The formation of a trade bloc necessarily improves well-being worldwide because it is a
step toward free trade.
Answer:
In the long run, a country with a relatively high inflation rate tends to have a
depreciating currency.
Answer:
Externalities are direct benefits or costs accruing to individuals or groups of individuals
who were not participants in the activity.
Answer:
Most foreign exchange trading is done among the banks themselves in the retail part of
the foreign exchange market.
Answer:
Larger interventions to stabilize a currency are usually more effective than smaller
interventions.
Answer:
While trade restrictions do provide gains to certain segments in the economy, such
restrictions will always lower national welfare.
Answer:
Suppose the United States’ imports substantially affect foreign incomes, and the foreign
countries import from the United States. The United States’ spending multiplier will
exceed the spending multiplier for a comparable small open economy.
Answer:
Arthur Pigou put forward the idea that positive and negative externalities can be
resolved by creating new private property institutions.
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Free trade is a zero-sum activity because a county always gains at the expense of its
trading partner.
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The opportunity cost of producing a good is the additional labor cost incurred to
produce an extra unit of the good.
Answer:
Most countries are able to use sterilized interventions to run deficits and surpluses
indefinitely.
Answer:
Government officials wanting to defend a fixed exchange rate may not have sufficient
reserves of foreign currency to keep the price fixed indefinitely.
Answer:
In 2013, U.S. households, businesses, and government were buying more goods and
services than they were producing.
Answer:
Hollywoodland, being self-sufficient in most products, trades only two goods with the
Rest of the World (ROW), movies and automobiles. Both of these goods are produced
using skilled labor (L) and capital (K) with the returns to capital being the interest rate
(r) and the returns to skilled labor being the wage rate (w). The production of
automobiles is capital intensive relative to the production of movies and Hollywoodland
is skilled-labor abundant relative to the ROW.
a. State the Heckscher-Ohlin theorem and use it to predict the pattern of trade between
Hollywoodland and the ROW.
Answer:
Consider firm X belongs to country A and firm Y belongs to country B. Suppose that it
is technologically feasible for both firms to produce good Z. Also assume that if they
do, then they will be the only suppliers of good Z in the world. Now, both the firms
have to decide simultaneously whether to produce good Z or not. Figure (a) shows the
payoffs of both firms if their respective governments do not provide them with export
subsidies. Figure (b) shows the payoffs when the government of country B grants an
export subsidy to firm Y, but the government of country A does not. From Figure (b),
the country B’s government’s decision to subsidize firm Y:
a. can be good for country B because firm X will decide not to produce.
b. will be good for country B only if government of country A decides to subsidize firm
X.
c. can never lead to an optimal solution since firm X will surely produce.
d. will be suboptimal since it will lose its customers in country A.
Answer:
The table given below shows the number of umbrellas and bushels of corn produced in
the United Kingdom and the Rest of the World per labor hour. The opportunity cost of
producing an umbrella in the United Kingdom is _____.
a. 2 bushels of corn
b. 3 bushels of corn
c. 3/2 of a bushel of corn
d. 1/3 of a bushel of corn
Answer:
The following equations describe the prices and marginal costs of producing corn and
toys in a country. The numbers in the equations indicate the amounts of labor and land
needed to produce a unit of corn and a unit of toys. In the equations, the wage rate and
the rental rate are denoted by ‘˜w’ and ‘˜r’ respectively.
Pcorn = 80w + 40r
Ptoys = 100w + 30r
a. If the price per unit of corn and the price per unit of toys are initially $200, calculate
the wage rate and the rental rate. Calculate the labor cost per unit of corn and per unit of
toys. What is the rental cost per unit of corn and per unit of toys?
Answer:
The table given below shows the number of umbrellas and bushels of corn produced in
the United Kingdom and the Rest of the World per labor hour. 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. 2/3 bushels of corn per umbrella; 2 bushels of corn per umbrella
b. 2/3 bushels of corn per umbrella; 3/2 bushels of corn per umbrella
c. 3/2 bushels of corn per umbrella; 3 of a unit of corn
d. 1/3 bushels of corn per umbrella; 3 bushels of corn per umbrella
Answer:
The figure given below shows the market for MP3 players in a small country. Dd and Sd
are the domestic demand and domestic supply curves of the MP3 players before the
imposition of the quota. (Sd + QQ) is the total available domestic supply curve after the
quota has been imposed. If the government auctions the import licenses, the quota on
MP3 players will result in a(n) _____ in the national well-being by_____.
a. decrease; $35 million
b. decrease; $85 million
c. increase; $70 million
d. increase; $195 million
Answer:
One disadvantage of the pre-1914 gold standard was that:
a. slow expansion of the world’s gold stock led to too much inflation in the prices of
products other than gold.
b. internal prices of economies being rigid, there arose uncertainty in the international
trade.
c. pressures to adjust were placed mainly on countries in payments deficit situations,
and not on countries in surplus.
d. central banks often changed their announced gold prices to achieve competitive
devaluations.
Answer:
A bottle of wine can be produced in France with 2 labor hours, and in the United States
with 4 labor hours. A pound of beef can be produced in France with 1 labor hour, and in
the United States with labor hours. Which of the following is true in this context?
a. France has a comparative advantage in the production of beef.
b. France has an absolute advantage in the production of beef.
c. The United States has an absolute, but not a comparative advantage in the production
of beef.
d. The United States has both comparative and absolute advantage in the production of
beef.
Answer:
The act of taking a net asset position or a net liability position in some asset class is
referred to as _____.
a. hedging
b. speculating
c. investing
d. buying
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.
What is the cost of the export subsidy to the Korean government?
a. $375 million
b. $3.75 billion
c. $4.5 billion
d. $52.25 billion
Answer:
Internal shocks to an economy with a fixed exchange rate will:
a. have the same types of impacts as monetary and fiscal policy changes.
b. have no impact on the domestic economy but will lead to external imbalances.
c. have no impact on both the country’s internal balance and the country’s balance of
payments.
d. have no impact on the country’s internal balance but will change the country’s
balance of payments.
Answer:
Which of the following is true of foreign exchange markets?
a. The foreign exchange market is a single gathering place where traders shout buy and
sell orders at each other.
b. Individuals’ exchanges of currencies comprise the largest portion of overall foreign
exchange trading.
c. The laws of demand and supply are not applicable in a foreign exchange market.
d. Most foreign exchange trading involves the exchange of U.S. dollars for other
currencies.
Answer:
The central bank of Alanza, a developing economy, persistently intervenes in the
foreign exchange market to prevent its currency from appreciating against the dollar.
Which of the following is the most probable consequence of this intervention by the
central bank?
a. The money supply in Alanza will decline.
b. Alanza’s exports will decline in the near future.
c. The rate of inflation in Alanza will increase.
d. Alanza is most likely to have a trade deficit with the United States.
Answer:
Countries that are open to international trade:
a. cannot suffer from immiserizing growth.
b. tend to grow faster than the closed economies.
c. tend to lose out on the benefits of technological diffusion.
d. do not experience biased growth.
Answer:
If international trade is based on product differentiation, for a country the basis for:
a. exporting is the domestic production of unique models or varieties demanded by
some consumers in foreign markets.
b. importing is that the price of the imports is the same as the price of the domestic
products.
c. importing is that foreign firms usually enjoy external scale economies.
d. exporting is that the domestic producers can charge a much higher price in the
international markets.
Answer:
The figure given below shows a shift in the production-possibility curve of a country
from AB to AC. Here, S1 and C1 are the initial production and consumption points
respectively. S2 and C2, on the other hand, are the final production and consumption
points respectively. The shifts shown in the given figure indicate that:
a. the domestic demand for wheat is higher than the demand in the international market.
b. the country can now consume more of both goods.
c. the world price of wheat has increased.
d. the terms of trade for this country have deteriorated.
Answer:
Suppose a country’s government is deciding whether or not to impose an import quota
to protect the domestic automobile industry. Will the domestic steel-producing firms be
in favor of a quota designed to protect the local automobile producers? Why or why
not?
Answer:
Discuss how openness to trade can influence economic growth in a country.
Answer:
Should receiving countries ban all forms of immigration because non-immigrant
workers in the receiving country are hurt by immigration? Discuss.
Answer:
Using relevant diagrams, illustrate a two-country two-good model in which one country
has an absolute advantage in the production of both goods, but each has a comparative
advantage in the production of only one good.
Answer:
Suppose the government of a small country has to frame a policy which would promote
the level of domestic production or employment of import-competing industries. It is
left with a choice of either imposing a tariff on the foreign goods or providing
production subsidies to the domestic firms. Which policy will the government choose
and why? Explain with a diagram. Is there a particular principle that can guide the
government’s decision? If so, name and state it.
Answer:
Exchange controls used by a country’s government to maintain an overvalued exchange
rate result in considerable costs to the country. Explain the situation with a diagram and
use it to show the deadweight loss. Describe the role that bribery and parallel markets
can play in economies with exchange controls.
Answer:
What are the five major forces that can lead to financial crises? Explain each of these
forces in depth.
Answer: