Open-Economy Macroeconomics
Final Exam
Course Introduction
Open-Economy Macroeconomics explores the functioning of economies that interact with the rest of the world through trade, investment, and financial markets. The course examines topics such as exchange rates, balance of payments, international capital flows, and the transmission of economic policy across borders. Students analyze how fiscal and monetary policies affect open economies, study current account dynamics, and consider the implications of globalization, currency unions, and crises in international finance. Emphasis is placed on both theoretical frameworks and real-world applications, equipping students to understand and evaluate global economic events and policy responses.
Recommended Textbook
International Economics 12th Edition by Dominick Salvatore
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Chapter 1: Introduction
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Q1) International trade is most important to the standard of living of:
A) the United States
B) Switzerland
C) Germany
D) England
Answer: B
Q2) International trade is similar to interregional trade in that both must overcome:
A) distance and space
B) trade restrictions
C) differences in currencies
D) differences in monetary systems
Answer: A
Q3) Identify some of the criticisms of the anti-globalization movement.
Answer: Increased world income inequality,child labor,environmental pollution.
Q4) What does the gravity model suggest?
Answer: That bilateral trade is positively related to the product of two countries GDP's and is smaller the greater distance between the two nations.
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3
Chapter 2: The Law of Comparative Advantage
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Q1) Explain why Ricardo's model of trade was superior to Adam Smith's.
Answer: Smith's model was based on absolute advantage,which required each nation to have an absolute productivity advantage in order for mutually beneficial trade to occur.Ricardo's model considered relative productivity,showing that even if a nation had an absolute advantage in everything it could still benefit from trade.
Q2) If with one hour of labor time nation A can produce either 3X or 3Y while nation B can produce either 1X or 3Y (and labor is the only input):
A) Px/Py=1 in nation A
B) Px/Py=3 in nation B
C) Py/Px=1/3 in nation B
D) Px/Py=3 in nation A
Answer: D
Q3) How can the production possibilities frontier be used to determine opportunity cost?
Answer: An production possibility frontier (PPF)shows the tradeoff between two goods.The slope of the PPF is the opportunity cost of the good on the x axis.The reciprocal of the slope is the opportunity cost of the good on the y axis.
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Chapter 3: The Standard Theory of International Trade
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Q1) Which of the following is a correct statement about deindustrialization in the United States?
A) Most job loss in manufacturing has been due to changes in productivity.
B) Most job loss in manufacturing has been due to competition from other countries.
C) Most job loss in manufacturing has been due to changes in the legal structure of trade.
D) Most job loss in manufacturing has been due to unfair trade practices.
Answer: A
Q2) Community indifference curves:
A) are negatively sloped
B) are convex to the origin
C) should not cross
D) all of the above
Answer: D
Q3) What is the marginal rate of transformation (MRT)?
Answer: The MRT of X for Y refers to the amount of Y that a nation must give up to produce each additional unit of X.MRT is another name for opportunity cost.The MRT increases as additional units of X are produced in an environment with increasing opportunity costs.
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Page 5
Chapter 4: Demand and Supply,
Terms of Trade
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Q1) If a nation's terms of trade improve,the nation's social welfare
A) will deteriorate.
B) will improve.
C) will remain unchanged.
D) might improve, deteriorate, or remain unchanged.
Q2) Draw a figure showing: (1)in Panel A a nation's demand and supply curve for A traded commodity and the nation's excess supply of the commodity, (2)in Panel C the trade partner's demand and supply curve for the same traded commodity and its excess demand for the commodity,and (3)in Panel B the supply and demand for the quantity traded of the commodity,its equilibrium price,and why a price above or below the equilibrium price will not persist.At any other price,QD QS,and P will change to P .
Q3) Which of the following statements is not correct?
A) The demand for imports is given by the excess demand for the commodity
B) the supply of exports is given by the excess supply of the commodity
C) the supply curve of exports is flatter than the total domestic supply curve of the commodity
D) the supply curve for exports is more inelastic than the total domestic supply curve of the commodity.
Q4) Carefully define and explain the meaning of "equilibrium terms of trade"
Page 6
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Chapter 5: Factor Endowments and the Heckscherohlin
Theory
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Q1) The H-O model is a simplification of a truly general equilibrium model because it deals with:
A) two nations
B) two commodities
C) two factors of production
D) all of the above
Q2) Over the last five decades,relative to the United States,real wages among industrialized countries have
A) become equal.
B) moved farther away.
C) moved closer together.
D) increased, then decreased.
Q3) The H-O model is a general equilibrium model because it deals with:
A) production in both nations
B) consumption in both nations
C) trade between the two nations
D) all of the above
Q4) List three possible explanations for the Leontief paradox
Q5) Define and explain factor intensity reversal
Q6) List at least four of the assumptions of the Heckscher-Ohlin theory Page 7
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Page 8
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) Transport costs:
A) increase the price in the importing country.
B) increase the price in the exporting country.
C) prevent international trade.
D) increase international trade.
Q3) The share of transport costs will fall less heavily on the nation:
A) with the more elastic demand and supply of the traded commodity
B) with the less elastic demand and supply of the traded commodity
C) exporting agricultural products
D) with the largest domestic market
Q4) Define and explain economies of scale.
Q5) How is intra-industry trade measured? Does the degree of intra-industry trade depend on how an industry is defined?
Q6) Discuss the stages of the product cycle model. Page 9
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Page 10
Chapter 7: Economic Growth and International Trade
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Q1) The Rybczynski theorem postulates that doubling L at constant relative commodity prices:
A) doubles the output of the L-intensive commodity
B) reduces the output of the K-intensive commodity
C) increases the output of both commodities
D) reduces the output of both commodities
Q2) Using the data presented in the chapter,explain how growth,trade,and welfare have changed in the leading industrial countries over the 1990-2010 period.
Q3) If the output of a nations exportable commodity increases proportionally more than the output of its importable commodity the output changes in considered
A) neutral
B) negative
C) anti-trade
D) pro-trade
Q4) Doubling only the amount of L available under constant returns to scale:
A) less than doubles the output of the L-intensive commodity
B) more than doubles the output of the L-intensive commodity
C) doubles the output of the K-intensive commodity
D) leaves the output of the K-intensive commodity unchanged
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Chapter 8: Trade Restrictions: Tariffs
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Q1) Which of the following statements is true?
A) an ad valorem tariff is a fixed sum per unit
B) the U.S. does not allow exports tariffs
C) in the case of a small country the cost of a tariff is split between the buyer and seller
D) a specific tariff is a % of the value of the unit
Q2) The imposition of an optimum tariff by a large nation:
A) improves its terms of trade
B) reduces the volume of trade
C) increases the nation's welfare
D) all of the above
Q3) The optimum tariff for a small nation is:
A) 100%
B) 50%
C) 0
D) depends on elasticities
Q4) Is there such thing as an optimum tariff for a small nation?
Q5) Explain the difference between an ad valorem,specific and compound tariff
Q6) Explain the redistribution effects of a tariff.
Q7) Under what conditions can a tariff improve a nation's welfare?
Page 12
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Chapter 9: Nontariff Trade Barriers and the New Protectionism
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Q1) On which of the following principles does GATT rest?
A) nondiscrimination
B) elimination of nontariff barriers
C) consultation among nations in solving trade disputes
D) all of the above
Q2) The WTO grew out of the following organization
A) the Bretton Woods system
B) The UN
C) The World Bank
D) The GATT
Q3) Industrial policy refers to:
A) an activist policy by the government of an industrial country to stimulate the development of an industry
B) the granting of a subsidy to a domestic industry to stimulate the development of an industry
C) the granting of a subsidy to a domestic industry to counter a foreign subsidy
D) all of the above
Q4) What is a quota and how does it compare to the economic effects of a tariff?
Q5) What is dumping and what are its various forms?
Q6) Summarize the Smoot-Hawley Tariff Act and its effects. Page 13
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Page 14
Chapter 10: Economic Integration: Customs Unions and Free Trade Areas
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Q1) 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
Q2) A trade-diverting customs union:
A) increases trade among union members and with nonmember nations
B) reduces trade among union members and with nonmember nations
C) increases trade among members but reduces trade with non-members
D) reduces trade among union members but increases it with nonmembers
Q3) 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
Q4) What is the theory of the second best?
Q5) Discuss the potential dynamic welfare gains that can result from the formation of a customs union.
Page 15
Q6) What is trade diversion?
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Page 16
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) 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
Q3) Those nations that liberalized trade during the past decade
A) grew faster than those that did not
B) grew more slowly than those that did not
C) grew at about the same rate as those that did not
D) any of the above
Q4) Explain why import substitution strategies have largely been less than successful.
Q5) Why did developing nations that switched from a policy of import substitution to a policy of export promotion generally grow faster during the past decade?
Q6) What is the difference between import substitution and export orientation?
Page 17
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Chapter 12: International Resource Movements and Multinational Corporations
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Q1) What is vertical integration and how is it related to direct foreign investment?
Q2) Owners of capital in developing countries generally
A) oppose an inflow of foreign direct investments from abroad
B) favor an inflow of foreign direct investments from abroad
C) are indifferent to foreign direct investments from abroad
D) we cannot say without additional information
Q3) What are the primary reasons for the existence of multinational corporations?
Q4) Labor in developing countries generally
A) opposes an inflow of foreign direct investments from abroad
B) favors an inflow of foreign direct investments from abroad
C) is indifferent to foreign direct investments from abroad
D) we cannot say without additional information
Q5) The reason the residents of a nation do not borrow from other nations and themselves undertake real investments in their own nation is that:
A) multinationals want to retain control over their own technology
B) banks do not want to lend to foreigners
C) vertical integration is not possible for foreigners
D) multinationals want to avoid horizontal integration
Q6) Discuss the motives for international labor migration.
Q7) What are the basic motives for international portfolio investments? Page 18
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Page 19
Chapter 13: Balance of Payments
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Q1) 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
Q2) Which of the following is a debit?
A) The export of goods
B) The export of services
C) Transfer payments given to foreigners
D) Capital inflows
Q3) From the U.S.point of view,drawing on (reducing)foreign bank balances in a New York bank represents a:
A) capital inflow
B) capital outflow
C) outflow of official reserves
D) debit in the current account
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) When the interest differential in favor of the foreign country is equal to the forward premium on the foreign currency,we:
A) are at covered interest arbitrage parity
B) are not at covered interest arbitrage parity
C) may or may not be at covered interest arbitrage parity
D) cannot say without additional information
Q2) What is the principle function of foreign exchange markets?
Q3) Explain what carry trade is.
Q4) Carry trade refers to
A) covered interest arbitrage in the spot and forward markets.
B) moving investment funds to countries in which there is less risk.
C) borrowing low-yielding currencies and lending high-yielding currencies.
D) exporting to one country and importing from another.
Q5) 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
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Chapter 15: Exchange Rate Determination
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Q1) According to the monetary approach to the balance of payments,a deficit in the nation's balance of payments results from:
A) an excess in the nation's stock of money supply that is not eliminated or corrected by the nation's monetary authorities
B) an excess in the stock of money demanded in the nation that is not satisfied by domestic monetary authorities
C) an excess in the stock of money demanded in the other nation that is not satisfied by the other nation's monetary authorities
D) an excess of imports over exports in the nation
Q2) The monetary approach to the balance of payments:
A) views the balance of payments as an essentially monetary phenomenon
B) rests on the purchasing power-parity theory
C) postulates that money plays the crucial role in the long run both as a disturbance and adjustment in the nation's balance of payments
D) all of the above
Q3) What is the empirical evidence for the monetary and portfolio balance model of exchange rate determination?
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Chapter 16: The Price Adjustment Mechanism With Flexible and Fixed Exchange Rates
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Q1) Explain why under a gold standard exchange rate system that the market exchange rate will never deviate far from the mint parity rate.
Q2) Explain the meaning of the J-curve effect and exactly why a J-curve is expected to exist.
Q3) The United States has a trade problem with Japan because the U.S.trade deficit with Japan:
A) is very large
B) has persisted for a long time
C) did not seem to decline when the dollar depreciated sharply with respect to the yen
D) all of the above
Q4) According to the quantity theory of money,if the velocity of money and physical output are held constant,and increase in the money supply will lead to
A) a proportional decrease in the price level
B) a proportional increase in the price level
C) no change in the price level
D) all of the above are possible outcomes
Q5) Explain why currency pass-through is not likely to be complete.
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Chapter 17: The Income Adjustment Mechanism and Synthesis
of Automatic Adjustments
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Q1) What are some of the disadvantages of a freely flexible exchange rate system with respect to the adjustment process?
Q2) The foreign trade multiplier of nation 1 is largest:
A) when there are no foreign repercussions
B) with foreign repercussions for an autonomous increase in nation 1's X that replace domestic production in nation 2
C) with foreign repercussions for an autonomous increase in I in nation 1
D) with foreign repercussions for an autonomous increase in I in nation 2
Q3) A benefit of automatic adjustment mechanisms is that they:
A) avoid the possibility of policy mistakes
B) avoid the time lags associated with adjustment policies
C) begin to operate as soon as balance of payments disequilibria develop
D) all of the above
Q4) In what way does the automatic income adjustment mechanism differ from the traditional or classical adjustment mechanism?
Q5) Why is the foreign trade multiplier smaller than the corresponding multiplier in a closed economy?
Page 24
Q6) Why is the foreign trade multiplier smaller in a large nation relative to small nation?
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Chapter 18: Open Economy Macroeconomics: Adjustment Policies
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Q1) To correct a balance of payments surplus and inflation a nation requires:
A) expansionary fiscal policy and easy monetary policy
B) contractionary fiscal policy and tight monetary policy
C) contractionary fiscal policy and easy monetary policy
D) expansionary fiscal policy and tight monetary fiscal policy
Q2) The IS curve is negatively sloped because:
A) the higher is the rate of interest the smaller is the quantity of money demanded for speculative purposes
B) higher rates of interest lead to greater capital flows
C) at lower interest rates the levels of investment and national income are higher
D) at lower interest rates the level of national income is lower
Q3) Use a Swan diagram to identify a point at which a nation has domestic unemployment and a trade surplus.What combination of policies should be used to restore balance?
Q4) Explain why according to monetarists (a)nations retain control over their money supply under a flexible exchange rate system but not under a fixed exchange rate system, (b)nations could not sterilize continuous money outflows or inflows under a fixed exchange rate system in order to retain control over their money supply.
Page 25
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Aggregate Demand and Aggregate Supply
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Q1) A nation's output in the short-run can
A) exceed its natural level
B) fall short of its natural level
C) equal to its natural level
D) any of the above
Q2) The long run aggregate supply curve is
A) independent of prices and is vertical at the nation's natural rate of output
B) dependent on prices and is vertical at the nation's natural rate of output
C) independent of prices and is horizontal at the nation's natural rate of output
D) dependent on prices and is horizontal at the nation's natural rate of output
Q3) Which of the following statements is false with regard to the effect of macroeconomic policies?
A) they generally cause shifts in the aggregate demand curve
B) they can possibly increase long-run growth
C) they can help correct supply shocks that increases production costs but only at the expense of even higher inflation
D) they always cause shifts in the long-run aggregate supply curve
Q4) How does an increase in government expenditure impact aggregate demand?
Q5) Why is monetary policy ineffective under a fixed exchange rate system?
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Coordination
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Q1) 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
Q2) A primary cause of the Eurozone Crisis has been
A) excessive borrowing by weaker countries in the euro area.
B) too rapid growth that has fueled inflation.
C) the failure of some nations to join the Eurozone.
D) recession in the United States, which caused a recession in Europe.
Q3) What are the advantages of the adoption of the euro as common currency for the euro member nations?
Q4) Everything else being the same,the volume of trade is likely to be:
A) larger under a flexible than under a fixed exchange rate system
B) larger under a fixed than under a flexible exchange rate system
C) equal under a flexible and fixed exchange rate system
D) any of the above
Page 27
Q5) Carefully explain the costs and benefits of a flexible exchange rate regime.
Q6) What is a currency board?
Q7) Carefully explain the costs and benefits of a flexible exchange rate regime.
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Q1) The Bretton Woods System:
A) allowed nation to change their par values when facing fundamental disequilibrium
B) allowed nations to change their par values when facing a temporary disequilibrium
C) did not allow nations to change their par exchange rates under any circumstance
D) allowed only deficit nations to change their par values, but not surplus nations
Q2) Sterilization refers to actions taken by central banks
A) to neutralize the effects of balance of payments disequilibria on the money supply.
B) to increase gold inflows when there is a balance of payments surplus.
C) to decrease gold outflows when there is a balance of payments surplus.
D) to cause the exchange rate to appreciate or depreciate.
Q3) What type of international monetary system(s)operated before WWI,between WWI and WWII,and shortly after WWII?
Q4) What measure have been taken to avoid or minimize future financial crises and strengthen the architecture of the current international financial system?
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