Global Economics Practice Questions
Course Introduction
Global Economics explores the interconnectedness of national economies within the international system, examining the flow of goods, services, capital, and labor across borders. The course covers key concepts such as comparative advantage, trade policy, exchange rates, and the balance of payments, while analyzing how global economic institutions like the IMF, World Bank, and WTO shape international economic relations. Students will also engage with contemporary issues including globalization, economic development, international financial crises, and the impact of emerging markets. Emphasis is placed on understanding the economic, political, and social factors influencing global economic integration and the challenges facing policymakers in a rapidly evolving world economy.
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International Economics 11th Edition by Dominick Salvatore
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) A rough measure of the degree of economic interdependence of a nation is given by:
A)the size of the nations' population
B)the percentage of its population to its GDP
C)the percentage of a nation's imports and exports to its GDP
D)all of the above
Answer: C
Q2) Identify at least three of the major international problems facing the world today. Answer: Rising protectionism,excessive volatility in exchange rates,structural imbalances in the United States,poverty in many developing nations,environmental degradation and climate change
Q3) The gravity model of international trade predicts that trade between two nations is larger
A)the larger the two nations
B)the closer the nations
C)the more open are the two nations
D)all of the above
Answer: D
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Chapter 2: The Law of Comparative Advantage
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Q1) Explain why Ricardo's model of trade was superior to Adam Smith's.
Answer: Smith's model was based on absolute advantage,which required each nation to have an absolute productivity advantage in order for mutually beneficial trade to occur.Ricardo's model considered relative productivity,showing that even if a nation had an absolute advantage in everything it could still benefit from trade.
Q2) The Mercantilists did not advocate:
A)free trade
B)stimulating the nation's exports
C)restricting the nations' imports
D)the accumulation of gold by the nation
Answer: A
Q3) The Mercantilists believed in
A)running trade surpluses
B)balanced trade
C)the logic of Adam Smith
D)no government intervention in markets.
Answer: A
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Chapter 3: The Standard Theory of International Trade
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Q1) Mutually beneficial trade cannot occur if production frontiers are:
A)equal but tastes are not
B)different but tastes are the same
C)different and tastes are also different
D)the same and tastes are also the same.
Answer: D
Q2) What is the reason for increasing opportunity cost?
Answer: Heterogeneous inputs.Not all inputs are equally well suited at producing different commodities.As a nation begins to produce more of one commodity it increases the scarcity of the resource that is good producing that commodity resulting in higher production costs as less productive resources are employed.
Q3) Which of the following is not true for a nation that is in equilibrium in isolation?
A)It consumes inside its production frontier
B)it reaches the highest indifference curve possible with its production frontier
C)the indifference curve is tangent to the nation's production frontier
D)MRT of X for Y equals MRS of X for Y,and they are equal to Px/Py
Answer: A
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Chapter 4: Demand and Supply, offer Curves, and the
Terms of Trade
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Q1) In what way does partial equilibrium analysis differ from general equilibrium analysis?
A)The former but not the latter can be used to determine the equilibrium price with trade
B)the former but not the latter can be used to determine the equilibrium quantity with trade
C)the former but not the latter takes into consideration the interaction among all markets in the economy
D)the former gives only an approximation to the answer sought.
Q2) Which of the following statements is not correct?
A)The demand for imports is given by the excess demand for the commodity
B)the supply of exports is given by the excess supply of the commodity
C)the supply curve of exports is flatter than the total domestic supply curve of the commodity
D)the supply curve for exports is more inelastic than the total domestic supply curve of the commodity.
Q3) Carefully explain the importance of the terms of trade to a nation.Your answer should include an explanation of how changes in the terms of trade are likely to impact social welfare.
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Chapter 5: Factor Endowments and the Heckscher-Ohlin
Theory
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Q1) The Leontief paradox refers to the empirical finding that U.S.
A)import substitutes are more K-intensive than exports
B)imports are more K-intensive than exports
C)exports are more L-intensive than imports
D)exports are more K-intensive than import substitutes
Q2) The H-O model is a simplification of a truly general equilibrium model because it deals with:
A)two nations
B)two commodities
C)two factors of production
D)all of the above
Q3) With equal technology nations will have equal K/L in production if:
A)factor prices are the same
B)tastes are the same
C)production functions are the same
D)all of the above
Q4) List at least four of the assumptions of the Heckscher-Ohlin theory
Q5) In the United States,labor unions consistently oppose international trade and support trade barriers.Use the H-O model to explain why.
Page 7
Q6) Define and explain factor intensity reversal
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Chapter 6: Economies of Scale, imperfect Competition, and International Trade
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Q1) Relaxing the assumptions on which the Heckscher-Ohlin theory rests:
A)leads to rejection of the theory
B)leaves the theory unaffected
C)requires complementary trade theories
D)cannot be done.
Q2) Carefully explain how and why the share of intra-industry trade has changed for countries.
Q3) When a nation has increasing returns to scale,the shape of its production possibility frontier is
A)linear
B)concave to the origin
C)convex to the origin
D)discontinuous
Q4) If a nation exports twice as much of a differentiated product that it imports,its intra-industry (T)index is equal to:
A)1.00
B)0.75
C)0.50
D)0.25
Q5) Define and explain economies of scale.
9
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Chapter 7: Economic Growth and International Trade
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Q1) Carefully identify and discuss the conditions which can lead to immiserizing growth.
Q2) Technical progress is usually classified into all of the following except A)neutral
B)negative
C)labor saving
D)capital saving
Q3) Doubling L with trade in a small L-abundant nation:
A)reduces the welfare of representative citizens.
B)reduces the nation's terms of trade
C)reduces the volume of trade
D)reduces national consumption.
Q4) In the absence of trade,technical progress
A)tends to increase the nation's welfare.
B)increases the nation's welfare only if it is labor-saving.
C)increases the nation's welfare only if it is capital-saving.
D)tends to decrease the nation's welfare.
Q5) Use graphs to demonstrate the effect of an increase in a small country's capital stock at constant commodity prices.
Q6) What is meant by comparative static analysis?
Page 10
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Chapter 8: Economic Growth and International Trade
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Q1) Which of the following statements is true?
A)an ad valorem tariff is a fixed sum per unit
B)the U.S.does not allow exports tariffs
C)in the case of a small country the cost of a tariff is split between the buyer and seller
D)a specific tariff is a % of the value of the unit
Q2) A good is produced using $160 in imported inputs.The current domestic price of the good is $200.For each of the following cases,find the level of effective protection.
a.The nominal tariff rate on the good is 10%,and there is no tariff on the inputs.
b.The nominal tariff rate on the good is 10%,and there is a 10% tariff on the inputs.
c.The nominal tariff rate on the good is 0%,and there is a 10% tariff on the inputs.
Q3) The imposition of an import tariff by a nation results in:
A)an increase in relative price of the nation's import commodity
B)an increase in the nation's production of its importable commodity
C)reduces the real return of the nation's abundant factor
D)all of the above
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Chapter 9: Nontariff Trade Barriers and the New Protectionism
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Q1) Summarize the Smoot-Hawley Tariff Act and its effects.
Q2) Suppose that domestic demand for a product is more inelastic than demand in the foreign country.A seller with market power would set a price in the foreign market that is ______ than the domestic price;this is an example of _________.
A)higher,predatory dumping
B)lower,predatory dumping
C)higher,international price discrimination
D)lower,international price discrimination
Q3) A fallacious argument for protection is:
A)the infant industry argument
B)protection for national defense
C)the scientific tariff
D)to correct domestic distortions
Q4) Game theory refers to:
A)a method of choosing the optimal strategy in conflict situations
B)the granting of a subsidy to correct a domestic distortion
C)the theory of tariff protection
D)the theory of comparative advantage
Page 12
Q5) What is dumping and what are its various forms?
Q6) What is an infant industry,and why would a country want to protect it?
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Chapter 10: Economic Integration: Customs Unions and Free Trade Areas
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Q1) One potential outcome from the formation of a regional trade agreement is A)trade creation
B)trade diversion
C)economies of scale
D)all of the above
Q2) 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
Q3) (a)Why did the United States supported economic integration in Europe after World War II?
(b)What direct or indirect evidence can you give to conclude that U.S.support for economic integration in Europe did in fact result in the hope-for outcome?
(c)What are the major economic disputes between the United States and Europe about these days?
What dangers do they create?
Page 14
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Chapter 11: International Trade and Economic Development
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Q1) The following is not an example of an international commodity agreement.
A)marketing boards
B)buffer stocks
C)export controls
D)purchase contracts
Q2) The terms of trade for most developing nations over the last thirty years have generally been
A)improving
B)about the same
C)worsening
D)depend largely on the export commodity
Q3) Those nations that liberalized trade during the past decade
A)grew faster than those that did not
B)grew more slowly than those that did not
C)grew at about the same rate as those that did not
D)any of the above
Q4) List four of the Millennium Development Goals.
Q5) List the current problems facing developing countries?
Q6) Explain why import substitution strategies have largely been less than successful.
Page 15
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Chapter 12: International Resource Movements and Multinational Corporations
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Q1) Discuss the motives for international labor migration.
Q2) International capital flows
A)increase world social welfare.
B)increase the welfare of the host country but not the investing country.
C)increase the welfare of the investing country but not the host country.
D)decrease world social welfare.
Q3) What is vertical integration and how is it related to direct foreign investment?
Q4) Labor in developing countries generally
A)opposes an inflow of foreign direct investments from abroad
B)favors an inflow of foreign direct investments from abroad
C)is indifferent to foreign direct investments from abroad
D)we cannot say without additional information
Q5) The most prominent form of private international economic organization today is the
A)European Union
B)World Trade Organization
C)multinational corporation
D)individual investor
Q6) What are the basic motives for international portfolio investments?
Q7) What are the primary reasons for the existence of multinational corporations? Page 16
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Chapter 13: Balance of Payments
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Q1) Carefully define the balance of payments.
Q2) The receipt of an interest payment on a loan made by a U.S.commercial bank to a foreign resident is entered in the U.S.balance of payments as a:
A)credit in the financial account
B)credit in the current account
C)credit in official reserves
D)debit in unilateral transfers
Q3) When the U.S.ships food aid to a developing nation,the U.S.debits:
A)unilateral transfers
B)services
C)financial account
D)official reserves
Q4) The largest trading partner of the United States is
A)Mexico
B)China
C)Japan
D)Canada
Q5) What is the difference between a credit transaction and a debit transaction in the balance of payments?
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Chapter 14: Foreign Exchange Markets and Exchange Rates
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Q1) What is arbitrage and how does it impact the exchange rate across foreign exchange markets?
Q2) According to the theory of covered interest arbitrage,if the interest differential in favor of the foreign country exceeds the forward discount on the foreign currency,there will be a:
A)capital inflow under covered interest arbitrage
B)capital outflow under covered interest arbitrage
C)no capital flow under a covered interest arbitrage
D)any of the above
Q3) Hedging refers to:
A)the acceptance of a foreign exchange risk
B)the covering of a foreign exchange risk
C)foreign exchange speculation
D)foreign exchange arbitrage
Q4) Spot currency transactions must settle within
A)two business days
B)one week
C)one month
D)one year
Q5) What is the principle function of foreign exchange markets?
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Chapter 15: Exchange Rate Determination
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Q1) The monetary base of the nation refers to the:
A)domestic credit created by the nation's monetary authorities or the domestic assets backing of the nation's money supply
B)international reserves of the nation
C)domestic credit created by the nation's monetary authorities or the domestic assets backing of the nation's money supply plus the international reserves of the nation
D)legal reserve requirements in the nation
Q2) According to the monetary approach to the balance of payments,a deficit in the nation's balance of payments results from:
A)an excess in the nation's stock of money supply that is not eliminated or corrected by the nation's monetary authorities
B)an excess in the stock of money demanded in the nation that is not satisfied by domestic monetary authorities
C)an excess in the stock of money demanded in the other nation that is not satisfied by the other nation's monetary authorities
D)an excess of imports over exports in the nation
Q3) Explain absolute and relative purchasing power parity (PPP).
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Chapter 16: The Price Adjustment Mechanism With Flexible and Fixed Exchange
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Q1) A depreciation of the nation's currency causes its terms of trade to:
A)deteriorate
B)improve
C)remain unchanged
D)any of the above
Q2) When a nation's demand curve for imports in terms of the foreign currency is vertical:
A)the nation's demand curve for the foreign currency has zero elasticity
B)the nation's demand for the currency is elastic
C)the nation's supply of the currency is vertical
D)the other nation's demand for the nation's currency has zero elasticity
Q3) A depreciation of a nation's currency shifts:
A)down its supply curve of imports in terms of the foreign currency
B)up its demand curve of imports in terms of the foreign currency
C)down its demand curve of imports in terms of the foreign currency
D)down its demand curve of imports in terms of the domestic currency
Q4) Explain why under a gold standard exchange rate system that the market exchange rate will never deviate far from the mint parity rate.
Page 21
Q5) Explain why currency pass-through is not likely to be complete.
Q6) Explain the meaning of the J-curve effect and exactly how it works.
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Chapter 17: The Income Adjustment Mechanism and Synthesis
of Automatic
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Q1) In the real world,the automatic income,price,and interest adjustment mechanisms,if allowed to operate,are likely to:
A)reinforce each other but still result in incomplete adjustment
B)reinforce each other and result in complete adjustment
C)work at cross purposes from each other and result in incomplete adjustment
D)work at cross purposes from each other and result in perverse adjustment
Q2) An autonomous increase in S from a condition of equilibrium in national income and in the trade balance results in the nation's income:
A)rising and its trade balance turning into surplus
B)falling and its trade balance turning into surplus
C)falling and its trade balance turning into deficit
D)rising and its trade balance turning into deficit
Q3) When S exceeds I,an open economy has a trade:
A)surplus
B)deficit
C)equilibrium
D)any of the above
Q4) What are some of the disadvantages of a freely flexible exchange rate system with respect to the adjustment process?
Page 23
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Chapter 18: Open-Economy Macroeconomics: Adjustment Policies
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Q1) Use a Swan diagram to identify a point at which a nation has domestic unemployment and a trade surplus.What combination of policies should be used to restore balance?
Q2) To correct a balance of payments surplus and unemployment a nation requires a:
A)devaluation and expansionary fiscal and monetary policies
B)devaluation and contractionary fiscal and monetary policies
C)devaluation or revaluation and expansionary fiscal and monetary policies
D)revaluation and either expansionary or contractionary fiscal and monetary policies
Q3) To correct a balance of payments surplus and inflation a nation requires:
A)expansionary fiscal policy and easy monetary policy
B)contractionary fiscal policy and tight monetary policy
C)contractionary fiscal policy and easy monetary policy
D)expansionary fiscal policy and tight monetary fiscal policy
Q4) What are direct controls?
Q5) Suppose a nation faces domestic unemployment and a surplus in its balance of payments.(a)Explain in detail the expenditure-changing policies required to cure the unemployment.(b)What would happen to the nation's external balance? Why?
Q6) What is meant by a three market balance equilibrium?
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Chapter 19: Prices and Output in an Open Economy:
Aggregate Demand and Aggregate Supply
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Q1) Which of the following is a correct statement about the effects of monetary and fiscal policies?
A)Monetary policy is effective under a fixed exchange rate regime,but not under flexible rates.
B)A monetary shock will shift the aggregate demand curve in the same direction,whether exchange rates are fixed or flexible.
C)A real shock will shift the aggregate demand curve under fixed but not flexible exchange rates.
D)Monetary policy can always be used to correct real shocks,whether exchange rates are fixed or flexible.
Q2) Inflation targeting refers to:
A)central banks targeting a precise number for the inflation rate.
B)central banks targeting a range for the inflation rate.
C)fiscal policies that target a precise number for the inflation rate.
D)fiscal policies that target a range for the inflation rate.
Q3) Suppose that the economy is in long-run equilibrium,and people in other countries suddenly decide to purchase fewer US goods.Explain the short-run effects on the US economy under both fixed and flexible exchange rates.
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Coordination
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Q1) The most extreme form of an exchange rate peg is a
A)currency board
B)flexible rate
C)floating rate
D)adjustable rate
Q2) Everything else being the same,the volume of trade is likely to be:
A)larger under a flexible than under a fixed exchange rate system
B)larger under a fixed than under a flexible exchange rate system
C)equal under a flexible and fixed exchange rate system
D)any of the above
Q3) Price discipline is:
A)greater under a fixed than under a flexible exchange rate system
B)greater under a flexible than under a fixed exchange rate system
C)about the same under a fixed as under a flexible exchange rate system
D)is unrelated to the type of exchange rate system
Q4) The European Monetary System is or resembles a:
A)fixed exchange rate system
B)a managed exchange rate system
C)a crawling peg system
D)a freely flexible exchange rate system Page 26
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Past,present,and Future
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Q1) The immediate cause for the collapse of the Bretton Woods System was:
A)the expectation that the United States would soon be forced to devalue the dollar
B)the massive flight of liquid capital from the United States
C)the attempt by three small European central banks to convert part of their dollar holdings into gold at the Fed
D)all of the above
Q2) Even with persistent trade deficits,the value of the U.S.dollar continued to rise into the mid-2000s primarily due to
A)strong dollar policies of the U.S.Treasury.
B)falling U.S.fiscal deficits.
C)economic growth in the U.S..
D)expansionary U.S.monetary policy.
Q3) What are the most serious economic problems facing the world today?
Q4) The Bretton Woods System was a:
A)gold standard
B)managed floating exchange rate system
C)gold-exchange standard
D)crawling peg system
Q5) What is IMF conditionality?
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