A rise in the domestic product of an economy deteriorates its current account balance.
Answer:
Increases in a country’s endowments of factors of production increase current output,
but do not contribute to long-run economic growth.
Answer:
If Canada has a current 90 day forward exchange rate value for its currency that is
above the current spot exchange rate value of its currency, then the Canadian 90-day
interest rate is relatively high.
Answer:
Exploiting substantial scale economies is an explanation of why some industries come
to be categorized as monopolistically competitive.
Answer:
Foreign Direct Investment is used for all foreign securities investments that do not
involve management control.
Answer:
During the crises of the 1990s, restructuring of bank debt was difficult as the number of
debtor and creditor countries was significantly large.
Answer:
Coordinated intervention, in which more than one central bank intervenes to influence
an exchange rate, is usually more effective than an intervention carried out by one
country of the same total size.
Answer:
The United States accounts for more than 50% of world production.
Answer:
The marginal productivity of capital increases with greater capital inflows into the
borrowing country.
Answer:
National sovereignty means that no one person or group is in charge of the international
economy.
Answer:
Usually, international arbitrage does not take place for non-traded products.
Answer:
Government loans are more efficient than production subsidies if a young industry faces
financial markets that are unwilling to provide funding to the industry due to the high
risk.
Answer:
With fixed exchange rates, fiscal policy is more powerful with a high degree of capital
mobility than with a low degree of capital mobility.
Answer:
Scale economies help explain why products are produced in a limited number of
varieties in a country.
Answer:
The quantity theory of money indicates that in any country the money supply is equated
to the demand for money, which is inversely proportional to the money value of the
gross domestic product.
Answer:
Monetary policy is more effective with fixed exchange rates than with floating
exchange rates.
Answer:
As a country moves up along its ‘bowed-out’ production possibility curve, the
opportunity cost of producing more of the good measured on the y-axis decreases.
Answer:
As long as the FE curve is vertical, internal and external balance can be achieved by
using the appropriate mix of monetary and fiscal policy.
Answer:
Consumer surplus is the net economic benefit to consumers who are able to buy a good
at a price lower than the highest price that they are willing to pay.
Answer:
In a first-best world, for any commodity, the price of the commodity, the private
marginal benefit, the private marginal cost of producing it, the social marginal benefit,
and the social marginal cost are all equal at the margin.
Answer:
Environmental harm declines with rising income per person when:
a. the consumption of environment-friendly goods decline with an increase in income.
b. with rise in income the increase in demand for better environment quality is larger
than any adverse effects from rising production scale.
c. the government imposes restrictions on the import of environment friendly
technologies from abroad.
d. the adverse effect of any increase in nominal GDP dominates any modest increase in
demand for environmental quality.
Answer:
The initial impact of _____ the money supply _____ the balance of payments.
a. expanding; worsens
b. expanding; improves
c. contracting; worsens
d. contracting; has no effect on
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 maintaining a fixed exchange rate at $1.90 per
pound. In the autumn-winter period, what type of intervention must British monetary
authorities engage in?
a. Sell 20 billion pounds at $1.90
b. Sell 60 billion pounds at $1.60
c. Buy 10 billion pounds at $1.60
d. Buy 20 billion pounds at $1.90
Answer:
Which of the following is an example of an international externality, in which
production (or consumption) activities in one country impose external costs on other
countries?
a. Transborder pollution
b. Persistent dumping
c. Free riding
d. Moral hazard
Answer:
The FE curve illustrates all combinations of domestic output levels and interest rates for
which:
a. the domestic product market is in equilibrium.
b. the domestic money market is in equilibrium.
c. there is a zero balance for the country’s official settlements balance.
d. there is full employment.
Answer:
_____ is an adjustable peg that provides substantial leeway for a country’s monetary
authority to change or abandon the fixed value.
a. Hard peg
b. Currency board
c. Soft peg
d. Dollarization
Answer:
The _____ exchange rate is the market rate between two currencies.
a. nominal bilateral
b. real bilateral
c. nominal effective
d. real effective
Answer:
Country Y has 15 thousand acres of land and 45 thousand laborers, whereas the Rest of
the World has 100 thousand acres of land and 200 thousand laborers. These countries
produce a labor-intensive good A, and a land-intensive good B. When trade opens up
between these countries, it can be inferred that country Y will:
a. export both goods.
b. export good B, and import good A.
c. export good A, and import good B.
d. import both goods.
Answer:
The intersection of the IS and LM curves shows:
a. the balance of payments deficit or surplus.
b. the short-run equilibrium interest rate and the output level in the economy.
c. the short-run trade balance.
d. the long-run equilibrium inflation rate and the natural rate of unemployment in the
economy.
Answer:
Studies of ISI and related policies show that income growth is:
a. negatively correlated with antitrade policies like ISI.
b. negatively correlated with outward-oriented policies that are closer to free trade.
c. positively correlated with antitrade policies like ISI.
d. not correlated with either free trade or antitrade policies.
Answer:
Country Y has 15 thousand acres of land and 45 thousand laborers, whereas the Rest of
the World has 100 thousand acres of land and 200 thousand laborers. These countries
produce a labor-intensive good A, and a land-intensive good B. Based on the
information given here, we can conclude that:
a. country Y is relatively labor-abundant.
b. country Y enjoys absolute advantage in the production of good B.
c. the Rest of the World is relatively labor-abundant.
d. the factor proportions are the same in both country Y and the rest of the world.
Answer:
When the exchange rate is set now for a currency trade that will take place sometime
more than a few days in the future is often referred to as a:
a. spot exchange rate.
b. forward exchange rate.
c. pegged exchange rate.
d. managed exchange rate.
Answer:
Cartel power is weakened by the tendency for:
a. the non-members to join a successful cartel.
b. the cartel members to increase output above their production quotas.
c. the cartel members to decrease output below their production quotas.
d. demand for the cartel’s product to increase over time.
Answer:
Which of the following is valid for a ‘first-best’ world?
a. Social Marginal Benefit (SMB) > Price (P) = Buyer’s Private Marginal Benefit (MB)
= Seller’s Private Marginal Cost (MC) = Social Marginal Cost (SMC)
b. Social Marginal Cost (SMC) > Price (P) = Buyer’s Private Marginal Benefit (MB) =
Seller’s Private Marginal Cost (MC) = Social Marginal Benefit (SMB)
c. Price (P) = Buyer’s Private Marginal Benefit (MB) = Seller’s Private Marginal Cost
(MC) = Social Marginal Cost (SMC) = Social Marginal Benefit (SMB)
d. Social Marginal Benefit (SMB) > Social Marginal Cost (SMC)
Answer:
Under free trade, a large country produces 1 million leather bags per year and imports
another 2 million bags per year at the world price of $60 per bag. Assume that the
country imposes a specific tariff of $5 per bag. As a result, the per-unit price of leather
bags decreases to $58 in the international market and the import of leather bags drops to
1.6 million. The domestic production, on the other hand, increases to 1.1 million.
As a result of the tariff being imposed:
a. the country gains national well-being because the tariff increases domestic
production.
b. the country loses national well-being because the tariff hurts the domestic consumers.
c. the country loses national well-being because the government revenue from tariff is
insufficient to compensate for the losses arising from the production and consumption
effects.
d. the country gains national well-being because the amount of the tariff revenue paid
by the exporters more than offsets the consumption and the production effects.
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. Pressures are there to
make British pounds appreciate and not depreciate. Which of the following
interventions is most likely in this situation?
a. The government of Britain should sell pounds and buy dollars.
b. The government of Britain should do nothing as a fixed rate will not change.
c. The government of Britain should buy pounds and sell dollars.
d. The government of Britain should decrease the country’s money supply.
Answer:
A small country is considering imposing a tariff on imported wine at the rate of $5 per
bottle. Economists have estimated the following based on this tariff amount:
World price of wine (free trade): $20 per bottle
Domestic production (free trade): 500,000 bottles
Domestic production (after tariff): 600,000 bottles
Domestic consumption (free trade): 750,000 bottles
Domestic consumption (after tariff): 650,000 bottles
The imposition of the tariff on wine will cause the country’s economic well-being to
_____ by _____.
a. fall; $0.5 million
b. rise; $0.75 million
c. fall; $100,000
d. fall; $0.75 million
Answer:
Suppose that country A, a relatively capital-abundant country, experiences further
expansion in its endowment of capital. Explain how this might affect its volume
(amount) of trade and its terms of trade with the rest of the world. Under what
conditions (if any) would the economic well-being of country A decline after the
increase in its capital endowment?
Answer:
Which of the following refers to dumping?
e. Selling domestic goods in the international market at much lower prices.
f. Selling domestic goods of inferior quality in the international markets at higher
prices.
g. Restricting the sale of domestic goods within the geographic boundary of the country.
h. Selling domestic goods at discounted prices to the local consumers and selling the
same at much higher prices to the foreign consumers.
Answer:
What is the mechanism at work that causes the increase in a country’s government
spending to have an impact on foreign countries’ production and income?
Answer:
What is predatory dumping? How likely is dumping to be predatory? Discuss.
Answer:
What was the basis of the financial crisis that Greece suffered in the first decade of the
21st century?
Answer:
Explain four reform measures that have been suggested to reduce the possibility and
frequency of international financial crises.
Answer:
A country with a fixed exchange rate experiences upward pressure on the exchange rate
value of its currency. The central bank chooses to intervene in the market to maintain its
fixed exchange rate. How would the central bank go about intervening? If the pressures
for the currency to appreciate persist, would it be difficult to maintain the fixed
exchange rate? Why or why not? Would your answers differ if the country carried out
sterilized intervention? Why or why not. Give an example of a country that attempted to
maintain their exchange rate in the face of upward pressures on their currency value.
What was the result?
Answer:
Suppose that the U.S. dollar-pound sterling spot exchange rate equals $1.60/, while the
360-day forward rate is $1.64/. The yield on a one-year U.S. treasury bill is 9% and that
on a one-year U.K. treasury bill is 8%. Calculate the covered interest differential in
favor of London. On the basis of this result, which country would you expect to face
capital inflows and which to face capital outflows?
Answer:
Suppose it is widely expected that the U.S. economy will grow faster than the Japanese
economy, have higher inflation, have a greater growth in money supply, and have low
and declining interest rates. Given these expectations, what do the various approaches
to exchange rate predict about the value of the dollar?
Answer:
What special challenges existed for the former Soviet Union countries transitioning
from centrally planned economies to market based economies? How successful have
these countries been?
Answer: