Course Introduction
World Economy Practice Questions
This course examines the structure, dynamics, and interdependence of the global economy. Students will explore key concepts such as international trade, financial systems, economic development, and the roles of major institutions like the International Monetary Fund and World Bank. The course also analyzes regional economic blocs, the impact of globalization, policy challenges, and current issues affecting developed and developing nations. Through case studies and real-world data, students will develop an understanding of how economic choices and events in one part of the world influence the broader global landscape.
Recommended Textbook
International Economics 9th Edition by Paul
R. Krugman Maurice Obstfeld
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1611 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) The international capital market is
A) the place where you can rent earth moving equipment anywhere in the world.
B) a set of arrangements by which individuals and firms exchange money now for promises to pay in the future.
C) the arrangement where banks build up their capital by borrowing from the Central Bank.
D) the place where emerging economies accept capital invested by banks.
E) exclusively concerned with the debt crisis that ended in the 1990s.
Answer: B
Q2) An important insight of international trade theory is that when countries exchange goods and services one with the other it
A) is always beneficial to both countries.
B) is usually beneficial to both countries.
C) is typically beneficial only to the low wage trade partner country.
D) is typically harmful to the technologically lagging country.
E) tends to create unemployment in both countries.
Answer: B
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Chapter 2: World Trade: An Overview
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Sample Questions
Q1) Since the period following World War II (the early 1950s), the proportion of most countries' production being used in some other country
A) remained constant.
B) increased.
C) decreased.
D) fluctuated widely with no clear trend.
E) increased slightly before dropping off.
Answer: B
Q2) In the pre-World War I period, the United Kingdom exported mainly A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) livestock.
Answer: A
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Chapter 3: Labor Productivity and Comparative Advantage:
The Ricardian Model
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Sample Questions
Q1) In a two country and two product Ricardian model, a small country is likely to benefit more than the large country because
A) the large country will wield greater political power, and hence will not yield to market signals.
B) the small country is less likely to trade at price equal or close to its autarkic (domestic) relative prices.
C) the small country is more likely to fully specialize.
D) the small country is less likely to fully specialize.
E) the small country can raise wages.
Answer: B
Q2) A country engaging in trade according to the principles of comparative advantage gains from trade because it
A) is producing exports indirectly more efficiently than it could alternatively.
B) is producing imports indirectly more efficiently than it could domestically.
C) is producing exports using fewer labor units.
D) is producing imports indirectly using fewer labor units.
E) is producing exports while outsourcing services.
Answer: B
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Chapter 4: Specific Factors and Income Distribution
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Sample Questions
Q1) The effect of trade on income distribution
A) can be significant in the sort run.
B) is positive for all segments of an economy.
C) is insignificant in the short run.
D) implies that there are no real gains from trade.
E) refutes the model of comparative advantage.
Q2) In the specific factors model, a country's production possibility frontier is ________ because of ________.
A) a straight line; diminishing marginal returns
B) a curved line; diminishing marginal returns
C) a straight line; constant marginal returns
D) a curved line; constant marginal returns
E) a curved line; a limited supply of labor
Q3) A factor of production that can be used in any sector of an economy is a(an)
A) mobile factor.
B) specific factor.
C) variable factor.
D) import-competing factor.
E) export-competing factor.
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6
Chapter 5: Resources and Trade: The Heckscher-Ohlin Model
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Sample Questions
Q1) If Japan is relatively capital rich and the United States is relatively land rich, and if food is relatively land intensive then trade between these two, formerly autarkic countries will result in
A) an increase in the relative price of food in the U.S.
B) an increase in the relative price of food in Japan.
C) a global increase in the relative price of food.
D) a decrease in the relative price of food in both countries.
E) an increase in the relative price of food in both countries.
Q2) Which of the following is an assertion of the Heckscher-Ohlin model?
A) The wage-rental ratio determines the capital-labor ratio in a country's industries.
B) An increase in a country's labor supply will increase production of both the capital-intensive and the labor-intensive good.
C) In the long-run, labor is mobile and capital is not.
D) Factor price equalization will occur only if there is costless mobility of all factors across borders.
E) Factor endowments determine the technology that is available to a country, which determines the good in which the country will have a comparative advantage.
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Page 7
Chapter 6: The Standard Trade Model
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Sample Questions
Q1) Refer to above figure. Now, suppose that the relative price of A is actually not higher than Albania's autarkic level of 1, but quite the opposite (e.g., P<sub>A</sub>/P<sub>B</sub> = 0.5). Would Albania still be able to gain from trade? If so, where would be its production point? Given the information in this question, where is Albania's comparative advantage?
Q2) Other things being equal, a rise in a country's terms of trade increases its welfare. What would happen if we relax the ceteris paribus assumption, and allow for the law of demand to operate internationally?
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.
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8
Chapter 7: External Economies of Scale and the
International
Location of Production
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Sample Questions
Q1) The learning curve describes the ________ relationship between ________ and ________.
A) inverse; unit cost; cumulative output
B) direct; unit cost; cumulative output
C) inverse; education; annual income
D) direct; education; annual income
E) direct; education; labor productivity
Q2) The Internet has made transactions between businesses (B2B trading) fast and easy. Any business in any location can access specialized knowledge, labor, and materials. It is likely that these virtual economic communities will result in
A) external economies of scale.
B) internal economies of scale.
C) consolidation of industries into a small number of powerful firms.
D) suppression of innovations and collusive behavior, driving up prices.
E) government intervention and regulation.
Q3) Why are increasing returns to scale and fixed costs important in models of international trade and imperfect competition?
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Page 9
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Sample Questions
Q1) Intra-industry trade will tend to dominate trade flows when which of the following exists?
A) small differences between relative country factor availabilities
B) large differences between relative country factor availabilities
C) homogeneous products that cannot be differentiated
D) constant cost industries
E) uneven distribution of abundant resources between two countries
Q2) The figure above represents the demand and cost functions facing a Brazilian Steel producing monopolist. If it were unable to export, and was constrained by its domestic market, what quantity would it sell at what price?
Q3) An imperfectly competitive firm has the following total cost curve: C = 100 + 4Q. What is total cost equal to when Q = 10?
Q4) The simultaneous export and import of widgets by the United States is an example of
A) intra-industry trade.
B) increasing returns to scale.
C) imperfect competition.
D) inter-industry trade.
E) the effect of a monopoly on international trade.
Page 10
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Chapter 9: The Instruments of Trade Policy
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Sample Questions
Q1) Refer to above figure. With a specific tariff of $3 per unit, what is the quantity of Widget imports?
Q2) The two deadweight triangles are the Consumption distortion and Production distortion losses. It is easy to understand why the Consumption distortion constitutes a loss for society. After all it raises the prices of goods to consumers, and even causes some consumers to drop out of the market altogether. It seems paradoxical that the Production distortion is considered an equivalent burden on society. After all, in this case, profits increase, and additional production (with its associated employment) comes on line. This would seem to be an offset rather than an addition to the burden or loss borne by society. Explain why the Production distortion is indeed a loss to society, and what is wrong with the logic that leads to the apparent paradox.
Q3) Specific tariffs are
A) import taxes stated in specific legal statutes.
B) import taxes calculated as a fixed charge for each unit of imported goods.
C) import taxes calculated as a fraction of the value of the imported goods.
D) the same as import quotas.
E) import taxes calculated based solely on the origin country.
Q4) Refer to above figure. In the absence of trade, what is the country's consumer plus producer surplus?
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Chapter 10: The Political Economy of Trade Policy
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Sample Questions
Q1) The optimum tariff is
A) the best tariff a country can obtain via a WTO negotiated round of compromises.
B) the tariff, which maximizes the terms of trade gains.
C) the tariff, which maximizes the difference between terms of trade gains and terms of trade loses.
D) not practical for a small country due to the likelihood of retaliation.
E) not practical for a large country due to the likelihood of retaliation.
Q2) Under U.S. commercial policy, the escape clause results in
A) temporary quotas granted to firms injured by import competition.
B) tariffs that offset export subsidies granted to foreign producers.
C) a refusal of the U.S. to extradite anyone who escaped political oppression.
D) tax advantages extended to minority-owned exporting firms.
E) tariff advantages extended to certain Caribbean countries in the U.S. market.
Q3) Export embargoes cause greater losses to consumer surplus in the target country
A) the lesser its initial dependence on foreign produced goods.
B) the more elastic is the target country's demand schedule.
C) the more elastic is the target country's domestic supply.
D) the more inelastic the target country's supply.
E) the larger the target country's labor force is.
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Page 12
Chapter 11: Trade Policy in Developing Countries
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Sample Questions
Q1) Refer to above figure. Why would workers not shift from agriculture to manufacturing in the initial situation where wages are higher in the latter?
Q2) The growth successes of the high performance Asian economies
A) supports the belief that economic development requires import substitution policies. B) rejects the belief that export-oriented industrialization is likely to promote economic development.
C) rejects the belief that economic development requires import substitution policies. D) suggests that free trade policies are required for successful economic development. E) enforces United States' hesitation to trade with developing countries.
Q3) Refer to above figure. If OmL1 workers are employed in manufacturing then what is the marginal productivity of labor in agriculture?
Q4) Refer to above figure. If manufacturing labor were to increase to OmL2, how much value would the economy as a whole gain?
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13
Chapter 12: Controversies in Trade Policy
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Sample Questions
Q1) Refer to the above table. Suppose both governments offer their respective company a subsidy of $4(million).
Q2) The best economic case one can make for an active industrial policy involves
A) the national security argument.
B) the technological spillover argument.
C) the environment preservation argument.
D) the high value added argument.
E) raising the national income.
Q3) It has been claimed that the Chinese burst of modernization which has been propelling its manufactured exports throughout the world at an unprecedented rate, is made possible by the use of slave (penal) labor. If this is true should China have been accepted as a full fledged member of the WTO? Why (or why not)?
Q4) Most developing countries oppose including labor standards in trade agreements because
A) they believe this would involve a loss of their national sovereignty.
B) they believe this would limit their ability to export to rich markets.
C) they believe this would create an uneven playing field.
D) multinational corporations control them.
E) they do not want to improve wages for their workers.
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Chapter 13: National Income Accounting and the Balance of Payments
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Sample Questions
Q1) In 2006, the United States had
A) a surplus in the current account.
B) a balance in the current account.
C) a deficit in the current account.
D) From 2006 data, it is too difficult to determine whether a surplus or a deficit existed in the current account.
E) a positive balance of net financial flows.
Q2) The German government carries out an official foreign exchange intervention in which it uses dollars held in an American bank to buy French currency from its citizens. How is this accounted for in the balance of payments?
A) current account, French good export
B) current account, German good import
C) financial account, French asset export
D) financial account, German asset export
E) financial account, German asset import
Q3) Explain the concept of Ricardian equivalence.
Q4) What types of international transactions are recorded in the balance of payment accounts?
Q5) What is the national income identity for an open economy?
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Chapter 14: Exchange Rates and the Foreign Exchange
Market: An Asset Approach
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Sample Questions
Q1) The dollar rate of return on euro deposits is
A) approximately the euro interest rate plus the rate of depreciation of the dollar against the euro.
B) approximately the euro interest rate minus the rate of depreciation of the dollar against the euro.
C) the euro interest rate minus the rate of inflation against the euro.
D) the rate of appreciation of the dollar against the euro.
E) the euro interest rate plus the rate of inflation against the euro.
Q2) Which of the following statements is the most accurate?
A) The U.S. and Canadian dollar have traded roughly at par since 1970.
B) The exchange rate (U.S.$ per Canadian $) has always been less than one since 1970.
C) The U.S. and Canadian dollar traded roughly at par in the early 1970s and as of 2006, is nearing par as the Canadian dollar rises.
D) The U.S. and Canadian dollar traded roughly at par in the early 1970s and as of 2006, is nearing par as the Canadian dollar falls.
E) None of the above.
Q3) Explain risk and liquidity of assets.
Q4) Who are the major participants in the foreign exchange market?
Page 16
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Chapter 15: Money, Interest Rates, and Exchange Rates
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Q1) Using a figure describing both the U.S. money market and the foreign exchange market, analyze the effects of an increase in the U.S. money supply on the dollar/euro exchange rate.
Q2) After a permanent increase in the money supply,
A) the exchange rate overshoots in the short run.
B) the exchange rate overshoots in the long run.
C) the exchange rate smoothly depreciates in the short run.
D) the exchange rate smoothly appreciates in the short run.
E) the exchange rate remains the same.
Q3) A permanent increase in a country's money supply
A) causes a more than proportional increase in its price level.
B) causes a less than proportional increase in its price level.
C) causes a proportional increase in its price level.
D) leaves its price level constant in long-run equilibrium.
E) causes an inversely proportional fall in its price level.
Q4) Analyze the effects of an increase in the European money supply on the dollar/euro exchange rate.
Q5) What will be the effects of an increase in the money supply on the interest rate?
Q6) What will be the effects of an increase in real output on the interest rate?
Page 17
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Chapter 16: Price Levels and the Exchange Rate in the Long Run
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Q1) What are the predictions for the long run equilibrium of the Monetary Approach?
Q2) Under the monetary approach to the exchange rate,
A) a reduction in the money supply will cause immediate currency depreciation.
B) a rise in the money supply will cause currency depreciation.
C) a rise in the money supply will cause immediate currency appreciation.
D) a rise in the money supply will cause depreciation.
E) a rise in the money supply will cause immediate currency depreciation.
Q3) What are the predictions of the PPP theory with regards to the real exchange rates?
Q4) An increase in the world relative demand for U.S. output causes
A) a short-run real depreciation of the dollar against the euro.
B) a long-run real appreciation of the dollar against the euro.
C) a long-run real depreciation of the dollar against the euro.
D) a short-run real appreciation of the euro against the dollar.
E) a long-run real appreciation of the euro against the dollar.
Q5) Discuss why the empirical support for PPP and the law of one price is weak in recent data.
Q6) Suppose Russia's inflation rate is 200% over one year but the inflation rate in Switzerland is only 2%. According to relative PPP, what should happen over the year to the Swiss franc's exchange rate against the Russian ruble?
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Chapter 17: Output and the Exchange Rate in the Short Run
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Q1) Which one of the following statements is the most accurate?
A) For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by a depreciation of domestic currency, all else equal.
B) For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by a depreciation of foreign currency, all else equal.
C) For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by an appreciation of domestic currency, all else equal.
D) For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of domestic currency, all else equal.
E) For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of foreign currency, all else equal.
Q2) Find the real exchange rate for the following case: Assume that the representative basket of European goods costs 150 euros and the representative U.S. basket costs $200, and the dollar/euro exchange rate is $1.20 per euro, then the price of the European basket in terms of U.S. basket is:
Q3) Describe what is a J Curve?
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19
Chapter 18: Fixed Exchange Rates and Foreign Exchange Intervention
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Q1) The expectation of future revaluation causes a balance of payments crisis marked by
A) a sharp rise in reserves and a fall in the home interest rate below the world interest rate.
B) a sharp fall in reserves and an even bigger fall in the home interest rate below the world interest rate.
C) a sharp fall in reserves and a rise in the home interest rate above the world interest rate.
D) a sharp rise in reserves and an even greater rise in the home interest rate above the world interest.
E) a sharp fall in reserves and an unchanged home interest rate.
Q2) This question concerns the mechanism of a reserve currency standard. Two countries, X and Y, have two currencies, x and y, fixed to the reserve currency, the U.S. dollar. Suppose the exchange rate between x and the U.S. dollar is 3x per dollar. Suppose the exchange rate between y and the U.S. dollar is 5y per dollar. Please explain (using numbers) the mechanism if the x-y exchange rate was 0.8 x per y.
Q3) Please define and give an example of sterilized foreign exchange intervention.
Q4) Please briefly describe what is meant by a gold exchange standard.
Page 20
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Chapter 19: International Monetary Systems: An Historical Overview
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Sample Questions
Q1) Countries where investment is relatively
A) productive should have current account deficits.
B) productive should have current account surpluses.
C) unproductive should have current account surpluses.
D) productive should balanced current account surpluses.
E) productive should have low outputs.
Q2) If the demand for Home exports decreased abroad, the Home fall in output would be greatest:
A) if the decrease was temporary and the exchange rate was fixed.
B) if the decrease was temporary and the exchange rate was floating.
C) if the decrease was permanent and the exchange rate was fixed.
D) if the decrease was permanent and the exchange rate was floating.
E) if the decrease was permanent and the exchange rate was high.
Q3) "Under floating rates, the economy is more vulnerable to shocks coming from the domestic money market." Discuss.
Q4) It is claimed that L. Frank Baum's classic 1900 children's book, The Wonderful Wizard of Oz, is an allegorical rendition of the U.S. political struggle over gold.
Q5) What is a convertible currency?
Q6) "Fixed exchange rates are not even an option for most countries." Discuss.
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Chapter 20: Optimum Currency Areas and the European Experience
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Q1) Which one of the following statements is true?
A) A fixed exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the relative price of domestic and foreign goods.
B) A flexible exchange rate does not automatically cushions the economy's output and employment by allowing an immediate change in the relative price of domestic and foreign goods.
C) A flexible exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the relative price of domestic and foreign goods.
D) A flexible exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the absolute price of domestic and foreign goods.
E) A fixed exchange rate automatically cushions the economy's output and employment by allowing an immediate change in the absolute price of domestic and foreign goods.
Q2) Explain why the oil price shocks after 1973 made countries unwilling to revive the Bretton Woods system of fixed exchange rates. See also Chapter 19.
Q3) Discuss the benefits and costs of joining a fixed-exchange area.
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Page 22
Chapter 21: Financial Globalization: Opportunity and Crisis
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Q1) Explain why large interest rate differences would be strong evidence of unrealized gains from trade.
Q2) Suppose one is offered a gamble in which you win $1,000 half the time but lose $1,000 half the time. Since in this case one is as likely to win as to lose the $1,000, the average payoff on this gamble its expected value is: 0.5 $1,000 + 0.5 (-$1,000) = 0.
Under such circumstances:
A) no one will take the gamble.
B) risk averse individuals will take the gamble.
C) risk lovers individuals will not take the gamble.
D) risk neutral individuals will not take the gamble.
E) risk lovers and risk neutral individuals may take the gamble.
Q3) Using international asset trade, countries can
A) never really eliminate all risk.
B) eliminate all risk.
C) actually increase their risk in some cases.
D) eliminate all their risk except for emerging markets.
E) never really diversify their holdings.
Q4) Explain the causes of the U.S. Savings and Loans crisis of the early 1980s.
Q5) Why is the foreign exchange market so vital?
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Chapter 22: Developing Countries: Growth, Crisis, and Reform
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Sample Questions
Q1) Why may equity finance be preferred to debt finance for developing countries?
A) A fall in domestic income automatically reduces the earnings of foreign shareholders without violating any loan agreement.
B) There are laws insuring against any default with equity finance.
C) The risk is shared between debtor and creditor with debt finance.
D) The tax structure leaves equity finance unconstrained.
E) Repayments are unaffected by falls in real income.
Q2) For many developing countries, natural resources or agricultural commodities make up a ________ share of exports
A) large
B) moderate
C) nonexistent
D) small
E) insubstantial
Q3) List and explain 3 major channels through which developing countries have financed their external deficits.
Q4) Explain the basic macroeconomic policy trilemma for open economies.
Q5) Should the IMF be abolished? Discuss.
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Q6) How was South Korea able to become one of the East Asian Economic Miracles?