Open Economy Macroeconomics
Exam Preparation Guide
Course Introduction
Open Economy Macroeconomics examines the behavior of macroeconomic variables in economies that interact with the rest of the world through trade, capital flows, and exchange rates. The course explores the determinants of output, inflation, interest rates, and exchange rates in open economies, and analyzes how policies such as monetary and fiscal interventions operate in the context of international markets. Topics include the balance of payments, exchange rate regimes, international financial markets, and the impact of structural and cyclical factors on macroeconomic stability. Emphasis is placed on both theoretical foundations and real-world policy challenges faced by governments and central banks in a globalized environment.
Recommended Textbook
International Economics 15th Edition by Robert Carbaugh
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17 Chapters
1863 Verified Questions
1863 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) Does exposure to competition with the world leader in a particular industry improve a firm's productivity?
Answer: The McKinsey institute found that higher productivity rested on the ability of mangers to invent new and ever more efficient ways of making products and on the ability of engineers to design products that are easy to make.The institute researchers observed that in the auto industry in Japan or the food industry in the United States,managers and engineers do not achieve innovations because they are smarter work harder or are better educated than their peers.They do so because they are subjected to intense global competition,where improving labor productivity is the key to success.
Q2) A firm's ____,relative to that of other firms,is generally regarded as the most important determinant of competitiveness.
A) Income level
B) Tastes and preferences
C) Governmental regulation
D) Productivity
Answer: D
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Chapter 2: Foundations of Modern Trade Theory:
Comparative Advantage
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Sample Questions
Q1) The basic idea of mercantilism was that wealth consisted of the goods and services produced by a nation.
A)True
B)False
Answer: False
Q2) John Stuart Mill's theory of reciprocal demand best applies when trading partners:
A) Are of equal size and importance in the market
B) Produce under increasing cost conditions
C) Partially specialize in the production of commodities
D) Have similar taste and preference levels
Answer: A
Q3) Ricardo's model of comparative advantage assumed all of the following except:
A) In each nation,labor is the only input
B) Costs do not vary with the level of production
C) Perfect competition prevails in all markets
D) Transportation costs rise as distance increases between countries
Answer: D
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Chapter 3: Sources of Comparative Advantage
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108 Flashcards
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Sample Questions
Q1) Should international transportation costs decrease,the effect on international trade would include:
A) An increase in the volume of trade
B) A smaller gain from trade
C) A decline in the income of home producers
D) A decrease in the level of specialization in production.
Answer: A
Q2) The simultaneous import and export of computers by Germany is an example of:
A) Intra-industry trade
B) Inter-industry trade
C) Perfect competition
D) Imperfect competition
Answer: A
Q3) Owners of resources specific to export industries tend to lose from international trade,while owners of factors specific to import-competing industries tend to gain.
A)True
B)False
Answer: False
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Chapter 4: Tariffs
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Sample Questions
Q1) Consider Table 4.1.Prior to the tariff,domestic value added equals:
A) $25
B) $50
C) $75
D) $100
Q2) Which of the following is true concerning a specific tariff?
A) It is exclusively used by the U.S.in its tariff schedules.
B) It refers to a flat percentage duty applied to a good's market value.
C) It is plagued by problems associated with assessing import product values.
D) It affords less protection to home producers during eras of rising prices.
Q3) Refer to Exhibit 4.2.As a result of the tariff,the price of imported motorcycles equals $13,000 and imports total 4 cycles.
A)True
B)False
Q4) Consider Figure 4.1.The tariff would be prohibitive (i.e.,eliminate imports)if it equaled:
A) $2
B) $3
C) $4
D) $5
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Chapter 5: Nontariff Trade Barriers
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Sample Questions
Q1) Consider Figure 5.2.In the absence of international dumping,ABC Inc.maximizes profits by selling ____ calculators at a price of $____; the firm realizes profits totaling $____.
A) 27,$5,$54
B) 27,$5,$36
C) 24,$4,$46
D) 24,$4,$28
Q2) Consider Figure 5.5.The government of Mexico collects 50 percent of the export quota's revenue effect,or $600,in the form of tax revenue.
A)True
B)False
Q3) Anti-dumping law has been called unfair for all of the following reasons EXCEPT:
A) they do not reflect currency fluctuations
B) they are based on average variable cost
C) they are based on average total cost
D) all of these are reasons to call these laws unfair
Q4) What are the intent and impact of domestic content requirements?
Q5) Is a tariff-rate quota a two-tier tariff? Why?
Q6) What is the price-based definition of dumping?
Q7) Describe some of the differences between tariffs and quotas?
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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) Under the trade adjustment assistance program,a domestic firm or worker can file for governmental assistance only if it demonstrates that it suffered economic hardship due to imports of foreign-subsidized goods.
A)True
B)False
Q2) Consider Figure 6.3.For the United States,the export quota results in a (an):
A) Improvement in its terms of trade with Iraq
B) Increase in its export revenue
C) Increase in domestic computer prices
D) Decrease in domestic consumer surplus
Q3) Suppose the United States imposes trade sanctions (export quotas)on grain sold to the Russians.Assuming other nations do not increase grain exports to the Russians,all of the following would occur except:
A) Grain prices would rise in Russia
B) Consumer surplus would decrease for the Russians
C) Grain prices would rise in the United States
D) Export revenues would decrease for U.S.producers
Q4) Explain how advocates of strategic trade policy differ from the classical free traders in their treatment of externalities?
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Chapter 7: Trade Policies for the Developing Nations
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Sample Questions
Q1) Under the Generalized System of Preferences program,the industrialized countries agree to maintain lower tariffs on imports of natural resources and higher tariffs on imports of manufactured goods.
A)True
B)False
Q2) If the demand for coffee is price inelastic,an increase in the supply of coffee leads to falling prices and rising sales revenues.
A)True
B)False
Q3) Consider Figure 7.2.Assume there exists a cartel of several producers that is maximizing total profit.If one producer cheats on the cartel agreement by decreasing its price and increasing its output,rational action of the other producers is to:
A) Increase their price in order to regain sacrificed profits
B) Decrease their price as well
C) Keep on selling at the agreed-upon price
D) Give the product away for free
Q4) What are some major trade problems faced by developing nations?
Q5) Are economic downturns helpful to cartels?
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Chapter 8: Regional Trading Arrangements
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130 Flashcards
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Sample Questions
Q1) At the Maastricht Summit of 1991,European Union negotiators called for the pursuit of a:
A) Free trade area
B) Customs union
C) Common market
D) Monetary union
Q2) Suppose that Mexico and Canada form a free-trade area and Canada begins importing steel from Mexico rather than from Germany.There occurs:
A) Trade diversion
B) Trade creation
C) Trade destruction
D) Trade exhaustion
Q3) Which economic integration scheme is solely intended to abolish trade restrictions among member countries,while setting up common tariffs against nonmembers?
A) Economic union
B) Common market
C) Free trade area
D) Customs union
Q4) What is meant by economic integration?
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Chapter 9: International Factor Movements and Multinational Enterprises
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Sample Questions
Q1) If a joint venture among competing firms is able to cut costs by extracting wage concessions from domestic workers,national welfare increases.
A)True
B)False
Q2) Which type of multinational diversification occurs when the parent firm establishes foreign subsidiaries to produce intermediate goods going into the production of finished goods?
A) Forward vertical integration
B) Backward vertical integration
C) Forward horizontal integration
D) Backward horizontal integration
Q3) Consider Figure 9.1.Compared to the market equilibrium position achieved by Sony Company and American Company as competitors,Venture Company as a monopoly leads to a deadweight loss of consumer surplus of:
A) $2
B) $4
C) $6
D) $8
Q4) What are the disadvantages of forming joint ventures?
Page 11
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Chapter 10: The Balance of Payments
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Sample Questions
Q1) If Toyota Inc.of Japan builds an automobile assembly plant in the United States,the Japanese capital account would register an outflow.
A)True
B)False
Q2) That German investors collect interest income on their holdings of U.S.Treasury bills constitutes a credit transaction on the U.S.balance of payments.
A)True
B)False
Q3) In the balance-of-payments statement,statistical discrepancy is treated as part of the merchandise trade account because merchandise transactions are generally the most frequent source of error.
A)True
B)False
Q4) On the U.S.balance-of-payments statement,a capital inflow would occur if a Swiss resident purchases the securities of the U.S.government.
A)True
B)False
Q5) What are the components of the current account of the balance of payments?
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Chapter 11: Foreign Exchange
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121 Verified Questions
121 Flashcards
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Sample Questions
Q1) Concerning the covering of exchange market risks--assuming that a depreciation of the domestic currency is anticipated,one can say that there is an incentive for:
A) Exporters to rush to cover their future needs
B) Importers to rush to cover their future needs
C) Both exporters and importers to rush to cover their future needs
D) Neither exporters nor importers to rush to cover their future needs
Q2) If the exchange rate is $0.01 per yen in New York and $0.015 per yen in Tokyo,an arbitrager could profit by buying yen in Tokyo and simultaneously sell them in New York.
A)True
B)False
Q3) Refer to Table 11.4.On Wednesday,the 180-day forward franc was selling at a:
A) 0.6 percent premium per annum against the dollar
B) 1.6 percent premium per annum against the dollar
C) 0.6 percent discount per annum against the dollar
D) 1.6 percent discount per annum against the dollar
Q4) If it takes 113.28 yen to buy $1,it takes $.009624 to buy 1 yen.
A)True
B)False
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Chapter 12: Exchange-Rate Determination
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133 Flashcards
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Sample Questions
Q1) Concerning exchange rate forecasting,____ relies on econometric models which are based on macroeconomic variables likely to affect currency values.
A) Fundamental analysis
B) Technical analysis
C) Judgmental analysis
D) Sunspot analysis
Q2) If consumer tastes in the United States change in favor of goods produced in France,the demand for francs will increase which causes an appreciation of the dollar against the franc under a floating exchange rate system.
A)True
B)False
Q3) Consider Figure 12.3.The market is initially governed by demand curve D<sub>0</sub> and supply curve S<sub>0</sub>.Suppose US consumers develop stronger preferences for UK made goods,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>
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Chapter 13: Mechanisms of International Adjustment
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107 Flashcards
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Sample Questions
Q1) If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3,the foreign-trade multiplier equal 2.0.
A)True
B)False
Q2) The classical gold standard
A) Existed from early 1800's to early 1900's
B) Did not allow for imports and exports of gold
C) Led to the outflow of gold from surplus nations
D) Led to the inflow of gold to deficit nations
Q3) Starting from a position where the nation's money demand equals the money supply and its balance of payments is in equilibrium,economic theory suggests that the nation's balance of payments would move into a surplus position if there occurred in the nation:
A) A decrease in the money supply
B) An increase in the money supply
C) A decrease in the money demand
D) None of the above
Q4) What is the foreign repercussion effect?
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Chapter 14: Exchange-Rate Adjustments and the Balance of Payments
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100 Flashcards
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Sample Questions
Q1) The effect of currency depreciation on the purchasing power of money balances and the resulting impact on domestic expenditures is emphasized by the:
A) Absorption approach
B) Monetary approach
C) Fiscal approach
D) Elasticity approach
Q2) Refer to Table 14.1.Assume that Toyota Inc.obtains all of its automobile inputs from Japanese suppliers.If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1,the dollar-equivalent cost of a Toyota automobile equals:
A) $10,000
B) $20,000
C) $30,000
D) $40,000
Q3) The absorption approach to currency depreciation focuses on the
A) Purchasing power of money
B) Relative price effects
C) Income effects
D) Price elasticity of demand
Q4) What is a pass-through relationship?
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Chapter 15: Exchange-Rate Systems and Currency Crises
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Sample Questions
Q1) Under the gold standard,the official exchange rate would be $2.80 per pound as long as the United States bought and sold gold at a fixed price of $35 per ounce and Britain bought and sold gold at 12.5 pounds per ounce.
A)True
B)False
Q2) Because there is no exchange stabilization fund under floating exchange rates,any holdings of international reserves serve as working balances rather than to maintain a given exchange rate for any currency.
A)True
B)False
Q3) Refer to Figure 15.2.Suppose the demand for pounds increases from D<sub>0</sub> to D<sub>1</sub>.Under a fixed exchange rate system,the U.S.exchange stabilization fund could maintain a fixed exchange rate of $0.80 per pound by:
A) Selling pounds for dollars on the foreign exchange market
B) Selling dollars for pounds on the foreign exchange market
C) Decreasing U.S.exports,thus decreasing the supply of pounds
D) Stimulating U.S.imports,thus increasing the demand for pounds
Q4) What is an SDR?
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Page 17
Chapter 16: Macroeconomic Policy in an Open Economy
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Sample Questions
Q1) A nation experiences overall balance if it achieves:
A) Balance-of-payments equilibrium,full employment,and price stability
B) Balance-of-payments equilibrium,maximum productivity,and price stability
C) Full employment,price stability and no change in its money supply
D) Full employment,price stability,and maximum productivity
Q2) Direct controls may take the form of
A) Tariffs
B) Export subsidies
C) Export quotas
D) All of the above
Q3) Given an open economy with high capital mobility and floating exchange rates,suppose an expansionary monetary policy is implemented to combat recession.The initial and secondary effects of the policy have conflicting effects on aggregate demand,thus weakening the policy's expansionary effect.
A)True
B)False
Q4) The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy coordination.
A)True
B)False
18
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Chapter 17: International Banking: Reserves, Debt, and Risk
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Sample Questions
Q1) Which of the following constitute(s)the largest component of the world's international reserves?
A) Gold
B) Special drawing rights
C) IMF drawings
D) Foreign currencies
Q2) Gold constitutes the largest component of the world's international reserves.
A)True
B)False
Q3) How can a bank reduce its exposure to the debt of developing nations?
Q4) Which of the following assets makes use of the basket valuation technique?
A) Swap agreements
B) Oil facility
C) Buffer stock facility
D) Special drawing rights
Q5) Which of the following does not represent a form of international liquidity?
A) IMF reserve positions
B) General arrangements to borrow
C) U.S.government securities
D) Reciprocal currency arrangements
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