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:
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:
Internal shocks cause less trouble with floating exchange-rates.
Answer:
Analysis using the gravity model shows that countries that have a higher degree of
government corruption trade more with other countries.
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The act of buying at a low price in one place and selling at a high price in another place
is called relative pricing.
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Gold is a major reserve asset that is currently being used in official reserve transactions.
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In the past three decades many developing countries have shifted away from restricting
FDI inflows to encouraging them.
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According to the specialized-factor pattern, the more a factor is concentrated in the
production of a product, the more it stands to gain from an increase in the price of this
product.
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For a country with a fixed exchange rate and no sterilization: When the FE curve is
steeper than the LM curve, a negative domestic spending shock to the IS curve creates a
balance of payments surplus, which then causes the LM curve to shift to the right.
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External effects from a transaction indicate that there is a misalignment between private
and social benefits or costs.
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Suppose country X partially specializes in the production of only two goods, food and
clothing. At the initial free trade equilibrium, the country produced 40 units of food and
20 units of clothing. At the same time10 units of food were exported and 10 units of
clothing were imported by country X. Now suppose a technological innovation in
country X leads to a balanced growth while leaving the relative prices of food and
clothing unchanged in the international market. Production of food in country X rises to
50 units and that of clothing rises to 25 units. If consumption of food, on the other hand,
rises to 42 units, we can most reasonably conclude that the:
a. consumption of clothing rises to 32 units.
b. the size of country X’s trade triangle has increased.
c. country X’s willingness to trade declines.
d. consumers in country X are left worse-off.
Answer:
Which of the following is a likely impact of international migration?
a. The native workers in the receiving country gain welfare.
b. The receiving country as a whole gains.
c. The workers remaining in the country after emigration lose welfare.
d. The country from which workers migrate out to other countries gains welfare as long
as remittances are small.
Answer:
Under a floating exchange rate regime with a high degree of capital mobility, in the
short run an expansionary fiscal policy will most likely create pressure on:
a. the domestic currency to appreciate.
b. the domestic currency to depreciate.
c. monetary authorities to revalue the domestic currency.
d. monetary authorities to devalue the domestic currency.
Answer:
Suppose the domestic supply (QS) and demand (QD)for MP3 players in the United
States are given by the following set of equations:
QS = ‘“25 + 10P
QD = 875 ‘“ 5P
If the United States can import MP3 players from the rest of the world at a per unit
price of $50, how many MP3 players will be produced in the United States?
a. 625
b. 475
c. 925
d. 525
Answer:
Which of the following statements is true?
a. Free trade causes contraction of the export-oriented sector.
b. Free trade causes contraction in the import-competing sector.
c. Free trade restricts consumption choices of the domestic consumers.
d. All the domestic producers benefit when a country engages in free trade.
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. Which of the following
is most likely to happen in the short run following the opening of free trade between the
countries?
a. All the workers in both the countries will gain while all the land owners in both the
countries will lose.
b. All the workers in both countries will lose while all the land owners in both the
countries will gain.
c. The workers and land owners in the food industry in Beta will gain while the workers
and the landowners in the drink industry will lose.
d. The workers and the land owners in the food industry in Alpha will gain while the
workers and the landowners in the drink industry will lose.
Answer:
Assuming no effect on exchange rates, which of the following is likely to happen if the
money supply in a country contracts?
a. Decline in the international price competitiveness
b. Rise in the interest rates
c. Fall in the inflow of financial capital
d. Rise in the real spending
Answer:
Suppose the interest rate in the U.K. is 4% for 90 days, the current spot rate is $2.00/,
and the 90-day forward rate is $1.96/. If the covered interest rate differential is about
zero, then the interest rate in the U.S. for 90 days is:
a. 6 percent.
b. 4 percent.
c. 3 percent.
d. 2 percent.
Answer:
The 1982 debt crisis was caused in part by:
a. falling world interest rates.
b. a rapid increase in cheap imports from developing countries.
c. falling developing country exports and high real interest rates.
d. rising commodity prices.
Answer:
For a country with a floating exchange rate and, initially, an overall payments balance
of zero, if the country implements expansionary monetary policy, the LM curve will
shift to the _____ which will lead to the country’s currency to __________.
a. left; appreciate
b. left; depreciate
c. right; depreciate
d. right; appreciate
Answer:
The figure given below represents the effects in the labor markets due to migration.
Here the world has been divided into a high-income ‘North’ (left panel) and a
low-income ‘South’ (right panel). Dn and Sn are the labor demand and the labor supply
curves in North. Ds and (Sr + Smig) are the labor demand and pre-migration labor
supply curves in South. Sr is the post-migration labor supply curve in South. The value
c is the cost of migrating.
When migration is not allowed, workers in North earn _____ per hour and workers in
South earn _____ per hour.
a. $6.75; $4.25
b. $8.00; $4.25
c. $6.75; $3.00
d. $8.00; $3.00
Answer:
Which of the following best characterizes the current U.S. exchange rate policy?
a. An adjustable pegged exchange rate
b. A crawling pegged exchange rate
c. A freely floating exchange rate
d. A fixed exchange rate
Answer:
Suppose country A is a major exporter of limestone in the world market. Which of the
following policies can be taken by the government of country A to enhance the gains
from exporting limestone by raising its world price?
a. Taxing limestone exports
b. Subsidizing export of limestone
c. Subsidizing the extraction of limestone
d. Setting a price ceiling on the limestone sold in the domestic market
Answer:
The Stolper-Samuelson theorem indicates that given certain assumptions and
conditions:
a. the real return to the factor used intensively in the import-competing industry will
rise in the long-run.
b. the real return to the factor used intensively in the export industry will fall in the
long-run.
c. the real return to all the resources in an economy will increase.
d. the real return to the factor used intensively in the export industry will rise in the
long-run.
Answer:
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. What is the opportunity cost
of producing a bushel of corn in the United Kingdom?
a. 1/8 of an umbrella
b. 1/3 of an umbrella
c. 3 umbrellas
d. 8 umbrellas
Answer:
An increase in home country money demand will shift the:
a. IS curve to the right.
b. LM curve to the right.
c. FE curve to the right.
d. LM curve to the left.
Answer:
If a country with a fixed exchange rate is continuously losing foreign reserves,
speculators will:
a. sell the country’s currency and buy foreign currency.
b. speculate that the country’s currency will be revalued.
c. buy the country’s currency and sell foreign currency.
d. lend foreign currency to the country’s central bank.
Answer:
The relationship between environmental harm and national income per person for
arsenic water pollution exhibits a(n):
a. downward sloping curve.
b. upward sloping curve.
c. U-shape curve.
d. inverted U-shaped curve.
Answer:
Calculate the effective rate of protection for the domestic MP3 player industry
following the imposition of a 20 percent tariff on the imports of MP3 players. The cost
of material inputs used in production of MP3 players in the country is $100 per unit and
there is free trade in these material inputs. The world price of MP3 players is $175 per
unit. Assume that the country is a small country.
a. 20%
b. 46â…”%
c. 90%
d. 72â…”%
Answer:
The figure given below represents the domestic market for wheat in a small country.
Imports of wheat are prohibited.
The production effect of the subsidy amounts to:
a. $200 million.
b. $300 million.
c. $1 billion.
d. $2.2 billion.
Answer:
How do the characteristics of immigrants influence the effects of immigration on the
receiving country? What are the implications for receiving country government policy
toward immigration?
Answer:
Briefly discuss the primary features of the mercantilist philosophy. Mention any two
major criticisms of the mercantilist theory as put forward by Adam Smith and other
economists.
Answer:
In mid-2010, the Chinese government ended its fixed exchange rate to the U.S. dollar
and began to allow the yuan to appreciate gradually. How would this shift affect the
Chinese economy?
Answer:
Every international transaction recorded in the balance of payments has both a credit
item and a debit item. In the case of a U.S. foreign aid, a debit in the balance of
payments, what is the offsetting credit? Explain.
Answer:
‘In the two-good, two-country model with increasing costs, the output quantities are
determined only by considering society’s preferences as illustrated with indifference
curves. However, in the same model, it is possible to determine the post-trade
consumption point in each country without indifference curves.’ Is this statement true or
false? Justify your answer.
Answer:
How does interbank foreign exchange trading work? What is being traded in the
interbank part of the foreign exchange markets? What functions does it serve?
Answer:
Explain why the Heckscher-Ohlin model predicts only partial specialization in the
production of two goods, while Ricardo’s comparative advantage model predicts full
specialization.
Answer:
Major shocks occasionally strike a country’s economy. List the types of shock that may
occur and discuss the effects of these exogenous changes on a country that has a
floating exchange rate.
Answer: