Global Economic Policy Final
Exam Questions
Course Introduction
Global Economic Policy examines the formulation, implementation, and impact of economic policies in an interconnected world. The course explores how governments, international organizations, and other key actors address global economic challenges such as trade imbalances, financial crises, development disparities, and climate change. Students will analyze policy tools and frameworks used to foster sustainable growth, promote international cooperation, and manage economic conflicts between nations. Through case studies and discussions, the course provides critical insight into current issues shaping the global economy and the policy responses influencing international economic stability and development.
Recommended Textbook
International Trade Theory and Policy 10th Edition by Paul
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Page 2
R. Krugman
Chapter 1: Introduction
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Q1) The international capital market is
A)the place where you can rent earth moving equipment anywhere in the world.
B)a set of arrangements by which individuals and firms exchange money now for promises to pay in the future.
C)the arrangement where banks build up their capital by borrowing from the Central Bank.
D)the place where emerging economies accept capital invested by banks.
E)exclusively concerned with the debt crisis that ended in the 1990s.
Answer: B
Q2) Cost-benefit analysis of international trade
A)is basically useless.
B)is empirically intractable.
C)focuses attention primarily on conflicts of interest within countries.
D)focuses attention on conflicts of interest between countries.
E)never leads to government intervention in international trade.
Answer: C
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Chapter 2: World Trade: An Overview
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Q1) When comparing the composition of world trade in the early 20th century to the early 21st century,we find major compositional changes.These include a relative decline in trade in agricultural and primary-products (including raw materials).How would you explain this in terms of broad historical developments during this period?
Answer: The typical composition of world production during this period experienced major changes.Focusing on today's Industrialized Countries (primarily members of the OECD),the industrial-employment composition was focused primarily on agriculture.Most value was in land.The predominant single consumption category was food.Since then,the economies shifted from the agricultural to the manufacturing sectors (continuing trends begun over a century earlier in the industrial revolution).Incomes rose,and consumption shifted in favor of (increasingly affordable)manufactures.Both income and price elasticities were greater in manufactures than in agricultural products.At the same time there was a steady tendency for synthetic (manufactured)inputs to replace agricultural based raw materials and industrial inputs.Hence,trade and of course international trade conformed to overall changes in patterns of world production and consumption.
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Chapter 3: Labor Productivity and Comparative Advantage:
The Ricardian Model
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Q1) It is generally claimed that state trading,or centrally controlled trading will tend to reach a lower economic welfare than would be reached by allowing market forces to determine trade flow directions and terms of trade.Illustrate a counter-example to this proposition.
Answer: In general,if we begin with any suboptimal distortion,the theory of the second best tells us that an additional "distortion" may move a country in the correct direction of a welfare improvement.For example,If a country has an overvalued exchange rate (that is,its currency is overpriced in the foreign exchange markets),it is possible that it will find itself in an autarkic equilibrium (that is,it might "overprice itself out of the international market").In such a case it is easy to demonstrate that if the government exports the goods in which the country enjoys comparative advantage,and imports the other (bypassing market prices and mechanisms),the country's economic welfare will improve.
Q2) Given the information in the table above.What is the opportunity cost of cloth in terms of Widgets in Foreign?
Answer: 2 widgets.
Q3) Given the information in the table above.What is the opportunity cost of Cloth in terms of Widgets in Foreign?
Answer: One half a widget.
Page 5
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Chapter 4: Specific Factors and Income Distribution
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Q1) In the specific factors model,a 5% increase in the price of food accompanied by a 5% increase in the price of cloth will cause wages to ________,the production of cloth to ________,and the production of food to ________.
A)increase by 5%;remain unchanged;remain unchanged
B)increase by less then 5%;decrease;increase
C)increase by more then 5%;increase;remain unchanged
D)remain constant;increase;increase
E)remain constant;decrease;decrease
Q2) The Ricardian two-country two-good model predicts that there are potential benefits from trade,but NOT
A)the effect of trade on income distribution.
B)the mechanism that determines which country will specialize in which good.
C)when one country has an absolute advantage in the production of both goods.
D)when one country has significantly lower wages than the other country.
E)when both countries have the same types of technology available.
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Chapter 5: Resources and Trade: the Heckscher-Ohlin Model
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Q1) Factors tend to be specific to certain uses and products
A)in the short run.
B)in countries lacking comparative advantage.
C)in capital-intensive industries.
D)in labor-intensive industries.
E)in countries lacking fair labor laws.
Q2) In the 2-factor,2 good Heckscher-Ohlin model,trade will ________ the owners of a country's ________ factor and will ________ the good that uses that factor intensively.
A)harm;scarce;import
B)harm;abundant;import
C)benefit;scarce;export
D)benefit;scarce;import
E)harm;scarce;export
Q3) Why are prices of factors of production NOT equalized?
Q4) Refer to above figure.Would you expect to find that the real wages become equalized in both countries? Explain the reason for any differences you note.
Q5) Why is the H.O.model called the factor-proportions theory?
Q7) "A good cannot be both land- and labor-intensive." Discuss. Page 7
Q6) Countries do not in fact export the goods the H.O.theory predicts.Discuss.
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Chapter 6: The Standard Trade Model
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Q1) An increase in a country's net commodity terms of trade will
A)not always guarantee positive changes in the country's economy.
B)always increase the country's economic welfare.
C)always increase the country's real income.
D)never increase the country's quantity of exports.
E)always increase the country's production of its import competing good.
Q2) The meaning of "terms of trade" is
A)the price of a country's exports divided by the price of its imports.
B)the amount of exports sold by a country.
C)the price conditions bargained for in international markets.
D)the quantities of imports received in free trade.
E)the tariffs in place between two trading countries.
Q3) Refer to above figure.Now,suppose that the relative price of A is actually not higher than Albania's autarkic level of 1,but quite the opposite .Would Albania still be able to gain from trade? If so,where would be its production point? Given the information in this question,where is Albania's comparative advantage?
Q4) Other things being equal,a rise in a country's terms of trade increases its welfare.What would happen if we relax the ceteris paribus assumption,and allow for the law of demand to operate internationally?
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Chapter 7: External Economies of Scale and the
International Location of Production
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Q1) Explain why positive economies of scale in one (of two)sectors may establish a comparative advantage for the large (as compared to the small)country in the production of the commodity which exhibits positive scale economies.
Q2) If output is increased in the long-run,average production costs in the presence of internal diseconomies of scale will ________,and in the presence of external diseconomies of scale,will ________.
A)decrease;decrease
B)increase;remain constant
C)remain constant;increase
D)decrease;remain constant
E)increase;decrease
Q3) If a scale economy is the dominant technological factor defining or establishing comparative advantage,then the underlying facts explaining why a particular country dominates world markets in some product may be pure chance,or historical accident.Explain,and compare this with the answer you would give for the Heckscher-Ohlin model of comparative advantage.
Q4) Why are increasing returns to scale and fixed costs important in models of international trade and imperfect competition?
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Q1) In the model of monopolistic competition,if firms have ________ average cost curves,then opening trade will ________ the total number of firms and ________ the average price.
A)downward sloping;decrease;decrease
B)downward sloping;decrease;increase
C)downward sloping;increase;decrease
D)upward sloping;decrease;increase
E)upward sloping;increase;decrease
Q2) Two countries engaged in trade in products with no scale economies,produced under conditions of perfect competition,are likely to be engaged in
A)inter-industry trade.
B)monopolistic competition.
C)intra-industry trade.
D)Heckscher-Ohlin trade.
E)oligopolistic competition
Q3) It is possible that trade based on external scale economies may leave a country worse off than it would have been without trade.Explain how this could happen.
Q4) What are the consequences of outsourcing production on the welfare of countries?
Page 11
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Chapter 9: The Instruments of Trade Policy
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Q1) An export subsidy differs from a tariff in each of the following ways EXCEPT
A)a tariff generates revenue.
B)a tariff is applied to imports.
C)a tariff results in an efficiency loss.
D)a tariff is a tax.
E)a tariff discourages imports.
Q2) Refer to above figure.In the absence of trade,what is the country's producer surplus?
Q3) Refer to above figure.With a specific tariff of $3 per unit,what is the quantity of Widgets produced domestically?
Q4) Refer to above figure.With a specific tariff of $3 per unit,what is the quantity of Widgets imported?
Q5) Refer to above figure.In the absence of a tariff and in the presence of trade,what is the country's consumer surplus?
Q6) Refer to above figure.With free trade and no tariffs,what is the quantity of Widgets consumed domestically?
Q7) Refer to above figure.What is the amount of efficiency loss resulting from imposition of the tariff?
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Chapter 10: The Political Economy of Trade Policy
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Q1) Refer to above figure.Assume that Boeing is the first to enter the Hungarian market.Without a government subsidy what price would they demand,and what would be their total profits?
Q2) The fact that trade policy often imposes harm on large numbers of people,and benefits only a few may be explained by
A)the lack of political involvement of the public.
B)the power of advertisement.
C)the problem of collective action.
D)the basic impossibility of the democratic system to reach a fair solution.
E)a cycle of political corruption.
Q3) The strongest political pressure for a trade policy that results in higher protectionism comes from
A)domestic workers lobbying for import restrictions.
B)domestic workers lobbying for export restrictions.
C)domestic workers lobbying for free trade.
D)domestic consumers lobbying for export restrictions.
E)domestic consumers lobbying for import restrictions.
Q4) Refer to above figure.What is the revenue gain or loss for Europe as a whole (including taxpayers)?
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Chapter 11: Trade Policy in Developing Countries
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Q1) The United States,as it began its long and successful growth in the early 19th century,consciously promoted domestic production through such activities as tariffs,Clay's American System,and many direct subsidies to railroads,canal companies,farmers (free land)etc.Today we view this blatant example of large scale and extensive import-substitution industrialization as having been very successful.Comment on this.
Q2) The development of countries like South Korea has been supported by all of the following EXCEPT
A)high domestic interest rates.
B)high domestic saving rates.
C)large endowments of human capital.
D)high levels of labor productivity.
E)reduced government regulation.
Q3) Sophisticated theoretical arguments supporting import-substitution policies include A)terms of trade effects.
B)scale economy arguments.
C)learning curve considerations.
D)the problem of appropriability.
E)domestic market failure arguments.
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Chapter 12: Controversies in Trade Policy
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Q1) Describe the environmental Kuznets curve.
Q2) Free trade and globalization is generally believed
A)to cause a degradation in the world's environment.
B)to improve the environment by correcting for distortions caused by import competing policies.
C)to help spread the best of each country's culture,so as to uplift global cultural standards.
D)to help each country safeguard the best of its own culture.
E)to make no difference in the economic welfare of the world.
Q3) The WTO seems at times to be interfering in domestic policy since
A)the line between domestic policies and de factor protectionism is often fuzzy.
B)it is a supra-national organization with the power to overturn governments.
C)it determines which nations may trade what with whom.
D)it punishes naughty nations.
E)it exempts the U.S.and other powerful member nations from many of its edicts.
Q4) What is a pollution haven?
Q5) Refer to the above table.Suppose Airbus is set to produce the aircraft before Boeing.Which company will enter the market?
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Chapter 13: National Income Accounting and the Balance of Payments
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Q1) Which one of the following statements is the MOST accurate?
A)GNP plus depreciation is called net national product (NNP).
B)GNP less depreciation is called net national product (NNP).
C)GNP less depreciation is called net factor product (NFP).
D)GDP plus depreciation is called net national product (NNP).
E)GDP less depreciation is called net national product (NNP).
Q2) A closed economy
A)can save either by building up its capital stock or by acquiring foreign wealth.
B)can save only by building up its capital stock.
C)can save only by acquiring foreign wealth.
D)cannot save either by building up its capital stock or by acquiring foreign wealth.
E)can save by avoiding excessive imports.
Q3) Every international transaction automatically enters the balance of payments
A)once either as a credit or as a debit.
B)twice,once as a credit and once as a debit.
C)once as a credit.
D)twice,both times as debit.
E)the times,once as a credit,onces as a debit,and once as an exchange.
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Chapter 14: Exchange Rates and the Foreign Exchange
Market: An Asset Approach
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Q1) Explain risk and liquidity of assets.
Q2) How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.60 dollars per British pound?
A)38.125 British pounds
B)28.125 British pounds
C)48.125 British pounds
D)58.125 British pounds
E)18.125 British pounds
Q3) A foreign exchange swap
A)is a spot sale of a currency.
B)is a forward repurchase of the currency.
C)is a spot sale of a currency combined with a forward repurchase of the currency.
D)is a spot sale of a currency combined with a forward sale of the currency.
E)make up a negligible proportion of all foreign exchange trading.
Q4) Show graphically a drop in the interest rate paid by euro deposits.What is the effect on the dollar?
Q5) Explain what is a "vehicle currency." Why is the U.S.dollar considered a vehicle currency?
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Chapter 15: Money,Interest Rates, and Exchange Rates
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Q1) Money includes A)currency.
B)checking deposits held by households and firms.
C)deposits in the foreign exchange markets.
D)currency and checking deposits held by households and firms.
E)futures and deposits in the foreign exchange market.
Q2) Which one of the following statements is the MOST accurate?
A)Given P<sub>US</sub>,when the money supply rises,the dollar interest rate declines and the dollar depreciates against the euro.
B)Given Y<sub>US</sub>,when the money supply rises,the dollar interest rate declines and the dollar depreciates against the euro.
C)Given P<sub>US</sub> and Y<sub>US</sub>,when the money supply decreases,the dollar interest rate declines and the dollar depreciates against the euro.
D)Given P<sub>US</sub> and Y<sub>US</sub>,when the money supply rises,the dollar interest rate declines and the dollar appreciates against the euro.
E)Given P<sub>US</sub> and Y<sub>US</sub>,when the money supply rises,the dollar interest rate declines and the dollar depreciates against the euro.
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Chapter 16: Price Levels and the Exchange Rate in the Long Run
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Q1) The PPP theory fails in reality for all of the following reasons EXCEPT A)transport costs.
B)monopolistic or oligopolistic practices in goods markets.
C)the inflation data reported in different countries are based on different commodity baskets.
D)restrictions on trade.
E)inflation rates are unrelated to money supply growth.
Q2) In January 2013,the world's cheapest Big Macs were sold in A)the Philippines.
B)Russia.
C)China.
D)Malysia.
E)the Czech Republic.
Q3) Under Purchasing Power Parity
A)E<sub>$/E</sub> = P<sup>i</sup><sub>US</sub>/P<sup>i</sup><sub>E</sub>.
B)E<sub>$/E</sub> = P<sup>i</sup><sub>E</sub>/P<sup>i</sup><sub>US</sub>.
C)E<sub>$/E</sub> = P<sub>US</sub>/P<sub>E</sub>.
D)E<sub>$/E</sub> = P<sub>E</sub>/P<sub>ES</sub>.
E)E<sub>$/E</sub> = P<sup>i</sup><sub>E + </sub>P<sup>i</sup><sub>US</sub>/P<sup>i</sup><sub>E</sub>.
Page 19
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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)In general,consumption demand rises by less than disposable income.
B)In general,consumption demand rises by more than disposable income.
C)In general,consumption demand rises by more than income.
D)In general,consumption demand rises by the same amount as disposable income rises.
E)In general,consumption demand rises are unrelated to disposable income rises.
Q2) Temporary tax cuts would cause
A)the AA-curve to shift left.
B)the AA-curve to shift right.
C)the DD-curve to shift left.
D)the DD-curve to shift right.
E)a shift in the AA-curve,although the direction is ambiguous.
Q3) Explain how does an increase in the real exchange rate affect exports and imports?
Q4) Explain what are the factors that shift the DD Schedule.
Q5) What are two ways the government can use to maintain full employment in an open economy? Also give an example for each.
Q6) What is inflation bias? What measures have governments taken to avoid it?
Q7) Explain how does a rise in real income affect aggregate demand?
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Chapter 18: Fixed Exchange Rates and Foreign Exchange Intervention
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Q1) In the interest rate parity condition with imperfect substitutes and a risk premium of
A)an increased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds.
B)a decreased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency bonds.
C)an increased stock of domestic government debt will reduce the difference between the expected returns on domestic and foreign currency bonds.
D)an increased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds.
E)a decreased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency bonds.
Q2) Use a figure to explain how a balance of payments crisis and its hand in capital flight.
Q3) List the drawbacks of the gold standard.
Q4) Please briefly describe what is meant by a gold exchange standard.
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Chapter 19: International Monetary Systems: An Historical Overview
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Q1) Advocates of floating rates pointed out that
A)removal of the obligation to peg currency values would restore monetary control to central banks.
B)imposing of the obligation to peg currency values would restore monetary control to central banks.
C)removing of the obligation to peg currency values would restore fiscal control.
D)imposing of the obligation to peg currency values would restore fiscal control.
E)imposing of the obligation to peg currency would restore monetary control to the consumer.
Q2) Discuss the impact of the restoration of convertibility in 1958.
Q3) Imagine a world with two large countries,Home and Foreign.Evaluate how Home's macroeconomic policies affect Foreign.Compare the small and the large country cases;consider both permanent monetary and fiscal policies.
Q4) What is a convertible currency?
Q5) Why do governments prefer to avoid current account deficits that are too large?
Q6) Describe the effects of the Smoot-Hawley tariff imposed by the United States in 1930.
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Chapter 20: Financial Globalization: Opportunity and Crisis
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Q1) Explain why large interest rate differences would be strong evidence of unrealized gains from trade.
Q2) Capital markets of poor developing countries that liberalized their financial systems to allow private asset trade with foreigners are called
A)direct foreign markets.
B)foreign exchange markets.
C)stock & bond markets.
D)emerging markets.
E)fledgling financial markets.
Q3) The purpose of the Basel Committee was to
A)achieve a better coordination of the surveillance exercised by national authorities over the international banking system.
B)achieve a better coordination of domestic banking systems.
C)achieve a better coordination between brokers and investment bankers.
D)achieve a better coordination between bond holder and bon issuers.
E)manipulate bank rates for more leverage profits.
Q4) Explain why,according to Feldstein and Horioka,one should expect that domestic investment rates diverge widely from saving rates.
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Chapter 21: Optimum Currency Areas and the Euro
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Q1) To join the EMU,a country must have
A)a public-sector deficit no higher than 3 percent of its GDP in general.
B)a public-sector deficit no higher than 2 percent of its GDP in general.
C)a public-sector deficit no higher than 1 percent of its GDP in general.
D)a zero public-sector deficit.
E)a public-sector deficit no higher than 4 percent of its GDP in general.
Q2) Explain what the GG-LL model tells us about the benefits of extensive trade between EU member states and comment on the significance of similarity of economic structure in this framework.
Q3) Explain the theory of optimum currency areas.
Q4) During the period from 1978-2012,the difference between annual inflation rates of EU countries and the German inflation rate
A)grew at an accelerating rate.
B)remained fairly constant.
C)largely disappeared.
D)went through periods of hyperinflation.
E)trended upward at a declining rate.
Q5) What is the "three-pronged approach" to organizing a banking union?
Q6) How did the European single currency evolved?
Q7) Discuss the benefits and costs of joining a fixed-exchange area.
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Chapter 22: Developing Countries: Growth, Crisis, and Reform
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Q1) The world's economies can be divided into four main categories according to their annual per-capita income levels.Which one of the following is NOT one of the categories?
A)low-income
B)upper middle-income
C)high-income
D)lower middle-income
E)middle-income
Q2) The term contagion refers to
A)a government's complete control over it's banking system.
B)a drop in interest rates across industrialized countries.
C)the vulnerability of healthy economies to crises generated by events elsewhere.
D)a directed attack on one market by a foreign market.
E)a side effect of international trade.
Q3) Compare currency board to conventional fixed exchange rate.
Q4) What explains the sharply divergent long-run growth patterns?
Q5) What is the theory of Second Best?
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Q6) During 1991,Argentina's monetary law had a currency board.Explain and give an example.