Course Introduction
International Economics
Chapter Exam Questions
International Economics explores the principles and theories underlying economic interactions between countries, including trade, investment, and finance. The course examines why nations trade, how trade policies affect economies, and the impact of globalization on growth and development. Topics include comparative advantage, balance of payments, exchange rates, international monetary systems, and the effects of tariffs and quotas. Students will analyze real-world issues such as trade agreements, economic integration, and the roles of multinational organizations, gaining critical insights into the complexities and interconnections of the global economy.
Recommended Textbook
Macroeconomics 7th Edition by Olivier Blanchard
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Page 2
Chapter 1: A Tour of the World
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Q1) In addition to capital accumulation and technological progress,what are some of the other possible explanations for recent output growth in China?
Answer: There are several additional potential causes of economic growth in China.These are: (1)the transition from central planning to a market economy; (2)the encouragement of joint ventures with foreign firms; and (3)protection of property rights.
Q2) Inflation represents
A)an increase in output.
B)an increase in the aggregate price level.
C)an increase in the unemployment rate.
D)a recession.
Answer: B
Q3) Most economists believe that the source of European high unemployment in the past two decades is
A)labor market institutions.
B)tight monetary policy.
C)tight fiscal policy.
D)financial crisis.
Answer: A
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Chapter 2: A Tour of the Book
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Q1) Which of the following does not represent real GDP?
A)GDP in current dollars
B)GDP in terms of goods
C)GDP in base year dollars
D)GDP in constant dollars
Answer: A
Q2) First,define nominal GDP and real GDP.Second,is it possible for nominal GDP in a year to be less than real GDP in the same year? Explain.
Answer: Nominal GDP represents the value of goods and services produced using current prices.Real GDP measures the value of the same goods and services using some base year prices.It is possible for nominal GDP to be less than real GDP in a given year.Given the definitions of the two variables,this will occur if prices in that year are simply less than prices in the base year.If,for example,the base year is 2002,it will generally be the case that nominal GDP will be less than real GDP for those years prior to 2002 given that prices have generally risen in all years.
Q3) Explain Okun's Law.
Answer: It shows the relationship between GDP growth and unemployment rate.If output growth is high,unemployment will decrease.
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Chapter 3: The Goods Market
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Q1) A tax cut will cause
A)a reduction in investment.
B)an increase in investment.
C)no change in investment.
D)no change in autonomous spending.
Answer: C
Q2) Suppose the consumption equation is represented by the following: C = 250 + .8YD.The multiplier for the above economy equals A)2)
B)3)
C)4)
D)5)
E) none of the above
Answer: D
Q3) Which of the following equals demand in a closed economy?
A)C + I + G + X
B)C + I + G + X - IM
C)C + I + G + IM - X
D)none of the above
Answer: D
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Chapter 4: Financial Markets
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Q1) Which of the following is a component of high powered money?
A)bonds held by banks, loans, and bank reserves
B)currency in circulation plus bank reserves
C)currency in circulation plus checkable deposits
D)bonds held by banks plus checkable deposits
E) the sum of currency in circulation, bank reserves, and checkable deposits
Q2) An open market sale of securities will tend to cause
A)a reduction in the supply of central bank money.
B)a reduction in the demand for currency.
C)a reduction in the demand for reserves.
D)none of the above
Q3) The federal funds rate is determined in which of the following markets?
A)the market for U.S. treasury securities
B)the money market
C)the bond market
D)the market for central bank money
E) none of the above
Q4) What is the difference between saving and savings?
Q5) Graphically illustrate and explain what effect a sale of bonds by the Federal Reserve will have on the money market.
Page 6
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Chapter 5: Goods and Financial Marketsthe Is-Lm Model
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Q1) A Fed purchase of securities will most likely have which of the following effects?
A)a rightward shift in the IS curve
B)a leftward shift in the IS curve
C)an upward shift in the LM curve
D)a downward shift in the LM curve
Q2) Explain in detail what effect a Fed purchase of bonds will have on: (1)the LM curve; and (2)the IS curve.
Q3) For this question,assume that investment spending depends only on output and no longer depends on the interest rate.Given this information,an increase in the money supply
A)will cause investment to decrease.
B)will cause investment to increase.
C)will cause a reduction in the interest rate.
D)will have no effect on output or the interest rate.
E) will cause an increase in output and have no effect on the interest rate.
Q4) First,briefly explain what is meant by the policy mix.Second,explain what effect different policy mixes might have on the level of output,investment,and the interest rate.
Q5) What is the IS relation? Explain why IS curve is downward sloping.
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Chapter 6: Financial Markets Ii: the Extended Is-Lm Model
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Q1) If the nominal interest rate 8% and expected inflation 3%,the expected real interest rate in year t is approximately A)2%.
B)3%.
C)5%.
D)8%.
E) 11%.
Q2) If the expected real interest rate 5% and expected inflation 3%,the nominal interest rate in year t is approximately A)2%.
B)3%.
C)5%.
D)8%.
E) 11%.
Q3) The borrowing rate is
A)the rate at which consumers and firms can borrow.
B)a nominal interest rate.
C)determined by monetary policy.
D)a risk premium.
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Page 8
Chapter 7: The Labor Market
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Q1) Based on the information above,the unemployment rate is A)4%.
B)6.6%.
C)9.1%.
D)10%.
E) 11.1%.
Q2) Based on wage setting behavior,we know that a reduction in the unemployment rate will cause
A)no change in the real wage.
B)a reduction in the real wage.
C)an increase in the real wage.
D)an upward shift of the WS curve.
Q3) First,explain what the PS relation represents.Second,explain why it has its particular shape.
Q4) Today,about ________ of U.S.workers have their wages set by collective bargaining agreements.
A)10%
B)15%
C)20%
D)25%
Page 9
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Chapter 8: The Phillips Curve, the Natural Rate of Unemployment, and Inflation
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Q1) For this question,assume that the Phillips curve equation is represented by the following equation: t - t = (m + z)- ut.A reduction in the unemployment rate will cause
A)a reduction in the markup over labor costs (i.e., a reduction in m).
B)an increase in the markup over labor costs.
C)an increase in the inflation rate over time.
D)a decrease in the inflation rate over time.
E) none of the above
Q2) As of 2009,what was the last year that U.S.experienced deflation?
A)1933
B)1955
C)1973
D)1991
E) 2001
Q3) Explain how changes in the proportion of contracts that are indexed affect how a given change in monetary policy will affect economic activity.
Q4) A number of factors are believed to have caused changes in the natural rate of unemployment in the United States during the 1990s.Briefly comment on each of these factors.
Page 10
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Q1) An increase in the price of oil will cause which of the following in the medium run?
A)no change in the level of output
B)no change in the price level
C)an increase in the unemployment rate
D)a reduction in the interest rate
E) none of the above
Q2) In the IS-LM-PC model,which of the following is assumed to be exogenous?
A)G
B)C
C)I
D)Y
Q3) From 1970 to the mid-1990s,the relative price of crude petroleum
A)steadily increased.
B)steadily decreased.
C)increased dramatically, then decreased dramatically.
D)decreased dramatically, then increased dramatically.
E) remained more or less the same.
Q4) Use the IS-LM-PC model to illustrate how the economy adjusts to an increase in taxes both in the short run and in the medium run.
11
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Chapter 10: The Facts of Growth
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Q1) For this question,assume that there are decreasing returns to capital,decreasing returns to labor,and constant returns to scale.A reduction in the capital stock will cause which of the following?
A)a reduction in output
B)no change in output
C)an increase in output per capita
D)increase the capital-labor ratio
E) none of the above
Q2) Decreasing returns to capital (N)implies that a 4% increase in N will cause
A)Y to increase by more than 4%.
B)Y to increase by exactly 4%.
C)Y to increase by less than 4%.
D)no change in Y / N.
Q3) Research by Richard Layard indicates that happiness
A)increases as output per capita increases.
B)decreases as output per capita increases.
C)does not change as output per capita changes.
D)appears to depend on people's relative incomes.
Q4) Graphically show and explain the effects of an improvement in the state of technology.
Page 12
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Chapter 11: Saving, capital Accumulation, and Output
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Q1) Which of the following will likely cause an increase in output per worker?
A)an increase in education expenditures
B)an increase in the saving rate
C)an increase in on-the-job training
D)all of the above
Q2) If endogenous growth models are correct,a lower rate of growth in the long run could occur as a result of which of the following?
A)a lower rate of saving
B)a lower rate of depreciation
C)a redefinition of depreciation
D)a redefinition of the steady state
E) none of the above
Q3) Suppose two countries are identical in every way with the following exception.Economy A has a higher saving rate than economy B.Given this information,we know with certainty that
A)steady state consumption in A is higher than in B.
B)steady state consumption in A is lower than in B.
C)steady state consumption in A and in B are equal.
D)steady state growth of output per worker is higher in A than in B.
E) none of the above
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Chapter 12: Technological Progress and Growth
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Q1) Which of the following will cause an increase in the steady-state growth rate of output per worker?
A)an increase in the saving rate
B)a reduction in the population growth rate
C)a reduction in the rate of depreciation
D)a reduction in the saving rate
E) none of the above
Q2) Assume that an economy experiences both positive population growth and technological progress.Once the economy has achieved balanced growth,we know that output (Y)is
A)constant.
B)growing at a rate of gA + gN.
C)growing at a rate of gN.
D)growing at a rate of gA.
E) growing at a rate of gA - gN.
Q3) Explain what factors determine how much investment is required to maintain a given level of capital per effective worker.
Q4) Explain what factors determine the slope of the required investment line.
Q5) What factors determine technological progress?
Q6) Explain the different dimensions of technological progress.
Page 14
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Chapter 13: Technological Progress: the Short, the Medium, and
the Long Run
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Q1) Explain some of the causes of increased wage inequality.
Q2) Suppose an economy is characterized by the equations below:
Price setting: P= (1 + m)(W / A)
Wage setting: W=AP(1 - u)
Solve for the natural rate of unemployment if the markup (m)is equal to 4%.
Q3) Assume an economy experiences an increase in productivity that occurs as a result of the more efficient use of existing technologies.Given this information,we would expect which of the following to occur?
A)aggregate demand would not change
B)aggregate demand would shift to the right
C)aggregate demand would shift to the left
D)both the aggregate demand and aggregate supply curves would shift to the left
Q4) For this question,assume that expectations of P and A are correct.Based on price setting behavior,the real wage will be equal to which of the following?
A)A / (1 + m)
B)AP / (1 + m)
C)APF(u,z)
D)P(1 + m)
E) none of the above
Page 15
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Chapter 14: Financial Markets and Expectations
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Q1) For this question,assume that one-year and two-year bonds have the same risk; therefore,you can ignore risk here.Assuming that there is arbitrage between one-year bonds and two-year bonds,we know that the expected rate of return on two-year bonds
A)will equal the expected rate of return from holding a one-year bond for one year.
B)will equal the expected rate of return from holding a one-year bond for two years.
C)will be larger than the expected rate of return from holding a one-year bond for one year.
D)will be smaller than the expected rate of return from holding a one-year bond for one year.
E) will be exactly half the rate of return on one-year bonds.
Q2) Explain what the term structure of interest rates represents.
Q3) Suppose the Fed implements a monetary expansion that is at least partially unexpected.Explain what effect this will have on stock prices.
Q4) Suppose individuals expect a cut in future taxes.Explain what effect this expected reduction in future taxes will have on the yield curve and on stock prices in the current period.
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Chapter 15: Expectations, consumption, and Investment
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Q1) Suppose current sales increase by $100 million.Investment theory suggests that current investment must
A)decrease exactly by $100 million.
B)increase by exactly $100 million.
C)increase by less than $100 million.
D)decrease, but by less than $100 million.
E) none of the above
Q2) Discuss the various components of wealth.
Q3) What is Tobin's q? How tight is the relation between Tobin's q and investment?
Q4) Which of the following would cause an increase in human wealth?
A)a permanent increase in salary
B)an increase in the value of one's house
C)an increase in the value of one's stock portfolio
D)all of the above
E) none of the above
Q5) Investment accounts for ________ of US GDP.
A)15%
B)20%
C)50%
D)70%
Page 17
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Chapter 16: Expectations, output, and Policy
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Q1) Assume individuals consider only the short run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose current taxes are cut and that individuals expect future taxes to decrease.Given this information,we know with certainty that
A)current output and the current interest rate will both increase.
B)current output will increase.
C)the current interest rate will increase.
D)the current output effects are ambiguous.
Q2) Since the end of 2008,the Federal Reserve has adopted an unconventional monetary tool called
A)quantitative easing.
B)open market operation.
C)change required reserve ratio.
D)discount loan.
Q3) Explain what effect a reduction in future expected output will have on the IS curve and LM curve in the current period.
Q4) Explain why the new IS curve that takes into account expectations is likely steeper than the original IS curve that ignored expectations.
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Chapter 17: Openness in Goods and Financial Markets
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Q1) Suppose the interest parity condition holds.Also assume that the one-year interest rate in the United States is 5% and that the one-year interest rate in Canada is 6%.What does this imply about the current versus future expected exchange rate (for the U.S.and Canadian dollars)? Explain.
Q2) In 2014,which of the following countries had the highest ratio of exports to GDP?
A)Germany
B)Netherlands
C)Japan
D)United States
E) Austria
Q3) Suppose that over the past decade,U.S.inflation is greater than that in Mexico.Further assume that during this same period,the dollar appreciates relative to the Mexican peso.Given this information,
A)the real exchange rate remains unchanged.
B)the real exchange rate must decrease.
C)the real exchange rate must increase.
D)the real exchange rate can increase or remain the same, but not decrease.
E) the real exchange rate can decrease or remain the same, but not increase.
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Chapter 18: The Goods Market in an Open Economy
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Q1) A change in which of the following variables will have no direct effect on the level of domestic demand?
A)domestic income
B)the real exchange rate
C)government spending
D)the interest rate (r)
E) none of the above
Q2) Which of the following will occur as a result of a tax cut?
A)private saving decreases
B)investment decreases
C)the trade balance improves
D)the trade balance worsens
E) the budget deficit decreases
Q3) Explain why in practice policy coordination is hard to achieve.
Q4) Which of the following is true when a county is experiencing a trade deficit (NX < 0)?
A)Demand for domestic goods is equal to the domestic demand for goods.
B)Demand for domestic goods is greater than the domestic demand for goods.
C)Demand for domestic goods is less than the domestic demand for goods.
D)A budget deficit exists.
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Chapter 19: Output, the Interest Rate, and the Exchange Rate
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Q1) Assume that the price levels in two countries are constant.In this situation,we know that
A)neither the real nor the nominal exchange rate can change.
B)the real exchange rate can change, while the nominal exchange rate is constant.
C)the nominal exchange rate can change, while the real exchange rate is constant.
D)the real and nominal exchange rate must move together, changing by the same percentage.
E) the nominal exchange rate will fluctuate more widely than the real exchange rate.
Q2) The exchange rate policy of the United States is A)the EMS.
B)a crawling peg.
C)a float.
D)a fixed rate within a band.
E) none of the above
Q3) In an economy operating under flexible exchange rates,explain why the IS curve is downward sloping.
Q4) Explain what the IP curve is and why it is upward sloping.
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Chapter 20: Exchange Rate Regimes
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Q1) In a fixed exchange rate regime,which of the following policies could be implemented to reduce a trade deficit and leave aggregate demand constant?
A)devalue the currency
B)increase government spending
C)decrease government spending
D)decrease government spending and devalue the currency
E) increase government spending and revalue the currency
Q2) Part of the reason for the Mexican peso crisis of 1994 was Mexico's decision to A)allow the peso to depreciate too rapidly.
B)allow the peso to appreciate too rapidly.
C)maintain relatively low nominal interest rates in the face of relatively high inflation. D)maintain a roughly fixed nominal exchange rate in the face of relatively high inflation.
E) run a very small budget deficit in the face of relatively high inflation.
Q3) According to Mundell,countries to constitute an optimal currency area need to satisfy one of the two conditions.Explain these conditions.
Q4) Does Europe constitute an optimal common currency area? Why?
Q5) Explain the cases for and against flexible and fixed exchange rate regimes.
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Chapter 21: Should Policy Makers Be Restrained
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Q1) The hostage taking example was developed by
A)John Nash.
B)Kydland and Prescott.
C)John Harsanyi.
D)Reinhard Selten.
Q2) Who is best known for arguing about the long and variable lags of monetary policy?
A)Friedman
B)Keynes
C)Phillips
D)Greenspan
E) Bernanke
Q3) During democratic presidential administration since 1948,economic growth was highest in ________ year of the administration?
A)first
B)second
C)third
D)fourth
Q4) Use "wars of attrition" to explain the debate about deficit reduction.
Q5) What are the new rules of the Euro Plus Pact adopted in 2011?
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Chapter 22: Fiscal Policy: a Summing up
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Q1) Very high debt burdens can result in
A)fine tuning.
B)automatic stabilizer.
C)the structural deficit.
D)tax smoothing.
E) debt repudiation.
Q2) In 2010,the debt-to-GDP ratio for the United States was approximately equal to A)90%.
B)17%.
C)37%.
D)67%.
Q3) Explain what is meant by automatic stabilizers and how they work to minimize fluctuations in economic activity.
Q4) The deficit at natural level of output is called
A)full-employment deficit.
B)mid-cycle deficit.
C)structural deficit.
D)cyclically adjusted deficit.
E) all of the above
Q5) Explain the economic costs of hyperinflation.
Page 24
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Chapter 23: Monetary Policy: a Summing up
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Q1) Since the 1980s,"NOW" accounts have been included in A)M1, but not M2.
B)M2, but not M1.
C)both M1 and M2.
D)the monetary base and M1, but not M2.
E) neither M1 nor M2.
Q2) In the medium run,an increase in the rate of growth of nominal money will cause A)lower nominal and lower real interest rates.
B)lower nominal interest rates and no change in the real interest rate.
C)an increase in inflation and an increase in output growth.
D)a proportionate increase in inflation.
Q3) There are how many members of the Board of Governors in the Federal Reserve system?
A)15
B)12
C)7
D)4
E) none of the above
Q4) First,write out the equation that represents the Taylor rule.Second,discuss how the Taylor rule is used to explain the implementation of monetary policy.
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Chapter 24: Epilogue: the Story of Macroeconomics
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Q1) The IS-LM model was developed by
A)Friedman and Phelps.
B)Hicks and Hansen.
C)Modigliani and Friedman.
D)Lucas and Sargent.
E) none of the above
Q2) The Great Depression had led economists to suggest a larger role for A)market mechanism.
B)government intervention.
C)price mechanism.
D)international trade.
Q3) The new classical interpretation of the economy suggests that A)output is always above the natural level.
B)output is always below the natural level.
C)output is always equal to the natural level.
D)recessions will not occur.
Q4) Discuss research on the role of banks and other financial institutions in the intermediation of funds between lenders and borrowers.
Q5) Explain the menu cost explanation of output fluctuations.
Q6) Discuss the major intellectual failure on macroeconomics from the crisis.
Page 26
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Chapter 25: Appendix
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Q1) Which of the following is included in National Income?
A)indirect taxes
B)consumption of fixed capital
C)proprietors' income
D)all of the above
Q2) When we estimate a regression to determine the relationship between changes in consumption and changes in current income,we find that
A)there are no residuals.
B)the R² is zero.
C)the MPC is larger than one.
D)all of the above
E) none of the above
Q3) If GDP is less than GNP,we know with certainty that
A)a budget deficit exists.
B)a trade surplus exists.
C)a trade deficit exists.
D)none of the above
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