International Economics Multiple Choice Questions
1. Trade In differentiated products refers to
A. intra industry trade
B. inter industry trade
C. trade based on economies of scale
D. non of the above
Answer: A. intra industry trade
2. The terms of trade of developing countries have a secular tendency to
A. improve
B. deteriorate
C. first improve and then deteriorate
D. remain the same
Answer: B. deteriorate
3. The opportunity cost theory assumes that
A. labour is the only factor of production
B. the price or the cost of a commodity can be determined by the labour content in it
C. labour is homogeneous
D. non of the above
Answer: D. non of the above
4. If a nation gains from trade its consumption point is
A. on the production possibility frontier (ppc)
B. inside the ppc
C. above the ppc
D. any of the above
Answer: C. above the ppc
5. Given below is a table who wing the maximum amount of wheat and cloth that the UK and U S could produce if they fully utilize all the factors of production with the best technology available indicate the comparative advantage of U K and U S. U K U S Bushels of wheat 50 120 Meters of Cloth 150 80
A. us have comparative advantage in cloth and u k have comparative advantage in wheat
B. u k have comparative advantage in cloth and us have comparative advantage in wheat
C. us have comparative advantage in cloth and wheat
D. uk have comparative advantage in cloth wheat
Answer: A. us have comparative advantage in cloth and u k have comparative advantage in wheat
6. If a nations terms of trade is ½ its trade partners terms of trade is
A. 4
B. 2
C. 1
D. ½
Answer: B. 2
7. The H O theory postulates that as a result of trade the differences in factor prices between nations
A. diminishes
B. increases
C. remains unchanged
D. any of the above
Answer: A. diminishes
8. Leontiff paradox refers to the result that the U S
A. exports are more capital intensive than imports
B. exports are more capital intensive than u s import substitutes
C. imports are more capital intensive than u s exports
D. import substitutes are more capital intensive than u s exports
Answer: D. import substitutes are more capital intensive than u s exports
9. The Exchange rate is kept the same in all parts of the market through
A. exchange rate arbiterage
B. interest arbiterage
C. hedging
D. speculation.
Answer: A. exchange rate arbiterage
10. Hedcging refers to
A. acceptance of foreign exchange risk
B. covering foreign exchange risk
C. foreign exchange speculation
D. foreign exchange arbiterage
Answer: B. covering foreign exchange risk
11. If { } > { } when K= capital and L= labour, and A and B are countries then
A. counry a is labour abundant
B. counry a is capital abundant
C. counry b is labour abundant
D. counry b is capital abundant
Answer: B. counry a is capital abundant
12. If { } > { } when K= capital and L= labour, and A and B are countries then
A. in counry a relative price of labour is low
B. in counry a relative price of capital is low
C. in counry b relative price of labour is low
D. non of the above
Answer: B. in counry a relative price of capital is low
13. In Autarchy a nations PPC also shows its
A. consumption function
B. sales frontier
C. profit frontier
D. factor endowment
Answer: A. consumption function
14. Opportunity cost theory
A. is anti thesis of recardian theory
B. is a synthesis of recardian and smiths theory
C. is a reconstruction of the recardian theory in terms of alternative cost.
D. non of the above
Answer: C. is a reconstruction of the recardian theory in terms of alternative cost.
15. The paradox that Growth can make a country worse off is termed as
A. leontiff paradox
B. rybezinsky theorem
C. immiserising growth
D. triffin dilemma
Answer: C. immiserising growth
16. “Free trade between two countries in H O model will equalize relative factor pricesprovided there is incomplete specialization.” This is
A. the factor price equalization theorem
B. rybezinsky theorem
C. leontiff paradox
D. cascading effect
Answer: A. the factor price equalization theorem
17. The absolute slope of a concave PPC is given by
A. internal equilibrium price ratio
B. the marginal rate of transformation
C. increasing returns to scale
D. all the above
Answer: B. the marginal rate of transformation
18. If { } > { } when K= capital and L= labour, Pk is price of capital and Pl is priceof labour and A and B are countries then
A. counry a is labour abundant
B. counry a is capital abundant
C. counry b is labour abundant
D. counry b is capital abundant
Answer: B. counry a is capital abundant
19. Devaluation works best when
A. it is accompanied by a decline in short term interest rate
B. foreign demad for exports is is elastic
C. demand for forign imports is inelastic
D. non of the above
Answer: B. foreign demad for exports is is elastic
20. BOP includes
A. current account
B. capital account
C. official reserve account
D. all the above
Answer: D. all the above
21. international trade refers to trade between
A. two regions of a country
B. two countries
C. two commodities produced in different countries
D. non of the above
Answer: B. two countries
22. The trade theory that states that nations should accumulate financial wealth, usuallyin the form of gold, by encouraging exports and discouraging imports is called
A. keynesianism
B. individualism
C. socialism
D. mercantilism.
Answer: D. mercantilism.
23. Which among the following are the central themes of Mercantilism?
A. export or perish.
B. strict focus on the wealth accumulation through protectionism.
C. no simultaneous gains or sharing of gains among countries are possible. one country can benefit only at the cost of other countries.
D. all the above.
Answer: D. all the above.
24. “An Enquiry in to the nature and causes of Wealth of Nations” is written by
A. j s mill
B. david recardo
C. karl marx
D. non of the above
Answer: D. non of the above
25. Adam Smith identified the basic reason for trade between two nations as
A. the difference in absolute advantage
B. the difference in comparative advantage
C. difference in factor endowments
D. non of the above.
Answer: A. the difference in absolute advantage
26. Theory of Absolute advantage is
A. a rejoinder of merchantalism
B. a corollary of merchantalism
C. critique of merchantalism
D. non of the above.
Answer: C. critique of merchantalism
27. The Absolute advantage theory indicates that a country should engage in theproduction and exchange of those commodities where it has
A. a comparative advantage
B. an absolute advantage
C. relative factor endowment
D. greater opportunity cost.
Answer: B. an absolute advantage
28. The ability to produce more of a good or service than competitors, using the sameamount of resources is
A. a comparative advantage
B. an absolute advantage
C. relative factor endowment
D. greater opportunity cost.
Answer: A. a comparative advantage
29. Which among the following are the major assumptions of Absolute advantagetheory?
A. there are two countries and two commodities and one country has absolute advantage in one commodity and the second country has advantage in another commodity.
B. labour is the only factor of production and labour is homogeneous, that means each unit of labour produces same level of output. value of a commodity is measured in terms of its labour content
C. labour is perfectly mobile within the country but perfectly immobile between the countries. it means that workers are free to move between industries within the nation but migration to other countries is impossible.
D. all the above.
Answer: D. all the above.
30. Absolute advantage theory assumes
A. no technological change.
B. no transportation cost
C. labour theory of value
D. all the above
Answer: D. all the above
31. The principle of comparative advantage was first introduced by
A. david ricardo
B. j s mill
C. adam smith
D. karl marx
Answer: A. david ricardo
32. The ability of a firm or individual to produce goods and/or services at a loweropportunity cost than other firms or individuals.
A. absolute advantage
B. opportunity cost
C. comparative advantage
D. non of the above.
Answer: C. comparative advantage
33. Major assumptions of the theory of Comparitive advantage are
A. there are two countries and two commodities and the countries have absolute advantage in both commodities .
B. labour is the only factor of production and labour is homogeneous, that means each unit of labour produces same level of output. value of a commodity is measured in terms of its labour content
C. labour is perfectly mobile within the country but perfectly immobile between the countries. it means that workers are free to move between industries within the nation but migration to other countries is impossible.
D. all the above.
Answer: D. all the above.
34. The ‘Reciprocal Demand Theory’ in International Trade can be attributed to
A. adam smith
B. david recardo
C. j s mill
D. karl marx
Answer: C. j s mill
35. The curve that shows howmuch of its import commodity a nation requires inexchange for various quantities of its export commodity is
A. demand curve
B. laffer curve
C. phillips curev
D. offer curev
Answer: D. offer curev
36. Reciprocal Demand Curve is another name for
A. demand curve
B. laffer curve
C. phillips curev
D. offer curev
Answer: D. offer curev
37. The Reciprocal Demand theory was put into graphic form by
A. adam smith
B. david recardo
C. alfred marshall and f.y. edgeworth
D. non of the above
Answer: C. alfred marshall and f.y. edgeworth
38. The amount of commodity a nation is willing to give up to get an additional unit ofanother commodity and still remain on the same indifference curve is known as
A. marginal rate of substitution
B. marginal rate of transformation
C. marginal product
D. non of the above
Answer: A. marginal rate of substitution
39. ————theory states that countries which are rich in labour will export labour intensive goods and countries which are rich in capital will export capital intensivegoods
A. the heckscher ohlin theorem
B. stolper samuelson theorem
C. leontiff paradox
D. rybezensky theorem.
Answer: A. the heckscher ohlin theorem
40. Which among the following is NOT an assumption of H-O Theorem
A. there are two countries involved. each country has two factors (labour andcapital) and produce two commodities either labour intensively or capital intensively.
B. there is no perfect competition in both commodity and factor markets. all production functions are hertogenious. production function is subject to increasing or decreasing returns to scale.
C. there are no transportation costs.
D. factors are freely mobile within a country but immobile between countries.
Answer: B. there is no perfect competition in both commodity and factor markets. all production functions are hertogenious. production function is subject to increasing or decreasing returns to scale.
41. Which among the following is an assumption of H-O Theorem
A. each commodity that a nation produce differs in factor intensity. trade is free i.e. there are no trade restrictions in the form of tariffs or non-tariff barriers.
B. the production function remains the same in different countries for the same commodity. for e.g. if commodity a requires more capital in one country then same is the case in other country.
C. there is full employment of resources in both countries and demand is identical in both countries.
D. all the above
Answer: A. each commodity that a nation produce differs in factor intensity. trade is free i.e. there are no trade restrictions in the form of tariffs or non-tariff barriers.
42. The HO theory deals with which type of trade?
A. intra industry trade
B. trade based on economies of scale
C. trade based on imitation gaps and product cycles
D. inter industry tarde
Answer: A. intra industry trade
43. The basis for mutually advantageous trade in H O theory is
A. technology
B. factor endowments
C. economies of scale
D. tastes.
Answer: C. economies of scale
44. Trade in differentiated products are also called
A. intra industry trade
B. trade based on economies of scale
C. trade based on imitation gaps and product cycles
D. inter industry tarde
Answer: D. inter industry tarde
45. Which among the following are the major limitations of the H O theorem?
A. it explains only a part of the world trade as it ignores trade in differentiated products.
B. factor endowment is not the sole factor influencing commodity price and international trade.
C. the theory is empirically proved wrong in the case of u s economy.
D. all the above.
Answer: A. it explains only a part of the world trade as it ignores trade in differentiated products.
46. _______________states that international trade will bring about equalization in the returns to homogeneous factors across countries, even without their physicalmovement.
A. theory of comparative advantage,
B. stolper-samuelson theorem,
C. rybczynski theorem, and
D. leontiff paradox.
Answer: B. stolper-samuelson theorem,
47. ____________states that at constant commodity prices, an increase in the quantity of one factor increases the production of the commodity intensive in this factor andreduces the output of the other commodity which is intensive in the constant factor.
A. theory of comparative advantage,
B. stolper-samuelson theorem,
C. rybczynski theorem, and
D. leontiff paradox.
Answer: C. rybczynski theorem, and
48. Net barter Terms of Trade is defined as
A. px/pm
B. g = qm/qx x 100
C. i = px/pm x qx
D. all the above
Answer: A. px/pm
49. The foreign exchange rate is NOT
A. the price of one currency expresses in terms of another.
B. rate at which of one commodity expresses in terms of another.
C. the value of one currency in terms of another
D. fixed for ever.
Answer: B. rate at which of one commodity expresses in terms of another.
50. ______________means the measures adopted for avoiding risks.
A. hedging
B. speculation
C. arbitrage
D. non of the above
Answer: A. hedging
51. _________________ is an open position in the market with an expectation of gainsthrough the fluctuations.
A. hedging
B. speculation
C. arbitrage
D. non of the above
Answer: B. speculation
52. Under a fixed exchange rate system, ____________________are official changes inthe value of a country’s currency relative to other currencies.
A. devaluation
B. depreciation and appreciation
C. revaluation
D. both a and c.
Answer: A. devaluation
53. __________ is the deliberate downward adjustment in the official exchange rate,reduces the currency’s value.
A. devaluation
B. depreciation
C. revaluation
D. appreciation. 56. a _______________is an upward adjustment in the official exchange rate, which
Answer: A. devaluation
54. A key effect of devaluation is that it
A. makes the domestic currency cheaper relative to other currencies.
B. makes the domestic currency dearer relative to other currencies.
C. makes the foreign currency cheaper relative to other currencies.
D. leaves the relative value unchanged.
Answer: A. makes the domestic currency cheaper relative to other currencies.
55. Devaluation leads to
A. increasing the price of imports and stimulating greater demand for domestic products.
B. domestic inflation.
C. rise in domestic interest rates.
D. all the above
Answer: D. all the above
56. Recardo’s Law of Comparitive advantage is based on
A. labour theory of value
B. opportunity cost
C. law of diminishing returns
D. all the above
Answer: A. labour theory of value
57. The exchange rate system that is followed in India is
A. fixed exchange rate system
B. flexible exchange rate system
C. managed float system
D. non of the above
Answer: C. managed float system
58. Pure theory of international trade is termed so because
A. it is based on unrealistic assumptions
B. it concentrates on static gains
C. monetary approaches are absent in them
D. it is based on deductive reasoning
Answer: C. monetary approaches are absent in them
59. Which among the following is true with regard to the PPP theory?
A. greater transportation costs and trade restrictions are between countries, the less likely for the costs of market baskets to be equalized.
B. costs of non tradable inputs are not taken into consideration by ppp.
C. it is based on the concept of law of one price
D. all the above
Answer: D. all the above
60. law of one price prevails when
A. transportation costs, barriers to trade (import-export levies, customs dutyet c) and other transaction costs (currency conversion fee) are insignificant.
B. there must be competitive markets for the goods and services in both countries.
C. the loop applies only to tradable goods. loop is not applicable to immobile goods such as houses and many services that are local in nature.
D. all the above
Answer: D. all the above
61. ______________ is a summary statement of all economic transactions of the residents of a nation with the residents of Rest of the World (ROW) during aparticular period of time.
A. balance of payment
B. capital account
C. official reserve account
D. net exports
Answer: D. net exports
62. Which among the following are differences between Balance of Trade andBalance of Payment?
A. balance of trade is defined as \difference between export and import of goods and services\ while balance of payment includes not only import and export of goods and services but also financial / capital transfer.
B. bot = net earning on exports – net payment made for imports while bop = current account + capital account + or – balancing item ( errors and omissions)
C. bot need not be in balance always while bop needs to be in balance
D. all the above
Answer: D. all the above
63. If Debit balance in the balance of payment accounts are greater than the Creditbalance it leads to
A. balance of payment surplus.
B. balance of payment deficit
C. chronic disequilibrium in bop
D. non of the above
Answer: B. balance of payment deficit
64. When each international transaction undertaken by the residents of a country areentered as a debit and credit entry of equal size, into the balance of payments, the method is known as.
A. balance ot trade
B. balance of payment
C. double entry bookkeeping
D. non of the above
Answer: C. double entry bookkeeping
65. Which among the following best explains the difference between Trade inInvisibles and merchandise trade?
A. invisible trade is much more hetnogenious than the merchandise.
B. invisibles trade includes shipping, banking and insurance services and payments by residents as tourists abroad. trade in merchandise include the export and import of goods only.
C. the net of exports and import of visible in balance of payment accounts is called the merchandise trade balance. the net of exports and import of invisibles or services in balance of payment accounts is called the services trade balance.
D. all the above.
Answer: D. all the above.
66. _______________are receipts which the residents of a country receive for free,without making any present or future service transaction in return.
A. grants
B. external borrowings
C. unilateral transfers
D. non of the above
Answer: C. unilateral transfers
67. The _______________ records all international financial transactions that involve resident of the country concerned- changing either his assets with or his liabilitiesto a resident of another country.
A. current account
B. capital account
C. official reserve account
D. unilateral transfers.
Answer: B. capital account
68. Official reserves consist of
A. gold,
B. special drawing rights (sdrs) borrowed from the imf,
C. holding of foreign convertible currencies.
D. all the above
Answer: D. all the above
69. Distinguish between autonomous and accommodating items in the balance of payments.
A. all transactions in the current and capital account are called automatic transactions. accommodating items are transactions that come under the official reserve account.
B. transactions are said to be autonomous if their value is determined independently of the balance of payments. accommodating items are determined by the net consequences of the autonomous items.
C. they take place for business or private motive. accommodating items are required to balance international transactions.
D. all the above
Answer: D. all the above
70. Which among the following sentence is NOT true
A. items are said to be above the line (autonomous) or below the line (accommodating).
B. the sum of the accommodating and autonomous items must be zero, since all entries in the balance of payment s accounts must come under one of the tw3o headings.
C. a surplus in a nation’s balance of payments is given by a net debit balance in the nation’s autonomous items and a deficit is given by a net credit balance.
D. b o p is a systematic statistical statement or record of the character and dimensions of the country’s economic relationship with the rest of the world.
Answer: C. a surplus in a nation’s balance of payments is given by a net debit balance in the nation’s autonomous items and a deficit is given by a net credit balance.
71. Which among the following is NOT a measure to correct the balance of paymentdisequilibrium?
A. devaluation
B. deflation
C. revaluation
D. non of the above
Answer: D. non of the above
72. Tariffs are
A. taxes imposed on imports.
B. taxes imposed on the consumption of domestic goods
C. taxes imposed on the consumption of imported services.
D. taxes imposed on the consumption of domestic services.
Answer: A. taxes imposed on imports.
73. When tariffs are imposed
A. the prices of imports would increase to the extent of tariff.
B. the prices of imports would decrease to the extent of tariff.
C. the prices of imports would increase by a multiplier of tariff
D. the prices of imports would decrease by a multiplier of tariff
Answer: A. the prices of imports would increase to the extent of tariff.
74. What are the major drawbacks of tariffs
A. they are restrictions to free trade
B. tariffs seek to establish equilibrium without removing the root causes of disequilibrium.
C. tariffs bring equilibrium by reducing the volume of trade.
D. all the above
Answer: D. all the above
75. Which of the following statement is true
A. a depreciation is likely to correct a deficit in bop when the demand for and supply of foreign exchange is more elastic
B. a depreciation is likely to correct a deficit in bop when the demand for and supply of foreign exchange is less elastic
C. a depreciation is likely to correct a deficit in bop when the demand for foreign exchange is more elastic and the and supply of foreign exchange is less elastic
D. non of the above
Answer: A. a depreciation is likely to correct a deficit in bop when the demand for and supply of foreign exchange is more elastic
76. Protectionist trade policy is associated with
A. mercantilists
B. heckscher and ohlin
C. modern trade theory
D. wto
Answer: A. mercantilists
77. Modern trade theory is developed by
A. adam smith
B. heckscher and ohlin
C. david recardo
D. karl marx
Answer: B. heckscher and ohlin
78. According to ________ even though a country is absolutely disadvantageous inboth commodities there is still possibility for trade
A. adam smith
B. heckscher and ohlin
C. david recardo
D. karl marx
Answer: C. david recardo
79. Principles of Political Economy and Taxation is the book of
A. adam smith
B. heckscher and ohlin
C. david recardo
D. karl marx
Answer: C. david recardo
80. Who reoriented comparative advantage theory?
A. adam smith
B. j m keynes
C. haberler
D. karl marx
Answer: C. haberler
81. Haberler reconstituted comparative advantage theory on the basis of ____
A. opportunity cost theory
B. labour theory of value
C. money
D. non of the above
Answer: A. opportunity cost theory
82. Factor endowment theory is also known as
A. heckcher ohlin theory
B. limit pricing theory
C. labour theory of value
D. opportunity cost theory
Answer: A. heckcher ohlin theory
83. The accounting system used in BOP
A. double entry book keeping system
B. the balance of payment system
C. system of national accounting
D. none of the above
Answer: A. double entry book keeping system
84. PPP theory is associated with the determination of _______
A. exchange rate
B. money value
C. tariffs
D. quatas
Answer: A. exchange rate
85. The analysis method used in Leontief’s study
A. factor price equalization theorem
B. double entry book keeping system
C. input – output analysis
D. none of the above
Answer: C. input – output analysis
86. India is NOT a _____ abundant nation
A. labour
B. capital
C. human capital
D. natural resources
Answer: B. capital
87. According to HO Model, India should import ______ abundant goods
A. labour
B. capital
C. human capital
D. natural resources
Answer: A. labour
88. When a commodity is produced with low K/L ratio that commodity is ______intensive commodity
A. labour
B. capital
C. human capital
D. natural resources
Answer: B. capital
89. A situation where one commodity is capital intensive in one country and labourintensive in another country is called
A. opportunity cost
B. factor price equalization
C. leontiff paradox
D. faction intensity reversal
Answer: D. faction intensity reversal
90. According to Rybczyski theorem commodity price should be
A. constant
B. increasing
C. decreasing
D. either increasing or decreasing
Answer: A. constant
91. Product transformation curve is also called
A. production indifference curves
B. production possibility frontier
C. isoquants
D. all the above
Answer: B. production possibility frontier
92. Current and capital accounts are examples of
A. autonomous transactions
B. accommodating transactions
C. unilateral transactions
D. balance of trade
Answer: A. autonomous transactions
93. Paper gold is also known as
A. us dollar
B. pound sterling
C. sdr
D. indian rupee.
Answer: C. sdr
94. SDR is the official currency of
A. imf
B. world bank
C. un
D. non of the above
Answer: A. imf
Unit 1
95. Which of the following is NOT true?
A. Small countries depend more on trade than large countries.
B. U.S. imports exceed U.S. exports.
C. Economists believe that international trade is beneficial for all countries involved in it, in most cases.
D. Imports cannot exceed exports for an extended period of time.
Answer: D. Imports cannot exceed exports for an extended period of time.
96. The term “gains from trade” describes:
A. The fact that when two countries trade, both are better off.
B. Consumer surplus.
C. Profits made by businessmen involved in international trade.
D. Producer surplus.
Answer: A. The fact that when two countries trade, both are better off.
97. Why do some people argue against free international trade?
A. Trade alters the distribution of income between broad groups of people.
B. Free trade threatens our country’s security.
C. There is disagreement on whether or not there are gains from trade.
D. The U.S. is a large country and therefore does not gain from international trade.
Answer: A. Trade alters the distribution of income between broad groups of people.
98. Which of the following theories was proposed by David Ricardo?
A. Theory of differences in labor productivity.
B. Theory of differences in climate and resources.
C. Theory of random components determining the pattern of trade.
D. Theory of differences in factor endowments.
Answer: A. Theory of differences in labor productivity.
99. What are most trade policies driven by?
A. Conflicts of interest between nations.
B. Conflicts of interest within nations.
C. Disagreements regarding who should produce certain products.
D. Disagreements on the prices of major commodities.
Answer: B. Conflicts of interest within nations.
100. Many countries were fixing the price of their currency in terms of gold:
A. Before World War I.
B. During World War I.
C. After World War II.
D. During World War II.
Answer: A. Before World War I.
101. How are international trade policies governed?
A. By the IMF.
B. They are not governed by anyone.
C. By the GATT.
D. By the U.N.
Answer: C. By the GATT.
102. Which of the following is NOT true regarding international capital markets?
A. There are special regulations in many countries with respect to foreign investment.
B. The volume of trade on capital markets is lower ever since the “debt crisis” of 1982.
C. Nations can default on their debt and may not be brought to court.
D. Currency fluctuations add instability.
Answer: B. The volume of trade on capital markets is lower ever since the “debt crisis” of 1982.
103. In his empirical test of comparative advantage, Wassily Leontief found that
A. U.S. exports are capital intensive relative to U.S. imports
B. U.S. imports are labor intensive relative to U.S. exports
C. U.S. exports are neither labor nor capital intensive
D. None of the above
Answer: D. None of the above
104. By adjusting the model of comparative advantage to include transportation costs along with production costs, we would expect
A. the prices of traded goods to be lower than when there are no transportation costs
B. specialization to stop when the production costs of the trading partners equalize
C. the volume of trade to be less than when there are no transportation costs
D. the gains from trade to be greater than when there are no transportation costs.
Answer: C. the volume of trade to be less than when there are no transportation costs
105. Assume that Country A is relatively abundant in labor and Country B is relatively abundant in land. Note that wages are the returns to labor and rents are the returns to land. According to the factor price equalization theorem, once Country A begins specializing according to comparative advantage and trading with Country B.
A. Wages and rents should fall in Country A
B. Wages and rents should rise in Country A
C. Wages should rise and rents should fall in Country A
D. Wages should fall and rents should rise in Country A
Answer: C. Wages should rise and rents should fall in Country A
106. Trade between two countries can benefit both countries if
A. Each country exports that good in which it has a comparative advantage.
B. Each country enjoys superior terms of trade.
C. Each country has a more elastic demand for the imported goods.
D. Each country has a more elastic supply for the supplied goods.
Answer: A. Each country exports that good in which it has a comparative advantage.
107. The Ricardian theory of comparative advantage states that a country has a comparative advantage in widgets if
A. Output per worker of widgets is higher in that country.
B. That country’s exchange rate is low.
C. Wage rates in that country are high.
D. The output per worker of widgets as compared to the output of some other product ishigher in that country.
Answer: D. The output per worker of widgets as compared to the output of some other product ishigher in that country.
108. In order to know whether a country has a comparative advantage in the production of one particular product we need information on at least ____unit labor requirements
A. One
B. Two
C. Three
D. Four
Answer: D. Four
109. As a result of trade, specialization in the Ricardian model tends to be
A. Complete with constant costs and with increasing costs.
B. Complete with constant costs and incomplete with increasing costs.
C. Incomplete with constant costs and complete with increasing costs.
D. Incomplete with constant costs and incomplete with increasing costs.
Answer: B. Complete with constant costs and incomplete with increasing costs.
110. A nation engaging in trade according to the Ricardian model will find its consumption bundle
A. Inside its production possibilities frontier.
B. On its production possibilities frontier.
C. Outside its production possibilities frontier.
D. Inside its trade-partner’s production possibilities frontier.
Answer: C. Outside its production possibilities frontier.
111. In the Ricardian model, if a country’s trade is restricted, this will cause all except which?
A. Limit specialization and the division of labor.
B. Reduce the volume of trade and the gains from trade
C. Cause nations to produce inside their production possibilities curves
D. May result in a country producing some of the product of its comparative Disadvantage
Answer: C. Cause nations to produce inside their production possibilities curves
112. If a very small country trades with a very large country according to the Ricardianmodel, then
A. The small country will suffer a decrease in economic welfare.
B. The large country will suffer a decrease in economic welfare.
C. The small country will enjoy gains from trade.
D. The large country will enjoy gains from trade.
Answer: C. The small country will enjoy gains from trade.
113. The following are all assumptions that must be accepted in order to apply theHeckscher – Ohlin Theory, except for one:
A. Countries differ in their endowments of factors of production.
B. Countries differ in their technologies.
C. There are two factors of production.
D. Production is subject to constant returns to scale.
Answer: B. Countries differ in their technologies.
114. In international-trade equilibrium in the Heckscher-Ohlin model,
A. The capital rich country will charge less for the capital intensive good than the price paid by the capital poor country for the capital-intensive good.
B. The capital rich country will charge the same price for the capital intensive good as that paid for it by the capital poor country.
C. The capital rich country will charge more for the capital intensive good than the price paid by the capital poor country for the capital-intensive go
Answer: B. The capital rich country will charge the same price for the capital intensive good as that paid for it by the capital poor country.
115. The Heckscher-Ohlin model predicts all of the following except:
A. Which country will export which product
B. Which factor of production within each country will gain from trade.
C. The volume of trade.
D. That wages will tend to become equal in both trading countries.
Answer: C. The volume of trade.
116. The Heckscher-Ohlin model differs from the Ricardian model of Comparative Advantage in that the former
A. Has only two countries
B. Has only two products.
C. Has two factors of production.
D. Has two production possibility frontiers (one for each country).
Answer: C. Has two factors of production.
117. In free trade between two countries in an H-O world:
A. If both countries produce both goods, wages in the two countries will be the
B. same.
C. If one country does not produce both goods, wages in the two countries will be the same
D. The world relative price is between the two-self-sufficiency relative Prices but the relative Price of a good would not be exactly the same in both countries
Answer: A. If both countries produce both goods, wages in the two countries will be the
118. The trade model of the Swedish economists Heckscher and Ohlin maintains that:
A. Absolute advantage determines the distribution of the gains from trade
B. Comparative advantage determines the distribution of the gains from trade.
C. The division of labor is limited by the size of the world market
D. A country exports goods for which its resource endowments are most suited.
Answer: D. A country exports goods for which its resource endowments are most suited.
119. According to the factor endowment model of Heckscher and Ohlin, countries heavil y endowed with land will:
A. Devote excessive amounts of resources to agricultural production.
B. Devote insufficient amounts of resources to agricultural production
C. Export products that are land-intensive.
D. Import products that are land-intensive.
Answer: C. Export products that are land-intensive.
120. According to the Heckscher-Ohlin model, the source of comparative advantage is a country’s:
A. Technology
B. Advertising
C. Factor endowments
D. Both (a) and (c)
Answer: C. Factor endowments
121. The Heckscher-Ohlin model rules out the classical model’s basis for trade by assuming that________ is (are) identical between countries.
A. Factor endowments
B. Factor intensities
C. Technology
D. Opportunity costs
Answer: C. Technology
122. According to the Heckscher-Ohlin model
A. Everyone automatically gains from trade
B. The gainers from trade outnumber the losers from trade
C. The scarce factor necessarily gains from trade
D. None of the above
Answer: B. The gainers from trade outnumber the losers from trade
123. Countries H and F operate in an H-O world. Each country produces two goods, A and B. Good A is relatively capital intensive and country F is relatively labor abundant. Suppose however, that the production technology is not the same in the two countries. That is, H has a superior technology of production compared to F.
A. Free trade will equalize wages between the two countries
B. In free trade, there will be no incentive for migration of labor from H to F.
C. In free trade there will be some incentive for workers from F to migrate to H.
D. Both b. and c.
Answer: D. Both b. and c.
124. According to the Heckscher – Ohlin model, if the United States is richly endowed in human capital relative to Mexico, then as NAFTA increasingly leads to more bilateral free trade between the two countries,
A. The United States will find its industrial base sucked into Mexico
B. Mexico will find its relatively highly skilled workers drawn to the United States
C. The wages of highly skilled U.S. workers will be drawn down to Mexican levels
D. The wages of highly skilled Mexican workers will rise to those in the United States.
Answer: D. The wages of highly skilled Mexican workers will rise to those in the United States.
125. In the 2-factor, 2 good Heckscher-Ohlin model, an influx of workers from across the border would
A. Moves the point of production along the production possibility curve
B. Shifts the production possibility curve outward, and increase the production of both good
C. Shift the production possibility curve outward and decrease the production of the Labor-intensive product
D. Shift the production possibility curve outward and decrease the production of the capital-intensive product.
Answer: D. Shift the production possibility curve outward and decrease the production of the capital-intensive product.
126. In the 2-factor, 2 good Heckscher-Ohlin model, the two countries differ in
A. Tastes
B. Military capabilities
C. Size
D. Relative availabilities of factors of production
Answer: D. Relative availabilities of factors of production
127. According to the Heckscher-Ohlin model, the source of comparative advantageis a country’s
A. Technology
B. Advertising.
C. Factor endowments
D. Both A and B.
Answer: C. Factor endowments
128. One way in which the Heckscher-Ohlin model differs from the Ricardo model of comparative advantage is by assuming that __________ is (are) identical in all countries.
A. Factor of production endowments
B. Scale economies
C. Factor of production intensities
D. Technology
Answer: D. Technology
129. The Heckscher-Ohlin model assumes that _____ are identical in all trading countries
A. Gross domestic product
B. Technologies
C. Factor endowments
D. Both A. and B
Answer: B. Technologies
130. As opposed to the Ricardian model of comparative advantage, the assumption of diminishing returns in the Heckscher-Ohlin model means that the probability is greater that with trade
A. Countries will not be fully specialized in one product
B. Countries will benefit from free international trade.
C. Countries will consume outside their production possibility frontier.
D. Comparative advantage is primarily supply related.
Answer: A. Countries will not be fully specialized in one product
131. Which of the following is false (for the Heckscher-Ohlin model)?
A. Differences in technologies could be the source of gains from trade
B. Some groups may gain and some may lose due to trade
C. Gains for the trade-related winners will tend to be larger than losses of losers.
D. None of the above.
Answer: A. Differences in technologies could be the source of gains from trade
132. If a commodity is classified as “labor-intensive” at one set of relative factor prices but “capital-intensive” at another set of relative prices, this situation is known as
A. demand reversal.
B. factor-intensity reversal.
C. balance of payment reversal
D. factor price reversal
Answer: B. factor-intensity reversal.
133. If relatively capital-abundant country A opens trade with relatively labor- abundant country B an 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?
A. (w/r) rises in A and falls in B
B. (w/r) rises in A and also rises in B
C. (w/r) falls in A and rises in B
D. (w/r) falls in A and also falls in B
Answer: C. (w/r) falls in A and rises in B
134. An implication of the Heckscher-Ohlin Theorem is that
A. if two countries have identical tsetse, then no trade will occur between them.
B. the relative price of a country’s scarce factor of production will rise when the country is opened to trade.
C. income distribution in a country does not change when a country is opened to trade.
D. two countries with identical tastes can still have a basis for trade if factor endowments of the countries differ and if the factor intensities of the commodities differ.
Answer: D. two countries with identical tastes can still have a basis for trade if factor endowments of the countries differ and if the factor intensities of the commodities differ.
135. Theory of comparative advantage was presented by:
A. Adam Smith
B. Ricardo
C. Hicks
D. Arshad
Answer: B. Ricardo
136. Which of the following is international trade:
A. Trade between provinces
B. Trade between regions
C. Trade between countries
D. (b) and (c) of above
Answer: C. Trade between countries
137. Which is NOT an advantage of international trade:
A. Export of surplus production
B. Import of defence material
C. Dependence on foreign countries
D. Availability of cheap raw materials
Answer: C. Dependence on foreign countries
138. Trade between two countries can be useful if cost ratios of goods are:
A. Equal
B. Different
C. Undetermined
D. Decreasing
Answer: B. Different
139. Modern theory of international trade is based n the views of:
A. Robbins and Ricardo
B. Adam Smith and Marshall
C. Heckcsher and Ohlin
D. Saleem and Kareem
Answer: C. Heckcsher and Ohlin
140. Foreign trade creates among countries:
A. Conflicts
B. Cooperation
C. Hatred
D. Both (a) & (b)
Answer: B. Cooperation
141. Net exports equal:
A. Exports x Imports
B. Exports + Imports
C. Exports – Imports
D. Exports of services only
Answer: C. Exports – Imports
142. If Japan and Pakistan start free trade, difference in wages in two countries will:
A. Increase
B. Decrease
C. No effect
D. Double
Answer: B. Decrease
143. According to Hecksher and Ohlin basic cause of international trade is:
A. Difference in factor endowments
B. Difference in markets
C. Difference in political systems
D. Difference in ideology
Answer: A. Difference in factor endowments
144. All are advantages of foreign trade EXCEPT:
A. People get foreign exchange
B. Nations compete
C. Cheaper goods
D. Optimum utilisation of country’s resources
Answer: A. People get foreign exchange
145. A primary reason why nations conduct international trade is because:
A. Some nations prefer to produce one thing while others produce another
B. Resources are not equally distributed to all trading nations
C. Trade enhances opportunities to accumulate profits
D. Interest rates are not identical in all trading nations
Answer: B. Resources are not equally distributed to all trading nations
146. A main advantage of specialization results from:
A. Economics of large scale production
B. The specializing country behaving as a monopoly
C. Smaller production runs resulting in lower unit costs.
D. High wages paid to foreign workers
Answer: A. Economics of large scale production
147. International trade in goods and services is sometimes used as a substitute for all of the following except:
A. International movements of capital.
B. International movements of labor.
C. International movements of technology
D. Domestic production of different goods and services
Answer: D. Domestic production of different goods and services
148. If a nation has an open economy it means that the nation:
A. Allows private ownership of capital.
B. Has flexible exchange rates
C. Has fixed exchange rates
D. Conducts trade with other countries
Answer: D. Conducts trade with other countries
149. International trade forces domestic firms to become more competitive in terms of:
A. The introduction of new products
B. Product design and quality
C. Product price
D. All of the above
Answer: D. All of the above
150. The movement to free international trade is most likely to generate short-term unemployment in which industries:
A. Industries in which there are neither imports nor exports
B. Import-competing industries.
C. Industries that sell to domestic and foreign buyers
D. Industries that sell to only foreign buyers
Answer: B. Import-competing industries.
151. International trade is based on the idea that:
A. Exports should exceed imports
B. Imports should exceed exports
C. Resources are more mobile internationally than are goods
D. Resources are less mobile internationally than are goods
Answer: D. Resources are less mobile internationally than are goods
152. Arguments for free trade are sometimes disregarded by politicians because:
A. Maximizing domestic efficiency is not considered important
B. Maximizing consumer welfare may not be a chief priority
C. There exist sound economic reasons for keeping one’s economy isolated from other economies.
D. Economists tend to favor highly protected domestic markets
Answer: B. Maximizing consumer welfare may not be a chief priority
153. Increased foreign competition tend to
A. Intensify inflationary pressure at home
B. Induce falling output per worker-hour for domestic workers
C. Place constraints on the wages of domestic workers
D. Increase profits of domestic import-competing industrie
Answer: C. Place constraints on the wages of domestic workers
154. Free trade is based on the principle of:
A. Comparative advantage
B. Comparative scale
C. Economies of advantage
D. Production possibility advantage
Answer: B. Comparative scale
Unit 2
155. In 2003, the US had the largest total amount of imports from and exports to
A. China.
B. Mexico.
C. Canada.
D. Germany.
Answer: C. Canada.
156. Evidence shows that
A. the effect of borders is not important when comparing international trade with trade between regions within a country.
B. the amount of trade that a country undertakes is not related to its geography.
C. the amount of trade between countries is not related to the cultural affinity between the countries.
D. countries farther apart have less trade between them on average.
Answer: D. countries farther apart have less trade between them on average.
157. The North American Free Trade Agreement
A. has reduced the usefulness of the gravity model.
B. has shown that international borders no longer affect the amount of trade between countries.
C. has reduced tariffs and other trade restrictions among British Columbia, Manitoba and Ontario.
D. has reduced tariffs and other trade restrictions among Canada, Mexico and the US.
Answer: D. has reduced tariffs and other trade restrictions among Canada, Mexico and the US.
158. While technologies have reduced the negative effect that distance has on trade,
A. the effect of international borders has not been reduced through trade agreements.
B. the effects of the Internet and airplanes on trade have been negligible.
C. political factors have historically been more influential in determining the amount of trade than available technologies.
D. cultural clashes have recently reduced the amount of US trade compared to US trade in 1950.
Answer: C. political factors have historically been more influential in determining the amount of trade than available technologies.
159. Most international trade today is classified as trade in
A. Agricultural products
B. Services
C. Manufactured products
D. Dairy products
Answer: C. Manufactured products
160. Approximately what percent of US imports occur through transactions conducted by amultinational corporation?
A. 5%
B. 10%
C. 25%
D. 40%
Answer: D. 40%
161. Outsourcing refers to the case in which
A. a firm exports out of a country rather than selling products within a country.
B. a firm imports into a country rather than buying products from within a domestic country.
C. consumers find out the source of where production occurs.
D. a firm moves part of its business operations out of the domestic country.
Answer: D. a firm moves part of its business operations out of the domestic country.
162. Gross domestic product measures
A. the gross weight of products that are imported into a domestic country.
B. the gross weight of products that are exported from a domestic country.
C. the gross profits from all final goods and services produced in an economy.
D. the total value of all final goods and services produced within an economy.
Answer: D. the total value of all final goods and services produced within an economy.
163. In the Ricardian model:
A. Trade will happen even if countries are identical.
B. Differences in factor endowments give rise to trade.
C. There is only one factor of production.
D. There is only one industry in each country.
Answer: C. There is only one factor of production.
164. The Ricardian model exhibits gains from trade:
A. Only if each country has an absolute advantage in one of the industries.
B. For both trading countries.
C. Only for one of the trading countries.
D. Only if countries specialize completely.
Answer: B. For both trading countries.
165. Country A has 5000 units of labor. It takes 50 units of labor to produce one computer and 1 unit to create a Web page. What is the opportunity cost of a Web page in terms of computers?
A. 50
B. 0.0002
C. 100
D. 0.02
Answer: D. 0.02
166. The opportunity cost of producing computers in terms of Web pages is 50 in Country A and is 10 in Country B. Based on the Ricardian model, what can we conclude about the pattern of trade?
A. Country A will export computers and import Web pages.
B. We need to know what the relative price of computers in terms of web pages is to answer this question.
C. We need to know what wages are to answer this question.
D. Country A will export Web pages and import computers.
Answer: D. Country A will export Web pages and import computers.
167. Which of the following is NOT an assumption in the Ricardian model?
A. Labor productivity in each country is fixed.
B. Labor can freely move across countries.
C. Each country has only one factor of production and its amount is fix
Answer: B. Labor can freely move across countries.
168. Country A has 100 units of labor and Country B has 200 units of labor. Both countries produce computers and Web pages. The unit labor requirements are given in the table below:Computers Web pages Country A 50 1 Country B 100 1 Assume free trade exists and that the relative price is such that both countries specialize completely in the industry in which they have a comparative advantage (neither country produces both goods). The supply of computers relative to Web pages will be:
A. (or 1/100)
B. 0.013 (or 1/75)
C. Impossible to determine without knowing the relative price of computers in terms of Web pages.
D. (or 1/50)
Answer: A. (or 1/100)
169. Country A and Country B produce computers and Web sites. The unit labor requirements are given in the table below: Computers Web pages Country A 50 1 Country B 100 1 At which of the following relative prices (computers in terms of Web sites) will Country B produce both goods under free trade?
A. 50
B. 75
C. 100
D. 25
Answer: C. 100
170. In the Ricardian model, when two countries trade freely, the relative price of the goods they are trading is determined by:
A. Relative demand and relative supply for each trading country.
B. Relative demand and relative supply on the world market.
C. Relative opportunity costs in the two countries.
D. Relative wages.
Answer: B. Relative demand and relative supply on the world market.
171. Which of the following is true?
A. Trade only hurts countries with lower wages.
B. Countries that open up for trade see their wages rise over time relative to U.S. wages.
C. Trade necessarily hurts poorer countries.
D. none
Answer: B. Countries that open up for trade see their wages rise over time relative to U.S. wages.
172. The welfare effects of a quota depend to a considerable extent upon
A. Who has the quota license
B. The size of the quota
C. Elasticities of domestic demand and supply
D. All of the above
Answer: D. All of the above
173. __________ are profits that accrue to whomever has the right to import the good thatis restricted by the quota.
A. Quota license
B. Quota rents
C. Quota prices
D. None of the above
Answer: B. Quota rents
174. The home-country government can confiscate the revenue effect of an import quotaif
A. Quota licenses are given to foreign exporting companies
B. Quota licenses are auctioned to the highest-bidding importing company
C. If quota licenses are given to domestic consumers of the good
D. Both (a) and (c)
Answer: B. Quota licenses are auctioned to the highest-bidding importing company
175. Governments around the world tend to auction quota licenses
A. Never
B. Seldom
C. Often
D. Always
Answer: B. Seldom
176. A(n) __________ is an example of a quota where foreigners hold quota licenses.
A. Export quota
B. Embargo
C. Auction quota
D. Tariff quota
Answer: D. Tariff quota
177. International dumping may involve
A. selling goods to foreigners at a price below that charged domestic consumers
B. selling goods to foreigners at a price below the cost of production
C. antidumping duties being levied on the imported, dumped goods
D. all of the above
Answer: D. all of the above
178. Nontariff trade barriers could include all of the following except
A. Domestic content laws
B. Government procurement policies
C. Health, safety, and environmental standards
D. Antidumping/countervailing duties applied to imports
Answer: D. Antidumping/countervailing duties applied to imports
179. A production subsidy that is granted to a producer of an import-competing good
A. Does not require governmental taxes to finance it
B. Yields the same deadweight welfare loss as an import tariff or import quota
C. Has only a consumption effect deadweight loss
D. Has only a protective effect deadweight loss
Answer: D. Has only a protective effect deadweight loss
180. A tariff-rate quota is essentially a
A. Two-tier tariff applied to a country’s imports
B. Three-tier tariff applied to a country’s imports
C. Two-tier quota applied to a country’s exports
D. Three-tier quota applied to a country’s exports
Answer: A. Two-tier tariff applied to a country’s imports
181. A tax of 20 cents per unit of imported cheese would be an example of a (an):
A. Compound tariff
B. Effective tariff
C. Ad valorem tariff
D. Specific tariff
Answer: D. Specific tariff
182. A sudden shift from import tariffs to free trade may induce short-term unemploymentin:
A. Import-competing industries
B. Industries that are only exporters
C. Industries that sell domestically as well as export
D. Industries that neither import nor export
Answer: A. Import-competing industries
183. The movement to free international trade is most likely to generate short-termunemployment in which industries?
A. Industries in which there are neither imports nor exports
B. Import-competing industries
C. Industries that sell to domestic and foreign buyers
D. Industries that sell to only foreign buyers
Answer: B. Import-competing industries
184. Suppose the government grants a subsidy to domestic producers of an import-competing good. The subsidy tends to result in deadweight losses for the domestic economy in the form of the:
A. Consumption effect
B. Redistribution effect
C. Revenue effect
D. Protective effect
Answer: D. Protective effect
185. Tariffs and quotas on imports tend to involve larger sacrifices in national welfare than would occur under domestic subsidies. This is because, unlike domestic subsidies, import tariffs and quotas:
A. Permit less efficient home production
B. Distort choices for domestic consumers
C. Result in higher tax rates for domestic residents
D. Redistribute revenue from domestic producers to consumers
Answer: B. Distort choices for domestic consumers
186. Suppose the government grants a subsidy to its export firms that permits them to charge lower prices on goods sold abroad. The export revenue of these firms would rise if the foreign demand is:
A. Elastic in response to the price reduction
B. Inelastic in response to the price reduction
C. Unit elastic in response to the price reduction
D. None of the above
Answer: A. Elastic in response to the price reduction
187. Because export subsidies tend to result in domestic exporters charging lower prices ontheir goods sold overseas, the home country’s:
A. Export revenues will decrease
B. Export revenues will rise
C. Terms of trade will worsen
D. Terms of trade will improve
Answer: C. Terms of trade will worsen
188. Which trade restriction stipulates the percentage of a product’s total value that must beproduced domestically in order for that product to be sold domestically?
A. Import quota
B. Orderly marketing agreement
C. Local content requirement
D. Government procurement policy
Answer: C. Local content requirement
189. The imposition of a domestic content requirement by the United States would cause consumer surplus for Americans to:
A. Rise
B. Fall
C. Remain unchanged
D. None of the above
Answer: B. Fall
190. Domestic content legislation applied to autos would tend to:
A. Support wage levels of American autoworkers
B. Lower auto prices for American autoworkers
C. Encourage American automakers to locate production overseas
D. Increase profits of American auto companies
Answer: C. Encourage American automakers to locate production overseas
191. Compared to an import quota, an equivalent tariff may provide a less certain amount ofprotection for home producers since:
A. A tariff has no deadweight loss in terms of production and consumption
B. Foreign firms may absorb the tariff by offering exports at lower prices
C. Tariffs are effective only if home demand is perfectly elastic
D. Quotas do not result in increases in the price of the imported good
Answer: D. Quotas do not result in increases in the price of the imported good
192. A tariff:
A. Increases the volume of trade
B. Reduces the volume of trade
C. Has no effect on volume of trade
D. (a) and (c) of above
Answer: B. Reduces the volume of trade
193. A tariff is:
A. A restriction on the number of export firms
B. Limit on the amount of imported goods
C. Tax and imports
D. and (c) of above
Answer: D. and (c) of above
194. It is drawback of protection:
A. Consumers have to pay higher prices
B. Producerrs get higher profits
C. Quality of goods may be affected
D. All of the above
Answer: B. Producerrs get higher profits
195. It is drawback of free trade:
A. Prices of local goods rise
B. Government looses income from custom duties
C. National resources are underutilized
D. (a) and (b) of above
Answer: A. Prices of local goods rise
196. Free traders maintain that an open economy is advantageous in that it provides all of thefollowing except:
A. Increased competition for world producers
B. A wider selection of products for consumers
C. The utilization of the most efficient production methods
D. Relatively high wage levels for all domestic workers
Answer: A. Increased competition for world producers
197. Recent pressures for protectionism in the United States have been motivated by all ofthe following except:
A. U.S. firms shipping component production overseas
B. High profit levels for American corporations
C. Sluggish rates of productivity growth in the United States
D. High unemployment rates among American workers
Answer: C. Sluggish rates of productivity growth in the United States
198. A sudden shift from import tariffs to free trade may induce short-term unemploymentin:
A. Import-competing industries
B. Industries that are only exporters
C. Industries that sell domestically as well as export
D. Industries that neither import nor export
Answer: B. Industries that are only exporters
199. Which of the following statements is correct?
A. In a customs union, member nations apply a uniform external tariff
B. in a free-trade area, member nations harmonize their monetary and fiscal policies
C. within a customs union there is unrestricted factor movement
D. a customs union is a higher form of economic integration than a common market
Answer: C. within a customs union there is unrestricted factor movement
200. A customs union that allows for the free movement of labor and capital among its member nations is called a:
A. preferential trade arrangement
B. free-trade area
C. common market
D. all of the above
Answer: C. common market
201. 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 nation
C. trade among members increases but trade with nonmembers decreases
D. trade among members decreases while trade with nonmembers increases
Answer: D. trade among members decreases while trade with nonmembers increases
202. A trade-diverting customs union:
A. increases trade among union members and with nonmember nations
B. reduces trade among union members and with nonmember nations
C. increases trade among members but reduces trade with non-members
D. reduces trade among union members but increases it with nonmembers
Answer: B. reduces trade among union members and with nonmember nations
203. A trade-diverting customs union results in:
A. trade diversion only
B. trade creation only
C. both trade creation and trade diversion
D. we cannot say
Answer: C. both trade creation and trade diversion
204. A trade-diverting customs union:
A. increases the welfare of member and nonmember nations
B. reduces the welfare of member and nonmember nations
C. 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
Answer: D. reduces the welfare of nonmembers and may increase or reduce that of members
205. A tariff:
A. Increases the volume of trade
B. Reduces the volume of trade
C. Has no effect on volume of trade
D. (a) and (c) of above
Answer: C. Has no effect on volume of trade
206. A tariff is:
A. A restriction on the number of export firms
B. Limit on the amount of imported goods
C. Tax and imports
D. (b) and (c) of above
Answer: C. Tax and imports
207. What would encourage trade between two countries:
A. Different tax system
B. Frontier checks
C. National currencies
D. Reduced tariffs
Answer: D. Reduced tariffs
208. In a free trade world in which no restrictions exist, international trade will lead to:
A. Reduced real living standard
B. Decreased efficiency
C. Increased efficiency
D. Reduced real GDP
Answer: C. Increased efficiency
209. Govt. policy about exports and imports is called:
A. Monetary policy
B. Fiscal policy
C. Commercial policy
D. Finance policy
Answer: D. Finance policy
210. International trade and domestic trade differ because of:
A. Trade restrictions
B. Immobility of factors
C. Different government policies
D. All of the above
Answer: B. Immobility of factors
211. What would encourage trade between two countries?
A. Different tax system
B. Quality control
C. Reduced tariffs
D. Fixing import quota
Answer: A. Different tax system
212. In the European Union:
A. All member countries have a single exchange rate
B. All members set their own tariffs
C. There is a common tariff against non-members
D. All taxes are set the same
Answer: C. There is a common tariff against non-members
213. On the 1st January 1958, six countries signed the treaty establishing the European Economic Community (EEC), in turn establishing the foundations for the European Union. In which European capital was it signed in from which it also takes its name?
A. Athens
B. Brussels
C. Rome
D. Amsterdam
Answer: C. Rome
214. The European Union has grown to be one of the world’s largest trading blocs and markets. What is the approximate size of the population of the EU?
A. 500 million people
B. 292 million people
C. 1.3 billion people
D. 127 million people
Answer: A. 500 million people
215. Which two institutions decide the Union’s budget?
A. The Council of Ministers and the European Commission
B. The European Parliament and the European Central Bank
C. The Council of Ministers and the European Parliament
D. The European Central Bank and the European Commission
Answer: C. The Council of Ministers and the European Parliament
216. The European Union is one powerful global economic bloc. ASEAN is best described as being:
A. A free trade zone
B. A confederation of states
C. A customs union
D. A monetary union
Answer: A. A free trade zone
217. Which of the following EU countries are sometimes referred to as the PIGS countries?
A. Portugal, Ireland. Greece, Spain
B. Poland, Italy, Germany, Slovenia
C. Poland, Ireland, Greece, Switzerland
D. Portugal, Italy, Greece, Slovenia
Answer: A. Portugal, Ireland. Greece, Spain
218. What is the main reason behind the introduction of the euro?
A. It promotes economic sovereignty
B. It can protect business trading from currency fluctuations
C. To allow the free movement of people
D. It was a branding exercise
Answer: B. It can protect business trading from currency fluctuations
219. Which of the following are exclusive EU competencies in relation to Member States?
A. Conservation of marine biological resources (common fisheries policies), common market policies, the customs union and monetary policy for Member States belonging to the Eurozone.
B. The customs union, the environment, agriculture and consumer protection.
C. Monetary policy for Member states belonging to the Eurozone, tourism, transport and industrial policy, EU regional Policy.
D. The customs union, common commercial (trade) policies, education and culture.
Answer: A. Conservation of marine biological resources (common fisheries policies), common market policies, the customs union and monetary policy for Member States belonging to the Eurozone.
220. A common or single market will have all of the following features except:
A. No internal trade barriers
B. Common external tariff
C. Factor and Asset mobility
D. A common currency
Answer: D. A common currency
221. Which of the options below is the only characteristic of a free trade area?
A. A common currency
B. Common economic policy
C. No internal trade barriers
D. Common external tariff
Answer: C. No internal trade barriers
Unit 3
222. On the balance-of-payments statements, merchandise imports are classified in the:
A. Current account
B. Capital account
C. Unilateral transfer account
D. Official settlements account
Answer: A. Current account
223. The balance of international indebtedness is a record of a country’s international:
A. Investment position over a period of time
B. Investment position at a fixed point in time
C. Trade position over a period of time
D. Trade position at a fixed point in time
Answer: B. Investment position at a fixed point in time
224. Which balance-of-payments item does not directly enter into the calculation of the U.S.gross domestic product?
A. Merchandise imports
B. Shipping and transportation receipts
C. Direct foreign investment
D. Service exports
Answer: C. Direct foreign investment
225. Which of the following is considered a capital inflow?
A. A sale of U.S. financial assets to a foreign buyer
B. A loan from a U.S. bank to a foreign borrower
C. A purchase of foreign financial assets by a U.S. buyer
D. A U.S. citizen’s repayment of a loan from a foreign bank
Answer: A. A sale of U.S. financial assets to a foreign buyer
226. Which of the following would call for inpayments to the United States?
A. American imports of German steel
B. Gold flowing out of the United States
C. American unilateral transfers to less-developed countries
D. American firms selling insurance to British shipping companies
Answer: D. American firms selling insurance to British shipping companies
227. In a country’s balance of payments, which of the following transactions are debits?
A. Domestic bank balances owned by foreigners are decreased
B. Foreign bank balances owned by domestic residents are decreased
C. Assets owned by domestic residents are sold to nonresidents
D. Securities are sold by domestic residents to nonresidents
Answer: A. Domestic bank balances owned by foreigners are decreased
228. Which of the following is classified as a credit in the U.S. balance of payments?
A. U.S. exports
B. U.S. gifts to other countries
C. A flow of gold out of the U.S.
D. Foreign loans made by U.S. companies
Answer: A. U.S. exports
229. What is “immiserizing growth”?
A. Export-biased growth that worsens terms of trade so that a country is worse off as a result.
B. The specialization of low-income countries in production of low-wage products.
C. Trade that hurts the poorest group of people.
D. Improvement in a country’s terms of trade at the expense of other countries.
Answer: A. Export-biased growth that worsens terms of trade so that a country is worse off as a result.
230. What is the “transfer problem”?
A. The fact that international transfers affect terms of trade when they are not taken into account.
B. Rich countries do not transfer a sufficient amount of money to poor countries.
C. Negative effects on a country that transfers money to others.
D. The severe indebtedness of some low-income countries.
Answer: A. The fact that international transfers affect terms of trade when they are not taken into account.
231. Unlike the balance of payments, the balance of international indebtedness indicates the international:
A. Investment position of a country at a given moment in time
B. Investment position of a country over a one-year period
C. Trade position of a country at a given moment in time
D. Trade position of a country over a one-year period
Answer: A. Investment position of a country at a given moment in time
232. Which of the following indicates the international investment position of a country at a given moment in time?
A. The balance of payments
B. The capital account of the balance of payments
C. The current account of the balance of payments
D. The balance of international indebtedness
Answer: D. The balance of international indebtedness
233. Concerning the U.S. balance of payments, which account is defined in essentially the same way as the net export of goods and services, which comprises part of the country’s gross domestic product?
A. Merchandise trade account
B. Goods and services account
C. Current account
D. Capital account
Answer: B. Goods and services account
234. If an American receives dividends from the shares of stock she or he owns in Toyota, Inc., a Japanese firm, the transaction would be recorded on the U.S. balance of payments as a:
A. Capital account debit
B. Capital account credit
C. Current account debit
D. Current account credit
Answer: D. Current account credit
235. If the United States government sells military hardware to Saudi Arabia, the transactionwould be recorded on the U.S. balance of payments as a:
A. Current account debit
B. Current account credit
C. Capital account debit
D. Capital account credit
Answer: B. Current account credit
236. The U.S. balance of trade is determined by:
A. Exchange rates
B. Growth of economies overseas
C. Relative prices in world markets
D. All of the above
Answer: D. All of the above
237. U.S. military aid granted to foreign countries is entered in the:
A. Merchandise trade account
B. Capital account
C. Current account
D. Official settlements account
Answer: C. Current account
238. If the U.S. faces a balance-of-payments deficit on the current account, it must run a surplus on:
A. The official settlements account
B. The capital account
C. Either the official settlements account or the capital account
D. Both the official settlements account and the capital account
Answer: C. Either the official settlements account or the capital account
239. The current account of the U.S. balance of payments does not include:
A. Investment income
B. Merchandise exports and imports
C. The sale of securities to foreigners
D. Unilateral transfers
Answer: C. The sale of securities to foreigners
240. The U.S. has a balance of trade deficit when its:
A. Merchandise exports exceed its merchandise imports
B. Merchandise imports exceed its merchandise exports
C. Goods and services exports exceed its goods and services imports
D. Goods and services imports exceed its goods and services exports
Answer: B. Merchandise imports exceed its merchandise exports
241. The value to American residents of income earned from overseas investments shows up in which account in the U.S. balance of payments?
A. Current account
B. Trade account
C. Unilateral transfers account
D. Capital account
Answer: A. Current account
242. What would be the effects of an export subsidy on oil imposed by Russia?
A. Relative world supply of oil rises and relative world demand falls.
B. Relative world supply of oil falls and relative world demand rises.
C. Relative world supply of and relative world demand for oil rise.
D. Relative world supply of and relative world demand for oil fall.
Answer: A. Relative world supply of oil rises and relative world demand falls.
243. What is the Metzler paradox?
A. An export subsidy can lead to an increase in the internal price of the subsidized good.
B. It is the same as immiserizing growth.
C. A tariff on imports can lead to a decline in the internal price of the go
Answer: C. A tariff on imports can lead to a decline in the internal price of the go
244. A country that is a net international debtor initially experiences:
A. An augmented savings pool available to finance domestic spending
B. A higher interest rate, which leads to lower domestic investment
C. A loss of funds to trading partners overseas
D. A decrease in its services exports to other countries
Answer: A. An augmented savings pool available to finance domestic spending
245. Credit (+) items in the balance of payments correspond to anything that:
A. Involves receipts from foreigners
B. Involves payments to foreigners
C. Decreases the domestic money supply
D. Increases the demand for foreign exchange
Answer: A. Involves receipts from foreigners
246. Debt (–) items in the balance of payments correspond to anything that:
A. Involves receipts from foreigners
B. Involves payments to foreigners
C. Increases the domestic money supply
D. Decreases the demand for foreign exchange
Answer: B. Involves payments to foreigners
247. When all of the debit or credit items in the balance of payments are combined:
A. Merchandise imports equal merchandise exports
B. Capital imports equal capital exports
C. Services exports equal services imports
D. The total surplus or deficit equals zero
Answer: D. The total surplus or deficit equals zero
248. In the balance of payments, the statistical discrepancy is used to:
A. Ensure that the sum of all debits matches the sum of all credits
B. Ensure that trade imports equal the value of trade exports
C. Obtain an accurate account of a balance-of-payments deficit
D. Obtain an accurate account of a balance-of-payments surplus
Answer: A. Ensure that the sum of all debits matches the sum of all credits
249. All of the following are credit items in the balance of payments, except:
A. Investment inflows
B. Merchandise exports
C. Payments for American services to foreigners
D. Private gifts to foreign residents
Answer: D. Private gifts to foreign residents
250. All of the following are debit items in the balance of payments, except:
A. Capital outflows
B. Merchandise exports
C. Private gifts to foreigners
D. Foreign aid granted to other nations
Answer: B. Merchandise exports
251. If the central bank purchases assets, it will result in:
A. An increase in the central bank’s net worth.
B. A decline in the central bank’s net worth.
C. An increase in the money supply.
D. A decline in the money supply.
Answer: C. An increase in the money supply.
252. If there is a decline in output, to keep the exchange rate fixed, the central bank has to:
A. Sell domestic assets.
B. Purchase foreign assets.
C. Sell foreign assets.
D. Purchase domestic assets.
Answer: C. Sell foreign assets.
253. What is the effect of an increase in taxes under fixed exchange rates and perfect asset substitutability in the short run?
A. A decline in output and no change in interest rates.
B. A decline in output and interest rates.
C. An increase in output and no change in interest rates.
D. An increase in output and interest rates.
Answer: C. An increase in output and no change in interest rates.
254. What is the effect of a currency devaluation under fixed exchange rates in the short run?
A. A decline in output.
B. A decline in foreign reserves.
C. An increase in exports.
D. An increase in imports.
Answer: C. An increase in exports.
255. Reducing a current account deficit requires a country to:
A. Increase the government’s deficit and increase private investment relative to saving
B. Increase the government’s deficit and decrease private investment relative to saving
C. Decrease the government’s deficit increase private investment relative to saving
D. Decrease the government’s deficit and decrease private investment relative to saving
Answer: D. Decrease the government’s deficit and decrease private investment relative to saving
256. Reducing a current account surplus requires a country to:
A. Increase the government’s deficit and increase private investment relative to saving
B. Increase the government’s deficit and decrease private investment relative to saving
C. Decrease the government’s deficit and increase private investment relative to saving
D. Decrease the government’s deficit and decrease private investment relative to saving
Answer: A. Increase the government’s deficit and increase private investment relative to saving
257. Concerning a country’s business cycle, rapid growth of production and employment iscommonly associated with:
A. Large or growing trade deficits and current account deficits
B. Large or growing trade deficits and current account surpluses
C. Small or shrinking trade deficits and current account deficits
D. Small or shrinking trade deficits and current account surpluses
Answer: A. Large or growing trade deficits and current account deficits
258. The burden of a current account deficit would be the least if a nation uses what itborrows to finance:
A. Unemployment compensation benefits
B. Social Security benefits
C. Expenditures on food and recreation
D. Investment on plant and equipment
Answer: D. Investment on plant and equipment
259. A major difference between the spot market and the forward market is that the spot market deals with:
A. The immediate delivery of currencies
B. The merchandise trade account
C. Currencies traded for future delivery
D. Hedging of international currency risks
Answer: A. The immediate delivery of currencies
260. The relationship between the exchange rate and the prices of tradable goods is known asthe:
A. Purchasing-power-parity theory
B. Asset-markets theory
C. Monetary theory
D. Balance-of-payments theory
Answer: A. Purchasing-power-parity theory
261. Low real interest rates in the United States tend to:
A. Decrease the demand for dollars, causing the dollar to depreciate
B. Decrease the demand for dollars, causing the dollar to appreciate
C. Increase the demand for dollars, causing the dollar to depreciate
D. Increase the demand for dollars, causing the dollar to appreciate
Answer: A. Decrease the demand for dollars, causing the dollar to depreciate
262. Assume that the United States faces an 8 percent inflation rate while no (zero) inflation existsin Japan. According to the purchasing-power-parity theory, the dollar would be expected to:
A. Appreciate by 8 percent against the yen
B. Depreciate by 8 percent against the yen
C. Remain at its existing exchange rate
D. None of the above
Answer: B. Depreciate by 8 percent against the yen
263. Suppose Mexico and the United States were the only two countries in the world. There exists anexcess supply of pesos on the foreign exchange market. This suggests that:
A. Mexico’s current account is in surplus
B. Mexico’s current account is in deficit
C. The U.S. current account is in deficit
D. The U.S. current account is in equilibrium
Answer: B. Mexico’s current account is in deficit
264. If Canada runs a current account surplus and exchange rates are floating:
A. The value of other currencies will rise relative to the dollar
B. The dollar will depreciate relative to other currencies
C. The price of foreign goods will become cheaper for Canadians
D. The price of foreign goods will rise for Canadians
Answer: C. The price of foreign goods will become cheaper for Canadians
265. Gold standard means:
A. Currency of the country is made of gold
B. Paper currency is not used
C. Currency of the country is freely convertible into gold
D. (a) & (c) of above
Answer: D. (a) & (c) of above
266. If a country decreases the external value of its currency, it will affect:
A. Volume of exports
B. Volume of imports
C. General price level
D. All of the above
Answer: D. All of the above
267. Rich countries have deficit in their balance of payments:
A. Sometimes
B. Never
C. Alternate years
D. Always
Answer: A. Sometimes
268. Balance of payments means:
A. The balance of receipts and payments of all banks
B. The balance of receipts and payments of State Bank
C. The balance of receipts and payments of foreign exchange by a country
D. The balance of govt. receipts and payments
Answer: C. The balance of receipts and payments of foreign exchange by a country
269. Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?
A. If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
B. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
C. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will strengthen.
D. If Country B’s inflation rate exceeds Country A’s inflation rate, Country A’s currency will weaken.
Answer: A. If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
270. The international Fisher effect (IFE) suggests that:
A. a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.
B. a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
C. a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
D. a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
Answer: A. a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.
271. According to the IFE, if British interest rates exceed U.S. interest rates:
A. the British pound’s value will remain constant.
B. the British pound will depreciate against the dollar.
C. the British inflation rate will decrease.
D. the forward rate of the British pound will contain a premium.
Answer: B. the British pound will depreciate against the dollar.
272. If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:
A. the value of the euro would often appreciate against the dollar.
B. the value of the euro would often depreciate against the dollar.
C. the value of the euro would remain constant most of the time.
D. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.
Answer: A. the value of the euro would often appreciate against the dollar.
273. If interest rate parity holds, then the one-year forward rate of a currency will ______ the predicted spot rate of the currency in one year according to the international Fisher effect.
A. greater than
B. less than
C. equal to
D. answer is dependent on whether the forward rate has a discount or premium
Answer: C. equal to
274. You have an opportunity to invest in Australia at an interest rate of 8%. Moreover, you expect the Australian dollar (A$) to appreciate by 2%. Your effective return from this investment is:
A. 8.00%.
B. 10.16%.
C. 6.00%.
D. 5.88%.
Answer: B. 10.16%.
275. The balance of payments equals:
A. The difference between household spending and income
B. The difference between government spending and income
C. A measure of the value of economic transactions between residents of a country and the rest of the world
D. The difference between inflation and unemployment
Answer: C. A measure of the value of economic transactions between residents of a country and the rest of the world
276. If there were a balance of payments deficit then in a floating exchange rate system:
A. The external value of the currency would tend to fall
B. The external value of the currency would tend to rise
C. The injections from trade are greater than the withdrawals
D. Aggregate demand is increasing
Answer: A. The external value of the currency would tend to fall
277. If the value of the pound in other currencies is strong, then other things being equal:
A. The price of UK products abroad in foreign currency will fall
B. The price of UK products abroad in foreign currency will rise
C. The price of UK products in the UK will rise
D. The price of UK products in the UK will fall
Answer: B. The price of UK products abroad in foreign currency will rise
278. If the value of the pound in terms of other currencies rises:
A. The spending on UK exports in pounds must rise
B. The spending on UK exports in foreign currency will rise if demand is price elastic
C. The demand for UK exports will rise
D. The spending on UK exports in foreign currency will fall if demand for UK exports is price elastic
Answer: D. The spending on UK exports in foreign currency will fall if demand for UK exports is price elastic
279. The supply of pounds to the currency market will be upward sloping if:
A. The demand for UK exports is price elastic
B. The demand for UK exports is price inelastic
C. The demand for imports into the UK is price elastic
D. The demand for imports into the UK is price inelastic
Answer: C. The demand for imports into the UK is price elastic
280. A fall in the value of the pound is likely to decrease spending on imports if:
A. The price elasticity of demand for imports is price elastic
B. The price elasticity of demand for imports is price inelastic
C. The price elasticity of demand for imports has a unit price elasticity
D. The price elasticity of demand for exports is price elastic
Answer: A. The price elasticity of demand for imports is price elastic
281. If the exchange rate is above the equilibrium level then in a floating exchange rate system:
A. There is excess demand and the exchange rate should fall
B. There is excess supply and the exchange rate should fall
C. There is excess demand and the exchange rate should rise
D. There is excess supply and the exchange rate should rise
Answer: B. There is excess supply and the exchange rate should fall
282. If the exchange rate is below the equilibrium level then in a floating exchange rate system:
A. There is excess demand and the exchange rate should fall
B. There is excess supply and the exchange rate should fall
C. There is excess demand and the exchange rate should rise
D. There is excess supply and the exchange rate should rise
Answer: C. There is excess demand and the exchange rate should rise
283. A depreciation of a currency occurs when:
A. The value of the currency falls
B. The value of the currency increases
C. Inflation falls
D. The balance of payments improves
Answer: A. The value of the currency falls
284. An appreciation of the currency is likely to occur if:
A. Domestic interest rates fall
B. There is an increase in demand for imports
C. There is an increase in demand for exports
D. There is an increase in the balance of payments deficit
Answer: C. There is an increase in demand for exports
Unit 4
285. If the central bank purchases assets, it will result in:
A. An increase in the money supply.
B. An increase in the central bank’s net worth.
C. A decline in the money supply.
D. A decline in the central bank’s net worth.
Answer: A. An increase in the money supply.
286. If there is a decline in output, to keep the exchange rate fixed, the central bank has to:
A. Purchase foreign assets.
B. Purchase domestic assets.
C. Sell domestic assets.
D. Sell foreign assets.
Answer: D. Sell foreign assets.
287. What is the effect of an increase in taxes under fixed exchange rates and perfect assetsubstitutability in the short run?
A. An increase in output and no change in interest rates.
B. A decline in output and interest rates.
C. A decline in output and no change in interest rates.
D. An increase in output and interest rates.
Answer: A. An increase in output and no change in interest rates.
288. What is the effect of a currency devaluation under fixed exchange rates in the short run?
A. A decline in output.
B. An increase in imports.
C. A decline in foreign reserves.
D. An increase in exports.
Answer: D. An increase in exports.
289. If a respectable source speculates that there is a possibility of devaluation:
A. Output will increase.
B. There will be a net private capital outflow.
C. The central bank’s foreign reserves will increase.
D. Domestic interest rates will decline.
Answer: B. There will be a net private capital outflow.
290. Under imperfect asset substitutability:
A. Central banks cannot keep the exchange rate fixed.
B. Domestic interest rates should be equal to foreign interest rates.
C. Central banks cannot affect money supply.
D. Sterilized intervention affects money supply.
Answer: D. Sterilized intervention affects money supply.
291. Which of the following is NOT true about the reserve currency standard?
A. The currency to which the rates are fixed should be the same as the currency the central bank holds.
B. Exchange rates are all fixed.
C. The reserve center can use monetary policy to keep exchange rates fix
Answer: C. The reserve center can use monetary policy to keep exchange rates fix
292. Which of the following is NOT true about the gold standard?
A. Central banks have to hold gold as reserve assets.
B. It does not lead to monetary policy spillovers.
C. Exchange rates are all fix
Answer: B. It does not lead to monetary policy spillovers.
293. Which of the following is NOT a motive for international asset trade?
A. Capital controls
B. Intertemporal trade
C. International portfolio diversification
D. Tax avoidance
Answer: A. Capital controls
294. Which of the following is NOT a part of a “policy trilemma”?
A. International trade policy
B. Capital controls
C. Monetary policy
D. Exchange rate regime
Answer: A. International trade policy
295. Which of the following is NOT a type of offshore bank?
A. Agency office
B. Subsidiary bank
C. Foreign branch
D. Investment bank
Answer: D. Investment bank
296. Which of the following is an example of “Eurocurrency” trade?
A. Trade of euros in Europe
B. Trade of dollars for euros anywhere
C. Trade of dollars in Europe
D. Intervention by the ESCB in the euro market
Answer: C. Trade of dollars in Europe
297. What are “Eurobanks”?
A. Banks that accept Eurocurrency deposits
B. Banks located in Europe
C. European-owned banks in the U.S.
D. Banks that accept deposits in euros
Answer: A. Banks that accept Eurocurrency deposits
298. Which of the following is NOT true about the IBFs?
A. They make loans to foreigners
B. They are not subject to taxes
C. They are only investment banks
D. They accept deposits from foreigners
Answer: C. They are only investment banks
299. What institution reduces the risk of bank runs in the U.S.?
A. FDIC
B. Federal Reserve System
C. Congress
D. S&Ls
Answer: A. FDIC
300. The Basel Committee:
A. Coordinates monetary policy among 11 countries.
B. Provides international deposit insurance.
C. Provides supervision of the banks trading internationally.
D. Provides LLR services to international banks.
Answer: C. Provides supervision of the banks trading internationally.
301. Which of the following is true regarding the capital market development since the 1970s?
A. The extent of intertemporal trade was larger than theory predicts.
B. Onshore-offshore interest rate differentials were too large.
C. The extent of the international portfolio diversification was smaller than theory predicts.
D. The role of emerging markets declined over time.
Answer: C. The extent of the international portfolio diversification was smaller than theory predicts.
302. Which one of the following statements is the most accurate?
A. A devaluation occurs when the central bank lowers the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank raises E.
B. A devaluation occurs when the central bank raises the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank lowers E.
C. Devaluation occurs when the domestic currency price of foreign currency, E, is raised, and a revaluation occurs when E is lower
Answer: B. A devaluation occurs when the central bank raises the domestic currency price of foreign currency, E, and a revaluation occurs when the central bank lowers E.
303. Which one of the following statements is the most accurate?
A. Depreciation is a rise in E when the exchange rate is fixed, and devaluation is a rise in E when the exchange rate floats.
B. Depreciation is a decrease in E when the exchange rate floats, and devaluation is a rise in E when the exchange rate is fixed.
C. Depreciation is a rise in E when the exchange rate floats, and devaluation is a rise in E when the exchange rate is fix
Answer: C. Depreciation is a rise in E when the exchange rate floats, and devaluation is a rise in E when the exchange rate is fix
304. Which one of the following statements is the most accurate?
A. Appreciation is a rise in e when the exchange rate floats, and revaluation is a fall in e when the exchange rate is fixed.
B. Appreciation is a fall in e when the exchange rate floats, and revaluation is a fall in e when the exchange rate is fixed.
C. Appreciation is a fall in e when the exchange rate is fixed, and revaluation is a fall in e when the exchange rate is flexible.
D. Appreciation is a fall in e when the exchange rate floats, and revaluation is a rise in e when the exchange rate is fixed.
Answer: B. Appreciation is a fall in e when the exchange rate floats, and revaluation is a fall in e when the exchange rate is fixed.
305. Which one of the following statements is the most accurate?
A. Devaluation reflects a deliberate government decision.
B. Depreciation reflects a deliberate government decision.
C. Devaluation reflects a deliberate government decision, and depreciation is an outcome of government actions and market forces acting together.
D. Depreciation reflects a deliberate government decision, and devaluation is an outcome of government actions and market forces acting together.
Answer: C. Devaluation reflects a deliberate government decision, and depreciation is an outcome of government actions and market forces acting together.
306. Which one of the following statements is the most accurate?
A. Revaluation reflects an outcome of government actions and market forces acting together, and appreciation reflects a deliberate government decision.
B. Revaluation reflects a deliberate government decision, and appreciation is an outcome of government actions and market forces acting together.
C. Revaluation reflects a deliberate government decision, and appreciation is an outcome of government actions.
D. Revaluation and appreciation have the same meaning and the same causes.
Answer: B. Revaluation reflects a deliberate government decision, and appreciation is an outcome of government actions and market forces acting together.
307. Under fixed exchange rate, which one of the following statements is the most accurate?
A. Devaluation causes a decrease in output, a decrease in official reserves, and a contraction of the money supply.
B. Devaluation causes a rise in output, a rise in official reserves, and an expansion of the money supply.
C. Devaluation causes a rise in output and a rise in official reserves.
D. Devaluation causes a rise in output and an expansion of the money supply.
Answer: B. Devaluation causes a rise in output, a rise in official reserves, and an expansion of the money supply.
308. Under fixed exchange rate, which one of the following statements is the mostaccurate?
A. Devaluation causes a rise in output.
B. Devaluation causes a decrease in output.
C. Devaluation has no effect on output.
D. Devaluation causes a rise in output and a decrease in official reserves.
Answer: A. Devaluation causes a rise in output.
309. Under fixed exchange rate, which one of the following statements is the mostaccurate?
A. Devaluation causes a reduction of the money supply.
B. Devaluation has no effect on the stock of money.
C. Devaluation causes an expansion of the money supply.
D. Devaluation causes a reduction in output.
Answer: C. Devaluation causes an expansion of the money supply.
310. The main reason(s) why governments sometimes chose to devalue their currencies is (are):
A. Devaluation allows the government to fight domestic unemployment despite the lack of effective monetary policy.
B. Devaluation improves in the current account.
C. Devaluation increases foreign reserves held by the central bank.
D. All of the above.
Answer: D. All of the above.
311. At negative nominal interest rates, which one of the following statements is the most accurate?
A. People would find money strictly preferable to bonds.
B. People would find money strictly preferable to bonds and bonds therefore would be in excess supply.
C. People would find money strictly preferable to bonds and bonds therefore would be in excess dema
Answer: B. People would find money strictly preferable to bonds and bonds therefore would be in excess supply.
312. Which of the following exchange rate policies uses a target exchange rate, but allowsthe target to change?
A. fixed exchange rate
B. flexible exchange rate
C. crawling peg
D. moving target
Answer: C. crawling peg
313. Which among the following could be said to be an ‘Open Economy’?
A. A nation that follows the doctrine of Free-market and Laissez-faire economics
B. A nation that trades with other nations in goods and services and financial assets
C. An economy that operates without government intervention
D. None of the above
Answer: A. A nation that follows the doctrine of Free-market and Laissez-faire economics
314. The records of exports and imports in goods and services and transfer payments is known as
A. Current account
B. Budget surplus
C. Economic leakage
D. degree of openness
Answer: A. Current account
315. The ratio of foreign rates to domestic rates measured in the ‘same’ currency is known as:
A. Real exchange rate
B. Nominal exchange rate
C. Superfluous exchange rate
D. None of the above
Answer: A. Real exchange rate
316. Which among the following is taken as the real measure of a country’s international competitiveness?
A. Real exchange rate
B. Nominal exchange rate
C. Superfluous exchange rate
D. None of the above
Answer: A. Real exchange rate
317. When the exchange rate is determined by the market forces of demand and supply, it is known as :
A. Real exchange rate
B. Nominal exchange rate
C. Superfluous exchange rate
D. Floating exchange rate
Answer: D. Floating exchange rate
318. The Gold Standard was prevalent in the world from:
A. 15th century to 18th century
B. 9th century to 18th century
C. From 1870 till First World War
D. From 1670 till First World War
Answer: C. From 1870 till First World War
319. An increase in foreign income generally leads to:
A. increased exports, increased domestic output
B. decreased exports, increased domestic output
C. decreased exports, decreased domestic output
D. increased exports, decreased domestic output
Answer: A. increased exports, increased domestic output
320. What records a country’s transactions (made by individuals, firms and government bodies.) with the rest of the world?
A. Trade deficit
B. Capital Budget
C. Foreign imports
D. Balance of Payments or BoP
Answer: D. Balance of Payments or BoP
321. Under a fixed exchange rate system, a contractionary fiscal policy leads to a worsening in a nation’s balance-of-payments position if the resulting:
A. Trade-account deficit more than offsets the capital-account surplus
B. Trade-account deficit more than offsets the capital-account deficit
C. Capital-account deficit more than offsets the trade-account surplus
D. Capital-account deficit more than offsets the trade-account deficit
Answer: C. Capital-account deficit more than offsets the trade-account surplus
322. Given a system of floating Exchange rates, falling income in the United States wouldtrigger:
A. An increase in the demand for imports and an increase in the demand for foreign currency
B. An increase in the demand for imports and a decrease in the demand for foreign currency
C. A decrease in the demand for imports and an increase in the demand for foreign currency
D. A decrease in the demand for imports and a decrease in the demand for foreign currency
Answer: D. A decrease in the demand for imports and a decrease in the demand for foreign currency
323. Under a system of floating Exchange rates, relatively low productivity and high inflation rates in the United States result in:
A. An increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciación in the dollar
B. An increase in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar
C. A decrease in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in thedollar
D. A decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar
Answer: A. An increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciación in the dollar
324. Which example of market expectations causes the dollar to appreciate against the yen?Expectations that the U.S. economy will have:
A. Faster economic growth tan Japan
B. Higher future interest rates than Japan
C. More rapid money supply growth tan Japan
D. Higher inflation rates than Japan
Answer: B. Higher future interest rates than Japan
325. Starting at the point of equilibrium between the money supply and the money demand, an increase in the domestic money supply causes the value of the home currency to:
A. Depreciate relative to other currencies
B. Appreciate relative to other currencies
C. Not change relative to other currencies
D. None of the above
Answer: A. Depreciate relative to other currencies
326. An Exchange rate is said to __________ when its short-run response to a change in marketFundamentals is greater than its long-run response. a
A. Overshoot
B. Undershoot
C. Depreciate
D. Appreciate
Answer: A. Overshoot
327. Concerning exchange-ratedetermination, “market fundamentals” include all of the Following except:
A. Monetary policy and fiscal policy
B. Profitability and riskiness of investments
C. Speculative opinión about future Exchange rates
D. Productivity changes affecting production costs
Answer: C. Speculative opinión about future Exchange rates
328. In the short run, Exchange rates respond tomarketforcessuch as:
A. Inflation rates
B. Expectations of future Exchange rates
C. Investment profitability
D. Government trade policy
Answer: B. Expectations of future Exchange rates
329. Long-run Exchange ratemovements are governed by all of the following except:
A. National productivity levels
B. Consumer tastes and preferences
C. Rates of inflation
D. Interest rate levels
Answer: D. Interest rate levels
330. That identical godos should cost the same in all nations, assuming tis costless to ship godos between nations and there are no barriers to trade, is a reflection of the:
A. Monetary approach to exchange-rate determination
B. Law of one price
C. Fundamentalist approach to exchange-ratedetermination
D. Exchange-rate-overshooting principle
Answer: B. Law of one price
331. The quantity of dollars supplied to the foreign Exchange market would increase if, other things remaining equal:
A. Incomerises in Canada
B. Manufacturing productivity increases in Canada
C. Prices decrease in Canada
D. Import tariffs rise in Canada
Answer: A. Incomerises in Canada
332. The Gold Standard was prevalent in the world from:
A. 15th century to 18th century
B. 9th century to 18th century
C. From 1870 till First World War
D. From 1670 till First WorldWar
Answer: C. From 1870 till First World War
333. When was the International Monetary Fund (IMF) set up?
A. 1912
B. 1214
C. 1942
D. 1944
Answer: D. 1944
334. If there is an increase in the trade deficit, there must be
A. An increase in the current account.
B. An increase in the capital account.
C. a decrease in the capital account.
D. An increase in net transfers in the current account.
Answer: B. An increase in the capital account.
335. To financelarge U.S. federal Budget deficits, the Federal Reserve increases the money supply. This leads to a surplus of dollars world wide. What happens to the U.S. dollar and trade?
A. The dollar appreciates in value, stimulating imports but curtailing exports.
B. The dollar appreciates in value, stimulating exports but curtailing imports.
C. The dollar depreciates in value, stimulating imports but curtailing exports.
D. The dollar depreciates in value, stimulating exports but curtailing imports.
Answer: D. The dollar depreciates in value, stimulating exports but curtailing imports.
336. The Federal Reserve raises interestrates. What happens in the foreign Exchange market?
A. Capital flows into the United States from other countries.
B. Capital flows out of the United States in to other countries.
C. The U.S. dollar depreciates.
D. Thereis no change in the foreign Exchange market
Answer: A. Capital flows into the United States from other countries.
337. If the dollar depreciates, this likely will cause
A. U.S. aggregate supply to rise in the short run and rise in the longrun.
B. U.S. aggregate supply to rise in the short run but fall in the longrun.
C. U.S. aggregate supply to fall in the short run and fall in the longrun.
D. U.S. aggregate supply to fall in the short run but rise in the longrun
Answer: B. U.S. aggregate supply to rise in the short run but fall in the longrun.
338. Ifthe U.S. dollar depreciates against the British pound, what is likely to happen?
A. British people will buy more American goods.
B. Americans will buy more British goods.
C. Americans will take more vacations in Britain.
D. British people will stop vacationing in Florida
Answer: A. British people will buy more American goods.
339. Exchange rates are flexible and fiscal policy is held constant. An expansionary monetary policywill be
A. Reinforce dbyan open economy.
B. Mitigated byan open economy.
C. Unaffected byan open economy.
D. Multiplied byan outflow of gold.
Answer: A. Reinforce dbyan open economy.
340. Exchange rates are flexible and fiscal policy is held constant. A Contractionary monetary policywill be
A. Reinforced byan open economy.
B. Mitigated byan open economy.
C. Unaffected byan open economy.
D. Multiplied bya noutflow of gold.
Answer: A. Reinforced byan open economy.
341. In a floating exchange rate system:
A. The government intervenes to influence the exchange rate
B. The exchange rate should adjust to equate the supply and demand of the currency
C. The Balance of Payments should always be in surplus
D. The Balance of payments will always equal the government budget
Answer: B. The exchange rate should adjust to equate the supply and demand of the currency
342. To prevent the external value of its currency rising the government could:
A. Sell its own currency
B. Increase interest rates
C. Buy its own currency
D. Sell foreign currency
Answer: A. Sell its own currency
343. A fall in the external value of a currency:
A. May cause an outward shift in the demand for the currency
B. May cause an inward shift in the supply for the currency
C. May lead to a movement along the demand curve for a currency
D. May be due to an increase in demand for the country’s export
Answer: C. May lead to a movement along the demand curve for a currency
344. Which of the following is NOT an argument for a country allowing its currency to float freely?
A. It allows the country to have sovereignty over its currency.
B. It enables a country to allow its currency to depreciate if it faces balance of payments deficits.
C. It gives greater certainty to firms involved in trade in terms of future revenues.
D. It enables a country to have greater control over its fiscal and monetary policies.
Answer: C. It gives greater certainty to firms involved in trade in terms of future revenues.
345. Starting from a position of internal and external balance, a reduction in aggregate demand will cause a current account _____________
A. deficit
B. surplus
C. revaluation
D. devaluation
Answer: B. surplus
346. A rise in the real exchange rate will ____________ the competitiveness of the domestic economy
A. increase
B. reduce
C. do nothing to
D. none
Answer: B. reduce
347. Within the circular flow of income, an increase in domestic income will tend to increase
A. exports
B. taxes
C. inventories
D. imports
Answer: D. imports
348. Perfect international capital mobility suggests that international funds will be responsive to _____________ differentials
A. current account
B. interest rate
C. tax
D. price
Answer: B. interest rate
349. When capital mobility is perfect, interest rate differentials will tend to be offset by ________
A. price differences
B. balance of payments differences
C. current account differences
D. expected exchange rate changes
Answer: D. expected exchange rate changes