World Economy
Final Test Solutions
Course Introduction
The World Economy course offers a comprehensive analysis of the global economic system, examining the interactions between nations, international institutions, and markets. Students will explore major topics such as international trade, globalization, economic development, and the effects of economic policies on global growth. The course also investigates the roles of international organizations like the World Trade Organization (WTO) and the International Monetary Fund (IMF), and addresses current issues such as inequality, environmental sustainability, and the impact of technological change on the global landscape. Through case studies and real-world examples, students develop a nuanced understanding of the forces shaping the modern world economy.
Recommended Textbook
Introduction to International Economics 3rd Edition by Dominick Salvatore
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Page 2
Chapter 1: Introduction to the Global Economy
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Q1) Free trade restricts a nation's ability to specialize in specific commodities that may allow for more efficient use of resources.
A)True
B)False
Answer: False
Q2) With respect to international trade in the real world:
A)most nations impose some restrictions limiting the free flow of goods.
B)most nations have eliminated all barriers to free trade.
C)most nations have a completely closed economy.
D)None of the above
Answer: A
Q3) Which of the following analyzes the basis for and gains from trade?
A)Balance of payments
B)Foreign exchange market
C)International trade policy
D)International trade theory
Answer: D
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Page 3
Chapter 2: Comparative Advantage
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Sample Questions
Q1) Adam Smith advocated a policy in which:
A)The government regulates all aspects of economic activity
B)The government interferes with economic activity to a moderate level
C)The government keeps regulation of economic activity to a minimum
D)The governments interference in economic activity is completely non-existent
Answer: C
Q2) Even if Country A has an absolute advantage in the production of all commodities over country B,David Ricardo claimed that the basis for mutually beneficial trade could still exist.
A)True
B)False
Answer: True
Q3) From 1815 to1914,the United States was the only Western nation that was completely free of mercantilist ideas.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The Standard Trade Model
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Q1) The _____________________ is given by the slope of the common tangent to the nation's production frontier and indifference curve at the autarky point of production and consumption.
A)equilibrium-relative commodity price in isolation
B)revealed comparative advantage
C)equilibrium-relative commodity price with trade
D)marginal rate of substitution
Answer: A
Q2) The ________________________ of X for Y in consumption refers to the amount of Y that a nation is willing to give up to consume an additional unit of X and remain on the same indifference curve.
A)marginal cost
B)production frontier
C)marginal rate of substitution (MRS)
D)marginal rate of transformation (MRT)
Answer: C
Q3) A nation that has many trading partners is said to be in a state of autarky.
A)True
B)False
Answer: False
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Chapter 4: The Heckscher-Ohlin and Other Trade Theories
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Q1) Mexico is relatively abundant in labor,while Canada is relatively abundant in capital.In both nations,the production of televisions is relatively more capital intensive than the production of corn.According to the factor endowment theory,Mexico will have a(n):
A)absolute advantage in the production of corn and computers
B)absolute advantage in the production of corn
C)comparative advantage in the production of corn
D)comparative advantage in the production of computers
Q2) Free international trade will continue to expand until the real wages for the same type of labor in the two nations and the real rate of interest for the same type of capital in the two nations are completely equalized.
A)True
B)False
Q3) As a result of environmentalist efforts,for the past three decades polluting and dirty industry exports have expanded slower relative to clean industries and their exports.
A)True
B)False
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Chapter 5: Trade Restrictions: Tariffs
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Sample Questions
Q1) ____________ have historically been the most important and most used type of trade restriction.
A)Quotas
B)Domestic content requirements
C)Import tariffs
D)Export tariffs
Q2) Consumer surplus is the difference between what consumers are willing to pay for a commodity and the price they actually pay for the commodity.
A)True
B)False
Q3) The resulting increase in producer surplus made possible by the imposition of a tariff is often referred to as the:
A)tax effect of a tariff
B)revenue effect of a tariff
C)subsidy effect of a tariff
D)consumption effect of a tariff
Q4) In question 54 can you find out the deadweight loss to the society,the loss to the consumers and the gain of the producers and also the amount of the tariff revenue generated from the tariff.
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Chapter 6: Nontariff Trade Barriers and the Political
Economy of Protectionism
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Q1) Briefly discuss the four major rounds of international trade negotiations held under the direction of the General Agreement on Tariffs and Trade.Include discussion of the primary outcomes of each round.
Q2) In which form of dumping is a commodity sold at a lower price abroad in order to drive foreign producers out of business,after which prices are raised to take advantage of the newly acquired monopoly power abroad?
A)Pervasive
B)Persistent
C)Predatory
D)Sporadic
Q3) GATT was an international organization composed of nations that would ultimately become known as the EU.
A)True
B)False
Q4) Under the most-favored-nations principle,the Senate has the power to negotiate mutual tariff reductions of up to 65% with other nations.
A)True
B)False
Page 8
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Chapter 7: Economic Integration
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Sample Questions
Q1) When was the EFTA (European Free Trade Association)formed?
A)1960
B)1940
C)1970
D)1965
Q2) In September,1993,__________________ signed the North American Free Trade Agreement (NAFTA).
A)the US and Canada
B)the US,Mexico and Central America
C)the US,Canada and Mexico
D)the US,Canada and Greenland
Q3) The British Commonwealth Preference Scheme is an example of a(n):
A)free trade area
B)customs union
C)preferential trade arrangement
D)common market
Q4) An economic union is the most robust form of economic integration.
A)True
B)False
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Chapter 8: Growth and Development With International Trade
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Q1) Assume in base year 1990,the net barter terms of trade is equal to 100,and we find that,for the 2004 fiscal year,the US price index for exports has fallen 7 percent and the price index for imports has risen by 5 percent.What is the value of the U.S.net barter terms of trade?
A)63.4
B)101.2
C)88.6
D)112.5
Q2) To this day,international trade remains as strong an engine of growth for regions of recent settlement as it was in the nineteenth century.
A)True
B)False
Q3) One of the most serious problems facing developing countries today is the lack of high paying corporate level positions,as this is the type of skilled labor needed to alleviate the poverty problem in these nations.
A)True
B)False
Q4) Briefly discuss the three most serious problems facing developing countries today.
Page 10
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Chapter 9: International Resource Movements and Multinational Corporations
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Q1) In reality,investors always know precisely the average return on stocks.
A)True
B)False
Q2) The two main types of foreign investments are portfolio and direct investments.
A)True
B)False
Q3) When capital moves from lower returns to higher returns,there will be
A)greater efficiency in the use of capital internationally.
B)increased world output.
C)increased world welfare.
D)all of the above.
Q4) _____________ often takes the form of starting a subsidiary or taking control of another firm.
A)Private investment
B)Portfolio investment
C)Direct investment
D)Indirect investment
Q5) Why does a multinational firm have to go for direct foreign investment instead of licensing a local firm to carry out production on its behalf?
Page 11
Q6) What are the basic reasons for a multinational corporations (MNCs)existence?
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Chapter 10: Balance of Payments
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Q1) The balance of payments is the sum of which of the following?
A)Current account balance
B)Current account balance + financial account balance
C)Current account balance + financial account balance + statistical discrepancy
D)None of the above
Q2) Which of the following is an example of a surplus in the balance of payments?
A)The excess of debits over credits in the current and financial accounts
B)The excess of credits over debits in the current account
C)The excess of credits over debits in the capital account
D)Both B & C
Q3) Which of the following is classified as a credit in the US balance of payments?
A)US exports
B)US gifts to other countries
C)A flow of gold out of the US
D)Foreign loans made by US companies
Q4) US military aid granted to foreign countries is entered in the:
A)Merchandise trade account
B)Capital account
C)Current account
D)Official settlements account
Page 13
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Chapter 11: The Foreign Exchange Market and Exchange Rates
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Q1) Which of these would not cause the US demand curve for foreign currency to shift to the left?
A)Americans wanting to consume fewer foreign goods
B)Decreasing interest rates in the US relative to other countries
C)Decreasing incomes in the US
D)A depreciation of the US dollar against foreign currencies
Q2) The most common forward rate is ____________.
A)one month
B)six months
C)three months
D)nine months
Q3) _______________ are medium term financial instruments falling somewhat between short term Eurocurrency bank loans and long-term international bonds bank deposits denominated in a currency other than that of the nation in which the deposit is held.
A)Eurobonds
B)Eurodollars
C)Euronotes
D)Offshore deposits
Q4) Please explain what is meant by Covered Interest Arbitrage.
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Chapter 12: Exchange Rate Determination
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Q1) What determines the supply of money in each nation?
A)The nation's monetary authorities
B)The level of real income in the nation
C)The general price level
D)The interest rate
Q2) What does not determine the demand for money in each nation?
A)The level of real income in the nation
B)The general price level
C)The interest rate
D)The amount of money in circulation
Q3) Which of the following is the elasticity approach not able to explain?
A)The large volatility of exchange rates over the past three decades
B)The sharp appreciation of the dollar from 1995 to 2002
C)The failure of the US trade deficits to decline when the dollar depreciated sharply from 1985 to 1988
D)All of the above
Q4) Discuss the difference between the absolute purchasing-power parity theory and the relative purchasing-power parity theory.
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Chapter 13: Automatic Adjustments With Flexible and Fixed Exchange Rates
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Q1) The mint parity plus the cost of shipping an amount of gold equal to one unit of the foreign currency between the two nations is:
A)gold export point
B)gold import point
C)price-specie-flow mechanism
D)equilibrium level of income
Q2) Which exchange system operated from the end of World War II to 1971?
A)The gold standard
B)The silver standard
C)The managed float
D)The Bretton Woods system
Q3) The marginal propensity to save is the amount of additional savings associated with each one-dollar increase in income multiplied by the increase in income.
A)True
B)False
Q4) When demand is unitary elastic,then a change in price will leave expenditures on the commodity at a greater value.
A)True
B)False
Page 16
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Chapter 14: Adjustment Policies
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Q1) To achieve internal balance under a fixed exchange rate system,what policies should be used?
A)Expenditure-changing policies
B)Devaluation policies
C)Revaluation polices
D)Expenditure-switching policies
Q2) Why during the period of fixed exchange rate,monetary policy is considered to be ineffective.
Q3) Which of the following is an indicator of a contractionary fiscal policy?
A)Reduced money supply
B)Reduced government expenditures
C)Reduction in taxes
D)Trade restrictions
Q4) The longest boom on record for the US took place during which decade?
A)1990s
B)1980s
C)1970s
D)1960s
Q5) Describe why monetary policy under a fixed exchange rate system is impotent.
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Chapter 15: Flexible Versus Fixed Exchange Rates,european
Monetary Systems,and Macroeconomic Policy
Coordination
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Q1) The modification of national economic policies in recognition of international interdependence is known as:
A)international macroeconomic policy coordination
B)international microeconomic policy coordination
C)monetary policy
D)fiscal policy
Q2) What are the advantages and disadvantages of fixed versus flexible exchange rates?
Q3) Which of the following is one of the conditions that was set under the Maastricht Treaty and must be met before a nation could join the European Monetary Union?
A)an inflation rate not exceeding 10 percent of the three member nations with highest inflation rate
B)a budget surplus not exceeding 3 percent of GDP
C)overall government debt not exceeding 60 percent of GDP
D)the average exchange rate not increasing by more than 5% of the EMS for the 5 years before joining the union
Q4) What are the advantages of International Macroeconomic Policy Coordination?
Page 18
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Chapter 16: The International Monetary System: Past, present, and Future
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Q1) Liquidity refers to the amount of international reserve assets available to settle long-term balance-of-payments disequilibria.
A)True
B)False
Q2) The 25% of a nation's quota in the IMF that the nation was originally required to pay in gold and could then borrow from the Fund almost automatically is known as the gold tranche.
A)True
B)False
Q3) Once a nation joins the IMF they are able to borrow 25% of their quota each year.The first loan,which could be borrowed without any restrictions or conditions,is referred to as a credit tranche.
A)True
B)False
Q4) The international monetary system refers to all of the following except?
A)Rules for effecting international payments
B)Customs,instruments and facilities for effecting international payments
C)Organizations for effecting international payments
D)Tariff,Quota and NTBs affecting the volume of international trade.
Page 19
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