Applied International Economics Test Bank
Course Introduction
Applied International Economics examines real-world international economic issues and policies through the lens of theoretical models and empirical analysis. The course explores topics such as trade theory, international finance, exchange rates, balance of payments, and economic integration, focusing on their practical application to global economic events and policy debates. Students will analyze the impact of international economic institutions, trade agreements, and policy interventions using contemporary data and case studies, developing skills necessary to assess the effects of globalization on businesses and economies.
Recommended Textbook
International Economics Theory and Policy 11th Edition by Paul R Krugman
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22 Chapters
1535 Verified Questions
1535 Flashcards
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Page 2
Chapter 1: Introduction
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37 Flashcards
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Sample Questions
Q1) International trade theory implies that international trade is beneficial to all trading countries. However, casual observation leads to the conclusion that official obstruction of international trade flows is widespread. How might you reconcile these two facts?
Answer: This question is meant to allow students to offer preliminary discussions of issues, which will be explored in depth later in the book.
Q2) Historians of economic thought often describe ________ written by ________ and published in ________ as the first real exposition of an economic model.
A) "Of the Balance of Trade," David Hume, 1776
B) "Wealth of Nations," David Hume, 1758
C) "Wealth of Nations," Adam Smith, 1758
D) "Wealth of Nations," Adam Smith, 1776
E) "Of the Balance of Trade," David Hume, 1758
Answer: E
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3
Chapter 2: World Trade: an Overview
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Sample Questions
Q1) In the current Post-Industrial economy, international trade in services (including banking and financial services)
A) dominates world trade.
B) does not exist.
C) is an increasingly important component of global trade.
D) is relatively stagnant.
E) far surpasses the predictions of economist Alan Blinder.
Answer: C
Q2) In the present, most of the exports from China are
A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) overpriced by world market standards.
Answer: A
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Chapter 3: Labor Productivity and Comparative Advantage: the Ricardian Model
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Sample Questions
Q1) If a production possibilities frontier is a straight line, then production occurs under conditions of
A) increasing opportunity costs.
B) constant opportunity costs.
C) decreasing opportunity costs.
D) infinite opportunity costs.
E) uncertain opportunity costs.
Answer: B
Q2) Given the information in the table above, if the world equilibrium price of widgets were 40 cloths, then
A) both countries could benefit from trade with each other.
B) neither country could benefit from trade with each other.
C) each country will want to export the good in which it enjoys comparative advantage.
D) neither country will want to export the good in which it enjoys comparative advantage.
E) both countries will want to specialize in cloth.
Answer: A
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Chapter 4: Specific Factors and Income Distribution
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Sample Questions
Q1) Japan's trade policies with regard to rice reflect the fact that A) japanese rice farmers have significant political power.
B) Japan imports most of the rice consumed in the country.
C) Japan has a comparative advantage in rice production and therefore exports most of its rice crop.
D) there would be no gains from trade available to Japan if it engaged in free trade in rice.
E) there are gains from trade that Japan captures by engaging in free trade in rice.
Q2) The relative price of a unit of cloth in the small isolated country of Moribundia is 5 units of food. When the central city, Mudhole, puts in an airstrip, the country is able to engage in trade. If the relative price of cloth in the outside world is 3 units of food, then Moribundia will export ________ and ________ factors used in the production of ________ will benefit.
A) cloth; mobile; cloth
B) food; mobile; food
C) food; immobile; cloth
D) food; immobile; food
E) cloth; immobile; cloth
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Chapter 5: Resources and Trade: the Heckscher-Ohlin Model
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Sample Questions
Q1) Which of the following empirical studies cast the most doubt on the Heckscher-Ohlin model?
A) the study by Wassily Leontief
B) the study by Bowen, Leamer, and Sveikauskas
C) the study by David Ricardo
D) the study by Adam Smith
E) the study by Davis and Weinstein
Q2) Factors tend to be specific to certain uses and products
A) in capital-intensive industries.
B) in labor-intensive industries.
C) in the short run.
D) in countries lacking fair labor laws.
E) in countries lacking comparative advantage.
Q3) If a good is labor intensive it means that the good is produced
A) using relatively more labor than goods that are not labor intensive.
B) using labor as the only input.
C) using more labor per unit of output than goods that are not labor intensive.
D) using labor such that the total cost of labor is greater than the total cost of capital.
E) using labor such that the cost of labor is more than 50% of total cost.
Page 7
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Chapter 6: The Standard Trade Model
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Sample Questions
Q1) If the U.S. (a large country) imposes a tariff on its imported good, this will tend to
A) cause a deterioration of U.S. terms of trade.
B) have no effect on terms of trade.
C) improve the terms of trade of all countries.
D) raise the world price of the good imported by the United States.
E) improve the terms of trade of the United States.
Q2) An import tariff will cause the terms of trade of the ________ country to ________ and will ________ the country.
A) importing; improve; benefit
B) importing; improve; harm
C) exporting; improve; benefit
D) exporting; improve; harm
E) importing; suffer; harm
Q3) The intertemporal budget constraint is defined as:
A) V = DP + DF/(1 + r)
B) DP + DF(1 + r) = QP + QF(1 + r)
C) DP + DF/(1 + r) = QP + QF/(1 + r)
D) DF + DP/(1 + r) = QF + QP/(1 + r)
E) V = QP + QF/(1 + r)
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Page 8
Chapter 7: External Economies of Scale and the
International Location of Production
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Sample Questions
Q1) The learning curve describes the ________ relationship between ________ and ________.
A) inverse; education; annual income
B) direct; education; annual income
C) direct; education; labor productivity
D) inverse; unit cost; cumulative output
E) direct; unit cost; cumulative output
Q2) If some industries exhibit internal increasing returns to scale in each country, we should not expect to see
A) intra-industry trade between countries.
B) high levels of specialization in both countries.
C) inter-industry trade between countries.
D) perfect competition in these industries.
E) increased productivity in both countries.
Q3) Internal economies of scale arise when the cost per unit
A) falls as the industry grows larger.
B) remains constant over a broad range of output.
C) rises as the industry grows larger.
D) falls as the average firm grows larger.
E) rises as the average firm grows larger.
Page 9
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Sample Questions
Q1) In the model of monopolistic competition, trade costs between countries cause A) marginal costs of goods sold domestically to exceed the marginal costs of exported goods.
B) countries to negotiate the elimination of trade costs by mutual subsidization of trade. C) prices of goods sold domestically to exceed the prices of exported goods.
D) some firms that can earn a profit on domestic sales to refrain from exporting their goods.
E) all firms that can earn a profit on domestic sales to export their goods at higher prices.
Q2) In the model of monopolistic competition, an increase in industry output will cause individual firms' demand curves to become ________, which will ________ demand for higher-priced goods and ________ demand for lower-priced goods. A) steeper; reduce; increase B) steeper; increase; reduce C) horizontal; reduce; reduce D) flatter; increase; reduce E) flatter; reduce; increase
Q3) What are the consequences of outsourcing production on the welfare of countries?
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Page 10
Chapter 9: The Instruments of Trade Policy
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Sample Questions
Q1) If an import-competing firm is the only domestic producer of a good, then a transition from autarky to free trade will ________ domestic price, ________ producer surplus, ________ consumer surplus, and ________ overall domestic national welfare.
A) increase; increase; increase; increase
B) decrease; decrease; decrease; decrease
C) decrease; decrease; increase; increase
D) increase; increase; decrease; decrease
E) increase; increase; decrease; increase
Q2) The effective rate of protection is a weighted average of nominal tariffs and tariffs on imported inputs. It has been noted that in most industrialized countries, the nominal tariffs on raw materials or intermediate components or products are lower than on final-stage products meant for final markets. Why would countries design their tariff structures in this manner?
Who tends to be helped, and who is harmed by this cascading tariff structure?
Q3) Refer to above figure. In the absence of a tariff and in the presence of trade, what is the country's consumer surplus?
Q4) Refer to above figure. The lowest specific tariff which would be considered prohibitive is ________.
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Chapter 10: The Political Economy of Trade Policy
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Sample Questions
Q1) The world trading system combines negotiated agreements that promote trade liberalization called ________ with binding agreements called ________ that block tariff increases.
A) fiscal policies; monetary policies
B) truces; aggressions
C) free trade; enforcement contracts
D) levers; ratchets
E) wheels; walls
Q2) The optimum tariff is
A) the best tariff a country can obtain via a WTO negotiated round of compromises.
B) the tariff, which maximizes the terms of trade gains.
C) the tariff, which maximizes the difference between terms of trade gains and terms of trade loses.
D) not practical for a small country due to the likelihood of retaliation.
E) not practical for a large country due to the likelihood of retaliation.
Q3) Refer to above figure. What happens to the Consumer Surplus of Hungarian customers as a result of this subsidy?
Q4) Refer to above figure. What would be the cost of the subsidy to European taxpayers?
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Page 12
Chapter 11: Trade Policy in Developing Countries
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Sample Questions
Q1) Growth rates in Brazil and other Latin American countries have actually been slower since the trade liberalization of the late 1980s than they were during import-substituting industrialization
A) proves that export promoting trade policy leads to relatively rapid economic growth.
B) proves that a free-trade orientation of trade policy results in rapid economic growth.
C) proves that exports help growth, whereas imports impede growth.
D) proves that trade policy is the most important policy area for promotion of economic development.
E) does not prove that trade liberalization always leads to rapid economic growth.
Q2) Taiwan and South Korea are examples of developing nations that have recently pursued these industrialization policies:
A) import substitution.
B) export promotion.
C) commercial dumping.
D) multilateral contract.
E) trade embargoes.
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13
Chapter 12: Controversies in Trade Policy
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Sample Questions
Q1) When one applies the Heckscher-Ohlin model of trade to the issue of trade-related income redistributions, one must conclude that North-South trade, such as U.S.-Mexico trade,
A) must help low-skilled workers on both sides of the border.
B) is likely to hurt high-skilled workers in the U.S.
C) is likely to involve higher overall national economic gains that will be greater than any harm done to low-skilled workers in the U.S.
D) is likely to hurt low-skilled workers in Mexico.
E) gives no advantage to the workers in either country.
Q2) Refer to the above table. Suppose both governments offer their respective company a subsidy of $4 (million).
Q3) In the Brander-Spencer model the subsidy raises profits by more than the subsidy because of
A) the "multiplier" effect of government expenditures.
B) the military-industrial complex.
C) the forward and backward linkage effects of certain industries.
D) the deterrent effect of the subsidy on foreign competition.
E) the economies of scale once the company enters the market.
Q4) Describe the environmental Kuznets curve.
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Chapter 13: National Income Accounting and the Balance of Payments
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Sample Questions
Q1) The United States issues a $10,000 debt forgiveness to Argentina. How is this accounted for in the balance of payments?
A) financial account, U.S. asset import
B) current account, Argentina transfer payment
C) current account, U.S. service export
D) capital account, U.S. transfer payment
E) current account, Argentina good import
Q2) How can changes in the market price of wealth previously acquired alter a country's net foreign wealth?
Q3) Movements in GDP
A) differ greatly from movements in GNP.
B) do not differ greatly from movements in GNP.
C) are not allowed to differ at all from movements in GNP by definition.
D) need to be inflation adjusted in order to match movements in GNP.
E) are not relevant to an examination of national income.
Q4) What are the main aspects of economic life that macroeconomics analysis is most concerned with?
Q5) Discuss the two different methods the Bureau of Economic Analysis (BEA) uses to place current values on foreign direct investments.
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Chapter 14: Exchange Rates and the Foreign Exchange
Market: an Asset Approach
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Sample Questions
Q1) What is the expected dollar rate of return on dollar deposits if today's exchange rate is $1.10 per euro, next year's expected exchange rate is $1.165 per euro, the dollar interest rate is 10%, and the euro interest rate is 5%?
A) 10%
B) 11%
C) -1%
D) 0%
E) 15%
Q2) Show graphically a drop in the interest rate paid by euro deposits. What is the effect on the dollar?
Q3) How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.25 dollars per one British pound?
A) 50 dollars
B) 60 dollars
C) 70 dollars
D) 62.5 dollars
E) 40 British pounds
Q4) What are the three factors that affect the demand for foreign currency?
Page 16
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Chapter 15: Money, Interest Rates, and Exchange Rates
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Sample Questions
Q1) In a classic paper, Columbia University economist Phillip Cagan drew the line between inflation and hyperinflation at an inflation rate of
A) 50 percent per month.
B) 10 percent per month.
C) 20 percent per month.
D) 5 percent per month.
E) 25 percent per month.
Q2) Which of the following can help to explain why higher inflation may lead to currency appreciations?
A) The interest rate is not the prime target of monetary policy.
B) Most central banks adjust their policy interest rates expressly so as to keep inflation in check.
C) Central banks increase the money supply leading to overshooting of the exchange rate.
D) Inflation will increase the purchasing power of a currency.
E) The world market does not adjust their currency trade to reflect inflation.
Q3) What will be the effects of an increase in the money supply on the interest rate?
Q4) What are the main factors that determine aggregate money demand?
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Page 17
Chapter 16: Price Levels and the Exchange Rate in the Long Run
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Sample Questions
Q1) Which of the following statements is the MOST accurate?
A) Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over different commodities space.
B) Absolute PPP may be valid even when relative PPP is not, provided the factors causing deviations from relative PPP are more or less stable over time.
C) Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time.
D) Relative PPP is not valid when absolute PPP is not.
E) Relative PPP is only valid when absolute PPP is valid, providing the factors causing deviations from relative PPP are more or less stable over time.
Q2) Discuss the relationship between PPP and the Law of One Price.
Q3) What is the Fisher Effect?
Provide an example.
Q4) Discuss the different effects on the domestic interest rates when prices are assumed flexible and when they are assumed to be sticky.
Q5) What effect do non-tradable goods have on PPP?
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Chapter 17: Output and the Exchange Rate in the Short Run
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Q1) Which one of the following statements is MOST accurate?
A) Factors of production can only be over-employed in the short run.
B) Factors of production can only be under-employed in the short run.
C) Factors of production can be over- or under-employed in the long run.
D) Factors of production can be over- or under-employed in the short run.
E) Factors of production are fully employed in the short run.
Q2) Explain how the AA schedule is derived.
Q3) In the short run, with prices fixed, how would an increase in government spending affect the DD-AA equilibrium?
A) It will increase output and appreciate the currency.
B) It will increase output and depreciate the currency.
C) It will decrease output and appreciate the currency.
D) It will decrease output and depreciate the currency.
E) It will increase output and have no effect on the currency.
Q4) Explain what are the factors that shift the DD Schedule.
Q5) Show the effects of a permanent increase in the money supply.
Q6) Give 4 examples of situations that would cause the DD-curve to shift to the left.
Q7) Describe a J Curve.
Q8) Explain what are the factors that shift the AA Schedule?
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Chapter 18: Fixed Exchange Rates and Foreign Exchange Intervention
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Sample Questions
Q1) Under fixed exchange rate, in general which one of the following statements is the MOST accurate?
A) The following condition should hold for domestic money market equilibrium: M /P = L(R*, Y).
B) The following condition should hold for domestic money market equilibrium: M /P = L(R*, Y).
C) The following condition should hold for domestic money market equilibrium: M = L(R*, Y).
D) The following condition should hold for domestic money market equilibrium: P = L(R*, Y).
E) The following condition should hold for domestic money market equilibrium: R*M /P = L(Y).
Q2) By fixing the exchange rate, the central bank gives up its ability to
A) adjust taxes.
B) increase government spending.
C) influence the economy through fiscal policy.
D) depreciate the domestic currency.
E) influence the economy through monetary policy.
Q3) Please discuss the difference between the terms devaluation and depreciation.
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Q4) Please define and give an example of sterilized foreign exchange intervention.
Chapter 19: International Monetary Systems: an Historical Overview
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Q1) Until the United States Civil War, The Unites States had a
A) gold-based monetary standard.
B) silver-based monetary standard.
C) bimetallic monetary standard consisting of silver and gold.
D) bimetallic monetary standard consisting of copper and silver.
E) bimetallic monetary standard consisting of copper and gold.
Q2) Advocates of flexible exchange rates claim that under flexible exchange rates
A) enhanced control over fiscal policy would allow countries to dismantle their distorting barriers to international payments.
B) reduced control over monetary policy would allow countries to dismantle their distorting barriers to international payments.
C) enhanced control over monetary policy would allow countries to increase their distorting barriers to international payments.
D) enhanced control over monetary policy would allow countries to dismantle their distorting barriers to international payments.
E) enhanced control over monetary policy would destabilize exchange rates.
Q3) Explain why the United States dollar became the postwar world's key currency.
Q4) "The line distinguishing external from internal goals can be fuzzy." Discuss.
Page 21
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Chapter 20: Financial Globalization: Opportunity and Crisis
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Sample Questions
Q1) Offshore banking can take place at which institution?
A) agency office only
B) subsidiary bank only
C) foreign bank only
D) subsidiary bank and foreign bank
E) agency office, subsidiary bank, and foreign branch
Q2) In the United States, which of the following safety precautions has the government NOT taken to reduce Bank failures?
A) implemented deposits insurance
B) bank reserve requirements
C) capital requirements and asset restrictions
D) required bank examination
E) forcibly closing poorly run banks
Q3) "There is evidence that the string of U.S. bank closings in the early 1930s helped start and worsen the Great Depression." Discuss.
Q4) Why is the foreign exchange market so vital?
Q5) How well has the international capital market performed?
Q6) What is the difference between equity instruments and debt instruments?
Q7) Discuss studies based on the interest parity conditions.
Page 22
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Chapter 21: Optimum Currency Areas and the Euro
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Q1) Explain why after, say Norway unilaterally pegs the krone to the euro, domestic money market disturbances will no longer affect domestic output despite the continuation of float-rate regime against non-euro currencies.
Q2) Discuss the benefits and costs of joining a fixed-exchange area.
Q3) Why does the LL schedule have a negative slope?
A) The economic stability loss from pegging to the area's currencies rises as the degree of economic interdependence rises.
B) The economic stability loss from pegging to the area's currencies falls as the degree of economic interdependence rises.
C) The economic stability loss from pegging to the area's currencies falls as the degree of economic interdependence falls.
D) The economic stability loss from pegging to the area's currencies rises as the degree of economic activity increases.
E) The economic stability loss from pegging to the area's currencies is constant, even as the degree of economic activity increases.
Q4) What behavior by central and private banks in euro zone countries created the conditions for the 2009 euro crisis?
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Chapter 22: Developing Countries: Growth, Crisis, and Reform
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Q1) The main factors that discourage investment in capital and skills in developing countries are
A) political instability, insecure property rights.
B) political instability, insecure property rights, misguided economic policies.
C) political instability, misguided economic policies.
D) political instability.
E) insecure property rights, misguided economic policies.
Q2) How would you define exchange control?
A) The government allocates foreign exchange through decree rather than through the market.
B) a country NOT pegging its exchange rate
C) a country pegging its exchange rate
D) a country buying up excess current account so that CA=0
E) a country restricting all foreign exchange
Q3) What is the domino effect or contagion?
Q4) The 1980s are considered as the "lost decade" of Latin American growth. Explain why?
Q5) What is Argentina's Convertibility Law of April 1991? Explain.
Q6) What explains the sharply divergent long-run growth patterns? Page 24
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Page 25