Unlike a tariff, quotas do not allow domestic monopolists to assert their monopoly
pricing powers.
Answer:
Forward exchange contracts are used for hedging but not for speculating.
Answer:
In a two-country two-good model, the opening of trade will necessarily lead to
complete specialization in the production of one good by one country and complete
specialization in the production of the other good by the other country.
Answer:
Standard loans of the IMF, known as stand-by arrangements, are normally to be repaid
in ten years.
Answer:
The law of one price is based on the purchasing power parity theory.
Answer:
The long-run decline in the relative price of primary products is a strong reason for
developing countries to avoid exporting primary products.
Answer:
Fiscal policy is highly effective when capital is not mobile and the country has fixed
exchange-rates.
Answer:
The existence of migration costs implies that factor-price-equalization in the labor
market is less likely.
Answer:
Monopoly power can create distortions because a powerful seller can raise price and
profits by restricting output.
Answer:
Living standards were converging among developing countries during 1990-2012.
Answer:
Capital inflows are debits and capital outflows are credits.
Answer:
With fixed exchange rates, external capital flow shocks have little impact on a country’s
economy.
Answer:
When economic growth in a large country lowers its willingness to trade, it can result
in:
a. an improvement in the country’s terms of trade.
b. a biased growth.
c. immiserizing growth.
d. the Dutch Disease.
Answer:
The amount by which imports increase when income goes up by one dollar is called:
a. the marginal propensity to consume.
b. the spending multiplier.
c. the money multiplier.
d. the marginal propensity to import.
Answer:
Explain how the following factors affect the value of dollar vis–vis other currencies
under a floating exchange rate system.
a. Tariffs and quotas are placed by the U.S. government on all imports into the country.
b. Demand by foreign consumers for the U.S. exports falls and the U.S. demand for
imports rises.
c. Rising interest rates in the United States relative to interest rates in Europe.
d. Rising U.S. fiscal deficits reduce investor confidence and lead to capital outflows.
Answer:
If the overall balance in the balance of payments account is in _____, there can be an
accumulation of official reserve assets by the country or a decrease in foreign official
reserve holdings of the country’s assets.
a. surplus
b. deficit
c. equilibrium
d. remission
Answer:
If a small country imposes a tariff on imported motorcycles:
a. the surplus of the domestic producers of motorcycles will decline, but the surplus of
the domestic consumers will increase.
b. the surplus of both the domestic producers and consumers of motorcycles will
decline.
c. the surplus of both the domestic producers and consumers of motorcycles will
increase.
d. the surplus of the domestic producers of motorcycles will increase, but the surplus of
the domestic consumers will decline.
Answer:
Under a floating exchange rate regime, with a contraction in the money supply, which
of the following is likely to happen in the short-run?
a. Increase in the country’s holdings of official international reserves
b. Deficit in the financial account
c. Inflow of foreign capital
d. Rise in the domestic price level
Answer:
The supply of money in a country like the United States is controlled by the
a. central bank of the country.
b. political party in charge of the government of the country.
c. International Monetary Fund.
d. commercial banks in the country.
Answer:
The figure given below shows the market for computers in the U.S. The domestic price
line inclusive of the tariff lies above the international price line. Dd and Sd are the
domestic demand and supply curves of computers respectively.
The production effect of the tariff on computers is worth
a. $48 million.
b. $4 million.
c. $8 million.
d. $44 million.
Answer:
Which of the following is true for an expansionary fiscal policy?
a. It leads to a fall in the interest rate.
b. It has no impact on the aggregate output.
c. It causes an increase in the aggregate demand.
d. It increases the level of imports.
Answer:
Embargoes are likely to be effective when:
a. the supply curve of the embargoing country is highly inelastic.
b. the demand for imports by the target country is relatively elastic.
c. a small county imposes an embargo on a large country.
d. the sanctions are sudden and comprehensive when first imposed.
Answer:
The asset market approach to exchange rate determination seeks to predict:
a. the forward exchange rate premiums.
b. the long-run trends in exchange rates.
c. the possibility of retaining a pegged exchange rate by the government.
d. the short-term pressures on exchange rates.
Answer:
Internal scale economies occur when:
a. expansion of output by a firm leads to greater specialization of labor.
b. expansion in an industry drives down the input prices.
c. industry growth leads to a greater diffusion of knowledge among firms.
d. a firm pays higher input prices to expand production.
Answer:
Under which of the following policies does the government enter the foreign exchange
market and buy or sell foreign currency in order to influence the exchange rate of the
domestic currency?
a. Exchange controls
b. Capital controls
c. Official intervention
d. Adjustable peg
Answer:
According to the Stolper-Samuelson theorem, a price change that reduces a country’s
production of its exportable product would:
a. reduce the returns to all factors of production within the country.
b. raise the returns to all factors of production within the country.
c. reduce the returns to the factor of production used intensively in the export industry.
d. raise the returns to the factor of production used intensively in the export industry.
Answer:
Suppose $1 = 0.85 euros in New York, 1 euro = 150 yen in Paris, and 1 yen = $0.008 in
Tokyo.
a. If you begin by holding $1, how could you profit from these exchange rates? What is
your arbitrage profit per dollar initially traded?
b. Identify the forces at work that will make the exchange rates consistent with each
other in this situation. That is, what forces will lead to a situation in which no profitable
arbitrage is possible?
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.
The figure given below shows the marginal external benefit curve (MEB) of the country
from the production of domestic mopeds.
What will be the impact on the national well-being if, instead of imposing a tariff of
$50 per unit, the government provides a subsidy of $50 per unit to the domestic
manufacturers of mopeds?
a. The national welfare will increase by $5 million.
b. The national welfare will decline by $2.5 million.
c. The national welfare will increase by $10.75 million.
d. The national welfare will decline by $5 million.
Answer:
The European Union has relatively large production and income effects on Africa.
Answer:
When the current $/ forward rate is below the current spot rate, the pound is at a(n)
_____.
a. forward premium
b. forward discount
c. covered parity
d. uncovered parity
Answer:
Which of the following has exchange-rates permanently fixed between countries and a
single monetary authority that conducts a single monetary policy for all member
countries?
a. A free trade area
b. A monetary union
c. A currency board
d. A special economic zone
Answer:
The impact on world welfare of an export subsidy and a countervailing duty (of the
same size as the subsidy) is:
a. zero.
b. negative due to overproduction.
c. negative due to under-consumption.
d. negative due to deadweight loss.
Answer:
Identify the correct statement.
a. There is sufficient evidence to prove that free trade simply promotes production and
consumption of products that tend to cause large amounts of pollution.
b. It is not easy to find cases where government policies that limit or distort trade result
in environmental damage.
c. Freer trade in environmental services actually lower environmental quality especially
in the developing countries.
d. Environmentalists often fear that free trade permits production to be shifted to
countries that have lax environmental standards.
Answer:
The French highly value domestic production of traditional French cheese made by
high-cost, traditional production methods. According to the specificity rule, the most
efficient policy tool to protect this traditional industry would be:
a. to provide a production subsidy to the domestic firms.
b. to impose an import tariff on cheeses produced in other countries.
c. to impose an import ban on cheeses produced in other countries.
d. to eliminate all barriers on cheese imports since no protectionist policy would be
efficient.
Answer:
If investors expect a decrease in the value of the Thai baht vis–vis other currencies,
their actions will cause:
a. a decrease in Thai interest rates.
b. the expected depreciation to occur much faster.
c. the Thai baht to appreciate immediately.
d. a large inflow of foreign capital into Thailand.
Answer:
The following current rates have been observed:
Spot exchange rate: $1.25/SFr
Expected future spot rate in 90 days: $1.2625/SFr
Annual interest rate on 90-day U.S.-dollar-denominated bonds: 10%
Annual interest rate on 90-day SFr-denominated bonds: 6%
At these initial rates, does uncovered interest parity hold? Then, if the U.S. money
supply unexpectedly increases by 10 percent, what is likely to be the effect on the spot
exchange rate? In your answer assume that the asset market clears faster than the goods
market (i.e. prices adjust slowly and interest rates adjust quickly). Also in your answer
address short-run changes in the exchange rate as well as long-run changes.
Answer:
Which countries are most and least likely to be harmed by adverse climate changes?
What progress that has been made to find a comprehensive way to address global
warming?
Answer:
Explain the basic requirements a country needs to fulfill to become a member of the
European Union and the process of integration of new members.
Answer:
Suppose a firm wants to expand sales of its product into a foreign country. Should the
firm license local firms in the foreign country to use its technologies to produce the
product or should it set up a foreign operation that it owns and controls? What factors
should the firm consider in taking the decision? When identifying these factors, clearly
explain how and why they push the decision toward one or the other of the two
available choices.
Answer:
The difference in the prices of a good in two countries creates opportunities for
arbitrage: traders buy the good at a low price in one country and sell it at a higher price
in the other. When the difference in the prices vanishes, and the world price is
established in both countries, there is no scope for trade anymore because no trader will
be willing to buy the good in one country and sell it in another. Discuss the validity of
this statement.
Answer:
What is the dying industry argument for establishing barriers to imports? What are its
merits and weaknesses? What measure(s) is/are more efficient than an import tariff if
the intention is to help workers who would be displaced from a dying industry? Why?
What measure(s) is/are more efficient than an import tariff if maintaining current
production levels is the goal of government policy?
Answer:
Using a flow chart, illustrate the effects of contracting the money supply in a country
with floating exchange rates.
Answer:
Do you think the GATT and WTO rulings on the U.S. efforts to reduce the number of
dolphin and sea turtle mortalities were justified? In your answer be sure to explain the
rulings and reasons behind these rulings. How might the United States have changed its
policies so that it did not violate WTO rules?
Answer:
‘A country can be left worse off as a result of free trade and/or exporting the wrong
products if there are no policies that force market decision-makers to internalize the
costs associated with the production of certain goods and services.’ Do you agree or
disagree with the statement? Illustrate your answer with the help of relevant diagrams.
Answer:
Suppose Chile joins a trade bloc formed by Argentina, Brazil, Paraguay, and Uruguay.
Before joining the trade bloc, the Chilean government has a tariff of 30 percent on
imported meat, and Chile’s imports of 40,000 tons of meat came exclusively from the
United States. The U.S. sold meat at a price of $2,000 per ton in the international
market. After joining the trade bloc, Chile switched to importing meat from the other
member countries at a price of $2,100 per ton. Its import increased to 50,000 tons.
Calculate the amount of trade creation and trade diversion as a result of this change. For
this product, did Chile gain economic well-being from joining the trade bloc? If so, then
how much? If not, then by how much would Chilean imports of meat have to increase
for Chile to benefit from joining the trade bloc?
Answer: