A central bank can sterilize the increase in the money supply that results from an
intervention to defend a fixed exchange rate by selling domestic government bonds.
Proposals for reform of antidumping policy include restricting its use to cases where
predatory dumping is plausible, accounting for consumer interests in the analysis of
injury from dumping, and replacing antidumping policy with safeguard policy.
Dollarization will reduce exchange-rate risk for a country.
An exchange rate regime in which the government intervenes in the market to influence
the market-determined exchange rate can be called either a dirty float or a managed
float.
According to the standard IS-LM-FE model, a country with a fixed exchange rate can
attain both internal and external balance by using an appropriate mix of monetary and
fiscal policies, without resorting to devaluation or revaluation.
The concept of purchasing power parity illustrates the relationship between the national
price levels and exchange rates in the long-run.
In second-best world, private actions will lead to the best possible outcomes for the
society.
Fiscal policy is the set of central-bank policies, institutions, and bank behavioral
patterns governing the availability of bank checking deposits and currency in
circulation.
The infant industry argument goes against the initiative of some developing countries to
develop more advanced manufacturing industries
The increasing oil prices during 2004-2008 show OPEC’s power to overcome market
pressures for declining prices.
For a small country, the sum of the production and the consumption effects indicate the
net loss in economic welfare due to the imposition of a tariff.
Mercantilists believed that a country gains from international trade only at the expense
of another country or countries.
For a small country with closed economy, if the marginal propensity to save is equal to
0.2, then the spending multiplier indicates that a $10 exogenous increase in government
spending will lead to a $20 increase in GDP.
Import tariffs are efficient second-best policy solutions for many developing countries
where government revenue is difficult to obtain by other means such as an income or
sales tax.
The spot exchange rate is the current price for an exchange that will take place a month
or more in the future.
The gains from trade are divided in proportion to the price changes that trade brings to
the trading countries.
The production-possibility curve shows various bundles of quantities of two goods that
lead to the same level of well-being to the consumers.
If a country wants to make extensive use of monetary policy to address domestic issues,
then that country should adopt a floating exchange-rate.
Growth rates have been consistently lower for developing counties than for developed
countries.
In a typical domestic lending boom, almost all of the amount borrowed is dedicated
toward investments to bring about substantial future gains.
Which of the following is NOT true of a nation’s production-possibility curve?
a. The production-possibility curve shows all combinations of amounts of different
products that an economy can produce when its resources are fully employed.
b. Points inside the production-possibility curve are feasible, but may represent
unemployment of some of the economy’s resources.
c. Points outside the production-possibility curve are not feasible production points
given the resources in the economy.
d. The negative slope of the production-possibility curve indicates declining
productivity.
Monetary expansion, with perfect capital mobility, is effective in improving
international price competitiveness of a country in:
a. the short-run with floating exchange rates.
b. the long-run with floating exchange rates.
c. the short-run with fixed exchange rates.
d. the long-run with fixed exchange rates.
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. The quota on
T-shirts causes domestic consumers to:
a. gain $7 million.
b. lose $7 million.
c. lose $70 million.
d. lose $77 million.
The table given below shows the units of land and labor required to produce a unit of
bread and cheese respectively in country X. If country X is a relatively land-abundant
country, the opening up of free trade would cause the price of bread relative to cheese
to:
a. rise.
b. fall.
c. stay the same.
d. initially rise but fall afterward.
Suppose country A is labor-abundant and capital-scarce and country B is labor-scarce
and capital-abundant. Good X is produced using a labor-intensive technology and good
Y is produced using a capital-intensive technology. Which of the following can most
reasonably be inferred from the given information?
a. a. Country A would export good X
b. b. Country B would import good Y
c. c. Country A would import good X
d. d. Country B would import both good X and good Y
Which of the following is NOT among the pressures imposed by the fixed-rate system
on the government of a country that has ongoing international payments deficits?
a. The country’s money supply increases substantially resulting in a higher inflation.
b. The country faces a limit on its ability to sustain deficits.
c. If the country cannot sterilize, then its money supply will decrease.
d. The country suffers deterioration in its creditworthiness.
At which of the following did the major countries of the world agree to intervene in the
foreign exchange markets to lower the value of the U.S. dollar?
a. Bretton Woods
b. Plaza Agreement
c. Bonn Summit
d. Louvre Accord
Which of the following transactions could contribute to a British current account
surplus? Discuss.
a. A French firm sells defense equipment to the British government for 250 million
pounds in bank deposits
Which of the following will cause a rightward shift of the market supply curve?
a. An increase in the product price
b. A decrease in input prices
c. Change in consumers’ tastes
d. An increase in national income
The demand and supply functions of the food grains in country X are as follows:
QD = 150 ‘“ 0.6P
QS = ï€40 + 0.5P
where QD and QS are in millions of tons and P is the price per ton. The world price of
grain is $200 per ton. The figure given below illustrates the demand and supply
functions of food grains in country X.
a. In a situation of free trade, how much food grains would be produced, consumed, and
traded in country X?
b. As a response to alleged unfair foreign practices, the U.S. farmers successfully lobby
for a $20 export subsidy per ton of the grains exported. Assuming that country A is a
‘small country’ in the world grain markets, and that imports of food grains are banned,
illustrate the impact of the export subsidy on domestic prices, consumption, production,
and exports of grain by this country. Also indicate the welfare effects on producers and
consumers. Calculate the cost of the subsidy to the government, and the overall change
in welfare in country A.
The figure given below shows the production-possibility curves of Canada (AB) and
the Rest of the World (CD). The pre-trade price ratio in Canada and the Rest of the
World are given by the lines P1 and P3 respectively. The international price ratio faced
by the countries is represented by the line P2. I1 and I2 are the pre-trade and post-trade
social indifference curves for both Canada and the Rest of the World respectively. As a
result of specialization and trade, cotton production in the world increases by _____
bale(s) and wheat production increases by _____ bushel(s).
a. a. 0; 3
b. b. 0; 1
c. c. 24; 19
d. d. 1; 0
Suppose the United States exports capital-intensive goods like construction equipment
to the rest of the world and imports clothing, a labor-intensive good. Both the goods use
capital and labor as their only inputs. Recently the capital endowment of the U.S. has
increased substantially, but the size of the labor force has remained unchanged.
a. What is the effect of the change in endowment on the shape and position of the
production-possibility curve of the U.S.? Illustrate your answer with the help of a
suitable diagram.
Suppose the domestic supply (QS) and demand (QD)for MP3 players in the United
States are given by the following set of equations:
QS = ‘“25 + 10P
QD = 875 ‘“ 5P
If the United States can import MP3 players from the rest of the world at a per unit
price of $50, what will be the total demand for MP3 players in the United States?
a. 625
b. 475
c. 925
d. 550
Which of the following constitutes the largest component of the world’s international
reserve assets?
a. Gold
b. Special drawing rights
c. IMF reserve positions
d. Foreign currencies
The Rybczynski theorem asserts that in a two-good model, and assuming that product
prices stay constant, growth in the endowment of one factor of production with the
other factor remaining unchanged, will result in:
a. an equal increase in the output of both goods.
b. an increase in the output of the good that uses the growing factor intensively and a
decrease in the output of the other good.
c. an increase in the output of both goods but a relatively greater increase in the output
of the good that uses the growing factor intensively.
d. an increase in the output of the good that uses the growing factor intensively, but the
output level of the other good will remain unchanged.
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 United States
will export _____ and import _____.
a. both the goods; neither good
b. shoes; automobiles
c. automobiles; shoes
d. neither good; both of the goods
The table given below shows the export and import values of automobiles,
pharmaceuticals, and clothing in country A and country B.
Country B has a higher intra-industry trade (IIT) share compared to country A for:
a. only automobiles.
b. only pharmaceuticals.
c. only clothing.
d. both pharmaceuticals and clothing.
_____ is the movement of people from one country to another country in which they
plan to reside for some noticeable period of time.
a. Denationalization
b. International transfer
c. Internal migration
d. International migration
The table given below shows the number of labor hours required to produce 1 gallon of
wine and 1 pound of cheese in the U.S. and France. If the U.S. and France engage in
free trade with each other, the international price of wine will lie between _____ and
_____.
a. 1 pound of cheese per gallon; 4 pounds of cheese per gallon
b. 0.5 pounds of cheese per gallon; 4 pounds of cheese per gallon
c. 1 pound of cheese per gallon; 2 pounds of cheese per gallon
d. 0.5 pounds of cheese per gallon; 2 pounds of cheese per gallon
The figure given below illustrates the impact of an export subsidy as imposed by a large
country. No imports are permitted.
Which of the following correctly identifies the net change in national welfare due to the
provision of the export subsidy by the domestic government?
a. The net gain in well-being for the exporting country is area ‘˜c’.
b. The net loss in well-being for the exporting country is area (b + d).
c. The net gain in well-being for the exporting country is area (b + d + f + g + i +j).
d. The net loss in well-being for the exporting country is area (b + d + f + g + h + i + j).
Everything else fundamental remaining unchanged, the monetary approach predicts that
a 5 percent cut in the money supply by the Fed will result in:
a. inflation in the U.S. economy.
b. a decrease in the market rate of interest in the U.S.
c. an increase in foreign investments by the Americans.
d. an appreciation of the U.S. dollar vis–vis other currencies.
What factors should be considered in determining whether a firm should sell to buyers
in a foreign country by exporting from its home country or by setting up local
production in the foreign country to produce the products that are sold to foreign
consumers? When identifying these factors, clearly explain how and why they push the
decision toward one or the other of the two available choices.
Suppose labor productivity in France is such that one hour of labor is required to
produce one gallon of wine while two hours of labor are required to produce one pound
of cheese. Assuming the availability of 1 million labor hours, draw a constant cost
production-possibility curve for France with quantity of cheese measured along the
vertical axis and wine on the horizontal axis. If the free trade price of wine is two
pounds of cheese per gallon, show where, with free trade, France will produce on its
production possibilities curve. Then, draw and use a trade line to illustrate how France
can gain from free trade.
International outsourcing’”the shifting of service activities from one country to
another’”was not an issue when the factor-price-equalization theory was developed.
Does the existence of outsourcing change the implications of the theory? Justify your
answer.
If there is only one domestic automobile manufacturing firm in a small country, will
there be a difference in terms of national economic well-being between using a tariff
and using a quota to protect the firm? If so, what is the difference? Clearly explain your
answer.
You are provided with the following information about a country’s international
transactions during a given year (in millions):
Calculate the official settlements balance and the current account balance.
Is the country increasing or decreasing its net holdings of official reserve assets? Why?
A country with a fixed exchange rate experiences downward pressure on the exchange
rate value of its currency. The central bank chooses to intervene in the market to
maintain its fixed exchange rate. How would the central bank go about intervening? If
the pressures for the currency to depreciate persist for a long period, even after
successive interventions in the foreign exchange market, would it be difficult to
maintain the fixed exchange rate? Why or why not? Give an example of a country that
attempted to maintain its exchange rate in the face of downward pressures. What was
the result?
How successful has import-substituting industrialization been?
Carefully explain how, and under what conditions, an increase in foreign markets
available to the United States computer producers would lead to an increase in
economic well-being for consumers of computers in the United States.