Open Economy Macroeconomics
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Course Introduction
Open Economy Macroeconomics explores the functioning of national economies in a global context, focusing on the interactions between domestic and international markets. The course examines topics such as exchange rates, balance of payments, international capital flows, and the effects of monetary and fiscal policy in an open economy setting. Students will analyze how global events and policy decisions impact inflation, interest rates, and economic growth, utilizing both theoretical frameworks and empirical evidence. Emphasis is placed on understanding current debates in international macroeconomics and on developing tools to critically assess issues such as globalization, financial crises, and trade imbalances.
Recommended Textbook
International Economics 12th Edition by Dominick Salvatore
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Chapter 1: Introduction
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Sample Questions
Q1) The gravity model of international trade predicts that trade between two nations is larger
A) the larger the two nations
B) the closer the nations
C) the more open are the two nations
D) all of the above
Answer: D
Q2) The opening or expansion of international trade usually affects all members of society:
A) positively
B) negatively
C) most positively but some negatively
D) most negatively but some positively
Answer: C
Q3) Identify some of the topics that international economics studies
Answer: The basis and gains from trade,the reasons and effects of protectionism,the flow of international payments,exchange rate systems and determination,macroeconomic policy in an open economy.
Q4) Identify some of the criticisms of the anti-globalization movement.
Answer: Increased world income inequality,child labor,environmental pollution.
Page 3
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Chapter 2: The Law of Comparative Advantage
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Q1) The first empirical test of the comparative advantage trade model was conducted by
A) MacDougall
B) Marshall
C) Jevons
D) Friedman
Answer: A
Q2) In trade between a small and a large nation:
A) the large nation is likely to receive all of the gains from trade
B) the small nation is likely to receive all of the gains from trade
C) the gains from trade are likely to be equally shared
D) we cannot say
Answer: B
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) The marginal rate of substitution (MRS)of X for Y in consumption refers to the:
A) amount of X that a nation must give up for one extra unit of Y and still remain on the same indifference curve
B) amount of Y that a nation must give up for one extra unit of X and still remain on the same indifference curve
C) amount of X that a nation must give up for one extra unit of Y to reach a higher indifference curve
D) amount of Y that a nation must give up for one extra unit of X to reach a higher indifference curve
Answer: B
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Chapter 4: Demand and Supply, offer Curves, and the
Terms of Trade
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Q1) All other things equal,if a nation's terms of trade improve,the nation
A) will have to export a greater quantity of goods.
B) will have to export a smaller quantity of goods.
C) could increase or decrease its exports.
D) will have to accept a lower standard of living.
Q2) 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
Q3) If a nation does not affect world prices by its trading,its offer curve:
A) is a straight line
B) bulges toward the axis measuring the import commodity
C) intersects the straight-line segment of the world's offer curve
D) intersects the positively-sloped portion of the world's offer curve
Q4) Carefully define and explain the meaning of "equilibrium terms of trade"
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Page 6
Chapter 5: Factor Endowments and the Heckscherohlin
Theory
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Q1) The H-O model assumes a world in which factors of production cannot move but goods can.In terms of output prices and factor prices,explain what (if anything)would be different about a world in which there was complete factor mobility but no trade versus a world in which there was absolutely free trade but no factor mobility.
Q2) List three possible explanations for the Leontief paradox
Q3) According to the H-O model,trade reduces international differences in:
A) relative but not absolute factor prices
B) absolute but not relative factor prices
C) both relative and absolute factor prices
D) neither relative nor absolute factor prices
Q4) If the assumptions of the H-O hold,a country that is relatively capital abundant will have a production possibilities frontier that is
A) relatively flat, with a constant slope.
B) relatively steep, with a constant slope.
C) relatively flat, with an increasing slope (in absolute value).
D) relatively steep, with an increasing slope (in absolute value).
Q5) Define and explain factor intensity reversal
Q6) List at least four of the assumptions of the Heckscher-Ohlin theory
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Chapter 6: Economies of Scale, imperfect Competition, and International Trade
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Q1) When a nation has increasing returns to scale,the shape of its production possibility frontier is
A) linear
B) concave to the origin
C) convex to the origin
D) discontinuous
Q2) Offshoring refers to
A) the purchase of parts and components from overseas to reduce production costs.
B) a firm producing parts in its own plants abroad.
C) importing final consumer goods instead of purchasing them domestically.
D) technology transfer from one country to another.
Q3) How is intra-industry trade measured? Does the degree of intra-industry trade depend on how an industry is defined?
Q4) Two developed nations are most likely to engage in
A) inter-industry trade based on economies of scale
B) intra-industry trade based on economies of scale
C) inter-industry trade based on comparative advantage
D) intra-industry trade based on comparative advantage
Q5) Discuss the stages of the product cycle model.
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Chapter 7: Economic Growth and International Trade
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Q1) Technical progress is usually classified into all of the following except A) neutral B) negative
C) labor saving
D) capital saving
Q2) The capital to labor ratios of countries over the last three decades has generally A) risen B) fallen C) remained relatively unchanged D) risen in developed nations and fallen in developing nations
Q3) What does it mean for a nation's production to be pro-trade?
Q4) How does a change in tastes that shifts in a nation's offer curve toward the axis measuring its exportable commodity impact the nation?
Q5) Technical progress in the nation's export commodity:
A) may reduce the nation's welfare
B) will reduce the nation's welfare
C) will increase the nation's welfare
D) leaves the nation's welfare unchanged
Q6) What is meant by comparative static analysis?
Page 9
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Chapter 8: Trade Restrictions: Tariffs
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Q1) A tariff in a small country will benefit
A) domestic consumers.
B) foreign producers.
C) the government imposing the tariff.
D) the world as a whole.
Q2) 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
Q3) If a small nation increases the tariff on its import commodity,its:
A) consumption of the commodity increases
B) production of the commodity decreases
C) imports of the commodity increase
D) domestic price of the commodity increases
Q4) Explain the redistribution effects of a tariff.
Q5) Under what conditions can a tariff improve a nation's welfare?
Q6) Using the concept of effective protection,explain how and why tariffs tend to vary with the level of processing of goods (that is,raw materials,intermediate goods,and finished goods).
Page 10
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Chapter 9: Nontariff Trade Barriers and the New Protectionism
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Q1) Carefully explain the current status of the Doha Round of trade negotiations and the challenges presented.
Q2) 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.
Q3) What is a quota and how does it compare to the economic effects of a tariff?
Q4) 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
Q5) Which of the following was not negotiated under the Uruguay Round?
A) reduction of tariffs on industrial goods
B) replacement of quotas with tariffs
C) reduction of subsidies on industrial products and on agricultural exports
D) liberalization in trade in most services
Q6) Summarize the Smoot-Hawley Tariff Act and its effects. Page 11
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Chapter 10: Economic Integration: Customs Unions and Free Trade Areas
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Q1) A trade-diverting customs union:
A) increases the welfare of member and nonmember nations
B) reduces the welfare of member and nonmember nations
C) increases the welfare of member nations but reduces that of nonmembers
D) reduces the welfare of nonmembers and may increase or reduce that of members
Q2) A customs union is more like to lead to trade creation and increased welfare under the following condition
A) lower pre-union trade barriers
B) lower trade barriers with the rest of the world
C) complementary economies
D) a smaller number of members
Q3) The following country is not a member of the European Union
A) Switzerland
B) Sweden
C) Ireland
D) Greece
Q4) Why do economies that are competitive rather than complementary tend to increase the benefits from customs unions?
Page 13
Q5) What is the theory of the second best?
Q6) What is trade diversion?
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Page 14
Chapter 11: International Trade and Economic Development
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Q1) MacBean found that the export instability faced by developing nations was:
A) not very large and did not seriously interfere with development
B) very large and seriously interfered with development
C) very large but did not seriously interfere with development
D) not very large but seriously interfered with development
Q2) The terms of trade for most developing nations over the last thirty years have generally been
A) improving
B) about the same
C) worsening
D) depend largely on the export commodity
Q3) List the current problems facing developing countries?
Q4) 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
Q5) Explain why import substitution strategies have largely been less than successful.
Q6) What is the difference between import substitution and export orientation?
Page 15
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Chapter 12: International Resource Movements and Multinational Corporations
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Q1) The most prominent form of private international economic organization today is the
A) European Union
B) World Trade Organization
C) multinational corporation
D) individual investor
Q2) The largest multinationals produce
A) motor vehicles.
B) petroleum.
C) financial products.
D) electronics.
Q3) U.S.labor generally
A) opposes U.S. investments abroad
B) favors U.S. investments abroad
C) is indifferent to U.S. investments abroad
D) we cannot say without additional information
Q4) Discuss the changes in the magnitude of foreign investment into the U.S.and U.S.investment overseas over the last fifty years.
Q5) Explain how international capital transfers impact employment in the receiving and investing nation.
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Chapter 13: Balance of Payments
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Q1) When the resident of a foreign nation (1)sells a U.S.stock and (2)deposits the proceeds in a U.S.bank,the U.S.:
A) credits financial for (1) and debits financial for (2)
B) credits the current account and debits financial
C) debits financial and credits official reserves
D) debits financial for (1) and credits financial for (2)
Q2) For the following set of international transactions <u>with the United States</u>,indicate in what <u>specific category and account</u> in the United States balance of payments each transaction would be included and whether it is a credit or debit.
Kodak,a U.S.company,sells photographic film in Europe and receives 50,000 euros in exchange.
Q3) The financial account of the U.S.includes:
A) the change in U.S. assets abroad and foreign assets in the U.S.
B) the change in U.S. assets abroad and foreign assets in the U.S., other than official reserve assets
C) all financial assets
D) all but current account transactions
Q4) What is meant by autonomous transactions?
Q5) Carefully define the balance of payments.
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Chapter 14: Foreign Exchange Markets and Exchange Rates
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Q1) The spot sale of a currency combined with a forward repurchase of the same currency is a
A) stop gap transaction
B) forward discount transaction
C) premium transaction
D) currency swap
Q2) Which is not a function of the foreign exchange market?
A) to transfer funds from one nation to another
B) to finance trade
C) to diversify risks
D) to provide the facilities for hedging
Q3) An effective exchange rate is a:
A) spot rate
B) forward rate
C) flexible exchange rates
D) weighted average of the exchange rates between the domestic currency and the nation's most important trade partners
Q4) What is arbitrage and how does it impact the exchange rate across foreign exchange markets?
Q5) Discuss the reasons for the existence and growth of Eurocurrency markets
Page 18
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Chapter 15: Exchange Rate Determination
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Q1) Explain absolute and relative purchasing power parity (PPP).
Q2) Discuss (a)the exchange dynamics of the dollar resulting from an unanticipated reduction of the U.S.money supply and (b)indicate the final long-run equilibrium interest rate,price index,and exchange rate as compared with the original equilibrium position.
Q3) Which of the following statements is true with respect to the monetary approach to the balance of payments:
A) the interest differential in favor of the dollar equals the expected rate of appreciation of the euro
B) the interest differential in favor of the dollar equals the expected rate of depreciation of the dollar
C) the interest differential in favor of the pound equals the expected rate of depreciation of the pound
D) all of the above
Q4) An unexpected increase in the U.S.money supply leads to:
A) an immediate reduction in the U.S. interest rate
B) an immediate larger dollar depreciation
C) a gradual appreciation of the dollar over time
D) all of the above
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Chapter 16: The Price Adjustment Mechanism With Flexible and Fixed Exchange Rates
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Q1) The Marshall-Lerner condition indicates that
A) if the sum of the price elasticities of the demand for imports and the demand for exports exceeds 1 the foreign exchange market will be stable.
B) if the sum of the price elasticities of the demand for imports and the demand for exports exceeds 1 the foreign exchange market will be unstable.
C) if the net differential between the price elasticities of the demand for imports and the demand for exports exceeds 1 the foreign exchange market will be stable.
D) if the net differential between the price elasticities of the demand for imports and the demand for exports exceeds 1 the foreign exchange market will be unstable.
Q2) Explain why under a gold standard exchange rate system that the market exchange rate will never deviate far from the mint parity rate.
Q3) The mint parity refers to the:
A) gold export point
B) gold import point
C) equilibrium exchange rate
D) ratio of the price of a unit of gold in terms of the currency of two nations
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Chapter 17: The Income Adjustment Mechanism and Synthesis of
Automatic
Adjustments
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Q1) 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
Q2) The improvement in a nation's balance of trade and payments resulting from a depreciation of its currency is:
A) reinforced by the induced fall in imports
B) partly neutralized by the induced rise in imports
C) partly neutralized by the induced fall in imports
D) any of the above.
Q3) Of the G-7 industrialized economies,the following nation has the lowest income elasticity of imports
A) The U.S.
B) German
C) Canada
D) Japan
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Chapter 18: Open Economy Macroeconomics: Adjustment Policies
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Q1) In order to achieve internal and external balance simultaneously,a nation must use at least:
A) one policy
B) two policies
C) three policies
D) cannot say
Q2) Suppose a nation faces domestic unemployment and a surplus in its balance of payments.(a)Explain in detail the expenditure-changing policies required to cure the unemployment.(b)What would happen to the nation's external balance? Why?
Q3) Direct controls refer to:
A) tariffs, quotas, and other quantitative restrictions on the flow of international trade
B) restrictions on international capital flows
C) multiple exchange rates
D) all of the above
Q4) Can a nation reach both internal and external balance under fixed exchange rates using only monetary policy? Explain.
Q5) What is meant by a three market balance equilibrium?
Q6) What are direct controls?
Page 22
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Chapter 19: Prices and Output in an Open Economy:
Aggregate Demand and Aggregate Supply
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Q1) Which of the following statements is false?
A) expansionary fiscal or monetary policy can increase the nation's output temporarily above its natural level
B) expansionary fiscal or monetary policy can used to correct a recession but only at the expense of higher prices in the nation
C) a recession cannot be eliminated automatically even if domestic prices are flexible downward
D) when prices are not flexible downward inflation may be less costly that recession
Q2) How does an increase in government expenditure impact aggregate demand?
Q3) 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.
Q4) Why is monetary policy ineffective under a fixed exchange rate system?
Q5) 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.
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Coordination
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Q1) The policy of intervention in the foreign exchange market to smooth out short-run fluctuations in exchange rates is called:
A) crawling peg
B) adjustable peg
C) leaning against the wind
D) managed float
Q2) Which of the following is not a benefit of participation in the Eurozone?
A) elimination of the need to exchange currencies
B) more rapid financial integration
C) maintenance of independent monetary policy
D) greater economic discipline
Q3) Price discipline is:
A) greater under a fixed than under a flexible exchange rate system
B) greater under a flexible than under a fixed exchange rate system
C) about the same under a fixed as under a flexible exchange rate system
D) is unrelated to the type of exchange rate system
Q4) Why is a flexible exchange rate system likely to be more efficient that a fixed exchange rate system?
Q5) Carefully explain the costs and benefits of a flexible exchange rate regime. Page 24
Q6) What is a currency board?
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Chapter
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Q1) Which of the following did not represent an evolution of the Bretton Woods System?
A) General Arrangements to Borrow
B) managed floating
C) standby arrangements
D) Special Drawing Rights
Q2) 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
Q3) Which of the following statements about the gold standard is not true?
A) London was the undisputed center of international trade and finance
B) International trade and international capital flows were mostly unrestricted
C) International liquid capital flows were mostly stabilizing
D) Countries were able to return to pre-war parities after World War I.
Q4) What is IMF conditionality?
Q5) What are the most serious economic problems facing the world today?
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