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 same.
d. rise at first and then fall.
Answer:
With perfect capital mobility uncovered interest parity always holds because:
a. almost unlimited flows of capital can occur if there is any deviation from the parity.
b. lower domestic interest rates trigger hedging to avoid exchange rate risks.
c. capital flows out at a much faster rate than it flows in if the interest rate changes.
d. the no-arbitrage condition cannot be satisfied without using forward contract.
Answer:
Which of the following contributed to the Asian Crisis?
a. The strong capital inflows from the industrialized countries mainly provided
financing for large fiscal deficits in the South East Asian countries.
b. The currencies of most of the Asian countries were substantially undervalued.
c. The Hong Kong dollar was allowed to depreciate.
d. The local borrowers in the Asian countries scrambled to sell local currency to
establish hedges against exchange rate risks.
Answer:
At which of the following did the United States agree to implement policies to reduce
U.S. inflation and reduce oil imports?
a. Bretton Woods
b. Plaza Accords
c. Bonn Summit
d. Louvre Accord
Answer:
In 1989 the United States passed a law against catching shrimp with nets that do not
have turtle excluder devices. Four Asian countries filed a complaint with the WTO, and
the WTO ruled that the U.S. policy violated WTO rules because:
a. protection of sea turtles was not a legitimate environmental purpose.
b. one nation could not impose moral values on other nations as per WTO rules.
c. sea turtles were not on the endangered species list.
d. the policy did not apply equally to all exporting nations and did not recognize
alternative ways to protect sea turtles.
Answer:
Under which of the following situations will a tariff imposed by a country fail to reduce
imports by as much as expected?
a. The current tariff rate is less than the prohibitive tariff rate.
b. The foreign export quantity supplied of the good imported by this country is more
responsive to changes in the world price than was expected.
c. The domestic supply of the import-competing products is more price-elastic than was
expected.
d. The domestic quantity demanded of the imported product is less responsive to price
changes than was expected.
Answer:
A domestic monetary shock is least disruptive:
a. under a floating exchange-rate system.
b. under a fixed exchange-rate system with sterilization.
c. under a fixed exchange-rate system without sterilization.
d. under both fixed and floating exchange-rates.
Answer:
Assume a country produces only wine and guns. Both wine and gun production use
land and labor as their only inputs. Wine production is relatively land-intensive while
gun production is relatively labor-intensive. According to the Rybczynski theorem, a
significant rise in immigration is most likely to lead to:
a. an increase in the production of both wine and guns.
b. an increase in wine production by a greater proportion than the increase in the size of
the labor force due to immigration.
c. an increase in the production of guns by a greater proportion than the increase in the
size of the labor force due to immigration.
d. an increase in wine production by a greater proportion than the increase in the
production of guns.
Answer:
If the U.S. allowed the export of significant amounts of natural gas, what would be the
economic effect?
a. There would be no net economic effect on international trade because increased
exports from the U.S. would be offset by increased imports to the U.S. of other goods.
b. The economic effect on international trade would be negative because increased
amounts of natural gas in the importing countries would drive down the price of
domestically produced natural gas in the importing countries.
c. The foreign demand for natural gas from the U.S. would increase the price of natural
gas in the U.S., production of natural gas in the U.S. would increase, and consumption
of natural gas in the U.S. would decrease slightly.
d. Increased demand for natural gas form the U.S. in foreign countries would increase
the price of natural gas world-wide and result in many countries not being able to afford
the price of natural gas.
Answer:
Assume a two-country, two-good, and two-input model. Let the two countries in this
model be the United States and the Rest of the World and the two goods being produced
by each of the countries be steel and wheat. The two factors of production used in
producing the goods in each country are capital and land. If the United States is
capital-abundant and steel production is capital-intensive, the Heckscher-Ohlin model
would predict that the United States would:
a. export steel and import wheat.
b. export wheat and import steel.
c. import both the goods from the rest of the world.
d. export both the goods to the rest of the world.
Answer:
If Canadian speculators expect the euro to appreciate against the U.S. dollar, they
would:
a. purchase Canadian dollars.
b. purchase U.S. dollars.
c. purchase euros.
d. use Canadian dollars to buy euros, instantly use the euros to buy U.S. dollars, and
then instantly use the U.S. dollars to buy Canadian dollars.
Answer:
A domestic spending shock are likely to be least disruptive:
a. under a floating exchange-rate system when there is high capital mobility.
b. under a fixed exchange-rate system when there is high capital mobility.
c. under a fixed exchange-rate system without sterilization.
d. under a floating exchange-rate system when there is low capital mobility.
Answer:
The weighted average exchange rate value of a country’s currency is called the _____
exchange rate.
a. nominal bilateral
b. real bilateral
c. nominal effective
d. real effective
Answer:
The table given below shows the number of labor hours required to produce 1 gallon of
wine and 1 pound of cheese in the U.S. and France. What is the relative price of cheese
(the price of cheese in terms of wine) in France under no trade situation?
a. 2 gallons of wine per pound
b. 1 gallon of wine per pound
c. 0.5 gallons of wine per pound
d. 0.25 gallons of wine per pound
Answer:
A number of EU countries encountered financial difficulties during the euro crisis in the
first decade of the 21st century, and some of those countries received bailouts from the
EU. Spain encountered financial difficulties in this period, but Spain did not require a
bailout. Why was Spain’s situation different from the situations that required other EU
countries to be bailed out?
a. Spain was not part of the EU, so the EU did not have the authority to bailout Spain.
b. Spain was bailed out by the U.S.
c. While other EU countries had government debt that exceed GDP, Spain’˜s debt was
less than GDP, so Spain’s financial situation was not as dire as in other EU countries.
d. Spain refused a bailout by the EU and defaulted on its government debt.
Answer:
The figure below shows the foreign exchange market. D is the demand curve for
pounds. S(Spring-summer) and S(Autumn-winter) are the supply curves of pounds
during the spring-summer and autumn-winter seasons, respectively. Assume that the
British government is committed to maintain a fixed exchange rate at $1.90 per pound.
In the spring-summer period, what type of intervention must British monetary
authorities engage in?
a. Sell 20 billion pounds at $1.90
b. Buy 40 billion pounds at $2.20
c. Sell 10 billion pounds at $2.20
d. Buy 20 billion pounds at $1.90
Answer:
Which of the following statements is true?
a. If the domestic interest rate rises, there will be international financial repositioning
toward domestic-currency assets, thereby causing the domestic currency to appreciate.
b. If the expected future spot exchange rate value of the foreign currency decreases,
there will be international financial repositioning toward foreign-currency assets,
thereby causing the domestic currency to depreciate.
c. If foreign interest rates increase, the domestic interest rate remaining unchanged,
there will be international financial repositioning toward domestic-currency assets and
the domestic currency will appreciate.
d. If the expected future spot dollar per euro exchange rate increases, there will be
international financial repositioning toward the dollar-denominated assets thereby
causing the euro to depreciate.
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.
Assume that the economy was initially at point A. Which of the following would have
moved the economy to point B?
a. Expansionary monetary policy with sterilization
b. Expansionary monetary policy without sterilization
c. Expansionary fiscal policy with sterilization
d. Contractionary fiscal policy without sterilization
Answer:
What would be the effect in the U.S. of increased exports of natural gas from the U.S.
to foreign countries?
a. Exports of natural gas from the U.S. would force the world-wide price of natural gas
to an equilibrium and reduce the price of natural gas for consumers in the U.S.
b. Exports of natural gas from the U.S. would result in higher prices for natural gas,
benefiting producers and exporters of natural gas in the U.S. and harming consumers of
natural gas in the U.S.
c. Exports of natural gas from the U.S. would force the world-wide price of natural gas
to an equilibrium which would mean that producers of natural gas in the U.S. could not
charge more than the cost to produce the natural gas.
d. The U.S. government would eventually have to prohibit exports of natural gas to
foreign countries in order to control the price of natural gas.
Answer: