economic 3
TRANSCRIPT
Question 1 1 out of 1 points
If a PPP estimate of the dollar/pound exchange rate is $1.61/£ and the current spot rate is
observed to be $1.68/£, you should, viewing the long run,
Answer
Selected Answer: expect the dollar to appreciate against the pound.
Correct Answer: expect the dollar to appreciate against the pound.
Question 2 0 out of 1 points
Suppose that a speculator notes that the current 3-months forward rate on the euro is $1.26. The
speculator expects that, in 3 months, the euro will have a value of $1.30. In this situation, the
speculator would _____ euros on the forward market, and this activity _____ for the speculator.
Answer
Selected Answer: sell; involves risk
Correct Answer: buy; involves risk
Question 3 1 out of 1 points
In a setting of flexible exchange rates, suppose that the U.S. citizens decrease their import
purchases from the United Kingdom at the same time that British citizens increase their
purchases of stocks and bonds from the United States. The first action (the U.S. imports) by itself
would lead to _____ of the dollar against the pound; the second action by itself would _____ of
the dollar against the pound.
Answer
Selected Answer: an appreciation; also lead to an appreciation
Correct Answer: an appreciation; also lead to an appreciation
Question 4 1 out of 1 points
If the equilibrium value of the pound is $1.60 in time period 1, but U.K. prices double between
time periods 1 and 2 while U.S. prices rise by 60 percent, then the (relative) purchasing-power-
parity theory would say that the equilibrium value of the pound in time period 2 is
Answer
Selected Answer: $1.28.
Correct Answer: $1.28.
Question 5 0 out of 1 points
If a speculator observes that the current 3-months forward rate on Swiss francs is 20¢ = 1 franc,
but he/she expects that the spot rate in 3 months will be 30¢ = 1 franc, then this speculator would
now
Answer
Selected Answer: sell francs on the forward market.
Correct Answer: buy francs on the forward market.
Question 6 0 out of 1 points
In general, other things being equal, trade creation is more likely to outweigh trade diversion for
a home country forming a customs union with partner countries (i) if the total number of
countries forming the union is _____, and (ii) if the level of tariffs in the home country prior to
the formation of the union is _____.
Answer
Selected Answer: small rather than large; low rather than high
Correct Answer: large rather than small; high rather than low
Question 7 1 out of 1 points
The Big Mac Index
Answer
Selected Answer: is an absolute PPP index of the international value of the U.S. dollar based
on a single commodity.
Correct Answer: is an absolute PPP index of the international value of the U.S. dollar based on
a single commodity.
Question 8 1 out of 1 points
Suppose that Mexico trades only with Germany and the United States. Additionally, suppose
that in 1995 the spot rates were 0.2 euro = 1 peso and $0.10 = 1 peso, and that in 2005 the spot
rates were 0.15 euro = 1 peso and $0.12 = 1 peso. If Mexico's trade is 20 percent with Germany
and 80 percent with the United States, calculation of the effective exchange rate for Mexico
indicates that the peso
Answer
Selected Answer: appreciated from 1995 to 2005.
Correct Answer: appreciated from 1995 to 2005.
Question 9 0 out of 1 points
In the graph below pertaining to good X for country A (where DA is the demand for X by A's
consumers, SA is the supply curve of X from A's home producers, SB is the horizontal supply
curve of X to country A from country B, SC is the horizontal supply curve of X to country A
from country C, and S'B and S'C are the horizontal supply curves from B and C, respectively,
with a tariff in place), suppose that country A, from this initial situation, now forms a customs
union with country C.
If country A formed a customs union with country C rather than with country B, imports of good
X into country A would be the amount _____.
Answer
Selected Answer: Q3Q4
Correct Answer: Q1Q6
Question 10 0 out of 1 points
If Japan invests overseas because of its high saving rate (in excess of domestic investment
spending), then this investment can cause_____ of the Japanese yen and, thus, a consequent trade
_____ for Japan.
Answer
Selected Answer: a depreciation; deficit
Correct Answer: a depreciation; surplus
Question 11 1 out of 1 points
In which of the following relationships between the expected future spot rate (E[e]) of a foreign
currency and the current forward rate (efwd) of a foreign currency would a speculator have an
incentive to sell foreign currency in the forward market?
Answer
Selected Answer: E(e) < efwd
Correct Answer: E(e) < efwd
Question 12 1 out of 1 points
The graph below pertains to good X for country A, where DA is the demand for X by A's
consumers, SA is the supply curve of X from A's home producers, SB is the horizontal supply
curve of X to country A from country B, SC is the horizontal supply curve of X to country A
from country C, and S'B and S'C are the horizontal supply curves from B and C, respectively,
with a tariff in place.
With the tariffs in place for both countries B and C, imports of good X into country A are
represented by distance
Answer
Selected Answer: Q3Q4
Correct Answer: Q3Q4
Question 13 1 out of 1 points
A simultaneous increase in U.S. demand for German products and decrease in the desire of
German investors to send funds to the United States would, under a flexible exchange rate
system and with other things being equal, lead to _____ of the U.S. dollar against the euro and to
_____ of the euro against the dollar.
Answer
Selected Answer: a depreciation; an appreciation
Correct Answer: a depreciation; an appreciation
Question 14 1 out of 1 points
A given exchange rate will be more or less the same in all of the world's financial markets
because of
Answer
Selected Answer: currency arbitrage.
Correct Answer: currency arbitrage.
Question 15 0 out of 1 points
An exporter who is to receive payment in foreign currency in 3 months and who wants to
engage in hedging would _____ the foreign currency on the 3-months forward market in order to
protect himself/herself from _____ of the foreign currency.
Answer
Selected Answer: buy; a depreciation
Correct Answer: sell; a depreciation
Question 16 0 out of 1 points
If good X from country C faces a 10 percent tariff in country A and a 20 percent tariff in country
B, but if A and B have free trade between each other, then A and B are part of which type of
grouping?
Answer
Selected Answer: economic union
Correct Answer: free-trade area
Question 17 0 out of 1 points
In considering trade creation and trade diversion in the formation of a customs union between
countries and whether membership in the customs union enhances welfare in a home country,
two general rules are that the customs union is more likely to enhance welfare, other things being
equal, (i) if the union contains a _____ number of countries and (ii) if costs of production in the
partner countries in the case of trade diversion differ _____ from costs of production in the
outside world (the nonmember countries).
Answer
Selected Answer: small rather than large; greatly
Correct Answer: large rather than small; only slightly
Question 18 0 out of 1 points
Other things being equal, if exchange rates are flexible, and if U.S. consumers increase their
demand for Japanese goods at the same time that Japanese consumers increase their demand for
U.S. goods, then we would expect the dollar to
Answer
Selected Answer: remain unchanged in value relative to the yen.
Correct Answer: The answer is impossible to determine without more information.
Question 19 0 out of 1 points
The graph below pertains to good X for country A, where DA is the demand for X by A's
consumers, SA is the supply curve of X from A's home producers, SB is the horizontal supply
curve of X to country A from country B, SC is the horizontal supply curve of X to country A
from country C, and S'B and S'C are the horizontal supply curves from B and C, respectively,
with a tariff in place.
Suppose that, from the initial situation where country A's tariff was applied to both countries B
and C, country A now forms a customs union with country B. With this customs union in place,
imports into country A are represented by distance _____.
Answer
Selected Answer: Q3Q4, all of which constitute trade diversion from the noncustoms union
country.
Correct Answer: Q2Q5, only part of which constitute trade diversion from the noncustoms
union country.
Question 20 1 out of 1 points
In the graph below pertaining to good X for country A (where DA is the demand for X by A's
consumers, SA is the supply curve of X from A's home producers, SB is the horizontal supply
curve of X to country A from country B, SC is the horizontal supply curve of X to country A
from country C, and S'B and S'C are the horizontal supply curves from B and C, respectively,
with a tariff in place), suppose that country A, from this initial situation, now forms a customs
union with country B.
The net welfare effect on country A from the formation of the customs union with country B is
_____.
Answer
Selected Answer: areas (a + c) minus area f
Correct Answer: areas (a + c) minus area f
Question 21 1 out of 1 points
Which of the following is considered a positive dynamic effect of integration?
Answer
Selected Answer: economies-of-scale effects
Correct Answer: economies-of-scale effects
Question 22 1 out of 1 points
If U.K. interest rates are higher than Japanese interest rates, then the theory of covered interest
arbitrage would suggest that, in the £/yen exchange markets, the yen would be at a forward
_____ and the pound would _____.
Answer
Selected Answer: premium; be at a forward discount
Correct Answer: premium; be at a forward discount
Question 23 1 out of 1 points
If two countries remove all tariffs on each other's products and establish a common set of tariffs
against the rest of the world, but they take no further steps toward economic integration, these
two countries have formed
Answer
Selected Answer: a customs union.
Correct Answer: a customs union.
Question 24 1 out of 1 points
If country A forms a customs union with country B, then
Answer
Selected Answer: countries A and B may especially benefit from the union if substantial
economies of scale exist in some of the A and B industries.
Correct Answer: countries A and B may especially benefit from the union if substantial
economies of scale exist in some of the A and B industries.
Question 25 0 out of 1 points
In a production-possibilities/indifference curve diagram depicting the movement of a country
from a situation of a uniform tariff against all trading partners to a situation of a customs union
with one trading partner,
Answer
Selected Answer: home production of the country's export good will increase and home
production of the country's import good will also increase after the formation of the customs
union.
Correct Answer: home production of the country's export good will increase, and home
production of the country's import good will decrease after the formation of the customs union.
Question 1 2 out of 2 points
If relatively labor-abundant country A has a Leontief statistic greater than 1.0 and relatively
capital-abundant country B has a Leontief statistic less than 1.0, this suggests that
Answer
Selected Answer: both countries are conforming to the prediction of the Heckscher-Ohlin
theorem.
Correct Answer: both countries are conforming to the prediction of the Heckscher-Ohlin
theorem.
Question 2 2 out of 2 points
If two countries with increasing opportunity costs have identical PPFs but different tastes,
Answer
Selected Answer: the countries will have different relative commodity prices under autarky,
and each country can gain by exporting the good for which its consumers have the lower relative
preference.
Correct Answer: the countries will have different relative commodity prices under autarky, and
each country can gain by exporting the good for which its consumers have the lower relative
preference.
Question 3 2 out of 2 points
If increased Heckscher-Ohlin-type trade were the major factor leading to increased income
inequality in the United States, then one would expect that the relative prices of skilled labor-
intensive goods to unskilled labor-intensive goods would have _____ and that nontraded goods
industries would have _____ their use of unskilled labor relative to skilled labor.
Answer
Selected Answer: risen; increased
Correct Answer: risen; increased
Question 4 0 out of 2 points
Suppose that the 3-months interest rate in New York is 4 percent and the 3-months interest rate
in London is 3 percent, and that the spot rate is $2.00/£ and the 3-months forward rate is $2.10/£.
In this situation, there is an incentive for short-term interest arbitrage funds to flow
Answer
Selected Answer: from London to New York.
Correct Answer: from New York to London.
Question 5 2 out of 2 points
In the Bretton Woods international monetary system, a country's currency, unless its par value
or parity value were officially changed, could not deviate more than _____ from its par value or
parity value. If the country's currency depreciated to its low point in this range, central banks
needed to _____ the currency in the exchange markets in order to keep the currency's value
within the specified range.
Answer
Selected Answer: plus or minus 1 percent; buy
Correct Answer: plus or minus 1 percent; buy
Question 6 0 out of 2 points
A simultaneous increase in U.S. demand for German products and decrease in the desire of
German investors to send funds to the United States would, under a flexible exchange rate
system and with other things being equal, lead to _____ of the U.S. dollar against the euro and to
_____ of the euro against the dollar.
Answer
Selected Answer: an appreciation; an appreciation
Correct Answer: a depreciation; an appreciation
Question 7 2 out of 2 points
In Europe's Economic and Monetary Union (EMU), the member countries
Answer
Selected Answer: use a common currency (the euro).
Correct Answer: use a common currency (the euro).
Question 8 2 out of 2 points
Suppose that, in the context of the Edgeworth box diagram in production, there are constant
returns to scale in each of the two industries. One good is relatively labor-intensive in its
production process, and the other good is relatively capital-intensive in its production process. In
considering this Edgeworth box diagram and the PPF that can be derived from it,
Answer
Selected Answer: the PPF will show increasing opportunity costs.
Correct Answer: the PPF will show increasing opportunity costs.
Question 9 2 out of 2 points
The optimal size of international reserves occurs for a country at the point where the
Answer
Selected Answer: marginal benefit of holding the reserves equals the marginal cost of holding
the reserves.
Correct Answer: marginal benefit of holding the reserves equals the marginal cost of holding
the reserves.
Question 10 2 out of 2 points
Given the U.S. wage rate of $40 per day and the exchange rate of £1 = $1, what is the upper
limit to the wage rate in the United Kingdom that is consistent with two-way trade between the
countries? (Textbook Reference: 4-2)
Answer
Selected Answer: £40 per day
Correct Answer: £40 per day
Question 11 2 out of 2 points
A major advantage of the system of flexible exchange rates (as opposed to fixed exchange rates)
is commonly thought to be
Answer
Selected Answer: the enhanced effectiveness of monetary policy in influencing national
income under flexible exchange rates.
Correct Answer: the enhanced effectiveness of monetary policy in influencing national income
under flexible exchange rates.
Question 12 2 out of 2 points
In the current international monetary system, countries
Answer
Selected Answer: have considerable latitude in choosing an exchange rate arrangement.
Correct Answer: have considerable latitude in choosing an exchange rate arrangement.
Question 13 2 out of 2 points
Other things being equal, if exchange rates are flexible, and if U.S. consumers increase their
demand for Japanese goods at the same time that Japanese consumers increase their demand for
U.S. goods, then we would expect the dollar to
Answer
Selected Answer: The answer is impossible to determine without more information.
Correct Answer: The answer is impossible to determine without more information.
Question 14 0 out of 2 points
In the Edgeworth box diagram in production with two goods and two factors of production,
Answer
Selected Answer: a movement from any point on the production efficiency locus (contract
curve) to any point off the locus must involve less production of both goods.
Correct Answer: a movement from any point on the production efficiency locus (contract
curve) to another point on the locus must involve greater production of one good and less
production of the other good.
Question 15 2 out of 2 points
If, because of Japan's high saving rate (in excess of domestic investment spending), Japan
invests overseas, then this investment can cause _____ of the Japanese yen and, thus, a
consequent trade _____ for Japan.
Answer
Selected Answer: a depreciation; surplus
Correct Answer: a depreciation; surplus
Question 16 2 out of 2 points
In the price-specie-flow doctrine, a deficit country will _____ gold, and this gold flow will
ultimately lead to _____ in the deficit country's exports.
Answer
Selected Answer: lose; an increase
Correct Answer: lose; an increase
Question 17 2 out of 2 points
In Figure 1 pertaining to good X for country A (where DA is the demand for X by A's
consumers, SA is the supply curve of X from A's home producers, SB is the horizontal supply
curve of X to country A from country B, SC is the horizontal supply curve of X to country A
from country C, and S'B and S'C are the horizontal supply curves from B and C, respectively,
with a tariff in place), suppose that country A, from this initial situation, now forms a customs
union with country B.
The net welfare effect on country A from the formation of the customs union with country B is
_____.
Answer
Selected Answer: areas (a + c) minus area f
Correct Answer: areas (a + c) minus area f
Question 18 2 out of 2 points
If a country's PX/PY in autarky is less than the PX/PY on the world market, as the country
moves to trade, the relative price of good Y will _____ for home consumers. Thus, consumers
with a strong relative preference for good _____ would tend to oppose the movement to trade.
Answer
Selected Answer: decrease; X
Correct Answer: decrease; X
Question 19 2 out of 2 points
The post-Bretton Woods international monetary system is generally thought to have been
characterized by all except which of the following features?
Answer
Selected Answer: Real exchange rates have been relatively constant during the period, and so
the system's existence, per se, has not had real economic effects.
Correct Answer: Real exchange rates have been relatively constant during the period, and so
the system's existence, per se, has not had real economic effects.
Question 20 2 out of 2 points
If good X from country C faces a 10 percent tariff in country A and a 20 percent tariff in country
B, but if A and B have free trade between each other, then A and B are part of which type of
grouping?
Answer
Selected Answer: free-trade area
Correct Answer: free-trade area
Question 21 2 out of 2 points
In the case of economists' definition of dumping, an exporting firm is selling its product at a
_____ price in the importing country than in the exporter's home country, and this suggests that
demand for the exporter's product is _____ in the exporting country than in the importing
country.
Answer
Selected Answer: lower; less elastic
Correct Answer: lower; less elastic
Question 22 2 out of 2 points
If a speculator observes that the current 3-months forward rate on Swiss francs is 20¢ = 1 franc,
but he/she expects that the spot rate in 3 months will be 30¢ = 1 franc, then this speculator would
now
Answer
Selected Answer: buy francs on the forward market.
Correct Answer: buy francs on the forward market.
Question 23 2 out of 2 points
In Adam Smith's view, international trade
Answer
Selected Answer: all of the above
Correct Answer: all of the above
Question 24 0 out of 2 points
If a Big Mac costs $2.50 in the United States and 2 pesos in Argentina, then the implied
purchasing-power-parity exchange rate using the Big Mac is _____. If the actual exchange rate
in the market is 0.6 pesos = $1, then an economist would say that the Argentine peso is _____
compared with its purchasing-power-parity rate.
Answer
Selected Answer: 1.25 pesos = $1; overvalued
Correct Answer: 0.8 pesos = $1; overvalued
Question 25 2 out of 2 points
The _____ to testing Heckscher-Ohlin seeks to determine whether a country is a net exporter or
net importer of the services of the various factors of production; the expectation is that, if a
country has an excess _____ a factor's services, the country will be a net exporter of that factor's
services.
Answer
Selected Answer: factor-content approach; supply of
Correct Answer: factor-content approach; supply of
Question 26 2 out of 2 points
If the Heckscher-Ohlin theorem is valid in practice (and assuming that capital and labor are
treated as the only two factors in the real world), then the Leontief statistic for a labor-abundant
country would be
Answer
Selected Answer: greater than 1.0.
Correct Answer: greater than 1.0.
Question 27 2 out of 2 points
If two countries have identical production-possibilities frontiers but different tastes, it is possible
for each country to gain from trade with the other country
Answer
Selected Answer: in the neoclassical model but not in the Classical model.
Correct Answer: in the neoclassical model but not in the Classical model.
Question 28 2 out of 2 points
In considering trade creation and trade diversion in the formation of a customs union between
countries and whether membership in the customs union enhances welfare in a home country,
two general rules are that the customs union is more likely to enhance welfare, other things being
equal, (i) if the union contains a _____ number of countries and (ii) if costs of production in the
partner countries in the case of trade diversion differ _____ from costs of production in the
outside world (the nonmember countries).
Answer
Selected Answer: large rather than small; only slightly
Correct Answer: large rather than small; only slightly
Question 29 2 out of 2 points
If the U.S. trade pattern is as indicated by the Leontief test, this would suggest that participation
in trade rather than in autarky by the United States has _____ the real return to U.S. capital and
_____ the real wage of U.S. labor.
Answer
Selected Answer: decreased; has increased
Correct Answer: decreased; has increased
Question 30 2 out of 2 points
A tariff placed upon a product in order to offset a foreign export subsidy is called
Answer
Selected Answer: a countervailing duty.
Correct Answer: a countervailing duty.
Question 31 2 out of 2 points
The Krugman economies-of-scale strategic trade policy model stresses that protection given to a
home firm will, other things being equal, _____ the marginal cost of producing each level of
home output and will _____ the marginal cost of producing each level of foreign output.
Answer
Selected Answer: decrease; increase
Correct Answer: decrease; increase
Question 32 0 out of 2 points
If the U.K. worker's wage is £30 per day (and the fixed exchange rate is $2 = £1), what is the
upper limit to the U.S. worker's wage per day?
Answer
Selected Answer: $40
Correct Answer: $120
Question 33 2 out of 2 points
The optimum tariff rate for a country is that rate which, assuming no retaliation,
Answer
Selected Answer: maximizes the country's welfare.
Correct Answer: maximizes the country's welfare.
Question 34 2 out of 2 points
An early significant agreement in the negotiations of the Doha Development Agenda that is of
importance to developing countries occurred in
Answer
Selected Answer: pharmaceuticals pricing.
Correct Answer: pharmaceuticals pricing.
Question 35 2 out of 2 points
The graph below pertains to good X for country A, where DA is the demand for X by A's
consumers, SA is the supply curve of X from A's home producers, SB is the horizontal supply
curve of X to country A from country B, SC is the horizontal supply curve of X to country A
from country C, and S'B and S'C are the horizontal supply curves from B and C, respectively,
with a tariff in place.
With the tariffs in place for both countries B and C, imports of good X into country A are
represented by distance _____.
Answer
Selected Answer: Q3Q4
Correct Answer: Q3Q4
Question 36 2 out of 2 points
If relatively capital-abundant country A opens trade with relatively labor-abundant country B,
and if the trade takes place in accordance with the Heckscher-Ohlin theorem, what would be the
consequence for factor prices (w/r) in the two countries?
Answer
Selected Answer: (w/r) falls in A and rises in B
Correct Answer: (w/r) falls in A and rises in B
Question 37 2 out of 2 points
In the current exchange rate arrangements of IMF members,
Answer
Selected Answer: a substantial number of countries do not have a freely floating exchange rate.
Correct Answer: a substantial number of countries do not have a freely floating exchange rate.
Question 38 2 out of 2 points
In a production-possibilities/indifference curve diagram depicting the movement of a country
from a situation of a uniform tariff against all trading partners to a situation of a customs union
with one trading partner,
Answer
Selected Answer: home production of the country's export good will increase and home
production of the country's import good will decrease after the formation of the customs union.
Correct Answer: home production of the country's export good will increase and home
production of the country's import good will decrease after the formation of the customs union.
Question 39 2 out of 2 points
The macroeconomic interpretation of a trade deficit for a country utilizes which one of the
following expressions (where Y = national income, C = consumption, I = investment, G =
government spending on goods and services, X = exports, and M = imports)?
Answer
Selected Answer: Y - (C + I + G) = (X - M)
Correct Answer: Y - (C + I + G) = (X - M)
Question 40 0 out of 2 points
Which one of the following is NOT an alleged disadvantage of a flexible exchange rate system?
Answer
Selected Answer: possibility of destabilizing speculation
Correct Answer: increased need for international reserves
Question 41 2 out of 2 points
According to the labor theory of value,
Answer
Selected Answer: the price of good A compared to the price of good B bears the same
relationship as the relative amounts of labor used in producing each good.
Correct Answer: the price of good A compared to the price of good B bears the same
relationship as the relative amounts of labor used in producing each good.
Question 42 0 out of 2 points
In the Edgeworth box diagram,
Answer
Selected Answer: a plotting of the output combinations along the diagonal results in the
production-possibilities frontier for this country.
Correct Answer: good B is the labor-intensive good, and good A is the capital-intensive good.
Question 43 2 out of 2 points
In a two-country world, the terms-of-trade impact of a tariff will definitely improve the welfare
of the tariff-imposing country (assuming no retaliation) if the tariff-imposing country
Answer
Selected Answer: is situated in the inelastic portion of its trading partner's offer curve.
Correct Answer: is situated in the inelastic portion of its trading partner's offer curve.
Question 44 2 out of 2 points
In a setting of flexible exchange rates, suppose that the U.S. citizens decrease their import
purchases from the United Kingdom at the same time that British citizens increase their
purchases of stocks and bonds from the United States. The first action (the U.S. imports) by itself
would lead to _____ of the dollar against the pound; the second action by itself would _____ of
the dollar against the pound.
Answer
Selected Answer: an appreciation; also lead to an appreciation
Correct Answer: an appreciation; also lead to an appreciation
Question 45 2 out of 2 points
The equilibrium condition for consumer behavior pertaining to goods A and B is
Answer
Selected Answer: (MUB/MUA) = (PB/PA).
Correct Answer: (MUB/MUA) = (PB/PA).
Question 46 0 out of 2 points
Which of the following sets of countries contains only members of the European Union?
Answer
Selected Answer: France, Spain, Switzerland, United Kingdom
Correct Answer: Belgium, Greece, Italy, Portugal
Question 47 2 out of 2 points
Under the Bretton Woods system (which was set up at the end of World War II), exchange rates
were
Answer
Selected Answer: permitted to vary 1 percent above or below parity.
Correct Answer: permitted to vary 1 percent above or below parity.
Question 48 2 out of 2 points
In the Uruguay Round of trade negotiations, the talks originally broke down in 1990 primarily
because of the strong disagreement between the United States and the European Community
with respect to
Answer
Selected Answer: subsidies and protection in agriculture.
Correct Answer: subsidies and protection in agriculture.
Question 49 2 out of 2 points
An implication of the Heckscher-Ohlin theorem is that
Answer
Selected Answer: two countries with identical tastes can still have a basis for trade if factor
endowments of the countries differ and if factor intensities of the commodities differ.
Correct Answer: two countries with identical tastes can still have a basis for trade if factor
endowments of the countries differ and if factor intensities of the commodities differ.
Question 50 2 out of 2 points
Other things being equal, a domestic monetary or financial shock (a shift in the LM curve) tends
to produce what relative degree of GDP change for the home country under a situation of flexible
exchange rates compared to a situation of fixed exchange rates?
Answer
Selected Answer: larger change with flexible rates
Correct Answer: larger change with flexible rates
Question 51 2 out of 2 points
Ignoring the negative sign, the slope of a consumer indifference curve at any given point on the
curve reflects
Answer
Selected Answer: the marginal rate of substitution (MRS) of the consumer between the two
goods.
Correct Answer: the marginal rate of substitution (MRS) of the consumer between the two
goods.
Question 52 2 out of 2 points
It is not uncommon to find a voting industry minority able to put in place trade policies that
benefit them at the expense of the majority because
Answer
Selected Answer: perceived consumer benefits are less than the cost of voting, leading to
consumer absenteeism at the polls.
Correct Answer: perceived consumer benefits are less than the cost of voting, leading to
consumer absenteeism at the polls.
Question 53 2 out of 2 points
In the Dornbusch-Fischer-Samuelson graph above, a uniform improvement in labor productivity
in all the home country's industries would shift the A schedule ____ and would lead to the export
of a ____ number of goods by the home country.
Answer
Selected Answer: upward; greater
Correct Answer: upward; greater
Question 54 2 out of 2 points
The macroeconomic view of a trade deficit implies that, other things being equal, the imposition
of a tariff will reduce the country's trade deficit
Answer
Selected Answer: only if the tariff leads to increased income in the country relative to the
country's spending.
Correct Answer: only if the tariff leads to increased income in the country relative to the
country's spending.
Question 55 2 out of 2 points
If a country has a currency board arrangement (with a 100-percent reserve system) in place, then
the country's money supply can be increased by a _____ by the country's central bank.
Answer
Selected Answer: purchase of foreign (external) assets from domestic citizens
Correct Answer: purchase of foreign (external) assets from domestic citizens
Question 56 0 out of 2 points
In the Williamson target zone plan, the major industrialized countries would negotiate mutually
consistent _____ target exchange rates, and there would be _____ deviation permitted from these
target rates.
Answer
Selected Answer: nominal effective; no
Correct Answer: real effective; some
Question 57 2 out of 2 points
The policy of minimum government interference in or regulation of economic activity,
advocated by Adam Smith and the Classical economists, was known as
Answer
Selected Answer: laissez-faire.
Correct Answer: laissez-faire.
Question 58 2 out of 2 points
In the United States, in approximately the last 2-3 decades, the supply of highly skilled (HS)
labor relative to less highly skilled (LS) labor has been rising. At the same time, the ratio of HS
labor wages relative to LS labor wages has been _____; therefore, the demand for HS labor
relative to LS labor must have been increasing _____ than the supply of HS labor relative to LS
labor.
Answer
Selected Answer: rising; more rapidly
Correct Answer: rising; more rapidly
Question 59 2 out of 2 points
Suppose that the wage rate in the United Kingdom is £30 per day, the wage rate in the United
States is $40 per day, and the exchange rate is £1 = $1. In this situation, the United Kingdom will
_____. (Textbook Reference: 4-2)
Answer
Selected Answer: export goods T and X and import good Y.
Correct Answer: export goods T and X and import good Y.
Question 60 2 out of 2 points
If the equilibrium value of the pound is $1.60 in time period 1, but U.K. prices double between
time periods 1 and 2 while U.S. prices rise by 60 percent, then the (relative) purchasing-power-
parity theory would say that the equilibrium value of the pound in time period 2 is
Answer
Selected Answer: $1.28.
Correct Answer: $1.28.
Question 61 2 out of 2 points
The view that inflation in a country can lead to depreciation of the country's currency and, in
turn, further inflation is known as
Answer
Selected Answer: the vicious circle hypothesis.
Correct Answer: the vicious circle hypothesis.
Question 62 2 out of 2 points
If two countries remove all tariffs on each other's products and establish a common set of tariffs
against the rest of the world, but they take no further steps toward economic integration, these
two countries have formed
Answer
Selected Answer: a customs union.
Correct Answer: a customs union.
Question 63 2 out of 2 points
In its lending to member countries, the International Monetary Fund (IMF)
Answer
Selected Answer: may increase the difficulty of obtaining loans and may insist on internal
policy changes by borrowing countries as the borrowers ask for additional loans.
Correct Answer: may increase the difficulty of obtaining loans and may insist on internal
policy changes by borrowing countries as the borrowers ask for additional loans.
Question 64 2 out of 2 points
If a commodity is classified as labor-intensive at one set of relative factor prices but capital-
intensive at another set of relative factor prices, this situation is known as
Answer
Selected Answer: factor-intensity reversal.
Correct Answer: factor-intensity reversal.
Question 65 2 out of 2 points
If country A forms a customs union with country B, then
Answer
Selected Answer: countries A and B may especially benefit from the union if substantial
economies of scale exist in some of the A and B industries.
Correct Answer: countries A and B may especially benefit from the union if substantial
economies of scale exist in some of the A and B industries.
Question 66 0 out of 2 points
A situation in which a country announces a parity value for its currency and permits small
variations around that value, but also adjusts the parity regularly by small amounts according to
various indicators is known as
Answer
Selected Answer: a managed float strategy of "leaning against the wind."
Correct Answer: a crawling peg.
Question 67 2 out of 2 points
In which of the following relationships between the expected future spot rate (E[e]) of a foreign
currency and the current forward rate (efwd) of a foreign currency would a speculator have an
incentive to sell foreign currency in the forward market?
Answer
Selected Answer: E(e) < efwd
Correct Answer: E(e) < efwd
Question 68 2 out of 2 points
If a PPP estimate of the dollar/pound exchange rate is $1.61/£ and the current spot rate is
observed to be $1.68/£, you should, viewing the long run,
Answer
Selected Answer: expect the dollar to appreciate against the pound.
Correct Answer: expect the dollar to appreciate against the pound.
Question 69 0 out of 2 points
If a country ties its currency to a specific foreign currency and allows its holdings of that
currency to govern the country's money supply, this arrangement is known as a
Answer
Selected Answer: floating exchange rate.
Correct Answer: currency board.
Question 70 2 out of 2 points
The first U.S. legislation to authorize adjustment assistance for workers displaced by tariff
reductions was the
Answer
Selected Answer: Trade Expansion Act of 1962.
Correct Answer: Trade Expansion Act of 1962.
Question 71 2 out of 2 points
The price-specie-flow mechanism suggested that
Answer
Selected Answer: a surplus country would experience an increase in its money supply and its
price level.
Correct Answer: a surplus country would experience an increase in its money supply and its
price level.
Question 72 2 out of 2 points
According to the theory of optimum currency areas, a country would be a good candidate for
membership in such an area if it had a _____ degree of factor mobility with other potential
member countries of the currency area and if the country were a relatively _____ economy.
Answer
Selected Answer: high; open
Correct Answer: high; open
Question 73 2 out of 2 points
An exporter who is to receive payment in foreign currency in 3 months and who wants to
engage in hedging would _____ the foreign currency on the 3-months forward market in order to
protect himself/herself from _____ of the foreign currency.
Answer
Selected Answer: sell; a depreciation
Correct Answer: sell; a depreciation
Question 74 2 out of 2 points
A Mercantilist policymaker would be in favor of which of the following policies or events
pertaining to his/her country?
Answer
Selected Answer: an increase in the percentage of factors of production devoted to adding
value to imported raw materials in order to later export the resulting manufactured goods
Correct Answer: an increase in the percentage of factors of production devoted to adding value
to imported raw materials in order to later export the resulting manufactured goods
Question 75 2 out of 2 points
In the Mercantilist view of international trade (in a two-country world),
Answer
Selected Answer: one country's gain from trade would be associated with a loss for the other
country.
Correct Answer: one country's gain from trade would be associated with a loss for the other
country.