The figure given below shows the market for computers in the U.S. The domestic price
line inclusive of the tariff lies above the international price line. Dd and Sd are the
domestic demand and supply curves of computers respectively.
Under free-trade the U.S. imported _____ computers, but following the imposition of
the tariff the U.S. began to import _____ computers.
a. 100,000; 70,000
b. 70,000; 100,000
c. 200,000; 190,000
d. 90,000; 100,000
Answer:
A moral hazard arises when:
a. risk averse individuals do not purchase insurance.
b. high risk individuals are unable to find insurance.
c. insurers are unable to fully pay legitimate claims.
d. insurance leads the insured to be less careful.
Answer:
Suppose country A produces two goods, good X and good Y. Production of good X
involves an intensive use of highly skilled workers. However, good Y is a relatively
capital-intensive good. If the country experiences a wave of immigration of highly
skilled workers, investment in physical capital remaining unchanged, the Rybczynski
theorem will predict that:
a. the production of good Y will contract.
b. the production of both the goods will expand in the same proportion.
c. the production of good X will contract.
d. the production of both the goods will increase, but increase in good X will be much
higher than increase in good Y.
Answer:
The exchange rate policy of a ‘crawling peg’ adopted by the Chinese government in
2005 means that the government
a. allowed small and controlled changes in the exchange-rate value over time.
b. pegged the Yuan to the U.S. dollar at the equilibrium exchange rate.
c. held a balanced portfolio of assets including a variety of foreign currencies.
d. caved in to pressures from foreign governments.
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.
By investing in U.K. treasury bills rather than U.S. treasury bills, and covering
exchange-rate risk, U.S. investors earn an approximate extra return for 6 months of:
a. 0.5 percent.
b. 1.5 percent.
c. 3.0 percent.
d. 4.0 percent.
Answer:
Concern about the ability of independent foreign firms to maintain product quality:
a. often results in the formation of a license agreement between a foreign firm and an
MNE.
b. makes licensing firms in the foreign markets preferable to FDI.
c. is an inherent disadvantage faced by the multinationals.
d. makes FDI preferable to licensing firms in the foreign markets.
Answer:
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 to $4 per unit.
However, the price of wheat remains unchanged. As a result of the change in the price
of cloth, the landowners are most likely to be able to:
a. purchase more of both cloth and wheat than in the absence of trade.
b. purchase more wheat but less cloth than in the absence of trade.
c. purchase less of both cloth and wheat than in the absence of trade.
d. purchase more cloth but less wheat than in the absence of trade.
Answer:
When taking into account foreign-income repercussions, the spending multiplier is:
a. smaller because an increase in domestic imports causes current account deficit.
b. larger because an increase in domestic imports causes foreign income to rise and thus
boosts domestic exports.
c. smaller because an increase in domestic imports lowers the growth in the domestic
exports.
d. larger because an increase in domestic imports causes a surplus in the official
settlements balance.
Answer:
Standard loans of the IMF to assist a country to address its balance of payment
problems are called:
a. stand-by arrangements.
b. extended funds.
c. supplemental reserves.
d. compensatory financing measures.
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 between North and South is allowed, how many workers will choose
to migrate to North?
a. 20 million
b. 30 million
c. 40 million
d. 50 million
Answer:
Assume that the FE curve is flatter than the LM curve. A negative external capital-flow
shock shifts the FE curve left. Under zero sterilization, which one of the following will
happen next?
a. Because of the incipient balance of payments deficit, LM curve will shift leftward
b. Because of the incipient balance of payments surplus, LM curve will shift rightward
c. Because of the incipient balance of payments deficit, IS curve will shift rightward
d. Because of the incipient balance of payments surplus, IS curve will shift leftward
Answer:
What is fracking?
a. A process that uses a combination of hydraulic pressure and horizontal drilling to
allow the extraction of natural gas that cannot otherwise be extracted.
b. The difference between the cost of producing natural gas and transporting it to
consumers and the price that consumers are willing to pay for the natural gas.
c. The sale of natural gas on the black market in foreign countries without approval of
the U.S. government.
d. The imposition of import tariffs on natural gas exported from the U.S. to protect
domestic producers in the importing country.
Answer:
The figure given below shows the marginal external benefit curve (MEB) of the country
from the production of domestic mopeds.
The increase in external benefits to the nation of the increased production of mopeds
because of the tariff is:
a. $13.25 million.
b. $2.5 million.
c. $5 million.
d. $7.5 million.
Answer:
The figure given below shows the U.S. market for imported wine. For simplicity, we
consider export supply curves to be flat. Chilean wine is available for $480 per barrel
and French wine is available for $420 per barrel.
Under free trade, how many barrels of wine will the United States import and who will
they import from?
a. 15 million barrels from Chile
b. 22 million barrels from France
c. 10 million barrels from France
d. 22 million barrels from Chile
Answer:
For small open economy, assume that the marginal propensity to import is 0.3, and that
interest rates, exchange rates, and the price level are all constant. If an increase of $10
billion in government spending results in an increase of $6 billion in imports, then:
a. real GDP increases by $4 billion.
b. the spending multiplier is 2.
c. taxes increase by $10 billion.
d. real domestic investment decreases by $4 billion.
Answer:
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 rises to 42 units,
the consumption of clothing:
a. rises to 33 units.
b. declines to 25 units.
c. rises to 35 units.
d. declines to less than 20 units.
Answer:
Under a floating exchange rate regime with a low degree of capital mobility, a change
in the exchange rate value of domestic currency following expansionary fiscal policy
will tend to:
a. deteriorate the current account.
b. decrease the country’s holdings of official reserve assets.
c. give a trade-based stimulus to domestic production.
d. cause a surplus in the financial account.
Answer:
Which of the following groups is most likely to be benefitted when a country engages
in free trade?
a. All the domestic producers of the country
b. The manufacturers of exportable goods
c. The producers in the import-competing industries
d. The workers employed in the import-competing industries
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. How much would
the importing nation lose if the government used VER instead of import quota?
a. $12 million
b. $20 million
c. $52 million
d. $24 million
Answer:
Which of the following is most likely to be an impact of FDI?
a. There may arise temporary unemployment in the home country.
b. The rental rate of capital declines in the home country.
c. The wage rate declines in the host countries.
d. Government revenue of the home country increases.
Answer:
Absolute PPP holds for a product bundle if:
a. the law of diminishing returns holds for all the goods in the bundle.
b. the goods are traded with minimum transportation costs.
c. there exists free trade in all the commodities.
d. the law of one price holds for each of the goods in the bundle.
Answer:
The figure given below shows a situation where the producers of good X are forming an
international cartel. Here, MR = Marginal Revenue, MC = Marginal Cost, and P =
Price. The cartel use monopoly pricing for its output.
How much would the consumer surplus fall after the formation of the cartel?
a. $5 billion
b. $15 billion
c. $20 billion
d. $50 billion
Answer: