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9) Dumping occurs whenever a firm
A) charges a lower price in foreign markets than it charges in its home market.
B) sells a lower-quality product in foreign markets than it sells in its home market.
C) earns economic profits on its sales to foreign markets.
D) disposes of wastes by shipping them to disposal sites in foreign countries.
10) Which of the following is not a source of foreign exchange for the United States?
A) Foreign tourists visiting the United States
B) U.S. exports to France
C) U.S. imports from Japan
D) German investments in the United States
11) If Americans decide to buy more Japanese automobiles,
A) the demand curve for Japanese yen will shift to the left.
B) the demand curve for American dollars will shift to the right.
C) the demand curve for Japanese yen will shift to the right.
D) the supply curve of Japanese yen will shift to the right.
12) If interest rates in the euro zone increased relative to those in the United States,
A) Americans would tend to demand fewer euros.
B) Europeans would tend to supply more euros.
C) the euro would tend to appreciate relative to the dollar.
D) the dollar would tend to appreciate relative to the euro.
13) If the price level in Japan increases more rapidly than the price level in the United States,
A) the Japanese will tend to supply more yen, appreciating the dollar relative to the yen.
B) the Japanese will tend to supply fewer yen, appreciating the dollar relative to the yen.
C) U.S. consumers will tend to demand more yen, depreciating the dollar relative to the yen.
D) U.S. consumers will tend to demand more yen, appreciating the dollar relative to the yen.
14) If the European central bank intervenes in the foreign exchange market by buying dollars for
euros, the intervention would tend to
A) depreciate the dollar relative to the euro.
B) appreciate the euro relative to the dollar.
C) depreciate both the euro and the dollar.
D) appreciate the dollar.
15) If the British decide to purchase more U.S. products,
A) the demand curve for the British pound will shift to the right.
B) the supply curve of the British pound will shift to the right.
C) the supply curve of the American dollar will shift to the right.
D) the supply curve of the American dollar will shift to the left.
16) If the yen price of the dollar (the price of a dollar stated in terms of Japanese yen) declined,
A) Japanese cars would cost Americans fewer dollars.
B) Japanese tourists would find American meals less expensive.
C) American cars would cost Japanese consumers more yen.
D) American tourists would be encouraged to tour Japan.
1) U.S. exports grew from approximately
A) 2 percent of GDP in 1968 to about 18 percent of GDP in 2008.
B) 5 percent of GDP in 1968 to about 13 percent of GDP in 2008.
C) 10 percent of GDP in 1968 to about 42 percent of GDP in 2008.
D) 2 percent of GDP in 1968 to about 29 percent of GDP in 2008.
2) In 2008, U.S. imports represented approximately
A) 6 percent of GDP.
B) 18 percent of GDP.
C) 25 percent of GDP.
D) 40 percent of GDP.
3) Imagine two countries considering trade with one another. Which of the following is false?
A) If a country can produce a product using fewer resources it has an absolute advantage in the
production of that product.
B) One of the countries can have an absolute advantage in the production of everything.
C) If a country can produce a product at a lower opportunity cost, it has a comparative advantage
in the production of that product.
D) One of the countries can have a comparative advantage in the production of everything.
The following diagrams show the production possibilities for two countries, Paradise and
Atlantis. Use the diagrams in answering the following question(s). All figures are in millions.
4) Based on the diagrams found above, the opportunity cost of producing a ton of fish in Paradise
is
A) 300 tons of fruit.
B) 150 tons of fruit.
C) 5 tons of fruit.
D) 1/5 ton of fruit.
5) Based on the diagrams above, the opportunity cost of producing a ton of fruit in Atlantis is
A) 50 tons of fish.
B) 1/3 ton of fish..
C) 3 tons of fish.
D) None of the above.
6) Based on the diagrams above, the principle of comparative advantage would suggest that
A) Paradise should specialize in fish and trade for fruit.
B) Atlantis should specialize in fruit and trade for fish.
C) Paradise should continue to produce both products.
D) Atlantis should specialize in fish and trade for fruit.
7) Based on the diagrams above, if these countries specialize in accordance with their
comparative advantage
A) their production possibilities curves will shift to the right.
B) each country will be able to consume a combination of products beyond its production
possibilities.
C) each country’s production possibilities curve will become steeper.
D) each country’s production possibilities curve will become flatter.
8) Based on the diagrams above, which of the following trading ratios are the two countries most
likely to find acceptable?
A) 1 ton of fish exchanges for 3 tons of fruit.
B) 1 ton of fish exchanges for 4 tons of fruit.
C) 1 ton of fish exchanges for 5 tons of fruit.
D) 1 ton of fish exchanges for 8 tons of fruit.
9) The model of comparative advantage assumes that
A) workers displaced from one industry are quickly reemployed in another.
B) economic resources are equally well suited to either industry.
C) the products offered by the two countries are identical that French champagne is identical to
California champagne, for instance.
D) All of the above
10) According to the text, “the benefits of free trade are widely diffused … whereas the losses are
concentrated.” This helps to explain why
A) we hear virtually universal support for free trade.
B) happy consumers take time to write their representatives and senators.
C) displaced workers seldom appeal for assistance.
D) None of the above
11) Protective tariffs
A) specify the maximum amount of a product that can be imported.
B) are more harmful to consumers than quotas.
C) drive up the prices of imported products.
D) make imported items more attractive to consumers.
12) Suppose that the United States imposed a tariff on imported automobiles. Which of the
following would be most likely to occur?
A) U.S. auto makers would be encouraged to develop better vehicles.
B) The price of imported automobiles would rise; the price of American-made automobiles
would be unchanged.
C) The price of imported automobiles would rise; the price of American-made automobiles
would fall.
D) The prices of imported and American-made automobiles would tend to rise.
13) In international trade, the term “dumping” means
A) shipping hazardous wastes to a foreign country for disposal.
B) charging foreign customers higher prices than domestic customers.
C) selling inferior merchandise to foreign consumers.
D) selling the same product to foreign consumers for less than you charge domestic consumers.
14) Antidumping laws
A) are generally supported by economists because dumping is widely viewed as an unfair form
of competition.
B) are commonplace abroad, but have been shunned in the United States.
C) are viewed by economists as another type of trade barrier.
D) have been declared illegal by the WTO.
15) The Smoot-Hawley Act of 1930
A) virtually eliminated tariffs worldwide.
B) raised U.S. import tariffs dramatically.
C) virtually eliminated U.S. import quotas, but replaced them with tariffs.
D) outlawed the use of child labor in the manufacture of products for export.
16) The GATT agreements were most successful in
A) eliminating disguised barriers, such as artificial health and safety regulations.
B) reducing tariffs.
C) curtailing the use of antidumping charges.
D) All of the above
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17) Which of the following is a true statement about regional trading agreements such as
NAFTA?
A) Economists prefer these agreements because they are more consistent with comparative
advantage than the broader agreements pursued by the WTO.
B) These agreements have become less popular since the emergence of the WTO.
C) These agreements are probably inferior to the worldwide agreements sought by the WTO
because they may compromise the principle of comparative advantage.
D) These agreements have essentially the same impact on trade as the GATT agreements and the
WTO.
18) Which of the following is a true statement?
A) Economists generally oppose tariffs, but support quotas as a method of generating tax
revenue.
B) Economists generally oppose both tariffs and quotas, but prefer quotas to tariffs because
tariffs are believed to be less effective in stemming flow of imports.
C) Economists generally oppose quotas, but support tariffs because they generate tax revenue.
D) Economists generally oppose both tariffs and quotas, but prefer tariffs to quotas, in part
because quotas are believed to be less effective in stemming the flow of imports.
19) Which of the following is a true statement about the WTO?
A) It was formed in 1944.
B) Its decisions are binding on its members.
C) Its membership is made up of wealthy countries who generally agree about how to tackle
complex issues.
D) Its membership is limited to the major industrialized nations.
20) One reason for the increasing popularity of regional trading agreements is
A) the fact that economists see them as preferable to broader, world-wide agreements.
B) the difficulty that the WTO has encountered in making headway on complex issues.
C) the GATT agreement’s lack of success in reducing tariffs and quotas.
D) All of the above
21) If a case of Mexican beer sells for 300 pesos and $1 exchanges for 10 pesos, that case of beer
will cost an American consumer
A) $3,000.
B) $300.
C) $30.
D) $3.
22) If it requires $1.50 to purchase one British pound, then an automobile that sells for $20,000
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in the United States would cost a British consumer
A) 60,000 British pounds.
B) 30,000 British pounds.
C) 13,333 British pounds.
D) 3,333 British pounds.
23) If exchange rates are determined entirely by the forces of demand and supply, it is
A) a system of floating or flexible exchange rates.
B) a system of managed exchange rates.
C) a system of fixed exchange rates.
D) a dirty float.
24) Which of the following would increase the demand for Japanese yen?
A) a drop in Japanese interest rates
B) an increase in the number of Japanese tourists heading for the United States
C) an increase in U.S. interest rates
D) an increase in U.S. incomes
25) Which of the following would lead to an increase in the supply of euros?
A) an increase in U.S. incomes
B) more American tourists headed for Europe
C) higher interest rates in the United States
D) lower inflation in Europe
26) If the dollar appreciates relative to the Mexican peso
A) it takes more pesos to purchase each dollar.
B) each dollar buys fewer pesos.
C) Mexican products are less attractive for Americans.
D) American products are more attractive for Mexicans.
27) If the dollar depreciates relative to the Japanese yen
A) it takes more dollars to buy each yen.
B) it takes fewer yen to buy each dollar.
C) Japanese products are more expensive for Americans.
D) All of the above
28) Which of the following would cause the dollar to appreciate relative to the euro?
A) European interest rates rise relative to those in the United States.
B) More Americans decide to vacation in Europe.
C) Europe experiences more rapid inflation than the United States.
D) European fashions become more popular with Americans.
29) The peso would tend to appreciate relative to the U.S. dollar if
A) more Mexicans began vacationing in the United States.
B) more Americans crossed the border to do their shopping.
C) American interest rates rose relative to those in Mexico.
D) prices in Mexico increased more rapidly than those in the United States.
30) If interest rates in Great Britain rise relative to those in the United States,
A) Brits would tend to supply more British pounds and the pound would depreciate.
B) Americans would tend to demand more British pounds and the dollar would appreciate.
C) Brits would tend to demand more dollars and the dollar would appreciate.
D) Americans would demand more British pounds and the dollar would depreciate.
31) Which of the following would shift both the demand and supply of yen?
A) an increase in U.S. incomes
B) U.S. consumers demand more Japanese automobiles.
C) Prices in Japan rise more rapidly than prices in the United States.
D) More Japanese decide to vacation in the United States.
32) Suppose the dollar appreciates relative to the Japanese yen. Which of the following is true?
A) Japanese exporting firms will find it easier to sell their products.
B) Japanese tourists will find it cheaper to visit the United States.
C) U.S. exporters will be happy.
D) Japanese importers will find U.S. products cheaper to buy.
33) Suppose the peso depreciates relative to the euro. Which of the following is true?
A) Mexicans will find it cheaper to visit Paris.
B) Mexican importers will find German products less expensive.
C) European exporters will find it easier to sell their product.
D) European investors will find it easier to purchase Mexican companies.
1) In 2008, exports accounted for approximately 25 percent of the U. S. gross domestic product.
2) In 2008 the United States imported more goods and services than it exported.
3) If a nation can produce a product at a lower opportunity cost than another nation, it is said to
have a comparative advantage in the production of that product.
4) In one day Bob can either mow 5 lawns or wash 10 cars. Frank can either mow 2 lawns or
wash 8 cars. Therefore, Bob has an absolute advantage in both lawn mowing and car washing.
5) In one day Bob can either mow 5 lawns or wash 10 cars. Frank can either mow 2 lawns or
wash 8 cars. Bob has a comparative advantage in car washing, and Frank has a comparative
advantage in lawn mowing.
6) In one day Bob can either mow 5 lawns or wash 10 cars. Frank can either mow 2 lawns or
wash 8 cars. Bob has a comparative advantage in both car washing and lawn mowing.
7) Suppose that in 1 hour Susan can either clean 10 fish or polish 20 pairs of shoes. In the same
period, Jamie can clean 20 fish or polish 10 pairs of shoes. Jamie has an absolute advantage in
fish cleaning and a comparative advantage in shoe polishing.
8) Suppose that in 1 hour Susan can either clean 10 fish or polish 20 pairs of shoe. In the same
period, Jamie can clean 20 fish or polish 10 pairs of shoes. Susan has a comparative advantage in
shoe polishing; Jamie has a comparative advantage in fish cleaning.
9) In comparing two countries, it is possible for one country to have an absolute advantage in the
production of all products.
10) In comparing two countries, it is possible for one country to have a comparative advantage in
the production of all products.
11) Trade based on comparative advantage permits nations to consume a combination of
products beyond their production possibilities curves.
12) When countries pursue trade based on comparative advantage, they shift their production
possibilities curves outward.
13) A tariff is a tax on imported products.
14) Economists dislike both tariffs and quotas, but they prefer quotas to tariffs.
15) A selective quota restricts imports of a particular product, while a global quota restricts
imports of all products.
16) The term “dumping” refers to exporting wastes to foreign countries for disposal.
17) “Dumping” refers to the sale of products to foreign consumers at lower prices than are
charged domestic customers.
18) The GATT agreements have resulted in substantially increasing tariff and quota barriers to
trade.
19) Under GATT rules, countries are discouraged from using import quotas.
20) The GATT replaced the World Trade Organization.
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21) Economists are generally more supportive of the WTO than they are of the NAFTA.
22) The NAFTA is a regional trade agreement while the GATT involves nations throughout the
world.
23) Tariffs tend to raise the prices of both imported products and those produced domestically.
24) The Smoot-Hawley Act of 1930 substantially reduced the tariffs imposed on products
imported into the U.S.
25) The United States, Canada, and Mexico have all signed the North American Free Trade
Agreement (NAFTA).
26) Trade adjustment assistance is intended to provide assistance to firms harmed by trade
barriers.
27) Americans visiting Europe would prefer an exchange rate of $0.50 = 1 euro rather than $0.75
= 1 euro.
28) American exporters would sell more products at an exchange rate of $0.50 = 1 euro rather
than $0.75 = 1 euro.
29) If U.S. consumers suddenly found French wines more attractive and French fashions more
appealing, the demand curve for euros would shift to the right.
30) If German consumers started demanding more U.S. products, the supply curve of euros
would shift to the left.
31) If British households began buying more U.S. products, the dollar would tend to depreciate
relative to the British pound.
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32) If European interest rates increased relative to U.S. interest rates, the dollar would tend to
depreciate relative to the euro.
33) If the price level in the U.S. increased relative to the price level in Europe, the euro would
tend to appreciate in value relative to the dollar.
34) If British interest rates increase relative to U.S. interest rates, the demand curve for the
British pound will shift to the right.
35) A stronger dollar will make it easier for American exporters to sell their products.
36) A nation can strengthen its currency by pursuing a restrictive monetary policy.
37) A nation can strengthen its currency by pursuing a restrictive monetary policy because higher
interest rates tend to attract foreign funds and because higher rates slow the domestic economy
and thus reduce imports.
38) The existing system of exchange rates is sometimes described as a “managed float,” because
central banks intervene in the foreign exchange market to influence exchange rates.
1) Explain the difference between absolute advantage and comparative advantage, and illustrate
the two concepts with examples from everyday life.
2) What is the difference between a tariff and a quota? Which do economists regard as less
harmful to consumers and why?
3) Explain the concept of dumping and how accusations of dumping can be used to restrain
international competition.
4) U.S. laws generally prohibit “dumping” and call for additional tariffs to be imposed on
products dumped in the U.S. market. Do these laws promote the welfare of U.S. citizens? Defend
your conclusion.
5) Suppose that European interest rates rise relative to those in the United States Use a graph to
illustrate the impact of this change on the exchange rate between the dollar and the euro. (Hint:
Measure the price of the euro in dollars on the vertical axis. Start with a price of $0.80 per
euro.)
6) Suppose the exchange rate between the dollar and the euro was fixed at $0.80 per euro. If U.S.
citizens began demanding more European products (and the Europeans did not increase their
demand for U.S. products), what short-term action would the Fed need to take to maintain the
exchange rate at $0.50 per euro? Why would the Fed’s ability to pursue this policy be limited to
the short term? If U.S. consumers persisted in buying more European products, what other action
could the Fed take to maintain the fixed exchange rate? Why might the Fed be reluctant to take
this action?
7) A stronger dollar will make some Americans happy and others unhappy. Discuss fully.
8) Suppose that the Fed pursues an expansionary monetary policy to combat unemployment in
the United States. What impact would this policy be likely to have on the exchange value of the
dollar relative to other currencies? Defend your conclusion.