Open Economy Macroeconomics
Practice Exam
Course Introduction
Open Economy Macroeconomics explores the macroeconomic interactions between countries, focusing on how trade, capital flows, exchange rates, and monetary and fiscal policies influence national economies in a global context. The course examines theoretical frameworks such as the Mundell-Fleming model, balance of payments, and the determination of exchange rates under various regimes. It also addresses contemporary issues like global financial crises, currency unions, international policy coordination, and the impact of globalization on economic performance. Students will develop a deeper understanding of the interconnectedness of economies and the challenges policymakers face in an increasingly integrated world.
Recommended Textbook
International Economics 11th Edition by Dominick Salvatore
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Chapter 1: Introduction
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Sample Questions
Q1) The opening or expansion of international trade usually affects all members of society:
A)positively
B)negatively
C)most positively but some negatively
D)most negatively but some positively
Answer: C
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) International trade theory refers to:
A)the microeconomic aspects of international trade
B)the macroeconomic aspects of international trade
C)open economy macroeconomics or international finance
D)all of the above
Answer: A
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Chapter 2: The Law of Comparative Advantage
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Q1) Ricardo explained the law of comparative advantage on the basis of:
A)the labor theory of value
B)the opportunity cost theory
C)the law of diminishing returns
D)all of the above
Answer: A
Q2) 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).If 3X is exchanged for 3Y:
A)nation A gains 2X
B)nation B gains 6Y
C)nation A gains 3Y
D)nation B gains 3Y
Answer: B
Q3) Explain the mercantilist view on trade.
Answer: The mercantilists believed trade was a zero-sum game - that one nation's gain was another's loss.They advocated export promotion and import restriction.
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Chapter 3: The Standard Theory of International Trade
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Q1) The marginal rate of transformation (MRT)of X for Y refers to:
A)the amount of Y that a nation must give up to produce each additional unit of X
B)the opportunity cost of X
C)the absolute slope of the production frontier at the point of production
D)all of the above
Answer: D
Q2) 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.
Q3) Community indifference curves:
A)are negatively sloped
B)are convex to the origin
C)should not cross
D)all of the above
Answer: D
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Chapter 4: Demand and Supply, offer Curves, and the
Terms of Trade
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Q1) 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.
Q2) If the nation's taste for its import commodity increases:
A)the nation's terms of trade remain unchanged.
B)the nation's terms of trade deteriorate.
C)the partner's terms of trade deteriorate.
D)the partner's terms of trade improve.
Q3) The offer curve of a nation shows:
A)the supply of a nation's imports
B)the demand for a nation's exports
C)the trade partner's demand for imports and supply of exports
D)the nation's demand for imports and supply of exports
Q4) Suppose the terms of trade for nation X rises from 100 to 110.Explain how this will impact the terms of trade for nation Y.
Page 6
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Chapter 5: Factor Endowments and the Heckscher-Ohlin
Theory
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Q1) One potential reasonable explanation for the Leontief paradox is that
A)The U.S.exports capital intensive goods
B)U.S.labor is more productive than its foreign counterpart
C)U.S.tastes were biased strongly in favor of capital intensive goods
D)The two factor model that was used was incomplete
Q2) With equal technology nations will have equal K/L in production if:
A)factor prices are the same
B)tastes are the same
C)production functions are the same
D)all of the above
Q3) Which of the following situations would violate the assumptions of the H-O model?
A)Doubling all inputs doubled the production of all outputs.
B)Nation 1 has technology that is different from Nation 2.
C)Nation 1's trade is balanced.
D)Nation 2 does not completely specialize in either good.
Q4) Define and explain factor intensity reversal
Q5) List three possible explanations for the Leontief paradox
Page 7
Q6) List at least four of the assumptions of the Heckscher-Ohlin theory
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Chapter 6: Economies of Scale, imperfect Competition, and International Trade
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Q1) A developed and developing nation are most likely to engage in
A)inter-industry trade based on economies of scale
B)intra-industry trade based on economies of scale
C)inter-industry trade based on comparative advantage
D)intra-industry trade based on comparative advantage
Q2) According to the Environmental Performance Index,the highest ranking country is A)New Zealand.
B)Switzerland.
C)the United States.
D)Germany.
Q3) Offshoring refers to
A)the purchase of parts and components from overseas to reduce production costs.
B)a firm producing parts in its own plants abroad.
C)importing final consumer goods instead of purchasing them domestically.
D)technology transfer from one country to another.
Q4) Increasing returns to scale means that
A)doubling all inputs leads to a more than proportional increase in output.
B)doubling all inputs leads to a proportional increase in output.
C)doubling all inputs leads to a less than proportional increase in output.
D)doubling all inputs leads to a decrease in output.
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Chapter 7: Economic Growth and International Trade
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Q1) Dynamic factors in trade theory refer to changes in all of the above except:
A)factor endowments
B)technology
C)tastes
D)tariff structure
Q2) Immiserizing growth is most likely in which of the following cases?
A)When the country is small.
B)When the demand for the nation's export good is inelastic.
C)In developed countries.
D)When growth causes the terms of trade to improve.
Q3) When a nation's growth deteriorates its terms of trade to the point that its welfare drops it is experiencing
A)debilitating growth
B)immiserizing growth
C)population growth
D)GDP per capital growth
Q4) What is meant by comparative static analysis?
Q5) Use graphs to demonstrate the effect of an increase in a small country's capital stock at constant commodity prices.
Page 9
Q6) What does the Rybczynski theorem postulate?
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Chapter 8: Economic Growth and International Trade
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Q1) Under what conditions can a tariff improve a nation's welfare?
Q2) The optimum tariff is the tariff rate that
A)saved the most domestic jobs
B)generates the largest tax revenue
C)maximizes domestic production
D)maximizes the net benefit from improving the improvement in the terms of trade relative to loss from the reduction in the volume of trade
Q3) A tariff in a small country will benefit
A)domestic consumers.
B)foreign producers.
C)the government imposing the tariff.
D)the world as a whole.
Q4) If a small nation increases the tariff on its import commodity:
A)the rent of domestic producers of the commodity increases
B)the protection cost of the tariff decreases
C)the deadweight loss decreases
D)all of the above
Q5) Explain the difference between an ad valorem,specific and compound tariff
Q6) Is there such thing as an optimum tariff for a small nation?
Q7) Explain the redistribution effects of a tariff.
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Chapter 9: Nontariff Trade Barriers and the New Protectionism
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Q1) An increase in the demand of the imported commodity subject to a given import quota:
A)reduces the domestic quantity demanded of the commodity
B)increases the domestic production of the commodity
C)reduces the domestic price of the commodity
D)reduces the producers' surplus
Q2) What is a quota and how does it compare to the economic effects of a tariff?
Q3) What is an infant industry,and why would a country want to protect it?
Q4) Game theory refers to:
A)a method of choosing the optimal strategy in conflict situations
B)the granting of a subsidy to correct a domestic distortion
C)the theory of tariff protection
D)the theory of comparative advantage
Q5) The WTO grew out of the following organization
A)the Bretton Woods system
B)The UN
C)The World Bank
D)The GATT
Q6) What is dumping and what are its various forms?
Q7) Summarize the Smoot-Hawley Tariff Act and its effects. Page 11
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Chapter 10: Economic Integration: Customs Unions and Free Trade Areas
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Q1) A customs union that allows for the free movement of labor and capital among its member nations is called a:
A)preferential trade arrangement
B)free-trade area
C)common market
D)all of the above
Q2) A trade-diverting customs union results in:
A)trade diversion only
B)trade creation only
C)both trade creation and trade diversion
D)we cannot say
Q3) The benefit that Mexico is likely to receive from NAFTA:
A)greater export-led growth
B)encouraging the return of flight capital
C)more rapid structural change
D)all of the above
Q4) Discuss the attempts at economic integration in developing countries.Why have these attempts been less successful than in developed countries?
Q5) What is trade diversion?
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Chapter 11: International Trade and Economic Development
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Q1) Developing nations often experience wildly fluctuating export prices for their primary products because of:
A)inelastic and stable demand and supply
B)elastic and unstable demand and supply
C)inelastic and unstable demand and supply
D)elastic and stable demand and supply
Q2) (a)Why did large developing nations generally follow a policy of import substitution as a strategy for growth during the 1950s,1960s,and 1970s?Why was this not generally possible for small developing nations?
(b)Why was the policy of import substitution generally a failure?
Q3) 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?
Q4) According to traditional trade theory,a developing nation should export the commodity:
A)of its comparative advantage
B)that it cannot produce relatively more efficiently
C)that intensive in the nation's relatively scarce factor
D)that is most differentiated.
Q5) List the current problems facing developing countries?
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Chapter 12: International Resource Movements and Multinational Corporations
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Q1) International capital flows
A)increase world social welfare.
B)increase the welfare of the host country but not the investing country.
C)increase the welfare of the investing country but not the host country.
D)decrease world social welfare.
Q2) Foreign holdings of U.S.long-term securities (stocks and bonds)have ________ over the last fifty
A)decreased
B)increased
C)remained unchanged
D)been volatile,at times increasing and at time decreasing
Q3) What is vertical integration and how is it related to direct foreign investment?
Q4) Which of the following areas accounts for the largest amount of U.S.foreign direct investment?
A)Asia and the Pacific
B)Europe
C)Latin America
D)Canada
Q5) Discuss the motives for international labor migration.
Q6) What are the basic motives for international portfolio investments? Page 15
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Chapter 13: Balance of Payments
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Q1) When the resident of a foreign nation (1)sells a U.S.stock and (2)deposits the proceeds in a U.S.bank,the U.S.:
A)credits financial for (1)and debits financial for (2)
B)credits the current account and debits financial
C)debits financial and credits official reserves
D)debits financial for (1)and credits financial for (2)
Q2) When the U.S.ships food aid to a developing nation,the U.S.debits:
A)unilateral transfers
B)services
C)financial account
D)official reserves
Q3) The largest trading partner of the United States is
A)Mexico
B)China
C)Japan
D)Canada
Q4) What is meant by autonomous transactions?
Q5) Carefully define the balance of payments.
Q6) What is the difference between a credit transaction and a debit transaction in the balance of payments?
Page 17
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Chapter 14: Foreign Exchange Markets and Exchange Rates
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Q1) A shortage of pounds under a flexible exchange rate system results in:
A)a depreciation of the pound
B)a depreciation of the dollar
C)an appreciation of the dollar
D)no change in the exchange rate
Q2) An increase in the pound price of the dollar represents:
A)an appreciation of the dollar
B)a depreciation of the dollar
C)an appreciation of the pound
D)a devaluation of the dollar
Q3) The exchange rate is kept within narrow limits in different monetary centers by:
A)hedging
B)exchange arbitrage
C)interest arbitrage
D)speculation
Q4) Spot currency transactions must settle within
A)two business days
B)one week
C)one month
D)one year
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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 surplus nation will have to give up in the long-run its goal of:
A)price stability
B)fixed exchange rate
C)price stability or fixed exchange rate
D)price stability and fixed exchange rate
Q2) An unexpected increase in the U.S.money supply leads to:
A)an immediate reduction in the U.S.interest rate
B)an immediate larger dollar depreciation
C)a gradual appreciation of the dollar over time
D)all of the above
Q3) Suppose that the price level in the United States is 135 and the price level in Germany is 234.What would absolute purchasing power parity theory predict the dollar/euro exchange rate to be?
Q4) The monetary approach assumes that the following assumption holds:
A)domestic and foreign bonds are perfect substitutes
B)covered interest arbitrage holds
C)expectations do not affect the future spot exchange rate.
D)the risk premium is positive
Q5) Explain absolute and relative purchasing power parity (PPP).
Page 19
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Chapter 16: The Price Adjustment Mechanism With Flexible and Fixed Exchange
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Q1) Under the gold standard:
A)each nations defines the price of gold in terms of its currency and then stands ready to buy and sell any amount of gold at that price
B)there is a fixed relationship between any two currencies called the mint parity
C)the exchange rate is determined by demand and supply between the gold points and is prevented from moving outside the gold points by gold shipments
D)all of the above
Q2) A nation's demand curve for foreign exchange is derived from the:
A)foreign demand curve for the nations' exports
B)nation's supply curve of exports
C)domestic demand curve for imports and the foreign supply curve for the nation's imports
D)foreign demand curve and the domestic supply curve for the nation's exports
Q3) Explain why under a gold standard exchange rate system that the market exchange rate will never deviate far from the mint parity rate.
Q4) Explain why currency pass-through is not likely to be complete.
Q5) Explain the meaning of the J-curve effect and exactly how it works.
Page 20
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Chapter 17: The Income Adjustment Mechanism and Synthesis
of Automatic
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Q1) Why is the foreign trade multiplier smaller than the corresponding multiplier in a closed economy?
Q2) Of the G-7 industrialized economies,the following nation has the lowest income elasticity of imports
A)The U.S.
B)German
C)Canada
D)Japan
Q3) The equilibrium level of national income in an open economy is given by:
A)I + X = S + M
B)X - M = S - I
C)I + (X-M)= S
D)all of the above
Q4) When considering the impact of foreign repercussions relative to a scenario without such repercussions,for a large nation the foreign trade multiplier will be
A)Larger
B)smaller
C)exactly the same
D)any of the above
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Chapter 18: Open-Economy Macroeconomics: Adjustment Policies
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Q1) In order to achieve internal and external balance simultaneously,a nation must usually use at least:
A)one policy
B)two policies
C)three policies
D)cannot say
Q2) What is meant by a three market balance equilibrium?
Q3) The LM curve is positively sloped because:
A)at higher levels of income,the transactions demand for money is higher.
B)higher rates of interest lead to lower 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 higher
Q4) A nation can eliminate domestic overemployment and a balance of payments surplus while maintaining a fixed exchange rate through
A)expansionary fiscal policy and expansionary monetary policy
B)expansionary fiscal policy and contractionary monetary policy
C)contractionary fiscal policy and expansionary monetary policy
D)contractionary fiscal policy and contractionary monetary policy
Q5) What are direct controls?
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Chapter
Aggregate Demand and Aggregate Supply
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Q1) In general,as the economy expands or contracts over the business cycle
A)prices change rapidly
B)prices remain unchanged except in a recession
C)prices remain unchanged until the economy reaches full employment
D)prices change,but slowly
Q2) 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
Q3) How does an increase in government expenditure impact aggregate demand?
Q4) With high short-term international capital flows,fixed exchange rates,and flexible prices
A)monetary policy is effective
B)fiscal policy is effective
C)both fiscal and monetary policies are effective
D)neither fiscal policy nor monetary policies are effective
Q5) What conditions lead to the stagflationary environment of the 1970s?
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Coordination
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Q1) The policy of changing par values by small preannounced amounts at frequent intervals until the equilibrium exchange rate is reached is called:
A)crawling peg
B)adjustable peg
C)managed float
D)dirty float
Q2) An alleged advantage of flexible over fixed exchange rates is:
A)market efficiency
B)stabilizing speculation
C)price discipline
D)all of the above
Q3) Why is a flexible exchange rate system likely to be more efficient that a fixed exchange rate system?
Q4) The most extreme form of an exchange rate peg is a
A)currency board
B)flexible rate
C)floating rate
D)adjustable rate
Q5) What is a currency board?
Page 24
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Page 25
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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) Under a gold standard
A)there cannot be a balance of payments deficit.
B)there cannot be a balance of payments surplus.
C)balance of payments imbalances should be quickly corrected by gold flows.
D)countries must sterilize all gold transactions.
Q3) Balance of payments adjustment under the gold standard is now believed to have occurred primarily through:
A)the price-specie-flow mechanism
B)gold shipments
C)stabilizing short-term capital flows and changes in national incomes
D)free trade
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