A major reason why agricultural products are heavily subsidized in the European Union
is because farmers have strong political lobbies.
Answer:
With floating exchange rates, the negative effects of international trade shocks on
internal balance are worsened by the effects of the resulting change in the exchange
rate.
Answer:
Speculating in a position exposed to exchange-rate risk is the act of reducing or
eliminating a net asset or net liability position in the foreign currency.
Answer:
A country has a current account deficit if it is saving more than it is investing
domestically.
Answer:
In September 2008 the investment bank Lehman Brothers lost its access to short-term
funding and averted failure when it was purchased by J.P. Morgan Chase.
Answer:
When an importing country compels the foreign exporting country to agree ‘voluntarily’
to restrict its exports to this country, the exporting firms in the foreign country suffer a
net welfare loss.
Answer:
A credit item is an item for which a country must pay.
Answer:
A rise in income unambiguously leads to less pollution.
Answer:
Countries that grow the fastest are those that adopt inward-oriented policies toward
trade and foreign direct investment.
Answer:
To maintain an undervalued currency, the country’s monetary authorities must intervene
in the foreign exchange market to buy its currency in the foreign exchange market.
Answer:
Government can change domestic interest rates to influence short-term capital flows
and thereby defend a fixed exchange rate.
Answer:
The Dutch disease refers to a situation in which new production of a natural resource
results in deindustrialization.
Answer:
The consumption effect of a tariff indicates the welfare loss to a country resulting from
the domestic consumers shifting from cheaper imports to more expensive local goods.
Answer:
Other things equal, an expected depreciation in the euro will lead to:
a. an inflow of capital to Europe.
b. an increase in official exchange market intervention by the euro area monetary
authorities.
c. a lowering of exports of European goods and services.
d. a decrease in the demand for euro-denominated financial assets.
Answer:
An expansion of the money supply by the country’s central bank:
a. decreases the willingness of banks to lend money.
b. reduces the price level.
c. increases the level of international capital inflows.
d. causes domestic interest rates to fall.
Answer:
Which of the following terms describes an exchange rate regime in which the
government intervenes in the foreign exchange market in order to influence the market
determined exchange rate?
a. Fully convertible
b. Currency control
c. Managed float
d. Clean float
Answer:
In 2004, China had a substantial trade surplus with
a. Russia
b. Japan
c. the United States
d. Brazil
Answer:
If Social Marginal Cost (SMC) > Price (P) = Buyer’s Private Marginal Benefit (MB) =
Seller’s Private Marginal Cost (MC) = Social Marginal Benefit (SMB), it implies that:
a. a commodity is oversupplied.
b. there is an excess demand for a commodity.
c. the socially optimal amount of a good is supplied.
d. firms are not maximizing profits.
Answer:
Countries having comparative advantages based on land and in various natural
resources are most likely to:
a. export manufactured goods.
b. experience biased growth.
c. experience rapid accumulation of capital.
d. export products like gold, coffee, or cocoa.
Answer:
The current account balance does NOT equal:
a. the difference between domestic product and domestic expenditure.
b. the difference between national saving and domestic investment.
c. net foreign investment.
d. the difference between government saving and government investment.
Answer:
Equilibrium GDP in the short-run is determined at the point where:
a. gross domestic production equals aggregate demand.
b. domestic production equals domestic consumption.
c. imports equal exports.
d. the rate of unemployment equals zero.
Answer:
Which of the following is true of a constant cost production-possibility curve?
a. A constant cost production possibilities curve is drawn as a positively sloped straight
line.
b. Along a constant cost production possibilities curve, the opportunity cost of
producing more of a good is constant.
c. When a country engages in free trade, the constant cost production-possibility curve
shifts to the right.
d. A country with a constant cost production-possibility curve partially specializes in the
production of goods when it engages in free trade with other nations.
Answer:
According to the assignment rule, which of the following policy mixes is appropriate
for a country with high inflation, a balance of payments deficit, and fixed exchange
rates?
a. Expansionary fiscal policy and expansionary monetary policy
b. Expansionary fiscal policy and contractionary monetary policy
c. Contractionary fiscal policy and expansionary monetary policy
d. Contractionary fiscal policy and contractionary monetary policy
Answer:
Which of the following asserts that import-competing firms that are struggling to stay in
business should be provided protection in order to maintain jobs and continue domestic
production?
a. The developing government argument
b. The infant industry argument
c. The dying industry argument
d. The optimal tariff argument
Answer:
There are limits to the ability of monetary authorities to use sterilized intervention in
the case of a deficit because:
a. the central bank may be unwilling to increase its holdings of foreign currency beyond
a certain limit.
b. the pressure from foreign countries to allow the domestic currency to appreciate will
lead to large losses.
c. the central bank’s ability to constantly obtain foreign currency for the sterilized
intervention is constrained.
d. the export level is fixed and it cannot be allowed to drop.
Answer:
Large countries are _____ susceptible to immiserizing growth than small countries
because when large countries expand their exports, their terms of trade _____.
a. less; improve
b. less; worsen
c. more; improve
d. more; worsen
Answer:
Consider firm X belongs to country A and firm Y belongs to country B. Suppose that it
is technologically feasible for both firms to produce good Z. Also assume that if they
do, then they will be the only suppliers of good Z in the world. Now, both the firms
have to decide simultaneously whether to produce good Z or not. Figure (a) shows the
payoffs of both firms if their respective governments do not provide them with export
subsidies. Figure (b) shows the payoffs when the government of country B grants an
export subsidy to firm Y, but the government of country A does not. From Figure (a),
we can correctly infer that:
a. it is optimal for firm X not to produce if firm Y does not produce.
b. both firms can decide to produce since they can anticipate that the other firm will not
produce.
c. it is optimal for firm Y not to produce no matter what firm X does.
d. both the firms will suffer losses if they produce simultaneously.
Answer:
Explain whether and why you would expect each of the following groups to gain or lose
from trade with standard or perfect competition, monopolistic competition, and external
scale economies.
a. The exporting country
b. Producers in the exporting country
c. Consumers in the exporting country
d. The importing country
e. Import-competing producers
f. Consumers in the importing country
g. The world as a whole
Answer:
The figure given below shows the U.S. market for imported wine. For simplicity, we
consider export supply curves to be flat. Chilean wine is available for $480 per barrel
and French wine is available for $420 per barrel.
Suppose the United States has a tariff of $80 per barrel on imported wine. Then, the
U.S. joins a free trade area with Chile. What will be the change in the consumer surplus
after the U.S. enters into a free trade agreement with Chile?
a. +$50 million
b. +$250 million
c. ‘“$50 million
d. ‘“$970 million
Answer:
_____ suggests that with an increase in economic prosperity, the world demand will
shift toward luxury goods and away from staple goods.
a. Engel’s law
b. The Heckscher-Ohlin theory
c. The law of convergence
d. The law of demand
Answer:
The Southern Common Market (MERCOSUR) is actually a _____.
a. free trade area
b. customs union
c. economic union
d. common market
Answer:
Explain the weak and the strong forms of the factor-price equalization theorem, and
discuss their real world relevance.
Answer:
What is an economic embargo? While the embargo is in effect, does it benefit or hurt
the embargoing countries? The country on which the embargo is being imposed? What
conditions lend themselves toward a successful embargo?
Answer:
Discuss the motivations, beyond the temporary loss of access to future loans, that
sovereign governments have to avoid defaulting on international debt.
Answer:
State the advantages and disadvantages of a foreign country adopting the U.S. dollar as
its own currency.
Answer:
We often hear that trade deficits are bad for a country. Do you agree or disagree with
this viewpoint? Explain carefully.
Answer:
Explain the three different viewpoints (meanings) of the current account balance.
Discuss the macroeconomic interpretations of a current account deficit.
Answer:
Use the standard IS-LM-FE framework and assume the country begins at a triple
intersection. What effect will an increase in the country’s money supply have on
domestic interest rates, output levels, and the official settlements balance, assuming low
capital mobility?
Answer:
‘Countries usually experience substantial economic gains from joining trade blocs.’ Do
you agree or disagree with this statement? Why? In your answer, include discussion of
the roles of trade creation and trade diversion. Also include discussion of other gains
that can arise in a country that chooses to join a trade bloc?
Answer: