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CAL STATE FULLERTON / Economic Sciences / FAD 335 / tariffs reallocate income from

tariffs reallocate income from

tariffs reallocate income from


School: California State University - Fullerton
Department: Economic Sciences
Course: International Economics
Professor: Abdolreza fazeli
Term: Fall 2016
Cost: 50
Name: Econ335 2nd Midterm Key Study. Fall 2016
Description: Covers chapter 6-12
Uploaded: 12/14/2016
29 Pages 771 Views 1 Unlocks

25 per bushel on soybean imports, how much will domestic production increase?

How much will the tariff reduce imports?

Intraindustry trade is characterized by what two features of the industry and market?

Second Midterm Study Questions, Key Dr. Reza Fazeli Econ.335 1. Intraindustry trade refers to international trade of products made within the same industry. 2. Intraindustry trade is characterized by what two features of the  industry and market? Economies We also discuss several other topics like What are the 3 area of cellular metabolism?
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of scale and differentiated products 3. One reason that a large share of the trade between high-income  industrial economies is intraindustry trade is because It allows firms to take advantage of internal economies of scale.  4. Strategic trade policy is concerned with capturing excess profits from foreign producers. 5. Which of the following is NOT a problem in the implementation of  industrial policies? A) Choosing the industry to target B) Knowing the optimum amount of resources to provide the targeted  industry C) The encouragement of rent seeking by firms in other industries D) The benefits are partly captured by foreign firms. E) All of the above are problems. 6. Two areas where the United States maintains considerable industrial  support are  A) manufacturing and education. B) housing and manufacturing. C) banking and retail sales. D) manufacturing and retail sales. E) agriculture and defense. 7. Which of the following is NOT true about the Grubel-Lloyd (GL) index  Xi ­ Mi ? X +M i i given by the equation: GLi = 1 -  If either X < M or M < X, then this necessarily implies that GL > 1. 8. An internal economies of scale is defined as A) one whose size or scale effects are not located in the firm, but in the industry. B) one with falling costs over a specific level of output. C) one with falling costs over a relatively large range of output. D) one with falling costs over a relatively large range of output, but  definite declining profits. 9. Which of the following is TRUE about monopolistic competition? A) One firm serves as the entire industry. B) A small number of firms serve the entire market. C) It is competition among many firms producing similar but  differentiated products. 1D) The pattern of production and trade is difficult to predict. E) It enjoys no economies of scale. 10. Suppose that by 1999, the United States exported $17.3 billion of motor vehicle parts and imported $34.2 billion of motor vehicle parts. If so, the Grubel-Lloyd index in this industry was 67.18%. A) True B) False 11. Which of the following is true about intraindustry trade? A) Economies of scale allow firms to enjoy lower average costs. B) It creates gains from trade. D) It may involve heightened competition and lower prices for  consumers. E) It increases consumer choice. 12. Is intraindustry trade happening due to comparative advantage? NO 13. The Ricardian model of trade is based on A) Relative productivity B) Relative Abundance of Resources C) The presence of Economies of Scale 14. Market failures occur whenever A) private returns may be greater than social returns. B) social returns may be greater than private returns. C) the free market produces less than what is socially optimal. D) monopolies exist in a market. E) All of the above. 15. 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: A) an initial headstart gives a scale advantage to already existing firms in one country. B) a location has a better-developed linkage between suppliers and  producers, giving it a cost advantage. C) 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 16. Would diseconomies of scale make it impossible for new firms to  enter the market? No 17. Would economies of scale make it difficult for new firms to enter  the market? Yes. 18. Which of the following is a reason social returns might be greater than private returns? B) Knowledge spillovers 2C) Spillovers from research and development D) Capital market imperfections E) All. Suppose that U.S. Supercomputers controls most of the world market,  but a group of entrepreneurs in the European Union is thinking of  starting a rival to be called EU Supercomputers. The industry has  decreasing costs. A hypothetical payoff matrix for the two firms is  given in the table below. The following question(s) are based on the  table: Table 5.1 U.S. Supercomputers 19. Based on Table 5.1, U.S. Supercomputers is already in the  market, and EU Supercomputers is thinking of entering. If no subsidy is provided, the equilibrium outcome is U.S. Supercomputers produces, EU Supercomputers does not. 20. Based on Table 5.1, if the governments of the European Union  offer a subsidy of 10 to EU Supercomputers, then the equilibrium  outcome is A) both firms produce. B) both firms do not produce. C) U.S. Supercomputers produces, EU Supercomputers does not. D) EU Supercomputers produces, U.S. Supercomputers does not. E) Not able to be determined from the information given. 21. Based on Table 5.1, if the governments of the European Union  offer a subsidy of 30 to EU Supercomputers, then the equilibrium  outcome is A) both firms produce. B) both firms do not produce. C) U.S. Supercomputers produces, EU Supercomputers does not. D) EU Supercomputers produces, U.S. Supercomputers does not. E) Not able to be determined from the information given. 22. Suppose that by 1999, the United States exported $17.3 billion of  motor vehicle parts and imported $34.2 billion of motor vehicle parts. If so, the Grubel-Lloyd index in this industry was 367.18%. 23. Which of the following is true? A) Economies of scale may be internal, external, or both. B) With internal economies of scale, the gains from trade include a  wider selection of consumer choices and lower prices. C) With external economies of scale, the gains from trade are less  certain since, in theory, they can lock in production in a less efficient  country and prevent the development of production in a more efficient  country. D)All. 24. The following are all true: A) Most of the maquiladora industry is located in the states of Mexico  that border the United States. C) The maquiladora industry accounts for more than half of Mexico's  exports today. D) Growth in Mexico's northern border cities , such as Tijuana and  Ciudad Juarez, took off almost a decade before NAFTA because of the  maquiladora industry. 25. Interindustry trade is not based on comparative advantage since it  consists of the export and import of similar countries and mostly  between countries that have similar productivity, technology, and  factor endowments. A) True False 26. In the case of a small country, producer surplus increases the same with tariffs and equivalent quotas. 27. In the case of a small country, consumer surplus decreases the same with tariffs and equivalent quotas. 28. In a small country, the net national cost of tariff protection is  equal to the reduction in consumer surplus minus the increase in government revenue and the increase in producer  surplus. 29. In economic terms, tariffs are preferred to quotas because given the way quotas are usually administered, tariffs cause a smaller  net national welfare loss. Scenario 6.1 Suppose that United States furniture makers import $100 of wood and  parts in order to make a dining room table selling for $500. The  imports have no tariff of quota restrictions. 30. Based on Scenario 6.1 above, value added in the United States is 4 $400. 31. Based on Scenario 6.1 above, if a tariff of 20 percent is placed on imports of dining room tables, the effective rate of protection is 25 percent. 32. Based on Scenario 6.1 above, if a tariff of 20 percent is placed on imports of dining room tables, and another tariff of 50 percent is  placed on imports of wood and parts, then the effective rate of  protection on tables made in the United States is 12.5 percent. 33. Consumer surplus is equal to the area under the demand curve and above the price line. 34. Producer surplus is equal to the area above the supply curve and below the price line. 35. Tariffs reallocate income from  consumers to producers. 36. The production side efficiency loss of a tariff is caused by the expansion of relative inefficient domestic production. 37. A real cost of tariffs and quotas that is difficult to measure is that they encourage rent seeking. 38. All the following are correct A) At the end of the twentieth century, more and more traded goods  and services incorporated specialized knowledge and unique ideas. B) Pharmaceuticals, computer hardware, telecommunications  equipment, and other high technology products are valuable because  of the innovation and research they incorporate. C) Software, movies, music, and other artistic expressions are valued  for their creativity. ED) The protection given to creators and innovators varied greatly  internationally until standardization began with the signing of the TRIPs agreement. 39. Large countries can improve their welfare by levying a tariff only  if it does not A) encourage rent seeking elsewhere in the economy. B) discourage innovation. C) lead to retaliation by the nation's trading partners. 40. Suppose a manufacturer of software develops a new computer  program that sells for $50. The $50 cost includes $0.25 for the CD it is  5stored on, $5 for the labor of the company software programmers, and  $1.75 for packaging materials and transportation costs. Value added by the software company is $48. 41. High tariffs on intermediate inputs decrease the effective rate of protection on final goods. 42. Which of the following is NOT correct about the effects of a tariff  on an imported product? A) Tariffs benefit domestic producers by raising price and domestic  output. B) Tariffs increase government revenue. C) Tariffs mean higher prices and less consumption for consumers of  the product. D) Tariffs increase the efficiency of how resources are allocated. 43. The following are the implications of tariff A) Producer surplus increases after a tariff is imposed. B) Government revenue increases after a tariff is imposed. C) Deadweight losses result from tariffs. 44. In order for large countries to successfully use tariffs to increase  well being, they must have significant market power so that foreign firms will cut  prices to preserve their sales. 45. Nominal rates of protection A) are always greater than effective rates of protection. B) are always smaller than effective rates of protection. C) refer to the tariffs placed on intermediate goods used to make the  final good or service. D) cannot be negative. 46. The following is true about issues/negotiations in the Doha  Development agenda? A) It is intended to deal with economic development issues and trade  barriers facing developing countries that were not adequately  addressed in the Uruguay Round. B) Many developing countries are upset with the levels of tariffs and  other barriers that industrialized countries use to protect agriculture,  clothing and textiles. C) Industrialized countries want developing countries to reduce their  tariffs, which on average are higher than the rates of richer countries. 47. Which type of restriction on quantity of imports is the most  transparent? A) Quota 6B) Licensing requirements C) Voluntary export restraints D) Government procurement policies 48. In which way are tariffs different from quotas? A) They reduce the volume of imported products. B) They raise the price of the imported products to consumers. C) They increase the domestic quantity supplied of the product. D) They raise government revenue. 49. Average tariff rates are highest for . low-income countries. Use the graph below and the following information to answer the next  question(s). The world price of soybeans is $2.00 per bushel, and the  importing country is small enough not to affect the world price. Figure 6.1 50. Based on Figure 6.1, suppose the government puts a tariff of  $0.25 per bushel on soybean imports. How much will the tariff reduce imports? Imports will decrease by 20 million bushels. 51. Based on Figure 6.1, given a tariff of $0.25 per bushel on  soybean imports, how much will domestic production increase? Domestic firms will increase output by 10 million bushels. 52. Based on Figure 6.1, how much revenue will the government  raise from a $0.25 per bushel tariff on soybean imports? 7The government will raise $15 million. 53. Based on Figure 6.1, how much revenue will the government  raise from a $0.25 per bushel tariff on soybean imports? The government will raise $15 million. 54. The new GATS and TRIPS are separate agreements negotiated  within the WTO framework as part of the Uruguay Round that apply to D) services and intellectual property. 55. Nontariff barriers to trade are less transparent than tariffs. Answer: TRUE 56. Both tariffs and quotas lead to a decrease in imports, a decrease  in domestic consumption, and an increase in domestic production. TRUE 57. Quotas usually lead to larger deadweight losses than tariffs. TRUE 58. Nontariff measures are generally much more difficult to eliminate than tariffs and quotas because they are embedded more deeply in  national economic policies. TRUE 59. An increase in domestic demand for a product protected by a  quota results in an increase in producer surplus for domestic firms,  while for a tariff it would result in more imports. TRUE 60. The rules for respecting property rights as they relate to trade  were negotiated during the Uruguay Round (1986-1994) and  culminated in the Trade Related Aspects Intellectual Property Rights  (TRIPS) agreement.  TRUE 61. What are the three major types of quotas? Answer: Formal quotas outright limit the quantity of imports; import  licenses; voluntary export restraints 62. What do developing countries want regarding agriculture in the  Doha Round? Answer: To limit government practices that block their access to  markets or that subsidize production in high income countries 63. Why is the Doha Round called the Doha Development Round? Answer: Because it pays particular attention to the trade issues facing  developing countries Use the information in the following table to answer the following  8question(s). Table 9.1 64. Based on Table 9.1, the balance on the current account is +200. 65. Based on Table 9.1, the balance on the financial account is -100. 66. Based on Table 9.1, the statistical discrepancy is -100. 67. Based on Table 9.1, if the information in the table is typical of  current and financial account values over a long period, then it would  be reasonable to infer that the net international investment position is negative. 68. If the residents of a country receive income from their foreign  investments, it is counted as a credit in the current account. 69. Which of the following is NOT part of the current account? A) Dividends received on a foreign investment B) Purchase of a plane ticket on a foreign airline C) Shipment of food aid to a poor country D) Purchase of a foreign bond E) All of the above. 70. If a country runs a current account surplus and national private  savings equals domestic investment, then the combined governmental accounts must be positive. 71. If all government budgets are balanced, and S is greater than I,  then the financial account must be negative. 72. The current account balance of the United States began to  deteriorate in the early 1980s. 973. People sometimes worry that American trade with other  countries will lead to large U.S. trade deficits and the movement of  massive amounts of American capital out of the country. This worry is  unfounded because countries cannot have both current account and financial account deficits at the same  time. 74. The difference between GNP and GDP is GNP includes income received from abroad and excludes income paid  abroad. Use the following table to answer the next question(s). All values are  measured as a percent of GNP. Table 9.2 75. Based on Table 9.2, total savings, private plus public, is equal to 16 percent of GNP. 76. Based on Table 9.2, the current account balance is +2 percent of GNP.. Use the following table to answer the next question(s). All values are  net. Table 9.3 77. Based on Table 9.3, the capital account balance is equal to +125. 78. Based on Table 9.3, if values in the table are amended to reflect  a net increase in U.S. foreign direct investment of 100, then the new  balance for the capital account balance becomes  +25. 1079. The most important determinant of private investment in an  economy is the amount of domestic savings. 80. If domestic savings is less than domestic investment, then Both A and C. 81. ) A current account deficit implies that the financial account is in surplus. 82. All of the following are true about foreign direct investment (FDI)  and portfolio investment except A) increases in the flow of portfolio investments increase the likelihood  of financial crisis. B) both portfolio investments and FDI are the same in that they both  give their holders a claim on the future output of the foreign economy. C) FDI is relatively illiquid compared to portfolio investment. D) portfolio investments have been on the decline in recent years (or  decades). E) FDI investors must be willing to go through many ups and downs in  order to benefit from their long-term investments. 83. Which of the following is FALSE? A) In 2002, the United States imported more goods and services from  foreign suppliers than it exported to foreign purchasers. B) Services are almost one-third of total exports and are a growing part of U.S. and world trade. C) The U.S. trade balance in services is in deficit. D) With the exception of the Gulf War period in 1991, the U.S. current  account has been in deficit since the 1980s. 84. During the 1990s,  A) Private savings fell. B) Investment rose. C) Public savings increased. D) The United States received capital inflows. E) Private savings fell short of investment for most of the 1990s. 85. Which of the following is FALSE? A) Current account deficits must be financed through inflows of capital. B) Loans from abroad add to a country's stock of external debt and  generate debt service. C) Borrowed funds are always used in a manner that contributes to the  expansion of the country's productive capability. 11D) Debt service can become an unsustainable burden that holds back  development. E) All countries have external debt. 86. The problems with excessive debt are: A) it worsens the central government's budget position by adding large debt service payments to other budget items. B) it reduces the quantity of resources available to invest in economic  development. C) if debt service is substantial, schools, health clinics, roads, ports,  other infrastructure, and social needs are less likely to be addressed. D) it can intensify and spread a crisis. 87. Critics of debt relief make all of the following arguments except A) it would be wasted money since the conditions that caused the debt would be likely to persist. B) countries with large foreign debts are poorly administered. C) debt relief can quickly fuel a new round of borrowing that simply  restores debt to prior levels. D) debt relief will encourage other nations to borrow excessively with  the hope that their debts may be forgiven in the future. E) the cost of debt relief to the most severely indebted countries is too  large for the high income countries to afford. 88. Between 1972 and 1999, the majority of loans to HIPC countries  went to regimes considered "not free," and between 1985 and 1995, to places that were considered "corrupt" by international organizations. Answer: TRUE 89. Capital inflows that take the form of direct investment may be  particularly beneficial if they bring new technologies, new  management techniques, and new ideas to the host country. Answer: TRUE 90. What does a current account deficit do that is positive for a  nation? Answer: The deficit enables more investment in the economy and  investment increases living standards. Capital inflows, in general,  indicate foreign confidence in the domestic economy. 91. What is the difference between the U.S. current account deficits  of the 1980s and the 1990s? Answer: In the 1980s, the government budget balance (T-G) turned  into a large negative, and foreign financing filled the gap. In the 1990s, the federal budget moved to a positive balance, but investment  expanded and private savings fell, overwhelming the changes in the  government budget position. 92. A firm that buys foreign exchange in order to take advantage of  higher foreign interest rates is A) speculating. 12B) demonstrating purchasing power parity. C) responding to fluctuations in the business cycle. D) ignoring the nominal rate of exchange. E) engaging in interest rate arbitrage. 93. Suppose the dollar is subject to a floating exchange rate system  and that R is the number of dollars per unit of foreign exchange. If R increases, then the dollar) appreciates. A) is devalued. B) is revalued. C) Both A and C. D) depreciates. 94. When an individual or firm in the United States requests that a  bank sell foreign  call a foreign exchange broker and arrange a purchase. 95. In order to protect against foreign exchange risk, firms can use the forward market for foreign exchange. 96. Covered interest arbitrage involves both the purchase of a foreign asset and a forward contract in the market  for foreign exchange. 97. All else equal and given the current system of exchange rates, if  the United States enters a period of exceptionally strong growth, A) the pressure on the dollar is to revalue. B) the pressure on the dollar is to devalue. C) the pressure on the dollar is to appreciate. D) Both A and D. E) the pressure on the dollar is to depreciate. 98. All else equal, if Canada raises its interest rates, A) the dollar depreciates. B) the U.S. demand for Canadian dollars increases. C) the Canadian supply of Canadian dollars increases. D) Both A and C E) Both A and B. 99. Suppose that the nominal exchange rate between the U.S. dollar  and the Mexican peso is 0.10 dollars per peso. If Mexico's inflation is 10 percent and the United States' inflation is 0 percent, from the U.S.  point of view, the real exchange rate A) appreciates to 0.11 dollars per peso. B) appreciates to 0.09 dollars per peso. C) depreciates to 0.09 dollars per peso. D) appreciates to 0.2 dollars per peso. E) depreciates to 0.11 dollars per peso. 100. Suppose that the nominal exchange rate between the U.S. dollar  and the Canadian dollar is 0.75 U.S. dollars per Canadian dollar. If  Canada's rate of inflation is 0 percent and the U.S. rate is 10 percent,  13then the real exchange rate for the U.S. dollar will A) appreciate by 10 percent. B) depreciate by about 9 percent. C) depreciate by 10 percent. D) None of the above. E) appreciate by about 9 percent. 101. Suppose the exchange rates between the United States and  Canada are in long-run equilibrium as defined by the idea of  purchasing power parity. If the law of one price holds perfectly, then  differences between U.S. and Canadian rates of inflation would (allTrue) A) have no effect on nominal exchange rates. B) be completely offset by changes in the real exchange rate. D) violate the conditions for the law of one price. E) lead to a change in the real purchasing power of each country's  currency when it is converted to the other country's currency. 102. Under a gold standard, countries should keep the supply of their domestic money fixed in proportion to their  gold holdings. 103. Under a fixed exchange standard, if the domestic demand for  foreign exchange increases A) the central monetary authority must increase the supply of  domestic money. B) the fixed exchange standard will breakdown. C) inflation will increase. D) the domestic currency must be depreciated. E) the central monetary authority must meet the demand out of its  reserves. 104. The Bretton Woods exchange rate system was an example of a A) target zone. B) managed float. C) pure gold standard. D) floating exchange rate system. E) modified gold standard. 105. The Smithsonian Agreement of 1971 was hailed by President  Nixon as a fundamental reorganization of the international monetary  system. In fact, what it accomplished was A) the revaluation of the dollar. B) the devaluation of the dollar. C) the reduction of the gold content of the dollar. D) the elimination of gold backing for the dollar. E) Both B and C. 106. The biggest disadvantage of a fixed exchange rate is the tradeoff between supporting the exchange rate and maintaining  economic growth 107. A single currency area requires 14mobile labor and synchronized business cycles. 108. Which of the following institutions is the most important  participant in foreign currency markets? A) A retail customer B) A foreign exchange broker C) A central bank D) None of the above. E) A commercial bank 109. An increase in the U.S. demand for the Mexican peso A) causes an increase in the U.S. dollar price of a Mexican peso. B) causes the Mexican peso to appreciate. C) causes the U.S. dollar to depreciate. D) causes Mexican goods to be relatively more expensive. E) All of the above. 110. According to purchasing power parity, which of the following is  FALSE about an overvalued dollar compared to the Japanese yen? A) U.S. merchants would be motivated to import more Japanese goods.  B) Japanese merchants would tend to export more to the United States. C) Prices in the United States would tend fall. D) Prices in Japan would tend to rise. E) Over the long term, the exchange rate would fall. 111. According to the text, which of the following factors may make  the theory of purchasing power parity unrealistic? A) Purchasing power parity works only with traded goods. B) Shipping, insurance, and transaction costs may reduce the  implication of purchasing power parity. C) Prices may not equalize if goods arbitrage is reduced by trade  barriers. D) The effects of purchasing power parity may not show up until many  years have passed. E) Trading countries may stop exchanging goods once prices between  them equalize. 112. Which of the following would NOT be a cause for an increased  American demand for the Mexican peso? A) The United States having lower interest rates than Mexico B) Increased American demand for Mexican goods C) The expectation by speculators that the value of the peso is edging  up D) More economic expansion in the United States 113. Which of the following is NOT one of the determinants of the  gains of adopting a single currency? A) A well-synchronized business cycle involving all member countries B) The possibility of factors of production to freely move across borders C) The willingness and ability of member countries to design policies to address regional imbalances that may develop D) Widening the common market by allowing other countries to join 15114. A forward exchange market contract obligates the owner to make a trade at a specified exchange rate a fixed number of days in the  future. Answer: TRUE 115. 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. Answer: TRUE 116. If the Japanese central bank sells yen and buys U.S. dollars, the  U.S. dollar will appreciate. Answer: TRUE 117. Suppose that the U.S. Open ticket costs $100 and the British  Open ticket costs £50 and the exchange rate is $1.43. How much does  the British Open ticket cost for an American attending the British  Open? Answer: $1.43 * 50 = $71.50 118. What are the differences and similarities between a depreciation  and devaluation of a currency? Answer: A depreciation of a currency takes place due to the mechanics of supply and demand and belongs to a flexible or floating exchange  rate system. On the other hand, devaluation is due to the intervention  by the monetary authority of a central bank of a country following a  fixed exchange rate system. They both result in a lower value of the  currency. 119. The following graph shows the demand and supply of pound  sterling: 16This condition will be satisfied  A) If the Americans buy more British goods. B) If the Americans buy more British financial assets. C) If the Americans buy more British real estate. D) If the British buy more American stocks and bonds. 120. Which of the following statements explain the graph above on  supply and demend for Yen, the Japanese currency? A) The US import from Japan increases, while American buy more  Japanese stocks. B) The US import from Japan declines, while the Japanese buy more  American bonds. 17C) The US import from Japan increases, while American buy more  Japanese assets. D) The US exports to Japan increases, while American buy more  Japanese stocks. 121. Suppose the interest rate in the U.K. is 4% for 90 days, the current  spot rate is $2.00/£, and the 90-day forward rate is $1.96/£. If the  covered interest rate differential is about zero, then the interest rate in  the U.S. for 90 days is: a. 6 percent. b. 4 percent. c. 3 percent. d. 2 percent. 122. The figure below shows the foreign exchange market. D£ is the  demand curve for pounds. S£ (Spring-summer) and S£ (Autumn-winter)  are the supply curves of pounds during the spring-summer and  autumn-winter seasons, respectively. Assume that the British  government is committed to maintain a fixed exchange rate at $1.90  per pound. In the spring-summer period, what type of intervention  must British monetary authorities engage in? $/£ S£ (Spring-summer) $2.20 $1.90 $1.60 040 60 30 50 70 S£ (Autumn-winter) D£ £ (billions) a. Sell 20 billion pounds at $1.90 b. Buy 40 billion pounds at $2.20 c. Sell 10 billion pounds at $2.20 d. Buy 20 billion pounds at $1.90 18 123. A higher rate of return for U.S. dollars makes holding dollars  more attractive.  a. The demand for dollars in the foreign exchange market shifts to  the right, from D0 to D1, b. The supply of dollars shifts to the left, from S0 to S1. c. The new equilibrium (E1) has a stronger exchange rate than the  original equilibrium (E0) d. All of the above are true. e. None of the above are true 124. The following graph shows the supply and demand for Malaysian  ringgit. a. Higher interest rate in Malaysia will lead to higher demand and  supply of ringgit b. Higher interest rate in Malaysia will lead to higher investment  and higher demand for ringgit. On the other hand, the supply of  ringgit will shift to the left, since more Malaysians will invest in  Malaysia rather than abroad. c. Higher interest rate in Malaysia will lead to lower investment  and lower demand for ringgit. On the other hand, the supply of  ringgit will shift to the left. d. All of the above are true. e. None of the above are true 19125. Currently the NAFTA nations do not meet the conditions for an  optimal currency area. What are the two main reasons why? Answer: Historically Mexico's business cycle has not been correlated  with the cycles in the United States and Canada; labor mobility is  limited.  126. What is the largest center for currency trading? Answer: London 127. If the forward rate is greater than the spot rate, what are  markets signaling about their expectations for the future spot rates for  the home currency? Answer: The home currency is expected to depreciate over the  maturity period of the forward contact.  128. If inflation is higher in the home market, what is expected to  happen to the real value of the home currency as time passes? Answer: Appreciates 129. How does rapid economic growth at home affect foreign  exchange markets? Answer: It increases home country demand for foreign currencies as it  increases imports. The home currency depreciates. 130. When did major currencies begin floating against each other,  ending the Bretton Woods system? Answer: March 1973 131. The most important participants in foreign exchange markets are __________. Answer: Commercial banks 132. Which type of exchange rate system minimizes external shocks  to an economy? Answer: A flexible exchange rate system 133. One possible meaning of the term financial crisis includes insolvency of a banking system. 134. An exchange rate crisis is caused by 20a sudden and an unexpected collapse in the value of a nation's  currency. 135. The international institution that serves as a lender of last resort  is called the  IMF. 136. All of the following are possible outcomes of a banking crisis  A) a recession due to decreases in consumption by households. B) decreases in lending practices by banks. C) decreases in investment. D) a contagion effect of the crisis from vulnerable banks to financial  institutions on sound basis. 137. A fixed exchange rate system crisis may be accompanied or  followed by devaluation of a currency. 138. A flexible exchange rate system crisis involves a rapid and uncontrolled depreciation of the currency. 139. All of the following are possible outcomes of a financial crisis  A) bank failings and disintermediation. B) decreases in investment. C) a recession. E) depreciation or devaluation of a currency. 140. One characteristic of a financial crisis caused by macroeconomic  imbalances is that it A) may or may not be predictable. B) will occur eventually even though its timing is unpredictable. C) may be caused by expansionary fiscal policies accompanied by high budget deficits. D) may be caused by high deficits financed by increases in the money  supply. E) All of the above. 141. All of the following are symptoms of definite and indefinite  macroeconomic imbalances  A) large budget deficits. B) an overvalued currency. C) a current account deficit. D) inflationary pressures. 142. An austerity policy is A) an increase in the money supply. b) an expansionary fiscal policy accompanied by decreases in taxes,  increases in expenditures, or both. C) an exchange rate switching policy from a fixed to a flexible  exchange rate system. d) None of the above. E) an expenditure reduction and expenditure switching policy. 21143. Which of the following was NOT a cause or a characteristic of the 1994/95 Mexican peso crisis? A) An overvalued exchange rate B) An inflow of large foreign portfolio capital C) Shifts by the world capital markets toward more conservative and  risk-averse investments because of interest and exchange rate  movements around the world D) High domestic investments with insufficient domestic savings E) The inability of the IMF, the world bank, and the NAFTA member  countries (i.e., the United States and Canada) to predict the looming  financial crisis 144. The Mexican peso crisis of 1994 and 1995 was directly related to a large capital account deficit. 145. ) Which of the following may NOT help avoid a financial crisis? A) Maintaining credible and sustainable fiscal policies B) Regulation and supervision of the financial system C) Disclosure of timely information to lenders, investors, and  depositors about key economic variables such as the central bank's  holding of international reserves D) Maintaining credible and sustainable monetary policies E) Immediately bailing out financial intermediaries and standing ready  to bail out others in case a financial crisis occurs 146. All of the following involve a moral hazard problem except A) an individual driving carelessly after buying a comprehensive  insurance policy for a Ford Pinto. B) the IMF bailing Mexico out of a financial crisis, with promises to do  the same for other nations that might face financial problems. C) making regular visits to your doctor because you know that you  have full healthcare coverage. D) membership in FDIC (Federal Deposit Insurance Corporation) by  your local bank. E) the requirement of banking institutions that owners invest a  substantial portion of their own capital in their bank. 147. All of the following statements are true about the real exchange  PP *  rate, given by the relation Rr = Rn  A) a greater change in P (domestic price) compared to a change in P*  (foreign price) necessitates a rise in the nominal rate, Rn, to keep the  real rate unchanged. B) a pegged exchange rate system requires tight control of the money  supply. 22C) an expansionary monetary policy raises the real exchange rate. d) the real exchange rate would be the same as the nominal exchange  rate only if the difference between domestic and foreign inflation rates  is zero. 148. When a nation has a lower opportunity cost of producing any good or service in relative  terms, that nation is said to have: a. an absolute advantage. b. a comparative advantage. c. low labor costs. d. better technology to produce that good or service. 149. If Home is capital abundant, then when it begins to freely trade with the rest of the  world, the return to capital in Home should _________ and the real wage in Home  should _______. a. fall; rise b. fall; fall c. rise; rise d. rise; fall 23150.  Following the Heckscher­Ohlin Theory,  France (Post­Trade) Shoes (million) Indifference curve A 100 60 B -(Pwheat/Pshoe)world  Wheat 8000 O 500 a. France exports 40 millions of Shoes. b. France exports 300 million tons of Wheat. c. France imports 300 million tons of Wheat. d. France imports 60 millions of Shoes. (million tons) 151. According to the Ricardian principle of comparative advantage, international trade  increases a nation's total output because: a. The nation's resources are used where they are most productive b. The output of the nation's trading partner declines c. The nation can produce to the exterior of its production possibilities frontier d. The nation increases investments and lowers consumption Answer the questions (152­153) below based upon the following diagram for a small country.  The world price of coffee is $10 each pound. A small country imposes an import tariff of $5 each pound of coffee.  24152. Refer to the figure above. With the import tariff, the total quantity of imports would equal a. 10,000 units. b. 30,000 units. c. 40,000 units. d. 50,000 units. 153. Refer to the figure above. With the import tariff, the government collects total tariff  revenues a. $30,000. b. $100,000. c. $150,000. d. $300,000. 154. Import tariffs and import quotas will lead to: a. Lower government revenue b.    higher domestic price c. increased consumer surplus d. decreased producer surplus 155. If, in 2000, $1 = 1.5 euros, and in 2007, $1 = 0.9 euros, which of the following  statements would be TRUE? a. More American tourists found it cheaper to travel to Europe in 2007. b. More Europeans stayed home in 2007 as visits to the United States became more  expensive. c. Europeans imported fewer products from the United States in 2007. d. Americans imported fewer products from Europe in 2007. 25156. Suppose the yen per dollar exchange rate is 100. The dollar price of a Japanese stereo  system worth 60,000 yen is: a. $6,000 b. $600 c. $1,667 d. $100 157.   China has pegged (fixed) its currency against the U.S. dollar. If demand for Yuan  (Chinese currency) rises: a. there is pressure for the U.S. dollar to appreciate. In this setting, China has to  purchase dollars to maintain its peg.  b. there is pressure for the U.S. dollar to appreciate. In this setting, China has to sell  dollars to maintain its peg.  c. there is pressure for the U.S. dollar to depreciate. In this setting, China has to  purchase dollars to maintain its peg.  d. there is pressure for the U.S. dollar to depreciate. In this setting, China has to sell  dollars to maintain its peg. 158 Which of the following was NOT one of the causes of the Asian financial crises of 1997 and 1998? A) A current account deficit and financial account surpluses B) China's 1994 devaluation of its fixed exchange rate C) The appreciation of the U.S. dollar and depreciation of the Japanese  yen D) Crony capitalism E) The use of exports as an engine of economic growth by the  countries involved 159 The main policy advice given by the IMF to East Asian countries facing  the financial crises of 1997/1998 was raising their domestic interest rates to stabilize the collapsing  currencies. 160 All of the following issues were discussed as options for reforming the  international financial architecture except A) how high an interest rate the lender of last resort should charge  when it makes loans. B) the length of the payback period. C) the size of the loans. D) the moral hazard problem associated with a lender of last resort. E) if the lender of last resort (i.e., the IMF) should consult and  collaborate with other international institutions such as the United  Nations and the WTO. 161 The IMF conditionality may include 26A) changes in the fiscal and monetary policies of the country facing the financial crisis. B) changes in the exchange rate policies. C) regulating and restructuring the financial sector of the economy of  the country in crisis. D) structural policies affecting international trade and public  enterprises. E) All of the above. 162 Which one of the following countries refused to accept the IMF  conditions during the East Asian financial crisis? A) South Korea B) Indonesia C) Thailand D) Singapore E) Malaysia 163 The Basel Capital Accord does NOT include A) requiring bank owners to invest into and have some capital  ownership in the banks they own.  B) supervision of banks by an oversight board. C) information disclosure designed to encourage market discipline. D) denying access to foreign capital by a country that defaults on its  international loans. 164 Which of the following is NOT likely to occur when a bank fails? A) Everyone that deposits money in the bank loses all or a portion of  their money, unless the country has a functioning deposit insurance  system. B) The loss of savings (or the feared loss of savings) causes households to cut back on consumption, which spreads the recessionary effect  wider through the country. C) Unaffected banks may stop making loans as they take a cautious  approach, slowing or stopping new investment. D) Layoffs occur and the economy falls deeper into a downward  spiraling inflation. E) Other banks make too many loans to make up for the loans not  made by the failed bank, kicking off a cycle of stimulation and inflation. 165 When expansionary fiscal and monetary policies are joined with a  __________ exchange rate system, the various components of economic  policy often interact in ways that lead to a crisis followed by a steep  recession. A) fixed B) floating C) flexible D) crawling peg 27166 Which of the following is a macroeconomic factor that contributed to  the financial crisis in 2007? A) Global saving and investment imbalances  B) Financial market innovation C) Deeper levels of integration across financial markets D) Challenges and failures in financial regulation 167 Current research suggests that countries that adopt a pegged  exchange rate may be more vulnerable to an exchange rate crisis. Answer: TRUE 168 Exchange rates and banking systems are often the variables  through which the contagion effects of a crisis are spread from one  country to another. Answer: TRUE 169 The most common type of macroeconomic imbalance is overly  expansionary fiscal policies that create large government budget  deficits, often financed by a high growth rate of the money supply. Answer: TRUE 170 A large and growing current account deficit can be an indicator of a  potential crisis. Answer: TRUE 171 Financial capital is highly volatile, and technological advances have  reinforced this volatility. Answer: TRUE 172 The two main types of economies generating current account surpluses from 2000 to 2007 were Asian exporters and oil producers. Answer: TRUE 173 What are the benefits of capital mobility? Answer: The benefits include that investors can put financial capital  where it earns the highest return, which raises welfare by putting  capital in its most valuable use. 174 What agreement has been reached to reduce the moral hazard  problem and what does it require? Answer: The Basel Capital Accord, which sets capital requirements,  requirements for supervisory review, and for requirements for  information disclosure. 175 If the banking sector borrows internationally and lends locally, how  does this intensify a financial crisis? Answer: The borrowed funds have to be repaid with appreciating  international currencies while payments received come in the  depreciating local currency. 176 How did the global supply of savings impact the formation of the  housing bubble? 28Answer: Interest rates were lower and demand for housing higher than it would have been otherwise. 177 Countries such as the United States that have large populations tend  to have A) higher openness indicators. B) lower openness indicators. C) relatively greater capital outflows. D) relatively smaller capital outflows. E) None of the above. 29

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