The price elasticity of demand measures the responsiveness of consumers to changes in
the price of a product.
Answer:
If a country’s currency is a reserve currency, then intervention in the foreign exchange
market to maintain a pegged exchange rate is unnecessary.
Answer:
Research supports the claim that there are significant compliance costs associated with
environmentally friendly production in countries with strong environmental laws, so
that there are significant incentives for firms to produce in countries with lax
environmental laws.
Answer:
There is substantial evidence to conclude that there is a very tight link between being a
developing country and being an exporter of primary products.
Answer:
A vertical FE curve indicates perfect capital mobility.
Answer:
In the short-run after a country engages in free trade, wages and land rents can be
expected to rise in the expanding sector of the country.
Answer:
The World Trade Organization has rules that try to limit the use of tariffs but not the use
of NTBs.
Answer:
Uncovered interest arbitrage is buying a country’s currency spot and selling that
country’s currency forward, to make a net profit from the combination of the difference
in interest rates between countries and the forward premium on the country’s currency.
Answer:
According to the theory of comparative advantage, trade will not occur if one country is
less efficient in the production of all products.
Answer:
U.S. firms could not make a profit on the export of natural gas to Asia and Europe
because of increasing production costs and transportation costs.
Answer:
It is usually safer for a large country to subsidize its export-oriented industries rather
than the import-replacing industries.
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. The Rest of the World has
an absolute advantage in the production of _____.
a. both corn and umbrella
b. only umbrella
c. only corn
d. neither corn nor umbrella
Answer:
According to the Mercantilists, governments should:
a. subsidize and encourage imports.
b. subsidize and encourage exports.
c. allow for free trade unencumbered by government regulations and restrictions.
d. not spend much on national defense.
Answer:
Which of the following is an immediate effect of an increase in money supply by the
European Central Bank by 10 percent?
a. There will be an inflow of foreign capital in the countries belonging to the European
Union.
b. The expected exchange rate value of the foreign currencies vis–vis the Euro will
increase.
c. The interest rate in the EU countries will increase.
d. The product prices in the EU countries will decline drastically.
Answer:
The current account balance of the balance of payments account equals:
a. the sum of national savings and domestic capital formation.
b. net foreign investment.
c. the domestic production of goods and services.
d. net credits minus debits involving changes in nonofficial foreign financial assets and
liabilities.
Answer:
The figure given below illustrates the impact of an export subsidy as imposed by a large
country. No imports are permitted.
The consumption effect of the export subsidy is shown by area(s):
a. b.
b. d.
c. (d + i + j).
d. (b + f + g).
Answer:
Which of the following countries reported an inflation rate of over 2,000 percent per
year during the late 1980s?
a. Mexico
b. Russia
c. Turkey
d. Argentina
Answer:
The figure given below illustrates the impact of an export subsidy as imposed by a large
country. No imports are permitted.
What is the net impact on the producer surplus of the export subsidy provided by the
domestic government?
a. The producer surplus falls by area (a + b).
b. The producer surplus increases by area (a + b + c + d).
c. The producer surplus falls by area (a + b + c + e + f + g + h).
d. The producer surplus increases by area (a + b + c).
Answer:
The low-rate loans that are to be repaid within 10 years seem to be a form of _____ as
they shift the IMF to a role as a development organization.
a. stand-by arrangements
b. mission creep
c. moral hazard
d. tequila effect
Answer:
When uncovered interest parity holds, it means that:
a. a currency is expected to appreciate by as much as its interest rate is lower than the
interest rate in the other country.
b. a currency is expected to appreciate by as much as its interest rate is higher than the
interest rate in the other country
c. exchange rate risk is unusually high
d. the forward premium equals the interest rate differential.
Answer:
Considering the United States to be a capital-abundant country, which of the following
facts would contradict the predictions of the Heckscher-Ohlin theory?
a. The United States is a net importer of labor-intensive products.
b. The United States is a net importer of products that use farmland intensively.
c. The United States is a net importer of certain natural resources such as petroleum.
d. The United States is a net importer of capital-intensive products.
Answer:
The ECB is prohibited from
a. lending to national governments or purchasing government debt directly from the
government.
b. owning government debt.
c. accepting deposits from EU countries.
d. paying interest on deposits.
Answer:
Assume that the exchange rates are fixed. When money demand is less sensitive to
interest rate changes than are international capital flows, _____ policy will be _____
effective than when money demand is more sensitive to interest changes than are
international capital flows.
a. expansionary fiscal; more
b. expansionary fiscal; less
c. expansionary monetary; more
d. sterilized intervention; more
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. If the U.K. and the Rest of
the World begin to trade with each other, the international price of umbrellas will lie
between _____ and _____.
a. 1/3 of a bushel of corn per umbrella; 3 bushels of corn per umbrella
b. 3 bushels of corn per umbrella; 8 bushels of corn per umbrella
c. 1/8 of a bushel of corn per umbrella; 1/3 of a bushel of corn per umbrella
d. 1/8 of a bushel of corn per umbrella; 8 bushels of corn per umbrella
Answer:
Under a floating exchange rate regime with a high degree of capital mobility, a change
in the exchange rate value of domestic currency following contractionary fiscal policy
is most likely to:
a. improve the current account.
b. decrease the country’s holdings of official reserve assets.
c. cause a surplus in the financial account.
d. induce inflow of foreign capital.
Answer:
Which of the following is an example of Foreign Direct Investment?
a. Ford motor company puts $10 million from its pension fund into a mutual fund
containing shares of foreign companies.
b. Dr. Gareau, a French biologist, buys $5,000 worth of shares of Toyota.
c. Wells Fargo Bank buys $10 million worth of Bank of England T-Bills.
d. Ford buys a controlling interest in Land Rover, a British automobile company.
Answer:
The figure given below represents the U.S. market for steel imports from Korea. The
Korean government provides an export subsidy of $25 per ton, and Korean firms use
the subsidy to reduce their export price to the United States to $375 per ton.
Suppose the United States now imposes a countervailing duty on the imports of steel at
the rate of $25 per ton. Which of the following is true in this context?
a. The welfare of the world as a whole is reduced by $750 million.
b. The welfare loss of Korea exceeds the welfare gain of the U.S.
c. The producers in the U.S. lose whereas the producers in Korea gain.
d. The world price level and volume of trade becomes similar to the free-trade
condition.
Answer:
At free-trade prices, a bicycle in country X sells for $100 when the per-unit cost of
material inputs is $90. Country X has a nominal tariff rate of 15% on bicycles, and 10%
on the material inputs. Based on this information, calculate the effective rate of
protection for the bicycle industry in country X. Assume that country X is a small
country.
a. 80%
b. 60%
c. 5%
d. 15%
Answer:
Which of the following is true of a voluntary export restraint (VER)?
a. A voluntary export restraint ensures that foreign exporting firms are unable to
exercise monopoly power.
b. A voluntary export restraint usually requires that the foreign exporting firms act like a
cartel, restricting sales and raising prices.
c. A voluntary export restraint generates more revenue for the government than a tariff
or quota.
d. Voluntary export restraints have only been used by the poor and developing nations
to protect their domestic industries.
Answer:
Which of the following refers to trade creation?
a. The net increase in exports when the currency of a country depreciates with respect to
a foreign currency
b. The net increase in imports when foreign firms lower the prices of their exports
c. The net volume of new trade that results from the formation of a trade bloc
d. The net change in the volume of trade when a country raises its barriers on its
imports
Answer:
Suppose the interest rate on 6-month treasury bills is 7 percent per year in the United
Kingdom and 4 percent per year in the United States. Also, today’s spot exchange price
of the pound is $2.00 while the 6-month forward exchange price of the pound is $1.98.
Consider the expected future spot rate of pounds is $2.04. By investing in U.K. treasury
bills rather than U.S. treasury bills, and NOT covering exchange-rate risk, the
approximate extra return earned by U.S. investors for 6 months will be:
a. 0.5 percent.
b. 5.0 percent.
c. 3.0 percent.
d. 3.6 percent.
Answer:
The figure given below represents the domestic market for wheat in a small country.
Imports of wheat are prohibited.
At a world price of $160 per bushel, the country produced _____ bushels of wheat and
exported _____ bushels of wheat.
a. 60; 60
b. 120; 80
c. 120; 60
d. 150; 120
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. Country B
has an absolute advantage in the production of:
a. neither good X nor good Y.
b. both good X and good Y.
c. only good X.
d. only good Y.
Answer:
Consider a product with a perfectly competitive market. Carefully explain why nations
gain from engaging in international trade in this product. Do nations gain equally from
trade? If not, what determines which country gains more? (In your answer you can
assume a two-country world.)
Answer:
‘It is good to protect domestic production for a nation as a whole and not just for
workers and firms receiving protection.’ Give three scenarios to justify this statement.
Answer:
Show graphically and explain the effects of imposition of a quota by a small country
under competitive conditions. The quota rights are given away for free to a fixed set of
import distributor firms in the country.
Answer:
Consider a country with a fixed exchange rate that is experiencing a deficit in it overall
payments balance. Show graphically (using IS-LM-FE) and explain how a change in
domestic monetary policy could attempt to quickly eliminate the payments deficit.
What could be a possible threat to the economy due to the policy change?
Answer:
‘Job-seeking immigration brings net economic benefits not only to the immigrants, but
also to the receiving country overall.’ Justify the statement.
Answer:
What are the five criteria for a country to join the European Monetary Union? What is
the purpose of the criteria? What are the gains from establishing the monetary union?
Answer:
‘The higher the tariff, the more domestic production is increased. Thus, a prohibitive
tariff is socially optimal.’ Explain the validity of this statement.
Answer:
Assume a two-country two-good two-input model. Let the countries in the model be the
United States and the Rest of the World and the goods be steel and wheat. The two
factors of production are capital and land. Further, the United States is capital-abundant
and steel production is capital-intensive. Suppose, in the absence of trade, the United
States operates at a point on its production-possibility curve where it produces and
consumes 20 units of wheat and 20 units of steel. Once it engages in free trade, the
international price of one unit of steel is two units of wheat. In response to the opening
of trade, the United States moves along its production-possibility curve to a new point
where it produces 30 units of steel and 10 units of wheat. Is the United States better-off
following the opening of trade? Provide a logical proof of your answer.
Answer:
The farmers in country A harvest and sell 150 bushels of wheat at the price of $80 per
bushel. Of the total produce 30 bushels are exported. If the government bans all exports
of wheat, the domestic price of wheat would drop to $60. But the production and sales
would also drop to 120 bushels. So, how much loss would the domestic farmers incur
due to the export ban?
Answer:
