International Political Economy
Final Test Solutions
Course Introduction
International Political Economy examines the complex interplay between politics and economics in the global arena. This course explores how states, markets, and institutions interact to shape international trade, monetary systems, development, and financial stability. Students will analyze major theories, such as liberalism, mercantilism, and structuralism, applying them to real-world issues such as globalization, economic crises, trade disputes, and the roles of international organizations like the IMF and World Trade Organization. The course aims to develop a nuanced understanding of how power, interests, and policy decisions impact economic relations and global prosperity.
Recommended Textbook
International Economics 9th Edition by Paul
R. Krugman Maurice Obstfeld
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Chapter 1: Introduction
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Sample Questions
Q1) In 1999, demonstrators representing a mix of traditional and new ideologies disrupted a major international trade meeting in Seattle of
A) the OECD.
B) NAFTA.
C) the WTO.
D) GATT.
E) the G8.
Answer: C
Q2) A fundamental problem in international economics is how to produce
A) a perfect degree of monetary harmony.
B) an acceptable degree of harmony among the international trade policies of different countries.
C) a world government that can harmonize trade and monetary policies
D) a counter-cyclical monetary policy so that all countries will not be adversely affected by a financial crisis in one country.
E) a worldwide form of currency.
Answer: B
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Chapter 2: World Trade: An Overview
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Sample Questions
Q1) Since World War II, the likelihood that any single item in the typical consumption basket of a consumer in the U.S. originated outside of the U.S.
A) remained constant.
B) increased.
C) decreased.
D) fluctuated widely with no clear trend.
E) increased slightly before dropping off.
Answer: B
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) The evidence cited in the chapter using the examples of the East Asia New Industrializing Countries suggests that as international productivities converge, so do international wage levels. Why do you suppose this happened for the East Asian NICs? In light of your answer, what do you think is likely to happen to the relative wages (relative to those in the United States) of China in the coming decade? Explain your reasoning.
Answer: Following the logic of the Ricardian model of comparative advantage, the East Asian countries played to their respective comparative advantages. This allowed the world demand to provide excess demands for their relatively abundant labor, which in turn tended to raise these wages. If China follows the same pattern, their wages levels should also be expected over time to converge to those in their industrialized country markets.
Q2) Given the information in the table above, Home's opportunity cost of cloth is:
A) 0.5
B) 2.0
C) 6.0 D) 1.5
E) 3.0
Answer: A
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Chapter 4: Specific Factors and Income Distribution
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Sample Questions
Q1) U.S. imports of sugar are limited by an import quota that, in 2006, imposed an average cost of ________ per consumer, which is an average of ________ per American job saved in the sugar industry.
A) $7; $860,000
B) $105; $56,000
C) $2; $1.3 million
D) $2; $22,000
E) $370; $980
Q2) In the four-quadrant diagram of the specific factors model, the graph in the upper right 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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6
Chapter 5: Resources and Trade: The Heckscher-Ohlin Model
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Sample Questions
Q1) In the Heckscher-Ohlin model, when two countries begin to trade with each other
A) the relative prices of traded goods in the two countries converge.
B) relative factor prices in the two countries diverge.
C) benefits from trade are evenly distributed between the two countries.
D) all factors in both countries will gain from trade.
E) all factors in one country will gain, but there may be no gains in the other country.
Q2) Refer to above figure. In autarky, Country P was producing at point 5. With trade, would its production point be found above or below point 5? Explain why. What must happen in the K/L intensity ratio in the production of each of the products in this country when moving from autarky to free trade?
Q3) The assumption of diminishing returns in the Heckscher-Ohlin model means that, unlike in the Ricardian model, it is likely that
A) countries will not be fully specialized in one product.
B) countries will benefit from free international trade.
C) countries will consume outside their production possibility frontier.
D) comparative advantage will not determine the direction of trade.
E) global production will decrease under trade.
Q4) "A good cannot be both land- and labor-intensive." Discuss.
Page 7
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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 tangent to the production possibility frontier.
B) the isovalue line intersects the production possibility frontier.
C) the isovalue line is above the production possibility frontier.
D) the isovalue line is below the production possibility frontier.
E) the isovalue line is tangent with the indifference curve.
Q2) A country will be able to consume a combination of goods that is not attainable solely from domestic production if
A) the world terms of trade differ from its domestic relative costs.
B) the country specializes in one product.
C) the country avoids international trade.
D) the world terms of trade equal the domestic relative costs.
E) the country's domestic production value equals world relative value.
Q3) If points A and B are two locations on a country's production possibility frontier, then
A) the country could produce either of the two bundles.
B) consumers are indifferent between the two bundles.
C) producers are indifferent between the two bundles.
D) at any point in time, the country could produce both.
E) both bundles must have the same relative cost.
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Chapter 7: External Economies of Scale and the
International Location of Production
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Sample Questions
Q1) If some industries exhibit internal increasing returns to scale in each country, we should not expect to see
A) perfect competition in these industries.
B) intra-industry trade between countries.
C) inter-industry trade between countries.
D) high levels of specialization in both countries.
E) increased productivity in both countries.
Q2) What is meant by an "industrial district" and what are the three main sources of the economic advantages derived from locating in such a district?
Q3) The Internet has made transactions between businesses (B2B trading) fast and easy. Any business in any location can access specialized knowledge, labor, and materials. It is likely that these virtual economic communities will result in
A) external economies of scale.
B) internal economies of scale.
C) consolidation of industries into a small number of powerful firms.
D) suppression of innovations and collusive behavior, driving up prices.
E) government intervention and regulation.
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Sample Questions
Q1) A firm in long-run equilibrium under monopolistic competition will earn
A) zero economic profits because of free entry.
B) positive monopoly profits because each sells a differentiated product.
C) positive oligopoly profits because each firm sells a differentiated product.
D) negative economic profits because it has economies of scale.
E) positive economic profit if it engages in international trade.
Q2) Intra-industry trade is most common in the trade patterns of
A) the industrial countries of Western Europe.
B) the developing countries of Asia and Africa.
C) raw material producers.
D) China with the rest of the world.
E) labor-intensive products.
Q3) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is average total cost equal to when Q = 10?
Q4) An imperfectly competitive firm has the following demand curve: Q = 100 - 2P. What is marginal revenue equal to when P = 30?
Q5) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is total cost equal to when Q = 10?
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Chapter 9: The Instruments of Trade Policy
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Sample Questions
Q1) An export tariff will ________ producer surplus, ________ consumer surplus, ________ government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on
Q2) 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.
Q3) In an inflationary environment, then over time
A) A specific tariff will tend to raise more revenue than an ad valorum tariff.
B) An ad valorum tariff will tend to raise more revenue than a specific tariff
C) An optimum tariff will tend to raise more revenue than an escalating tariff
D) A tariff quota will tend to raise more revenue than a specific tariff.
E) an import quota would raise more revenue than a specific tariff.
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Chapter 10: The Political Economy of Trade Policy
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Sample Questions
Q1) Refer to above figure. What happens to the Consumer Surplus of Hungarian customers as a result of this subsidy?
Q2) The strongest political pressure for a trade policy that results in higher protectionism comes from
A) domestic workers lobbying for import restrictions.
B) domestic workers lobbying for export restrictions.
C) domestic workers lobbying for free trade.
D) domestic consumers lobbying for export restrictions.
E) domestic consumers lobbying for import restrictions.
Q3) The existence of marginal social benefits which are not marginal benefits for the industry producing the import substitutes
A) is an argument supporting free trade and non-governmental involvement.
B) is an argument supporting the use of an optimum tariff.
C) is an argument supporting the use of market failures as a trade-policy strategy.
D) is an argument rejecting free trade and supporting governmental involvement.
E) is an argument rejecting the domestic market failure concept.
Q4) Refer to above figure. What is the revenue gain or loss for Europe as a whole (including taxpayers)?
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Chapter 11: Trade Policy in Developing Countries
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Sample Questions
Q1) A reason why it is difficult for developing countries to maintain a cartel is that
A) the elasticity of demand for a cartel's output decreases over time.
B) producers in the cartel have an economic incentive to cheat.
C) economic profits discourage other producers from entering the industry.
D) producers in the cartel have the motivation to lower prices but not to raise prices.
E) tariffs allow producers in the cartel to produce items that make no profit.
Q2) Refer to above figure. If OmL1 workers are employed in manufacturing then what is the marginal productivity of labor in agriculture?
Q3) The infant industry argument calls for active government involvement
A) only if the government forecasts are accurate.
B) only if some market failure can be identified.
C) only if the industry is not one already dominated by industrial countries.
D) only if the industry has a high value added.
E) only if the industry is independently able to earn high returns.
Q4) Refer to above figure. If manufacturing labor were to increase to OmL2, how much value would the economy as a whole gain?
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Chapter 12: Controversies in Trade Policy
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Sample Questions
Q1) When one applies the Heckscher-Ohlin model of trade to the issue of trade-related income redistributions, one must conclude that North South trade, such as U.S.-Mexico trade,
A) must help low skill workers on both sides of the border.
B) is likely to hurt high-skilled workers in the U.S.
C) is likely to involve higher overall national economic gains that will be greater than any harm done to low-skilled workers in the U.S.
D) is likely to hurt low-skilled workers in Mexico.
E) gives no advantage to the workers in either country.
Q2) Low wages and poor working conditions in many U.S. trade partners
A) prove that the gains-from-trade arguments of the Ricardian model are false.
B) may be a fact of life, but economists don't care.
C) are facts emphasized by U.S. labor in its contract negotiations.
D) prove that the gains-from-trade arguments of the Ricardian model are true.
E) prove that international trade is exploitative.
Q3) Refer to the above table. Suppose both governments offer their respective company a subsidy of $4(million).
Q4) Describe the environmental Kuznets curve.
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) Ricardian equivalence argues that when the government cuts taxes and raises its deficit,
A) consumers anticipate that they will face lower taxes later to pay for the resulting government debt.
B) consumers anticipate that they will higher services from the government.
C) consumers anticipate that they will face higher taxes later to pay for the resulting government debt.
D) consumers anticipate it will affect their future taxes, in general in the direction of lowering future taxes.
E) consumers anticipate that the low tax rates will continue.
Q2) Government transfer payments like social security and unemployment benefits are A) included in government purchases.
B) not included in government purchases.
C) not included in government purchases, but they are included in the consumption component of GNP.
D) not included in government purchases, but they are part of the investment component of GNP.
E) included in government purchases but not in the GNP.
Q3) What is the national income identity for an open economy?
Page 15
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Chapter 14: Exchange Rates and the Foreign Exchange
Market: An Asset Approach
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Sample Questions
Q1) What is the expected dollar rate of return on euro deposits with today's exchange rate at $1.10 per euro, next year's expected exchange rate at $1.166 per euro, the dollar interest rate at 10%, and the euro interest rate at 5%?
A) 10%
B) 11%
C) -1%
D) 0%
E) 15%
Q2) Show graphically a drop in the interest rate paid by euro deposits. What is the effect on the dollar?
Q3) The largest trading of foreign exchange occurs in
A) New York.
B) London.
C) Tokyo.
D) Frankfurt.
E) Singapore.
Q4) Explain what is a "vehicle currency." Why is the U.S. dollar considered a vehicle currency?
Q5) Discuss the effects of a rise in the dollar interest rate on the exchange rate.
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Chapter 15: Money, Interest Rates, and Exchange Rates
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Sample Questions
Q1) After a permanent increase in the money supply,
A) the exchange rate overshoots in the short run.
B) the exchange rate overshoots in the long run.
C) the exchange rate smoothly depreciates in the short run.
D) the exchange rate smoothly appreciates in the short run.
E) the exchange rate remains the same.
Q2) An increase in
A) nominal output raises the interest rate while a fall in real output lowers the interest rate, given the price level and the money supply.
B) real output decreases the interest rate while a fall in real output increases the interest rate, given the price level.
C) real output raises the interest rate while a fall in real output lowers the interest rate, given the money supply.
D) nominal output raises the interest rate while a fall in real output lowers the interest rate, given the price level.
E) real output raises the interest rate while a fall in real output lowers the interest rate, given the price level and the money supply.
Q3) What will be the effects of an increase in real output on the interest rate?
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Chapter 16: Price Levels and the Exchange Rate in the Long Run
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Q1) Under the monetary approach to the exchange rate theory, money supply growth at a constant rate
A) eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level or the long-run relative prices of goods and services.
B) eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do affect the full-employment output level and the long-run relative prices of goods and services.
C) eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services.
D) eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services.
E) eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services.
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Chapter 17: Output and the Exchange Rate in the Short Run
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Q1) An increase in the real exchange rate
A) makes imports more expensive.
B) makes imports less expensive.
C) does not affect import values.
D) always makes the number of imports rise.
E) makes domestic consumers spend more on only foreign imports.
Q2) Find the real exchange rate for the following case: Assume that the representative basket of European goods and services costs 40 euros and the representative U.S. basket costs $50, and the dollar/euro exchange rate is $0.90 per euro, then the price of the European basket in terms of U.S. basket is ________.
Q3) The aggregate demand for home input can be written as a function of: I. Real exchange rate.
II) Government spending.
III) Disposable income.
A) I only
B) III only
C) I and III
D) II and III
E) I, II, and III
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Chapter 18: Fixed Exchange Rates and Foreign Exchange Intervention
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Q1) Please describe in detail a self-fulfilling currency crisis.
Q2) The expectation of future devaluation causes a balance of payments crisis marked by
A) a sharp rise in reserves and a fall in the home interest rate below the world interest rate.
B) a sharp fall in reserves and an even bigger fall in the home interest rate below the world interest rate.
C) a sharp fall in reserves and a rise in the home interest rate above the world interest rate.
D) a sharp rise in reserves and an even greater rise in the home interest rate above the world interest.
E) a sharp rise in reserves and a rise in the home interest rate to the level of the world interest.
Q3) Under the gold standard, if the dollar price of gold is pegged at $35 per ounce and the euro price of gold is pegged at 12 euro per ounce, what is the dollar/euro exchange rate?
Q4) Under the gold standard, if the dollar price of gold is pegged at $35 per ounce and the dollar/euro exchange rate is set at $2.40 per euro, what must the euro price of gold be pegged at?
Page 20
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Chapter 19: International Monetary Systems: An Historical Overview
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Q1) Under the gold standard era of 1870-1914,
A) central banks tried to have sharp fluctuations in the balance of payments.
B) central banks tried to avoid sharp fluctuations in the current account of the balance of payments.
C) central banks tried to avoid sharp fluctuations in the trade account of the balance of payments.
D) central banks tried to avoid sharp fluctuations in the capital account of the balance of payments.
E) central banks tried to avoid sharp fluctuations in the balance of payments.
Q2) Using the II-XX framework, show using a figure that fiscal policies by themselves cannot bring the economy to both internal and external balances.
Q3) Which of the following is one component of the "trilemma" that is faced by policy makers in choosing monetary arrangements?
A) freedom of international capital movements
B) exchange rate instability
C) tariffs and subsidies
D) restrictions on the migration of labor
E) global inflation
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Chapter 20: Optimum Currency Areas and the European Experience
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Q1) An inflation-prone country
A) gains from vesting its monetary policy decisions with a "conservative" central bank.
B) loses from vesting its monetary policy decisions with a "conservative" central bank.
C) gains from vesting its fiscal policy decisions with a "conservative" central bank.
D) loses from vesting its fiscal policy decisions with a "conservative" central bank. E) remains constant when vesting its fiscal policy decisions with a "conservative central bank.
Q2) "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.
Q3) Draw the graph of the GG and LL schedules and explain the logic behind the slopes of each of the schedules.
Q4) How were the initial members of EMU chosen? How will new members be admitted? What is the structure of the complex of financial and political institutions that govern economic policy in the euro zone?
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Chapter 21: Financial Globalization: Opportunity and Crisis
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Q1) The purpose of the Basel Committee was to:
A) achieve a better coordination of the surveillance exercised by national authorities over the international banking system.
B) achieve a better coordination of domestic banking systems.
C) achieve a better coordination between brokers and investment bankers.
D) achieve a better coordination between bond holder and bon issuers.
E) manipulate bank rates for more leverage profits.
Q2) Asset trades that deal with equity instruments are best described as
A) share of stock.
B) exchange rate.
C) bonds.
D) bank deposits.
E) factors.
Q3) The first run on a British bank since 1866 occurred in August 2007 at which bank?
A) Liberty Mutual
B) Liberty Rock
C) Northern Rock
D) Bank of England
E) First Savings and Loan
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Chapter 22: Developing Countries: Growth, Crisis, and Reform
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Q1) East Asia's crisis was relatively long lived because
A) East Asia's financial institutions had encouraged borrowing all together.
B) East Asia's financial institutions had encouraged heavy borrowing in local currency.
C) East Asia's financial institutions had extended low-interest loans.
D) East Asia's financial institutions had extended high-interest loans.
E) East Asia's financial institutions had encouraged heavy borrowing in dollars.
Q2) List and explain 3 major channels through which developing countries have financed their external deficits.
Q3) One should expect ________ relationship between annual per-capita GDP and an inverse index of corruption
A) a weak and negative
B) a weak and positive
C) a strong and negative
D) a strong and positive
E) an unpredictable
Q4) Describe alternative forms of capital inflow to finance external deficits and explain why these methods were used in different times?
Q5) Evaluate the Argentinean Convertibility Law of April, 1991.
Page 24
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