IS and Econ 13 - 2nd Midterm Examination

Answer Key (correct answers with *)

S. Skaperdas February 23, 2015
Version A
Please fill in your scantron, INCLUDING
YOUR VERSION/TEST FORM (A)
There are 35 questions in this exam (for a total
of 45 points). Questions 1-25 are worth 1 point
each. Questions 26-35 are worth 2 points each.

6. Which of the following is an example of

negative externality?
a. Cathy dislikes her new hairstyle
b. Mike ate too much bread and felt
sick
c. Rachel missed an episode of her
favorite TV show
d. John drives recklessly*
e. None of the above

1. When a country has a trade deficit,

a. Exports exceed imports
b. The countrys economy produces
more than it consumes
c. Imports exceed exports*
d. The current account is positive.
e. a and b.

7. Suppose that Brazil has a comparative

advantage in coffee and Peru has a comparative
advantage in tomatoes. Which of the following
groups would be worse off if these countries
specialize and trade?
a. Coffee producers in Peru*
b. Coffee producers in Brazil
c. Tomato producers in Peru
d. Always everybody is better off
when specialization and trade take
place
e. All groups are worse off when
specialization and trade take place

2. The following are factors that help explain

trade protection EXCEPT for
a.
trade policy creating losers as well as
gainers from freer trade.
b.
strategic trade policy.
c.
security concerns.
d.
the infant industry argument.
e.
comparative advantage*
3. Pursuing freer trade is
a. always best for a country.
b. sometimes not in the interest of a
country.*
c. always bad for a country.
d. always benefits the citizens of a
country.
e. a and d.
4. If the social cost of fishing is greater than its
private cost, then we can conclude that
a. a positive externality exists
b. government should encourage
fishing
c. there is no externality
d. a negative externality exists*
e. None of the above
5. In general, the social benefit of an activity
equals
a. Its private benefit
b. Its external benefit
c. Its private benefit plus its external
benefit*
d. Its price
e. All of the above

8. When you talk during class with your friend

a. you create a positive externality because
your friend is lonely.
b. you create a positive externality because
your friend has a positive view of you.
c. you create a positive externality when
your friend was late in class.
d. you create a negative externality
because you bother others around you.*
e. a and b.
9. The ozone depletion in the upper layers of the
atmosphere
a. is an example of a positive externality.
b. has been largely mitigated through the
banning of chlorofluorocarbons (CFCs).*
c. is a worsening problem.
d. has reduced air pollution is Southern
California.
e. a and d.
10. Methane produced by cattle, an activity that
adversely affects the environment,
a. could be reduced by subsidizing cattle
production.
b. could be increased by taxing cattle
production.
c. could be reduced by taxing cattle
production.*
d. is an example of a positive externality.
e. b and d.

11. A well-maintained yard

a. induces a positive externality because it
increases the homes market value.
b. induces a negative externality because it
increases the property tax liability of the
owner.
c. induces a positive externality because it
increases the value of adjacent properties in
the neighborhood.*
d. cannot provide any type of externality.
e. a and c.
12. The smoking ban on all UC campuses
a. can be expected to yield few known
benefits as a result of the absence of second-hand
smoke.*
b. can be expected to yield large benefits as
a result of the absence of second-hand smoke.
c. is expected to have no costs.
d. a and c.
e. b and c.
13. When an activity has a positive externality,
a. its social costs exceed its private costs.
b. its private costs exceed its social costs.
c. its social benefits exceed its private
benefits.*
d. its private benefits exceed its social
benefits.
e. its external costs exceed its social costs.
14. Gross Domestic Product (GDP) consists of
a. Consumption plus Savings plus net
exports.
b. Consumption plus Investment plus
Government expenditures.
c. Consumption plus Investment plus
Savings plus net exports.
d. Consumption plus Savings plus the
Current Account Surplus.
e. Consumption plus Investment plus
Government expenditures plus net
exports.*
15. An Iowa farmer buys a new truck made in
Connecticut by a Japanese company. As a result
a. US GDP increases, but Japanese
GDP is unaffected*
b. GDP for both US and Japan
increase
c. US GDP increases, but Japanese
GDP decreases
d. Japanese GDP increases, but US
GDP is unaffected
e. None of the above

Suppose in year 1, company XYZ produces 3000

light bulbs and 300 tables, selling at the price of
$2 per light bulb and $50 per table. In year 2,
company XYZ produces 4000 light bulbs and
200 tables, selling at the price of $3 per light
bulb and $60 per table. Assuming that year 1 is
the base year, use this information to answer the
following questions:
16. Nominal income for year 1 is:
a. $20,000
b. $21,000*
c. $24,000
d. $18,000
e. $25,000
17. Nominal income for year 2 is:
a. $20,000
b. $21,000
c. $24,000*
d. $18,000
e. $25,000
18. Real income for year 2 using year 1 as the
base year is:
a. $20,000
b. $21,000
c. $24,000
d. $18,000*
e. $25,000
19. An example of a government transfer is a(n)
a. expenditure on an interstate highway.
b. inheritance from a deceased relative.
c. tax on inheritance.
d. subsidy to corn producers.*
e. salary for members of the armed forces.
20. Which of the following transactions will be
included in Canadian GDP?
a. An American buys a bottle of French
perfume.
b. Mr. Moneybags buys an existing share
of the Bank of Montreal.
c. Coca-Cola builds a new bottling plant in
California.
d. A California winery produces a bottle of
Pinot Noir and sells it to a customer in
Vancouver, Canada.
e. United Airlines buys a new plane from
Canadas Bombardier.*

21. Suppose that the Chinese Renminbi has

appreciated relative to the US dollar. What
happens to Chinese and US imports?
a. Imports for both China and US fall
b. Imports for both China and US rise
c. Chinese imports fall, US imports rise
d. Chinese imports rise, US imports
fall*
e. None of the above
22. Which of the following is not a factor behind
the demand for US dollars?
a. Tourists who want to visit US
b. Those who want to buy US assets
c. Those who want to invest in the US
stock market
d. American tourists abroad*
e. Speculators betting in favor of US
dollars.
23. The Financial (or, Capital) account equals
a. Foreign purchases of US assets
minus US purchases of foreign
assets plus reserves adjustments.*
b. Net income received from
investment abroad
c. Net transfer payments from abroad
d. Exports minus imports
e. Trade balance
24. The exchange rate is the
a. interest rate differential between counties.
b. balance of trade differential between
countries.
c. price of gold.
d. the price of different goods in different
countries.
e. relative price of currencies of different
countries.*
25. Examples of activities that typically have
positive externalities include
a. fishing.
b. smoking.
c. eating junk food.
d. driving.
e. public debate.*

Please note that questions 26-35 are worth 2

points each.
26. Which of the following are benefits of trade?
a. Specialization in production and
Comparative advantage
b. Availability of new goods
c. Learning-by-doing
d. Productivity gains due to
competition
e. All of the above*
27. Government subsidies to U.S. farm products
a. are highly uncommon.
b. tend to lower their international price.
c. can be considered a form of trade
protection
d. b and c.*
e. All of the above.
28. Suppose the U.S. market for a certain
industry, say textiles, opens to international
competition through a complete elimination of
trade barriers. Then, other things being equal,
we can expect
a. no effect on employment or wages since
industries such as textiles are never
affected by international competition.
b. an increase in the number of U.S.
workers employed in that industry and
an increase in their wages.
c. a decrease in the number of U.S.
workers employed in that industry and
an increase in their wages.
d. an increase in the number of U.S.
workers employed in that industry and a
decrease in their wages.
e. a decrease in the number of U.S.
workers employed in that industry and a
decrease in their wages.*
29. When you ask a question in class
a. you create a positive externality because
your friend has a positive view of you
b. you create a negative externality
because you interrupt the train of
thought of others around you.
c. you create a positive externality because
you make a positive impression on the
professor.
d. you create a positive externality because
other students who had the same
question, but did not ask, benefit.*
e. you never induce an external effect on
others.

30. Mitigating the effects of climate change is

complicated because of
a. the uncertainty about future costs and the
effects of possible measures.
b. domestic and international politics.
c. making proper intergenerational
valuations.
d. a and b.
e. all of the above.*
31. Flexible exchange rates
a. have existed continuously throughout
the West for over two centuries.
b. have been adopted by every country,
including China.
c. were an integral part of the industrial
revolution.
d. imply that exchange rates are
determined by the supply and demand
for currencies.*
e. a and d.
32. The Bretton Woods system was
characterized by
a. the universal adoption of the Gold
standard.
b. the absence of recessions.
c. flexible exchange rates.
d. low levels of cross-country capital
movements.*
e. All of the above.
33. For the past decade, the US
a. had a yearly trade deficit (negative trade
balance).
b. had a yearly trade surplus (positive
trade balance).
c. some years it had a trade deficit and
some years a trade surplus.
d. consumed more goods and services than
it produced.
e. a and d.*

34. When a country has a trade surplus,

a. The financial (or, capital) account must
necessarily be negative.
b. The financial account is positive.
c. The financial account is zero.
d. the value of its exports is higher than
the value of its imports.*
e. a and d.
35. Since 1971
a. restrictions on trade gradually increased.
b. only the U.S. dollar has been backed by
gold.
c. no currency has been backed by either
gold or silver.*
d only a new currency, the euro, followed
the practice of the Swiss franc to be backed
by gold.
e. only the Icelandic kroner has been
backed by a precious metal successfully.