Open Economy Macroeconomics
Midterm Exam
Course Introduction
Open Economy Macroeconomics explores the functioning of national economies in a global context, focusing on how countries interact through trade, capital flows, and exchange rates. The course examines key topics such as balance of payments, determination of exchange rates, the impact of fiscal and monetary policies in an open economy, and international financial markets. Students will analyze the effects of globalization, policy coordination, currency crises, and international economic institutions on macroeconomic stability and growth. Theoretical frameworks are combined with real-world case studies to understand the challenges and opportunities arising from economic integration and interdependence.
Recommended Textbook
International Economics 9th Edition by Paul R. Krugman Maurice
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Obstfeld
Chapter 1: Introduction
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Q1) Historians of economic thought often describe ________ written by ________ and published in ________ as the first real exposition of an economic model.
A) "Of the Balance of Trade," David Hume, 1776
B) "Wealth of Nations," David Hume, 1758
C) "Wealth of Nations," Adam Smith, 1758
D) "Wealth of Nations," Adam Smith, 1776
E) "Of the Balance of Trade," David Hume, 1758
Answer: E
Q2) The balance of payments has become a central issue for the United States because
A) when the balance of payments is not balanced, society is unbalanced.
B) the U.S. economy cannot grow when the balance of payments is in deficit.
C) the U.S. has run huge trade deficits in every year since 1982.
D) the U.S. never experienced a surplus in its balance of payments.
E) the U.S. once ran a large trade surplus of about $40 billion.
Answer: C
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Chapter 2: World Trade: An Overview
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Q1) In the current Post-Industrial economy, international trade in services (including banking and financial services)
A) dominates world trade.
B) does not exist.
C) is relatively rare.
D) is relatively stagnant.
E) far surpasses the predictions of economist Alan Blinder.
Answer: C
Q2) Approximately what percent of all world production of goods and services is exported to other countries?
A) 10%
B) 30%
C) 50%
D) 100%
E) 90%
Answer: B
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Chapter 3: Labor Productivity and Comparative Advantage:
The Ricardian Model
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Q1) Assume that labor is the only factor of production and that wages in the United States equal $20 per hour while wages in Japan are $10 per hour. Production costs would be lower in the United States as compared to Japan if
A) U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour.
B) U.S. labor productivity equaled 30 units per hour and Japan's 20 units per hour.
C) U.S. labor productivity equaled 20 units per hour and Japan's 30 units per hour.
D) U.S. labor productivity equaled 15 units per hour and Japan's 25 units per hour.
E) U.S. labor productivity equaled 15 units per hour and Japan's 40 units per hour.
Answer: A
Q2) Given the information in the table above. If these two countries trade these two goods with each other in context of the Ricardian model of comparative advantage, what is the lower limit for the price of cloth?
Answer: One half a widget.
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Chapter 4: Specific Factors and Income Distribution
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Q1) The specific factors model assumes that there are ________ goods and ________ factor(s) of production.
A) two; three
B) two; two
C) two; one
D) three; two
E) four; three
Q2) There is a bias in the political process against free trade because
A) those who lose from free trade are better organized than those who gain.
B) the gains from free trade cannot be measured.
C) those who gain from free trade can't compensate those who lose.
D) foreign governments make large donations to U.S. political campaigns.
E) there is a high correlation between the volume of imports and the unemployment rate.
Q3) The effect of trade on income distribution
A) can be significant in the sort run.
B) is positive for all segments of an economy.
C) is insignificant in the short run.
D) implies that there are no real gains from trade.
E) refutes the model of comparative advantage.
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Chapter 5: Resources and Trade: The Heckscher-Ohlin Model
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Q1) In the Heckscher-Ohlin model, when there is international-trade equilibrium
A) the relative price of the capital intensive good in the capital rich country will be the same as that in the capital poor country.
B) the capital rich country will charge less for the capital intensive good than the price paid by the capital poor country for the capital-intensive good.
C) the capital rich country will charge more for the capital intensive good than the price paid by the capital poor country for the capital-intensive good.
D) workers in the capital rich country will earn more than those in the poor country.
E) the workers in the capital rich country will earn less than those in the poor country.
Q2) In the 2-factor, 2 good Heckscher-Ohlin model, the production possibility frontier is kinked when
A) there is no factor substitution in production.
B) the opportunity cost of production is constant.
C) there are unemployed factor resources.
D) a country does not engage in trade.
E) transportation costs are very high.
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Chapter 6: The Standard Trade Model
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Q1) If the ratio of price of cloth (P<sub>C</sub>) divided by the price of food (P<sub>F</sub>) increases in the international marketplace, then
A) world relative quantity of cloth supplied will increase.
B) world relative quantity of cloth supplied and demanded will increase.
C) world relative quantity of cloth supplied and demanded will decrease.
D) world relative quantity of cloth demanded will decrease.
E) world relative quantity of food will increase.
Q2) If Slovenia were a large country in world trade, then if it instituted a large set of subsidies for its exports, this must
A) harm its terms of trade.
B) have no effect on its terms of trade.
C) improve its terms of trade.
D) decrease its marginal propensity to consume.
E) harm world terms of trade.
Q3) Refer to above figure. Now, suppose that the relative price of A is actually not higher than Albania's autarkic level of 1, but quite the opposite (e.g., P<sub>A</sub>/P<sub>B</sub> = 0.5). Would Albania still be able to gain from trade? If so, where would be its production point? Given the information in this question, where is Albania's comparative advantage?
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Chapter 7: External Economies of Scale and the
International Location of Production
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Q1) The existence of external economies of scale
A) may be associated with a perfectly competitive industry.
B) cannot be associated with a perfectly competitive industry.
C) tends to result in one huge monopoly.
D) tends to result in large profits for each firm.
E) focuses more on individual firms than the industry as a whole.
Q2) The learning curve describes the ________ relationship between ________ and ________.
A) inverse; unit cost; cumulative output
B) direct; unit cost; cumulative output
C) inverse; education; annual income
D) direct; education; annual income
E) direct; education; labor productivity
Q3) Internal economies of scale will ________ average cost when output is ________ by ________.
A) reduce; increased; a firm
B) increase; increased; a firm
C) reduce; increased; the industry
D) increase; increased; the industry
E) reduce; reduce; the industry
Page 9
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Q1) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is average total cost equal to when Q = 10?
Q2) In the model of monopolistic competition, compared to a firm with a lower marginal cost, a firm with a higher marginal cost will set a ________ price, produce ________ output, and earn ________ profits.
A) higher; less; less
B) lower; more; more
C) higher; more; more
D) lower; less; less
E) higher; less; more
Q3) Two countries engaged in trade in products with scale economies, produced under conditions of monopolistic competition, are likely to be engaged in
A) intra-industry trade.
B) price competition.
C) inter-industry trade.
D) Heckscher-Ohlinean trade.
E) immiserizing trade.
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Chapter 9: The Instruments of Trade Policy
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Q1) Refer to above figure. The loss of Consumer Surplus due to the tariff equals
Q2) A lower tariff on imported steel would most likely benefit
A) foreign producers at the expense of domestic consumers.
B) domestic manufacturers of steel.
C) domestic consumers of steel.
D) workers in the steel industry.
E) foreign consumers of steel.
Q3) What is a true statement concerning the imposition in the U.S. of a tariff on cheese?
A) It lowers the price of cheese domestically.
B) It raises the price of cheese internationally.
C) It raises revenue for the government.
D) It will always result in retaliation from abroad.
E) it leads to higher domestic demand for cheese.
Q4) Refer to above figure. In the absence of trade, how many Widgets does this country produce and consume?
Q5) It is argued that a tariff may help promote employment in a single industry, but is not likely to help employment in general. Discuss.
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Chapter 10: The Political Economy of Trade Policy
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Q1) Protectionism tends to be concentrated in two sectors
A) agriculture and clothing.
B) high-tech and national security sensitive industries.
C) capital and skill intensive industries.
D) industries concentrated in the South and in the Midwest of the country.
E) financial services and manufacturing based in the Midwest.
Q2) Developing countries have often attempted to establish cartels so as to counter the actual or perceived inexorable downward push on the prices of their exported commodities. OPEC is the best well known of these. How are such cartels expected to help the developing countries? At times importing countries profess support for such schemes. Can you think of any logical basis for such support? How are cartels like monopolies, and how are they different from monopolies. Why is there a presupposition among economists that such schemes are not likely to succeed in the long run?
Q3) The World Trade Organization provides for all of the following except
A) the usage of the most favored nation clause.
B) assistance in the settlement of trade disagreements.
C) bilateral tariff reductions.
D) multilateral tariff reductions.
E) the prevention of nontariff interventions in trade.
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Chapter 11: Trade Policy in Developing Countries
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Q1) The HPAE (High Performance Asian Economies) countries
A) have all consistently supported free trade policies.
B) have all consistently maintained import-substitution policies.
C) have all consistently maintained non-biased efficient free capital markets.
D) have all maintained openness to international trade.
E) have all outperformed the U.S.
Q2) The "East Asian Miracle" of the "Four Tigers" in the 1960s was replicated by
A) developing countries around the world.
B) other East Asian countries.
C) Sub Sahara African countries.
D) Industrialized countries.
E) Eastern European countries.
Q3) The disappointment with import-substitution policies is in part because
A) of the rapid and continuous growth record of South American countries.
B) many countries pursuing this strategy experienced stagnation in their growth.
C) this policy is inconsistent with sophisticated economic growth models.
D) this policy tended to create world-class industrial competitors.
E) of the financial investment lost by the U.S.
Q4) Refer to above figure. If OmL1 workers are employed in manufacturing then what is the marginal productivity of labor in agriculture?
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Chapter 12: Controversies in Trade Policy
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Q1) Refer to the above table. Suppose both governments offer their respective company a $10 million subsidy.
Q2) When Japan's MITI (Ministry of International Trade and Industry) focused resources on the semiconductor industry, this was seen as a typically successful Japanese foray into a new dynamic strategic sector. The results, as viewed by the late 1990s
A) justified this view.
B) led to similar structuring of industrial policy in the U.S.
C) lent support to the Brander-Spencer model.
D) helped shift the focus of economists away from Japanese-style industrial policy.
E) propelled Japan into the leading country in high-tech manufacturing.
Q3) In the second half of the 1990s a rapidly growing movement focused on the harm caused by international trade to
A) land owners in poor countries.
B) capital owners in rich industrialized countries.
C) land owners in rich industrialized countries.
D) production workers in both rich and poor countries.
E) terms of trade in developing countries.
Q4) What is a pollution haven?
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Chapter 13: National Income Accounting and the Balance of Payments
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Q1) Consider how the United States balance of payments accounts are affected when U.S. banks forgive two billion in debt owed to them by the government of Argentina.
Q2) Every international transaction automatically enters the balance of payments
A) once either as a credit or as a debit.
B) twice, once as a credit and once as a debit.
C) once as a credit.
D) twice, both times as debit.
E) the times, once as a credit, onces as a debit, and once as an exchange.
Q3) Which of the following is true?
A) A country with a current account surplus is earning more from its exports than it spends on imports.
B) A country could finance a current account deficit by using previously accumulated foreign wealth to pay for its imports.
C) A country with a current account deficit must be increasing its net foreign debts by the amount of the deficit.
D) We can describe the current account surplus as the difference between income and absorption.
E) All of the above are true of current account balances.
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Chapter 14: Exchange Rates and the Foreign Exchange
Market: An Asset Approach
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Q1) Which of the following is not an example of a financial derivative?
A) forwards
B) bonds
C) swaps
D) futures
E) options
Q2) What is the interest parity condition?
Q3) When a country's currency depreciates,
A) foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are more expensive.
B) foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are cheaper.
C) foreigners find that its exports are cheaper; however, domestic residents are not affected.
D) foreigners are not affected, but domestic residents find that imports from abroad are more expensive.
E) foreigners find that its exports are cheaper and domestic residents find that imports from abroad are more expensive.
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Chapter 15: Money, Interest Rates, and Exchange Rates
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Q1) Michael Woodford says the following is an advantage of interest-rate instruments for central banks:
A) Conduct monetary policy without inflation.
B) Conduct monetary policy even if checking deposits pay interest at competitive rates.
C) Conduct monetary policy without government approval.
D) Conduct monetary policy with consumers in mind.
E) Conduct monetary policy with workers in mind.
Q2) The family summer house on Cape Cod pays a return in the form of
A) interest rate.
B) capital gains.
C) the pleasure of vacations at the beach.
D) stock options.
E) capital gains and pleasure.
Q3) A reduction in a country's money supply causes:
A) its currency to depreciate in the foreign exchange market.
B) its currency to appreciate in the foreign exchange market.
C) does not affect its currency in the foreign market.
D) does affect its currency in the foreign market in an ambiguous manor.
E) affects other countries currency in the foreign market.
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Chapter 16: Price Levels and the Exchange Rate in the Long Run
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Q1) Floating exchange rates
A) systematically lead to much larger but less frequent short-run deviations from the absolute PPP.
B) systematically lead to much larger and more frequent short-run deviations from the relative PPP.
C) systematically lead to much smaller and less frequent short-run deviations from the relative PPP.
D) systematically lead to much smaller but more frequent short-run deviations from the relative PPP.
E) systematically lead to much smaller and less frequent short-run deviations from the absolute PPP.
Q2) In February 2007, the world's cheapest Big Macs were sold in
A) the Philippines.
B) Russia.
C) Ukraine.
D) China.
E) the Czech Republic.
Q3) What are the predictions for the long run equilibrium of the Monetary Approach?
Q4) How can long run values in the real exchange rate change?
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Chapter 17: Output and the Exchange Rate in the Short Run
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Q1) What is the AA-curve? Why does it have a negative slope? What factors cause it to shift?
Q2) Explain how would an increase in government spending affect the DD-AA schedule in the short run.
Q3) One implication of an empirical investigation of the Marshall-Lerner condition is that, in the ________, a real ________ in a nation's currency is likely to ________ the country's current account balance.
A) long-run; depreciation; improve
B) short-run; depreciation; improve
C) long-run; appreciation; improve
D) short-run; appreciation; improve
E) short-run but not the long-run; appreciation; improve
Q4) When the real exchange rate rises,
A) Imports measured in terms of domestic output will rise.
B) Imports measured in terms of domestic output will fall.
C) Imports measured in terms of domestic output will never be affected.
D) Imports measured in terms of domestic output may rise or fall.
E) Imports measured in terms of foreign output will rise.
Q5) Describe what is a J Curve?
Q6) Explain what are the factors that shift the DD Schedule.
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Chapter 18: Fixed Exchange Rates and Foreign Exchange Intervention
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Q1) Perfect asset substitutability is the assumption that
A) the foreign exchange market is in equilibrium only when expected returns on domestic assets are greater than returns on foreign currency bonds.
B) the foreign exchange market is in equilibrium only when expected returns on foreign currency bonds are greater than returns on domestic assets.
C) the foreign exchange market is in equilibrium only when expected returns on all assets are negative.
D) the foreign exchange market is in equilibrium only when expected returns on domestic assets are equal to returns on foreign currency bonds.
E) the foreign exchange market is in equilibrium only when domestic assets are risk-free.
Q2) Please discuss the difference between the terms devaluation and depreciation.
Q3) When a country's currency is devalued:
A) output decreases.
B) output increases and the money supply decreases.
C) the money supply decreases.
D) output decreases and the money supply increases.
E) both the output and the money supply increases.
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Chapter 19: International Monetary Systems: An Historical Overview
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Q1) One should expect the forward exchange market to flourish
A) under a fixed exchange rate regime.
B) under a flexible exchange rate regime.
C) under neither fixed nor flexible exchange rate regimes.
D) under both fixed and flexible exchange rate regimes.
E) only under a gold standard.
Q2) Using an equation, explain why do governments prefer to avoid excessive current account surpluses?
Q3) Since 1973 "dirty floats" have been required because:
A) PPP has not held.
B) high inflation countries have stronger currencies than countries with low inflation.
C) countries are not cooperating as much as original theorists predicted.
D) in the short run, monetary and fiscal policy only affects the autonomous home economy.
E) countries with a floating exchange rate have laissez-faire economies.
Q4) Which system of interest rates is theoretically worst for policy coordination among the industrial countries of the world? How has this played out since the 1980s?
Q5) Why do governments prefer to avoid current account deficits that are too large?
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Chapter 20: Optimum Currency Areas and the European Experience
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Q1) Explain how the German Bundesbank gained its low-inflation reputation?
Q2) The level of fiscal federalism in the European Union is
A) too big to cushion member countries from adverse economic events.
B) too small to cushion member countries from adverse economic events.
C) appropriate to cushion member countries from adverse economic events.
D) too big relative to the one in the U.S.
E) similar in its level to that of the U.S.
Q3) How the European single currency evolved?
Q4) Using the GG-LL framework, analyze the effect of an increase in the size and frequency of sudden shifts in the demand for a country's exports.
Q5) The intersection of GG and LL determines
A) the optimal level of integration desired by Norway.
B) the maximum integration level desired by Norway.
C) the minimum level of integration that will cause Norway to join the fixed exchange rate regime.
D) the maximum level of integration that will cause Norway to join the fixed exchange rate regime.
E) the maximum level of integration that can aid Norway if it joins the fixed exchange rate regime.
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Chapter 21: Financial Globalization: Opportunity and Crisis
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Q1) What is the basic motive for asset trade?
A) the belief that large risks will lead to large returns
B) restoration of the balance of payments
C) portfolio unification
D) economic stability
E) increase expected returns and reduced risk
Q2) Eurodollars are
A) dollar deposits located in the United States.
B) dollar deposits located in Europe.
C) dollar deposits located outside Europe.
D) dollar deposits located outside the United States.
E) dollar deposits located outside both Europe and the United States.
Q3) Which one of the following possibilities is true?
A) Much of eurocurrency trading occurs in Europe.
B) Much of eurocurrency trading occurs in the United States.
C) Eurocurrencies trading occurs everywhere except the United States.
D) Eurocurrencies trading occurs everywhere except Europe.
E) Eurocurrencies trading occurs everywhere except China.
Q4) Describe how the Eurodollar market's early growth was spawned by the Cold War between the United States and the U.S.S.R.
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Chapter 22: Developing Countries: Growth, Crisis, and Reform
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Q1) A currency board can ________ a country's ability to act as a lender of last resort.
A) aggrandize
B) limit
C) enhance
D) offset
E) not affect
Q2) Explain the extensive economic role of government within a developing country.
Q3) Based on the case study, answer the following question: Can currency boards make fixed exchange rates credible?
Q4) The world's economies can be divided into four main categories according to their annual per-capita income levels: low-income, lower middle-income, upper middle-income and high-income economies. What category would Pakistan and India fall under?
A) low-income
B) upper middle-income
C) high-income
D) lower middle-income
E) Pakistan and India fall between lower-middle and upper-middle.
Q5) Describe the crisis in Russia starting from 1989. Explain why?
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