International capital-flow shocks tend to be less disruptive with floating exchange rates
than with fixed exchange-rates.
Answer:
Too much of a good is produced if some external benefits of producing or consuming it
are ignored by the private decision makers.
Answer:
Gains from joining a trade bloc will be higher if the import demands of the member
countries are relatively elastic.
Answer:
With dollarization adopted by a country, the ‘seigniorage profit’ from issuing currency
in the country goes to a foreign government.
Answer:
During 2005-2008, the Chinese currency gradually depreciated against the U.S. dollar.
Answer:
The law of one price works well for heavily traded commodities, either at a point in
time or for changes over time.
Answer:
If the dollar per pound exchange rate changes from $1.50 per pound to $2 per pound, it
implies that the dollar has appreciated against the pound.
Answer:
When increasing amounts of a variable factor are added to a fixed factor, the output
increases but at a diminishing rate.
Answer:
Expansionary monetary policy will cause the FE curve to shift to the right.
Answer:
For a country with a fixed exchange rate and no sterilization: When the FE curve is
flatter than the LM curve, a negative domestic spending shock to the IS curve creates a
balance of payments deficit, which then causes the LM curve to shift to the left.
Answer:
The Maastricht Treaty laid out the convergence criteria for the Exchange Rate
Mechanism.
Answer:
The figures given below illustrate a situation of a trade embargo. In Figure (a) Dd and
Sd are the domestic demand and supply curves of the embargoing countries. The import
price is P0 and the target country imports the amount Q0 before the embargo is imposed.
The embargo initiator(s) lose area _____ while the target country loses _____.
a. (b + c); (a + c)
b. (a + d); (b + c)
c. a; b
d. a; (b + c)
Answer:
Which of the following statements is true?
a. The special drawing right (SDR) is a basket of currencies made up of U.S. dollars,
euros, British pounds, and Japanese yen.
b. Today, only China and Switzerland have currencies fixed to gold.
c. Currencies whose prices are fixed to the same commodity would ensure that arbitrage
will not work and exchange rates will be floating.
d. A country maintains a floating exchange rate value to weaken the international value
of its currency.
Answer:
Which of the following explains the spread of financial crises from one country to
another?
a. Global contagion
b. Moral hazard
c. Butterfly trade
d. The Doppler effect
Answer:
A monopolistically competitive firm:
a. sets price of its product equal to its marginal cost of production.
b. sells a homogeneous product in the market.
c. faces a perfectly elastic demand curve.
d. earns zero economic profits in the long-run.
Answer:
From pre-World War II years to the early 1980s, which of the following countries was
the principal lender in the world?
a. The United States
b. The United Kingdom
c. Germany
d. Japan
Answer:
Suppose the domestic supply (QS) and demand (QD) for skateboards in the United
States are given by the following set of equations:
QS = ‘“60 + 3P
QD = 390 ‘“ 2P
In the absence of trade with the rest of the world, the consumer surplus in the United
States skateboard market equals _____ and the producer surplus equals_____.
a. $7,050; $11,525
b. $31,500; $9,450
c. $20,474; $7,350
d. $11,025; $7,350
Answer:
The _____ established the criteria for participation in the European Monetary Union
(EMU).
a. Exchange Rate Mechanism
b. Treaty of Rome
c. European Central Bank
d. Maastricht Treaty
Answer:
Assume that country A provides a subsidy on its exports to country B. Country B is
about to impose a countervailing duty (of the same magnitude as the export subsidy) on
the imports from country A. Which of the following statements is true in this context?
a. The exporters in country A gain surplus when the government of country B imposes a
countervailing duty.
b. The import-competing producers in country B are worse off after the imposition of
the countervailing duty by the government.
c. The overall national well-being of country B would be lower when the domestic
government imposes a countervailing duty to offset the impact of the export subsidy.
d. The consumers in country B are better off after the government of country B imposes
a countervailing duty.
Answer:
For which of the following environmental pollutions would we expect that an
inverted-U relationship would exist between environmental harm and per capita
income?
a. Carbon dioxide emissions
b. Lead pollution in water
c. Sulfur dioxide in air
d. Airborne heavy particles
Answer:
Which of the following allows member countries to import from other member
countries freely, but imposes trade barriers against imports from outside countries?
a. A trade embargo
b. A trade bloc
c. A cultural union
d. A trade union
Answer:
Which of the following is true of product cycle hypothesis?
a. It explains how a country completely specializes in the production of the good that
was first invented in this country.
b. It ignores the importance of research and development in the improvement of
production technology in a country.
c. It explains how an initial exporter of a good ends up importing the good from other
countries.
d. It assumes that the demands for various commodities in the countries do not change
over time.
Answer:
An increase in capital inflows in the United States will result in a(n) _____ foreign
currency and a(n) _____ the U.S. dollars in the foreign exchange market.
a. increase in the demand for; increase in the supply of
b. increase in the supply of; increase in the demand for
c. shortage of foreign currency; surplus of
d. decrease in the supply of; decrease in the demand for
Answer:
Which of the following is a major drawback of the EMU?
a. Its inability to raise efficiency in production, thus lowering aggregate output of the
member nations
b. Its inability to bring down the transaction costs of trade between member nations
c. Its inability to use monetary policies to address a recession that affects some member
countries but not others
d. Its inability to keep the actual average inflation rate close to its target inflation rate
Answer:
If two countries choose to fix the exchange rates among their currencies, then:
a. the nominal exchange rate will remain consistent independent of inflation rates.
b. the country with high rate of inflation will eventually suffer current account deficits.
c. the country with a current account deficit can increase its money supply to delay the
need for intervention.
d. there usually is more pressure on the government whose country has an overall
payments surplus than on the government whose country has an overall payments
deficit.
Answer:
Which of the following will cause the LM curve to shift to the left?
a. A reduction in the interest rates
b. A decrease in the average price level
c. An exogenous decrease in money demand
d. A contractionary monetary policy
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 one-year forward premium against the British
pound of 3%, the covered interest differential is:
a. the same as the uncovered interest differential.
b. equally favoring investments in both the nations.
c. in favor of investments in the United Kingdom.
d. in favor of investments in the United States.
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.
If the price of the 6-month forward pound were to _____, U.S. investors would see no
return difference between covered U.K. investment and domestic U.S. investment.
a. rise to $1.99
b. rise to $2.01
c. fall to $1.96
d. fall to $1.97
Answer:
The United States produces some of the electronic components used as inputs in its
fighter planes. But due to the limited number of companies that produce these items, it
is forced to import these parts from Japan as well. There is concern that in the case of a
prolonged war, these important imports may not be available. Fearing that the air force
may be unable to fulfill its tasks in the case of a prolonged war, the specificity rule
suggests that the United States should:
a. ban the importation of these electronics parts in order to protect jobs in this industry.
b. impose tariffs on the imports of these electronic parts.
c. subsidize the domestic production of these electronics parts.
d. impose high taxes on the production of these electronic parts.
Answer:
Which of the following factors is most likely to result in a decline in the relative price
of the primary products in the world market?
a. Increase in imports of primary products
b. Development of synthetic substitutes for primary products
c. Rapid increase in world population
d. Increase in the prices of inputs used in producing primary products
Answer:
The tax-or-subsidy approach for solving externality problems was developed by:
a. Arthur Pigou.
b. Ronald Coase.
c. Eli Heckscher.
d. Bertil Ohlin.
Answer:
Financing from the parent company to its foreign affiliates is generally a small
percentage of total funding because:
a. the returns on such investment are taxed at very high rates.
b. the parent firm wants to reduce the risks to which its foreign activities are exposed.
c. most foreign governments have imposed quotas of foreign investment in their
domestic economy.
d. most major home-country governments limit investment in foreign firms by their
domestic firms.
Answer:
When firm X doubled its output, it was found that its cost per unit declined by 10%. It
can be concluded that:
a. the firm was facing external scale diseconomies.
b. the firm was enjoying internal scale economies.
c. the firm was operating on the inelastic portion of the demand curve.
d. the marginal cost of production at the initial output level was constant.
Answer:
Which of the following is a ‘unit-free’ measure?
a. Consumer surplus when the demand curve is horizontal
b. Producer surplus when the supply curve is vertical
c. Market supply
d. Price elasticity of demand
Answer:
Suppose a small country experiences economic growth which leads to an increased
willingness to trade. The country’s terms of trade will _____ because the prices of its
exports will _____ relative to the price that it has to pay for its imports.
a. worsen; fall
b. improve; not change
c. remain unaffected; not change
d. remain constant; fall
Answer:
If a country’s currency is _____, then the country can borrow from other countries
almost without limit by issuing assets that will be held by the central banks of other
countries.
a. pegged
b. floating
c. a reserve currency
d. golden
Answer: