International Economics Solved Exam Questions - 1535 Verified Questions

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International Economics

Solved Exam Questions

Course Introduction

International Economics explores the fundamental principles and advanced concepts governing economic interactions between nations. The course examines topics such as trade theories, international finance, exchange rate systems, balance of payments, trade policy, globalization, and the impact of international institutions. Students will gain an understanding of how economic forces and government policies influence global trade and investment flow, affect domestic markets, and shape economic relationships across countries. Special attention is given to current issues such as trade disputes, regional integration, foreign direct investment, and the challenges faced by developing economies in the international context.

Recommended Textbook

International Economics Theory and Policy 11th Edition by Paul R Krugman

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Page 2

Chapter 1: Introduction

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Sample Questions

Q1) International economics ________ use the same fundamental methods of analysis as other branches of economics, because ________.

A) does not, the level of complexity of international issues is unique

B) does not, the interactions associated with international economic relations is highly mathematical

C) does not, international economics takes a different perspective on economic issues

D) does not, international economic policy requires cooperation with other countries

E) does, the motives and behavior of individuals are the same in international trade as they are in domestic transactions

Answer: E

Q2) The United States is less dependent on trade than most other countries because

A) the United States is a relatively large country with diverse resources.

B) the United States is a "Superpower."

C) the military power of the United States makes it less dependent on anything.

D) the United States invests in many other countries.

E) many countries invest in the United States.

Answer: A

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Chapter 2: World Trade: an Overview

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Sample Questions

Q1) We see that the Netherlands, Belgium, and Ireland trade considerably more with the United States than with many other countries.

A) This is explained by the gravity model, since these are all large countries.

B) This is explained by the gravity model, since these are all small countries.

C) This fails to be consistent with the gravity model, since these are small countries.

D) This fails to be consistent with the gravity model, since these are large countries.

E) This is explained by the gravity model, since they do not share borders.

Answer: C

Q2) The two neighbors of the United States do a lot more trade with the United States than European economies of equal size.

A) This contradicts predictions from gravity models.

B) This is consistent with predictions from gravity models.

C) This is irrelevant to any inferences that may be drawn from gravity models.

D) This is because these neighboring countries have exceptionally large GDPs.

E) This relates to Belgium's trade record with the U.S.

Answer: B

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4

Chapter 3: Labor Productivity and Comparative Advantage: the Ricardian Model

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Sample Questions

Q1) Which of the following statements is TRUE?

A) Free trade is beneficial only if your country is strong enough to stand up to foreign competition.

B) Free trade is beneficial only if your competitor does not pay unreasonably low wages.

C) Free trade is beneficial only if both countries have access to the same technology.

D) Free trade is never beneficial for developing countries.

E) Free trade can be beneficial to the economic welfare of all countries involved.

Answer: E

Q2) Which of the following is most likely to be an untraded good in a Ricardian two-country, multi-good model?

A) steel

B) textiles

C) haircuts

D) petroleum

E) telemarketer services

Answer: C

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Chapter 4: Specific Factors and Income Distribution

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Sample Questions

Q1) The degree of a factor's specificity is inversely related to

A) the amount of time required to redeploy the factor to a different industry.

B) factor quality, with lower quality factors having a lower level of specificity.

C) the cost of the factor as a proportion of the long-run total cost of production.

D) the mobility of the factor, with more mobile factors having less specificity.

E) technology differences between two countries, with a less advanced technology resulting in less factor specificity.

Q2) In the four-quadrant diagram of the specific factors model, the graph in the upper left quadrant is a country's

A) production possibility frontier.

B) labor allocation constraint.

C) production function for food.

D) production function for cloth.

E) labor supply curve.

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Chapter 5: Resources and Trade: the Heckscher-Ohlin Model

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Sample Questions

Q1) Use the diagram above to identify the pre-trade situation for Australia and Sri Lanka. Where on the K/L axis will you find each of the two countries? Which of the two countries has a higher relative wage, w/r? Which product is the labor intensive, and which is the land intensive one? Show where the relative price of cloth to food will be found once trade opens between these two countries. Show where the relative wages of each will appear.

Q2) International trade has strong effects on income distributions. Therefore, international trade

A) will be beneficial to all those engaged in international trade.

B) will tend to hurt one trading country.

C) will tend to hurt everyone in both countries.

D) will tend to hurt some groups in each trading country.

E) is beneficial to everyone in both trading countries.

Q3) "A good cannot be both land- and labor-intensive." Discuss.

Q4) Countries do not in fact export the goods the H.O. theory predicts. Discuss.

Q5) Why do you suppose that South-South trade does NOT conform in volume, but does conform in pattern with expectations generated by the Heckscher-Ohlin model?

Q6) International trade leads to complete equalization of factor prices. Discuss.

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Chapter 6: The Standard Trade Model

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Sample Questions

Q1) A country cannot produce a mix of products with a higher value than where

A) the isovalue line is above the production possibility frontier.

B) the isovalue line is below the production possibility frontier.

C) the isovalue line is tangent with the indifference curve.

D) the isovalue line is tangent to the production possibility frontier.

E) the isovalue line intersects the production possibility frontier.

Q2) The price of ________ consumption in terms of ________ consumption is

A) future; current; r

B) present; future; r

C) future; current; 1 + r

D) future; current; 1/(1 + r)

E) present; future; 1/(1 + r)

Q3) It may be argued that theoretically, international capital movements

A) tend to hurt the recipient countries.

B) tend to hurt labor in donor countries.

C) increase future production in donor countries.

D) tend to hurt the donor countries.

E) tend to hurt labor in recipient countries.

Q4) Describe the nature of trade between two countries based on intertemporal comparative advantage.

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Chapter 7: External Economies of Scale and the

International Location of Production

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Sample Questions

Q1) In the presence of external economies of scale, trade

A) will unambiguously improve welfare in both countries.

B) will unambiguously worsen welfare in the exporting country and improve welfare in the importing country.

C) may or may not improve welfare in both countries.

D) will unambiguously improve welfare in the exporting country and worsen welfare in the importing country.

E) will unambiguously worsen welfare in both countries.

Q2) A learning curve relates ________ to ________ and is a case of ________ returns.

A) unit cost; cumulative production; dynamic increasing

B) output per time period; long-run marginal cost; dynamic decreasing

C) output per time period; long-run marginal cost; dynamic increasing

D) unit cost; cumulative production; dynamic decreasing

E) labor productivity; education; increasing marginal

Q3) If a scale economy is the dominant technological factor defining or establishing comparative advantage, then the underlying facts explaining why a particular country dominates world markets in some product may be pure chance, or historical accident. Explain, and compare this with the answer you would give for the Heckscher-Ohlin model of comparative advantage.

Page 9

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Sample Questions

Q1) Refer to above figure. The monopolist can export as much as it likes of its steel at the world price of $5/ton. How much steel will the monopolist sell, and at what price?

Q2) If the market for products produced by firms in a monopolistically competitive industry becomes ________, then there will be ________ firms and each firm will produce ________ output and charge a ________ price.

A) smaller; fewer; less; higher

B) smaller; fewer; less; lower

C) smaller; more; less; lower

D) smaller; more; less; higher

E) smaller; fewer; more; higher

Q3) A firm in long-run equilibrium under monopolistic competition will earn

A) positive oligopoly profits because each firm sells a differentiated product.

B) zero economic profits because of free entry.

C) negative economic profits because it has economies of scale.

D) positive economic profit if it engages in international trade.

E) positive monopoly profits because each sells a differentiated product.

Q4) What are the consequences of outsourcing production on the welfare of countries?

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Chapter 9: The Instruments of Trade Policy

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Sample Questions

Q1) The imposition of tariffs on imports results in deadweight (triangle) losses. These are

A) production and consumption distortion effects.

B) redistribution effects.

C) revenue effects

D) efficiency effects.

E) distortion of incentives.

Q2) The effective rate of protection is a weighted average of nominal tariffs and tariffs on imported inputs. It has been noted that in most industrialized countries, the nominal tariffs on raw materials or intermediate components or products are lower than on final-stage products meant for final markets. Why would countries design their tariff structures in this manner?

Who tends to be helped, and who is harmed by this cascading tariff structure?

Q3) Refer to above figure. What is the amount of government revenue resulting from imposition of the tariff?

Q4) Refer to above figure. With free trade and no tariffs, what is the quantity of Widgets produced domestically?

Q5) Refer to above figure. What is the amount of efficiency loss resulting from imposition of the tariff?

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Chapter 10: The Political Economy of Trade Policy

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Sample Questions

Q1) Export embargoes cause greater losses to consumer surplus in the target country

A) the lesser its initial dependence on foreign produced goods.

B) the more elastic is the target country's demand schedule.

C) the more elastic is the target country's domestic supply.

D) the more inelastic is the target country's supply.

E) the larger the target country's labor force is.

Q2) The U.S. producer Boeing, and the European Airbus are contemplating the next generation mid-sized fuel efficient generation of air carrier. If both produce their respective models, then each would lose $50 million (because the world market is just not large enough to enable either to capture potential scale economies if they had to share the world market). If neither produce, then each one's net gain would of course be zero. If either one produces while the other does not, then the producer will gain $500 million.

(a)What is the correct strategy for either company?

(b)What is the correct strategy for a government seeking to maximize national economic welfare?

(c)If a national government decides to subsidize its aircraft producer, how high should be the subsidy?

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Chapter 11: Trade Policy in Developing Countries

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Sample Questions

Q1) Refer to above figure. Why would workers not shift from agriculture to manufacturing in the initial situation where wages are higher in the latter?

Q2) The infant industry argument is that

A) comparative advantage is irrelevant to economic growth.

B) developing countries have a comparative advantage in agricultural goods.

C) developing countries have a comparative advantage in manufacturing.

D) developing countries have a potential comparative advantage in manufacturing.

E) developing countries have no chance to compete with industrialized countries.

Q3) The consensus today is that import-substitution protectionist industrial policy has not served the developing countries' growth ambitions well. This fact proves that policies relying on export-driven growth are the "winning ticket" for these countries.

Q4) China's recent experience supports the proposition that A) "economic miracles" are solely to be expected in small countries.

B) central planning and socialism can promote sustained economic growth. C) a lessening of income disparities is a prerequisite for economic growth.

D) growth in a large country cannot be affected by its foreign sector.

E) policy changes can dramatically prompt export oriented growth.

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Chapter 12: Controversies in Trade Policy

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Sample Questions

Q1) The Shipbreakers of Alang utilize much labor and little capital, thereby supporting the applicability of the

A) factor proportions explanation of the sources of comparative advantage.

B) specific factor theory of comparative advantage.

C) monopolistic competition theory of comparative advantage.

D) scale economies theory of comparative advantage.

E) basis of the non-dumping legislation.

Q2) In the second half of the 1990s a rapidly growing movement focused on the harm caused by international trade to

A) land owners in poor countries.

B) capital owners in rich industrialized countries.

C) land owners in rich industrialized countries.

D) production workers in both rich and poor countries.

E) terms of trade in developing countries.

Q3) Refer to the above table. Suppose Airbus is set to produce the aircraft before Boeing. Which company will enter the market?

Q4) Refer to the above table. Suppose the U.S. government (but not Europe) offers a $10 million subsidy?

Q5) What is a pollution haven?

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Chapter 13: National Income Accounting and the Balance of Payments

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Sample Questions

Q1) The official settlements balance or balance of payments is the sum of

A) the current account balance, and the capital account balance, less the non-reserve portion of the financial account balance.

B) the current account balance and the capital account balance.

C) the current account balance, the capital account balance, the non-reserve portion of the financial account balance, the statistical discrepancy.

D) the current account balance and the non-reserve portion of the financial account balance.

E) the current account balance and the interest in all investments.

Q2) In an open economy, the CA is equal to

A) Y - (C + I + G).

B) Y + (C + I + G).

C) Y - (C - I + G).

D) Y - (C + I - G).

E) Y + (C - I - G).

Q3) What are the main aspects of economic life that macroeconomics analysis is most concerned with?

Q4) "The balance of payments is seldom in balance in practice." Discuss.

Q5) What is the national income identity for an open economy?

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Chapter 14: Exchange Rates and the Foreign Exchange

Market: an Asset Approach

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Sample Questions

Q1) Forward and spot exchange rates

A) are necessarily equal.

B) do not move closely together.

C) are always such that the forward exchange rate is higher.

D) move closely together and are equal on the value date.

E) are unrelated to the value date.

Q2) In 2013, about

A) 20 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.

B) 10 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.

C) 30 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.

D) 40 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.

E) 87 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.

Q3) What is the interest parity condition?

Q4) Who are the major participants in the foreign exchange market?

Page 16

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Chapter 15: Money, Interest Rates, and Exchange Rates

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Sample Questions

Q1) What term means an explosive and seemingly uncontrollable inflation in which money loses value rapidly and may even go out of use?

A) superinflation

B) stagflation

C) hyperinflation

D) maginflation

E) deflation

Q2) Using a figure describing both the U.S. money market and the foreign exchange market, analyze the effects of an increase in the U.S. money supply on the dollar/euro exchange rate.

Q3) Explain the effects of a permanent increase in the U.S. money supply in the short run and in the long run. Assume that the U.S. real national income is constant.

Q4) In Zimbabwe, the government stopped the country's hyperinflation by

A) reducing domestic monetary growth drastically.

B) returning to a gold/silver currency standard.

C) switching to foreign currencies that are relatively stable.

D) passing a law making price increases illegal.

E) implementing a new currency based on diamonds.

Q5) What are the main functions of money?

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Chapter 16: Price Levels and the Exchange Rate in the Long Run

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Sample Questions

Q1) Interest rate differences between countries depend on

A) differences in expected inflation, but not on expected changes in the real exchange rate.

B) differences in expected changes in the real exchange rate, but not on expected inflation.

C) neither differences in expected inflation, nor on expected changes in the real exchange rate.

D) differences in expected inflation and nothing else.

E) differences in expected inflation, and on expected changes in the real exchange rate.

Q2) What can explain the failure of relative PPP to hold in reality?

Q3) Which of the following statements is the MOST accurate?

A) Relative PPP is not a reasonable approximation to the data.

B) Relative PPP is sometimes a reasonable approximation to the data but often performs poorly.

C) Relative PPP is sometimes a reasonable approximation to the data.

D) PPP is sometimes a reasonable approximation to the data.

E) PPP is sometimes a reasonable approximation to the data but usually performs poorly.

Q4) What is the real exchange rate between the dollar and the euro equal to?

Page 18

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Chapter 17: Output and the Exchange Rate in the Short Run

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Q1) If the economy starts in long-run equilibrium, a permanent fiscal expansion will cause

A) an increase in exchange rate, E.

B) a decrease in exchange rate, E.

C) an increase in output, Y.

D) a decrease in output, Y.

E) shifting of the AA curve up and to the right.

Q2) One implication of an empirical investigation of the Marshall-Lerner condition is that, in the ________, a real ________ in a nation's currency is likely to ________ the country's current account balance.

A) long run; depreciation; improve

B) short run; depreciation; improve

C) long run; appreciation; improve

D) short run; appreciation; improve

E) short run but not the long run; appreciation; improve

Q3) What is the real exchange rate?

What is its relationship to the current account?

Q4) Please discuss the volume effect and the value effect in regards to how the current account will move given a change in the real exchange rate.

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Chapter 18: Fixed Exchange Rates and Foreign Exchange Intervention

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Q1) A balance of payments crises under fixed exchange rates occurs when A) marginal returns on foreign exchange investments approach zero.

B) a country runs out of foreign reserves.

C) a country is in a liquidity trap.

D) forward currency markets undergo high volatility.

E) exports and imports expand beyond some point.

Q2) From the Civil War up to 1914, the United States adhered to a A) gold standard.

B) silver standard.

C) bimetallic standard.

D) bronze standard.

E) copper standard.

Q3) Briefly describe two systems for fixing the exchange rates of all currencies against each other and the time periods in which they were used.

Q4) Please define and give an example of sterilized foreign exchange intervention.

Q5) Briefly discuss the main advantage of the bimetallic standard over the gold standard.

Page 20

Q6) Please describe in detail a self-fulfilling currency crisis.

Q7) Please discuss the difference between the terms devaluation and depreciation.

Q8) List the drawbacks of the gold standard.

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Chapter 19: International Monetary Systems: an Historical Overview

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Q1) A person holding dollar deposits during the devaluation of the dollar would

A) enjoy a monetary gain.

B) see the foreign currency value of dollar assets increase by the amount of the exchange rate change.

C) shift their wealth into domestic investments.

D) suffer a monetary loss and see the foreign currency value of dollar assets decrease by the amount of the exchange rate change.

E) see no change in their investments.

Q2) How did the international monetary system influence macroeconomic policy-making and performance during the post-World War II years during which exchange rates were fixed under the Bretton Woods agreement (1946-1973)?

Q3) The effects of a decrease in export demand

A) is a powerful argument in favor of fixed rates.

B) is a powerful argument in favor of flexible rates.

C) shows the difficulties in determining which exchange rate is better.

D) is a powerful argument in favor of fixed rates only in the short run.

E) is a powerful argument in favor of fixed rates only in the long run.

Q4) Why do governments prefer to avoid excessive current account surpluses?

Or, why are growing domestic claims to foreign wealth ever a problem?

Page 22

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Chapter 20: Financial Globalization: Opportunity and Crisis

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Q1) Banks in the U.S.

A) are prevented from holding assets that are "too risky."

B) are not prevented from holding assets that are "too risky."

C) are encouraged not to hold assets that are "too risky."

D) are not encouraged not to hold assets that are "too risky."

E) are encouraged to lend to a single private customer.

Q2) People who are risk averse

A) value a collection of assets only on the basis of its expected returns.

B) value a collection of assets only on the basis of the risk of that return.

C) value a collection of assets not only on the basis of its expected returns but also on the basis of the risk of that return.

D) are less likely to invest in life insurance.

E) are less likely to have a diverse portfolio.

Q3) Which of the following statements is TRUE?

A) Bank failure is limited to banks that have mismanaged their assets.

B) Bank failure is limited to banks that have invested in real estate.

C) Bank failure is limited to banks that have invested in government bonds.

D) Bank failure is limited to a few banks.

E) Bank failure is NOT limited to banks that have mismanaged their assets.

Q4) Discuss studies based on the interest parity conditions.

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Chapter 21: Optimum Currency Areas and the Euro

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Q1) The European Economic and Monetary Union

A) set up a single currency and sole bank for European economic monetary policy.

B) eliminated all barriers to trade such as tax differentials between borders.

C) produced a single government for handling European affairs.

D) created the Common Agricultural Pact.

E) eliminated all local currencies in Western Europe.

Q2) Explain why when Norway unilaterally fixes its exchange rate against the euro but leaves the krone free to float against the non-euro currencies, it is unable to keep at least some monetary independence.

Q3) Explain why even owners of capital that cannot be moved can avoid more of the economic stability loss due to fixed exchange rates when Norway's economy is open to capital flows.

Q4) "The costs and benefits for a country from joining a fixed-exchange rate area such as the EMS depend on how well-integrated its economy is with those of its potential partners." Discuss.

Q5) Describe the single supervisory mechanism or SSM proposed by EU leaders in June of 2012.

Q6) How did the European single currency evolve?

Q7) What event in 2009 ignited the euro crisis?

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Chapter 22: Developing Countries: Growth, Crisis, and Reform

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Q1) Discuss the role of more "transparency" in reducing the risk of financial crisis.

Q2) A considerable advantage that richer countries have over poorer ones is exemplified by the fact that

A) richer countries do not have to denominate their foreign debts in their own currencies. B) richer countries have the ability to denominate their foreign debts in foreign currencies.

C) when demand falls for a poorer country's goods, this leads to a significant wealth transfer from foreigners to the poorer country, a kind of international insurance payment. D) richer countries have the ability to denominate their foreign debts in their own currencies.

E) richer countries can extract trade advantages by using military power.

Q3) The main reason for the crisis in Argentina in 2001 and 2002, has to do with exchange rate policy, i.e., the continued peg of the exchange rate to the dollar. Discuss.

Q4) Explain the theory behind convergence and why it is a "deceptively simple" theory.

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