World Economy
Final Exam Questions
Course Introduction
This course provides a comprehensive overview of the structures, dynamics, and key issues shaping the contemporary world economy. Students will explore the historical development of global economic systems, the roles of international organizations, the mechanics of international trade and investment, and the impact of globalization. The curriculum emphasizes the analysis of economic relationships among countries, patterns of global production and consumption, and challenges such as inequality, financial crises, and sustainable development. Through case studies and applied projects, students will gain the analytical skills needed to understand and assess the forces driving the interconnected global marketplace.
Recommended Textbook
International Trade Theory and Policy 10th Edition by Paul
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Page 2
R. Krugman
Chapter 1: Introduction
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Sample Questions
Q1) International capital markets experience a kind of risk not faced in domestic capital markets,namely
A)"economic meltdown" risk.
B)Flood and hurricane crisis risk.
C)the risk of unexpected downgrading of assets by Standard and Poor.
D)the risk of exchange rate fluctuations.
E)the risk of political upheaval.
Answer: D
Q2) Trade theorists have proven that the gains from international trade
A)must raise the economic welfare of every country engaged in trade.
B)must raise the economic welfare of everyone in every country engaged in trade.
C)must harm owners of "specific" factors of production.
D)will always help "winners" by an amount exceeding the losses of "losers."
E)usually outweigh the benefits of protectionist policies.
Answer: E
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Chapter 2: World Trade: An Overview
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Sample Questions
Q1) In general,which of the following do NOT tend to increase trade between two countries?
A)linguistic and/or cultural affinity
B)historical ties
C)larger economies
D)mutual membership in preferential trade agreements
E)the existence of well controlled borders between countries
Answer: E
Q2) Since World War II,the likelihood that any single item in the typical consumption basket of a consumer in the U.S.originated outside of the U.S.
A)remained constant.
B)increased.
C)decreased.
D)fluctuated widely with no clear trend.
E)increased slightly before dropping off.
Answer: B
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4
Chapter 3: Labor Productivity and Comparative Advantage:
The Ricardian Model
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Sample Questions
Q1) If the world terms of trade for a country are somewhere between the domestic cost ratio of H and that of F,then
A)country H but not country F will gain from trade.
B)country H and country F will both gain from trade.
C)neither country H nor F will gain from trade.
D)only the country whose government subsidizes its exports will gain.
E)country F but not country H will gain from trade.
Answer: B
Q2) In order to know whether a country has a comparative advantage in the production of one particular product we need information on at least ________ unit labor requirements
A)one
B)two
C)three
D)four
E)five
Answer: D
Q3) Given the information in the table above.What is the opportunity cost of Cloth in terms of Widgets in Foreign?
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) A country's budget constraint states that
A)the value of exports must be equal to the value of imports.
B)real income in the exporting country must be equal to real income in the importing country.
C)unless a country engages in trade,the value of exports cannot exceed the value of goods produced.
D)a country will engage in trade only if the value of imports exceed the value of exports.
E)a country will engage in trade only if the value of exports exceeds the value of imports.
Q2) The slope of a country's production possibility frontier with cloth measured on the horizontal and food measured on the vertical axis in the specific factors model is equal to ________ and it ________ as more cloth is produced.
A)-MPL<sub>F</sub>/MPL<sub>C</sub>;becomes steeper
B)-MPL<sub>F</sub>/MPL<sub>C</sub>;becomes flatter
C)-MPL<sub>F</sub>/MPL<sub>C</sub>;is constant
D)-MPL<sub>C</sub>/MPL<sub>F</sub>;becomes steeper
E)-MPL<sub>C</sub>/MPL<sub>F</sub>;is constant
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Chapter 5: Resources and Trade: the Heckscher-Ohlin Model
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Sample Questions
Q1) Use the diagram above to identify the pre-trade situation for Australia and Sri-Lanka.Where on the K/L axis will you find each of the two countries? Which of the two countries has a higher relative wage,w/r? Which product is the labor intensive,and which is the land intensive one? Show where the relative price of cloth to food will be found once trade opens between these two countries.Show where the relative wages of each will appear.
Q2) The Heckscher-Ohlin model predicts all of the following EXCEPT
A)the volume of trade.
B)which country will export which product.
C)which factor of production within each country will gain from trade.
D)that relative wages will tend to become equal in both trading countries.
E)that trade increases a country's overall welfare.
Q3) According to the Heckscher-Ohlin model,the source of comparative advantage is a country's
A)factor endowments.
B)technology.
C)advertising.
D)human capital.
E)political system.
Q4) Why is the H.O.model called the factor-proportions theory?
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Chapter 6: The Standard Trade Model
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Sample Questions
Q1) A country will be able to consume a combination of goods that is not attainable solely from domestic production if
A)the world terms of trade differ from its domestic relative costs.
B)the country specializes in one product.
C)the country avoids international trade.
D)the world terms of trade equal the domestic relative costs.
E)the country's domestic production value equals world relative value.
Q2) The price of ________ consumption in terms of ________ consumption is ________.
A)future;current;1/(1 + r)
B)present;future;1/(1 + r)
C)future;current;r
D)present;future;r
E)future;current;1 + r
Q3) If Slovenia is a large country in world trade,then if it imposes a large set of tariffs on many of its imports,this would
A)improve its terms of trade.
B)have no effect on its terms of trade.
C)harm its terms of trade.
D)decrease its marginal propensity to consume.
E)increase its exports.
Page 8
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Chapter 7: External Economies of Scale and the
International Location of Production
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Sample Questions
Q1) A learning curve relates ________ to ________ and is a case of ________ returns.
A)unit cost;cumulative production;dynamic increasing returns
B)output per time period;long-run marginal cost;dynamic increasing returns
C)unit cost;cumulative production;dynamic decreasing returns
D)output per time period;long-run marginal cost;dynamic decreasing returns
E)labor productivity;education;increasing marginal returns
Q2) When there are external economies of scale,an increase in the size of the market will
A)increase the number of firms and lower the price per unit.
B)increase the number of firms and raise the price per unit.
C)decrease the number of firms and raise the price per unit.
D)decrease the number of firms and lower the price per unit.
E)not affect the number of firms,but will lower the price per unit.
Q3) External economies of scale often arise because similar firms
A)locate in the same geographic region.
B)collude to fix prices and increase profits.
C)have excellent internal logistics.
D)agree to cooperate to expand global trade.
E)have economies of scale in production.
Page 9
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Sample Questions
Q1) Refer to above figure.While selling exports it would also maximize its domestic sales by equating its marginal (opportunity)cost to its marginal revenue of $5.How much steel would the firm sell domestically,and at what price?
Q2) In an industry where firms experience internal scale economies,the long-run cost of production will depend on
A)the size of the market.
B)the size of the labor force.
C)whether the country engages in intra-industry trade.
D)individual firms' fixed costs.
E)whether the country engages in inter-industry trade.
Q3) An industry is characterized by scale economies and exists in two countries.In order for consumers of its products to enjoy both lower prices and more variety of choice
A)the two countries must engage in international trade with each other.
B)each country's marginal cost must equal that of the other country.
C)the marginal cost of this industry must equal marginal revenue in the other.
D)the monopoly must lower prices in order to sell more.
E)they must combine to become a multinational corporation.
Q4) What are the consequences of outsourcing production on the welfare of countries?
Page 10
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Chapter 9: The Instruments of Trade Policy
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Sample Questions
Q1) An import quota will ________ producer surplus,________ consumer surplus,________ government revenue,and ________ overall domestic national welfare.
A)increase;decrease;increase;have an ambiguous effect on B)increase;decrease;decrease;decrease
C)increase;decrease;have no effect on;have an ambiguous effect on D)increase;decrease;have no effect on;decrease
E)increase;increase;decrease;have an ambiguous effect on
Q2) Some argue that tariffs always hurt the imposing country's economic welfare,and are typically designed to shift resources from one sector to another,protected or preferred one,within an economy.Find and discuss a counter example to this argument.
Q3) Should the home country be "large" relative to its trade partners,its imposition of a tariff on imports would lead to an increase in domestic welfare if the terms of the trade rectangle exceed the sum of the
A)revenue effect plus redistribution effect.
B)protective effect plus revenue effect.
C)consumption effect plus redistribution effect.
D)production distortion effect plus consumption distortion effect.
E)terms of trade gain.
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Chapter 10: The Political Economy of Trade Policy
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Sample Questions
Q1) The prohibitive tariff is a tariff that
A)is so high that it eliminates imports.
B)is so high that it causes undue harm to trade-partner economies.
C)is so high that it causes undue harm to import competing sectors.
D)is so low that the government prohibits its use since it would lose an important revenue source.
E)is so low that it causes domestic producers to leave the industry.
Q2) A trade policy designed to alleviate some domestic economic problem by exporting it to foreign countries is know as a(n)
A)international dumping policy.
B)countervailing tariff policy.
C)beggar thy neighbor policy.
D)trade adjustment assistance policy.
E)redistribution quota policy.
Q3) Refer to above figure.Suppose the European government provides Airbus with a subsidy of $4 for each airplane sold,and that the subsidy convinces Boeing to exit the Hungarian market.Now Airbus would be the monopolist in this market.What price would they charge,and what would be their total profits?
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Chapter 11: Trade Policy in Developing Countries
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Sample Questions
Q1) Which industrialization policy used by developing countries places emphasis on the comparative advantage principle as a guide to resource allocation?
A)export promotion
B)import substitution
C)international commodity agreements
D)Infant Industry promotion
E)intra-industry trade practice
Q2) Which of the following could explain why the terms of trade of developing countries might deteriorate over time?
A)Developing country exports consist mainly of manufactured goods.
B)Developing country exports consist mainly of primary products.
C)Commodity export prices are determined in highly competitive markets.
D)Commodity export prices are solely determined by developing countries.
E)Developing country exports are too diverse.
Q3) The consensus today is that import-substitution protectionist industrial policy has not served the developing countries' growth ambitions well.This fact proves that policies relying on export-driven growth are the "winning ticket" for these countries.
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Chapter 12: Controversies in Trade Policy
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Sample Questions
Q1) Faced with the evidence of poor working conditions and low wages in the border maquiladoras,economists
A)shrug their shoulders and ignore the issue.
B)agree that trade theory is thus proven hollow and internally inconsistent.
C)argue that U.S.consumers should not consume lettuce.
D)argue that the poor conditions and low wages are actually improvements for the Mexican workers,and may be cited as gains-from-trade.
E)argue that Mexico's generally high overall productivity offsets these conditions.
Q2) When one applies the Heckscher-Ohlin model of trade to the issue of trade-related income redistributions,one must conclude that North South trade,such as U.S.-Mexico trade
A)must help low skill workers on both sides of the border.
B)is likely to hurt high-skilled workers in the U.S.
C)is likely to hurt low-skilled workers in the U.S.
D)is likely to hurt low-skilled workers in Mexico.
E)is likely to help highly skilled workers in Mexico.
Q3) Refer to the above table.Suppose the U.S.government (but not Europe)offers a $10 million subsidy?
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Chapter 13: National Income Accounting and the Balance of Payments
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Sample Questions
Q1) 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.
Q2) How does an economy's central bank manage the supply of money through official reserve transactions?
Q3) Over the 1980s
A)there is no question that a large increase in U.S.foreign assets did occur.
B)there is a question whether a large decrease in U.S.foreign assets did occur.
C)there is no question that a large decrease in U.S.foreign assets did occur.
D)there is no question that there was almost no change in U.S.foreign assets.
E)there is no question that rising exports exceeded U.S.foreign debt.
Q4) Discuss the values of private saving in closed and open economies.
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Chapter 14: Exchange Rates and the Foreign Exchange
Market: An Asset Approach
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Sample Questions
Q1) If the dollar interest rate is 10 percent,the euro interest rate is 6 percent,then
A)an investor should invest only in dollars if the expected dollar depreciation against the euro is 4 percent.
B)an investor should invest only in euros if the expected dollar depreciation against the euro is 4 percent.
C)an investor should be indifferent between dollars and euros if the expected dollar depreciation against the euro is 4 percent.
D)an investor should invest only in dollars.
E)an investor should invest only in euros.
Q2) How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.60 dollars per British pound?
A)38.125 British pounds
B)28.125 British pounds
C)48.125 British pounds
D)58.125 British pounds
E)18.125 British pounds
Q3) Explain risk and liquidity of assets.
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Chapter 15: Money,Interest Rates, and Exchange Rates
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Sample Questions
Q1) Inflation targeting was initiated by which central bank in 1989?
A)U.S.
B)Japan
C)Canada
D)New Zealand
E)U.K.
Q2) Which one of the following statements is the MOST accurate?
A)A permanent increase in a country's money supply causes a proportional long-run depreciation of its currency against foreign currencies.
B)A temporary increase in a country's money supply causes a proportional long-run depreciation of its currency against foreign currencies.
C)A permanent increase in a country's money supply causes a proportional long-run appreciation of its currency against foreign currencies.
D)A permanent increase in a country's money supply causes a proportional short-run depreciation of its currency against foreign currencies.
E)A permanent increase in a country's money supply causes a proportional short-run appreciation of its currency against foreign currencies.
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Chapter 16: Price Levels and the Exchange Rate in the Long Run
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Q1) Under Purchasing Power Parity
A)E<sub>$/E</sub> = P<sup>i</sup><sub>US</sub>/P<sup>i</sup><sub>E</sub>.
B)E<sub>$/E</sub> = P<sup>i</sup><sub>E</sub>/P<sup>i</sup><sub>US</sub>.
C)E<sub>$/E</sub> = P<sub>US</sub>/P<sub>E</sub>.
D)E<sub>$/E</sub> = P<sub>E</sub>/P<sub>ES</sub>.
E)E<sub>$/E</sub> = P<sup>i</sup><sub>E + </sub>P<sup>i</sup><sub>US</sub>/P<sup>i</sup><sub>E</sub>.
Q2) Which of the following statements is the MOST accurate? In general,under the monetary approach to the exchange rate
A)the interest rate is not independent of the money supply growth rate in the short run. B)the interest rate is independent of the money supply growth rate in the long run.
C)the interest rate is not independent of the money supply growth rate in the long run,but independent in the short run.
D)the interest rate is not independent of the money supply growth rate in the long run. E)the interest rate is a factor of the money supply growth rate only in the short term.
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Chapter 17: Output and the Exchange Rate in the Short Run
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Q1) Imagine that the economy is at a point on that is below both AA and DD,where both the output and asset markets are out of equilibrium.Which first action is TRUE?
A)The economy will stay at this level in the short run.
B)The exchange rate will first rise to a point on the AA schedule.
C)The exchange rate will first rise to a point on the DD schedule.
D)The AA-DD equilibrium will shift to the position of the economy.
E)The output level will first increase to a position on the DD schedule.
Q2) Find the real exchange rate for the following case: Assume that the representative basket of European goods and services costs 40 euros and the representative U.S.basket costs $50,and the dollar/euro exchange rate is $0.90 per euro,then the price of the European basket in terms of U.S.basket is ________.
Q3) The J-curve illustrates which of the following?
A)the effects of depreciation on the home country's economy
B)the immediate increase in current account caused by a currency depreciation
C)the gradual adjustment of home prices to a currency depreciation
D)the short-term effects of depreciation on the current account
E)the Keynesian view of international trade dynamics
Q4) Demonstrate how a permanent fiscal expansion will not increase output in the long run.
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Chapter 18: Fixed Exchange Rates and Foreign Exchange Intervention
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Q1) A balance sheet for the central bank of Pecunia is shown below:
Central Bank Balance Sheet
Assets Liabilities
Foreign assets $1,000 Deposits held by private banks $500
Domestic assets $1,500 Currency in circulation $2,000
Please write the new balance sheet if the bank sells $100 worth of foreign bonds for domestic currency.
Q2) From the Civil War up to 1914,the United States adhered to a A)gold standard.
B)silver standard.
C)bimetallic standard.
D)bronze standard.
E)copper standard.
Q3) Use a figure to illustrate the ineffectiveness of monetary policy to spur on an economy under a fixed exchange rate.
Q4) Describe the mechanism which would take place if the Bank of England decides to increase its money supply by purchasing domestic assets under the gold standard.
Q5) List the drawbacks of the gold standard.
Q6) Please briefly describe what is meant by a gold exchange standard.
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Chapter 19: International Monetary Systems: An Historical Overview
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Q1) Countries with the
A)biggest deflations and output contractions are countries which were never on the gold standard until 1936.
B)biggest inflations and output contractions are countries which were on the gold standard until 1936.
C)lowest deflations and output contractions are countries which were on the gold standard until 1936.
D)biggest deflations and output increases are countries which were on the gold standard until 1936.
E)biggest deflations and output contractions are countries which stayed on the gold standard until 1936.
Q2) The costs of inflation have been most apparent in the post-war period in countries like
A)Serbia.
B)Belgium.
C)the United States.
D)Canada.
E)Japan.
Q3) "A monetary policy is not a policy tool under fixed exchange rates." Discuss.
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Chapter 20: Financial Globalization: Opportunity and Crisis
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Q1) The leading center of Eurocurrency trading is
A)New York City.
B)Chicago.
C)London.
D)Paris.
E)Frankfurt.
Q2) The Fed's Regulation Q
A)placed a ceiling on the interest rates U.S.banks could pay on time deposits to foreigners.
B)placed a ceiling on the interest rates U.S.banks could pay on time deposits.
C)placed a ceiling on the amount U.S.residents can deposits in Euro banks.
D)placed a ceiling on the amount foreign residents can deposits in domestic American banks.
E)placed a ceiling on the amount foreign banks can pay on time deposits.
Q3) Suppose you are offered a gamble in which you win $1,000 half the time but lose $1,000 half the time.If you are risk averter will you take the gamble?
Q4) How well has the international capital market perform?
Q5) Explain why the FDIC is following a "too-big-to-fail" policy of fully protecting all depositors at the largest banks.
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Chapter 21: Optimum Currency Areas and the Euro
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Q1) Why did the EU countries move away from the EMS toward the goal of a single shared currency?
Q2) What is one way to offset the economic stability loss due to fixed exchange rates?
Q3) The EU countries were prompted to seek closer coordination of monetary policies and greater exchange rate stability in order
A)to enhance Europe's role in the world monetary system.
B)to turn the European Union into a truly unified market.
C)both to enhance Europe's role in the world monetary system and to turn the European Union into a truly unified market.
D)both to turn the European Union into a truly unified market and to counter the rise of Japan in international financial markets.
E)to homogenize all European cultures.
Q4) Explain why the European Union's current combination of rapid capital migration with limited labor migration may actually raise the cost of adjusting to product market shocks without exchange rate change?
Q5) Describe the single supervisory mechanism or SSM proposed by EU leaders in June of 2012.
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Chapter 22: Developing Countries: Growth, Crisis, and Reform
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Q1) Which of the following is NOT a common characteristic of a developing country?
A)extensive direct government control of the economy
B)history of low inflation
C)many weak credit institutions
D)"pegged" exchange rates
E)Agricultural commodities make up a large share of its exports.
Q2) What does it mean for a loan to be in default?
A)when the borrower of the a loan fails to repay on schedule according to a loan contract,without the agreement of the lender
B)when the borrower of a loan fails to repay on schedule according to a loan contract,with the agreement of the lender
C)when the lender of a loan fails to supplies the full amount of a loan to the borrower
D)when the lender of a loan supplies the full amount of a loan to a borrower without any promise of being repaid
E)when the lender of a loan fails to offer the promised sum
Q3) Compare currency board to conventional fixed exchange rate.
Q4) Based on the 1997 Crisis and your own experience,what are the main weaknesses of the East Asian economies?
Page 24
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