In the Plaza Agreement, the United States agreed to reduce its fiscal deficit.
If additional domestic production will lead to positive spillover effects, then an import
tariff that increases domestic production would better adhere to the specificity rule than
would a government subsidy to domestic production.
A ban on exportation of ivory by itself restricts legal supply, raises the world price, and
encourages illegal trade.
A nation’s international investment position shows its stock of international assets and
liabilities at a point in time.
Government procurement practices can restrict imports if the purchasing processes are
heavily biased toward products with large local content.
International macroeconomic policy coordination would give countries the opportunity
to avoid beggar-thy-neighbor policies.
It is easier to transfer capital from one country to another using FDI than to use
international portfolio investment.
The national defense argument advocates the use of import barriers on goods that would
be important in the case of a military emergency.
The exchange-rate mechanism (ERM) crisis occurred because exchange controls were
not adjusted frequently enough.
Historically, the U.S. firms have shown less of a preference for FDI and management
control than have firms from other investing countries.
The Leontief paradox suggests that in the United States, physical capital was an
export-oriented input.
The long-run trends of relative prices of primary products suggest that the countries that
are dependent on the export of primary products are most likely to:
a. experience deterioration in their terms of trade.
b. experience improvement in their terms of trade.
c. be able to import more from abroad.
d. experience an increase in their growth rates.
The figure given below illustrates the market for British pounds. D and S are the
demand and supply curves of the British pounds respectively.
If the U.S. Federal Reserve uses a contractionary monetary policy, the _____ curve
would shift right and the pound would tend to _____.
a. S; appreciate
b. D; depreciate
c. S; depreciate
d. S; appreciate
Under a floating exchange rate regime with a high degree of capital mobility,
international crowding out of expansionary fiscal policy occurs when:
a. the foreign money supply increases.
b. foreign interest rates increase.
c. the country’s currency appreciates.
d. domestic interest rates increase.
H. Ross Perot’s famous claim in 1992 that NAFTA would cause a “great sucking sound”
referred to:
a. a huge increase in foreign direct investment in the U.S.
b. an instant shift of jobs from the U.S. to the Mexico.
c. a rapid increase in the U.S. exports to Canada.
d. a rapid increase in the wage inequality in Mexico.
Governments choose to use voluntary export restraints rather than tariffs because:
a. voluntary export restraints have the potential to generate higher revenue.
b. voluntary export restraints do not generate any welfare loss in the importing country.
c. tariffs more obviously violate the international rules of the WTO.
d. the increase in the price of the imported good in the domestic market is much lower
in case of VERs than tariffs.
If a 1% increase in the price of DVD players leads to a 3% reduction in its sales, we can
conclude that:
a. the supply of DVD players is perfectly inelastic.
b. DVD players are inferior goods.
c. the demand for DVD players is relatively elastic.
d. the demand for DVD’s is relatively inelastic.
A decrease in the foreign interest rate relative to the domestic interest rate _____ the
exchange rate value of a foreign currency in the short run.
a. raises
b. lowers
c. does not affect
d. causes fluctuations in
When domestic production causes pollution that imposes an external cost on the
country, the country may export the wrong products because:
a. the price of the product should be lower, which could lead to less production of the
product.
b. the price of the product should be lower, which could lead to no exports of the
product.
c. the price of the product should be higher, which could lead to more exports of the
product.
d. the price of the product should be higher, which could lead to no exports of the
product.
Refer to Figure 2.1 below. At a price of $70, the consumer surplus equals:
a. $6,000,000.
b. $8,000,000.
c. $5,000,000.
d. $10,000,000.
Which of the following refers to individual efforts by businesses that focus on
improvements in production technologies for existing products and on new production
technologies for new or improved products?
a. Balanced growth
b. Diffusion
c. Import competition
d. Research and development
Consider a two-country, two-commodity model. The table given below shows the units
of good X and good Y produced in country A and country B per labor hour. The number
of labor hours required to produce 1 unit of good Y in country B is:
a. 0.5.
b. 1.
c. 1.43.
d. 2.
If trade corresponds to the Heckscher-Ohlin theory, which of the following is most
likely to happen in the long run after a labor-abundant country engages in free trade?
a. The rate of unemployment in the country is most likely to increase.
b. The total output in the economy will decline.
c. The capital to labor ratio in the export sector will increase.
d. The rental rates of capital will increase but the wage rates will decline.
Shifts in demand away from French products and toward the U.S. products (caused by
forces other than changes in the exchange rate) would result in extra attempts to:
a. buy both euros and dollars.
b. sell both euros and dollars.
c. sell Euros and buy dollars.
d. buy Euros and sell dollars.
In the U.S., the trade adjustment assistance:
a. provides workers who have been displaced from import-competing firms with an
unemployment compensation for at least 24 months.
b. provides subsidies to firms who produce exportable commodities.
c. provides incentives for workers to search for new jobs outside the import-competing
industry before they lose their jobs in these industries.
d. is often criticized on the ground that it leads to a huge drain of government funds.
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.
Suppose the United States has a tariff of $80 per barrel on imported wine. Then, the
United States joins a trade bloc with Chile. What is the net effect on the U.S. well-being
of joining the trade bloc?
a. The national welfare increases by $50 million.
b. The national welfare decreases by $550 million.
c. The national welfare decreases by $800 million.
d. The national welfare increases by $250 billion.
The process of ‘demonetization of gold’ involves:
a. purchase of gold and supply of money into the market by the central banks to defend
the fixed gold prices.
b. sudden fall in private demand for gold in a country due to discovery of a minable
gold deposit.
c. gold sales into the private market in recent decades by the central banks and the IMF.
d. sudden increase in the private demand for gold in a country, forcing its central bank
to sell off gold.
Other things equal, the domestic currency _____ when the domestic money supply
increases relative to the foreign money supply.
a. depreciates in the long-run
b. appreciates in the long-run
c. remains unchanged in the long-run.
d. appreciates in the short-run but returns to its initial value in the long-run.
While developing countries have over _____ of the world’s population, they produce
less than _____ of the world’s output.
a. 5/6; 1/4
b. 7/8; 1/8
c. 2/3; 1/3
d. 5/6; 1/2
Assume that there are only two countries in the world, Pacifica and Atlantica. Both
countries produce and consume surfboards. The pre-trade price of surfboards in
Atlantica is lower than the pre-trade price of surfboards in Pacifica. Draw a three-graph
diagram to depict the Pacifica, Atlantica, and international markets for surfboards
illustrating the pre-trade price difference. Now assume that free trade opens up between
Pacifica and Atlantica. Depict a plausible world price in the graphs. What happens to
overall economic welfare in the two countries? Be sure to label and refer to the graphs
in your answer.
If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.1,
and the government increases expenditures by $10 billion, ignoring foreign-income
repercussions, how much will GDP rise?
a. $20 billion.
b. $10 billion.
c. $25 billion.
d. $15 billion.
Which of the following is an impact of increased illegal immigration on an economy?
a. The rate of inflation in the receiving country increases.
b. The demand for labor in the receiving country declines.
c. The demand for public goods like education and health care increases.
d. The real wage rate of workers increases.
Which of the following correctly identifies the impact of tariffs on the producers of
import-competing products in the imposing country?
e. They can price their products higher than the imported goods.
f. They can expand their production and sales.
g. They are forced to go out of business in the long run.
h. They are forced to charge a price equal to the average cost of production.
Consider that in country A, there are some models of cars available in the luxury
segment produced by the domestic companies. Some more models are available in the
same segment in country B as well. Explain with the help of suitable figures how the
consumers in both the countries gain if these countries engage in free trade.
‘In the shift from no trade to free trade, the monopolistic-competition model can predict
which specific varieties of products will be produced by which countries, and the
models based on substantial scale economies can predict which countries will be the
major production locations for a product.’ Are these claims correct? Explain briefly.
Assume that the three-month forward exchange rate is $2.00/ and a speculator believes
that the spot rate in three months will be $2.05/. How can this person speculate in the
forward market? Also assume that the speculator is willing to take a position of about
$20 million or 10 million. How much will the speculator earn if he or she is correct?
Using the concepts of community indifference curves and production-possibility curve,
explain how the international price of a good is determined in the Heckscher-Ohlin
two-goods model. What is the unit of measurement for the price of a good in this
model?
Describe a situation in which a one-way speculative gamble would be possible and
explain the effects that this type of speculation would have on a country trying to
maintain its fixed exchange rate.
In a two-country world, the opening of free trade does not make everyone in the two
countries better off. What assumption(s) must be made in order to make the claim that
both countries do in fact benefit from the free trade?
How can you define dumping? If the importing country suspects dumping, what action
can be taken?
‘For countries with fixed exchange rates, payments deficits would be self-correcting, if
only governments would stop doing their darnedest to prevent correction.’ Comment,
and include how counterbalancing monetary policy (sterilization) can prevent
self-adjustment from occurring.