Principles of International Economics
Exam Answer Key
Course Introduction
Principles of International Economics introduces students to the fundamental theories and concepts governing trade and financial interactions among countries. The course explores why nations engage in trade, how comparative advantage shapes the global exchange of goods and services, and the impact of trade policies such as tariffs and quotas. Students also examine the workings of foreign exchange markets, balance of payments, and the international monetary system. Topics include the effects of globalization on economic growth, income distribution, and the role of international economic institutions. Through real-world case studies and quantitative analysis, students gain a comprehensive understanding of the complexities and dynamics of the global economy.
Recommended Textbook
International Economics 15th Edition by Robert Carbaugh
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Chapter 1: The International Economy and Globalization
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Sample Questions
Q1) If a nation has an open economy,it means that the nation:
A) Allows private ownership of capital
B) Has flexible exchange rates
C) Has fixed exchange rates
D) Conducts trade with other countries
Answer: D
Q2) With globalization and import competition,U.S.prices have generally:
A) increased
B) decreased
C) remained stable
D) all of these at various times
Answer: B
Q3) Human rights activists contend that this organization supports governments that permit sweatshops:
A) The International Organization for Standardization
B) The International Monetary Fund
C) The World Health Organization
D) All of these
Answer: B
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Page 3
Chapter 2: Foundations of Modern Trade Theory:
Comparative Advantage
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Q1) Assume that the United States and Canada engage in trade.If the international terms of trade coincides with the Canadian cost ratio,the United States realizes all of the gains from trade with Canada.
A)True
B)False
Answer: True
Q2) Consider Figure 2.2.With specialization,Canada produces:
A) 16 televisions
B) 12 televisions and 8 refrigerators
C) 8 televisions and 16 refrigerators
D) 24 refrigerators
Answer: D
Q3) A nation realizes maximum gains from trade at the point where the international terms-of-trade line is tangent to its community indifference curve.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Sources of Comparative Advantage
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Q1) Hong Kong is relatively abundant in labor,while Canada is relatively abundant in capital.In both countries the production of shirts is relatively more labor intensive than the production of computers.According to the factor endowment theory,Hong Kong will have a(n):
A) Absolute advantage in the production of shirts and computers
B) Absolute advantage in the production of computers
C) Comparative advantage in the production of shirts
D) Comparative advantage in the production of computers
Answer: C
Q2) Legislation requiring domestic manufacturers to install pollution abatement equipment tends to promote:
A) Higher production costs and an increase in output
B) Higher production costs and a decrease in output
C) Lower production costs and an increase in output
D) Lower production costs and a decrease in output
Answer: B
Q3) The theory of overlapping demands applies best to trade in manufactured goods.
A)True
B)False
Answer: True
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Chapter 4: Tariffs
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Sample Questions
Q1) Which of the following is a fixed percentage of the value of an imported product as it enters the country?
A) Specific tariff
B) Ad valorem tariff
C) Nominal tariff
D) Effective tariff
Q2) With a compound duty,its "specific" portion neutralizes the cost disadvantage of domestic manufacturers that results from tariff protection granted to domestic suppliers of raw materials,and the "ad valorem" portion of the duty grants protection to the finished-goods industry.
A)True
B)False
Q3) The most vocal political pressure for tariffs is generally made by:
A) Consumers lobbying for export tariffs
B) Consumers lobbying for import tariffs
C) Producers lobbying for export tariffs
D) Producers lobbying for import tariffs
Q4) How can tariffs be justified?
Q5) What happens to effective protection when the value added by the domestic producer declines?
6
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Chapter 5: Nontariff Trade Barriers
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Sample Questions
Q1) Consider Figure 5.3.In the absence of trade,Sweden's equilibrium price and quantity of apples would be:
A) $0.60 and 22 pounds
B) $0.60 and 14 pounds
C) $1.00 and 18 pounds
D) $1.40 and 14 pounds
Q2) Consider Figure 5.3.If the Swedish government auctions import licenses to the highest bidder in a competitive market,it could realize revenues of up to:
A) $3.20
B) $4.00
C) $4.80
D) $5.60
Q3) Anti-dumping law has been called unfair for all of the following reasons EXCEPT:
A) they do not reflect currency fluctuations
B) they are based on average variable cost
C) they are based on average total cost
D) all of these are reasons to call these laws unfair
Q4) What are the intent and impact of domestic content requirements?
Q5) Describe some of the differences between tariffs and quotas?
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Chapter 6: Trade Regulations and Industrial Policies
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Sample Questions
Q1) Copyrights,trademarks,and patents are used to protect the intellectual property of a nation from foreign imitators.
A)True
B)False
Q2) The most recent round of multilateral trade negotiations is the:
A) Kennedy Round
B) Tokyo Round
C) Doha Round
D) Geneva Round
Q3) Proponents of the Smoot-Hawley Act of 1930 viewed it as a means of combating domestic unemployment.
A)True
B)False
Q4) The high point of U.S.protection culminated with the passage of the:
A) Smoot-Hawley Act of 1930
B) General Agreements on Tariffs and Trade in 1947
C) Trade Reduction Act of 1962
D) Adjustment Assistance Act of 1970
Q5) Has industrial policy contributed significantly to Japan's economic growth?
Q6) What is the essential idea behind strategic trade policy?
Page 8
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Chapter 7: Trade Policies for the Developing Nations
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Sample Questions
Q1) Consider Figure 7.3.Under a profit-maximizing cartel,producers realize:
A) Profits totaling $280
B) Profits totaling $360
C) Losses totaling $140
D) Losses totaling $180
Q2) Which trade strategy have developing countries used to replace commodity exports with exports such as processed primary products,semi-manufacturers,and manufacturers?
A) Multilateral contract
B) Buffer stock
C) Export promotion
D) Export quota
Q3) The OPEC nations during the 1970s manifested their market power by utilizing:
A) Export tariffs levied for revenue purposes
B) Export tariffs levied for protective purposes
C) Import tariffs levied for protective purposes
D) Import tariffs levied for revenue purposes
Q4) Most of China's manufactured exports have constituted labor-intensive goods.
A)True
B)False
Page 9
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Chapter 8: Regional Trading Arrangements
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Sample Questions
Q1) Suppose that Mexico and Canada form a free-trade area and Canada begins importing steel from Mexico rather than from Germany.There occurs:
A) Trade diversion
B) Trade creation
C) Trade destruction
D) Trade exhaustion
Q2) If a customs union included all of the countries in the world,there could exist only trade creation,not trade diversion.
A)True
B)False
Q3) Consider Figure 8.2.With free trade,Portugal produces 15 tons of steel,consumes 30 tons of steel,and imports 15 tons of steel.
A)True
B)False
Q4) All welfare consequences of a regional trading arrangement are dynamic
A)True
B)False
Q5) Who were the losers in the U.S.as a result of NAFTA?
Q6) Explain the theory of optimum currency areas.
Page 10
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Chapter 9: International Factor Movements and Multinational
Enterprises
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Q1) Multinational corporations often locate manufacturing operations abroad in order to take advantage of foreign resource endowments or wage scales.
A)True
B)False
Q2) Labor migration tends to increase output and decrease wages in the country of immigration while decreasing output and increasing wages in the country of emigration.
A)True
B)False
Q3) The effect of workers migrating from low-wage Mexico to high-wage United States is to redistribute income from capital to labor in the United States and from labor to capital in Mexico.
A)True
B)False
Q4) Critics of multinational corporations maintain that they often abandon domestic workers in order to take advantage of lower wage scales abroad.
A)True
B)False
Q5) What are guest workers?
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Chapter 10: The Balance of Payments
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Sample Questions
Q1) If Bank of America receives repayment for a loan it made to a Mexican firm,the U.S.capital account would register an inflow.
A)True
B)False
Q2) Most economists belief that in the 1980s,a massive outflow of capital caused a current account deficit for the United States.
A)True
B)False
Q3) The burden of a current account deficit would be the least if a nation uses what it borrows to finance:
A) Unemployment compensation benefits
B) Social Security benefits
C) Expenditures on food and recreation
D) Investment on plant and equipment
Q4) Although the United States has realized merchandise trade deficits since the early 1970s,its goods-and-services balance has always registered surplus.
A)True
B)False
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Page 12
Chapter 11: Foreign Exchange
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Sample Questions
Q1) Assume that you are the Chase Manhattan Bank of the United States,and you have 1 million Swiss francs in your vault that you will need to use in 30 days.Moreover,you need 500,000 British pounds for the next 30 days.You arrange to loan your francs to Barclays Bank of London for 30 days in exchange for 500,000 pounds today,and reverse the transaction at the end of 30 days.You have just arranged a:
A) Forward contract
B) Futures contract
C) Spot contract
D) Currency swap
Q2) Suppose that a Swiss watch that costs 400 francs in Switzerland costs $200 in the United States.The exchange rate between the franc and the dollar is:
A) 2 francs per dollar
B) 1 franc per dollar
C) $2 per franc
D) $3 per franc
Q3) How is the equilibrium rate of exchange determined?
Q4) Most foreign exchange trading is carried out in the forward market.
A)True
B)False
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Chapter 12: Exchange-Rate Determination
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Sample Questions
Q1) In a free market,the equilibrium exchange rate occurs at the point where the quantity demanded of a foreign currency equals the quantity of that currency supplied.
A)True
B)False
Q2) Economies with relatively high growth rates in labor productivity tend to find their currencies' exchange values appreciating under a floating exchange-rate system.
A)True
B)False
Q3) All of the following are important long-run determinants of exchange rates except
A) Consumer tastes
B) Trade policy
C) Labor productivity
D) Interest rates
Q4) According to the law of one price,identical goods should cost the same in all nations,assuming there are no shipping costs nor trade barriers.
A)True
B)False
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Chapter 13: Mechanisms of International Adjustment
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Sample Questions
Q1) Is the monetary approach to the balance-of-payments part of the traditional adjustment theories?
Q2) If the marginal propensity to save equals 0.1 and the marginal propensity to import equals 0.3,an autonomous increase in exports of $1,000 would expand domestic income by $2,500 which leads to an increase in imports of $750.
A)True
B)False
Q3) The balance-of-payments adjustment mechanism developed during the 1700s by the English economist David Hume is the:
A) Income-adjustment mechanism
B) Flexible-exchange-rate-adjustment mechanism
C) Price-adjustment mechanism
D) Rank-reserve-adjustment mechanism
Q4) Refer to Figure 13.3.As U.S.interest rates rise relative to foreign interest rates,the U.S.slides upward along schedule CA<sub>0</sub>,thus moving towards capital and financial account surplus.
A)True
B)False
Q5) What is the foreign repercussion effect?
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Chapter 14: Exchange-Rate Adjustments and the Balance of Payments
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Q1) Suppose the exchange value of the franc rises against the currencies of Switzerland's major trading partners.To protect themselves from decreases in foreign sales caused by the mark's appreciation,Swiss companies could shift production to countries whose currencies had depreciated against the mark.
A)True
B)False
Q2) Suppose the U.S.price elasticity of demand for imports equals 1.2 and the foreign elasticity of demand for U.S.exports equals 1.5.According to the Marshall-Lerner condition,an appreciation of the dollar's exchange value would worsen the U.S.balance of trade.
A)True
B)False
Q3) How do movements in exchange rates affect domestic costs,in the presence of foreign sourcing?
Q4) According to the absorption approach,an increase in domestic expenditures must occur for currency devaluation to promote balance of trade equilibrium.
A)True
B)False
Page 16
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Chapter 15: Exchange-Rate Systems and Currency Crises
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Q1) Under the historic adjustable pegged exchange-rate system,member countries were permitted to correct persistent and sizable payment deficits (i.e.,fundamental disequilibrium)by:
A) Officially revaluing their currencies
B) Officially devaluing their currencies
C) Allowing their currencies to depreciate in the free market
D) Allowing their currencies to appreciate in the free market
Q2) Refer to Figure 15.1.Suppose the United States decreases investment spending in Switzerland,thus reducing the demand for francs from D<sub>0</sub> to D<sub>2</sub>.Under a floating exchange rate system,the new equilibrium exchange rate would be:
A) $0.40 per franc
B) $0.50 per franc
C) $0.60 per franc
D) $0.70 per franc
Q3) A surplus nation can reduce its payments imbalance by:
A) Applying tariffs and trade restrictions on imports
B) Revaluing its national currency
C) Increasing its labor productivity
D) Setting higher interest rates than its trading partners
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Chapter 16: Macroeconomic Policy in an Open Economy
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Q1) Given an open economy with high capital mobility,fiscal policy is strengthened under fixed exchange rates.
A)True
B)False
Q2) Which policy is an expenditure-switching policy?
A) Increase in the money supply
B) Decrease in government expenditures
C) Increase in business and household taxes
D) Decrease in import tariffs
Q3) Under a system of managed-floating exchange rates with heavy exchange rate intervention:
A) Fiscal policy is successful in promoting internal balance,while monetary policy is unsuccessful
B) Monetary policy is successful in promoting internal balance,while fiscal policy is unsuccessful
C) Both fiscal policy and monetary policy are successful in promoting internal balance
D) Neither fiscal policy nor monetary policy are successful in promoting internal balance
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Chapter 17: International Banking: Reserves, Debt, and Risk
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Q1) Bilateral agreements between central banks,which provide for an exchange of currencies to help finance temporary balance-of-payments disequilibriums,are referred to as:
A) IMF drawings
B) Special drawing rights
C) Buffer stock facility
D) Swap agreements
Q2) An advantage of international reserves is that they allow countries to sustain temporary balance-of-payments deficits until acceptable adjustment measures can operate to correct the disequilibrium.
A)True
B)False
Q3) Which organization is largely intended to make long-term reconstruction loans to developing nations?
A) Export-Import Bank
B) World Bank
C) International Monetary Fund
D) United Nations
Q4) Are international reserve needs different for different exchange rate regimes?
Q5) Describe the eurocurrency market.
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