In an economic union, member countries do not have free flow of factors of production
but have a common internal policy.
A bank deposit in Germany denominated in euros is a Eurocurrency deposit.
Intra-industry trade in differentiated products is negligible between countries that are
similar in their general production capabilities.
Intervention to defend a fixed exchange rate can magnify the transmission of a foreign
recession into an economy.
Fracking has proven to have minimal environmental effects, so the environmental costs
of fracking are insignificant.
Importation of natural gas into Japan would cause the price of natural gas in Japan to
fall and consumption to increase.
If the interest rate of a foreign country is less than that of the domestic country, then the
foreign country will have a positive forward premium on its currency.
The smaller the country, the more its spending tends to affect other countries.
A price support on agricultural products is a minimum domestic price set by the
government. The government outlaws transaction below the price support, but usually
has no commitment to buy any amounts that farmers cannot sell at this price.
Turkey joined the EU in 2008 after implementing the necessary political and economic
policy changes.
Firms that are participating in persistent dumping will sell less in the foreign market
and charge a higher price than in the home market.
If a country does not have an absolute advantage in the production of at least one
commodity, then it cannot gain from free trade.
An increase in per capita incomes can be expected to have little effect on reducing
emissions that lead to global warming.
Assume the standard trade model with two countries (Alpha and Beta), two goods (food
and drink), and two factors of production (land and labor). Further assume that Alpha is
relatively labor-abundant and drink is relatively labor-intensive. If the countries engage
in free trade, Alpha will:
a. export both food and drink.
b. export drink and import food.
c. import both goods.
d. export food and import drink.
Which of the following is a relevant monetary policy during an acute financial crisis in
an economy?
a. Investment in foreign government bonds should be increased.
b. The domestic currency should be revalued.
c. The reserve requirements for the commercial banks should be increased.
d. The nominal interest rates should be lowered.
The figure given below shows the production possibility curves for Canada (AB) and
the Rest of the World (CD). The opportunity cost of producing a bushel of corn in
Canada and in the Rest of the World are _____ liters and _____ liters of maple syrup
respectively.
a. 9/7; 2
b. 7/9; 2
c. 9/7; 1/2
d. 7/9; 1/2
Which of the following is a means of allocating import licenses by assigning the
licenses without competition, applications, or negotiation?
a. Fixed favoritism
b. Resource-using application procedures
c. Import-license auctions
d. Domestic content requirements
As the recession in the euro area appeared to end on mid-2009, to address a perceived
weakness in the Irish banking system, the Irish government did what?
a. It decreed that all debts of Irish banks were being canceled.
b. It decreed that Irish banks would thereafter pay not more than 3 percent per annum
on deposits.
c. It decreed that it would loan Irish banks the equivalent of 3 billion U.S. dollars.
d. It decreed that the Irish government would guarantee all deposits and debts of the
largest Irish banks.
For a country which has a relatively high rate of inflation and wants some form of
pegged exchange rate, which of the following exchange rate regimes is the best choice?
a. Fully fixed exchange rate
b. Adjustable peg
c. Crawling peg
d. Fully convertible
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. According to the figure, if import licenses are allocated based
on a resource-using procedure, the loss to the economy will be:
$80
0
a. $35 million.
b. less than $10 million.
c. greater than $35 million.
d. $25 million.
Which of the following factors can lead to an increase in demand for coffee at
Starbucks?
a. An increase in household income
b. An increase in the price of sugar
c. An increase in the price of coffee beans
d. A 10 percent decline in local population
An increase in a nation’s financial liabilities to foreign residents is a:
a. reserve inflow.
b. reserve outflow.
c. capital imports.
d. capital exports.
While a large country can either be better off or worse off due to the imposition of a
tariff, the same country will necessarily be worse off as a result of imposing an
equivalent import quota.
Which of the following refers to the consumption effect of a tariff on imported
automobiles?
a. The decline in the purchase of the imported product due to the increase in its price.
b. The net increase in the availability of the domestic automobiles for the consumers
owing to higher prices.
c. The net increase in the government revenue by taxing the domestic consumers who
buy the imported automobiles.
d. The net increase in the consumption of imported automobiles by the domestic
consumers.
Which of the following best describes a situation in which a country buys domestic
currency in order to defend a pegged exchange rate, and also uses a policy in the
domestic economy in to prevent the domestic money supply from changing?
a. Official intervention
b. Sterilized intervention
c. Maintaining a crawling peg
d. Deficit without tears
Which of the following capital transaction items is entered as a debit in the U.S. balance
of payments?
a. A U.S. resident transfers $100 from his account at Credit Suisse in Basel
(Switzerland) to his account at a San Francisco branch of Wells Fargo Bank.
b. A French resident transfers $100 from his account at Wells Fargo Bank in San
Francisco to his Credit Suisse account in Basel.
c. A U.S. resident sells his IBM stock to a French resident.
d. A U.S. resident sells his Credit Suisse stock to a French resident.
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
If the initial prices of wheat and cloth are $3 per unit then:
a. both the wage rate and the rental rate are equal to $1.
b. the wage rate and the rental rate are $1 and $2 respectively.
c. the wage rate and the rental rate are $2 and $3 respectively.
d. both the wage rate and the rental rate are equal to $2.
Which of the following statements is NOT accurate?
a. A fundamental disequilibrium can result in a one-way speculative gamble.
b. An ongoing disequilibrium in the foreign exchange market can be sterilized by
keeping official reserve holdings steady.
c. Fundamental disequilibrium calls for a persistent series of interventions.
d. The value of the foreign currency declines if a country revalues its own currency.
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 a bushel of corn in the United Kingdom is _____.
a. 2/3 of an umbrella
b. 3 umbrellas
c. 1/2 of an umbrella
d. 2 umbrellas
If the price of a normal good is measured along the vertical axis and its quantity along
the horizontal axis, an increase in the price of the good will lead to:
a. a downward movement along the demand curve.
b. an upward movement along the demand curve.
c. a rightward shift of the demand curve.
d. a leftward shift of the demand curve.
A deficit in the overall balance of payments of a nation generally is an indication that:
a. the country’s monetary authority is selling foreign currency.
b. the country’s monetary authority is buying foreign currency.
c. the country’s monetary authority is buying domestic government bonds.
d. the country’s monetary authority is selling domestic currency.
The figure given below shows the market for shoes in the U.S. The domestic price line
with tariff lies above the international price line. Dd and Sd are the domestic demand
and supply curves of shoes respectively.
The imposition of a tariff on shoes caused economic welfare in the U.S. to _____ by an
amount measured by the area _____.
a. fall; c
b. fall; (b + d)
c. rise; (b + c+ d)
d. rise; (a + c)
One of the reasons that protectionists and government officials may favor using a quota
instead of a tariff is:
a. quotas generate more revenue for the government than tariffs.
b. quotas ensure that the quantities of imports are strictly limited.
c. quotas create less market distortions than tariffs.
d. quotas give less power to politicians than tariffs.
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. If the government
auctions the import licenses, the national well-being will _____ by _____.
a. increase; $40 million
b. decrease; $12 million
c. increase; $65 million
d. decrease; $5 million
Suppose country A relies on exports of two primary products, sugar cane and rubber.
a. According to the predictions of Engel’s law, what will happen to the terms of trade of
country A in the long run?
b. If you are to provide economic policy advice to this nation’s government, what
advice would you give? In your answer, be sure to explain the reasons behind your
advice.
Explain how products produced by high-wage workers in the United States can
compete with the products manufactured in countries whose workers earn much lower
wages.
Suppose country X is relatively labor abundant and relatively land scarce. Country Y,
on the other hand, is relatively labor scarce and relatively land abundant. The
production of corn is relatively land intensive while, the production of shoes is
relatively labor intensive. Explain the short and long-run effects of opening to free trade
between these countries on the incomes of: workers employed in the production of corn
in each country; workers employed in the production of shoes in each country; land
used in the production of corn in each country; and land used in the production of shoes
in each country.
Explain the possible reasons for and benefits of international macroeconomic policy
coordination. What are two different reasons why we actually see little international
macroeconomic policy coordination?
Suppose a recent study shows that in country A, consumers pay an average of about
$169,000 per job per year maintained by import protection. Given that these employees
earned much less than $169,000 per year, it would be much cheaper to simply pay these
workers not to work and impose no import restrictions. Why do you think that, in spite
of the fact that there is a net welfare loss, the government of country A has maintained
these barriers?
What is intra-industry trade? Is intra-industry trade consistent with the predictions of
the Heckscher-Ohlin theory? Explain, and relate your discussion to evidence about
trade between industrialized countries and developing counties, and about trade among
industrialized countries.
Briefly discuss different methods of allocating quota licenses to the importers by the
government. Also explain the inefficiency implications of each method.
A country can actually improve its well-being if it is in a position to impose a non-zero
‘optimal tariff’. Explain what an optimal tariff is, what conditions must be in place in
order to implement an optimal tariff, and how such a tariff will increase national
welfare. Assuming a country could impose an optimal tariff, would you suggest it do
so? Justify your answer.