Which of the following theories correctly predicts that a country will export those
goods that use the country’s abundant factor(s) intensively and import those goods that
use the country’s scarce factor(s)?
a. a. The theory of absolute advantage
b. b. The theory of comparative advantage
c. c. The Heckscher-Ohlin theory
d. d. The theory of purchasing power parity
Answer:
Assume that investment opportunities are less in high-wealth countries and more in
low-wealth countries. Now, if all barriers to international financial transactions are
removed, borrowers in _____ countries lose and lenders in _____ countries gain.
a. high-wealth; low-wealth
b. low-wealth; high-wealth
c. high-wealth; high-wealth
d. low-wealth; low-wealth
Answer:
The figure given below shows the national market for mopeds in a country. Dd and Sd
are the domestic demand and supply curves of mopeds respectively.
Calculate the welfare loss arising from the consumption effect of the tariff.
a. $14 million
b. $2.5 million
c. $5 million
d. $7.5 million
Answer:
Everything else remaining unchanged, an increase in interest rates in the United States
is most likely to result in:
a. depreciation of the dollar.
b. outflows of capital from the United States.
c. capital inflows into the United States.
d. a decrease in the demand for dollar-denominated financial assets.
Answer:
Which of the following is most likely to happen if the Thai baht depreciates against the
euro?
a. The money supply in Thailand will increase.
b. Thailand will have a trade deficit with the euro-area.
c. Thai demand for European goods will increase.
d. The number of European tourists visiting Thailand will increase.
Answer:
Which of the following is true of trade embargoes?
a. A trade embargo refers to a uniform tariff being imposed on all imported products by
a country.
b. Embargoes are discriminatory restrictions or bans on economic exchange.
c. Unlike other trade restrictions, a trade embargo does not harm the imposing country.
d. Trade embargoes refer to import bans on tangible goods, and not services.
Answer:
A nation is called a lender if:
a. its financial account is in deficit during a time period.
b. its current account is in surplus during a time period.
c. its current account is in deficit during a time period.
d. its net stock of foreign assets is positive.
Answer:
Which of the following mechanisms cannot be adopted by a country to defend a fixed
exchange rate?
a. The government can buy or sell foreign currency in order to influence the actual
exchange rate.
b. The government can allow the currency to self-adjust and the resulting market rate
will be equal to the intended rate in the fixed exchange rate regime.
c. The government can impose a form of exchange control.
d. The government can alter domestic interest rates in order to influence short-term
capital flows.
Answer:
Direct democracy makes tariffs less likely to be voted into law because:
a. the size of the individual losses would be larger than the individual gains from any
potential protectionist measure.
b. domestic producers threatened by increased imports will lobby against the trade
agreements entered into by the countries.
c. each person does not vote on the basis of his/her direct interest as a winner or loser
from protection.
d. the number of people who are hurt by protectionist measures exceeds the number of
people who gain from protectionist measures.
Answer:
Which of the following is the least efficient method of allocating import licenses by the
government?
a. Fixed favoritism
b. A competitive auction
c. Resource-using application procedures
d. A free lottery
Answer:
Suppose the interest rate on one-year U.S. T-bills is 4% and interest rate on one-year
British T-bills is 6.5%. If the dollar is at a forward premium against the British pound of
1%, an American investor who does not want to face exchange-rate risk (but does want
to earn the highest possible return) should:
a. invest in dollar-denominated assets.
b. invest in pound-denominated assets.
c. forego use of the forward exchange rate market.
d. do nothing because exchange-rate risk is unacceptable.
Answer:
Which of the following conditions is NOT necessary for immiserizing growth to arise
in a country?
a. The country’s growth must be strongly biased toward expanding the country’s supply
of exports and the increase in exports must be large enough to have a noticeable impact
on world prices.
b. The foreign demand for the country’s exports must be price inelastic so that an
expansion in the country’s export supply leads to a large drop in the international price
of the export product.
c. Before the growth, the country must be heavily engaged in trade so that the welfare
loss from the decline in the terms of trade is great enough to offset the gains from being
able to produce more.
d. The country must specialize in the production of a single exportable good and import
all the other goods consumed in the economy.
Answer:
As long as _____ and _____ are low enough, foreign direct investment can be used to
reduce total costs by locating different stages of overall production in different
countries.
a. foreign demand; transport costs
b. transport costs; trade barriers
c. trade barriers; domestic demand
d. domestic taxes; foreign demand
Answer:
In a market, distortions do not exist if:
a. the social marginal benefit is greater than the social marginal cost.
b. the social marginal benefit is equal to the social marginal cost.
c. the social marginal benefit is less than the social marginal cost.
d. the private marginal benefit is greater than the social marginal benefit.
Answer:
Assume a two-country two-good two-input model where the following relationships
hold:
(K/L)U.S. > (K/L)ROW
(K/L)automobiles > (K/L)shoes
Where (K/L)U.S. is the capital-labor ratio in the United States, (K/L)ROW is the
capital-labor ratio in the Rest of the World, (K/L)automobiles indicates the capital-labor
ratio in the production of automobiles, and (K/L)shoes indicates the capital-labor ratio in
the production of shoes. Assume further that technology and tastes are the same in the
United States and the Rest of the World. If trade opens up between the United States
and the Rest of the World, according to the Heckscher-Ohlin model, the Rest of the
World will export _____ and import _____.
a. both the goods; neither good
b. shoes; automobiles
c. automobiles; shoes
d. neither good; both of the goods
Answer:
Exchange rate overshooting occurs:
a. because interest rates are sticky.
b. because product prices are sticky in the short run.
c. only if investors and speculators react irrationally to any change in the monetary
policies of the domestic or the foreign government.
d. when one of the nations has a very high rate of inflation.
Answer:
In 2001, which of the following countries replaced its currency with the U.S. dollar?
a. Panama
b. El Salvador
c. Hong Kong
d. Argentina
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.
A downward movement along the vertical axis would correspond to a(n) _____ of the
U.S. dollar.
a. arbitrage
b. swap
c. appreciation
d. depreciation
Answer:
In the figure given below AB is the production-possibility curve of Canada. In the
absence of trade, the price ratio is 1 bushel of wheat/bale of cotton as shown by the line
PQ. The international price ratio is 0.25 bushels of wheat/bale of cotton as shown by the
line RS. I1 and I2 are the pre-trade and the post trade community indifference curves of
Canada respectively. In the absence of international trade, 1 bushel of wheat will
exchange for _____ bale(s) of cotton in Canada. After Canada engages in international
trade, 1 bushel of wheat will exchange for _____ bale (s) of cotton.
a. a. 1; 0.25
b. b. 4; 1
c. c. 1; 4
d. d. 0; 2.5
Answer:
Which of the following asserts that temporary protection from international competition
is needed for a nascent industry that initially has high costs?
a. The developing government argument
b. The infant industry argument
c. The dying industry argument
d. The optimal tariff argument
Answer:
If exporters of a primary product form an international cartel, then:
a. the importing countries will be forced to reduce the barriers on their imports.
b. the world supply of the primary product will expand substantially.
c. the world efficiency will increase.
d. output of the primary product will fall and its price will rise.
Answer:
Under perfect capital mobility and fixed exchange rates, expansionary _____ is
especially effective because the _____.
a. fiscal policy; LM curve effectively is vertical.
b. monetary policy; LM curve effectively is the same as the FE curve.
c. fiscal policy; interest rate does not change.
d. monetary policy; interest rate does not change.
Answer: