Open Economy Macroeconomics
Question Bank
Course Introduction
Open Economy Macroeconomics explores the dynamics of national economies interacting with the global environment, focusing on trade, capital flows, exchange rates, and international policy coordination. The course examines how countries manage macroeconomic policies under different exchange rate systems, the impact of globalization on inflation, unemployment, and economic growth, and the role of institutions such as central banks and international organizations. Through theoretical frameworks and empirical evidence, students analyze topics such as balance of payments, currency crises, monetary and fiscal policy in open economies, and the effects of international shocks on domestic markets.
Recommended Textbook
International Economics 6th Edition by James Gerber
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830 Verified Questions
830 Flashcards
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Page 2
Chapter 1: The United States in a Global Economy
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Sample Questions
Q1) Describe at least three ways that global capital markets are different today from what they were like in the late nineteenth century.
Answer: There are more varieties of financial instruments available.A major difference is that exchange rates were fixed then which meant less exchange rate risk and uncertainty then and now higher costs and transactions volume given the need to manage that risk.Transaction costs are significantly lower today than in the past.
Q2) What do economists call movements of labor and capital between nations?
Answer: Factor flows
Q3) Daily foreign exchange transactions have grow from about $15 billion in 1973 to about $4 trillion today.
A)True
B)False
Answer: True
Q4) Which nations does the acronym BRIC stand for?
Answer: Brazil,Russia,India and China
Q5) Why are high domestic savings rates important?
Answer: It correlates with high domestic investment
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Chapter 2: International Economic Institutions Since World War Ii
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Q1) Which of the following is TRUE?
A)A country experiencing a debt or currency crisis would contact the World Trade Organization.
B)The World Trade Organization was formed at the Bretton Woods conference.
C)The General Agreement on Tariffs and Trade created the World Trade Organization in the negotiations and treaty known as the Uruguay Round.
D)The World Trade Organization has no power to resolve trade disputes and to enforce their resolution.
Answer: C
Q2) The World Bank was created as a result of the Bretton Woods conference and was originally focused on the reconstruction of Europe after World War II.
A)True
B)False
Answer: True
Q3) Which round of GATT first addressed subsidies?
Answer: The Tokyo Round
Q4) How is the IMF funded?
Answer: It collects fees called quotas from it members.
Page 4
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Chapter 3: Comparative Advantage and the Gains From Trade
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Q1) Economic restructuring that takes place as a result of opening to trade with other countries
A)contradicts the idea of gains from trade.
B)causes some trading activity to be zero sum.
C)worsens the nation's allocation of resources.
D)improves the nation's allocation of resources.
E)is a highly unlikely event.
Answer: D
Q2) Based on Table 3.1,the opportunity cost of a pair of shoes in the United States is A)three computers.
B)two computers.
C)one computer.
D)one-half computer.
E)None of the above.
Answer: D
Q3) Mercantilists perceived trade as a zero sum game.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Comparative Advantage and Factor
Endowments
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Q1) Suppose that Brazil is capital abundant and Chile is natural resource abundant.If timber is natural resource intensive and computers are capital intensive,then
A)Chile will produce more computers after trade begins with Brazil.
B)Brazil will produce more timber after trade begins with Chile.
C)Chile will produce more timber after trade begins with Brazil.
D)Brazil will completely specialize in computers once trade begins with Chile.
Q2) What is the Heckscher-Ohlin theorem? Using the case studies in the chapter on U.S.trade with China describe the theory and the resulting trade patterns that would support it.
Q3) The L in OLI theory stands for loyalty,and this factor makes it more difficult for firms to substitute foreign operations for domestic as they fear a loss of sales due to negative publicity.
A)True
B)False
Q4) Offshoring by domestic firms causes job losses not job expansion in the home market.
A)True
B)False
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Q5) In the Heckscher-Ohlin model,what assumption is made about opportunity costs?
Chapter 5: Beyond Comparative Advantage
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Q1) Under some circumstances,trade could stifle the development of new industries and reduce global efficiency.All of the following describe conditions that could lead to that situation except
A)an initial head start gives a scale advantage to already existing firms in one country.
B)diseconomies of scale make it impossible for new firms to enter the market.
C)a location has a better-developed linkage between suppliers and producers,giving it a cost advantage.
D)a historical accident,such as the shifting of airplane production to the United States to avoid World War II bombings,causes firms in one location to have a competitive advantage.
Q2) Intraindustry trade refers to
A)international trade of products made within the same industry.
B)international trade of products made across different industries.
C)trade that occurs as a result of comparative advantage.
D)the exchange of non-similar items.
E)trade that occurs mostly within developing countries.
Q3) If the United States and Mexico trade Budweiser for Modelo beer,what type of trade does this represent?
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Chapter 6: The Theory of Tariffs and Quotas
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Q1) In a small country,the net national cost of tariff protection is equal to the reduction in consumer surplus minus
A)the gain to foreigners.
B)the increase in government revenue and the increase in producer surplus.
C)the increase in government revenue.
D)the increase in producer surplus.
E)the efficiency loss and the consumption side loss.
Q2) Which of the following would be a deadweight loss from a tariff?
A)The shift of consumer surplus to government
B)The increase in producer surplus
C)The decrease in consumer surplus
D)The decrease in consumer surplus due to a drop in consumption
E)All of the above.
Q3) Tariff revenue is an important source of operating revenue for many governments of high income countries.
A)True
B)False
Q4) Why is the Doha Round called the Doha Development Round?
Q5) Developing countries have identified which key issues as important to them in current trade talks?
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Chapter 7: Commercial Policy
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Q1) Under Special 301,what is the U.S.government required to do?
Q2) The biggest flaw in the logic of the labor argument is the failure to consider A)the needs of developing countries.
B)the impact of tariffs on inflation.
C)the differences in national productivity levels.
D)the strategy of multinational businesses.
E)the impact on employment levels.
Q3) The more difficult the goal,the more likely military force is going to be needed to back up economic sanctions.
A)True
B)False
Q4) 301-actions are more frequently used as a tool of trade policy,especially since the formation of the World Trade Organization.
A)True
B)False
Q5) Critique the infant industry or the labor argument for protection.
Q6) Describe some of the gains from lowering trade barriers that may be difficult to measure.
Q7) How did the Uruguay Round of GATT impact agriculture?
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Chapter 8: International Trade and Labor and Environmental Standards
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Sample Questions
Q1) What environmental problem gets worse as income rises according to your text?
Q2) Some proponents of trade sanctions argue for changes in policy because they fear low standards will be used to capture markets and foreign investment.While theoretically possible,there is little or no support for the view that countries use low labor standards this way,because
A)countries with low labor standards generally have trouble attracting foreign investment.
B)low standards can reduce costs,but they cannot change a country's comparative advantage.
C)it is impossible to lower labor standards.
D)Both A and B are correct.
E)A,B,and C are all correct.
Q3) There is clear evidence of a race-to-the-bottom internationally,regarding working conditions and the environment.
A)True
B)False
Q4) Is there one optimal environmental standard for the entire world? If not,how might using trade barriers to enforce country-specific environmental standards reduce overall well being?
Page 10
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Chapter 9: Trade and the Balance of Payments
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Q1) For the United States,U.S.direct foreign investment abroad is more significant than foreign investment in U.S.securities and currency.
A)True
B)False
Q2) Your text identifies all of the following as reasons why unsustainable debt may occur except
A)when countries are dependent on one or two key export commodities,and there is a sudden drop in the price of those commodities.
B)when natural disasters occur.
C)when civil conflicts are resolved and a peace dividend occurs.
D)when there are corrupt politicians and practices.
E)when government officials try to buy votes with unsustainable spending.
Q3) Based on Table 9.2,the current account balance is
A)-2 percent of GNP.
B)+2 percent of GNP.
C)+4 percent of GNP.
D)-4 percent of GNP.
E)None of the above.
Q4) What does a current account deficit do that is positive for a nation?
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Chapter 10: Exchange Rates and Exchange Rate Systems
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Sample Questions
Q1) An American firm that buys foreign exchange because its managers expect the dollar to depreciate is
A)increasing the supply of foreign exchange.
B)increasing the demand for foreign exchange.
C)speculating.
D)Both A and B.
E)Both B and C.
Q2) If U.S.consumers increase their demand for foreign products and foreign travel,the U.S.dollar would tend to depreciate as more dollars are supplied to foreign exchange markets.
A)True
B)False
Q3) Under a fixed exchange standard,if the domestic demand for foreign exchange increases
A)the central monetary authority must meet the demand out of its reserves.
B)the central monetary authority must increase the supply of domestic money.
C)the fixed exchange standard will breakdown.
D)inflation will increase.
E)the domestic currency must be depreciated.
Q4) How is dollarization different from monetary union?
Page 12
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Chapter 11: An Introduction to Open Economy
Macroeconomics
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Sample Questions
Q1) When aggregate demand increases,
A)the price level is likely to rise as GDP rises.
B)the price level is likely to fall as GDP rises.
C)aggregate supply will shift to the right.
D)aggregate supply will shift to the left.
Q2) Expansionary fiscal policy is likely to lead a nation's currency to depreciate.
A)True
B)False
Q3) For any given increase in spending that is not directly caused by an increase in income,the impact on equilibrium GDP is greater than the initial spending increase.
A)True
B)False
Q4) Government spending and taxes
A)do not change aggregate demand.
B)are an important component of aggregate supply.
C)do not play a big role in determining GDP.
D)are a major determinant of aggregate demand.
E)cannot affect the price level.
Q5) How does expansionary monetary policy affect a nation's exchange rate?
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Chapter 12: International Financial Crises
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Q1) Tax systems in developing countries tend to be efficient and reliable.
A)True
B)False
Q2) Deficits financed by borrowed money lead to inflation,and in a fixed or crawling peg exchange rate system,this leads to the real exchange rate being undervalued.
A)True
B)False
Q3) If governments promise to bail out the financial system in the event of a crisis,this creates a moral hazard problem.Describe this problem.
Q4) A flexible exchange rate system guarantees a country will not experience an exchange rate crisis.
A)True
B)False
Q5) Which of the following does not occur in resolving a debt crisis?
A)Debts are restructured
B)Repayment periods are shortened
C)Interest rates are reduced
D)Some partial debt forgiveness
Q6) What are the costs of capital mobility?
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Chapter 13: The United States in the World Economy
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Q1) Even though Mexico is a developing country,the NAFTA market is very rich.
A)True
B)False
Q2) What is the United States primary trade promotion initiative with Africa?
Q3) Why is the U.S.putting less emphasis on multilateral and more emphasis on bilateral trade agreements?
Q4) Twenty-four years before CUSTA,another agreement between the same countries covered trade in
A)textiles.
B)steel.
C)autos.
D)agriculture.
E)telecommunications.
Q5) What is the significant feature of a preferential arrangement?
Q6) Describe the trends in U.S.manufacturing employment and U.S.manufacturing output over the last 40 years.What factors have contributed to these?
Q7) What two trends was Canada trying to address in negotiating CUSTA?
Q8) When did NAFTA go into effect?
Q9) What is the main problem with rules of origin?
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Chapter 14: The European Union: Many Markets Into One
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Q1) The Single European Act was expected to create economic benefits by reducing the costs and risks of currency market transactions.
A)True
B)False
Q2) The first and biggest problem the EU faces in its expansion to the east is
A)the reform of its agricultural subsidy programs.
B)the lack of democracy in the countries that are most likely to become members.
C)the unwillingness of the new members to adopt EU rules.
D)the lack of market economies in the countries that are most likely to become members.
E)the unwillingness of citizens in the new member countries to migrate to higher income countries.
Q3) Subsidiarity requires nations to give up some of their national sovereignty.
A)True
B)False
Q4) Adopting the Single European Act had broad popular support;the Treaty on European Union was more controversial.
A)True
B)False
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Chapter 15: Trade and Policy Reform in Latin America
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Q1) The main difference between stabilization policies and structural reform policies is that stabilization policies
A)focus on microeconomic issues and structural reform policies focus on the macroeconomic environment.
B)focus on macroeconomic issues and structural reform policies focus on the microeconomic environment.
C)are rarely used by reform governments;they prefer to use structural reform policies in their place.
D)have smaller economic impacts than structural reform policies.
E)create less unemployment than structural reform policies.
Q2) Private capital flows in the form of both direct and portfolio investment began to return to Latin America after 1989,effectively marking the end of the Lost Decade.
A)True
B)False
Q3) Briefly describe orthodox stabilization policies.
Q4) What economic problems persist in Latin America? How has this shaped recent policy in the region and why are changes particularly challenging?
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Chapter 16: Export-Oriented Growth in East Asia
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Q1) Investment in education in the HPAE was ________ in ________.
A)low;primary schools
B)high;primary schools
C)low;primary and secondary schools
D)high;primary and secondary schools
E)high;university education
Q2) The main contributor to growth in the HPAE according to empirical research was government industrial policies.
A)True
B)False
Q3) Falling inequality has been a feature of the HPAE due to land reform,free public education,free basic health care,and significant investments in infrastructure for communication,sanitation,and transportation.
A)True
B)False
Q4) Rent-seeking activities have been a major problem in the HPAE and contributed greatly to the Asian financial crisis.
A)True
B)False
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Chapter 17: The Bric Countries in the World Economy
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Q1) Special economic zones in China have been
A)the same as export processing zones.
B)centers of economic reform.
C)controlled by state run enterprises.
D)closed to foreigners.
E)poor regions that are targeted for industrial development.
Q2) Trade in services such as information technology
A)is like other trade,it creates winners and losers,but the gains for national economies likely outweigh the costs.
B)creates gains for India's economy,but national welfare losses for the countries that import these services.
C)make it highly likely that information technology jobs will ultimately disappear in the industrialized countries.
D)is not perceived as threatening by industrialized countries so is unlikely to lead to any protectionist sentiment or pressures in the way the manufacturing does.
Q3) Describe how Brazil and Russia are similar and how they are different.
Q4) What is the difference between Chinese and Indian trade in services?
Q5) Why has Chinese exchange rate policy been controversial?
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