Open Economy Macroeconomics
Exam Preparation Guide
Course Introduction
Open Economy Macroeconomics explores the functioning of economies that interact with the rest of the world through trade, investment, and financial flows. The course covers key concepts such as the balance of payments, exchange rates, international capital markets, and the impact of government policies in an interconnected global environment. Students will analyze how external factors influence domestic output, inflation, and employment, and examine the effectiveness and limitations of monetary and fiscal policy in open economies. The course equips students with analytical tools to assess real-world issues such as currency crises, trade imbalances, and the transmission of economic shocks across borders.
Recommended Textbook
International Economics 14th Edition by Robert Carbaugh
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17 Chapters
1874 Verified Questions
1874 Flashcards
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Chapter 1: The International Economy and Globalization
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48 Verified Questions
48 Flashcards
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Sample Questions
Q1) Increased globalization is fostered by:
A) Increased tariffs and quotas
B) Restrictions on the migration of labor
C) Reduced transportation costs
D) Restrictions on investment flows
Answer: C
Q2) International trade tends to cause welfare losses to at least some groups in a country:
A) The less mobile the country's resources
B) The more mobile the country's resources
C) The lower the country's initial living standard
D) The higher the country's initial living standard
Answer: A
Q3) International trade is based on the idea that:
A) Exports should exceed imports
B) Imports should exceed exports
C) Resources are more mobile internationally than are goods
D) Resources are less mobile internationally than are goods
Answer: D
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Page 3
Chapter 2: Foundations of Modern Trade Theory: Comparative Advantage
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170 Verified Questions
170 Flashcards
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Sample Questions
Q1) Because the Ricardian theory of comparative advantage was based only on a nation's demand conditions, it could not fully explain the distribution of the gains from trade among trading partners.
A)True
B)False
Answer: False
Q2) If two nations of approximately the same size and with similar taste patterns participate in international trade, the gains from trade tend to be shared about equally between them.
A)True
B)False
Answer: True
Q3) Assuming increasing cost conditions, trade between two countries would not be likely if they have:
A) Identical demand conditions but different supply conditions
B) Identical supply conditions but different demand conditions
C) Different supply conditions and different demand conditions
D) Identical demand conditions and identical supply conditions
Answer: D
Page 4
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Chapter 3: Sources of Comparative Advantage
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) Assume that Country A, in the absence of trade, finds itself relatively abundant in labor and relatively scarce in land. The factor endowment theory reasons that with free trade, the internal distribution of national income in Country A will change in favor of:
A) Labor
B) Land
C) Both labor and land
D) Neither labor nor land
Answer: A
Q2) The Heckscher-Ohlin theory emphasizes the role that demand plays in the creation of comparative advantage.
A)True
B)False
Answer: False
Q3) Fears about the downward pressure that cheap foreign workers place on U.S. wages have led U.S. labor unions to lobby for import restrictions such as tariffs and quotas.
A)True
B)False
Answer: True
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Chapter 4: Tariffs
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124 Flashcards
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Sample
Questions
Q1) Consider Figure 4.1. In the absence of trade, Mexico's producer surplus and consumer surplus respectively equal:
A) $120, $240
B) $180, $180
C) $180, $320
D) $240, $240
Q2) Unlike a specific tariff, an ad valorem tariff differentiates between commodities with different values.
A)True
B)False
Q3) Is it possible for a low nominal tariff rate to understate the effective rate of protection? What is tariff escalation?
Q4) Relatively low wages in Mexico make it impossible for U.S. manufacturers of labor-intensive goods to compete against Mexican manufacturers.
A)True
B)False
Q5) A tariff quota is a combination of a specific tariff and an ad valorem tariff.
A)True
B)False
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Chapter 5: Nontariff Trade Barriers
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133 Verified Questions
133 Flashcards
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Sample Questions
Q1) During the 1980s, U.S. steel-using companies (Caterpillar) actively supported the U.S. government's negotiation of voluntary export agreements with foreign steel-exporting countries.
A)True
B)False
Q2) The imposition of a domestic content requirement by the United States would cause consumer surplus for Americans to:
A) Rise
B) Fall
C) Remain unchanged
D) None of the above
Q3) Consider Figure 5.5. Suppose that the governments of Mexico and Japan negotiate a voluntary export agreement in which Japanese TV exports to Mexico are limited to 8 units. Under the quota, the price of TVs in Mexico equals $250 while Mexicans produce 10 TVs and purchase 18 TVs.
A)True
B)False
Q4) Is a tariff-rate quota a two-tier tariff? Why?
Q5) What is an OMA?
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Chapter 6: Trade Regulations and Industrial Policies
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129 Verified Questions
129 Flashcards
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Sample Questions
Q1) Referring to Figure 6.1, the total cost of the Airbus subsidy to the European taxpayer equals:
A) $16 million
B) $20 million
C) $24 million
D) $28 million
Q2) The most recent round of multilateral trade negotiations is the:
A) Kennedy Round
B) Tokyo Round
C) Doha Round
D) Geneva Round
Q3) An antidumping duty levied on imports of foreign-produced steel leads to an increase in consumer surplus in the home country.
A)True
B)False
Q4) During the past four decades:
A) Nontariff barriers (NTBs) and tariffs have increased in importance
B) NTBs and tariffs have decreased in importance
C) NTBs have increased and tariffs have decreased in importance
D) NTBs have decreased and tariffs have increased in importance
Page 8
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Chapter 7: Trade Policies for the Developing Nations
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) By the 1990s, China had departed from a capitalistic economy and shifted to a Soviet-type economy encompassing small-scale, labor-intensive industry.
A)True
B)False
Q2) Consider Figure 7.3. Under competitive conditions, the price of a barrel of oil equals:
A) $7
B) $11
C) $12
D) $16
Q3) Not only do changes in demand induce relatively wide fluctuations in price when supply is inelastic, but changes in supply induce relatively wide fluctuations in price when demand is inelastic.
A)True
B)False
Q4) Most developing-nation exports go to industrial nations while most developing-nation imports originate in industrial nations.
A)True
B)False
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Chapter 8: Regional Trading Arrangements
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130 Flashcards
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Sample Questions
Q1) When the formation of a free trade area results in the reduction of trade with nonmember nations in favor of member countries, ____ occurs.
A) Trade devaluation
B) Trade revaluation
C) Trade creation
D) Trade diversion
Q2) According to Figure 8.1, the formation of a Greece/Germany customs union would result in:
A) $20 of trade diversion
B) $40 of trade diversion
C) $20 of trade creation
D) $40 of trade creation
Q3) Which nation is \(\underline { \text { not } }\) a member of the North American Free Trade Association?
A) Canada
B) Greenland
C) Mexico
D) United States
Q4) What factors influence the extent of trade creation and trade diversion?
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Chapter 9: International Factor Movements and Multinational Enterprises
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Sample Questions
Q1) Labor migration tends to increase output and decrease wages in the country of immigration while decreasing output and increasing wages in the country of emigration.
A)True
B)False
Q2) A joint venture along two large competing companies tends to yield a market-power effect, which results in a reduction in consumer surplus, that is not offset by a corresponding gain to producers.
A)True
B)False
Q3) Opposition to Mexico's maquiladoras has come from U.S. labor unions which claim that maquiladoras have resulted in job losses for U.S. workers.
A)True
B)False
Q4) Vertical integration occurs if a parent multinational corporation establishes foreign subsidiaries to produce intermediate goods or inputs that go into the production of a finished good.
A)True
B)False
Page 11
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Chapter 10: The Balance of Payments
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99 Flashcards
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Sample Questions
Q1) All of the following are debit items in the balance of payments, except:
A) Capital outflows
B) Merchandise exports
C) Private gifts to foreigners
D) Foreign aid granted to other nations
Q2) The U.S. has a balance of \(\underline { \text { trade deficit } }\) when its:
A) Merchandise exports exceed its merchandise imports
B) Merchandise imports exceed its merchandise exports
C) Goods and services exports exceed its goods and services imports
D) Goods and services imports exceed its goods and services exports
Q3) \(\underline { \text { Unlike } }\) the balance of payments, the balance of international indebtedness indicates the international:
A) Investment position of a country at a given moment in time
B) Investment position of a country over a one-year period
C) Trade position of a country at a given moment in time
D) Trade position of a country over a one-year period
Q4) Refer to Table 10.3. The services balance registered a surplus of $100 billion.
A)True
B)False
Q5) What does a current account deficit mean?
Page 12
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Chapter 11: Foreign Exchange
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121 Verified Questions
121 Flashcards
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Sample Questions
Q1) Which financial instrument provides a buyer the right to purchase or sell a fixed amount of currency at a prearranged price, within a few days to a couple of years?
A) Letter of credit
B) Foreign currency option
C) Cable transfer
D) Bill of exchange
Q2) Assume that Boeing anticipates receiving 20 million yen in 3 months from exports of jumbo jets to a Japanese airline. The firm could hedge against the risk of a depreciation of the dollar against the yen by contracting to sell its expected yen proceeds for dollars in the forward market at today's forward rate.
A)True
B)False
Q3) The supply schedule of yen has a positive-sloping region which corresponds to the inelastic region on the Japanese demand schedule for foreign currency.
A)True
B)False
Q4) What foreign exchange transactions do banks typically engage in?
Q5) Where are foreign currency options traded?
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Chapter 12: Exchange-Rate Determination
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133 Flashcards
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Sample Questions
Q1) If real interest rates decline in the United States relative to real interest rates abroad, the dollar's exchange value will appreciate under a floating exchange-rate system.
A)True
B)False
Q2) Consider Figure 12.3. The market is initially governed by demand curve D<sub>0</sub> and supply curve S<sub>0</sub>. Suppose the domestic price level rises rapidly in the United States but stays relatively constant in the United Kingdom, which supply and demand curves depict the new situation?
A) S<sub>1</sub> and D<sub>2</sub>
B) S<sub>2</sub> and D<sub>1</sub>
C) S<sub>0</sub> and D<sub>2</sub>
D) S<sub>0 </sub>and D<sub>1</sub>
Q3) Concerning exchange-rate determination, market fundamentals include inflation rates, productivity levels, and speculative opinion about future exchange rates.
A)True
B)False
Q4) In a free market, what determines exchange rates in the long run and the short run?
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Chapter 13: Mechanisms of International Adjustment
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107 Flashcards
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Sample Questions
Q1) Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA<sub>0</sub> to CA<sub>1</sub> if:
A) U.S. residents receive subsidies to invest in foreign nations
B) U.S. interest rates rise relative to foreign interest rates
C) Taxes are reduced on income earned by U.S. residents from their foreign investments
D) Expected profits decline on U.S. investments in foreign manufacturing
Q2) Refer to Figure 13.1. Downward movements along U.S. capital and financial account schedule CA<sub>0</sub> would be caused by:
A) U.S. interest rates rising relative to foreign interest rates
B) U.S. interest rates falling relative to foreign interest rates
C) Taxes placed on income earned by U.S. residents from their foreign investments
D) Taxes placed on income earned by foreign residents from their U.S. investments
Q3) The foreign-trade multiplier equals the sum of the marginal propensity to import and the marginal propensity to save.
A)True
B)False
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15
Chapter 14: Exchange-Rate Adjustments and the Balance of Payments
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100 Flashcards
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Sample Questions
Q1) Which of the following is true for the J-curve effect? It:
A) Applies to the interest rate effects of currency depreciation
B) Applies to the income effects of currency depreciation
C) Suggests that demand tends to be most elastic over the long run
D) Suggests that demand tends to be least elastic over the long run
Q2) Assume the Canadian demand elasticity for imports equals 1.2, while the foreign demand elasticity for Canadian exports equals 1.8. Responding to a trade deficit, suppose the Canadian dollar depreciates by 10 percent. For Canada, the depreciation would lead to a(n):
A) Worsening trade balance--a larger deficit
B) Improving trade balance--a smaller deficit
C) Unchanged trade balance
D) None of the above
Q3) The J-curve effect implies that following a currency appreciation, a country's trade balance:
A) Worsens before it improves
B) Continually worsens
C) Improves before it worsens
D) Continually improves
Q4) What is a pass-through relationship?
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Chapter 15: Exchange-Rate Systems and Currency Crises
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107 Verified Questions
107 Flashcards
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Sample Questions
Q1) Small nations (e.g., Tanzania) with more than one major trading partner tend to peg the value of their currencies to:
A) Gold
B) Silver
C) A single currency
D) A basket of currencies
Q2) To offset an appreciation of the dollar against the yen, the Federal Reserve would:
A) Sell dollars on the foreign exchange market and lower domestic interest rates
B) Sell dollars on the foreign exchange market and raise domestic interest rates
C) Buy dollars on the foreign exchange market and lower domestic interest rates
D) Buy dollars on the foreign exchange market and raise domestic interest rates
Q3) Today, special drawing rights (SDRs) represent the most important currency basket against which developing countries maintain pegged exchange rates.
A)True
B)False
Q4) Which nations use multiple exchange rates the most and why?
Q5) What is the difference between the crawling peg and adjustable pegged exchange rates?
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Chapter 16: Macroeconomic Policy in an Open Economy
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72 Flashcards
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Sample Questions
Q1) Most industrial countries generally considered ____ as the most important economic goal.
A) External balance
B) Internal balance
C) Maximum efficiency for business
D) Maximum efficiency for labor
Q2) A nation realizes overall balance when it achieves full employment and current account equilibrium.
A)True
B)False
Q3) Given an open economy with high capital mobility, all of the following statements are true except:
A) fiscal policy is strengthened under fixed exchange rates
B) monetary policy is weakened under fixed exchange rates
C) monetary policy is strengthened under floating exchange rates
D) fiscal policy is strengthened under floating exchange rates
Q4) The Group of five (G-5) nations include Japan, Germany, China, and Australia.
A)True
B)False
Q5) What policy instrument should be used when demand-pull inflation exists?
Page 18
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Chapter 17: International Banking: Reserves, Debt, and Risk
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Sample Questions
Q1) Which organization is largely intended to make long-term reconstruction loans to developing nations?
A) Export-Import Bank
B) World Bank
C) International Monetary Fund
D) United Nations
Q2) Swap arrangements
A) Are agreements between governments
B) Require repayment within a stipulated period
C) Are usually multilateral agreements
D) Are never initiated by telephone
Q3) Which of the following is\(\underline { \text { not } }\) considered an "owned" reserve?
A) National currencies
B) Gold
C) Special drawing rights
D) Oil facility
Q4) Describe the eurocurrency market.
Q5) How can a bank reduce its exposure to the debt of developing nations?
Q6) Are international reserve needs different for different exchange rate regimes?
Page 19
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