trade and the international price of skateboards is $75, it
would import _____ skateboards from the rest of the world.
a. 65
b. 85
c. 75
d. 95
Answer:
Consider a two-country, two-commodity model. The table given below shows the units
of good X and good Y produced in country A and country B per labor hour. The number
of labor hours required to produce 1 unit of good X in country A is:
a. 0.5.
b. 1.
c. 1.43.
d. 2.
Answer:
Company X is a perfume manufacturer and one of its popular products involves
rosewood. It is deeply concerned with the market price fluctuations of rosewood. To
protect this, it enters into a contract which would allow the company to buy rosewood
at a specific price at a given future date. This is an example of:
a. hedging.
b. speculation.
c. investment.
d. profit maximization.
Answer:
The retail part of the foreign exchange market does not include traders at banks trading
with:
a. national governments.
b. stock brokers who trade in the assets of the firms in different nations.
c. traders at other banks.
d. nonfinancial companies that sometimes want to buy and sell different currencies.
Answer:
Refer to Figure 2.1 below. At a price of $70, the producer surplus equals:
a. $6,000,000.
b. $8,000,000.
c. $15,000,000.
d. $30,000,000.
Answer:
For an investor who starts with dollars and wants to end up with dollars in the future,
which of the following choices is an example that includes hedging?
a. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated
financial instruments, and sign a forward exchange contract to buy the foreign currency
b. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated
financial instruments, and sign a forward exchange contract to buy dollars
c. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated
financial instruments, and then buy dollars at the future spot rate
d. Buy a dollar-denominated financial asset
Answer:
Which of the following would tend to contribute to a U.S. current account surplus?
a. The United States makes a unilateral tariff reduction on imported goods.
b. The United States cuts back on American military personnel stationed in Japan.
c. U.S. tourists travel in large numbers to Asia.
d. Russian vodka becomes increasingly popular in the United States.
Answer:
Which of the following was signed in 1987 and banned the exportation and importation
of CFCs and halons?
a. The Uruguay Round
b. The CITES
c. The Montreal Protocol
d. The Kyoto Protocol
Answer:
If international financial transactions are prohibited:
a. lenders in the richer countries will probably earn high rates of return.
b. borrowers in poorer countries will probably pay low interest rates.
c. lenders in the richer countries will probably earn low rates of return.
d. exchange rates cannot remain fixed.
Answer:
The figure below shows an IS-LM-FE model for an economy with fixed exchange
rates. Initially the economy was at point A, a triple intersection. Here, the FE curve is
flatter than the LM curve.
In order to maintain the fixed exchange rate, at point B monetary authorities must:
a. buy domestic government bonds.
b. sell domestic currency.
c. buy domestic currency.
d. sell domestic government bonds.
Answer:
Scale economies are said to be present when:
a. an increase in output leads to an increase in average cost.
b. an increase in output has no impact on average cost.
c. an increase in output leads to a decrease in average cost.
d. there is a single firm in an industry.
Answer:
Which of the following would you expect to lead to worsening environmental quality?
a. An export or production subsidy from the French government to French steel
manufacturers
b. Freer trade in capital equipment that incorporates environmentally friendly
technologies
c. An export subsidy for producers of clean technology for producing paper
d. Freer trade that promotes production of manufactured goods in developing countries
where environmental laws are strict
Answer:
The amount by which debt obligations exceed the present value of the payments that
will be made to service the debts is called:
a. sovereign debt.
b. debt swap.
c. debt overhang.
d. debt restructuring.
Answer:
Which of the following is indicated by the Engel’s law?
a. Everything else remaining unchanged, an increase in the price of a commodity lowers
the real income of the consumers.
b. In the long run an increase in per capita income will drive down the relative prices of
primary products.
c. In the long run the developing countries will grow faster than the developed
countries.
d. The rate of inflation in an economy is inversely proportional to the rate of
nemployment.
Answer:
A mortgage-backed security is a debt instrument based on a pool of mortgages, and
payment of that debt depends on the mortgages in the pool being paid. Many European
banks invested in mortgage-backed securities. What was the effect of the financial crisis
that began in the U.S. on these European banks?
a. Since most of the mortgages in these mortgage pools were guaranteed by agencies of
the U.S. government, these European banks did not suffer unexpected losses.
b. When the mortgages in the pools were not paid, the mortgage-backed securities lost
value or became worthless and these European banks suffered significant losses.
c. These European banks might have suffered significant losses but the European
central Bank bought the securities at face value.
d. These European banks hedged their investment in U.S. mortgage-backed securities
with investments in European mortgage-backed securities, so losses on U.S.
mortgage-backed securities were offset by gains on European mortgage-backed
securities.
Answer:
Whenever the benefits of group effort fall on every member of a large dispersed group,
regardless of individual contributions, there can be a:
a. sudden-damage effect.
b. spillover effect
c. free-rider problem.
d. negative externality.
Answer:
The figures given below illustrate a situation of a trade embargo. In Figure (a) Dd and
Sd are the domestic demand and supply curves of the embargoing countries. The import
price is P0 and the target country imports the amount Q0 before the embargo is imposed.
As a result of this embargo, the exporting countries not participating in the embargo
gain area _____.
a. a
b. b
c. c
d. (b + c)
Answer:
Which of the following is a plausible solution to a distortion?
a. By centralizing the privately owned enterprises
b. By shutting down any industry which is contributing to atmospheric pollution
c. By imposing a tax or subsidy on the activity if the social marginal cost or the social
marginal benefit exceeds the market price
d. By imposing an importation ban on manufactured goods
Answer:
For an investor who starts with dollars and wants to end up with dollars in the future,
which of the following choices is an example of a covered international investment?
a. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated
financial instruments, and sign a forward exchange contract to buy the foreign currency
b. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated
financial instruments, and sign a forward exchange contract to buy dollars
c. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated
financial instruments, and then buy dollars at the future spot rate
d. Buy a dollar-denominated financial asset
Answer:
For a large country, replacing imports with domestic goods can result in:
a. a decrease in the price of its exports.
b. an increase in the world price of its imports.
c. a more efficient allocation of resources based on comparative advantage.
d. improvement in the country’s terms of trade.
Answer:
If there is a shift of international trade away from a country’s products, we can expect
that the FE and IS curves will shift to the _____, the overall payments balance will
move toward _____, and the domestic currency will _____.
a. right; surplus; appreciate
b. right; deficit; appreciate
c. left; surplus; depreciate
d. left; deficit; depreciate
Answer:
An international trade shock arising from a sudden increase in import demand is likely
to be least disruptive to a country with:
a. a floating exchange-rate system.
b. a fixed exchange-rate system with sterilization.
c. a fixed exchange-rate system without sterilization.
d. a surplus in the overall payment balance.
Answer:
For which of the following types of environmental pollution can we expect that the
level of environmental harm would increase as per capita income increases?
a. Carbon dioxide emissions
b. Lead pollution in water
c. Carbon monoxide
d. Arsenic in water
Answer:
Explain the concept of scale economies. Explain the difference between internal and
external scale economies. What pattern of trade do we expect to see in industries with
substantial external scale economies?
Answer:
When would a currency speculator buy a put option and when would it be worth
exercising the option? What are some advantages and disadvantages of currency
options compared to forward exchange contracts?
Answer:
‘The countries which have implemented policies that emphasize exporting have been
more successful than the countries practicing ISI.’ Does theory suggest that this must be
the case? That is, theoretically, is there no support for ISI, or are the necessary
conditions for successful ISI not being met?
Answer:
With the help of a suitable diagram, explain how in a two-country two commodity
model, one of the countries may fail to specialize completely despite enjoying
comparative advantage in one of the goods.
Answer:
Using a flow chart, illustrate the effects of a decrease in government spending (G) in a
country with floating exchange rates and highly mobile international capital.
Answer:
Explain carefully, with a diagram, the crucial conditions for immiserizing growth to
occur. In particular, discuss the effect of the size of the country, the volume of foreign
trade, the type of growth the country experiences, and foreign demand for the exports of
the country.
Answer:
Explain when strategic export subsidies could be good for a country. Consider firm X
belongs to country A and firm Y belongs to country B. Use a duopolistic market
structure where both firms are dominant players in the world market. Discuss the
differences between the game in which no subsidies are given and the game in which
only one firm receives a subsidy. Create a hypothetical matrix in this context to aid your
explanation.
Answer: