Open Economy Macroeconomics
Midterm Exam
Course Introduction
Open Economy Macroeconomics explores the behavior and performance of economies that engage in international trade and financial transactions. The course examines key concepts such as exchange rates, balance of payments, international capital flows, and the impact of globalization on macroeconomic policy. Topics include the mechanisms of currency determination, the effects of fiscal and monetary policy in open versus closed economies, and the implications of international economic integration. Through theoretical models and real-world case studies, students gain an understanding of how external shocks and international linkages influence economic growth, inflation, unemployment, and financial stability in an increasingly interconnected world.
Recommended Textbook
International Finance Theory and Policy 10th Edition by Paul R. Krugman
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706 Verified Questions
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Chapter 1: Introduction
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Sample Questions
Q1) Which of the following does NOT belong?
A) NAFTA
B) Uruguay Round
C) World Trade Organization
D) non-tariff barriers
E) major free trade agreements of the 1990s
Answer: D
Q2) An improvement in a country's balance of payments means a decrease in its balance of payments deficit,or an increase in its surplus.In fact we know that a surplus in a balance of payments
A) is always beneficial.
B) is usually beneficial.
C) is never harmful.
D) is sometimes harmful.
E) is always harmful.
Answer: D
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Chapter 2: National Income Accounting and the Balance of Payments
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Sample Questions
Q1) The official settlements balance or balance of payments is the sum of
A) the current account balance, the capital account balance, the non reserve portion of the financial account balance, the statistical discrepancy.
B) the current account balance and the capital account balance.
C) the current account balance, the capital account balance, the non reserve portion of the financial account balance.
D) the current account balance and the non reserve portion of the financial account balance.
E) the current account balance and the interest in all investments.
Answer: A
Q2) The earnings of a Spanish factory with British owners are
A) counted in Spain's GDP.
B) part of Britain's GNP.
C) only counted in Britain's GDP.
D) only part of Spain's GNP.
E) counted in Britain's GDP and are a part of Spain's GNP.
Answer: E
Q3) What is the national income identity for an open economy?
Answer: Y = C + I + G + EX - IM
Page 4
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Chapter 3: Labor Productivity and Comparative Advantage:
The Ricardian Model
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Sample Questions
Q1) If one country's wage level is very high relative to the other's (the relative wage exceeding the relative productivity ratios),then if they both use the same currency
A) neither country has a comparative advantage.
B) only the low wage country has a comparative advantage.
C) only the high wage country has a comparative advantage.
D) consumers will still find trade worth while from their perspective.
E) it is possible that both will enjoy the conventional gains from trade.
Answer: E
Q2) Given the information in the table above
A) neither country has a comparative advantage in cloth.
B) Home has a comparative advantage in widgets.
C) Foreign has a comparative advantage in widgets.
D) Home has a comparative advantage in both cloth and widgets.
E) neither country has a comparative advantage in widgets.
Answer: C
Q3) 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.
Page 5
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Chapter 4: Specific Factors and Income Distribution
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Sample Questions
Q1) The degree of a factor's specificity is inversely related to
A) the mobility of the factor, with more mobile factors having less specificity.
B) the amount of time required to redeploy the factor to a different industry.
C) the cost of the factor as a proportion of the long-run total cost of production.
D) technology differences between two countries, with a less advanced technology resulting in less factor specificity.
E) factor quality, with lower quality factors having a lower level of specificity.
Q2) In the specific factors model,the effects of trade on welfare overall are ________ and for fixed factors used to produce the imported good they are ________.
A) positive; negative
B) positive; positive
C) negative; positive
D) ambiguous; positive
E) positive; ambiguous
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Chapter 5: Resources and Trade: The Heckscher-Ohlin
Model
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Q1) The Leontief Paradox
A) refers to the finding that U.S. exports were more labor intensive than its imports.
B) refers to the finding that U.S. Exports were more capital intensive than its exports.
C) refers to the finding that the U.S. produces outside its Edgeworth Box.
D) still accurately applies to today's pattern of U.S. international trade.
E) refers to the fact that Leontief-an American economist-had a Russian name.
Q2) Refer to above figure.In autarky,Country P was producing at point 5.With trade,would its production point be found above or below point 5? Explain why.What must happen in the K/L intensity ratio in the production of each of the products in this country when moving from autarky to free trade?
Q3) International trade has strong effects on income distributions.Therefore,international trade
A) will tend to hurt some groups in each trading country.
B) is beneficial to everyone in both trading countries.
C) will tend to hurt one trading country.
D) will tend to hurt everyone in both countries.
E) will be beneficial to all those engaged in international trade.
Q4) International trade leads to complete equalization of factor prices.Discuss.
Page 7
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Chapter 6: The Standard Trade Model
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Sample Questions
Q1) International borrowing and lending may be interpreted as one form of A) intertemporal trade.
B) intermediate trade.
C) trade in services.
D) unrequited international transfers.
E) aid to offset trade advantages.
Q2) Suppose that a country experiences growth strongly biased toward its export,cloth
A) this will tend to worsen the country's terms of trade.
B) this will tend to improve the country's terms of trade.
C) this will tend to leave the country's terms of trade unchanged.
D) this will tend to worsen the terms of trade for the country's trading partner.
E) this will increase the price of cloth relative to the imported good.
Q3) Suppose Albania is exporting product B,and experienced economic growth biased in favor of product B as seen in the figure above.We are also told that Albania's new consumption point is at point d.Would you still consider the economic growth,which took place biased in favor of B? If Albania were a large country how would this growth affect its terms of trade?
Q4) What is intertemporal comparative advantage?
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Page 8
Chapter 7: External Economies of Scale and the
International Location of Production
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Sample Questions
Q1) The long-run market supply curve in the presence of internal economies of scale is ________,and in the presence of external economies of scale,it is ________.
A) downward sloping; downward sloping
B) upward sloping; horizontal
C) horizontal; upward sloping
D) downward sloping; horizontal
E) upward sloping; downward sloping
Q2) The study of factors that influence both international and interregional trade is referred to as
A) accidents of history.
B) economic geography.
C) factor abundance theory.
D) weather analysis.
E) centralized optimization.
Q3) If a scale economy is the dominant technological factor defining or establishing comparative advantage,then the underlying facts explaining why a particular country dominates world markets in some product may be pure chance,or historical accident.Explain,and compare this with the answer you would give for the Heckscher-Ohlin model of comparative advantage.
Page 9
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Chapter 8: Firms in the Global Economy: Export
Decisions,Outsourcing,and Multinational Enterprises
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Sample Questions
Q1) 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
Q2) Foreign outsourcing is
A) the transfer of operations to foreign contractors.
B) an example of internalization.
C) an example of foreign direct investment.
D) currently illegal in the U.S.
E) the substitution of immigration for foreign direct investment.
Q3) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q.What is average total cost equal to when Q = 10?
Q4) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q.What is total cost equal to when Q = 10?
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Q5) What are the consequences of outsourcing production on the welfare of countries?
Chapter 9: The Instruments of Trade Policy
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Sample Questions
Q1) An export subsidy is
A) a payment to a firm or individual that ships a good abroad.
B) a fee that is charged to a country that ships goods to the U.S.
C) a payment made to a foreign government in return for preferential trade treatment.
D) illegal in the U.S. but is fairly common in the rest of the world.
E) a limit on the quantity of a good or service that can be sold abroad.
Q2) Economic theory in general,and trade theory in particular are replete with equivalencies.For example,it is argued that for any specific tariff one can find an equivalent ad valorem tariff;and that for any quota one can calculate a tariff equivalent.Discuss conditions or situations under which a specific and an ad valorem tariff are not equivalent.Discuss conditions or situations when a tariff and a quota are not equivalent.
Q3) In an inflationary environment,then over time
A) a specific tariff will tend to raise more revenue than an ad valorem tariff.
B) an ad valorem tariff will tend to raise more revenue than a specific tariff.
C) an optimum tariff will tend to raise more revenue than an escalating tariff.
D) a tariff quota will tend to raise more revenue than a specific tariff.
E) an import quota would raise more revenue than a specific tariff.
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11
Chapter 10: The Political Economy of Trade Policy
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Sample Questions
Q1) Today U.S.protectionism is concentrated in A) high-tech industries.
B) labor-intensive industries.
C) industries in which Japan has a comparative advantage.
D) computer intensive industries.
E) capital-intensive industries.
Q2) The General Agreement on Tariffs and Trade and the World Trade Organization have resulted in
A) the establishment of universal trade adjustment assistance policies.
B) the establishment of the European Union.
C) the reciprocal trade clause.
D) reductions in trade barriers via multilateral negotiations.
E) the total protection of all intellectual property rights.
Q3) The optimum tariff is most likely to apply to
A) a small tariff imposed by a small country.
B) a small tariff imposed by a large country.
C) a large tariff imposed by a small country.
D) a large tariff imposed by a large country.
E) an ad valorem tariff on a small country.
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Page 12
Chapter 11: Trade Policy in Developing Countries
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Sample Questions
Q1) The remarkable success of the HPAEs proves that
A) trade policy is the key to successful economic growth.
B) trade policy is irrelevant to successful economic growth.
C) high educational standards is the key to successful economic growth.
D) dual economies must suffer economic stagnation.
E) trade policy can lead to a higher standard of living for developing countries.
Q2) An efficient economy would set the marginal product in the traditional sector
A) lower than that in the modern non-traditional sector.
B) higher than that in the modern sophisticated sector.
C) equal to that in the modern sophisticated sector.
D) lower in the relatively capital intensive sector.
E) higher in the relatively capital intensive sector.
Q3) The infant industry argument calls for active government involvement
A) only if the government forecasts are accurate.
B) only if some market failure can be identified.
C) only if the industry is not one already dominated by industrial countries.
D) only if the industry has a high value added.
E) only if the industry is independently able to earn high returns.
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Chapter 12: Controversies in Trade Policy
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Q1) The argument that strategic planning is not likely to be practical due to insufficient information means that
A) because of trade secrets, the government does not know true cost relationships in any given industry.
B) if the government had all the relevant information in a given industry then it could decide whether a subsidy would enhance the public's welfare.
C) even if the government had all the relevant information in a given industry, it still could not decide whether a subsidy would enhance the public's welfare.
D) due to recent cuts in the Department of the Census' sampling budgets, industry surveys are no longer reliable, so that there is no way to determine if a subsidy is in the public's interest.
E) the government would need to employ its intelligence agencies in order to gain a complete understanding of the market.
Q2) Refer to the above table.Suppose Airbus is set to produce the aircraft before Boeing.Which company will enter the market?
Q3) Describe the environmental Kuznets curve.
Q4) What is a pollution haven?
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