Chapter  1: Introduction                                               

Multiple-Choice Questions1.  Which of the following products are not produced at all in the United States?   *a.  Coffee, tea, cocoab.  steel, copper, aluminumc.  petroleum, coal, natural gasd.  typewriters, computers, airplanes

2.  International trade is most important to the standard of living of:

a.  the United States*b. Switzerlandc. Germanyd. England

3.  Over time, the economic interdependence of nations has:

*a. grownb. diminishedc. remained unchangedd. cannot say

4.  A rough measure of the degree of economic interdependence of a nation is given by:

a. the size of the nations' populationb. the percentage of its population to its GDP*c. the percentage of a nation's imports and exports to its GDPd. all of the above

5.  Economic interdependence is greater for:

*a. small nationsb. large nationsc. developed nationsd. developing nations

6.  The gravity model of international trade predicts that trade between two nations is larger     a. the larger the two nationsb. the closer the nations c. the more open are the two nations*d. all of the above

7.  International economics deals with:

a. the flow of goods, services, and payments among nationsb. policies directed at regulating the flow of goods, services, and paymentsc. the effects of policies on the welfare of the nation*d. all of the above

8.  International trade theory refers to:

*a. the microeconomic aspects of international tradeb. the macroeconomic aspects of international tradec. open economy macroeconomics or international finance d. all of the above

9.  Which of the following is not the subject matter of international finance?

a. foreign exchange marketsb. the balance of payments*c. the basis and the gains from traded. policies to adjust balance of payments disequilibria

10.  Economic theory:

a. seeks to explain economic eventsb. seeks to predict economic eventsc. abstracts from the many detail that surrounds an economic event *d. all of the above

11. Which of the following is not an assumption generally made in the study of international economics?

a. two nationsb. two commodities*c. perfect international mobility of factorsd. two factors of production    12.  In the study of international economics:

a. international trade policies are examined before the bases for tradeb. adjustment policies are discussed before the balance of paymentsc. the case of many nations is discussed before the two-nations case*d. none of the above    13.  International trade is similar to interregional trade in that both must overcome:   

*a. distance and spaceb. trade restrictionsc. differences in currenciesd. differences in monetary systems

14.  The opening or expansion of international trade usually affects all members of society:  a. positivelyb. negatively*c. most positively but some negativelyd. most negatively but some positively     15.  An increase in the dollar price of a foreign currency usually:

a. benefit U.S. importers *b. benefits U.S. exporters c. benefit both U.S. importers and U.S. exporters d. harms both U.S. importers and U.S. exporters

16. Which of the following statements with regard to international economics is true?

a. It is a relatively new field*b. it is a relatively old fieldc. most of its contributors were not economistsd. none of the abovePART ONE:  INTERNATIONAL TRADE THEORY

Chapter  2: The Law of Comparative Advantage   

    Multiple-Choice Questions

1.  The Mercantilists did not advocate:

*a.free tradeb. stimulating the nation's exportsc. restricting the nations' importsd. the accumulation of gold by the nation

2.  According to Adam Smith, international trade was based on:

*a. absolute advantageb. comparative advantagec. both absolute and comparative advantaged. neither absolute nor comparative advantage3.  What proportion of international trade is based on absolute advantage?

a. Allb. most*c. somed. none

4. The commodity in which the nation has the smallest absolute disadvantage is the commodity of its:

a. absolute disadvantageb. absolute advantagec. comparative disadvantage*d. comparative advantage

5. If in a two-nation (A and B), two-commodity (X and Y) world, it is established that nation A has a comparative advantage in commodity X, then nation B must have:

a. an absolute advantage in commodity Yb. an absolute disadvantage in commodity Yc. a comparative disadvantage in commodity Y*d. a comparative advantage in commodity Y

6. If with one hour of labor time nation A can produce either 3X or 3Y while nation B can produce either 1X or 3Y (and labor is the only input):

a. nation A has a comparative disadvantage in commodity Xb. nation B has a comparative disadvantage in commodity Y*c. nation A has a comparative advantage in commodity Xd. nation A has a comparative advantage in neither commodity

7.  With reference to the statement in Question 6:

a  Px/Py=1 in nation Ab. Px/Py=3 in nation Bc. Py/Px=1/3 in nation B*d. all of the above

8.  With reference to the statement in Question 6, if 3X is exchanged for 3Y:

a. nation A gains 2X*b. nation B gains 6Y

c. nation A gains 3Yd. nation B gains 3Y

9. With reference to the statement of Question 6, the range of mutually beneficial trade between nation A and B is:

a  3Y < 3X < 5Yb. 5Y < 3X < 9Y*c  3Y < 3X < 9Yd. 1Y < 3X < 3Y

10.  If domestically 3X=3Y in nation A, while 1X=1Y domestically in nation B:

a. there will be no trade between the two nationsb. the relative price of X is the same in both nations c. the relative price of Y is the same in both nations *d. all of the above

11.  Ricardo explained the law of comparative advantage on the basis of:

*a. the labor theory of valueb. the opportunity cost theoryc. the law of diminishing returnsd. all of the above

12.  Which of the following statements is true?

a. The combined demand for each commodity by the two nations is negatively     slopedb. the combined supply for each commodity by the two nations is rising stepwise    c. the equilibrium relative commodity price for each commodity with trade is     given by the  intersection of the demand and supply of each commodity by the     two nations*d. all of the above

13. A difference in relative commodity prices between two nations can be based upon a      difference in:

a. factor endowmentsb. technologyc. tastes*d. all of the above

14.  In the trade between a small and a large nation:

a. the large nation is likely to receive all of the gains from trade*b. the small nation is likely to receive all of the gains from trade      c. the gains from trade are likely to be equally sharedd. we cannot say

15.  The Ricardian trade model has been empirically

*a. verifiedb. rejectedc. not testedd. tested but the results were inconclusive

Chapter  3: The Standard Theory of International Trade                        Multiple-Choice Questions

1. A production frontier that is concave from the origin indicates that the nation incurs

     increasing opportunity costs in the production of:

a.  commodity X onlyb.  commodity Y only*c.  both commoditiesd.  neither commodity

2.  The marginal rate of transformation (MRT) of X for Y refers to:

a.  the amount of Y that a nation must give up to produce each additional unit of X  b.  the opportunity cost of Xc.  the absolute slope of the production frontier at the point of production*d.  all of the above

3.  Which of the following is not a reason for increasing opportunity costs:

*a. technology differs among nationsb. factors of production are not homogeneousc. factors of production are not used in the same fixed proportion in the production     of all commoditiesd. for the nation to produce more of a commodity, it must use resources that are less and less suited in the production of the commodity

4.  Community indifference curves:

a. are negatively slopedb. are convex to the originc. should not cross*d. all of the above

5.  The marginal rate of substitution (MRS) of X for Y in consumption refers to the:

a. amount of X that a nation must give up for one extra unit of Y and still remain on the same indifference curve*b. amount of Y that a nation must give up for one extra unit of X and still remain     on the same indifference curvec. amount of X that a nation must give up for one extra unit of Y to reach a higher indifference curve  d. amount of Y that a nation must give up for one extra unit of X to reach a higher indifference curve

6.  Which of the following statements is true with respect to the MRS of X for Y?

a. It is given by the absolute slope of the indifference curveb. declines as the nation moves down an indifference curvec. rises as the nation moves up an indifference curve*d. all of the above

7.  Which of the following statements about community indifference curves is true?

a.  They are entirely unrelated to individuals' community indifference curvesb.  they cross, they cannot be used in the analysis *c. the problems arising from intersecting community indifference curves can be overcome by the application of the compensation principled. all of the above.

8.  Which of the following is not true for a nation that is in equilibrium in isolation?

*a. It consumes inside its production frontierb. it reaches the highest indifference curve possible with its production frontierc. the indifference curve is tangent to the nation's production frontierd. MRT of X for Y equals MRS of X for Y, and they are equal to Px/Py

9.  If the internal Px/Py is lower in nation 1 than in nation 2 without trade:

a.  nation 1 has a comparative advantage in commodity Yb.  nation 2 has a comparative advantage in commodity X*c. nation 2 has a comparative advantage in commodity Yd.  none of the above

10.  Nation 1's share of the gains from trade will be greater:

a. the greater is nation 1's demand for nation 2's exports*b. the closer Px/Py with trade settles to nation 2's pretrade Px/Pyc. the weaker is nation 2's demand for nation 1's exports d. the closer Px/Py with trade settles to nation 1's pretrade Px/Py

11.  If Px/Py exceeds the equilibrium relative Px/Py with trade

a. the nation exporting commodity X will want to export more of X than at     equilibriumb. the nation importing commodity X will want to import less of X than at     equilibriumc. Px/Py will fall toward the equilibrium Px/Py*d. all of the above

12.  With free trade under increasing costs: a.  neither nation will specialize completely in productionb. at least one nation will consume above its production frontier c. a small nation will always gain from trade*d. all of the above

13.  Which of the following statements is false?

a.The gains from trade can be broken down into the gains from exchange and the     gains from specializationb. gains from exchange result even without specialization *c. gains from specialization result even without exchanged. none of the above

14.  The gains from exchange with respect to the gains from specialization are always:

a. greaterb. smallerc. equal*d. we cannot say without additional information

15.  Mutually beneficial trade cannot occur if production frontiers are:

a.  equal but tastes are notb.  different but tastes are the samec.  different and tastes are also different*d.  the same and tastes are also the same.

1. ? Chapter  4: Demand and Supply, Offer Curves, and the Terms of Trade   

         Multiple Choice Questions

1.  Which of the following statements is correct?   a.  The demand for imports is given by the excess demand for the commodityb.  the supply of exports is given by the excess supply of the commodity

c.  the supply curve of exports is flatter than the total supply curve of the commodity *d.  all of the above

2.  At a relative commodity price above equilibrium

a.  the excess demand for a commodity exceeds the excess supply of the commodityb.  the quantity demanded of imports exceeds the quantity supplied of exports*c.  the commodity price will falld.  all of the above

3.  The offer curve of a nation shows:

a.  the supply of a nation's importsb.  the demand for a nation's exportsc.  the trade partner's demand for imports and supply of exports*d.  the nation's demand for imports and supply of exports

4.  The offer curve of a nation bulges toward the axis measuring the nations

a.  import commodity*b.  export commodityc.  export or import commodityd.  nontraded commodity

5.  Export prices must rise for a nation to increase its exports because the nation:

a.  incurs increasing opportunity costs in export productionb.  faces decreasing opportunity costs in producing import substitutesc.  faces decreasing marginal rate of substitution in consumption*d.  all of the above

6.  Which of the following statements regarding partial equilibrium analysis is false?

a.  It relies on traditional demand and supply curvesb.  it isolates for study one market *c.  it can be used to determine the equilibrium relative commodity price but not the equilibrium quantity with trade d.  none of the above

    7.  Which of the following statements regarding partial equilibrium analysis is true?

a. The demand and supply curve are derived from the nation's production frontier     and indifference mapb.  It shows the same basic information as offer curvesc.  It shows the same equilibrium relative commodity prices as with offer curves*d.  all of the above

8.  In what way does partial equilibrium analysis differ from general equilibrium analysis?     a.  The former but not the latter can be used to determine the equilibrium price with     tradeb. the former but not the latter can be used to determine the equilibrium quantity     with tradec. the former but not the latter takes into consideration the interaction among all markets in the economy*d.  the former gives only an approximation to the answer sought.

9.  If the terms of trade of a nation are 1.5 in a two-nation world, those of the trade partner are:

a.  3/4*b.  2/3

c.  3/2d.  4/3

10.  If the terms of trade increase in a two-nation world, those of the trade partner:

*a.  deteriorateb.  improvec.  remain unchangedd.  any of the above

11.  If a nation does not affect world prices by its trading, its offer curve:

a.  is a straight lineb.  bulges toward the axis measuring the import commodity*c.  intersects the straight-line segment of the world's offer curved.  intersects the positively-sloped portion of the world's offer curve

12.  If the nation's tastes for its import commodity increases:

a.  the nation's offer curve rotates toward the axis measuring its import commodityb.  the partner's offer curve rotates toward the axis measuring its import commodity             c.  the partner's offer curve rotates toward the axis measuring its export commodity      *d.  the nation's offer curve rotates toward the axis measuring its export commodity

13.  If the nation's tastes for its import commodity increases:

a.  the nation's terms of trade remain unchanged*b.  the nation's terms of trade deterioratec.  the partner's terms of trade deteriorated.  any of the above

14.  If the tastes for a nation import commodity increases, trade volume:

*a.  increasesb.  declinesc.  remains unchangedd.  any of the above

15.  A deterioration of a nation's terms of trade causes the nation's welfare to:

a.  deteriorateb.  improvec.  remain unchanged*d.  any of the above

Chapter  5: Factor Endowments and the Heckscher-Ohlin Theory        Multiple-Choice Questions

1.  The H-O model extends the classical trade model by:

a.  explaining the basis for comparative advantageb.  examining the effect of trade on factor prices*c.  both a and bd.  neither a nor b

2.  Which is not an assumption of the H-O model

a.  the same technology in both nationsb.  constant returns to scale*c.  complete specializationd.  equal tastes in both nations

3.  With equal technology nations will have equal K/L in production if:

*a.  factor prices are the sameb.  tastes are the samec.  production functions are the samed.  all of the above

4.  We say that commodity Y is K-intensive with respect to X when:

a.  more K is used in the production of Y than Xb.  less L is used in the production of Y than X*c.  a lower L/K ratio is used in the production of Y than Xd.  a higher K/L is used in the production of X than Y

5.  When w/r falls, L/K

a.  falls in the production of both commodities*b.  rises in the production of both commoditiesc.  can rise or falld.  is not affected

6.  A nation is said to have a relative abundance of K if it has a:

a.  greater absolute amount of Kb.  smaller absolute amount of L c.  higher L/K ratio*d.  lower r/w

    7.  A difference in relative commodity prices between nations can be based on a difference in:

a.  technologyb.  factor endowmentsc.  tastes*d.  all of the above

8.  In the H-O model, international trade is based mostly on a difference in:

a.  technology*b.  factor endowmentsc.  economies of scaled.  tastes

9.  According to the H-O model, trade reduces international differences in:

a.  relative but not absolute factor pricesb.  absolute but not relative factor prices*c.  both relative and absolute factor pricesd.  neither relative nor absolute factor prices

10.  According to the H-O model, international trade will:

a.  reduce international differences in per capita incomesb.  increases international differences in per capita incomes*c.  may increase or reduce international differences in per capita incomesd.  lead to complete specialization

11.  The H-O model is a general equilibrium model because it deals with:

a.  production in both nationsb.  consumption in both nationsc.  trade between the two nations*d.  all of the above

12.  The H-O model is a simplification of the a truly general equilibrium model     because it deals with:

a.  two nationsb.  two commoditiesc.  two factors of production*d.  all of the above

13.  The Leontief paradox refers to the empirical finding that U.S.

*a.  import substitutes are more K-intensive than exportsb.  imports are more K-intensive than exportsc.  exports are more L-intensive than importsd.  exports are more K-intensive than import substitutes

14.  From empirical studies, we conclude that the H-O theory:

a.  must be rejectedb.  must be accepted without reservations*c.  can be accepted while awaiting further testingd.  explains all international trade

15.  For factor reversal to occur, two commodities must be produced with:

*a.  sufficiently different elasticity of substitution of factors      b.  the same K/L ratioc.  technologically-fixed factor proportionsd.  equal elasticity of substitution of factors

              Chapter  6: Economies of Scale, Imperfect Competition, and International Trade  

Multiple-Choice Questions:

1.  Relaxing the assumptions on which the Heckscher-Ohlin theory rests:

a.  leads to rejection of the theoryb.  leaves the theory unaffected*c.  requires complementary trade theoriesd.  any of the above.

1. Which of the following assumptions of the Heckscher-Ohlin theory, when relaxed, leave     the theory unaffected?

a.  Two nations, two commodities, and two factors

b.  both nations use the same technologyc.  the same commodity is L-intensive in both nations*d.  all of the above

2. Which of the following assumptions of the Heckscher-Ohlin theory, when relaxed,     require new trade theories?  *a.  Economies of scaleb.  incomplete specializationc.  similar tastes in both nationsd.  the existence of transportation costs

3. International trade can be based on economies of scale even if both nations have identical:

a.  factor endowmentsb.  tastesc.  technology*d.  all of the above

5.  A great deal of international trade:

a.  is intra-industry tradeb.  involves differentiated productsc.  is based on monopolistic competition*d.  all of the above

6.  The Heckscher-Ohlin and new trade theories explains most of the trade:

a.  among industrial countriesb.  between developed and developing countriesc.  in industrial goods*d.  all of the above

1. The theory that a nation exports those products for which a large domestic market exists     was advanced by:

*a.  Linderb.  Vernonc.  Leontiefd.  Ohlin

8.  Intra-industry trade takes place:

a.  because products are homogeneous*b.  in order to take advantage of economies of scalec.  because perfect competition is the prevalent form of market organizationd.  all of the above

1. If a nation exports twice as much of a differentiated product that it imports, its intra-     industry (T) index is equal to:

a.  1.00b.  0.75*c.  0.50d.  0.25

10.  Trade based on technological gaps is closely related to:

a.  the H-O theory*b.  the product-cycle theoryc.  Linder's theoryd.  all of the above

11.  Which of the following statements is true with regard to the product-cycle theory?

a.  It depends on differences in technological changes over time among countriesb.  it depends on the opening and the closing of technological gaps among countriesc.  it postulates that industrial countries export more advanced products to less advanced countries*d.  all of the above

12.  Transport costs:

a.  increase the price in the importing countryb.  reduces the price in the exporting country*c.  both of the aboved.  neither a nor b.

13.  Transport costs can be analyzed:

a.  with demand and supply curvesb.  production frontiersc.  offer curves*d.  all of the above

14.  The share of transport costs will fall less heavily on the nation:

*a.  with the more elastic demand and supply of the traded commodityb.  with the less elastic demand and supply of the traded commodityc.  exporting agricultural productsd.  with the largest domestic market

15.  A footloose industry is one in which the product:a.  gains weight in processingb.  loses weight in processingc.  both of the above*d.  neither a nor b.

Chapter  7: Economic Growth and International Trade            Multiple-Choice Questions

1.  Dynamic factors in trade theory refer to changes in:a.  factor endowmentsb.  technologyc.  tastes*d.  all of the above

2.  Doubling the amount of L and K under constant returns to scale:a.  doubles the output of the L-intensive commodityb.  doubles the output of the K-intensive commodityc.  leaves the shape of the production frontier unchanged*d.  all of the above.

3.  Doubling only the amount of L available under constant returns to scale:a.  less than doubles the output of the L-intensive commodity*b.  more than doubles the output of the L-intensive commodityc.  doubles the output of the K-intensive commodityd.  leaves the output of the K-intensive commodity unchanged

a.  doubles the output of the L-intensive commodity*b.  reduces the output of the K-intensive commodityc.  increases the output of both commoditiesd.  any of the above

5.  Doubling L is likely to:

a.  increases the relative price of the L-intensive commodityb.  reduces the relative price of the K-intensive commodity*c.  reduces the relative price of the L-intensive commodityd.  any of the above

1. Technical progress that increases the productivity of L proportionately more than the     productivity of K is called:

*a.  capital savingb.  labor savingc.  neutrald.  any of the above

7.  A 50 percent productivity increase in the production of commodity Y:

a.  increases the output of commodity Y by 50 percentb.  does not affect the output of Xc.  shifts the production frontier in the Y direction only*d.  any of the above

8.  Doubling L with trade in a small L-abundant nation:

*a.  reduces the nation's social welfareb.  reduces the nation's terms of tradec.  reduces the volume of traded.  all of the above

9.  Doubling L with trade in a large L-abundant nation:

a.  reduces the nation's social welfareb.  reduces the nation's terms of tradec.  reduces the volume of trade*d.  all of the above    

1. If, at unchanged terms of trade, a nation wants to trade more after growth, then the     nation's terms of trade can be expected to:

*a.  deteriorateb.  improvec.  remain unchangedd.  any of the above

2. A proportionately greater increase in the nation's supply of labor than of capital is likely      to result in a deterioration in the nation's terms of trade if the nation exports:

a.  the K-intensive commodity*b.  the L-intensive commodityc.  either commodityd.  both commodities

12.  Technical progress in the nation's export commodity:

*a.  may reduce the nation's welfare

b.  will reduce the nation's welfarec.  will increase the nation's welfared.  leaves the nation's welfare unchanged

13.  Doubling K with trade in a large L-abundant nation:

a.  increases the nation's welfareb.  improves the nation's terms of tradec.  reduces the volume of trade*d.  all of the above

14.  An increase in tastes for the import commodity in both nations:

a.  reduces the volume of trade*b.  increases the volume of tradec.  leaves the volume of trade unchangedd.  any of the above

15.  An increase in tastes of the import commodity of Nation A and export in B:

*a.  will reduce the terms of trade of Nation Ab.  will increase the terms of trade of Nation Ac.  will reduce the terms of trade of Nation Bd.  any of the above

                    PART TWO:  INTERNATIONAL TRADE POLICY Chapter  8: Trade Restrictions: Tariffs                       

Multiple-choice Questions

1.  Which of the following statements is incorrect?

a.  An ad valorem tariff is expressed as a percentage of the value of the traded commodityb.   a specific tariff is expressed as a fixed sum of the value of the traded     commodity. c.   export tariffs are prohibited by the U.S. Constitution*d.  The U.S. uses exclusively the specific tariff   

2.  A small nation is one:a.  which does not affect world price by its tradingb.  which faces an infinitely elastic world supply curve for its import commodityc. whose consumers will pay a price that exceeds the world price by the amount of the tariff*d.  all of the above

3.  If a small nation increases the tariff on its import commodity, its:

a.  consumption of the commodity increasesb.  production of the commodity decreasesc.  imports of the commodity increase*d.  none of the above

1. The increase in producer surplus when a small nation imposes a tariff is measured by the area:

*a.  to the left of the supply curve between the commodity price with and without     the tariffb.  under the supply curve between the quantity produced with and without the tariff

c.  under the demand curve between the commodity price with and without the tariffd.  none of the above.

5.  If a small nation increases the tariff on its import commodity:

*a.  the rent of domestic producers of the commodity increasesb.  the protection cost of the tariff decreasesc.  the deadweight loss decreasesd.  all of the above

1.     Which of the following statements is incorrect with respect to the rate of effective

         protection? a.  for given values of ai and ti, g is larger the greater is tb.  for a given value of t and ti, g is larger the greater is ai

c.  g exceeds, is equal to or is smaller than t, as ti is smaller than, is equal to     or is larger than t*d.  when aiti exceeds t, the rate of effective protection is positive

7.  With ai=50%, ti=0, and t=20%, g is:

*a.  40%b.  20%c.  80%d.  0

8.  The imposition of an import tariff by a small nation: *a.  increases the relative price of the import commodity for domestic producers     and consumersb. reduces the relative price of the import commodity for domestic producers and consumersc.  increases the relative price of the import commodity for the nation as a wholed.  any of the above is possible

9.  The imposition of an import tariff by a small nation:

a.  increases the nation's welfare*b.  reduces the nation's welfarec.  leaves the nation's welfare unchangedd.  any of the above is possible

10.  According to the Stolper-Samuelson theorem, the imposition of a tariff by a nation:

a.  increases the real return of the nation's abundant factor*b.  increases the real return of the nation's scarce factorc.  reduces the real return of the nation's scarce factord.  any of the above is possible

11.  The imposition of an import tariff by a nation results in:a.  an    increase in relative price of the nation's import commodityb.  an increase in the nation's production of its importable commodityc.  reduces the real return of the nation's abundant factor*d.  all of the above    12.  The imposition of an import tariff by a nation can be represented by a rotation of the:

*a.  nation's offer curve away from the axis measuring the commodity of its comparative advantageb. the nation's offer curve toward the axis measuring the commodity of its comparative advantagec. the other nation's offer curve toward the axis measuring the commodity of its comparative advantaged. the other nation's offer curve away from the axis measuring the commodity of     its comparative advantage

13.  The imposition of an import tariff by a large nation:

a.  increases the nation's terms of tradeb.  reduces the volume of tradec.  may increase or reduce the nation's welfare*d.  all of the above

14.  The imposition of an optimum tariff by a large nation:

a.  improves its terms of tradeb.  reduces the volume of tradec.  increases the nation's welfare*d.  all of the above

15.  The optimum tariff for a small nation is:

a.  100%b.  50%*c.  0            d.  depends on elasticities 

    Chapter  9: Nontariff Trade Barriers and the New Protectionism       

Multiple-choice Questions:

1.  An import quota:

a.  increases the domestic price of the imported commodityb.  reduces domestic consumptionc.  increases domestic production*d.  all of the above

2.  An increase in the demand of the imported commodity subject to a given import quota:

a.  reduces the domestic quantity demanded of the commodity*b.  increases the domestic production of the commodityc.  reduces the domestic price of the commodityd.  reduces the producers' surplus       

1. Adjustment to any shift in the domestic demand or supply of an importable commodity

     occurs:    a.  in domestic price with an import quotab.  in the quantity of imports with a tariffc.  through the market mechanism with an import tariff but not with an import     quota*d.  all of the above

4.  An international cartel refers to:

a.  dumping*b.  an organization of exportersc.  an international commodity agreementd.  voluntary export restraints

1. The temporary sale of a commodity at below cost or at a lower price abroad in order to drive foreign producers out of business is called:

*a.  predatory dumpingb.  sporadic dumpingc.  continuous dumpingd.  voluntary export restraints       

2. The type of dumping which would justify antidumping measures by the country subject to the dumping is:

*a.  predatory dumpingb.  sporadic dumpingc.  continuous dumpingd.  all of the above

7.  A fallacious argument for protection is:   a.  the infant industry argumentb.  protection for national defense*c.  the scientific tariffd.  to correct domestic distortions

8.  Which of the following is true with respect to the infant-industry argument for     protection:                   

a.  it refers to temporary protection to establish a domestic industryb.  to be valid, the return to the grown-up industry must be sufficiently high also to repay for the higher prices paid by domestic consumers of the commodity during the infancy periodc.  is inferior to an equivalent production subsidy to the infant industry*d.  all of the above

9.  Which of the following is false with respect to strategic trade policy?

a.  it postulates that a nation can gain by an activist trade policy*b.  it is practiced to some extent by most industrial nationsc.  it can easily be carried outd.  all of the above

1. Industrial policy refers to:

a. an activist policy by the government of an industrial country to stimulate the development of an industry b.  the granting of a subsidy to a domestic industry to stimulate the development of an industry c.  the granting of a subsidy to a domestic industry to counter a foreign subsidy

*d.  all of the above

11.  Game theory refers to:

*a.  a method of choosing the optimal strategy in conflict situationsb.  the granting of a subsidy to correct a domestic distortionc.  the theory of tariff protectiond.  none of the above

12.  Trade protection in the United States is usually provided to:    a.  low-wage workersb.  well-organized industries with large employmentc.  industries producing consumer products*d.  all of the above

13.  The most-favored-nation principle refers to:    *a.  extension to all trade partners of any reciprocal tariff reduction negotiated by the U.S. with any of its trade partnersb.  multilateral trade negotiationc.  the General Agreement on Tariffs and Traded.  the International Trade Organization

14.  On which of the following principles does GATT rest?    a.  nondiscriminationb.  elimination of nontariff barriersc.  consultation among nations in solving trade disputes*d.  all of the above

15.  Which of the following was not negotiated under the Uruguay Round? a.  reduction of tariffs on industrial goodsb.  replacement of quotas with tariffsc.  reduction of subsidies on industrial products and on agricultural exports*d.  liberalization in trade in most services

Chapter 10: Economic Integration: Customs Unions and Free Trade Areas    Multiple-choice Questions:

1.  Which of the following statements is correct?

*a.  In a customs union, member nations apply a uniform external tariffb.  in a free-trade area, member nations harmonize their monetary and fiscal policiesc.  within a customs union there is unrestricted factor movementd.  a customs union is a higher form of economic integration than a common market

2. A customs union that allows for the free movement of labor and capital among its member nations is called a: a.  preferential trade arrangementb.  free-trade area*c.  common marketd.  all of the above

3.  A trade-creating customs union is one where:

 a. lower-cost imports from outside the customs union are replaced by higher-cost imports from a union member

*b. some domestic production in a member nation is replaced by lower-cost imports from another member nationc.  trade among members increases but trade with nonmembers decreasesd.  trade among members decreases while trade with nonmembers increases

4.  A trade-diverting customs union:

a.  increases trade among union members and with nonmember nationsb.  reduces trade among union members and with nonmember nations*c.  increases trade among members but reduces trade with non-membersd.  reduces trade among union members but increases it with nonmembers

5.  A trade-diverting customs union results in:

a.  trade diversion onlyb.  trade creation only*c.  both trade creation and trade diversiond.  we cannot say

6. The formation of a trade-creating customs union where all economic resources of member     nations are fully employed before and after the formation of the customs union leads to an:   

*a.  increase in the welfare of member and nonmember nationsb.  increase in the welfare of member nations onlyc.  increase in the welfare of nonmember nations onlyd.  increase or decrease in the welfare of member and nonmember nations

7.  A trade-diverting customs union:

a.  increases the welfare of member and nonmember nationsb.  reduces the welfare of member and nonmember nationsc.  increases the welfare of member nations but reduces that of nonmembers*d.  reduces the welfare of nonmembers and may increase or reduce that of members

8.  A trade-diverting customs union is more likely to lead to trade creation:

a.  the lower are the pre-union trade barriers of the member countries*b.  the lower are the customs union's barriers on trade with the rest of the worldc.  the smaller is the number of countries forming the customs union and the smaller their size d.  the more complementary rather than competitive are the economies of the nations forming the customs union

9.  The theory of customs union is a special case of the theory of:

a.  effective protection*b.  the second bestc.  the product cycled.  comparative advantage

10.  Which is not a dynamic benefit from the formation of a customs union?

a.  increased competitionb.  economies of scalec.  stimulus to investment*d.  trade creation

11.  The formation of the EU resulted in:

a.  trade creation in industrial and agricultural products

b.  trade diversion in industrial and agricultural products*c.  trade creation in industrial products and trade diversion in agricultural productsd.  trade diversion in industrial products and trade creation in agricultural products

12.  The benefit that the United States is likely to receive from NAFTA:

*a.  increasing competition in product and resource marketsb.  greater technical innovationc.  improvements in its terms of traded.  all of the above

13.  The benefit that Mexico is likely to receive from NAFTA:

a.  greater export-led growthb.  encouraging the return of flight capitalc.  more rapid structural change*d.  all of the above

14. Which is a stumbling block to successful economic integration among groups of     developing nations?a.  benefits are not evenly distributed among nationsb.  many developing nations are not willing to relinquish part of their newly-acquired sovereignty to a supranational community body, as required for successful economic integration c.  the complementary nature of their economies and competition for the same world markets for their agricultural exports*d.  all of the above

15.  The formation of a free trade area among the countries of Eastern Europe is advocated          in order to:

a.  restore trade trading*b.  retain the traditional trade links that can be justified on market principlesc.  reduce the need for structural change            d.  none of the above        

PART THREE:  THE BALANCE OF PAYMENTS, FOREIGN EXCHANGE MARKETS,

AND EXCHANGE RATES Chapter 13: The Balance of Payments                       

Multiple-choice Questions:

1.  Which of the following is false?

a.  A credit transaction leads to a payment from foreignersb.  A debit transaction leads to a payment to foreigners*c.  A credit transaction is entered with a negative signd.  Double-entry bookkeeping refers to each transaction entered twice.

2.  Which of the following is a debit?

a.  The export of goodsb.  The export of services*c.  Unilateral transfers given to foreignersd.  Capital inflows

3.  Capital inflows:

a.  refer to an increase in foreign assets in the nationb.  refer to a reduction in the nation's assets abroad

c.  lead to a payment from foreigners*d.  all of the above

4.  When a U.S. firm imports goods to be paid in three months the U.S. credits:

a.  the current accountb.  unilateral transfers*c.  capitald.  official reserves

5.  The receipt of an interest payment on a loan made by a U.S. commercial bank to a foreign resident is entered in the U.S. balance of payments as a:    a.  credit in the capital account*b.  credit in the current accountc.  credit in official reservesd.  debit in unilateral transfers

6.  The payment of a dividend by an American company to a foreign stockholder represents:

a.  a debit in the U.S. capital accountb.  a credit in the U.S. capital accountc.  a credit in the U.S. official reserve account*d.  a debit in the U.S. current account

7. When a U.S. firm imports a good from England a pays for it by drawing on its pound     sterling balances in a London Bank, the U.S. debits its current account and credits its:

a.  official reserve accountb.  unilateral transfers accountc.  services in its current account*d.  capital account

8.  When the U.S. ships food aid to a developing nation, the U.S. debits:

*a.  unilateral transfersb.  servicesc.  capitald.  official reserves

9. When the resident of a foreign nation (1) sells a U.S. stock and (2) deposits the proceeds in a U.S. bank, the U.S.:    a.  credits capital for (1) and debits capital for (2)b.  credits the current account and debits capitalc.  debits capital and credits official reserves*d.  debits capital for (1) and credits capital for (2)

10. When a U.S. resident (1) purchases foreign treasury bills and pays by (2) drawing down his bank balances abroad, the U.S.:

a.  debits short-term capital and credits official reserves*b.  debits capital for (1) and credits capital for (2)    c.  debits official reserves and credits capitald.  credits short-term capital and debits official reserves    11.  From the U.S. point of view, drawing on (reducing) foreign bank balances in a New York bank represents a:  a.  capital inflow*b.  capital outflow

c.  outflow of official reservesd.  debit in the current account  

12.  Which is not an official reserve asset of the U.S.?

a.  U.S. holdings of Special Drawing Rightsb.  The U.S. reserve position in the International Monetary Fund*c.  Foreign official holdings of U.S. dollarsd.  Official holdings of foreign currencies by U.S. monetary authorities

13.  The capital account of the U.S. includes:a.  the change in U.S. assets abroad and foreign assets in the U.S.*b.  the change in U.S. assets abroad and foreign assets in the U.S., other than     official reserve assetsc.  all financial assetsd.  all but current account transactions

14.  Accommodating items are:a.  transactions in official reserve assetsb.  the items below the linec.  needed to balance international transactions*d.  all of the above

15.  Which of the following is false?*a.  a net debit balance in the current and capital accounts measures the surplus in     the nation's balance of paymentsb.  a balance of payments deficit must be settled by a net credit in the official     reserve accountc. a deficit in the balance of payments can be measured by the excess of credits     over debits in the official reserve accountd.  a net debit balance in the official reserve account refers to a surplus   

Chapter 14: Foreign Exchange Markets and Exchange Rates            Multiple-choice Questions:

1.  Which is not a function of the foreign exchange market?

a.  to transfer funds from one nation to anotherb.  to finance trade*c.  to diversify risksd.  to provide the facilities for hedging

2.  An increase in the pound price of the dollar represents:   *a.  an appreciation of the dollarb.  a depreciation of the dollarc.  an appreciation of the poundd.  a devaluation of the dollar

3.  A change from $1=€1 to $2=€1 represents

*a.  depreciation of the dollarb.  an appreciation of the dollarc.  a depreciation of the poundd.  none of the above

4.  A shortage of pounds under a flexible exchange rate system results in:

a.  a depreciation of the pound*b.  a depreciation of the dollarc.  an appreciation of the dollar

d.  no change in the exchange rate

5.  An effective exchange rate is a:a.  spot rateb.  forward ratec.  flexible exchange rates*d.  weighted average of the exchange rates between the domestic currency and     the nation's most important trade partners

6.  The exchange rate is kept within narrow limits in different monetary centers by:a.  hedging*b.  exchange arbitragec.  interest arbitraged.  speculation

7.  If SR=$1/€1 and the three-month FR=$0.99/€1:

*a.  the euro is at a three-month forward discount of 1%b.  the euro is at a forward discount of 1% per yearc.  the euro is at a three-month forward premium of 1%d.  the dollar is at a three-month forward discount of 1%

8.  Hedging refers to:

a.  the acceptance of a foreign exchange risk*b.  the covering of a foreign exchange riskc.  foreign exchange speculationd.  foreign exchange arbitrage

9.  A U.S. importer scheduled to make a payment of €100,000 in three months can hedge      his foreign exchange risk by: a.  purchasing $100,000 in the forward market for delivery in three monthsb.  selling €100,000 in the spot market for delivery in three months*c.  purchasing €100,000 in the forward market for delivery in three monthsd.  selling €100,000 in the spot market for delivery in three months

10. If the three-month FR=$1/€1 and a speculator anticipates that SR=$1.02/€1 in three     months, he can earn a profit by:a.  selling euros forward*b.  purchasing euros forwardc.  selling dollars forwardd.  purchasing dollars forward

11.  Destabilizing speculation refers to the:

*a.  sale of the foreign currency when the exchange rate falls or is lowb.  purchase of the foreign currency when the exchange rate falls or is lowc.  sale of the foreign currency when the exchange rate rises or is highd.  all of the above

12. A capital outflow from New York to Frankfurt under covered interest arbitrage can take place if the interest differential in favor of Frankfurt is:

a.  smaller than the forward discount on the euro b.  equal to the forward discount on the euro *c.  larger than the forward discount on the euro d.  none of the above.  

13. According to the theory of covered interest arbitrage, if the interest differential in favor of the foreign country exceeds the forward discount on the foreign currency, there will be a:

a.  capital inflow under covered interest arbitrage*b.  capital outflow under covered interest arbitragec.  no capital flow under a covered interest arbitraged.  any of the above

14. When the interest differential in favor of the foreign country is equal to the forward     premium on the foreign currency, we:

a.  are at covered interest arbitrage parity*b.  are not at covered interest arbitrage parityc.  may or may not be at covered interest arbitrage parityd.  we cannot say without additional information

15.  The currency of the nation with the lower interest rate is usually at a

*a.  forward premium b.  forward discountc.  covered interest arbitrage parityd.  any of the above

Chapter 15: Exchange Rate Determination                                        Multiple-choice Questions:

1.  Which is correct with respect to the absolute PPP theory?

a.  It postulates that the exchange rate between two currencies is equal to the ratio     of the price levels in the two nationsb.  it does not take into consideration transportation costs or other obstructions to     the flow of international trade c.  can be very misleading*d.  all of the above

2.  The relative purchasing power-parity theory postulates that:

a. The equilibrium exchange rate is equal to the ratio of the price level in the two     nations*b.  the change in the exchange rate over a period of time should be proportional     to the relative change in the price level in the two nations over the same time     periodc. the change in the exchange rate over a period of time should be proportional to     the absolute change in the price level in the two nations over the same time periodd. the exchange rate at a period of time should be proportional to the relative     prices in the two nations

3.  The relative PPP theory gives better results:

*a.  in the long run than in the short runb.  when structural changes take placec.  the greater is the level of commodity aggregationd.  in tests including developed and developing countries

4.  The monetary approach to the balance of payments:

a.  views the balance of payments as an essentially monetary phenomenonb.  rests on the purchasing power-parity theoryc.  postulates that money plays the crucial role in the long run both as a     disturbance and adjustment in the nation's balance of payments*d.  all of the above

5.  If a nation's money GDP is 100 and the velocity of circulation of money is 4, the quantity demanded of money in the nation is:

a.  20*b.  25  c.  50  d.  100

6.  The monetary base of the nation refers to the:

a.  domestic credit created by the nation's monetary authorities or the domestic     assets backing of the nation's money supplyb.  international reserves of the nation*c.  domestic credit created by the nation's monetary authorities or the domestic     assets backing of the nation's money supply plus the international reserves of the     nationd.  legal reserve requirements in the nation

7.  If the legal reserve requirement of the nation is 25%, the money multiplier in the nation is:a.  2*b.  4c.  5d.  6

8.  According to the monetary approach to the balance of payments, a deficit in the nation's balance of payments results from:

*a.  an excess in the nation's stock of money supply that is not eliminated or corrected by the nation's monetary authoritiesb.  an excess in the stock of money demanded in the nation that is not satisfied by domestic monetary authoritiesc.  an excess in the stock of money demanded in the other nation that is not satisfied by the other nation's monetary authoritiesd.  an excess of imports over exports in the nation

9.  If the increase in a nation's money supply grows less rapidly than its GNP, the nation will face a:

a.  once-and-for-all balance of payments deficitb.  once-and-for-all balance of payments surplusc.  continuous balance of payments deficit*d.  continuous balance of payments surplus

10. According to the monetary approach to the balance of payments a non-reserve currency nation:         

*a.  has no control over its money supply in the long-run under fixed exchange     rates                  b.  has no control over its money supply in the short-run under fixed exchange     rates             c.  has no control over its money supply in the long-run under flexible exchange     rates           d.  retains complete control over its money supply in the long-run

11.  According to the monetary approach to the balance of payments, a surplus nation will have to give up in the long-run its goal of:

a.  price stabilityb.  fixed exchange rate*c.  price stability or fixed exchange rated.  price stability and fixed exchange rate

12.  Which of the following statements is true with respect to the monetary approach to the balance of payments:    a. the interest differential in favor of the dollar equals the expected rate of     appreciation of the eurob. the interest differential in favor of the dollar equals the expected rate of     depreciation of the dollarc. the interest differential in favor of the pound equals the expected rate of     depreciation of the pound*d. all of the above

13.  The monetary approach assumes that the following assumption holds:   *a.  domestic and foreign bonds are perfect substitutesb.  covered interest arbitrage holdsc.  expectations do not affect the future spot exchange rate.d.  the risk premium is positive

14.  The portfolio balance approach:

a.  can be regarded as an extension of the monetary approachb.  deals with money and other domestic and foreign financial assetsc.  can more readily be extended than the monetary approach to deals with the real sector*d.  all of the above

15.  According to the portfolio balance approach, an increase in the expected appreciation of the foreign currency leads domestic residents to increase:

a  the demand for domestic money b. the demand for the domestic bond*c. the demand for the foreign bond      d. the risk premium

16.  According to the portfolio balance approach, a reduction in the risk premium on the foreign bond leads domestic residents to increase the demand for the:

a. domestic money b. domestic bond*c. foreign bondd. all of the above

17.  According to the portfolio balance approach, an increase in domestic real income or GDP leads domestic residents to increase the demand for the:

*a  domestic money b. domestic bondc. foreign bondd. all of the above

18.  According to the portfolio balance approach, an increase in domestic wealth leads domestic residents to increase the demand for the:

a  domestic money b. domestic bondc. foreign bond*d. all of the above

19.  Which of the following is false with regard to exchange rate dynamics:

a.  seeks to explain exchange rate fluctuations over time*b.  results because the real sector adjusts instantaneously to disturbancesc.  in the short run, the exchange rate overshoots its long-run equilibriumd.  results from the stock adjustment in financial assets

20.  An unexpected increase in the U.S. money supply leads to:

a.  an immediate reduction in the U.S. interest rateb.  an immediate larger dollar depreciationc.  a gradual appreciation of the dollar over time*d.  all of the above

PART FOUR:OPEN ECONOMY MACROECONOMICS AND THE INTERNATIONAL MONETARY SYSTEM

Chapter 16: The Price Adjustment Mechanisms with Flexible and Fixed Exchange Rates    Multiple-choice Questions:

1.  The more elastic is a nation's demand and supply of foreign exchange the:

a.  larger is the devaluation or depreciation required to correct a deficit of a given     size in the nation's balance of payments*b.  smaller is the devaluation or depreciation required to correct a deficit of a     given size in the nation's balance of paymentsc. less feasible is a flexible exchange rate systemd.  less feasible is a devaluation as a policy to correct a deficit in the nation's     balance of  payments

2.  A nation's demand curve for foreign exchange is derived from the:

a.  foreign demand curve for the nations' exportsb.  nation's supply curve of exports*c. domestic demand curve for imports and the foreign supply curve for the nation's imports                  d.  foreign demand curve and the domestic supply curve for the nation's exports

3.  A depreciation of a nation's currency shifts:

a.  down its supply curve of imports in terms of the foreign currencyb.  up its demand curve of imports in terms of the foreign currency*c.  down its demand curve of imports in terms of the foreign currencyd.  down its demand curve of imports in terms of the domestic currency

4.  When a nation's demand curve for imports in terms of the foreign currency is vertical:

*a.  the nation's demand curve for the foreign currency has zero elasticityb.  the nation's demand for the currency is elasticc.  the nation's supply of the currency is verticald.  the other nation's demand for the nation's currency has zero elasticity

5.  A depreciation of a nation's currency shifts:

a.  down its supply curve of exports in terms of the domestic currency*b.  down its supply curve of exports in terms of the foreign currencyc.  down its demand curve for exports in terms of the foreign currencyd.  up its supply curve of imports in terms of the foreign currency

6.  When a nation's demand curve for exports in terms of the foreign currency is inelastic:

*a.  the nation's supply curve of the foreign currency is negatively inclinedb.  the nation's supply curve of the foreign currency is verticalc.  the nation's demand curve for the foreign currency is negatively inclinedd.  the other nation's supply curve of the nation's currency is negatively inclined

7.  For a small nation:

a.  the foreign supply of exports is horizontalb.  the domestic demand for imports is horizontal*c.  the foreign demand for its exports is horizontald.  the foreign supply of exports is vertical

8.  A depreciation of the nation's currency causes its terms of trade to:a.  deteriorateb.  improvec.  remain unchanged*d.  any of the above

9.  A depreciation of a nation's currency is:  *a.  inflationary for the nationb.  deflationary for the nationc.  deflationary for the trade partnerd.  any of the above

10.  The foreign exchange market is stable when:

a. The demand curve of foreign exchange is negatively inclined and the supply     curve of foreign exchange is positively inclinedb. the supply curve of foreign exchange is negatively inclined and less elastic than the demand curvec. the sum of the absolute values of the elasticity of the nation's demand of imports and the foreign demand for the nation's exports is greater than one*d. all of the above

11.  The United States has a trade problem with Japan because the U.S. trade deficit with Japan:

a.  is very largeb.  has persisted for a long timec.  did not seem to decline when the dollar depreciated sharply with respect to the     yen*d.  all of the above

12.  The mint parity refers to the:    a.  gold export pointb.  gold import pointc.  equilibrium exchange rate*d.  ratio of the price of a unit of gold in terms of the currency of two nations

13.  Under the gold standard:

a. each nations defines the price of gold in terms of its currency and then stands     ready to buy and sell any amount of gold at that priceb. there is a fixed relationship between any two currencies called the mint parityc. the exchange rate is determined by demand and supply between the gold points     and is prevented from moving outside the gold points by gold shipmentsd.  all of the above

14. Which of the following statements is not true with regard to the price-specie-flow mechanism:

a.  relies on the quantity theory of moneyb. requires that nations allow their money supply to rise when the nation has a     surplus in its balance of payments and to fall when the nation has a deficit*c.  requires that the price elasticity of demand for imports and exports be equal to zerod. it was introduced by David Hume to show the futility of the mercantilists'                prescription that a nation should attempt to continuously accumulate gold

15.  A currency board refers to the case where:

a. the central bank sterilizes changes in the money supply resulting from balance     of payments disequilibria *b.  the money supply of the nation is backed by 100 percent international     reservesc.  the nation operates under flexible exchange ratesd.  the nation retains firm control over its money supply

                                               Chapter 17: The Income Adjustment Mechanism and Synthesis of Automatic Adjustments

Multiple-choice Questions:

1.  In order to isolate the income adjustment mechanism, we assume that: a.  the nation operates under a fixed exchange rate systemb.  all prices, wages, and interest rates are constantc.  the nation operates at less than full employment*d.  all of the above

2.  The marginal propensity to consume measures:    a.  the ratio of imports to incomeb.  the ratio of income to imports*c.  the change in imports over the change in incomed.  the change in income over the change in imports

3.  The income elasticity of imports is given by:

a.  the percentage change in income over the percentage change in importsb.  the change in imports over the change in income*c.  the marginal propensity to import over the average propensity to importd.  the average propensity to import over the marginal propensity to import

4.  The equilibrium level of national income in an open economy is given by:

a.  I + X = S + Mb.  X - M = S - Ic.  I + (X-M) = S*d.  all of the above

5.  If MPS=0.2 and MPM=0.3, the foreign trade multiplier is:    a.  5b.  3.3c.  3*d.  2

6.  When S exceeds I, an open economy has a trade balance:    *a.  surplusb.  deficitc.  equilibriumd.  any of the above    7.  The S-I function rises because:

a.  rising I are subtracted from constant S

*b.  constant I are subtracted from rising Sc.  rising I are subtracted from rising Sd.  constant I are added to falling S

8.  An autonomous fall in M from a condition of equilibrium in national income and in the     trade balance results in the nation's income:

a.  rising and its trade balance turning to deficitb.  falling and its trade balance turning into surplus*c.  rising and its trade balance turning into surplusd.  rising and the trade balance remaining in equilibrium

9. An autonomous increase in S from a condition of equilibrium in national income and in the      trade balance results in the nation's income:a.  rising and its trade balance turning into surplus*b.  falling and its trade balance turning into surplusc.  falling and its trade balance turning into deficitd.  rising and its trade balance turning into deficit

10.  The foreign trade multiplier of nation 1 is largest:    a.  when there are no foreign repercussionsb.  with foreign repercussions for an autonomous increase in nation 1's X that replace domestic production in nation 2*c.  with foreign repercussions for an autonomous increase in I in nation 1d.  with foreign repercussions for an autonomous increase in I in nation 2

11.  By itself, the automatic income adjustment mechanism is likely to bring about:

*a.  incomplete adjustmentb.  complete adjustmentc.  perverse adjustmentd.  any of the above

12.  A depreciation of a deficit nation's currency from a condition of full employment:   *a.  may improve the nation's trade balanceb.  will improve the nation's trade balancec.  will leave the nation's trade balance unchangedd.  will cause a deterioration in the nation's trade balance

13. The improvement in a nation's balance of trade and payments resulting from a depreciation     of its currency is:

a.  reinforced by the induced fall in imports*b.  partly neutralized by the induced rise in importsc.  partly neutralized by the induced fall in importsd.  any of the above.

14. In the real world, the automatic income, price, and interest adjustment mechanisms, if      allowed to operate, are likely to:

a.  reinforce each other but still result in incomplete adjustment*b.  reinforce each other and result in complete adjustmentc.  work at cross purposes from each other and result in incomplete adjustment    d.  work at cross purposes from each other and result in perverse adjustment

15.  A benefit of automatic adjustment mechanisms is that they:a.  avoid the possibility of policy mistakes

b.  avoid the time lags associated with adjustment policiesc.  begin to operate as soon as balance of payments disequilibria develop*d.  all of the above

Chapter 18: Open Economy Macroeconomics: Adjustment Policies   

Multiple-choice Questions:

1.  The most important economic objective of industrial nations is:

a.  external balance*b.  internal balancec.  a reasonable rate of growthd.  an equitable distribution of income

2.  In order to achieve internal and external balance simultaneously, a nation must usually use at least:

a.  one policy*b.  two policiesc.  three policiesd.  cannot say

3.  Points below internal balance line YY in the Swan diagram indicate:

a.  a balance of payments deficitb.  a balance of payments surplus*c.  unemploymentd.  inflation

4.  To correct a balance of payments deficit and unemployment a nation requires a:

a.  devaluation and expansionary fiscal and monetary policiesb.  devaluation and contractionary fiscal and monetary policies*c.  devaluation and either expansionary or contractionary fiscal and monetary policiesd.  revaluation and either expansionary or contractionary fiscal and monetary policies

5.  To correct a balance of payments deficit and inflation a nation requires a:

a.  devaluation and expansionary fiscal and monetary policiesb.  devaluation and contractionary fiscal and monetary policies*c.  devaluation or revaluation and contractionary fiscal and monetary policiesd.  revaluation and either expansionary or contractionary fiscal and monetary policies

6.  To correct a balance of payments surplus and unemployment a nation requires a:

a.  devaluation and expansionary fiscal and monetary policiesb.  devaluation and contractionary fiscal and monetary policies*c.  devaluation or revaluation and expansionary fiscal and monetary policiesd.  revaluation and either expansionary or contractionary fiscal and monetary policies

7.  To correct a balance of payments surplus and inflation a nation requires a:

a.  devaluation and expansionary fiscal and monetary policiesb.  devaluation and contractionary fiscal and monetary policies*c.  devaluation and either expansionary or contractionary fiscal and monetary policiesd.  revaluation and either expansionary or contractionary fiscal and monetary policies

8.  The IS curve is negatively inclined because:

a.  the higher is the rate of interest the smaller is the quantity of money demanded     for speculative purposesb.  higher rates of interest lead to greater capital flows*c.  at lower interest rates the levels of investment and national income are higherd.  at lower interest rates the level of national income is lower

9.  If the BP curve is above the point of intersection of the IS and LM curves, the nation will:

*a.  have a balance of payments deficit at that level of incomeb.  have a balance of payments surplus at that level of incomec.  be in recessiond.  face inflation

10.  To correct unemployment from a condition of external balance, a nation will usually have to use:

a.  expansionary fiscal policy onlyb.  easy monetary policy onlyc.  expansionary fiscal policy and easy monetary policy*d.  expansionary fiscal policy and tight monetary policy

11.  To achieve external balance and correct a recession, a nation will always have to use tight monetary policy if at the full employment level of national income the nation's BP curve is:

*a.  above the LM curveb.  below the LM curve    c.  steeper than the LM curved.  above the IS curve

12.  In a world of perfectly elastic international capital flows and fixed exchange rates:

a.  fiscal policy is completely ineffective*b.  monetary policy is completely ineffectivec.  both fiscal and monetary policies are completely ineffectived.  both fiscal and monetary policies are effective

13.  To correct unemployment and a balance of payments deficits with flexible exchange rates and imperfect capital mobility:

a.  both fiscal and monetary policies are requiredb.  fiscal policy is requiredc.  monetary policy is required*d.  either monetary or fiscal policy is required

14.  To correct a balance of payments surplus and inflation a nation requires:

a.  expansionary fiscal policy and easy monetary policyb.  contractionary fiscal policy and tight monetary policy*c.  contractionary fiscal policy and easy monetary policyd.  expansionary fiscal policy and tight monetary fiscal policy

15.  To correct a balance of payments deficit and inflation a nation requires:

a.  contractionary fiscal policy and easy monetary policyb.  contractionary fiscal policy and tight monetary policyc.  expansionary fiscal policy and tight monetary policy*d.  any of the above depending on the level of inflation and the size of the initial     deficit

16.  Direct controls refer to:

a.  tariffs, quotas, and other quantitative restrictions on the flow of international     tradeb.  restrictions on international capital flowsc.  multiple exchange rates*d.  all of the above

Chapter 19: Prices and output in an Open Economy: Aggregate Demand and Aggregate

Supply    Multiple-Choice Questions

1.  In general, as the economy expends or contracts over the business cycle

*a.  prices changeb.  prices remain unchanged except in a recessionc.  prices remain unchanged until the economy reaches full employmentd.  all of the above

2.  The aggregate demand curve (AD) for  closed economy is derived from the

a.  IS curveb.  LM curvec.  FE curve*d.  IS and LM curves

3.  A reduction in the general price level with a constant money supply is shown by a

a.  leftward shift in the LM curve*b.  movement down along a given aggregate demand curvec.  rightward shift in the aggregate supply curved.  a rightward shift in the IS curve

4.  An increase in the money supply with constant prices leads to a

a.  leftward shift in the LM curveb.  movement along a given aggregate demand curve*c.  rightward shift in the aggregate demand curved.  rightward shift in the IS curve

5.  An increase in government expenditures leads to

a.  a rightward shift in the IS curveb.  a rightward shift in the AD curvec.  an increase in the level of national income*d.  all of the above

6.  A nation's output in the short-run can    a.  exceed its natural levelb.  fall short of its natural levelc.  equal to its natural level

*d.  any of the above

7.  Which of the following statements is false?a.  a nations' natural level of output can increase as a result of growth b.  imperfection in product markets can lead to temporary deviations in a nation's     output from its long-run natural level*c.  sticky wages cannot lead to temporary deviations in a nation's output from     its long-run natural leveld.  none of the above.   8.  Output in the short run exceeds the natural level of output if expected prices

*a.  exceed actual pricesb.  are lower than actual pricesc.  are equal to actual pricesd.  any of the above

9.  The aggregate demand curve (AD) for an open economy is derived from the

a.  IS curveb.  LM curvec.  BP curve*d.  all of the above

10.  The aggregate demand curve for an open economy under fixed exchange rates is a.  less elastic than if the economy were closed*b.  more elastic than in the economy were closed c.  more elastic than in the economy operated with flexible exchange ratesd.  all of the above

11.  An autonomous improvement in the nation's trade balance under fixed exchange rates will cause the nation's aggregate demand curve to  

*a.  shift to the rightb.  shift to the left   c.  remain unchangedd.  any of the above

12.  An autonomous short-term capital outflow under flexible exchange rates causes the nation's aggregate demand curve to

*a.  shift to the rightb.  shift to the left   c.  remain unchangedd.  any of the above

13.  With high short-term international capital flows, fixed exchange rates, and flexible prices

a.  monetary policy is effective*b.  fiscal policy is effectivec.  both fiscal and monetary policies are effectived.  neither fiscal policy nor monetary policies are effective

14.  Which of the following statements is false?

a.  expansionary fiscal or monetary policy can increase the nation's output     temporarily above its natural levelb.  expansionary fiscal or monetary policy can used to correct a recession but only at the expense of higher prices in the nation

*c. a recession cannot be eliminated automatically even if domestic prices are flexible downwardd.  when prices are not flexible downward inflation may be less costly that recession

15.  Which of the following statements is false with regard to the effect of macroeconomic policies?

a.  they generally cause shifts in the aggregate demand curveb.  they can possibly increase long-run growthc.  they can help correct supply shocks that increases production costs but only at     the expense of even higher inflation*d.  they always cause shifts in the long-run aggregate supply curve