Suppose country A, a labor-abundant country, produces only wheat and cloth. The
following equations illustrate the prices and costs of wheat and cloth in the country,
where the numbers indicate the amounts of labor and land needed to produce a unit of
wheat and cloth. ‘˜w’ is the wage rate and ‘˜r’ is the rental rate of land.
Price of wheat = 1w + 2r
Price of cloth = 2w + 1r
Suppose country A engages in free trade and the price of cloth increases from $3 per
unit to $4 per unit. The price of wheat remains unchanged at $3 per unit. The wage rate
and the rental rate change to _____ and _____ respectively._____.
a. $3/8; $7/8
b. $1; $5/3
c. $5/3; $2/3
d. $4/7; $3/7
Answer:
Which of the following measures to resolve financial crises involves loan commitments
to assist a country in getting through a crisis?
a. Debt repudiation
b. Loan amortization
c. A rescue package
d. Debt restructuring
Answer:
Suppose the U.K. has instituted an expansionary monetary policy to fight
unemployment in the economy. The U.K. has a floating exchange rate.
a. If the exchange rate value of the pound remains steady, what are the effects of easy
money on British national product and income? What is the effect on the British
unemployment rate? Explain.
b. Following the monetary expansion, what is the likely pressure on the exchange rate
value of the pound? Explain.
c. What are the implications of the change in the exchange rate value of the pound for
British national product and unemployment? Does the exchange rate change tend to
reinforce or counteract the expansionary thrust of the British monetary policy? Explain.
Answer:
A negative externality is said to exist if:
a. the private marginal cost exceeds the private marginal benefit.
b. the producer and the consumer surplus for a particular good are not equal.
c. a tax imposed on the production of a particular good results in a deadweight loss.
d. the social costs exceed the private costs.
Answer:
When a large country imposes an import quota:
a. the product’s world price rises.
b. the product’s world price falls.
c. the product’s domestic price falls.
d. domestic production of the product falls.
Answer:
Which of the following is incorrect?
a. Overall, floating exchange-rates discipline countries to have low inflation rates.
b. With fixed exchange-rates, a country that prefers to have a lower inflation rate than
its trading partners will tend to import inflation from its partners.
c. Floating exchange-rates permit countries to have different inflation rates.
d. Since 1973, high degrees of variability of floating exchange-rates may have caused
considerable adjustment into or out of trade-oriented production from time to time.
Answer:
If an individual consumes more of good X when his/her income doubles, we can infer
that
a. the individual is highly sensitive to changes in the price of good X.
b. good X is a normal good.
c. good X is an inferior good.
d. the demand for good X is perfectly inelastic.
Answer:
A large country can gain from imposing a tariff on the import of a good if:
a. the tariff drives the quantity imported to zero.
b. the tariff is high enough that the country becomes an exporter of the product.
c. the part of the tariff paid by the foreign exporters is greater than the losses arising
from the production and consumption effects of the tariff in the domestic market
d. the tariff revenue collected by the domestic government is less than the losses caused
by the production and consumption effects of the tariff.
Answer:
Under which of the following scenarios is active domestic monetary policy least likely
to be effective?
a. Flexible exchange rates; zero capital mobility
b. Fixed exchange rates; perfect capital mobility
c. Flexible exchange rates; perfect capital mobility
d. All three scenarios are equal
Answer:
Which of the following is most likely to happen if the demand for money decreases in
the domestic economy under floating exchange rates and free capital mobility?
a. The domestic interest rate will increase.
b. Domestic borrowing will decline.
c. The financial account of the country’s balance of payments will deteriorate.
d. The average price level in the domestic economy will decrease.
Answer:
Which of the following is an expected effect of a tariff or a nontariff barrier (NTB) on a
product?
a. A decrease in the domestic production of the product
b. An increase in the employment of labor and other resources used in the
import-competing industry in the tariff imposing country
c. An increase in domestic consumption of the imported product
d. A decrease in government revenue
Answer:
Which of the following statements is true?
a. Increases in a country’s endowments of land, labor, and capital will lead to long-run
economic growth.
b. Improvements in the technology used in production can lead to increases in current
output levels, but will not affect long-run economic growth.
c. Improvements in production technology do not affect the shape or position of the
production-possibility curve.
d. Biased growth leads to a proportionate shift in the production-possibility curve.
Answer:
If an investor starts with dollars and wants to end up with dollars in the future, which of
the following is NOT an investment choice that can be made?
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:
Country A is a large country that imports good-quality processed chicken from country
B. Suddenly, country A’s government decides to impose a tariff on this import. Who
among the following will be adversely affected by this policy?
a. Consumers of chicken in country B
b. Consumers of ham in country B
c. Producers of chicken in country B
d. Suppliers of chicken in Country A
Answer:
The figure given below illustrates the market for British pounds. D and S are the
demand and supply curves of the British pounds respectively.
Suppose initially the exchange rate is pegged at $2.50 per pound. If the governments
allow the pound to float, the pound will experience a(n):
a. surplus.
b. buoyant period.
c. appreciation.
d. depreciation.
Answer:
Other fundamental things equal, a decrease in the exchange rate value of the domestic
currency will make domestic goods:
a. to be demanded more internationally.
b. less competitive in the international markets.
c. less expensive in the domestic market.
d. less expensive to produce.
Answer:
_____ means committing oneself to an uncertain future value of one’s net worth in
terms of home currency.
a. Selling
b. Hedging
c. Speculating
d. Importing
Answer:
Other fundamental things equal, an increase in the exchange rate value of the domestic
currency will make the domestic goods:
a. to be demanded more internationally.
b. less competitive in the international markets.
c. more expensive in the domestic market.
d. more expensive to produce.
Answer:
An investment exposed to exchange-rate risk is a(n) _____ international investment.
a. covered
b. uncovered
c. hedged
d. arbitrage
Answer:
The figure below shows an IS-LM-FE model for an economy with fixed exchange
rates. Initially the economy is at point A, a triple intersection. Here, the FE curve is
steeper 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:
One of the usual policy changes included in an IMF prescription is:
a. temporary cartels in domestic product markets.
b. changes in fiscal policy to reduce the government budget deficit.
c. increased barriers to imports.
d. decreased regulation of public sector enterprises.
Answer: