International Economic Policy
Final Exam
Course Introduction
International Economic Policy explores the frameworks, institutions, and strategies that shape economic interactions between countries. This course examines the formulation and impact of trade policies, exchange rates, monetary and fiscal policies, and international agreements on global markets and national economies. Students analyze contemporary policy debates, assess the roles of organizations such as the IMF and WTO, and consider the challenges posed by globalization, economic development, and financial crises. The course emphasizes critical thinking about how economic policies influence international relations, market stability, and domestic economic well-being.
Recommended Textbook
International Economics 12th Edition by Dominick Salvatore
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Page 2
Chapter 1: Introduction
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Q1) Economic theory:
A) seeks to explain economic events
B) seeks to predict economic events
C) abstracts from the many detail that surrounds an economic event
D) all of the above
Answer: D
Q2) International economics deals with:
A) the flow of goods, services, and payments among nations
B) policies directed at regulating the flow of goods, services, and payments
C) the effects of policies on the welfare of the nation
D) all of the above
Answer: D
Q3) Today roughly _____ million people live in countries other than the one in which they were born.
A) 500
B) 100
C) 50
D) 200
Answer: D
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Page 3
Chapter 2: The Law of Comparative Advantage
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Q1) Which of the following statements is true?
A) The combined demand for each commodity by the two nations is negatively sloped
B) the combined supply for each commodity by the two nations is rising stepwise
C) the equilibrium relative commodity price for each commodity with trade is given by the intersection of the demand and supply of each commodity by the two nations
D) All of the above statements are true.
Answer: D
Q2) The first empirical test of the comparative advantage trade model was conducted by
A) MacDougall
B) Marshall
C) Jevons
D) Friedman
Answer: A
Q3) Explain the mercantilist view on trade.
Answer: The mercantilists believed trade was a zero-sum game - that one nation's gain was another's loss.They advocated export promotion and import restriction.
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Chapter 3: The Standard Theory of International Trade
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Q1) The marginal rate of transformation (MRT)of X for Y refers to:
A) the amount of Y that a nation must give up to produce each additional unit of X
B) the opportunity cost of X
C) the absolute slope of the production frontier at the point of production
D) all of the above
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) Carefully explain what an indifference curve is.
Answer: An indifference curve show various combinations of commodity consumption that yield the same level of satisfaction.It is convex to the origin due to the diminishing returns associated with the consumption of more of one commodity relative to another.
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Chapter 4: Demand and Supply, offer Curves, and the
Terms of Trade
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Q1) 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.
Q2) If a nation's terms of trade improve,the nation's social welfare
A) will deteriorate.
B) will improve.
C) will remain unchanged.
D) might improve, deteriorate, or remain unchanged.
Q3) If the nation's tastes for its import commodity increases:
A) the nation's offer curve rotates toward the axis measuring its import commodity
B) the partner's offer curve rotates toward the axis measuring its import commodity
C) the partner's offer curve rotates toward the axis measuring its export commodity
D) the nation's offer curve rotates toward the axis measuring its export commodity
Q4) Carefully define and explain the meaning of "equilibrium terms of trade"
Q5) 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) Over the last five decades,relative to the United States,real wages among industrialized countries have
A) become equal.
B) moved farther away.
C) moved closer together.
D) increased, then decreased.
Q2) Which of the following situations would violate the assumptions of the H-O model?
A) Doubling all inputs doubled the production of all outputs.
B) Nation 1 has technology that is different from Nation 2.
C) Nation 1's trade is balanced.
D) Nation 2 does not completely specialize in either good.
Q3) List three possible explanations for the Leontief paradox
Q4) 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
Q5) 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) Increasing returns to scale means that
A) doubling all inputs leads to a more than proportional increase in output.
B) doubling all inputs leads to a proportional increase in output.
C) doubling all inputs leads to a less than proportional increase in output.
D) doubling all inputs leads to a decrease in output.
Q2) Discuss the stages of the product cycle model.
Q3) 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.
Q4) The intra-industry trade index measures the magnitude of a nation's
A) product life cycle
B) comparative advantage
C) economies of scale
D) trade in differentiated products
Q5) How do differing environmental standards between countries affect international trade,and why can this create problems?
8
Q6) Carefully explain how and why the share of intra-industry trade has changed for countries.
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Page 9
Chapter 7: Economic Growth and International Trade
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Q1) Doubling L is likely to:
A) increases the relative price of the L-intensive commodity
B) reduces the relative price of the K-intensive commodity
C) reduces the relative price of the L-intensive commodity
D) any of the above
Q2) An increase in tastes for the import commodity in both nations:
A) reduces the volume of trade
B) increases the volume of trade
C) leaves the volume of trade unchanged
D) any of the above
Q3) A proportionately greater increase in the nation's supply of labor than of capital is likely to result in a deterioration in the nation's terms of trade if the nation exports:
A) the K-intensive commodity
B) the L-intensive commodity
C) either commodity
D) both commodities
Q4) 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) The imposition of an import tariff by a small nation:
A) increases the relative price of the import commodity for domestic producers and consumers
B) reduces the relative price of the import commodity for domestic producers and consumers
C) increases the relative price of the import commodity for the nation as a whole
D) any of the above is possible
Q2) The imposition of a tariff will
A) increase imports, decrease domestic production, and increase consumption
B) decrease imports, increase domestic production, and decrease consumption
C) decrease imports, decrease domestic production, and increase consumption
D) increase imports, increase domestic production, and decrease consumption
Q3) The imposition of an import tariff by a large nation:
A) increases the nation's terms of trade
B) reduces the volume of trade
C) may increase or reduce the nation's welfare
D) all of the above
Q4) Under what conditions can a tariff improve a nation's welfare?
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) The type of dumping which would justify antidumping measures by the country subject to the dumping is:
A) predatory dumping
B) sporadic dumping
C) continuous dumping
D) all of the above
Q2) An increase in the demand of the imported commodity subject to a given import quota:
A) reduces the domestic quantity demanded of the commodity
B) increases the domestic production of the commodity
C) reduces the domestic price of the commodity
D) reduces the producers' surplus
Q3) As of 2015,the status of the Doha Round is
A) There is a new agreement in place.
B) Negotiations are continuing.
C) Negotiations have collapsed.
D) Negotiations have not yet begun.
Q4) What is an infant industry,and why would a country want to protect it?
Q6) Summarize the Smoot-Hawley Tariff Act and its effects. Page 12
Q5) What is a quota and how does it compare to the economic effects of a tariff?
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Chapter 10: Economic Integration: Customs Unions and Free Trade Areas
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Q1) The North American Free Trade Agreement (NATFA)is best defined as a A) free trade area
B) customs union
C) preferential trade arrangement
D) economic union
Q2) The formation of a free trade area among the countries of Eastern Europe is advocated in order to:
A) restore trade trading
B) retain the traditional trade links that can be justified on market principles
C) reduce the need for structural change
D) none of the above
Q3) The formation of a trade-creating customs union where all economic resources of member nations are fully employed before and after the formation of the customs union leads to an:
A) increase in the welfare of member and nonmember nations
B) increase in the welfare of member nations only
C) increase in the welfare of nonmember nations only
D) increase or decrease in the welfare of member and nonmember nations
Q4) What is trade diversion?
Q5) What is the theory of the second best?
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Chapter 11: International Trade and Economic Development
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Q1) Developing nations often experience wildly fluctuating export prices for their primary products because of:
A) inelastic and stable demand and supply
B) elastic and unstable demand and supply
C) inelastic and unstable demand and supply
D) elastic and stable demand and supply
Q2) 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
Q3) According to traditional trade theory,a developing nation should export the commodity:
A) of its comparative advantage
B) that it cannot produce relatively more efficiently
C) that intensive in the nation's relatively scarce factor
D) that is most differentiated.
Q4) Why did developing nations that switched from a policy of import substitution to a policy of export promotion generally grow faster during the past decade?
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Chapter 12: International Resource Movements and Multinational Corporations
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Q1) The brain drain refers to the transfer of:
A) technology from developed to developing nations
B) skilled labor and professionals from developed to developing nations
C) unskilled labor from developing to developed nations
D) skilled labor and professionals from less advanced to more advanced nations
Q2) Portfolio theory tells us that by investing in securities with yields that are inversely related over time:
A) a given yield can be obtained at a smaller risk
B) a higher yield can be obtained for the same level of risk
C) a two-way capital flow may be required to achieve a balanced portfolio
D) all of the above
Q3) 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
Q4) Discuss the motives for international labor migration.
Q5) What are the primary reasons for the existence of multinational corporations?
Q7) What are the basic motives for international portfolio investments? Page 16
Q6) What is vertical integration and how is it related to direct foreign investment?
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Page 17
Chapter 13: Balance of Payments
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Q1) The U.S.government gives $1,000,000 to Somalia.In the U.S.balance of payments,the gift of funds is recorded as a ______ to the ________ account.and as a ______ to the ________ account.
A) debit, current; there is no offsetting transaction because it is a gift.
B) debit, financial; credit, current.
C) credit, financial; debit, current.
D) debit, current; credit, financial.
Q2) 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
Q3) When the U.S.ships food aid to a developing nation,the U.S.debits:
A) secondary income
B) services
C) financial account
D) official reserves
Q4) Carefully define the balance of payments.
Q5) What is meant by autonomous transactions?
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Chapter 14: Foreign Exchange Markets and Exchange Rates
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Q1) Which of the following is NOT a reason for the smaller interest rate spread in Eurocurrency markets
A) the absence of legal reserve requirements
B) lack of competition for deposits
C) economies of scale
D) risk diversification
Q2) 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
Q3) A shortage of pounds under a flexible exchange rate system results in:
A) a depreciation of the pound
B) a depreciation of the dollar
C) an appreciation of the dollar
D) no change in the exchange rate
Q4) Discuss the reasons for the existence and growth of Eurocurrency markets
Q5) Explain what carry trade is.
Q6) What is the principle function of foreign exchange markets?
Page 19
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Chapter 15: Exchange Rate Determination
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Q1) What is the empirical evidence for the monetary and portfolio balance model of exchange rate determination?
Q2) Which of the following is false with regard to exchange rate dynamics:
A) seeks to explain exchange rate fluctuations over time
B) results because the real sector adjusts instantaneously to disturbances
C) in the short run, the exchange rate overshoots its long-run equilibrium
D) results from the stock adjustment in financial assets
Q3) 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.
Q4) The monetary approach to the balance of payments:
A) views the balance of payments as an essentially monetary phenomenon
B) rests on the purchasing power-parity theory
C) postulates that money plays the crucial role in the long run both as a disturbance and adjustment in the nation's balance of payments
D) all of the above
Q5) 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 gold standard operated from
A) about 1880 until the outbreak of World War I
B) about 1880 until the outbreak of World War II
C) about 1500 until the outbreak of World War I
D) about 1500 until the outbreak of World War II
Q2) What are the necessary elasticity conditions for a stable foreign exchange market?
Q3) The more elastic is a nation's demand and supply of foreign exchange the:
A) larger is the devaluation or depreciation required to correct a deficit of a given size in the nation's balance of payments
B) smaller is the devaluation or depreciation required to correct a deficit of a given size in the nation's balance of payments
C) less feasible is a flexible exchange rate system
D) less feasible is devaluation as a policy to correct a deficit in the nation's balance of payments
Q4) Suppose that under the gold standard,the price of gold is set at $30/ounce in the United States and 15/ounce in the United Kingdom.What are the gold import and export points if there is a 10% cost of shipping gold?
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Chapter 17: The Income Adjustment Mechanism and Synthesis
of Automatic Adjustments
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Q1) One disadvantage facing a freely flexible exchange rate system is that is can cause A) overshooting
B) competitive devaluations
C) hedging
D) loss of monetary policy control
Q2) When considering the impact of foreign repercussions relative to a scenario without such repercussions,for a large nation the foreign trade multiplier will be A)larger
B) smaller
C) exactly the same
D) any of the above
Q3) When considering the impact of foreign repercussions relative to a scenario without such repercussions,for a small nation the foreign trade multiplier will be A)larger
B) smaller
C) exactly the same D) any of the above
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Page 22
Chapter 18: Open Economy Macroeconomics: Adjustment Policies
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Q1) Can a nation reach both internal and external balance under fixed exchange rates using only monetary policy? Explain.
Q2) The IS curve is negatively sloped because:
A) the higher is the rate of interest the smaller is the quantity of money demanded for speculative purposes
B) higher rates of interest lead to greater capital flows
C) at lower interest rates the levels of investment and national income are higher
D) at lower interest rates the level of national income is lower
Q3) To achieve external balance and correct a recession,a nation will always have to use tight monetary policy if at the full employment level of national income the nation's BP curve is:
A) above the LM curve
B) below the LM curve
C) steeper than the LM curve
D) above the IS curve
Q4) Use graph to illustrate the effect of perfect capital mobility under fixed and flexible exchange rate regimes.
Q5) What is meant by a three market balance equilibrium?
Page 23
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Chapter 19: Prices and Output in an Open Economy:
Aggregate Demand and Aggregate Supply
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Q1) Suppose that the economy is in long-run equilibrium,and interest rates in the rest of the world rise.Explain the short-run effects on the US economy under fixed and flexible exchange rates.
Q2) A reduction in the general price level with a constant money supply is shown by a
A) leftward shift in the LM curve
B) movement down along a given aggregate demand curve
C) rightward shift in the aggregate supply curve
D) a rightward shift in the IS curve
Q3) What is the natural level of output?
Q4) 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.
Q5) The aggregate demand curve for an open economy under fixed exchange rates is
A) less elastic than if the economy were closed
B) more elastic than in the economy were closed
C) more elastic than in the economy operated with flexible exchange rates
D) all of the above
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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) International policy coordination may help avoid
A) beggar-thy-neighbor policies
B) competitive devaluations
C) retaliatory behavior
D) all of the above
Q4) Which of the following exchange rate systems is must susceptible to speculation attack?
A) an adjustable peg
B) a currency board
C) a managed float
D) a free float
Q5) What is a currency board? Page 25
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Q1) The present international monetary system is a:
A) gold standard
B) flexible exchange rate system
C) managed exchange rate system
D) a target zone system
Q2) What is IMF conditionality?
Q3) Which of the following is false with regard to the present international monetary system?
A) Special Drawing Rights are the primary reserve asset
B) Monetary authorities intervene in foreign exchange markets to smooth out excessive short-run fluctuations in exchange rates
C) It was forced on the world by the collapse of the Bretton Woods System
D) It was formally recognized in the Jamaica Accords
Q4) The International Monetary Fund was initially established to manage
A) the Gold Standard
B) the Gold-Exchange Standard
C) the euro-dollar exchange rate
D)the Dollarization initiative
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Q5) Explain why the establishment of a freely-flexible exchange rate system is unlikely today.