Making effective monetary policy for the euro zone should be a relatively easy task for
the European Central Bank (ECB) since the euro member countries are very similar.
Answer:
Just before the Asian crisis, Thailand had large current account deficits.
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Monetary policies adopted by a country do not affect its trading partners as long as the
partner countries use different currencies.
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For developed countries, more price supports and subsidies are provided to agriculture
worldwide than to any other sector of the economy.
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Most interbank trading occurs through electronic brokering systems, with only a small
remaining role for voice brokers.
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The production-possibility curve alone does not provide enough information to
determine the amount of each good produced by the economy.
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If a currency is at a forward premium by as much as its interest rate is lower than the
interest rate in the other country, covered interest parity holds.
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Monetary policy is only effective in a country with floating exchange rates when capital
is highly mobile.
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A prominent feature of the IMF conditionality programs is nationalization of key
industries.
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A reduction in taxes on domestic financial investments usually leads to capital outflows.
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The combination of currency and bank deposits at the central bank is called the money
supply.
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Exports depend on income in the exporting country and on the relative prices between
the exporting and importing countries.
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The relative prices of wool, cocoa, aluminum, rice, cotton and sugar declined by more
than half during the 20th century.
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When a tariff is imposed on an imported good, the prices of the similar products
produced within the country also increases.
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International trade patterns are broadly consistent with the Heckscher-Ohlin prediction
that nations tend to export the products that use their abundant factors intensively.
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The host country has more reasons to restrict FDI than does the home country.
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Covered interest parity is rarely found to hold empirically.
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International trade shocks are more disruptive with fixed exchange rates than with
floating exchange rates.
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In intra-industry trade, an exporting firm may be forced to sell its product at a lower
price than in the absence of trade.
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Consumers of the exportable product in the exporting country gain when trade is based
on:
a. different factor endowments.
b. technological differences.
c. external scale economies.
d. increasing-cost industries.
Answer:
What event in Japan increased demand for imported natural gas in Japan?
a. Deposits of natural gas in Japan have been exhausted.
b. The largest deposits of natural gas available to Japan are located in the islands in the
South China Sea and Japan and China have a dispute about who owns those islands.
c. A tsunami in 2011 damaged the nuclear reactor in Fukushima causing Japan to shut
down all of its nuclear generation of electricity.
d. Japan imposed strict environmental requirements for the generation of electricity that
can only be met by using natural gas to produce electricity.
Answer:
Which of the following ways can an MNE adopt to reduce its exposure to political risks
in its host country?
a. By threatening to cease all exports of its products to the host country
b. By establishing more than one affiliate in the host country
c. By equating its physical assets in the host country with its local borrowings
d. By negotiating with the host country’s government to clear off its debts
Answer:
Vintland and Moonited Republic produce wine and cheese. The opportunity cost for the
production of a bottle of wine in Vintland is 2 pounds of cheese, and in the Moonited
Republic is 2.5 pounds of cheese. Based on this information, it can be concluded that:
a. trade between the two countries based on comparative advantage is not possible.
b. Vintland has a comparative advantage in the production of wine.
c. Vintland has a comparative advantage in the production of cheese and Moonited has
a comparative advantage in the production of wine.
d. Vintland has an absolute disadvantage in the production of both goods.
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.
Who among the following groups will most likely benefit if the exchange rate is pegged
at $2.50 per pound?
a. The U.S. importers
b. The British importers
c. The British exporters
d. The import-competing producers in the U.K.
Answer:
In a nation’s balance of payments, which one of the following items is always recorded
as a positive entry?
a. Changes in foreign currency reserves
b. Imports of goods and services
c. Military foreign aid supplied to allied nations
d. Purchases by foreign travelers visiting the country
Answer:
In the figure given below, we see an expansion of the production-possibility curve
(from PPC1 to PPC2). The two goods produced are wheat and cloth, which are
land-intensive and labor-intensive respectively. The outward shift of the
production-possibility curve is likely the result of:
Wheat
a. a fall in average cost of producing cloth.
b. an increase in the price of cloth.
c. an increase in the size of the labor force, the area under cultivation remaining
unchanged.
d. an increase in the national amount of usable land, the size of the labor force
remaining unchanged.
Answer:
Which of the following is true of the gravity model?
a. The gravity model states that the trade flows between two countries is independent of
the geographical distance between them.
b. The gravity model emphasizes on the role of the government to generate adequate
gains from trade.
c. The gravity model states that trade flows between a developing and a developed
nation is usually unidirectional.
d. The gravity model states that the trade flows between two countries is directly
proportional to their GDP.
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.
The world’s net gain due to migration is represented by the area:
a. (a + b).
b. (e + f).
c. (a + f).
d. (b + f).
Answer:
In a country’s balance of payments, which of the following items will be recorded as a
debit entry?
a. Domestic bank balances owned by foreigners are reduced
b. Foreign bank balances owned by domestic residents are reduced
c. Assets owned by domestic residents are sold to nonresidents
d. Securities are sold by domestic residents to nonresidents
Answer:
Under a floating exchange rate regime, the domestic currency will normally depreciate
if the money supply:
a. contracts.
b. expands.
c. does not change with the change in the exchange rates.
d. is managed to keep the country’s inflation rate steady.
Answer:
A good is said to be overproduced in an economy if:
a. the marginal cost of producing the good is less than its price.
b. the marginal benefit derived from the consumption of the good is more than the
price.
c. the social marginal cost exceeds the social marginal benefit.
d. the production of the good generates a positive externality.
Answer:
A small country imports T-shirts. With free trade at a world price of $10, domestic
production is 10 million T-shirts and domestic consumption is 42 million T-shirts. The
country’s government now decides to impose a quota to limit T-shirt imports to 20
million per year. With the import quota in place, the domestic price rises to $12 per
T-shirt and domestic production rises to 15 million T-shirts per year. The quota on
T-shirts causes domestic producers to:
a. gain $5 million.
b. lose $5 million.
c. gain $25 million.
d. gain $30 million.
Answer:
The figure given below shows the production possibility curves for Canada (AB) and
the Rest of the World (CD). Suppose Canada begins to trade with the Rest of the World.
If in the international market 1 bushel of corn is exchanged for 1 liter of maple syrup,
Canada will produce _____ bushels of corn and the Rest of the World will produce
_____ liters of maple syrup.
a. 35; 32.5
b. 70; 50
c. 0; 0
d. 90; 100
Answer:
An investment is _____ if it is fully hedged against exchange-rate risk.
a. covered
b. uncovered
c. speculative
d. risk neutral
Answer:
Japanese economists worry that changes in the U.S. inflation rate have too large an
effect on the Japanese economy. What type of exchange rate regime should Japan have
if it does not want the U.S. inflation changes to impact the Japanese internal economy?
Explain, and use relative PPP in your explanation.
Answer:
What are NTBs? Discuss any three forms of NTBs other than quotas and VERs.
Answer:
A country begins with external balance (its official settlements balance is zero). Explain
the effects of a shift by the country to an expansionary monetary policy on the balance
of payments of the country. (Assume that the exchange rate is fixed, but do not consider
any follow-on effects from defending the fixed rate.)
Answer:
Why is a depreciation or devaluation of the nation’s currency unable to eliminate a trade
balance deficit when the country’s demand for imports and the foreign demand for the
country’s exports are both highly inelastic?
Answer:
When countries have severe balance of payments difficulties caused by unsustainable
current account deficits, they can approach the International Monetary Fund (IMF) for
assistance. In providing financial assistance, the IMF generally insists that the country
implement a series of policy changes designed to reduce the deficit. These programs are
controversial as they tend to focus on demand reduction. Explain why demand
reduction would solve a current account deficit problem. Would a program designed to
increase the nation’s GDP growth rate be a method of reducing a current account
deficit? Why or why not?
Answer:
When a small country imposes a tariff, the domestic price of the good increases. This
causes a ‘production’ and a ‘consumption’ effect. Explain carefully these two effects, and
discuss whether they increase or decrease the country’s well-being.
Answer:
Country X produces two goods, guns and roses, using labor and land. Assume that
production of guns is relatively labor-intensive and production of roses is relatively
land-intensive. Suppose a large number of workers from a neighboring country migrate
to country X. Carefully explain all the predictions of the Rybczynski theorem’ about the
changes in output of both guns and roses in country X. Be certain to explain any shifts
in resources from one industry to the other.
Answer:
Describe the Bretton Woods exchange rate system and explain how it fell apart.
Answer:
What predictions does the purchasing-power parity theory make concerning the impact
of domestic inflation on the home country’s exchange rate? What are the limitations of
the purchasing-power parity theory?
Answer:
How did the global financial crisis that began in the U.S. in 2007 affect countries in
Europe?
Answer: