Global Economics
Test Bank
Course Introduction
Global Economics explores the complex and interconnected nature of the world economy, examining how countries, businesses, and individuals interact across borders. The course covers fundamental concepts such as international trade, balance of payments, exchange rates, globalization, and economic development. Students analyze the impact of global economic policies, institutions like the World Trade Organization and International Monetary Fund, and contemporary issues such as trade wars, emerging markets, and economic crises. Through case studies and real-world examples, the course equips students with the analytical tools necessary to understand and critically assess the challenges and opportunities presented by an increasingly globalized economic landscape.
Recommended Textbook
International Economics 12th Edition by Dominick Salvatore
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Page 2
Chapter 1: Introduction
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Q1) In the study of international economics:
A) international trade policies are examined before the bases for trade
B) adjustment policies are discussed before the balance of payments
C) the case of many nations is discussed before the two-nations case
D) none of the above
Answer: D
Q2) What does the term "globalized world" mean?
Answer: It means we can connect instantly with any corner of the world,that we consume good from around the world,that tastes are converging,that worker can increasingly migrate for work,and that people can invest in companies anywhere in the world.
Q3) Today the largest net exporter of capital in terms of the total world percentage is A) Japan
B) The United States
C) Germany
D) China
Answer: C
Q4) Identify some of the criticisms of the anti-globalization movement.
Answer: Increased world income inequality,child labor,environmental pollution.
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3
Chapter 2: The Law of Comparative Advantage
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Q1) If domestically 3X=3Y in nation A,while 1X=1Y domestically in nation B:
A) there will be no trade between the two nations
B) the relative price of X is the same in both nations
C) the relative price of Y is the same in both nations
D) all of the above
Answer: D
Q2) If in a two-nation (A and B),two-commodity (X and Y)world,it is established that nation A has a comparative advantage in commodity X,then nation B must have:
A) an absolute advantage in commodity Y
B) an absolute disadvantage in commodity Y
C) a comparative disadvantage in commodity Y
D) a comparative advantage in commodity Y
Answer: D
Q3) Ricardo explained the law of comparative advantage on the basis of:
A) the labor theory of value
B) the opportunity cost theory
C) the law of diminishing returns
D) all of the above
Answer: A
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Page 4
Chapter 3: The Standard Theory of International Trade
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Q1) A production frontier that is concave from the origin indicates that the nation incurs increasing opportunity costs in the production of:
A) commodity X only
B) commodity Y only
C) both commodities
D) neither commodity
Answer: C
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) The gains from exchange with respect to the gains from specialization are always:
A) greater
B) smaller
C) equal
D) we cannot say without additional information
Answer: D
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5
Chapter 4: Demand and Supply, offer Curves, and the
Terms of Trade
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Q1) The index of relative U.S.export prices fell during the first few years of the 21 century.The primary cause of this was
A) the growing U.S. trade deficit
B) the rising price of commodities, such as oil
C) the persistent appreciation of the U.S. dollar
D) the introduction of the Euro as a major world currency
Q2) Export prices must rise for a nation to increase its exports because the nation:
A) incurs increasing opportunity costs in export production
B) faces decreasing opportunity costs in producing import substitutes
C) faces decreasing marginal rate of substitution in consumption
D) all of the above
Q3) Which of the following statements regarding general equilibrium analysis is not true?
A) The demand and supply curve are derived from the nation's production frontier and indifference map
B) It shows the same basic information as offer curves
C) It shows the same equilibrium relative commodity prices as with offer curves
D) It shows the same equilibrium relative commodity prices as partial equilibrium analysis.
Q4) Carefully define an offer curve and explain how it is derived.
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Chapter 5: Factor Endowments and the Heckscherohlin
Theory
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Q1) We say that commodity Y is K-intensive with respect to X when:
A) more K is used in the production of Y than X
B) less L is used in the production of Y than X
C) a lower L/K ratio is used in the production of Y than X
D) a higher K/L is used in the production of X than Y
Q2) International trade will ______ the price of a nation's abundant resources and _____ the price of a nation's scarce resources
A) increase; increase
B) decrease; decrease
C) decrease; increase
D) increase; decrease
Q3) a)Identify the conditions that may give rise to trade between two nations.
b)What are some of the assumptions on which the Heckscher-Ohlin theory is based?
c)What does this theory say about the pattern of trade and effect of trade on factor prices?
Q4) List three possible explanations for the Leontief paradox
Q5) Define and explain factor intensity reversal
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Q6) In the United States,labor unions consistently oppose international trade and support trade barriers.Use the H-O model to explain why.
Chapter 6: Economies of Scale, imperfect Competition, and International Trade
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Q1) Intra-industry trade takes place:
A) because products are homogeneous
B) in order to take advantage of economies of scale
C) because perfect competition is the prevalent form of market organization
D) because there is technological change.
Q2) How do differing environmental standards between countries affect international trade,and why can this create problems?
Q3) The share of transport costs will fall less heavily on the nation:
A) with the more elastic demand and supply of the traded commodity
B) with the less elastic demand and supply of the traded commodity
C) exporting agricultural products
D) with the largest domestic market
Q4) Discuss the stages of the product cycle model.
Q5) Trade based on technological gaps is closely related to:
A) the H-O theory
B) the product-cycle theory
C) Linder's theory
D) the factor price equalization theorem.
Q6) Carefully explain how and why the share of intra-industry trade has changed for countries. Page 8
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Page 9
Chapter 7: Economic Growth and International Trade
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Q1) If the output of a nations exportable commodity increases proportionally more than the output of its importable commodity the output changes in considered A) neutral
B) negative
C) anti-trade
D) pro-trade
Q2) Technical progress in the nation's export commodity:
A) may reduce the nation's welfare
B) will reduce the nation's welfare
C) will increase the nation's welfare
D) leaves the nation's welfare unchanged
Q3) Technical progress is usually classified into all of the following except A) neutral
B) negative
C) labor saving
D) capital saving
Q4) What is meant by comparative static analysis?
Q5) Using the data presented in the chapter,explain how growth,trade,and welfare have changed in the leading industrial countries over the 1990-2010 period.
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Chapter 8: Trade Restrictions: Tariffs
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Q1) According to the Stolper-Samuelson theorem,the imposition of a tariff by a nation:
A) increases the real return of the nation's abundant factor
B) increases the real return of the nation's scarce factor
C) reduces the real return of the nation's scarce factor
D) any of the above is possible
Q2) A small nation is one which must have all of the following characteristics except:
A) It does not affect world price by its trading.
B) It faces an infinitely elastic world supply curve for its import commodity.
C) It faces an infinitely elastic world demand curve for its export commodity.
D) It has a small geographic area.
Q3) Which of the following statements is u>incorrect</u> with respect to the rate of effective protection?
A) For given values of a and t , g is larger the greater is t.
B) For a given value of t and t , g is larger the greater is a .
C) The rate of effective protection, g, exceeds t when t is less than t.
D) When a t exceeds t, the rate of effective protection is positive.
Q4) Is there such thing as an optimum tariff for a small nation?
Q5) Explain the redistribution effects of a tariff.
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Chapter 9: Nontariff Trade Barriers and the New Protectionism
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Q1) Which of the following was not negotiated under the Uruguay Round?
A) reduction of tariffs on industrial goods
B) replacement of quotas with tariffs
C) reduction of subsidies on industrial products and on agricultural exports
D) liberalization in trade in most services
Q2) Trade protection in the United States is usually provided to:
A) low-wage workers
B) well-organized industries with large employment
C) industries producing consumer products
D) all of the above
Q3) 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
Q4) What is an infant industry,and why would a country want to protect it?
Page 12
Q5) What is a quota and how does it compare to the economic effects of a tariff?
Q6) What is dumping and what are its various forms?
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Chapter 10: Economic Integration: Customs Unions and Free Trade Areas
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Q1) 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
Q2) Which of the following best describes economic integration in Central and Eastern Europe?
A) The Council of Mutual Economic Assistance is the primary current organization.
B) The Baltic states are actively organized into their own trading bloc.
C) The more developed countries of Central Europe are attempting to become EU members.
D) All of Eastern and Central Europe will become part of the EU.
Q3) What is the theory of the second best?
Q4) Discuss the conditions which are more likely to lead to increased welfare with the formation of a customs union.
Q5) Discuss the potential dynamic welfare gains that can result from the formation of a customs union.
Q6) What is trade diversion?
Page 14
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Chapter 11: International Trade and Economic Development
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Q1) In the 2000s,the most rapid rate of economic growth has been observed in A) rich countries.
B) globalizers.
C) nonglobalizers.
D) Rate of growth have been roughly equivalent among all groups.
Q2) Trade cannot be an engine of growth for today's developing nations because:
A) the income elasticity for many of their exports is less than 1
B) there are many substitutes for their goods.
C) technical advances have increased the the raw-material content of many products
D) there are too many trade restrictions.
Q3) Supporting the price of a commodity by buying it when its price is low is:
A) a buffer stock
B) a purchase contract
C) an export control
D) a marketing board
Q4) List the current problems facing developing countries?
Q5) Explain why international trade cannot be expected to be the primary engine of growth for today's developing nations.
Q6) List four of the Millennium Development Goals.
Page 15
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Chapter 12: International Resource Movements and Multinational Corporations
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Q1) Foreign direct investment benefits the host nation because it:
A) increases the K/L ration
B) increases the productivity of labor
C) increases per capita income
D) all of the above
Q2) U.S.labor generally
A) opposes U.S. investments abroad
B) favors U.S. investments abroad
C) is indifferent to U.S. investments abroad
D) we cannot say without additional information
Q3) Which of the following areas accounts for the largest amount of U.S.foreign direct investment?
A) Asia and the Pacific
B) Europe
C) Latin America
D) Canada
Q4) Discuss the motives for international labor migration.
Q5) What are the basic motives for international portfolio investments?
Page 16
Q6) Explain how international capital transfers impact employment in the receiving and investing nation.
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Page 17
Chapter 13: Balance of Payments
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Q1) Carefully define the balance of payments.
Q2) When a U.S.firm imports a good from England a pays for it by drawing on its pound sterling balances in a London Bank,the U.S.debits its current account and credits its:
A) official reserve account
B) secondary income account
C) services in its current account
D) financial account
Q3) Accommodating items are:
A) transactions in official reserve assets
B) the items below the line
C) needed to balance international transactions
D) all of the above
Q4) What is the international investment position and how has it changed for the United States over the last fifty years.
Q5) Capital inflows:
A) refer to an increase in foreign assets in the nation
B) refer to a reduction in the nation's assets abroad
C) lead to a payment from foreigners
D) all of the above
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Chapter 14: Foreign Exchange Markets and Exchange Rates
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Q1) A change from $1= 1 to $2= 1 represents
A) depreciation of the dollar
B) an appreciation of the dollar
C) a depreciation of the pound
D) none of the above
Q2) Spot currency transactions must settle within
A) two business days
B) one week
C) one month
D) one year
Q3) Discuss the reasons for the existence and growth of Eurocurrency markets
Q4) Which is not a function of the foreign exchange market?
A) to transfer funds from one nation to another
B) to finance trade
C) to diversify risks
D) to provide the facilities for hedging
Q5) How does covered interest arbitrage create efficiency in foreign exchange markets?
Q6) Explain what carry trade is.
Q7) What is the principle function of foreign exchange markets?
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Chapter 15: Exchange Rate Determination
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Q1) According to the portfolio balance approach,a reduction in the risk premium on the foreign bond leads domestic residents to increase the demand for the:
A) domestic money
B) domestic bond
C) foreign bond
D) all of the above
Q2) Since the creation of the euro,forecasts have
A) accurately predicted changes in the euro.
B) correctly predicted changes in the euro most of the time.
C) not been used to chart movements in the euro.
D) not been able to correctly chart movements in the euro.
Q3) According to the monetary approach to the balance of payments,a surplus nation will have to give up in the long-run its goal of:
A) price stability
B) fixed exchange rate
C) price stability or fixed exchange rate
D) price stability and fixed exchange rate
Q4) Explain absolute and relative purchasing power parity (PPP).
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Chapter 16: The Price Adjustment Mechanism With Flexible and Fixed Exchange Rates
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Q1) The foreign exchange market is stable when:
A) The demand curve of foreign exchange is negatively inclined and the supply curve of foreign exchange is positively inclined
B) the supply curve of foreign exchange is negatively inclined and less elastic than the demand curve
C) the sum of the absolute values of the elasticity of the nation's demand of imports and the foreign demand for the nation's exports is greater than one D) all of the above
Q2) Under the gold standard:
A) each nations defines the price of gold in terms of its currency and then stands ready to buy and sell any amount of gold at that price
B) there is a fixed relationship between any two currencies called the mint parity
C) the exchange rate is determined by demand and supply between the gold points and is prevented from moving outside the gold points by gold shipments
D) all of the above
Q3) Explain why currency pass-through is not likely to be complete.
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Chapter 17: The Income Adjustment Mechanism and Synthesis
of Automatic Adjustments
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Q1) 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
Q2) A benefit of automatic adjustment mechanisms is that they:
A) avoid the possibility of policy mistakes
B) avoid the time lags associated with adjustment policies
C) begin to operate as soon as balance of payments disequilibria develop
D) all of the above
Q3) An autonomous fall in M from a condition of equilibrium in national income and in the trade balance results in the nation's income:
A) rising and its trade balance turning to deficit
B) falling and its trade balance turning into surplus
C) rising and its trade balance turning into surplus
D) rising and the trade balance remaining in equilibrium
Q4) Why is the foreign trade multiplier smaller than the corresponding multiplier in a closed economy?
Page 22
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Chapter 18: Open Economy Macroeconomics: Adjustment Policies
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Q1) To correct a balance of payments deficit and unemployment a nation requires a:
A) devaluation and expansionary fiscal and monetary policies
B) devaluation and contractionary fiscal and monetary policies
C) devaluation and either expansionary or contractionary fiscal and monetary policies
D) revaluation and either expansionary or contractionary fiscal and monetary policies
Q2) 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?
Q3) In order to achieve internal and external balance simultaneously,a nation must use at least:
A) one policy
B) two policies
C) three policies
D) cannot say
Q4) What are direct controls?
Q5) Use graph to illustrate the effect of perfect capital mobility under fixed and flexible exchange rate regimes.
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Aggregate Demand and Aggregate Supply
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Q1) An autonomous improvement in the nation's trade balance under fixed exchange rates will cause the nation's aggregate demand curve to
A) shift to the right
B) shift to the left
C) remain unchanged
D) any of the above
Q2) Output in the short run exceeds the natural level of output if expected prices
A) exceed actual prices
B) are lower than actual prices
C) are equal to actual prices
D) any of the above
Q3) With high short-term international capital flows,fixed exchange rates,and flexible prices
A) monetary policy is effective
B) fiscal policy is effective
C) both fiscal and monetary policies are effective
D) neither fiscal policy nor monetary policies are effective
Q4) What conditions lead to the stagflation of the 1970s?
Q6) Why is monetary policy ineffective under a fixed exchange rate system? Page 24
Q5) How does an increase in government expenditure impact aggregate demand?
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Page 25
Coordination
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Q1) Explain what are the benefits and costs for a European nation contemplating joining the European Monetary Union.
Q2) Under a flexible as compared to a fixed exchange rate system:
A) a nation can more easily achieve its desired inflation-unemployment tradeoff
B) it is more difficult for a nation to achieve its desired inflation-unemployment tradeoff
C) it is more difficult for a nation to achieve internal balance
D) it is more difficult for a nation to achieve external balance
Q3) Which of the following statements is correct with respect to flexible exchange rates?
A) they insulate the domestic economy from external shocks much more than fixed exchange rates
B) they are particularly attractive to nations subject to large external shocks
C) they provide less stability to an open economy subject to large internal shocks
D) all of the above
Q4) Why is a flexible exchange rate system likely to be more efficient that a fixed exchange rate system?
Q5) What is a currency board?
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Q1) What is IMF conditionality?
Q2) Explain why the establishment of a freely-flexible exchange rate system is unlikely today.
Q3) The Bretton Woods System:
A) allowed nation to change their par values when facing fundamental disequilibrium
B) allowed nations to change their par values when facing a temporary disequilibrium
C) did not allow nations to change their par exchange rates under any circumstance
D) allowed only deficit nations to change their par values, but not surplus nations
Q4) During the 1960s,the U.S.attempted to correct its balance of payments deficits by:
A) ad hoc measures
B) devaluing the dollar
C) deflating the economy
D) restricting imports
Q5) What type of international monetary system(s)operated before WWI,between WWI and WWII,and shortly after WWII?
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