Exambank

1
The Mariel boatlift of Cuban immigrants into Miami caused

the:
x population of unskilled workers in Miami to decline. (Incorrect)
x population of skilled workers in Miami to decline. (Incorrect)
x supply of labor to increase, but it did not decrease the
wages. (True Answer Correct)
x wages of all workers to decline. (Incorrect)
The immigration of Russian Jews to Israel:

x increased the population of Israel and caused wages to
plummet. (Incorrect)
x decreased the native population of Israel. (Incorrect)
x increased the population of skilled workers but did not decrease
wages. (True Answer Correct)
x caused wages of skilled workers to decrease. (Incorrect)
The results of the influx of workers into Miami in 1980 as a

result of the Mariel boatlift and from Russia to Israel in 1989
after the fall of the Soviet Union:
x were different: wages fell in Miami but rose in Israel. (Incorrect)
x were similar: wages fell in Israel but rose in Miami. (Incorrect)
x surprised most people because the outcome was no reduction in
wages in either area. (True Answer Correct)
x were that wages fell in both regions, confirming that immigration
hurts domestic workers. (Incorrect)
Interesting real-life examples tell us that labor migration often:

x reduces wages in both the source nation and the destination
nation. (Incorrect)
x has no negative effect on wages in the destination nation. (True
Answer Correct)
x increases labor productivity. (Incorrect)
x changes the labor market so that competition for workers
rises. (Incorrect)
When some factors are fixed, it is a short-run model. This is

called the ____________ model:
x Heckscher-Ohlin (Incorrect)
x Ricardian (Incorrect)
x specific-factors (True Answer Correct)
x purchasing power parity (Incorrect)
6
To study labor migration using the specific-factors model, we

assume ________ and ________ cannot move within the
domestic economy, but we allow ________ to move both
domestically and internationally.
x land; capital; labor (True Answer Correct)
x labor; land; capital (Incorrect)
x land; loanable funds; capital (Incorrect)
x labor; capital; land (Incorrect)
When we use the specific-factors model to study immigration,

we assume that:
x land is immobile internationally but capital and labor are
internationally mobile. (True Answer Correct)
x land and capital are immobile internationally but labor is
internationally mobile. (Incorrect)
x land, labor, and capital are internationally mobile. (Incorrect)
x land, labor, and capital are internationally immobile. (Incorrect)
Which model can we use to analyze the short-run effects of

migration?
x
x
x
x
specific-factors (True Answer Correct)

Ricardian (Incorrect)
Heckscher-Ohlin (Incorrect)
purchasing power parity (Incorrect)
When the supply of labor increases, according to the specificfactors model, which of the following is not likely to happen?
x The number of workers employed will increase. (Incorrect)
x The wages for workers will decline. (Incorrect)
x The marginal product of labor shifts to the right. (Incorrect)
x The overall wage in the economy increases in the short run. (True
Answer Correct)
10
When the supply of labor increases, according to the specificfactors model, which of the following is likely to happen in the
sending country?
x The number of workers employed will decrease. (Incorrect)
x The wages for workers will rise. (Incorrect)

x The marginal product of labor shifts to the right. (Incorrect)
x All of the answers are likely to happen in the sending
country. (True Answer Correct)
11
The specific-factors model predicts that after immigration, the

equilibrium wage in both industries in the destination nation:
x
x
x
x
rises. (Incorrect)
falls. (True Answer Correct)
remains the same. (Incorrect)
cannot be determined with the information given. (Incorrect)
12
If a person leaves Sweden to work in the United States, she is

said to ________from Sweden and __________to the United
States.
x immigrate; emigrate (Incorrect)
x emigrate; immigrate (True Answer Correct)
x immigrate; immigrate (Incorrect)
x emigrate; emigrate (Incorrect)
13
One example of emigration from Europe was during the period

between 1870 and 1913. Wages grew rather than declined in the
destination nations of the United States, Canada, and Australia.
Why?
x The economic theory did not predict well. (Incorrect)
x Workers from Europe were highly skilled and raised the
equilibrium wage. (Incorrect)
x The government stepped in and raised the minimum
wage. (Incorrect)
x Wages rose due to the industrial revolution and higher levels of
capital but grew more slowly because of the immigration. (True
Answer Correct)
14
Large-scale immigration into the New World between 1870 and

1913 caused the real wages to:
x decrease in comparison to Europe. (Incorrect)
x increase at a slower pace in comparison to Europe. (True Answer
Correct)
x increase at a higher pace in comparison to Europe. (Incorrect)
x stay constant. (Incorrect)
15
The large-scale labor migration that occurred during 1870 to

1913 from Europe to America ____ wages in the destination
nations and ____ wages in the source nations, thus leading to
_____ of wages between the regions.
x lowered; raised; convergence (True Answer Correct)
x raised; raised; divergence (Incorrect)
x lowered; lowered; divergence (Incorrect)
x raised; lowered; convergence (Incorrect)
16
Between 1870 and 1913, labor migration from the Old World
(Europe) to the New World (the United States, Canada, and
Australia) caused:
x real wages to rise in the New World. (Incorrect)
x real wages to fall in the Old World. (Incorrect)
x real wages to diverge between the New and Old
Worlds. (Incorrect)
x real wages to converge between the New and Old Worlds. (True
Answer Correct)
17
Between 1870 and 1913, labor migration from the Old World
(Europe) to the New World (the United States, Canada, and
Australia):
x decreased the rate of growth of real wages in the New World and
increased the rate of growth of real wages in the Old World. (True
Answer Correct)
x increased the rate of growth of real wages in the New World and
decreased the rate of growth of real wages in the Old
World. (Incorrect)
x decreased the rate of growth of real wages in both the New and
Old Worlds. (Incorrect)
x increased the rate of growth of real wages in both the New and
Old Worlds. (Incorrect)
18
Emigration and immigration are:

x
x
x
x
19
when workers leave and workers come in. (True Answer Correct)
two ways of saying workers are coming in. (Incorrect)
when workers come in and workers leave. (Incorrect)
two ways of saying workers leave. (Incorrect)
The specific-factors model can also apply to recent immigration

into the United States. There are two major categories of U.S.
immigrants:
x male and female. (Incorrect)
x young and middle-aged. (Incorrect)
x very low skill and highly educated and skilled. (True Answer
Correct)
x middle-income artisans and performance artists. (Incorrect)
20
U.S. immigrants from Mexico are mainly _________workers

and U.S. immigrants from India are mainly
___________workers.
x low-skilled; highly skilled (True Answer Correct)
x middle-income artisans; performance artists (Incorrect)
x male; female (Incorrect)
x younger; older (Incorrect)
21
Which group of U.S. citizens competes with illegal immigrants in

the United States?
x
x
x
x
22
medical doctors (Incorrect)

high school dropouts (True Answer Correct)
college graduates (Incorrect)
all U.S. citizens (Incorrect)
The H1-B visa program is designed to:

x keep out undocumented workers. (Incorrect)
x encourage bright U.S. college students to study abroad. (Incorrect)
x attract scientists and engineers from other nations to help U.S.
industry prosper. (True Answer Correct)
x have a way to force foreign students to go back to their native
lands after graduation. (Incorrect)
23
Of the 10% of the U.S. workforce with advanced degrees, the

share of those who are foreign born is:
x
x
x
x
more than 50%. (Incorrect)

between 17 and 30%. (True Answer Correct)
less than 15%. (Incorrect)
24
The combination of legal and illegal immigrants in the United

States creates a U-shaped pattern between the number of
immigrants and:
x wages of competing American workers. (Incorrect)
x their wages. (Incorrect)
x their educational level. (True Answer Correct)
x their jobs. (Incorrect)
25
Foreign-born workers in the United States tend to:

x be poorly educated (high school dropouts) or very highly educated
(graduate degrees). (True Answer Correct)
x be mainly very poorly educated. (Incorrect)
x be mainly very highly educated. (Incorrect)
x have educational levels similar to U.S.-born workers. (Incorrect)
26
In the United States the share of foreign-born workers with 8

years of education or less is:
x
x
x
x
27
Illegal immigrants into the United States tend to compete mainly

with:
x
x
x
x
28
highly educated American workers. (Incorrect)

poorly educated American workers. (True Answer Correct)
all American workers. (Incorrect)
each other. (Incorrect)
Legal immigrants into the United States tend to compete mainly

with:
x
x
x
x
29

more than 70%. (True Answer Correct)
negligible. (Incorrect)
highly educated American workers. (True Answer Correct)

poorly educated American workers. (Incorrect)
all American workers. (Incorrect)
each other. (Incorrect)
Because most immigrants into the United States are either

highly skilled or unskilled, the majority of workers:
x see very little impact on their wages as a result of
immigration. (True Answer Correct)

x have difficulty finding jobs and getting raises because of all the
competition from immigrants. (Incorrect)
x feel a big hit on wages and unemployment. (Incorrect)
x must rely on trade adjustment assistance for help retraining and
relocating. (Incorrect)
30
In Europe, which of the following industries welcomed

immigrants from Eastern Europe prior to the 20082009
recession?
x construction and restaurants (True Answer Correct)
x education (Incorrect)
x medicine (Incorrect)
x banking (Incorrect)
31
In the specific-factors model, migration of labor will cause:

x the wage to rise in the receiving country and the wage to fall in
the sending country. (Incorrect)
x the wage to fall in the receiving country and the wage to rise in
the sending country. (True Answer Correct)
x the wage to rise in both the receiving and sending
countries. (Incorrect)
x the wage to fall in both the receiving and sending
32
In the specific-factors model, labor migration from Mexico to

the United States will cause _________ in U.S. low-skilled wages
and _________ in Mexican low-skilled wages.
x increases; decreases (Incorrect)
x increases; increases (Incorrect)
x decreases; decreases (Incorrect)
x decreases; increases (True Answer Correct)
33
If capital is specific to manufacturing and land is specific to

agriculture, then migration of labor from low-income to highincome countries will cause:
x the wage to rise in the high-income country and the wage to fall in
the low-income country. (Incorrect)
x the wage to fall in the high-income country and the wage to rise in
the low-income country. (True Answer Correct)
x the wage to rise in both the high-income and low-income
x the wage to fall in both the high-income and low-income
34
Emigration causes __________ in the capitallabor ratio and

__________ in the return to capital.
x
x
x
x
35
Immigration causes __________ in the capitallabor ratio and

__________ in the return to capital.
x
x
x
x
36
increases; decreases (True Answer Correct)

increases; increases (Incorrect)
decreases; decreases (Incorrect)
decreases; increases (Incorrect)
increases; decreases (Incorrect)

decreases; increases (True Answer Correct)
What would the owners of capital and land do?

x support closing the borders to foreign labor (Incorrect)
x support more open borders and an influx of workers (True
Answer Correct)
x not worry about immigration issues (Incorrect)
x reject legislation easing rules on immigration (Incorrect)
37
In destination countries, as immigration occurs and more labor

is employed, in the short run, wages fall and the marginal
products of land and capital (fixed resources):
x are unaffected. (Incorrect)
x both rise. (True Answer Correct)
x both fall. (Incorrect)
x rise for one and fall for the other. (Incorrect)
38
In destination countries, as immigration occurs and more labor

is employed, in the short run, wages fall and the rental (return
to) of land and capital (fixed resources):
x are unaffected. (Incorrect)
x both rise. (True Answer Correct)
x both fall. (Incorrect)
x rise for one and fall for the other. (Incorrect)
39
Because immigration raises the marginal products and the

return to nonlabor factors of production, in the short run
owners of nonlabor resources often support:
x open borders. (True Answer Correct)
x tighter restrictions on immigration. (Incorrect)
x controls on the flow of foreign direct investment
(FDI). (Incorrect)
x immigration of persons only for humanitarian reasons. (Incorrect)
40
U.S. and European immigration policies are best described as

welcoming:
x
x
x
x
41
all foreign workers. (Incorrect)

foreign workers in most industries. (Incorrect)
foreign workers in select industries. (True Answer Correct)
no foreign workers. (Incorrect)
The effect of immigration on industry output in the short run is:

x to lower it across all industry. (Incorrect)
x to raise it in sectors that do not get immigrant workers but lower it
where immigrants are employed. (Incorrect)
x that, surprisingly, additional workers are employed, but there is no
effect on industry output. (Incorrect)
x that it raises industry output overall, and the rise is skewed so
industries employing immigrants rise by morethus shifting the
PPF. (True Answer Correct)
42
Which of the following would U.S. labor unions support?

x lobbying for legislation to eliminate all restrictions on
immigration (Incorrect)
x lobbying for legislation to increase direct foreign investment in
the United States (True Answer Correct)
x lobbying for legislation to ease rules on immigration (Incorrect)
x Labor unions would support all of the listed measures. (Incorrect)
43
In the specific-factors model, immigration causes:

x a rightward shift in the receiving country's production possibilities
frontier. (True Answer Correct)
x a leftward shift in the receiving country's production possibilities

frontier. (Incorrect)
x no change in the receiving country's production possibilities
x a rightward shift in the sending country's production possibilities
44
Suppose labor and capital are the only two resources used for
production. In the short run:
x only capital can move freely between sectors. (Incorrect)
x only labor can move freely between sectors. (True Answer
Correct)
x both capital and labor can move freely between
sectors. (Incorrect)
x both resources are restricted in their movement. (Incorrect)
45
Suppose labor and capital are the only two resources used for
production. In the long run:
x both capital and labor can move freely between sectors. (True
Answer Correct)
x only labor can move between sectors. (Incorrect)
x only capital can move between sectors. (Incorrect)
x both capital and labor are blocked from moving between
sectors. (Incorrect)
46
In order to analyze migration in the long run, it is appropriate

to use:
x the specific-factors model with free movement of labor across
borders. (Incorrect)
x the Heckscher-Ohlin model with free movement of labor across
borders. (True Answer Correct)
x the Ricardian model with no movement of labor across
x the PPF modified for three goods, three factors of production (all
fixed), and three nations. (Incorrect)
47
Which of the following events will cause the production

possibility frontier to shift outward?
x a natural disaster that causes widespread damage (Incorrect)
x a computer problem that affects all business that rely on
computers (Incorrect)
x a wave of immigration caused by new easier rules (True Answer
Correct)
x a war that destroys the nation's infrastructure (Incorrect)
48
In the specific-factors model, how will immigration affect the

sending country's production possibilities frontier?
x It will shift it to the right. (Incorrect)
x It will shift it to the left. (True Answer Correct)
x It will not affect its production possibilities curve. (Incorrect)
x It will first shift it to the left, then shift it back to its original
position. (Incorrect)
49
Which is the best approach to analyzing migration in the long

run?
x the specific-factors model with no resource mobility across
borders (Incorrect)
x the specific-factors model with free movement of labor across
borders (Incorrect)
x the Heckscher-Ohlin model with free movement of labor across
borders (True Answer Correct)
x the Heckscher-Ohlin model with no resource mobility across
borders (Incorrect)
50
Consider an economy that only produces steel and shoes; steel is

capital intensive and shoes are labor intensive. Which industry
has a lower capitallabor ratio?
x steel (Incorrect)
x shoes (True Answer Correct)
x The capital-labor ratios are identical in steel and shoes. (Incorrect)
x neither steel nor shoes (Incorrect)
51
Immigration will lead to a rightward shift in the receiving

country's production possibilities frontier. As a result, this shift
will:
x favor the labor-intensive good. (True Answer Correct)
x favor the capital-intensive good. (Incorrect)
x equally favor the labor-intensive and the capital-intensive
good. (Incorrect)
x cause an increase in the production of the labor-intensive good
and a decrease in the capital-intensive good. (Incorrect)
52
Immigration will shift the sending country's production

possibilities frontier inward. This shift will cause:
x a larger decline in the potential output of the capital-intensive
good. (Incorrect)
x a larger decline in the potential output of the labor-intensive
good. (True Answer Correct)
x equal declines in the potential output of both the labor-intensive
and the capital-intensive good. (Incorrect)
x a decline in the potential output of the labor-intensive good and an
increase in the potential output of the capital-intensive
good. (Incorrect)
53
In the HO model, a box diagram describes the distribution of:

x output between the two producing sectors in a country. (True
Answer Correct)
x output between the two countries of the model. (Incorrect)
x labor and capital between the two producing sectors of a
country. (Incorrect)
x labor between the two countries of the model. (Incorrect)
54
When factors of production are not fixed (as per the long run)
and labor immigrates, capital will:
x remain fixed because capital is never mobile. (Incorrect)
x increase in the capital-intensive industry. (Incorrect)
x move to the higher productivity use in the labor-intensive industry
until returns are again equalized. (True Answer Correct)
x become idled as owners of capital seek more profitable
opportunities. (Incorrect)
55
Consider a hypothetical economy in which only computers and

shoes are produced and in which computer production is capital
intensive as compared with shoe production. If two resources
are being used, labor and capital, then the capitallabor ratio
would be:
x higher in the shoe industry. (Incorrect)
x lower in the computer industry. (Incorrect)
x the same in both industries. (Incorrect)
x higher in the computer industry. (True Answer Correct)
56

capital intensive and shoes are labor intensive. How will
emigration of labor from this economy affect the marginal
productivity of labor?
x It will fall. (Incorrect)
x It will not change. (True Answer Correct)
x It will rise. (Incorrect)
x It will fall in the short run and rise in the long run. (Incorrect)
57
In the long run (the HO model), immigration will lead to:

x an increase in the production of both the labor-intensive and the
capital-intensive goods in the receiving country. (Incorrect)
x an increase in the production of the labor-intensive good and a
decrease in the production of the capital-intensive good in the
receiving country. (True Answer Correct)
x a decrease in the production of both the labor-intensive and the
x a decrease in the production of the labor-intensive and an increase
in the production of the capital-intensive good in the receiving
58
In the long run, when there is immigration of labor and all

domestic factors of production are mobile:
x resources move out of the labor-intensive industry into the other
sectors of the economy. (Incorrect)
x the excess labor cannot be absorbed into the economy, and
eventually workers will seek to emigrate. (Incorrect)
x the excess labor is absorbed, but it raises the unemployment rate
and drives down wages, and the owners of capital are the clear
winners. (Incorrect)
x the capital-labor ratio in each industry is unchanged, and the
additional labor in the economy is fully employed. (True Answer
Correct)
59

capital intensive and shoes are labor intensive. How will
emigration of labor from this economy affect production?
x Production of both the labor-intensive and the capital-intensive
good will rise. (Incorrect)
x Production of both the labor-intensive and capital-intensive good
will fall. (Incorrect)
x Production of the labor-intensive good will rise and production of

the capital-intensive good will fall. (Incorrect)
x Production of the labor-intensive good will fall and production of
the capital-intensive good will rise. (True Answer Correct)
60
Because the capital-labor ratio will be unchanged in the long

run, immigration causes the MPs, and returns to the factors
will:
x remain constant. (True Answer Correct)
x fall. (Incorrect)
x rise. (Incorrect)
x rise in the short run, but fall in the long run. (Incorrect)
61

x an increase in the price of both the labor-intensive and the capitalintensive goods in the receiving country. (Incorrect)
x an increase in the price of the labor-intensive good and a decrease
in the price of the capital-intensive good in the receiving
x a decrease in the price of both the labor-intensive and the capitalintensive goods in the receiving country. (Incorrect)
x no change in the price of either the labor-intensive or the capitalintensive good in the receiving country. (True Answer Correct)
62
In the long run, which of the following will occur if the U.S.
federal government eliminates restrictions on migration of
Mexican workers to the United States?
x The United States' total K/L ratio will rise. (Incorrect)
x Mexico's total K/L ratio will fall. (Incorrect)
x Wages of American workers who compete with Mexican workers
for jobs will rise. (Incorrect)
x The returns to U.S. owners of capital will remain
unchanged. (True Answer Correct)
63

x an increase in the wage and a decrease in the return to capital in
the receiving country. (Incorrect)
x an increase in both the wage and the return to capital in the
receiving country. (Incorrect)
x a decrease in the wage and an increase in the return to capital in
the receiving country. (Incorrect)

x no change in the wage and the return to capital in the receiving
64
For the sending country, what will be the long-run effects of

immigration on wages and the return to capital?
x The wage will increase, and the return to capital will
decrease. (Incorrect)
x The wage will decrease, and the return to capital will
increase. (Incorrect)
x Both the wage and the return to capital will increase. (Incorrect)
x There will be no change in the wage and the return to
capital. (True Answer Correct)
65

shoes are produced and in which computer production is capital
intensive compared with shoe production. If two resources are
being used, labor and capital, then any increase in immigration
in the long run will:
x cause the capitallabor ratio to increase in the computer
industry. (Incorrect)
x cause the capitallabor ratio to increase in the shoe
x cause the capitallabor ratio to increase in both the
industries. (Incorrect)
x increase the number of workers employed in the shoe
industry. (True Answer Correct)
66

shoes are produced. If two resources are being used, labor and
capital, then any increase in immigration in the long run will:
x decrease the wages in the shoe industry. (Incorrect)
x decrease the wages in the computer industry. (Incorrect)
x increase the wages in the shoe industry. (Incorrect)
x keep the wages constant, because the marginal products do not
change. (True Answer Correct)
67
In an economy with two industries, an increase in immigration

will:
x cause employment to increase in both in the long run. (Incorrect)
x cause employment to increase in one and decrease in the other in
the short run. (Incorrect)
x cause employment to increase in one and decrease in the other in

the long run. (True Answer Correct)
x cause a decline in wages in both industries in the long
run. (Incorrect)
68

x a rightward shift in the receiving country's production possibilities
frontier. (True Answer Correct)
x a leftward shift in the receiving country's production possibilities
x no change in the receiving country's production possibilities
x a rightward shift in the sending country's production possibilities
69
What is the long-run effect of immigration on capital use in the

receiving country?
x There is no change because the remaining capital is not
mobile. (Incorrect)
x Capital will move to the capital-intensive industry. (Incorrect)
x The return to capital (rental) will fall. (Incorrect)
x Capital will move to the labor-intensive industry. (True Answer
Correct)
70
The labor-intensive industry's output in the long run will ______

after immigration.
x
x
x
x
71
remain constant (Incorrect)

fall (Incorrect)
rise (True Answer Correct)
equal zero (Incorrect)
Which of the following does NOT reflect a long-run impact of

labor immigration?
x an increase in production in the labor-intensive
industry (Incorrect)
x a decrease in production in the capital-intensive
x a shift of labor and capital into labor-intensive
industries (Incorrect)
x the PPF shifts inward (True Answer Correct)

72
In the Heckscher-Ohlin model with two goods and two factors,

an increase in one factor will cause:
x an increase in the production of the good that uses the factor
intensively. (True Answer Correct)
x a decrease in the production of the good that uses the factor
intensively. (Incorrect)
x an increase in the production of the good that does not use the
factor intensively. (Incorrect)
x no change in the production of both goods. (Incorrect)
73
What is the effect of immigration in the long run?

x an increase in output (Incorrect)
x an increase in factor prices (Incorrect)
x no change in factor prices (Incorrect)
x an increase in output and no change in factor prices (True Answer
Correct)
74
The overall long-run impact of labor immigration on returns to

factors:
x increases returns to labor and decreases returns to
capital. (Incorrect)
x increases returns to labor and increases returns to
capital. (Incorrect)
x leaves both relative and absolute returns constant. (True Answer
Correct)
x raises both relative and absolute returns. (Incorrect)
75
The hypothesis that the results of a long-run Heckscher-Ohlin

model with labor immigration will result in an increase in
production for the labor-intensive industry while reducing
production in the capital-intensive industry is known as the
_____ theorem.
x Stolper-Samuelson (Incorrect)
x specific-factors (Incorrect)
x Ricardian (Incorrect)
x Rybczynski (True Answer Correct)
76
A corollary to the Rybczynski theorem is that in the long run,

prices of factors will not be affected. This is known as:
x
x
x
x
77
the Friedman corollary. (Incorrect)

the Marshall-Lerner condition. (Incorrect)
the factor price insensitivity result. (True Answer Correct)
the Stolper-Samuelson prediction. (Incorrect)
According to the Rybczynski theorem, immigration will cause:

x an increase in the output of the labor-intensive good and a
decrease in the output of the capital-intensive good in the receiving
x an increase in the output of both the labor-intensive and the
x a decrease in the output of the labor-intensive good and an
increase in the output of the capital-intensive good in the receiving
x decreases in the output of both the labor-intensive the capitalintensive goods in the receiving country. (Incorrect)
78
According to the Rybczynski theorem, immigration of unskilled

labor from Mexico to the United States will cause:
x a decrease in Mexico's output of capital-intensive
products. (Incorrect)
x a decrease in Mexico's output of labor-intensive products. (True
Answer Correct)
x an increase in Mexican wages. (Incorrect)
x a decrease in Mexican wages. (Incorrect)
79
In the Heckscher-Ohlin model, what is the term used to describe

the absorption of an increase in a factor with changes in sector
outputs without any change in factor prices?
x factor price insensitivity (True Answer Correct)
x factor price equalization (Incorrect)
x factor price theorem (Incorrect)
x factor price absorption (Incorrect)
80
According to the Rybczynski theorem, immigration will affect

production in the sending country through __________ in the
output of the labor-intensive good and __________ in the output
of the capital-intensive good.
x
x
x
x
increases; decreases (Incorrect)

decreases; increases (True Answer Correct)
81
In the long run, which of the following will occur if the U.S.
federal government eliminates restrictions on migration of
Mexican workers to the United States?
x U.S. production of labor-intensive goods will increase. (True
Answer Correct)
x U.S. production of both labor-intensive and capital-intensive
goods will increase. (Incorrect)
x U.S. production of capital-intensive goods will
x Mexican production of labor-intensive goods will
82
During the past 10 to 20 years, a considerable amount of foreign

capital has flowed into China. What is an implication of capital
flow upon the composition of Chinese trade?
x There should be no change in the composition of China's
trade. (Incorrect)
x There should be a shift toward the export of more labor-intensive
x There should be a shift toward the export of more capitalintensive products. (True Answer Correct)
x There should be a shift toward the import of more capitalintensive products. (Incorrect)
83
A study of the results of the Mariel boatlift on wages in Miami

found:
x significant declines in wages for unskilled workers. (Incorrect)
x no significant decline in wages for unskilled workers due to a
trend to substitute employment of low-skill workers for more
expensive technology such as computers. (True Answer Correct)
x an ironic rise in wages and salaries paid to low-skill workers
because the boatlift immigrants had superior technical
skills. (Incorrect)
x that wages in the apparel industry collapsed, raising
unemployment across the board and lowering wages of all workers
in all skill categories. (Incorrect)
84
Skill-biased technological changes:

x benefit educated workers more than uneducated workers. (True
Answer Correct)
x benefit all workers equally. (Incorrect)
x benefit uneducated workers more than educated
workers. (Incorrect)
x benefit no workers. (Incorrect)
85
In 2005, approximately what percentage of the U.S. population

was foreign born?
x
x
x
x
86
3% (Incorrect)
13% (True Answer Correct)
23% (Incorrect)
33% (Incorrect)
A number of studies of the effect of immigration on U.S. wages

has found:
x no effect on any wage group. (Incorrect)
x significant rises in wages for unskilled workers and the highest
skill levels but a negative impact for middle-skill
occupations. (Incorrect)
x significant declines in wages for unskilled workers and the highest
skill levels but a positive impact for middle-skill occupations. (True
Answer Correct)
x no effect on other groups but significant declines in wages for
mid-skill occupations, which comprise most manufacturing and
white-collar jobs. (Incorrect)
87
Foreign direct investment may take the form of purchasing an

existing plant or operation called:
x
x
x
x
88
acquisition FDI. (True Answer Correct)

greenfield FDI. (Incorrect)
requisition FDI. (Incorrect)
brownstone FDI. (Incorrect)
Foreign direct investment may take the form of a new start-up

facility called a(n):
x acquisition FDI. (Incorrect)
x greenfield FDI. (True Answer Correct)
x intermediary FDI. (Incorrect)

x brownfield FDI. (Incorrect)
89
According to the U.S. Department of Commerce, a foreign direct

investment inflow to the United States occurs whenever a
foreign company acquires ____ or more of a U.S. firm.
x 10% (True Answer Correct)
x 25% (Incorrect)
x 51% (Incorrect)
x 100% (Incorrect)
90
Foreign direct investment is defined by the commerce

department as:
x a minimum 51% ownership of an American company. (Incorrect)
x a minimum increase in employment of 10 American
x at least 10% ownership of an American company. (True Answer
Correct)
x only investment by foreign governments in American
companies. (Incorrect)
91
Greenfield investment is defined as:

x a takeover of an existing company. (Incorrect)
x construction of a new factory in a foreign company. (True
Answer Correct)
x the hiring of at least 25 workers in a foreign company. (Incorrect)
x renting space in an office building. (Incorrect)
92
Modeling FDI movement from one nation to another, if we use

the short-run (specific-factors) model, the wages of labor in the
recipient nation:
x decline absolutely. (Incorrect)
x rise as a result of the rise in the MP of labor. (True Answer
Correct)
x are not affected. (Incorrect)
x decline relatively as capital competes with labor, but not
absolutely. (Incorrect)
93
In the short-run (specific-factors) model, foreign direct

investment is expected to ________the marginal product of labor
and ________wages in the receiving country.
x
x
x
x
94
decrease; decrease (Incorrect)

increase; decrease (Incorrect)
decrease; increase (Incorrect)
increase; increase (True Answer Correct)
According to the short-run (specific-factors) model, how will

FDI affect wages in the recipient nation?
x They will rise. (True Answer Correct)
x They will fall. (Incorrect)
x They will not affect wages. (Incorrect)
x They will fall in comparison to wages in the sending
95

FDI affect the marginal productivity of labor in the recipient
nation?
x The MPL will rise in the production of both the labor- and capitalintensive goods. (True Answer Correct)
x The MPL will rise only in the production of the labor-intensive
good. (Incorrect)
x The MPL will rise only in the production of the capital-intensive
good. (Incorrect)
x The MPL will fall in the production of both the labor and capitalintensive goods. (Incorrect)
96
As FDI flows into a nation, the marginal product of labor always

_______________ in the short run.
x
x
x
x
97
rises (True Answer Correct)

falls (Incorrect)
remains the same (Incorrect)
falls then rises (Incorrect)

FDI affect the return to capital and the return to land in the
recipient nation?
x The returns to land and capital will both decrease. (Incorrect)
x The return to land will decrease; the return to capital will
increase. (True Answer Correct)
x The return to land will increase; the return to capital will
x The returns to land and capital will both increase. (Incorrect)
98

investment is expected to cause a(n) ________in the production
of the capital-intensive good and a(n) ________in the production
of the land-intensive good in the receiving country.
x decrease; decrease (Incorrect)
x increase; decrease (True Answer Correct)
x decrease; increase (Incorrect)
x increase; increase (Incorrect)
99

investment is expected to cause a(n) ________in the return to
capital and a(n) ________in the return to land in the receiving
country.
x increase; decrease (Incorrect)
x decrease; increase (True Answer Correct)
100
In the short run, the FDI inflow into a country in the

manufacturing sector will cause:
x an increase in the output of the agricultural sector. (Incorrect)
x an increase in the employment in the agricultural
sector. (Incorrect)
x a decrease in the employment in the manufacturing
sector. (Incorrect)
x an increase in the output and employment in the manufacturing
sector. (True Answer Correct)
101
In the short run, assuming there are two sectors in an economy,

agriculture and manufacturing, an increase in the FDI in the
manufacturing sector will cause the production possibility
frontier to:
x shift outward for both sectors. (Incorrect)
x shift inward. (Incorrect)
x shift outward for manufacturing only. (True Answer Correct)
x stay the same. (Incorrect)
102
In the short run, when FDI increases in a country, the rental

rate on capital will _____ and the wage rate will ______.

103
With fixed factors of production in the short-run (specific

factors), when FDI occurs, in the recipient nation there is
_______________ in the return to capital and land and
_______________ in the return to labor.
x an increase; a decrease (Incorrect)
x a decrease; an increase (True Answer Correct)
x no change; an increase (Incorrect)
x a decrease; no change (Incorrect)
104
During the past 20 years, there has been substantial FDI in

China. What are the expected short-run effects of this FDI
upon the rental rate on capital and wages in China?
x The rental rate should increase and wages should
x The rental rate and wages should both increase. (Incorrect)
x The rental rate and wages should both decrease. (Incorrect)
x The rental rate should decrease and wages should increase. (True
Answer Correct)
105
In the long run, when FDI occurs, industry output in the

recipient nation is affected in the following way(s):
x There is no change in either the output of the capital-intensive or
the labor-intensive industry. (Incorrect)
x The labor-intensive industry expands; the capital-intensive
industry contracts. (Incorrect)
x The capital-intensive industry expands; the labor-intensive
industry contracts. (True Answer Correct)
x Both capital- and labor-intensive industries expand in the same
proportion. (Incorrect)
106
In the long run, an increase in FDI in the manufacturing sector

will:
x increase marginal product of labor in the agriculture
sector. (Incorrect)
x increase marginal product of labor in the manufacturing
sector. (Incorrect)
x decrease marginal product of labor in the agriculture
sector. (Incorrect)
x not change the marginal product of labor in either sector. (True
Answer Correct)
107
We model FDI flows in the long run using a method similar to

that in which we model labor migration in the long run, by
using:
x a simple supply-and-demand approach. (Incorrect)
x the Ricardian comparative advantage model. (Incorrect)
x the Heckscher-Ohlin model with the assumption that capital can
migrate. (True Answer Correct)
x the Rybczynski theorem. (Incorrect)
108
According to the long-run model, generally when FDI takes

place, the investment capital moves from:
x southern hemisphere nations to northern hemisphere
nations. (Incorrect)
x high-wage nations to low-wage nations. (True Answer Correct)
x Eastern Europe to Western Europe. (Incorrect)
x privately owned enterprises to government-owned
enterprises. (Incorrect)
109
In the long run, if all resources can move within a nation, an

inflow of FDI will:
x increase production in the capital-intensive sectors as capital
becomes cheaper. (True Answer Correct)
x lower the productivity of the agricultural sector. (Incorrect)
x lower wages. (Incorrect)
x decrease the production of capital-intensive goods. (Incorrect)
110
The international movement of factors of production:

x is prohibited by the Geneva Convention. (Incorrect)
x is completely free of restrictions everywhere in the
world. (Incorrect)
x tends to make the prices paid to factors of production among
countries move further apart over time. (Incorrect)
x tends to make the prices paid to the factors of production among
countries more similar over time. (True Answer Correct)
111
SCENARIO: TRADE IN GOODS BETWEEN CHINA AND

THE UNITED STATES
(1) China has 1,000 units of capital and 3,000 workers; (2) the
United States has 3,000 units of capital and 1,000 workers; (3)
clothing production is labor intensive; and (4) chemical

production is capital intensive.
Reference: Ref 5-1
(Scenario: Trade in Goods Between China and the United

States) Suppose that the United States eliminates all restrictions
on immigration and Chinese workers are free to emigrate from
China to the United States. How many Chinese workers must
emigrate from China to the United States in order for factor
price equalization to occur?
x 1,000 (Incorrect)
x 2,000 (True Answer Correct)
x 3,000 (Incorrect)
x 4,000 (Incorrect)
112
In the long run, returns to capital and wages do not change

when FDI or labor immigration occurs because:
x world prices of output are unchanged. (Incorrect)
x marginal productivities are unchanged. (Incorrect)
x there is no change in the capitallabor ratio in either
x world prices of output and marginal productivities are
unchanged. (Incorrect)
113
In the long run, an increase in FDI in the manufacturing sector

will __________ the return to capital in the ____________
sector.
x decrease; agriculture (Incorrect)
x increase; manufacturing (Incorrect)
x decrease; manufacturing (Incorrect)
x not change; manufacturing or agriculture (True Answer Correct)
114
SCENARIO: TRADE IN GOODS BETWEEN MEXICO AND

THE UNITED STATES
(1) Mexico has 2,000 units of capital and 2,000 workers; (2) the
United States has 6,000 units of capital and 4,000 workers; (3)
clothing production is labor intensive; and (4) chemical
production is capital intensive.
Reference: Ref 5-2
(Scenario: Trade in Goods Between Mexico and the United

States) Suppose that the United States eliminates all restrictions
on immigration from Mexico. How many Mexican workers
must emigrate to the United States in order for factor price
equalization to occur?
x
x
x
x
115
500 (True Answer Correct)

1,000 (Incorrect)
1,500 (Incorrect)
2,000 (Incorrect)
Which of the following is a key assumption in factor price

insensitivity in response to a fall in FDI?
x Technology is changing in the capital-intensive
sector. (Incorrect)
x Technology is changing in the labor-intensive sector. (Incorrect)
x Prices are changing for the capital-intensive good. (Incorrect)
x None of these answer choices are correct. (True Answer Correct)
116
FDI inflows to Singapore during the latter part of the twentieth

century in the short run:
x contradicted the specific-factors model because wages fell while
the rental on capital rose. (Incorrect)
x confirmed the specific-factors model because wages rose while
the rental on capital fell. (True Answer Correct)
x did not have any measurable effects on either wages or the rental
on capital. (Incorrect)
x confounded economists because the rental on capital rose and
wages rose as well. (Incorrect)
117
If FDI has spillover benefits for the recipient nation (such as

spurring technological innovation, more FDI, or growth in
labor productivity), then it could explain why in Singapore:
x wages fell in the short run. (Incorrect)
x in the long run, wages fell and returns to capital rose. (Incorrect)
x in the long run, contradicting the HO model, wages rose and
returns to capital were close to original levels (depending on the
calculation used). (True Answer Correct)
x absolutely nothing changed in either the short or long
run. (Incorrect)
118
Without productivity growth, in the long run the effect of labor

migration is:
x an increase in production in the sector using labor (or capital)
intensively. (True Answer Correct)
x clear gains to owners of capital versus labor. (Incorrect)

x clear gains to labor versus owners of capital. (Incorrect)
x a shift of world resources toward the high-income
119
Without productivity growth, the long-run effect(s) of labor

migration on the receiving country is(are):
x an increase in production of the labor-intensive good. (True
Answer Correct)
x lower wages. (Incorrect)
x higher returns to capital. (Incorrect)
x None of the answers listed are correct. (Incorrect)
120
Measuring the effects of labor immigration shows that:

x as workers move, they disrupt their families and cause huge costs
in the recipient nation. (Incorrect)
x most immigrants spend months trying to find work. (Incorrect)
x immigration benefits the recipient nation by raising the marginal
product of capital, expanding labor-intensive production, and
lowering prices of labor-intensive goods. (True Answer Correct)
x immigration is very harmful to the host nation because of a huge
increase in the unemployment rate. (Incorrect)
121
In the short run, which of the following will cause gains from
labor migration to the recipient nation to be lower?
x Workers remit less than the value of their marginal
x Migrant workers have a declining marginal product so that the
equilibrium wage is lower than MPs of earlier
immigrants. (Incorrect)
x Immigrants are low cost in terms of adjustment costs such as
crime prevention, language assimilation, and few children enrolled
in school. (Incorrect)
x Workers remit more than the value of their marginal
products. (True Answer Correct)
122
If there were no trade in goods, which of the following would

one expect?
x labor to immigrate from the capital-abundant country (Incorrect)
x labor to emigrate to the capital-abundant country (True Answer
Correct)
x labor to emigrate to the capital-scarce country (Incorrect)
x labor to immigrate from the capital-scarce country (Incorrect)
123
Which of the following statements does NOT describe the

effect(s) of labor immigration?
x The source nation benefits from remittances and a rise in the
overall marginal product of labor as surplus workers
emigrate. (Incorrect)
x Emigrating workers take skills and talent, and the marginal
product of labor declines in the source nation, thus reducing the
benefit. (Incorrect)
x Emigration of workers usually raises the real wage of workers
left behind in the source nation. (Incorrect)
x The source nation experiences a decline in the overall marginal
product of labor as surplus workers emigrate. (True Answer
Correct)
124
In the very long run, theoretically there will be equilibrium

with full migration of capital and labor. If and when this ever
happens, what will the global economy experience?
x an equality of wages and marginal product (Incorrect)
x an equality of returns to the owners of capital (Incorrect)
x a fully Pareto-efficient world economy with the highest standard
of living possible (Incorrect)
x an equality of wages and marginal product, an equality of returns
to the owners of capital, and a fully Pareto-efficient world economy
with the highest standard of living possible (True Answer Correct)
125
A key assumption in proving the gains from immigration is

that:
x immigrants are generally high skilled. (Incorrect)
x the productivity of labor is rising in the number of workers
used. (Incorrect)
x immigrants are generally low skilled. (Incorrect)
x the productivity of labor is falling in the number of workers
used. (True Answer Correct)
126
Payments made by foreign resident workers to their home

nations (taxes) or to their families is called:
x worker redistribution. (Incorrect)
x worker earnings. (Incorrect)

x worker remittances. (True Answer Correct)
x worker repayments. (Incorrect)
127
Some economists have proposed a brain drain tax to be

administered through the United Nations. This would:
x tax firms that hire people who need remedial reading and writing
skills to be able to function in an advanced economy. (Incorrect)
x tax earnings of highly educated immigrants and repay the nation
of origin for their losses. (True Answer Correct)
x force immigrants to pay taxes where they work instead of where
they live. (Incorrect)
x require the national government to pay taxes to states to recover
the cost of educating immigrants. (Incorrect)
128
The gains from immigration of labor or capital to the recipient

nation can be summarized as the:
x total cost of acquiring new resources versus the cost of using
domestic resources. (Incorrect)
x increase in prices minus the increase in the unemployment
rate. (Incorrect)
x gain in domestic real GDP minus costs as a result of the
immigration. (True Answer Correct)
x impact on the ability of labor unions to attract new members and
the ability of domestic firms to retain profits. (Incorrect)
129
Which of the following is nearly always true of highly educated

immigrants?
x They impose high costs on the recipient nation. (Incorrect)
x They move from high-wage nations to low-wage
x They cost the source nation in terms of lost opportunity and
benefit the recipient nation. (True Answer Correct)
x They impose high costs on the recipient nation, and they move
from high-wage nations to low-wage nations. (Incorrect)
130
The economic benefit to immigrating workers is:

x political freedom and ideological peace. (Incorrect)
x living in a nation where they do not have to pay taxes and receive
many free social services. (Incorrect)
x the chance to be free from discrimination and poverty. (Incorrect)

x the present value of higher wages minus the value of the costs
involved with the immigration process. (True Answer Correct)
131
Economists conclude that the effect on our world's standard of

living as a result of labor and capital migration has been:
x negative overall. (Incorrect)
x positive overall as resources move to their highest-valued
use. (True Answer Correct)
x positive in some respects but very harmful in the long run to
x so small worldwide that the effect is not worth
measuring. (Incorrect)
132
Economist George Borjas has estimated the net benefits

(+)/costs () to the United States from labor immigration to be
approximately:
x +10% of GDP. (Incorrect)
x 5% of GDP. (Incorrect)
x +0.1% of GDP. (True Answer Correct)
x 0.5% capital losses and 0.8% labor gains. (Incorrect)
133
Economists who have studied the impact of immigration on

world welfare generally find after considering impacts on all
constituencies that world GDP has _______ as a result of
immigration of workers and FDI.
x decreased (Incorrect)
x risen (True Answer Correct)
x remained constant (Incorrect)
x decreased sharply (Incorrect)
134
As of 2005 the European Union had:

x
x
x
x
135
5 members. (Incorrect)
25 members. (True Answer Correct)
Figure: Wages in Home and Foreign
Reference: Ref 5-3
(Figure: Wages in Home and Foreign) Calculate the value gains

to the home country if some of its workers are allowed to
migrate to the foreign country.
x 200 workers (Incorrect)
x $300 (Incorrect)
x $500 (True Answer Correct)
x $7,500 (Incorrect)
136
Figure: Wages in Home and Foreign
Reference: Ref 5-3
(Figure: Wages in Home and Foreign) What potential costs

might offset some of the gains determined above?
x moving costs (Incorrect)
x higher living costs (Incorrect)

x payments to agents to arrange migration (such as traffickers who
arrange illegal migration or lawyers who arrange legal
migration). (Incorrect)
x All of the answers listed are potential costs of migration. (True
Answer Correct)
137
According to economists, which of the following statements

about international capital mobility is correct?
x International resource mobility has had no effect upon world
GDP. (Incorrect)
x International resource mobility has had a negative effect upon
world GDP. (Incorrect)
x International resource mobility has had a positive effect upon
world GDP. (True Answer Correct)
x International resource mobility has had such a small effect upon
world GDP that it is not worth measuring. (Incorrect)
138
The mass migration to the United States in the nineteenth

century caused wages to fall in the United States.
x True (True Answer )
x False ()
139
Immigration of workers will always be harmful to the country

receiving the workers.
x True ()
x False (True Answer )
140
It is reasonable to assume that the amount of capital and land

in a country is fixed in the short run.
x False ()
141
In the long run, capital is mobile among countries.

x False ()
142
Gastarbeiters are illegal immigrant workers in Germany.

x True ()

143
Owners of capital and land usually support the reduction of

restrictions on immigration.
x False ()
144
If wages rise due to immigration, the marginal products of the

specific factors (capital and land) rise, and therefore their
rentals also increase.
x True ()
145
One would expect the owners of capital and land to support

increased immigration more than increased imports.
x False ()
146
According to the Rybczynski theorem, immigration will lead to

an increase in output in the labor-intensive industry and a
decrease in the output of the capital-intensive industry.
x False ()
147
According to the Rybczynski theorem, when labor migrates

from one country to another, the sending country will
experience an increase in output in the labor-intensive industry
and a decrease in the output of the capital-intensive industry.
x True ()
148
According to the Rybczynski theorem, when labor migrates

from one country to another, the sending country will
experience a decrease in the output of the labor-intensive
industry and an increase in the output of the capital-intensive
industry.
x False ()
149
Factor price insensitivity occurs when labor immigration causes

changes in capitallabor ratios, but not in wages and rentals.
x True ()
150
Between 1990 and 2004, immigration caused a 20% decrease in

the wages of the majority of U.S. workers.
x True ()
151
General Motor's construction of a plant to produce Buicks in

China is an example of U.S. foreign direct investment.
x False ()
152
In the long run, the output of the capital-intensive good will

increase if the amount of capital increases in a country due to
FDI.
x False ()
153
In the short-run, foreign direct investment in China is expected

to lower returns to capital and raise wages.
x False ()
154
The Rybczynski theorem predicts that FDI will lead to an

increase in the output of the capital-intensive industry and a
decrease in the output of the labor-intensive industry.
x False ()
155
In the long run, the output of the labor-intensive good will

increase if the amount of capital increases in a country due to
FDI.
x True ()
156
In the long run, wages will increase if the amount of capital

increases in a country due to FDI.
x False ()
157
In the long run, returns to capital will increase if the amount of

capital increases in a country due to FDI.
x True ()

158
In the long run, returns to capital will increase if a country's

labor force increases due to increased immigration.
x False ()
159
In the long run, wages will increase if a country's labor force

increases due to increased immigration.
x True ()
160
Immigration in the United States is a controversial subject

because groups oppose spending public funds on foreigners.
x False ()
161
There are no significant costs for immigrants to move to a

country.
x True ()
162
In a two-country model, with migration of labor we will see

wages equalize in the long run.
x False ()
16
3
Suppose that an economy has 1,500 units of capital and 1,000 workers. This
economy produces computers and shoes. Computer production requires 4 units of
capital per worker and shirt production requires 1 unit of capital per worker.
A. Solve for the amount of labor and capital used in each industry.
If you answered Question 6 at the end of chapter 5, you know that:
(1) KC + KS = the total capital stock, and LC + LS = the total labor force; and
(2) KC = 4 LC, and KS = 1 LS .
B. Suppose that the number of workers increases to 1,250 due to immigration, keeping
total capital fixed at 1,000. Solve for the distribution of labor and capital between the
two sectors.
x ()
164
In the short run, immigration lowers wages in both sectors

because of what feature of production?
x ()
16
5
Immigrants were recruited to work in the iron and copper mines of Michigan's
Upper Peninsula from the mid-1800s to the early 1900s. The first immigrants were
recruited from the tin mining area of Cornwall (United Kingdom); later
immigrants came from Finland, Sweden, northern Italy, and the Balkan countries.
A. Give some plausible reasons why the later immigrants originated in Scandinavia and
other parts of Europe.
B. Give some reasons why Cornish immigrants tended to be paid more than later
immigrants.
C. Immigration more or less ceased around 1920. One reason was the introduction of
one-man drilling techniques; another was the end of World War I. Why did these two
events cause cessation of immigration to Michigan's Upper Peninsula.
x ()
166
In spring 2010, an explosion on an offshore oil-drilling rig

caused 11 deaths and a major oil spill in the Gulf of Mexico.
Shortly thereafter, the U.S. government declared a moratorium
on oil drilling in U.S. territorial waters in the Gulf of Mexico
and a re-examination of offshore drilling regulations. What are
the expected short- and long-run effects of these actions on
labor in Gulf coastal states?
x ()
167
When Irish immigrants first came to the United States, they

were widely discriminated against. A century after a wave of
Irish immigration, however, Americans generally look
favorably on Irish heritage. How can our models explain this?
x ()
168
Assume two nations, two products, and two factors of

production, labor and capital. Compare the situation of FDI in
the short run and the long run regarding wages, returns to
capital, industry output, and prices of goods.
x ()
16
9
There is a large amount of Pakistani, Indian, Bangladeshi, and Philippine labor

working (mainly in low-skilled jobs) in Arabian Peninsula countries (e.g., Qatar,
Saudi Arabia, United Arab Emirates). Suppose that you are an Indian worker
who could earn $1,000 annually at home and $3,000 in Saudi Arabia.
A. Compare the productivity of this worker at home and in Saudi Arabia.
B. Why might these productivities differ?
C. Often, a broker arranges visas for foreigners to work in Saudi Arabia. What is the
maximum amount that an Indian worker might be willing to pay a broker to arrange a
work visa for Saudi Arabia?

x ()
Suppose that imports and exports in an industry are $100

million and $200 million, respectively. Will the index of intraindustry trade for this industry rise, fall, or remain unchanged if
exports fall to $100 million?
x rise (Incorrect)
x fall (True Answer Correct)
x remain unchanged (Incorrect)
x There is not enough information to determine how the index will
change. (Incorrect)
The ____________ model best explains intra-industry trade.

x
x
x
x
monopolistic competition (True Answer Correct)
specific-factors (Incorrect)
To analyze intra-industry trade, we must bring in imperfect

competition, and we change our assumptions about our trade
models to allow:
x price-conscious consumers. (Incorrect)
x short-run unemployment. (Incorrect)
x differentiated products. (True Answer Correct)
x perfect competition. (Incorrect)
Products traded between two nations that are very similar and
very close substitutes, but that may be of different quality or
prices, are called:
x differentiated complements. (Incorrect)
x differentiated substitutes. (Incorrect)
x differentiated products. (True Answer Correct)
x perfect substitute products. (Incorrect)
The cross-trade of very similar products exported and imported

by trading partners seems to contradict which model(s)?
x
x
x
x
specific-factors (Incorrect)
All of the answer choices are correct. (True Answer Correct)
A differentiated product is one that:

x is slightly different from the competitor's product, although it is a
close substitute. (True Answer Correct)
x is very different. (Incorrect)
x is traded within firms and is not for sale in retail
markets. (Incorrect)
x has a shelf life of less than 1 year. (Incorrect)
Differentiated is another word for:

x
x
x
x
identical. (Incorrect)
homogeneous. (Incorrect)
heterogeneous. (True Answer Correct)
None of the answer choices are correct. (Incorrect)
When a firm raises the price of a differentiated product in an

imperfectly competitive market:
x it will see lower sales but will not lose all its sales. (True Answer
Correct)
x it will lose all its sales to competitor firms. (Incorrect)
x it will actually get new customers from other firms. (Incorrect)
x it will see an increase in revenues. (Incorrect)
Which of the following features is characteristic of monopolistic

competition?
x many large producers (Incorrect)
x homogeneous products (Incorrect)
x differentiated products (True Answer Correct)
x No individual producer has any influence on the market
price. (Incorrect)
10
Which of the following is NOT characteristic of a

monopolistically competitive industry?
x
x
x
x
monopoly profits (True Answer Correct)

many firms in the industry (Incorrect)
differentiated products (Incorrect)
influence of individual firms on the market price (Incorrect)
11
Increasing returns to scale occurs when a firm's:

x average costs of production increase as its output
increases. (Incorrect)
x average costs of production decrease as its output increases. (True
Answer Correct)
x average fixed costs increase as its output increases. (Incorrect)
x marginal costs increase as its output increases. (Incorrect)
12
A feature of imperfect competition is _________, which means

that as the firm expands its production, average costs of
production fall. Therefore, the firm can _______ its costs of
production by selling internationally.
x economies of scale; decrease (True Answer Correct)
x economies of scale; increase (Incorrect)
x increasing returns to scale; decrease (Incorrect)
x specialization; increase (Incorrect)
13
The term for very similar products being exported and imported
by trading partners is:
x
x
x
x
14
reciprocal trade. (Incorrect)

imperfect competition. (Incorrect)
intra-industry trade. (True Answer Correct)
inter-industry trade. (Incorrect)
Intra-industry trade refers to:

x imports and exports within the same industry. (True Answer
Correct)
x imports and exports originating in different industries. (Incorrect)
x international trade patterns predicted by the Heckscher-Ohlin
model. (Incorrect)
x Ricardian comparative advantage. (Incorrect)
15
When countries specialize in different varieties of the same type

of product and trade them, it is called:
x
x
x
x
comparative advantage. (Incorrect)

the Heckscher-Ohlin model. (Incorrect)
intra-industry trade. (True Answer Correct)
increasing returns to scale. (Incorrect)
16
The monopoly equilibrium occurs when:

x the monopolist has driven out all competitors. (Incorrect)
x the monopoly firm has sold the maximum number of
units. (Incorrect)
x the monopoly firm produces the quantity that maximizes its
profits (or minimizes loss) where MR = MC. (True Answer Correct)
x the monopoly firm has gotten unions to agree to wage
concessions. (Incorrect)
17
For a monopolistic competitor, marginal revenue at its shortrun equilibrium price and quantity equals:
x
x
x
x
18
price. (Incorrect)
marginal cost. (True Answer Correct)
average cost. (Incorrect)
average revenue. (Incorrect)
A monopolist maximizes its profits by selling up to the point

where:
x its price equals its marginal cost. (Incorrect)
x its price equals its marginal revenue. (Incorrect)
x its marginal revenue equals its marginal costs. (True Answer
Correct)
x the difference between its price and average cost is
maximized. (Incorrect)
19
The price charged by a monopoly firm is the market price

(demand curve) at which:
x MR = MC, and usually P > MR and P > MC. (True Answer
Correct)
x the firm is just breaking even. (Incorrect)
x the firm makes a normal profit. (Incorrect)
x the firm can export its products. (Incorrect)
20
A monopolistic competitive firm:

x will always earn monopoly profits. (Incorrect)
x will never earn monopoly profits. (Incorrect)
x may earn monopoly profits in the short run. (True Answer
Correct)
x may earn monopoly profits in the long run. (Incorrect)

21
A duopoly is a market structure in which:

x two consumers buy the product. (Incorrect)
x two firms sell the product. (True Answer Correct)
x one firm sells the product and one consumer buys the
product. (Incorrect)
x two firms sell the product and two consumers buy the
product. (Incorrect)
22
If there is a duopoly and the products are identical

(homogeneous), the firm selling the product for a lower price
will:
x earn less revenue. (Incorrect)
x get 100% of the sales. (True Answer Correct)
x have a hard time being profitable. (Incorrect)
x be perceived to have lower quality products. (Incorrect)
23
In a duopoly where products are differentiated and firms charge

different prices, the demand curves are _______________ than if
the firms sell identical products at the same price.
x steeper (Incorrect)
x farther to the right (Incorrect)
x more elastic (flatter) (True Answer Correct)
x less elastic (Incorrect)
24
In a duopoly, each firm faces:

x a more elastic demand curve if it raises its price. (Incorrect)
x a more elastic demand curve if it lowers its price. (True Answer
Correct)
x a perfectly elastic demand curve. (Incorrect)
x a perfectly inelastic demand curve. (Incorrect)
25
Which of the following is NOT an assumption of monopolistic

competition?
x Each firm's output is slightly different from other firms in the
x There are many firms in the industry. (Incorrect)
x Production occurs with increasing returns to scale
technology. (Incorrect)
x Each firm faces a perfectly elastic demand curve. (True Answer
Correct)
26
The demand curve facing a monopolistic competitor:

x
x
x
x
is perfectly inelastic. (Incorrect)

is perfectly elastic. (Incorrect)
slopes downward to the right. (True Answer Correct)
has a positive slope. (Incorrect)
27
To analyze monopolistic competition in trade, we make several

assumptions about the market. Which is NOT an assumption of
imperfect competition?
x many firms in the industry (Incorrect)
x easy entry and exit (Incorrect)
x constant long-run average cost (True Answer Correct)
x increasing returns to scale, falling long-run average
cost (Incorrect)
28
Which of the following is NOT a characteristic of monopolistic

competition?
x Firms have some control over their markets. (Incorrect)
x Firms produce an identical product. (True Answer Correct)
x Firms retain some ability to control prices. (Incorrect)
x The average cost for firms declines as they produce more
output. (Incorrect)
29
Which of the following is NOT an assumption for monopolistic

competition?
x Firms produce goods using a technology with increasing returns
to scale. (Incorrect)
x There are many firms in the industry. (Incorrect)
x Firms have no control over the price of the product. (True Answer
Correct)
x Each firm produces a good that is similar to, but differentiated
from, the goods that other firms in the industry produce. (Incorrect)
30
When average costs of production are falling, average cost:
x
x
x
x
31
When there are increasing returns to scale, average costs must

be:
x
x
x
x
32
focusing on a single product line and specializing. (Incorrect)

exporting goods to other countries. (Incorrect)
selling more in their home market (Incorrect)
hiring more workers at the existing plant. (True Answer Correct)
A firm's average costs will be falling whenever its:

x
x
x
x
35
falling. (True Answer Correct)

rising. (Incorrect)
constant. (Incorrect)
falling, then rising. (Incorrect)
Increasing returns to scale and declining average costs result

from all of the following except:
x
x
x
x
34
falling. (True Answer Correct)

rising. (Incorrect)
falling, then rising. (Incorrect)
Whenever a firm's marginal costs are less than its average costs,
its average costs must be:
x
x
x
x
33
is higher than marginal cost. (True Answer Correct)

is equal to price. (Incorrect)
is negative. (Incorrect)
is less than marginal cost. (Incorrect)
marginal costs are positive. (Incorrect)

marginal costs are negative. (Incorrect)
marginal costs are less than average costs. (True Answer Correct)
marginal costs are less than fixed costs. (Incorrect)
Firm X's total fixed costs are $1,000. Its total variable costs of
producing 100 units are $2,000, and its total variable costs of
producing 200 units are $4,000. Firm X's average costs
experiences which of the following as it increases output from
100 to 200 units?
x Average costs increase. (Incorrect)
x Average costs decrease. (True Answer Correct)
x Average costs remain constant. (Incorrect)

x Average costs increase slightly. (Incorrect)
36
Consider the following cost information for a monopolist: MR =

$15, MC = $23, and the quantity is 9. Which of the following
statements is correct?
x The monopolist should produce and sell 9 units of
output. (Incorrect)
x The monopolist should increase production of output. (Incorrect)
x We need more information to decide if the firm needs to
produce. (Incorrect)
x The monopolist should not produce this output because MR <
MC. (True Answer Correct)
37
At its current production level, a monopolist's marginal revenue

is $20 and its marginal cost is $10. Which of the following
statements is correct?
x The monopolist should produce and sell more output. (True
Answer Correct)
x The monopolist should produce and sell less output. (Incorrect)
x The monopolist is maximizing its profits at its current level of
output. (Incorrect)
x More information is required to decide if the firm needs to change
its production. (Incorrect)
38
A monopolistic competitor has fixed costs of $100 and marginal

costs of $10 per unit. What is its average cost of producing 100
units?
x $10 (Incorrect)
39
A monopolistic competitor has fixed costs of $100 and marginal

costs of $10 per unit. What is its marginal revenue at its
equilibrium price and quantity?
x $11 (Incorrect)
40
If a firm has a total cost of $150 and a variable cost of $100 for
producing 5 units of output, then the fixed cost is:
x
x
x
x
$35. (Incorrect)
$50. (True Answer Correct)
$250. (Incorrect)
$100. (Incorrect)
41
If a firm has an average total cost of $55 and an average fixed

cost of $10 for producing 5 units of output, then the total
variable cost will be:
x $550. (Incorrect)
x $525. (Incorrect)
x $225. (True Answer Correct)
x $65. (Incorrect)
42
If a firm has a total fixed cost of $75 and an average variable

cost of $35 for producing 10 units of output, the average total
cost would be:
x $425. (Incorrect)
x $42.50. (True Answer Correct)
x $110. (Incorrect)
x $350. (Incorrect)
43
In the long run, profits in a monopolistic competition market are

zero because:
x
x
x
x
of government regulations. (Incorrect)

of collusion. (Incorrect)
firms are free to enter and exit the market. (True Answer Correct)
firms produce a differentiated product. (Incorrect)
44
In the short run, in equilibrium, firms that operate in a

monopolistically competitive market have a downsloping
demand curve and will charge a price where _____ and ______ .
x quantity produced is maximized; costs are minimized (Incorrect)
x sales revenue is maximized; costs are falling (Incorrect)
x MR = MC; P > average cost (True Answer Correct)
x average costs are rising; sales are rising (Incorrect)
45
Figure: Costs and Demand for a Monopolistic Competitor
Reference: Ref 6-1
(Figure: Costs and Demand for a Monopolistic Competitor) The

profit-maximizing amount of output produced will be:
x 42. (Incorrect)
x 32. (True Answer Correct)
x 0 (not profitable). (Incorrect)
x 50. (Incorrect)
46
Reference: Ref 6-1
(Figure: Costs and Demand for a Monopolistic Competitor)

What price will the firm charge?
x
x
x
x
47
$15 (True Answer Correct)

$10 (Incorrect)
The firm cannot be profitable, so the price is zero. (Incorrect)
The firm is a price maker, so it should charge $20. (Incorrect)
Reference: Ref 6-1

total cost of producing the profit-maximizing output is:
x $480. (Incorrect)
x $420. (Incorrect)
x $500. (Incorrect)
48
Reference: Ref 6-1

profits for the firm are:
x $320. (Incorrect)
x $480. (Incorrect)
x $420. (Incorrect)
49
SCENARIO: A MONOPOLIST'S MARKET

A monopolistically competitive firm faces demand given by this
equation: P = 50 Q. It has no fixed costs and its marginal cost is
$20 per unit.
Reference: Ref 6-2
(Scenario: A Monopolist's Market ) What quantity will the firm

produce when it is maximizing its profits?
x 10 (Incorrect)
x 15 (True Answer Correct)
x 20 (Incorrect)
x 25 (Incorrect)
50

$20 per unit.
Reference: Ref 6-2
(Scenario: A Monopolist's Market ) What price will the firm

charge when it is maximizing its profits?
x
x
x
x
51
$20 (Incorrect)
$25 (Incorrect)
$30 (Incorrect)

$20 per unit.
Reference: Ref 6-2
(Scenario: A Monopolist's Market ) What is the value of the

firm's monopoly profits when it sets a price that maximizes its
monopoly profits?
x $125 (Incorrect)
x $300 (Incorrect)
x $425 (Incorrect)
52
Use this demand equation for a good produced by a

monopolistically competitive firm for the following.
Demand Equation: P = 10 Q
Reference: Ref 6-3
(Demand Equation) At what price is the firm's total revenue

maximized?
x $9 (Incorrect)
x $7 (Incorrect)
x $5 (Incorrect)
53

Reference: Ref 6-3
(Demand Equation) If the firm's marginal cost is a constant $2

per unit, what price will it charge and how many units will it
produce if it maximizes its profits?
x $8 and 2 units (Incorrect)
x $6 and 4 units (True Answer Correct)
54

Reference: Ref 6-3
(Demand Equation) If the firm has no fixed costs and variable

costs of $2 per unit, what is the value of the firm's monopoly
profits when it sets a price that maximizes its monopoly profits?
x $7 (Incorrect)
x $12 (Incorrect)
x $15 (Incorrect)
55
In the long run, in a monopolistically competitive market, what

will be the situation?
x Competition drives out firms until there is only one
left. (Incorrect)
x New firms enter the market because of monopoly profits, the
demand curve shifts to the left and becomes flatter, and profits
disappear. (True Answer Correct)
x New firms enter the market and eventually there is only one kind
of product, and each firm agrees to share the profits. (Incorrect)
x Consumers are left with no choices and no close substitutes, and
firms make higher profits. (Incorrect)
56
When firms charge different prices for differentiated products

in imperfect competition, the firm's demand curve is
___________ than would be the case if firms had identical
products and prices.
x flatter (True Answer Correct)
x steeper (Incorrect)
x farther to the right (Incorrect)
x less elastic (Incorrect)
57
In the long run, a monopolistically competitive firm will produce

where:
x
x
x
x
average cost equals price. (True Answer Correct)

average cost equals marginal revenue. (Incorrect)
marginal revenue equals price. (Incorrect)
marginal cost equals price. (Incorrect)
58
In the long run, a monopolistically competitive firm:

x
x
x
x
59
will earn normal profits. (Incorrect)

will earn excess profits. (Incorrect)
will earn no profits. (True Answer Correct)
will produce where marginal cost equals price. (Incorrect)
If a firm in monopolistic competition lowers its price, what

would be the case with respect to products sold?
x The number of products sold would increase, but actual sales
revenue would fall. (Incorrect)
x The number of products sold would decline because this is not
perfect competition. (Incorrect)
x The number of products sold would increase slightlyand in
some cases not at all. (Incorrect)
x The number of products sold and sales revenues would be higher
as the firm lured customers from its competitors and attracted new
customers. (True Answer Correct)
60
In the short run, international trade allows a monopolistically

competitive firm an opportunity to:
x produce more output. (Incorrect)
x earn monopoly profits. (Incorrect)
x reduce its average costs. (Incorrect)
x produce more output, earn monopoly profits, and reduce its
average costs. (True Answer Correct)
61
In monopolistic competition, when trade is opened, if the nations

have similar tastes, technology, products, and costs, the outcome
is that:
x no trade is possible. (Incorrect)
x consumers are left with no choices. (Incorrect)
x each firm has a larger market in which to sell, and consumers
have more choices of sellers and products. (True Answer Correct)
x transportation costs become the driving factor. (Incorrect)
62
Suppose that there are 50 monopolistically competitive firms in

country A and 50 firms in the same monopolistically competitive
firms in country B. If country A and country B engage in
international trade, we expect that the total number of firms in
this industry will:
x
x
x
x
decrease. (True Answer Correct)
remain unchanged. (Incorrect)
first decrease, then increase. (Incorrect)
63
In monopolistic competition, when trade is opened, if the nations

have similar tastes, technology, products, and costs, the firms
will have an incentive to:
x lower prices to get new customers and increase market
share. (True Answer Correct)
x raise prices to take advantage of a lucrative situation. (Incorrect)
x cut corners in manufacturing to boost profits. (Incorrect)
x raise quality, so they can charge a higher price than the
competition. (Incorrect)
64
In long-run equilibrium with trade, losses from import

competition will force some firms to ______________ ,
increasing the remaining firms' demand curves, which will
become ______________ , due to the increased variety of
products from _______________.
x raise prices; steeper; new firms entering the industry (Incorrect)
x leave the industry; flatter; foreign firms (True Answer Correct)
x lower prices; more inelastic; new firms entering the
x lay off workers; more elastic; the research and development
departments in firms (Incorrect)
65
In the long run, international trade allows a monopolistically

competitive firm an opportunity to:
x produce more output and earn monopoly profits. (Incorrect)
x produce less output and earn monopoly profits. (Incorrect)
x produce more output and reduce its average costs. (True Answer
Correct)
x produce less output and increase its average costs. (Incorrect)
66
In the long run, prices in a monopolistically competitive industry

will be ________ prices without trade.
x
x
x
x
higher than (Incorrect)

lower than (True Answer Correct)
equal to (Incorrect)
the same as (Incorrect)
67
In the long run, a monopolistically competitive firm that trades

internationally will ____________than it would in autarky.
x
x
x
x
produce more output (True Answer Correct)

earn more monopoly profits (Incorrect)
have higher average costs (Incorrect)
produce more output and earn more monopoly profits (Incorrect)
68
With increasing returns (falling average costs), as the remaining

firms expand, the demand curves become _______________ due
to foreign competition, and firms must _______________.
x steeper; raise prices. (Incorrect)
x flatter; lower prices. (True Answer Correct)
x flatter; raise prices. (Incorrect)
x steeper; lower prices. (Incorrect)
69
Consumers gain from trade within a monopolistically

competitive industry because:
x
x
x
x
70
prices fall and product varieties decrease. (Incorrect)

prices rise and product varieties increase. (Incorrect)
prices rise and product varieties decrease. (Incorrect)
prices fall and product varieties increase. (True Answer Correct)
Consumers benefit from trade, using monopolistic competition,

because:
x the prices are lower than in the no-trade scenario. (Incorrect)
x consumer surplus increases as there is more choice of
goods. (Incorrect)
x the government provides cash subsidies to consumers. (Incorrect)
x the prices are lower than in the no-trade scenario, and consumer
surplus increases as there is more choice of goods. (True Answer
Correct)
71
When firms behave like monopolistic competition, trade benefits

consumers in two ways:
x
x
x
x
better quality products, increased information (Incorrect)

higher incomes, more dependable products (Incorrect)
lots of bells and whistles, higher wages (Incorrect)
lower prices, more variety (True Answer Correct)
72
Under free trade and monopolistic competition, the following is

likely:
x Domestic firms will always be provided cash
subsidies. (Incorrect)
x Some domestic firms will shut down. (True Answer Correct)
x Consumers will not benefit at all from trade. (Incorrect)
x Foreign firms will sell the product at a higher price in the export
market. (Incorrect)
73
The costs identified with opening trade are called:

x
x
x
x
74
Adjustment costs include:

x
x
x
x
75
short-run costs. (Incorrect)

adjustment costs. (True Answer Correct)
variable costs. (Incorrect)
overhead costs. (Incorrect)
dealing with child labor issues. (Incorrect)

human rights. (Incorrect)
getting used to foreign products. (Incorrect)
short-term unemployment. (True Answer Correct)
In the long-run monopolistic competition with trade, the

equilibrium number of firms:
x lies below that of either country in autarky. (Incorrect)
x lies between the number of firms in the two countries in
autarkies. (Incorrect)
x lies above the total number of firms worldwide in autarky. (True
Answer Correct)
x lies above the number of firms in the two countries in
autarkies. (Incorrect)
76
Which of the following is NOT a reason for Canada to join

NAFTA?
x Canada can increase its markets by selling to the United States
and Mexico. (Incorrect)
x Canada can enjoy lower average cost by producing
more. (Incorrect)
x Canada did not want U.S. products to dominate its domestic
market. (True Answer Correct)

x Canada will see an increase in income and employment by joining
NAFTA. (Incorrect)
77
Using a model of imperfect competition, economist Daniel

Trefler concluded that the North American Free Trade
Agreement:
x cost Canada more than 100,000 jobs that were never
replaced. (Incorrect)
x presented no real issue about job loss in Canada. (Incorrect)
x caused Canada to lose 5% of jobs in manufacturing because
Canadian tariffs had to be cut, but over time the trade agreement
created higher productivity and more jobs to offset losses. (True
Answer Correct)
x created new jobs in Canada from day one as firms sold across the
border and undercut U.S. firms. (Incorrect)
78
NAFTA benefited Canadian consumers because of:

x
x
x
x
79
Studies have concluded that NAFTA caused ________ in

economic welfare to Canada.
x
x
x
x
80
a gain (True Answer Correct)

a loss (Incorrect)
no change (Incorrect)
first a gain, then a loss (Incorrect)
Studies of U.S.-Canadian free trade have concluded that free

trade produced what effect on Canadian firms?
x
x
x
x
81
higher wages and more travel opportunity. (Incorrect)

lower wages but also lower taxes. (Incorrect)
lower prices but lower quality. (Incorrect)
lower prices and increased variety. (True Answer Correct)
increased productivity (True Answer Correct)

decreased productivity (Incorrect)
no change in productivity (Incorrect)
could not be determined (Incorrect)
Studies of U.S.-Canadian free trade have concluded that the

number of new jobs created in Canadian manufacturing were
_________ the number of jobs lost elsewhere in Canadian
manufacturing due to free trade.

x
x
x
x
82
less than (Incorrect)

equal to (Incorrect)
greater than (True Answer Correct)
substantially greater than (Incorrect)
Since NAFTA was signed, Mexico saw the productivity of its

firms:
x decrease in the non-maquiladora plants. (Incorrect)
x decrease in the maquiladora plants. (Incorrect)
x increase in the maquiladora plants at a faster pace than in the nonmaquiladora plants. (True Answer Correct)
x increase in the maquiladora plants at a slower pace than in the
non-maquiladora plants. (Incorrect)
83
Studies of NAFTA have concluded that from 1994 to 2003, free

trade caused ______ increases in the productivity of Mexican
maquiladora firms producing for export than for Mexican firms
mainly producing for the Mexican domestic market.
x larger (True Answer Correct)
x smaller (Incorrect)
x identical (Incorrect)
x substantially larger (Incorrect)
84
NAFTA is believed to have __________ manufacturing

productivity, especially in the maquiladora plants.
x
x
x
x
85
raised (True Answer Correct)

lowered (Incorrect)
had no effect on (Incorrect)
greatly hindered (Incorrect)
NAFTA's effect on Mexican wages of labor was probably slowed

by:
x the Mexican peso crisis in which Mexico's currency fell greatly in
value. (True Answer Correct)
x the reluctance of the U.S. government to allow guest
x the Iraq war. (Incorrect)
x so much illegal immigration. (Incorrect)
86
Mexico's gains from NAFTA have benefited mostly:

x
x
x
x
87
unskilled workers. (Incorrect)

semi-skilled workers. (Incorrect)
higher-income workers. (True Answer Correct)
agricultural workers. (Incorrect)
NAFTA probably helped productivity in Mexico's maquiladora

sector, but:
x trade with China has taken on more importance. (Incorrect)
x world competition and the close relationship with the United
States may have limited its comeback. (True Answer Correct)
x both governments have reversed some of the tariff
reductions. (Incorrect)
x Mexico has raised taxes on the maquiladoras, and that has caused
international tension. (Incorrect)
88
Studies of NAFTA have concluded that free trade caused ______

in the variety of U.S. imports from Mexico.
x
x
x
x
decreases (Incorrect)
increases (True Answer Correct)
no change (Incorrect)
slight decreases (Incorrect)
89
Studies of NAFTA have concluded that increases in the variety

of U.S. imports from Mexico are equivalent to about a ________
% per year reduction in Mexican import prices.
x 100.2 (Incorrect)
x 10.2 (Incorrect)
x 1.2 (True Answer Correct)
x 0.2 (Incorrect)
90
The United States has benefited from NAFTA substantially in

terms of increased ____ , which has lowered prices and given
consumers more choices.
x prices (Incorrect)
x pariety (True Answer Correct)
x manufacturing jobs (Incorrect)
x quality (Incorrect)
91
Using data from Trade Adjustment Assistance claims, we can

make an accurate estimate of:
x the variety of products U.S. consumers import from
Mexico. (Incorrect)
x U.S. exports to Mexico that give Mexican consumers more
product variety. (Incorrect)
x the barriers to trade erected by affected firms. (Incorrect)
x the unemployment caused by NAFTA. (True Answer Correct)
92
Approximately how many U.S. workers received Trade

Adjustment Assistance from 1994 to 2002 as a result of job
losses due to NAFTA?
x 525 million (Incorrect)
x 52.5 million (Incorrect)
x 5.25 million (Incorrect)
x 0.525 million (True Answer Correct)
93
U.S. unemployment caused by NAFTA over the years from 1994

to 2002:
x totaled 13% of manufacturing job loss in the United States during
that period. (Incorrect)
x was not permanent as most workers were re-employed within 3
years. (Incorrect)
x was offset completely by increased product variety imports and
lowered prices. (Incorrect)
x totaled 13% of manufacturing job loss in the United States during
that period, was not permanent as most workers were re-employed
within 3 years, and was offset completely by increased product
variety imports and lowered prices. (True Answer Correct)
94
U.S. unemployment as a result of free-trade agreements such as

NAFTA:
x should be taken much more seriously, and workers should be
offered assistance. (Incorrect)
x is a temporary phenomenon to which the economy will adjust
within a few years. (True Answer Correct)
x results in a shift into lower productivity jobs such as hamburger
flipping. (Incorrect)
x results in a shift into lower productivity jobs such as hamburger
flipping and is a temporary phenomenon to which the economy will
adjust within a few years. (Incorrect)
95
U.S. Trade Adjustment Assistance:

x is not available to workers in manufacturing. (Incorrect)
x is not available to workers displaced by NAFTA. (Incorrect)
x is not available to workers in service industries. (True Answer
Correct)
x expired with the advent of the WTO in 1995. (Incorrect)
96
A recap of the effects of NAFTA for its first 9 years reveals some
adjustment costs were offset by:
x benefits for U.S. manufacturing productivity. (Incorrect)
x benefits for U.S. consumers. (Incorrect)
x benefits for higher-wage workers in Mexican maquiladora
industries. (Incorrect)
x benefits for U.S. manufacturing productivity, U.S. consumers, and
higher-wage workers in Mexican maquiladora industries. (True
Answer Correct)
97
When imports and exports for the same type of good are nearly
equal:
x the laws of comparative advantage break down. (Incorrect)
x it is an indication that nearly all the trade is intra-industry. (True
Answer Correct)
x exports are probably just finished in the nation instead of being
fully sourced there. (Incorrect)
x there is a very low level of intra-industry trade. (Incorrect)
98
The calculation that tells us the proportion of trade in each

product involving both imports and exports is:
x
x
x
x
99
the index of overlapping production. (Incorrect)

the index of effective trade. (Incorrect)
the index of intra-industry trade. (True Answer Correct)
the index of displacement. (Incorrect)
The index of intra-industry trade is calculated as:

x the minimum of imports and exports divided by the average of
imports and exports. (True Answer Correct)
x the maximum of imports and exports divided by the sum of
imports and exports. (Incorrect)
x imports divided by exports. (Incorrect)

x imports plus exports divided by the average of imports and
exports. (Incorrect)
100
Suppose that industry X and industry Y have intra-industry

trade indexes equal to 0.80 and 0.20, respectively. Which
statement below is correct?
x There is a greater share of intra-industry trade in industry X than
in industry Y. (True Answer Correct)
x There is a greater share of intra-industry trade in industry Y than
in industry X. (Incorrect)
x Industry X and industry Y have equal shares of intra-industry
trade. (Incorrect)
x There is no intra-industry trade in either industry X or industry
Y. (Incorrect)
101
For which product below would you expect the index of intraindustry trade to be lowest?
x
x
x
x
102
golf clubs (Incorrect)

automobiles (Incorrect)
whiskey (Incorrect)
natural gas (True Answer Correct)
If the index of intra-industry trade is high, products are

probably ______ , and costs in both nations are ______ .
x
x
x
x
identical; different (Incorrect)

differentiated; similar (True Answer Correct)
identical; similar (Incorrect)
differentiated; different (Incorrect)
103
What is the value of the index of intra-industry trade for an

industry in which exports are $100 million and imports are
$200 million?
x 100/300 = 0.33 (Incorrect)
x (100 + 200)/100 = 3.00 (Incorrect)
x 100/[1/2 (100 + 200)] = 0.67 (True Answer Correct)
x 100/200 = 0.50 (Incorrect)
104
If the index of intra-industry trade for an industry is zero, then:

x exports and imports in that industry are equal. (Incorrect)
x there are no exports in that industry. (Incorrect)

x there are no imports in that industry. (Incorrect)
x there is no trade in that industry. (True Answer Correct)
105
If exports of an industry are $100 million and imports are zero,

the value of the index of intra-industry trade is:
x
x
x
x

1 (Incorrect)
0.5 (Incorrect)
100 million (Incorrect)
106
What is the value of the intra-industry trade index for an

industry in which exports are $100 million and imports are
$100 million?
x 100/200 = 0.50 (Incorrect)
x (100 + 100)/100 = 2.00 (Incorrect)
x (100 100)/100 = 0.00 (Incorrect)
107
What is the value of the intra-industry trade index for an

industry in which exports are $200 million and imports are $20
million?
x 2.00 (Incorrect)
x (200 + 20)/20 = 11.00 (Incorrect)
x (200 20)/200 = 0.90 (Incorrect)
108
Use this table on imports and exports of commodities for the United
States.
Table: Imports and Exports Within Industries
Value of Imports
Product
($million)
Golf Clubs
Value of Exports
($million)
$305.8
$318.7
Large passenger aircraft
7000
18,821.5
Fax machines
271.8
150.2
Men's shorts
701.3
12.1
Reference: Ref 6-4
(Table: Imports and Exports Within Industries) The intra-industry

trade index for large passenger aircraft is:
x
x
x
x
109
129.10%. (Incorrect)
54%. (True Answer Correct)
2.56%. (Incorrect)
42%. (Incorrect)
States.
Value of Imports
Product
($million)
Golf Clubs
Value of Exports
($million)
$305.8
$318.7
7000
18,821.5
Fax machines
271.8
150.2
Men's shorts
701.3
12.1
Reference: Ref 6-4
(Table: Imports and Exports Within Industries) The intra-industry

trade index for fax machines is:
x 211%. (Incorrect)
x 90%. (Incorrect)
x 71%. (True Answer Correct)
x 98%. (Incorrect)
110
States.
Value of Imports
Product
($million)
Golf Clubs
$305.8
Value of Exports
($million)
$318.7
7000
18,821.5
Fax machines
271.8
150.2
Men's shorts
701.3
12.1
Reference: Ref 6-4
(Table: Imports and Exports Within Industries) In the table, which

industry has the lowest intra-industry trade index?
x large passenger aircraft (Incorrect)
x fax machines (Incorrect)
x golf clubs (Incorrect)

x men's shorts (True Answer Correct)
111
The higher the value for the index of intra-industry trade:

x the lower total trade is for other products. (Incorrect)
x the greater percentage of trade in that good is intraindustry. (True Answer Correct)
x the more we should be concerned about job loss and
outsourcing. (Incorrect)
x the higher the gains from trade. (Incorrect)
112
The gravity equation is used to predict the:

x
x
x
x
113
level of bilateral trade. (True Answer Correct)

level of intra-industry trade. (Incorrect)
weight of exports plus imports. (Incorrect)
level of inter-industry trade (Incorrect)
Some factors affecting the gravity equation constant are:

x tariffs or quotas. (Incorrect)
x customs issues and finance and currency issues. (Incorrect)
x administrative barriers to trade. (Incorrect)
x tariffs or quotas, customs issues and finance and currency issues,
and administrative barriers to trade. (True Answer Correct)
114
Economist Jan Tinbergen developed a formula, called ______ ,

to predict which nations would engage in bilateral trade.
x
x
x
x
115
the trade deficit equation. (Incorrect)

the index of equality. (Incorrect)
the Tinbergen ratio. (Incorrect)
the gravity equation of trade. (True Answer Correct)
The gravity equation uses a calculation to predict the level of

bilateral trade based directly on ____ and inversely on _____.
x wages; technology (Incorrect)
x size of GDP; geographic distance between them (True Answer
Correct)
x percent of GDP in manufacturing; level of tariffs (Incorrect)
x growth rate of GDP; openness to trade (Incorrect)

116
Other things equal, the gravity equation predicts that the

United States will have more trade with __________ than with
_________ .
x Bangladesh; Japan (Incorrect)
x Russia; Japan (Incorrect)
x Canada; Bangladesh (True Answer Correct)
x Russia; Bangladesh (Incorrect)
117
Other things equal, the level of bilateral trade between two

countries will increase as their GDP:
x
x
x
x
118
rises. (True Answer Correct)

falls. (Incorrect)
stays the same. (Incorrect)
becomes less equal. (Incorrect)
Table: Distances and GDP

Distance from the
Country
United States
GDP
Germany
4,000 miles
$4 trillion
Norway
4,000 miles
$0.5 trillion
France
4,000 miles
$2 trillion
Sweden
4,000 miles
$1 trillion
Reference: Ref 6-5
(Table: Distances and GDP) According to the gravity equation,

which country should be the United States' largest trade
partner?
x Germany (True Answer Correct)
x Norway (Incorrect)
x France (Incorrect)
x Sweden (Incorrect)
119
Table: Distances and GDP

Distance from the
Country
United States
Germany
4,000 miles
GDP
$4 trillion
Norway
4,000 miles
$0.5 trillion
France
4,000 miles
$2 trillion
Sweden
4,000 miles
$1 trillion
Reference: Ref 6-5
(Table: Distances and GDP) According to the gravity equation,

which country should be the United States' smallest trade
partner?
x Germany (Incorrect)
x Norway (True Answer Correct)
x France (Incorrect)
120
The distances from Paris, France to Frankfurt, Germany;

Stockholm, Sweden; and Oslo, Norway are about 400 miles, 450
miles, and 500 miles, respectively. Would you expect more
French trade with Germany, Sweden, or Norway?
x Germany (True Answer Correct)
x Norway (Incorrect)
x Equal amounts of trade would be expected with each
121
Larger countries will trade more with one another; this is

empirically supported by the:
x
x
x
x
122
intra-industry trade. (Incorrect)

increasing returns to scale. (Incorrect)
gravity equation. (True Answer Correct)
comparative advantage. (Incorrect)
The gravity equation calculation is:

x the inverse of the average GDPs times transportation
costs. (Incorrect)
x the sum of GDPs times total exports. (Incorrect)
x the product of the GDPs in two nations divided by a measure of
the distance between them times a constant reflecting other factors
affecting trade. (True Answer Correct)
x the product of the land mass of the two nations divided by the
average of their GDPs times a constant factor reflecting other
factors affecting trade. (Incorrect)
123
The gravity equation was tested and found to be very accurate

in predicting:
x world trade in total. (Incorrect)
x trade between various provinces in Canada and American
states. (True Answer Correct)
x trade between the United States and Japan. (Incorrect)
x trade between nations in the European Union. (Incorrect)
124
To test the gravity equation of trade, a regression model was

calculated for two nations, the United States and Canada,
testing the correlation among:
x regional trade, size of GDP, and distance for states and
provinces. (Incorrect)
x intra-industry trade, size of GDP, and size of states and
x bilateral trade and ratio of GDP for states and
x bilateral trade, size of GDP, and distance for states and
provinces. (True Answer Correct)
125
Tests of the gravity equation for trade between Canadian

provinces and American states indicate that:
x individual state and individual provincial GDPs are negatively
related to the amount of trade between individual states and
x individual state and individual provincial GDPs are positively
provinces. (True Answer Correct)
x individual state and individual provincial GDPs are not at all
x the gravity equation does not apply to U.S.-Canadian
trade. (Incorrect)
126
Border effects can result from:

x
x
x
x
trade. (Incorrect)
tariffs. (True Answer Correct)
monopolistic competition. (Incorrect)
imperfect competition. (Incorrect)
127
What did using the gravity equation to predict trade within the
borders of a nation reveal?
x Trade between states or regions within a nation is much more
likely than trade outside the borders. (True Answer Correct)
x Trade between states or regions within a nation is much less
likely to occur. (Incorrect)
x There was no predictive value for trade within a nation's
x Trade between states or regions within a nation is more subject to
national law and regulation and therefore not as
predictable. (Incorrect)
128
The Heckscher-Ohlin model can explain simultaneous U.S.

exports of Budweiser beer to Canada and U.S. imports of
Molson's beer from Canada.
x True ()
129
The Heckscher-Ohlin model is useful to explain why the United

States exports wheat to China and imports shirts from Canada.
x False ()
130
A country can never import the commodities that it is

exporting.
x True ()
131
Perfectly competitive firms can influence the price that they

charge.
x True ()
132
The price set by a profit-maximizing monopolist will exceed its

marginal cost of producing the last unit.
x False ()
133
Perfectly competitive firms can produce differentiated

products.
x True ()

134
The average cost of producing 100 units for a monopolistic

competitor with $100 of fixed costs and a constant marginal
cost of $1 per unit is $2.00.
x False ()
135
Free entry means that any firm can begin production without
cost.
x True ()
136
A monopolistic competitor can earn monopoly profits in the

short run.
x False ()
137
A monopolistic competitor has fixed costs of $100 and a

constant $1 marginal cost of production. This monopolistic
competitor will earn monopoly profits if it produces and sells
300 units at a price of $2.00 each.
x False ()
138
The demand curve facing a monopolistic competitor will

become more inelastic when it engages in international trade.
x True ()
139
Compared to a no-trade situation (autarky), a monopolistic

competitor charges a higher price and produces more output
when it engages in international trade.
x True ()
140
Consumers do not gain from trade in monopolistically

competitive products.
x True ()
141
In the United States, NAFTA has benefited the economy

because workers gained more than U.S. consumers.
x True ()
142
The Ricardian model and the Heckscher-Ohlin model show that

countries will export commodities that they also import in
order to maximize gains.
x True ()
143
Monopolistic competition suggests that under free trade each

country specializes in one product and exchanges it for another
from a foreign country.
x True ()
144
The index of intra-industry trade increases as the degree of

intra-industry increases.
x False ()
145
When monopolistic competition exists, a country may both

export and import the same product.
x False ()
146
Intra-industry trade refers to situations in which a country's

exports and imports are different products.
x False ()
147
Suppose that imports and exports in an industry are both $100

million. If exports rise to $200 million, the value of the
industry's index of intra-industry trade will fall.
x False ()
148
Suppose that imports and exports in an industry are $100

million and $200 million, respectively. The index of intraindustry trade for this industry is ($200)/[1/2($100 + 200)] =
1.50.
x True ()
149
Suppose that the index of intra-industry trade for the U.S.

computer industry increases from 0.25 to 0.50. This increase
means that the U.S. computer industry produces more
computers.
x True ()
150
The index of intra-industry trade can never exceed 1.00.

x False ()
151
An increase in the index of intra-industry trade implies that

there has been an increase in the country's exports in that
industry.
x True ()
152
The Heckscher-Ohlin model is a good predictor of trade

patterns for industries with high values of the index of intraindustry trade.
x True ()
153
In the Ricardian and the Heckscher-Ohlin models, a country

exports and imports different products.
x False ()
154
The Heckscher-Ohlin model is a good predictor of intraindustry trade patterns

x True ()
155
According to the gravity equation, the larger two countries'

GDPs are, the greater the amount of trade between them.
x False ()
156
Other things equal, the gravity equation predicts that there

should be more trade between the United States and Canada
than between the United States and Argentina.
x False ()
157
When research and development costs are spread out over

more consumers, it is an example of what?
x ()
15
8
XYZ Corporation is a monopolistic competitor. It has fixed costs of $1,000 per

month and a constant marginal cost of $1 per unit of production.
A) Will it earn a monopoly profit if it produces 1,000 units and sells each for $1.50?
B) Suppose the demand curve facing XYZ Corporation shifts to the right so it now can
sell 2,000 units at $1.50 each. Will it now earn a monopoly profit?
C) Why might XYZ's demand curve shift to the right?
D) What must XYZ do in order to find its short-run equilibrium price and quantity?
x ()
15
9
ABC Corporation is a monopolistic competitor. It has fixed costs of $5,000 and a

constant marginal cost of $500 per unit of production. It faces a demand curve
described by this equation:
P = 1,000 10Q.
A) Find ABC's equilibrium price and quantity.
B) Will it earn monopoly profits at this equilibrium?
C) What will happen to ABC's price, quantity, and monopoly profits in the long run?
x ()
160
Why would you expect firms with high research and

development costs to be more interested in free trade?
x ()
161
The fall in real wages for the maquiladora workers during the
1990s was likely due to what?
x ()
162
Would you say that the gains clearly outweigh the costs of
NAFTA for the United States?
x ()
163
Has the United States gained or lost from NAFTA?

x ()
164
The table below gives intra-industry trade in three industries.

Which of the three industries has the greatest degree of intraindustry trade?
A
B
C
Exports
100
200
300
Imports
200
200
200
x ()
165
Use this information to answer the following questions: The

GDPs of countries A, B, and C are $1,000, $2,000, and $3,000,
respectively. There are 1,000 miles between country A and
countries B and C. Assume that their markets are
monopolistically competitive. Does the gravity equation predict
that there will be more trade between A and B or between A
and C?
x ()
The United States recently levied tariffs on tires imported from

what country?
x
x
x
x
Import tariffs are ___________ on imports, and import quotas

are ____________ on imports.
x
x
x
x
General Agreement on Taxes and Tariffs. (Incorrect)

General Agreement on Tariffs and Trade. (True Answer Correct)
General Agreement on Trade and Taxes. (Incorrect)
General Agreement on Trade. (Incorrect)
WTO is the acronym (or abbreviation) for the:

x
x
x
x
subsidies; taxes (Incorrect)

limits; subsidies (Incorrect)
taxes; limits (True Answer Correct)
limits; taxes (Incorrect)
GATT is the acronym (or abbreviation) for the:

x
x
x
x
Japan (Incorrect)
Brazil (Incorrect)
Russia (Incorrect)
China (True Answer Correct)
World Traffic Organization. (Incorrect)

World Trade Organization. (True Answer Correct)
World Tariff Organization. (Incorrect)
World Tax Organization. (Incorrect)
An international conference in Bretton Woods, New Hampshire,

in 1944 resulted in the formation of the:
x European Union in 1945. (Incorrect)
x Kyoto Agreement in 1971. (Incorrect)
x General Agreement on Tariffs and Trade (GATT) in 1947. (True
Answer Correct)
x International Red Cross in 1955. (Incorrect)
Which organization acts as a forum for countries to come to

agreement on trade policies and resolve trade policy disputes?
x the International Trade Organization (Incorrect)
x the United Nations (Incorrect)

x the World Trade Organization (True Answer Correct)
x the United Nations Conference on Trade and
Development (Incorrect)
7
The General Agreement on Tariffs and Trade focused on:

x raising tariffs on agricultural products. (Incorrect)
x lowering trade restrictions between countries. (True Answer
Correct)
x promoting full employment worldwide. (Incorrect)
x increasing trade restrictions between countries. (Incorrect)
Under the GATT framework, nations negotiated for up to 6

years, resulting in new trade agreements. These are known as:
x
x
x
x
What organization emerged from the GATT, starting January 1,

1995, with expanded responsibilities and global interaction?
x
x
x
x
10
the Doha round (Incorrect)

the World Trade Organization (WTO) (True Answer Correct)
the United Nations (Incorrect)
the Institute for International Economics (Incorrect)
What is the most recent set of negotiations at WTO called?

x
x
x
x
11
conferee sessions. (Incorrect)

plenary meetings. (Incorrect)
sesqui-sessions. (Incorrect)
rounds. (True Answer Correct)
the Doha round (True Answer Correct)

the Kyoto round (Incorrect)
the Geneva accord (Incorrect)
the Paris negotiation (Incorrect)
One feature of the GATT and now the WTO is that all member
nations get the same treatment from their trading partners in
terms of trade rules and restrictions. This provision is called:
x beggar thy neighbor. (Incorrect)
x the good neighbor policy. (Incorrect)
x rotating obligations. (Incorrect)
x normal trade relation (formerly, most favored nation) status. (True

Answer Correct)
12
Most favored nation status requires:

x a WTO member that reduces a tariff on imports from one WTO
trading partner to apply the lower tariff to imports from all other
WTO members. (True Answer Correct)
x a WTO member that reduces a tariff on imports from one WTO
trading partner to apply the lower tariff to imports from all other
x a WTO member that increases a tariff on imports from one WTO
trading partner to raise the tariff on imports from all other WTO
members. (Incorrect)
x a WTO member that increases a tariff on imports from one WTO
trading partner to raise the tariff on imports from all other
13
What is an export subsidy?

x a payment by one government to another for exports (Incorrect)
x a payment (or other benefit) to domestic firms by their
government to help them sell exports more cheaply (True Answer
Correct)
x the rule that says all exports must be taxed before they leave the
port (Incorrect)
x a provision that exporters must get their payments indirectly
through a third party (Incorrect)
14
The escape clause in U.S. trade law:

x enables the United States to withdraw from NAFTA. (Incorrect)
x permits the U.S. government to impose trade barriers if fairly
traded imports are the cause of significant injury to a U.S. industry
and its workers. (Incorrect)
x permits the government to impose trade remedies against nations
that unfairly subsidize their exports to the United States. (True
Answer Correct)
x enables immigrants to return to their home countries. (Incorrect)
15
What GATT provision did the United States use to justify

levying tariffs on tire imports in fall 2009?
x
x
x
x
16
According to the GATT, a tariff applied under the safeguard

provision must:
x
x
x
x
17
antidumping duties (Incorrect)

export subsidization (Incorrect)
safeguard clause (True Answer Correct)
national security (Incorrect)
be temporary. (True Answer Correct)

be permanent. (Incorrect)
apply to all imports. (Incorrect)
be no higher than 10%. (Incorrect)
Which of the following is an exception to the most favored

nation principle?
x trade in petroleum (Incorrect)
x trade with Japan (Incorrect)
x tariff concessions negotiated within a free-trade area or a customs
union (True Answer Correct)
x trade in services (Incorrect)
18
Under the WTO provision of Article XIX, countries can:

x never charge a tariff on an import. (Incorrect)
x always charge a tariff on imports. (Incorrect)
x temporarily charge a higher tariff on certain commodities. (True
Answer Correct)
x provide subsidies to all domestic producers of import competing
19
The safeguard provision or escape clause allows a country to:

x import products below cost from foreign countries. (Incorrect)
x export products by selling below cost to foreign
x avoid tariffs in foreign countries temporarily. (Incorrect)
x temporarily increase tariffs on certain imported goods. (True
Answer Correct)
20
The GATT maintained a provision that nations could enact

temporary emergency tariffs or quotas if imports threatened the
existence of domestic producers. The WTO has not struck that
provision. Economists call this:
x the tariff bill. (Incorrect)
x the escape clause. (True Answer Correct)
x justifiable means. (Incorrect)
x domestic job security provision. (Incorrect)
21
To help its domestic producers, the United States unilaterally

raised tariffs on ____ in early 2002, but after a ruling against the
United States by the WTO, it was forced to rescind the tariff.
x autos (Incorrect)
x steel (True Answer Correct)
x oil (Incorrect)
x dairy products (Incorrect)
22
Normally the WTO does not allow discriminatory treatment in

trade of member nations, but it makes an exception for nations:
x that have a large trade surplus. (Incorrect)
x using environmentally harmful production techniques. (Incorrect)
x that cannot control drugs and other illegal activities. (Incorrect)
x engaging in regional free-trade agreements. (True Answer
Correct)
23
A free-trade area is defined as:

x a trading agreement that allows for free flow of
resources. (Incorrect)
x a trading agreement that binds member countries to have a
uniform tariff on other countries. (Incorrect)
x a trading agreement that lets countries rely on subsidies on
domestic production. (Incorrect)
x a trading agreement in which a group of countries voluntarily
agree to remove trade barriers between themselves. (True Answer
Correct)
24
A customs union is different from a free-trade area, in that:

x the latter allows for free movement of factors, whereas the former
does not. (Incorrect)
x the latter allows for uniform tariffs, whereas the former does
not. (Incorrect)
x the latter removes trade barriers between member countries,
whereas the former adopts identical tariffs with the rest of the
world. (True Answer Correct)
x the former removes trade barriers between member countries,
whereas the latter adopts identical tariffs with the rest of the
world. (Incorrect)
25
A country that becomes a member of the World Trade

Organization agrees to bind its tariffs. Binding means that the
country agrees not to increase existing tariffs and that it will not
introduce new tariffs. However, the GATT allows three
exceptions to binding. Which of the following is NOT an
exception to binding?
x antidumping duties against dumped imports (Incorrect)
x countervailing duties against subsidized imports (Incorrect)
x safeguard or escape clause tariffs (Incorrect)
x tariff reductions negotiated in free-trade areas (True Answer
Correct)
26
Which of the following is not an important provision of the

GATT?
x
x
x
x
the most favored nation clause (Incorrect)

the safeguard provision or escape clause (Incorrect)
antidumping tariffs (Incorrect)
approval of export subsidies (True Answer Correct)
27
China recently became a member of the World Trade

Organization. For China, one of the benefits of WTO
membership is:
x most favored nation treatment of its exports. (Incorrect)
x the right to increase tariffs on all its imports. (Incorrect)
x the right to subsidize all its exports. (Incorrect)
x the right to impose antidumping duties on its imports. (True
Answer Correct)
28
The GATT/WTO allows nations to impose tariffs in response to

unfair trade practices such as:
x dumping. (True Answer Correct)
x transportation costs. (Incorrect)
x environmental degradation. (Incorrect)
x dumping and environmental degradation. (Incorrect)

29
Consumer surplus is:

x the difference between the price of a product and consumers'
valuation of the last unit of the product purchased. (Incorrect)
x the difference between the price of a product and what consumers
were willing to pay for the product. (True Answer Correct)
x the difference between the discounted price of a product and its
retail price. (Incorrect)
x the difference between the price paid by consumers and the price
required of producers. (Incorrect)
30
The difference between the price consumers are willing to pay

and the price that they actually pay is known as:
x
x
x
x
31
price discrimination. (Incorrect)

government surplus. (Incorrect)
consumer surplus. (True Answer Correct)
producer surplus. (Incorrect)
Figure: Consumer Surplus
Reference: Ref 7-1
(Figure: Consumer Surplus) When the price of the product is

$15, the consumer surplus is:
x $416. (Incorrect)
x $13. (Incorrect)
x $15. (Incorrect)
32
Figure: Consumer Surplus
Reference: Ref 7-1
(Figure: Consumer Surplus) If the price of the product

decreases to $10, the consumer surplus increases by:
x $378. (Incorrect)
x $208. (Incorrect)
x $420. (Incorrect)
33
When consumers are able to buy a product at a price lower than

its marginal value to them, it is called:
x
x
x
x
34
consumer surplus. (True Answer Correct)

consumer sovereignty. (Incorrect)
marginal utility. (Incorrect)
When firms are able to sell units of a good at a price higher than
the marginal cost of production, they are getting:
x
x
x
x
consumer surplus. (Incorrect)

higher efficiency. (Incorrect)
producer surplus. (True Answer Correct)
marginal utility. (Incorrect)
35
Suppose that consumer demand is given by this equation: P = 10

Q. What is the value of consumer surplus when P = 5?
x
x
x
x
36
$5 (Incorrect)
$12.50 (True Answer Correct)
$25 (Incorrect)
$50 (Incorrect)
Producer surplus is:

x the difference between the price of a product and marginal cost of
producing the product. (True Answer Correct)
x the difference between the price of a product and what consumers
were willing to pay for the product. (Incorrect)
x the difference between the discounted price of a product and its
retail price. (Incorrect)
x the difference between the price of a product and its average cost
of production. (Incorrect)
37
Suppose that the supply curve for widgets is described by this

equation: P = 2Q. What is the value of producer surplus when P
= 5?
x $5 (Incorrect)
x $12.50 (Incorrect)
x $50 (Incorrect)
38
One interpretation of producer surplus is that it equals:

x the profits of a firm. (Incorrect)
x the return to the fixed factors of production in an industry. (True
Answer Correct)
x consumer surplus. (Incorrect)
x the difference between the price of a product and its average cost
of production. (Incorrect)
39
If we assume perfect competition in the product markets,

producer surplus is:
x maximized. (Incorrect)
x minimized. (Incorrect)
x equal to the firm's monopoly profits. (Incorrect)
x equal to the return to the fixed factors of production. (True

Answer Correct)
40
We can measure producer and consumer surplus by looking at

the supply and demand graphical representation. Consumer
surplus is:
x the area above the supply curve but below the equilibrium
price. (Incorrect)
x the area below the demand curve but greater than the equilibrium
price. (True Answer Correct)
x the area below the demand curve all the way down to the quantity
axis. (Incorrect)
x the combined triangular area below the demand curve and above
the supply curve. (Incorrect)
41
We can measure producer and consumer surplus by looking at

the supply and demand graphical representation. Producer
surplus is:
price. (Incorrect)
axis. (Incorrect)
42
We can measure producer and consumer gains by looking at the

supply and demand graphical representation. Total welfare in
the economy would be:
price. (Incorrect)
price. (Incorrect)
axis. (Incorrect)
the supply curve. (True Answer Correct)
43
How many units will a country import if S = 1P represents its

home supply curve, D = 100 1P represents its home demand
curve, and the world price is $25?
x 25 (Incorrect)

x 75 (Incorrect)
x 100 (Incorrect)
44
A small country in international trade faces a:

x
x
x
x
45
If there is free trade in a small economy, the nation will be able

to import unlimited quantities of the product at the:
x
x
x
x
46
perfectly elastic world supply curve. (True Answer Correct)

perfectly inelastic world supply curve. (Incorrect)
perfectly elastic world demand curve. (Incorrect)
perfectly inelastic world demand curve. (Incorrect)
domestic price. (Incorrect)

world price. (True Answer Correct)
price measured in euros. (Incorrect)
price determined after all tariffs are assessed. (Incorrect)
SCENARIO: PRODUCTION IN NORWAY

Suppose that Norway is a small country and currently produces
100,000 board feet of lumber at $600 per 1,000 board feet. Then it
begins to trade at the world price of $500 per 1,000 board feet. As a
result of trade, Norway's production falls to 50,000 board feet and
its consumption increases to 200,000 board feet.
Reference: Ref 7-2
(Scenario: Production in Norway) How many board feet of

lumber does Norway now import?
x 250,000 board feet (Incorrect)
x 150,000 board feet (True Answer Correct)
47

Reference: Ref 7-2
(Scenario: Production in Norway) What is Norway's total gain

in consumer surplus once it begins to trade?
x
x
x
x
48
$10,000 (Incorrect)
$15,000 (True Answer Correct)
$100,000 (Incorrect)

Reference: Ref 7-2
(Scenario: Production in Norway) What is Norway's total

welfare gain once it begins to trade?
x $7,500 (True Answer Correct)
49
Figure: The Import-Competing Industry
Reference: Ref 7-3
(Figure: The Import-Competing Industry) The producer surplus

without trade in the figure is:
x $510. (Incorrect)
x $22. (Incorrect)
x $17. (Incorrect)
50
Reference: Ref 7-3
(Figure: The Import-Competing Industry) If the demand for the

product increases and the new equilibrium price is 30 and
quantity is 50, what is the increase in producer surplus?
x $625 (Incorrect)
x $550 (Incorrect)
x $255 (Incorrect)
51
Reference: Ref 7-3
(Figure: The Import-Competing Industry) In the figure, with

free trade, if the world price of the product is $15, then the total
consumer surplus is:
x $1,395. (Incorrect)
x $22.50. (Incorrect)
52
Reference: Ref 7-3
(Figure: The Import-Competing Industry) In comparison to a

no-trade situation, with free trade, producer surplus __________
to _________.
x increases; $75 (Incorrect)
x decreases; $75 (True Answer Correct)
x increases; $150 (Incorrect)
x decreases; $150 (Incorrect)
53
Figure: Home's Import-Competing Industry
Reference: Ref 7-4
(Figure: Home's Import-Competing Industry) What is the

domestic price before trade?
x $800 (Incorrect)
x $50 (Incorrect)
54
Reference: Ref 7-4

domestic price after trade?
x $100 (Incorrect)
x $800 (Incorrect)
55
Reference: Ref 7-4

consumer surplus before trade?
x triangle ADB (True Answer Correct)
x triangle AEC (Incorrect)
x quadrangle DEBC (Incorrect)

x triangle EFG (Incorrect)
56
Reference: Ref 7-4

consumer surplus after trade?
x triangle ADB (Incorrect)
x triangle AEC (True Answer Correct)
57
Reference: Ref 7-4
(Figure: Home's Import-Competing Industry) What is this
nation's welfare before trade?

x
x
x
x
58
triangle AFB (True Answer Correct)

triangle AEC (Incorrect)
quadrangle DEBC (Incorrect)
triangle EFC (Incorrect)
Reference: Ref 7-4
(Figure: Home's Import-Competing Industry) What is this

nation's welfare after trade?
x triangle AFB (Incorrect)
x triangle AEC + triangle EFG (True Answer Correct)
59
Reference: Ref 7-4
(Figure: Home's Import-Competing Industry) How would we

measure the gains from trade in this diagram?
x triangle AFB (Incorrect)
x triangle AEC (Incorrect)
x quadrangle DECB (consumer gains) DEBG (producer
losses) (True Answer Correct)
x triangle EFC (Incorrect)
60
Reference: Ref 7-4
(Figure: Home's Import-Competing Industry) Based on the

figure, the Home import demand curve:
x shows total imports of the product at various world
prices. (Incorrect)
x shows that at a world price of $100, this nation would import
none. (Incorrect)
x shows that at a world price of $50, this nation would import 900
units. (Incorrect)
x shows total imports of the product at various world prices; shows
that at a world price of $100, this nation would import none; and
shows that at a world price of $50, this nation would import 900
units. (True Answer Correct)
61
The Home import demand curve is downward sloping because:

x as the government forces the price down, the consumers buy
more. (Incorrect)
x foreign companies want to help domestic competitors. (Incorrect)
x as the price falls below domestic equilibrium, the shortage in
demand is filled by importing more quantity from abroad. (True
Answer Correct)
x consumers can control the price of the good. (Incorrect)
62
If S = 1P represents a country's home supply curve and D = 100

1P represents its home demand curve, then the equilibrium
price and quantity in autarky are:
x $50 and 50 units. (True Answer Correct)
x None of the answer choices are correct. (Incorrect)
63
If S = 1P represents a country's home supply curve and D = 100

1P represents its home demand curve, then the equation
representing its import demand curve is:
x 100 2P. (True Answer Correct)
x 50 1P. (Incorrect)
64
Suppose that the equations S = 2P and D = 6 P represent a

small country's home supply and home demand curves. Find the
equilibrium price in autarky.
x $4 (Incorrect)
x $6 (Incorrect)
x $8 (Incorrect)
65

small country's home supply and home demand curves. If the
world price is $1, what is the increase in the country's surplus
when it trades compared to autarky?
x $6.00 (Incorrect)
x $4.50 (Incorrect)
x $2.50 (True Answer Correct)
x $0.50 (Incorrect)
66

small country's home supply and home demand curves. If the
government imposed a 50% tariff on imports, how much
revenue would it collect as a result of the tariff? (Note: It is
possible to consume partial units of this product, such as 2.5
units.)
x $1.50 (Incorrect)
x $2.75 (Incorrect)
x $0.50 (Incorrect)
67
SCENARIO: FINNISH STEEL

Suppose that the free-trade price of a ton of steel is 500. (Note:
is the symbol for the euro, a common currency used in 16
European countries, including Finland.) Finland, a small country,
imposes a 60 per-ton specific tariff on imported steel. With the
tariff, Finland produces 300,000 tons of steel and consumes
600,000 tons of steel.
Reference: Ref 7-5
(Scenario: Finnish Steel) What is the purpose of this 60-perton tariff?

x to protect Finnish steel consumers from foreign
competition (Incorrect)
x to protect Finnish steel producers and consumers from the World
Trade Organization (Incorrect)
x to protect Finnish steel producers from foreign competition (True
Answer Correct)
x to comply with provisions of the General Agreement on Tariffs
and Trade (Incorrect)
68

Reference: Ref 7-5
(Scenario: Finnish Steel) What is likely to happen to Finnish

production of steel and the price of steel sold in Finland after the
60-per-ton tariff is imposed?
x Finnish steel production will fall, and the Finnish price of steel
x Finnish steel production will rise, and the Finnish price of steel
x Finnish steel production will fall, and the Finnish price of steel
will rise. (Incorrect)
x Finnish steel production will rise, and the Finnish price of steel
will rise. (True Answer Correct)
69

Reference: Ref 7-5
(Scenario: Finnish Steel) Who will gain and who will lose as a
result Finland's 60-per-ton tariff on imported steel?
x Both Finnish steel producers and steel consumers will be worse
off with the tariff than without it. (Incorrect)
x Finnish steel producers will be better off and Finnish steel
consumers will be worse off with the tariff than without it. (True
Answer Correct)
x Finnish steel producers will be worse off and Finnish steel
consumers will be better off with the tariff than without
it. (Incorrect)
x Both Finnish steel producers and steel consumers will be better
off with the tariff than without it. (Incorrect)
70

Reference: Ref 7-5
(Scenario: Finnish Steel) Suppose that the 60-per-ton tariff

caused Finnish production of steel to increase by 100,000 tons
and Finnish consumption of steel to fall by 100,000 tons. What is
the value of Finland's welfare loss due to the tariff?
x 200,000 tons (Incorrect)
x 6 million (True Answer Correct)
71

Reference: Ref 7-5
(Scenario: Finnish Steel) How much total tariff revenue will the
Finnish government collect as a result of the 60-per-ton tariff?
x 18 million (True Answer Correct)
72

Reference: Ref 7-5
(Scenario: Finnish Steel) What is the value of the tariff revenue

from the 60-per-ton tariff?
x
x
x
x
73
18 million (True Answer Correct)

Reference: Ref 7-5
(Scenario: Finnish Steel) What will happen to the Finnish price

of steel if Finnish demand increases and the tariff remains at
60-per-ton?
x It will not change. (True Answer Correct)
x It will increase. (Incorrect)
x It will decrease. (Incorrect)
x It will first increase, then decrease. (Incorrect)
74
SCENARIO: GUATEMALA'S TELEVISION MARKET

This table gives the hypothetical supply and demand of television
sets in Guatemala. Guatemala is a small country that is unable to
affect world prices. The world price (free-trade price) is $300 per
TV set.
Price
Quantity Demanded
Quantity Supplied
$100
3,200
200
$200
2,800
400
$300
2,400
600
$400
2,000
800
$500
1,600
1,000
$600
1,200
1,200
$700
800
1,400
Reference: Ref 7-6
(Scenario: Guatemala's Television Market) In the absence of

trade, how many TV sets will Guatemala produce?
x 1,400 (Incorrect)
x 1,000 (Incorrect)
x 800 (Incorrect)
75

TV set.
Price
Quantity Demanded
Quantity Supplied
$100
3,200
200
$200
2,800
400
$300
2,400
600
$400
2,000
800
$500
1,600
1,000
$600
1,200
1,200
$700
800
1,400
Reference: Ref 7-6
(Scenario: Guatemala's Television Market) With free trade, how

many TV sets will Guatemala produce?
x 800 (Incorrect)
x 400 (Incorrect)
x 200 (Incorrect)
76

TV set.
Price
Quantity Demanded
Quantity Supplied
$100
3,200
200
$200
2,800
400
$300
2,400
600
$400
2,000
800
$500
1,600
1,000
$600
1,200
1,200
$700
800
1,400
Reference: Ref 7-6
(Scenario: Guatemala's Television Market) With free trade, how

many TV sets will Guatemala import?
x 1,200 (Incorrect)
x 800 (Incorrect)
x 600 (Incorrect)
77

TV set.
Price
Quantity Demanded
Quantity Supplied
$100
3,200
200
$200
2,800
400
$300
2,400
600
$400
2,000
800
$500
1,600
1,000
$600
1,200
1,200
$700
800
1,400
Reference: Ref 7-6
(Scenario: Guatemala's Television Market) Suppose that

Guatemala now imposes a 100% tariff on imported TVs. How
many TVs will it now import?
x 200 (Incorrect)
x 400 (Incorrect)
x 600 (Incorrect)
78

TV set.
Price
Quantity Demanded
Quantity Supplied
$100
3,200
200
$200
2,800
400
$300
2,400
600
$400
2,000
800
$500
1,600
1,000
$600
1,200
1,200
$700
800
1,400
Reference: Ref 7-6
(Scenario: Guatemala's Television Market) How much total

tariff revenue will Guatemala collect when it imposes the 100%
tariff on imported TVs?
x $300 (Incorrect)
79

TV set.
Price
Quantity Demanded
Quantity Supplied
$100
3,200
200
$200
2,800
400
$300
2,400
600
$400
2,000
800
$500
1,600
1,000
$600
1,200
1,200
$700
800
1,400
Reference: Ref 7-6
(Scenario: Guatemala's Television Market) What is the value of

the total welfare losses that Guatemala will suffer as a result of
the 100% tariff on imported TVs?
80

TV set.
Price
Quantity Demanded
Quantity Supplied
$100
3,200
200
$200
2,800
400
$300
2,400
600
$400
2,000
800
$500
1,600
1,000
$600
1,200
1,200
$700
800
1,400
Reference: Ref 7-6
(Scenario: Guatemala's Television Market) Who will benefit

from Guatemala's 100% tariff on imported TVs?
x Guatemala's consumers (Incorrect)
x Guatemala's TV producers (True Answer Correct)
x Guatemala's TV importers (Incorrect)
x foreign TV manufacturers (Incorrect)
81
In general, a tariff reduces the national welfare of the small

importing nation because:
x there is a fall in producer surplus. (Incorrect)
x there is a rise in consumer surplus. (Incorrect)
x the gain in consumer surplus is smaller than the loss in producer
surplus. (Incorrect)
x the gain in producer surplus is smaller than the loss in consumer
surplus. (True Answer Correct)
82
Which of the following is NOT an effect of an import tariff?

x It increases producer surplus by raising the market price and
allowing more production. (Incorrect)
x It raises government revenue. (Incorrect)
x It reduces consumer surplus by raising the market
price. (Incorrect)
x It improves efficiency in the economy overall because it saves
high-paying jobs. (True Answer Correct)
83
Figure: Home Market I
Reference: Ref 7-7
(Figure: Home Market I) The Home market shown in the figure

has imposed a _____ tariff.
x $3 (Incorrect)
x $16 (Incorrect)
x $22 (Incorrect)
84
Reference: Ref 7-7
(Figure: Home Market I) Under free trade, the Home country

will import:
x 26. (Incorrect)
x 22. (Incorrect)
x 10. (Incorrect)
85
Reference: Ref 7-7
(Figure: Home Market I) After the imposition of the tariff, the

producer surplus in the Home country:
x decreases by $84. (Incorrect)
x increases by $72. (True Answer Correct)
x increases by $84. (Incorrect)
x increases by $64. (Incorrect)
86
Reference: Ref 7-7
(Figure: Home Market I) The government revenue due to the

tariff is:
x $84. (Incorrect)
x $14. (Incorrect)
x $8. (Incorrect)
87
Reference: Ref 7-7
(Figure: Home Market I) What is the deadweight loss because of

the tariff?
x $12 (Incorrect)
x $48 (Incorrect)
x $44 (Incorrect)
88
To measure the impact of a tariff on the total welfare of society,

we calculate the:
x rise in consumer surplus plus the rise in producer
x rise in producer surplus plus increase in tariff revenue going to the
government minus loss of consumer surplus. (True Answer Correct)
x rise in government revenues plus the rise in consumer
x total number of jobs saved by the tariff times the average
wage. (Incorrect)
89
When a tariff is imposed, there is always an additional loss. One

loss occurs when production moves from more efficient foreign
producers to less efficient domestic producers. This loss is the:
x consumption loss. (Incorrect)
x efficiency transfer. (Incorrect)
x production loss. (True Answer Correct)
x X-factor. (Incorrect)
90
When a tariff is imposed, there is always an additional loss. One

loss occurs when consumers purchase fewer units of the good
because prices have risen, so society loses the value of that
consumption. This loss is the:
x consumption loss. (True Answer Correct)
x efficiency transfer. (Incorrect)
x production loss. (Incorrect)
x X-factor. (Incorrect)
91
Which of the following taxes is easiest to collect?

x
x
x
x
92
Lower-income countries have reduced their dependence upon

_____________ over the past 20 to 30 years.
x
x
x
x
93
income taxes (Incorrect)

wealth taxes (Incorrect)
tariffs (True Answer Correct)
value-added taxes (Incorrect)
income taxes (Incorrect)

wealth taxes (Incorrect)
tariffs (True Answer Correct)
value-added taxes (Incorrect)
A country will impose a tariff because:

x it discourages domestic production. (Incorrect)
x it reduces the benefits for domestic producers. (Incorrect)
x it is a source of revenue for the government. (True Answer
Correct)
x it will encourage domestic consumers to buy foreign
goods. (Incorrect)
94
Tariffs are used to:

x collect government revenue. (Incorrect)
x manipulate world prices. (Incorrect)
x encourage domestic production. (Incorrect)
x collect government revenue, manipulate world prices, and
encourage domestic production. (True Answer Correct)
95
Why should small nations impose tariffs, even though they

reduce national welfare?
x Small, mostly poor, nations have no reliable means for collecting
taxes to run their governments. (Incorrect)
x Politicians like to build favor with industrial interests, especially
during political campaigns. (Incorrect)
x Congressional raises often hinge on whether or not enough tariff
revenue is collected by the treasury department. (Incorrect)
x Small, mostly poor, nations have no reliable means for collecting
taxes to run their governments and politicians like to build favor
with industrial interests, especially during political campaigns. (True
Answer Correct)
96
Why didn't U.S. tire producers support the recently enacted

tariff on imported Chinese tires?
x Many of them manufacture tires in China. (True Answer Correct)
x They were already earning monopoly profits. (Incorrect)
x Since the union supported the tariff, they naturally had to oppose
it. (Incorrect)
x They wanted the government to impose an import quota rather
than an import tariff. (Incorrect)
97
The politics behind tariff protection suggests that, other things

equal, tariffs are more likely to be imposed when the:
x benefits to consumers and producers are concentrated on specific
firms and states. (Incorrect)
x benefits to producers and their labor forces are concentrated on
specific firms and states. (True Answer Correct)
x benefits to producers and their labor forces are spread
nationwide (Incorrect)
x losses to consumers are concentrated on specific firms and
states. (Incorrect)
98
In 2002 the United States relied upon the GATT's ________ to

impose tariffs on imported steel.
x
x
x
x
99
escape clause (True Answer Correct)

antidumping clause (Incorrect)
countervailing duty clause (Incorrect)
most favored nation clause (Incorrect)
Section 421 of the amended Trade Act of 1974 allows tariffs to

be applied against:
x rising imports from China that cause market disruption in a U.S.
x any imports that cause market disruption in a U.S.
x subsidized Chinese imports. (Incorrect)
x any imports from Canada or Mexico that violate NAFTA
provisions. (Incorrect)
100
When the United States imposed tariffs of 30% on many steel

imports in March 2002, the estimated total cost to the United
States over the period of March 2002 to December 2003 was:
x $1 million. (Incorrect)
x $3.32 for each job savedcertainly worth it. (Incorrect)
x $185 million. (True Answer Correct)
x too small to measure. (Incorrect)
101
One estimate of the deadweight losses of the 2002 U.S tariffs on

imported steel is:
x
x
x
x
102
$185 trillion. (Incorrect)

$185 billion. (Incorrect)
$185 million. (True Answer Correct)
$185,000. (Incorrect)
U.S. consumers were hurt by the 2002 steel tariff; U.S.

producers who use steel were also hurt, but the biggest outcry
came from:
x exporters of steel to the United StatesEurope, Japan, and South
Korea. (True Answer Correct)
x the United Nations. (Incorrect)
x the big labor unions. (Incorrect)
x Ralph Nader, who is very opposed to restrictions on free
trade. (Incorrect)
103
The WTO reacted in what way to U.S. imposition of steel tariffs

in 2002?
x It said that even though the tariffs were high, it was OK because
of the escape clause. (Incorrect)
x It suspended the United States temporarily, stripping it of all its
rights in the organization. (Incorrect)
x It made the United States promise to repeal the tariff as soon as
possible. (Incorrect)
x It allowed other nations to impose tariffs on U.S. exports to
retaliate. (True Answer Correct)
104
When one country retaliates to a tariff with its own tariff, this is
a:
x
x
x
x
tariff war. (True Answer Correct)

tariff tiff. (Incorrect)
tariff conflict. (Incorrect)
tariff fight. (Incorrect)
105
One difference between the tariffs on steel imports levied in

2002 and the tariffs on Chinese tire imports levied in 2009 was
that:
x U.S. steel producers supported the steel tariff while U.S. tire
producers did not support the tire tariff. (True Answer Correct)
x U.S. tire producers supported the tire tariff while U.S. steel
producers did not support the steel tariff. (Incorrect)
x U.S. steel workers supported the steel tariff while U.S. tire
workers did not support the tire tariff. (Incorrect)
x U.S. tire workers supported the tire tariff while U.S. steel
workers producers did not support the steel tariff. (Incorrect)
106
U.S. tire producers did not support the recently enacted tariff
on imports of Chinese tires because U.S. producers that also
produce tires in China would have experienced a decline in
their ___________ earned in ___________ .
x consumer surplus; the United States (Incorrect)
x producer surplus; the United States (Incorrect)
x consumer surplus; China (Incorrect)
x producer surplus; China (True Answer Correct)
107
If a large country imposes a tariff, it may have a different

effect. What?
x If a large nation imposes a tariff, that government gets more

revenue. (Incorrect)
x Consumers in the nation have so many other choices, it may not
have any effect at all. (Incorrect)
x Because of the size of the nation, a tariff that decreases the
quantity demanded of the product may also reduce the world price
of the good. (True Answer Correct)
x The large nation can just buy up foreign producers if they don't
like having a tariff imposed. (Incorrect)
108
What is a difference between a tariff imposed by a large

country and a tariff imposed by a small country?
x A tariff imposed by a large country has no deadweight
consumption and production losses. (Incorrect)
x A tariff imposed by a large country has a terms-of-trade
effect. (True Answer Correct)
x A tariff imposed by a small country has a terms-of-trade
effect. (Incorrect)
x A tariff imposed by a large country has no deadweight
consumption loss. (Incorrect)
109
Foreign supply curves facing a large country differ from those

facing a small country. Large countries face _____________
foreign supply curves and small countries face ______________
foreign supply curves.
x perfectly price elastic; upward-sloping (Incorrect)
x upward-sloping; perfectly price elastic (True Answer Correct)
x downward-sloping; perfectly price elastic (Incorrect)
x upward-sloping; downward-sloping (Incorrect)
110
A large nation faces a(n) ____ foreign export supply curve,

rather than a(n) ____ foreign export supply curve.
x
x
x
x
111
flat; upward-sloping (Incorrect)

downward-sloping; upward-sloping (Incorrect)
upward-sloping; flat (True Answer Correct)
flat; downward-sloping (Incorrect)
When a large country imposes a tariff, the burden is often

shared by:
x foreign consumers and domestic producers. (Incorrect)
x domestic consumers and foreign producers. (True Answer
Correct)
x all producers and consumers in each nation equally. (Incorrect)
x its government. (Incorrect)
112
If a large country imposes a tariff:

x its economic welfare may increase. (True Answer Correct)
x its economic welfare must always fall. (Incorrect)
x its economic welfare will increase if its deadweight losses exceed
gains from its terms-of-trade effect. (Incorrect)
x the tariff will have the same impact as an identical tariff imposed
by a small country. (Incorrect)
113
Who bears the burden of the terms-of-trade effect when a large

country imposes a tariff?
x
x
x
x
foreign consumers. (Incorrect)

foreign producers. (True Answer Correct)
domestic producers (Incorrect)
domestic consumers (Incorrect)
114
Because a large nation can force the exporting nation to pay a

substantial amount of the tariff, its _________ may improve
after the tariff is imposed.
x consumption (Incorrect)
x production (Incorrect)
x terms of trade (True Answer Correct)
x income tax collection rate (Incorrect)
115
If a large country imposes a tariff:

x the terms-of-trade effect may offset deadweight losses on its
economy. (True Answer Correct)
x the terms-of-trade effect can never offset deadweight losses on its
economy. (Incorrect)
x there will be no terms-of-trade effect. (Incorrect)
x the country will always be worse off. (Incorrect)
116
Suppose that the world price of resins is $100 per ton. Now
suppose that the United States imposes a 10% tariff on
imported resins. What is the U.S. domestic price of resins after
the 10% tariff is imposed (rounded to the nearest dollar) if
exporters bear half of the tariff?

x
x
x
x
$90 (Incorrect)
$100 (Incorrect)
$95 (Incorrect)
117
The United States applies a 25% tariff on imported pickup

trucks (mainly from Japan). If the United States is considered
to be a large country, then:
x the U.S. price of imported Japanese pickup trucks will increase
by 25%. (Incorrect)
by less than 25%. (True Answer Correct)
by more than 25%. (Incorrect)
by 35%. (Incorrect)
118
When a large nation imposes a tariff on a smaller nation and

causes its terms of trade to deteriorate, the tariff is sometimes
referred to as a:
x beggar-thy-neighbor tariff. (True Answer Correct)
x hate-thy-neighbor tariff. (Incorrect)
x love-thy-neighbor tariff. (Incorrect)
x aid-thy-neighbor tariff. (Incorrect)
119
Figure: Home Market II
Reference: Ref 7-8
(Figure: Home Market II) For the large-country case in the

figure, the free-trade price of the product is ______ and the
amount imported is _________.
x $20; 30 (True Answer Correct)
x $25; 10 (Incorrect)
120
Reference: Ref 7-8
(Figure: Home Market II) The large country imposes a tariff
of:
x
x
x
x
121
$10. (True Answer Correct)

$20. (Incorrect)
$25. (Incorrect)
$15. (Incorrect)
Reference: Ref 7-8
(Figure: Home Market II) The foreign producers in the figure

absorbed _____ of the overall tariff.
x $10 (Incorrect)
x $8 (Incorrect)
x 10% (Incorrect)
122
Reference: Ref 7-8
(Figure: Home Market II) The net welfare loss for the home
country because of the tariff is:
x $50. (Incorrect)
x $25. (Incorrect)
x $100. (Incorrect)
123
Suppose that the United States is a large country. In fall 2009,

the United States imposed tariffs on tires imported from China.
The deadweight losses of these tariffs were larger than the
terms-of-trade gains to the U.S. economy. Who was better off
and who was worse off as a result of these tariffs?
x U.S. tire producers were better off and U.S. consumers and
Chinese tire producers were worse off. (True Answer Correct)
x U.S. tire producers, U.S. consumers, and Chinese tire producers
were all worse off. (Incorrect)
x U.S. tire producers and Chinese tire producers were better off
and U.S. consumers were worse off. (Incorrect)
x U.S. tire producers and U.S. consumers were better off and
Chinese tire producers were worse off. (Incorrect)
124
Suppose that the U.S. government imposes a 20% tariff to

protect U.S. clothing manufacturers adversely affected by the
expiration of the Multifibre Agreement. Compared with a freetrade situation, the price of clothing will ______ , and U.S.
clothing production will ________ .
x fall; fall (Incorrect)
x fall; rise (Incorrect)

x rise; rise (True Answer Correct)
x rise; fall (Incorrect)
125
Suppose that the world price of steel is $500 per ton. Now
suppose that the United States imposes a 20% tariff on
imported steel (as it did in 2002). What is the U.S. domestic
price of steel after the 20% tariff is imposed (rounded to the
nearest dollar) if exporters bear two-thirds of the tariff?
x $433 (Incorrect)
x $533 (Incorrect)
x $567 (Incorrect)
126
The United States applies a 25% tariff on imported pickup

trucks. If the United States is considered to be a large country,
then the U.S. price of an imported Toyota pickup with a CIF
price (price landed at the U.S. border) of $20,000 will be:
x between $15,000 and $25,000. (Incorrect)
x between $20,000 and $25,000. (True Answer Correct)
127
A tariff levied on a good produced in a small nation with an

inelastic supply that maximizes the gain to a large nation is
called a(n):
x retaliatory tariff. (Incorrect)
x prime tariff. (Incorrect)
x inelastic tariff. (Incorrect)
x optimal tariff. (True Answer Correct)
128
Table: Export Supply Elasticities

The supplied table gives the foreign elasticity of supply for several
types of U.S. steel imports.
Product
Elasticity of Export Supply
Alloy Steel
0.27
Steel bars and rods
0.80
Steel tubes and pipes
90
Steel flat-rolled products
750
Reference: Ref 7-9
(Table: Export Supply Elasticities) According to the table, for

which product is the United States' optimal tariff the largest?
x
x
x
x
129
alloy steel (True Answer Correct)

steel bars and rods (Incorrect)
steel tubes and pipes (Incorrect)
steel flat-rolled products (Incorrect)

Product
Alloy Steel
0.27
Steel bars and rods
0.80
90
750
Reference: Ref 7-9
(Table: Export Supply Elasticities) For which product is the

United States' optimal tariff the smallest?
x alloy steel (Incorrect)
x steel bars and rods (Incorrect)
x steel tubes and pipes (Incorrect)
x steel flat-rolled products (True Answer Correct)
130

Product
Alloy Steel
0.27
Steel bars and rods
0.80
90
750
Reference: Ref 7-9
(Table: Export Supply Elasticities) According to the table, the

United States can be considered a small-country importer of
which steel product?
x
x
x
x
131
alloy steel (Incorrect)

steel bars and rods (Incorrect)
steel tubes and pipes (Incorrect)
steel flat-rolled products (True Answer Correct)

Product
Alloy Steel
0.27
Steel bars and rods
0.80
90
750
Reference: Ref 7-9
(Table: Export Supply Elasticities) It is almost certain that the

2002 imposition of 13% to 15% tariffs on steel tubes and pipes
resulted in:
x terms-of-trade gains that were greater than deadweight
losses. (Incorrect)
x terms-of-trade gains that equaled deadweight losses. (Incorrect)
x deadweight losses that were greater than terms-of-trade
gains. (True Answer Correct)
x no deadweight losses. (Incorrect)
132
Suppose that the United States is a large country and it wishes

to impose optimal tariffs on its imports of avocados, bananas,
and cherries. The export supply elasticities of avocados,
bananas, and cherries are 1, 2, and 3, respectively. Rank the
products on the basis of their optimal tariffs from lowest to
highest tariff.
x cherries, bananas, avocados (Incorrect)
x avocados, cherries, bananas (Incorrect)
x bananas, avocados, cherries (Incorrect)
x avocados, bananas, cherries (True Answer Correct)
133
Why did the European Union put tariffs on some banana

exports and not others?
x to encourage organic farming in the Caribbean (Incorrect)
x to support former colonies in Africa (True Answer Correct)
x to discourage European banana consumption (Incorrect)

x to encourage European banana production (Incorrect)
134
In 2009, the European Union agreed to grant tariff-free access

to its former colonies and to reduce tariffs on imports by 35%
over seven years on _________, which finally ended a 15-year
feud between the European Union and the United States and
Latin American producers.
x pineapples (Incorrect)
x bananas (True Answer Correct)
x avocados (Incorrect)
x oranges (Incorrect)
135
When the Multifibre Arrangement was abolished,

____________ saw the largest increase in its exports to the
United States.
x Japan (Incorrect)
x India (Incorrect)
x Mexico (Incorrect)
x China (True Answer Correct)
136
Why does the United States maintain high sugar quotas?

x to fight the obesity problem in America (Incorrect)
x to punish sugar production in Communist nations (Incorrect)
x to support sugar producers in low-income countries (Incorrect)
x to avoid payouts to domestic sugar producers (True Answer
Correct)
137
Which of the following will occur when a small country imposes

a quota on imported sugar?
x The domestic price of sugar will fall. (Incorrect)
x Domestic sugar consumption will fall. (True Answer Correct)
x Domestic sugar production will fall. (Incorrect)
x The domestic price of sugar will fall and domestic sugar
consumption and production will fall. (Incorrect)
138
Which of the following is NOT an effect of an import quota

imposed by a small nation?
x It raises producer prices. (Incorrect)
x It generates revenue for the nation. (True Answer Correct)
x It causes more production by domestic industries. (Incorrect)

x It causes a reduction in imports of the product. (Incorrect)
139

European countries, including Finland.) Finland, a small
country, imposes a 60-per-ton specific tariff on imported steel.
With the tariff, Finland produces 300,000 tons of steel and
consumes 600,000 tons of steel.
Reference: Ref 7-10
(Scenario: Finnish Steel) Suppose that Finland decides to use an

import quota to achieve the same effects on domestic steel
production as the tariff. How large a quota must it use?
x 60 (Incorrect)
x 300,000 tons (True Answer Correct)
140

Reference: Ref 7-10
(Scenario: Finnish Steel) What will happen to the Finnish price

of steel if Finnish demand increases and a 300,000-ton quota
remains unchanged?
x It will not change. (Incorrect)
x It will increase. (True Answer Correct)
x It will decrease. (Incorrect)
x It will first increase, then decrease. (Incorrect)
141

Reference: Ref 7-10
(Scenario: Finnish Steel) What will happen to Finnish welfare

losses if Finnish demand for steel increases and the quota
remains unchanged?
x They will decrease. (Incorrect)
x They will not change. (Incorrect)
x They will increase. (True Answer Correct)
x They will first increase, then decrease. (Incorrect)
142
Suppose that:
(1) the United States has a comparative advantage in
producing chemicals;
(2) Costa Rica has a comparative advantage in producing
sugar; and
(3) the United States imposes a quota on its imports of
Costa Rican sugar.
Now suppose that the United States eliminates its import quotas
on Costa Rican sugar. Which of the following is most likely to
occur for the United States?
x Consumer surplus for American consumers of sugar products
x Producer surplus for American sugar producers will
rise. (Incorrect)
x Consumer surplus for American consumers of sugar products
will rise. (True Answer Correct)
x Tariff revenues for the U.S. government will rise. (Incorrect)
143
Figure: The Soybean Market
Reference: Ref 7-11
(Figure: The Soybean Market) A quota generates a protective

effect just like a tariff. Use the figure to calculate the equivalent
import tariff that would produce the same result as an import
quota of 200 units.
x $1 (Incorrect)
x $2 (Incorrect)
x $4 (Incorrect)
144
Reference: Ref 7-11
(Figure: The Soybean Market) Because there is no government

revenue as a result of the quota, one of the parties in the trade
transaction makes a return equal to lost government revenue
(P MC) Qimports. This is called:
x a windfall profit. (Incorrect)
x a quota rent. (True Answer Correct)
x gains from trade. (Incorrect)
x unearned income. (Incorrect)
145
Quota rents are:

x the difference between the domestic price and world price
following imposition of a quota. (True Answer Correct)
x the extra return to land that occurs following imposition of a
quota. (Incorrect)
x the difference between imports with no quota and imports with
the quota. (Incorrect)
x the extra payment to labor that occurs following imposition of a

quota. (Incorrect)
146
Who collects quota rents when the government gives quota

licenses to domestic firms?
x
x
x
x
147

foreign suppliers (Incorrect)
domestic producers (True Answer Correct)
the government (Incorrect)
Rent-seeking activities are:

x landowners' efforts to receive higher returns for their
land. (Incorrect)
x bribery and lobbying activities to obtain quota licenses. (True
Answer Correct)
x foreign suppliers' efforts to reduce quotas. (Incorrect)
x domestic consumers' efforts to reduce tariffs. (Incorrect)
148
If rent-seeking occurs, then a country's welfare losses from

quotas will:
x
x
x
x
increase. (True Answer Correct)

not change. (Incorrect)
first increase, then decrease. (Incorrect)
149
If a quota license is awarded to a domestic firm without an

auction, it may generate bribes or lobbying spending to earn
this revenue. Economists call this a(n) ____ activity.
x efficient (Incorrect)
x unnecessary (Incorrect)
x wasteful rent-seeking (True Answer Correct)
x profit-maximizing (Incorrect)
150
Who collects quota rents when the government auctions quota

licenses?
x
x
x
x

foreign suppliers (Incorrect)
domestic producers (Incorrect)
the government (True Answer Correct)
151
One way to fairly distribute quotas, while getting revenue for

the government, is to:
x auction quotas in a public sale to the highest bidder. (True
Answer Correct)
x conduct a lottery for quotas for the lucky winner. (Incorrect)
x allow Congress to apportion quotas among their
constituents. (Incorrect)
x restrict quotas on the basis of handicap, gender, and other
protected status. (Incorrect)
152
When a nation agrees to limit its own exports by imposing

quotas on its own firms in order to keep revenue high, keep
from breaking WTO rules, and pacify protectionist interests in
the import nation, it is known as:
x lost profit opportunities. (Incorrect)
x reverse import restrictions. (Incorrect)
x a voluntary export restraint agreement. (True Answer Correct)
x deadweight welfare loss. (Incorrect)
153
An import quota is different from a voluntary export restraint

because:
x the former is imposed by the exporting country and the latter by
the home country. (Incorrect)
x the former is imposed by the home country and the latter by the
exporting country. (True Answer Correct)
x the latter is specified by domestic importers. (Incorrect)
x the former results in less gain for the country. (Incorrect)
154
What is the main difference between a quota and a voluntary

export restraint?
x There are no differences between a quota and a voluntary export
restraint. (Incorrect)
x The importing country administers a quota and the exporting
country administers a voluntary export restraint. (True Answer
Correct)
x A quota affects a country's imports while a voluntary export
restraint affects its exports. (Incorrect)
x A quota has deadweight losses while a voluntary export restraint
has no deadweight losses. (Incorrect)
155
In the 1980s the United States used _________ to restrict

imports of Japanese automobiles.
x
x
x
x
quotas (Incorrect)
tariffs (Incorrect)
voluntary export restraints (True Answer Correct)
156
In the 1980s the United States negotiated a voluntary export

agreement with Japan in which each Japanese auto producer
voluntarily agreed to reduce the number of its automobiles
exported to the United States. This voluntary export agreement
caused each Japanese auto producer to:
x raise the prices of their automobile exports to the United
States. (True Answer Correct)
x lower the prices of their automobile exports to the United
States. (Incorrect)
x not change the prices of their automobile exports to the United
States. (Incorrect)
x increase the number of automobiles exported to the United
States. (Incorrect)
157
Who captured the quota rents of the 1980s U.S.-Japanese

voluntary export agreement for automobiles?
x
x
x
x
158
Compared with a tariff, welfare losses will _______ when

voluntary export restraints are used to reduce imports.
x
x
x
x
159
Japanese auto producers (True Answer Correct)

U.S. consumers of Japanese automobiles (Incorrect)
U.S. auto producers (Incorrect)
the U.S. government (Incorrect)
decrease (Incorrect)
not change (Incorrect)
increase (True Answer Correct)
first increase, then decrease (Incorrect)
What is the major difference between a tariff and a quota that

have equivalent impacts upon domestic production?
x A quota does not lead to an increase in domestic prices while a
tariff does. (Incorrect)
x The government collects with a tariff; other domestic groups
(e.g., domestic producers, importers) may collect with a
quota. (True Answer Correct)

x The government collects with a tariff; exporters collect with a
quota, thus leading to further deadweight losses for the quotaimposing country. (Incorrect)
x The government collects with a tariff; importers collect with a
quota, offsetting consumption deadweight losses and leading to
lower deadweight losses for the quota-imposing
160
The elimination of the Multifibre Agreement in 2005 caused

welfare gains for the average U.S. household of approximately:
x
x
x
x
$100. (Incorrect)
$100 annually. (True Answer Correct)
$1,000. (Incorrect)
$1,000 annually. (Incorrect)
161
What happened to the price of U.S. clothing and U.S. clothing

production as a result of the expiration of the Multifibre
Agreement in 2005?
x The price of clothing in the United States fell, and U.S. clothing
production fell. (True Answer Correct)
x The price of clothing in the United States fell, and U.S. clothing
production rose. (Incorrect)
x The price of clothing in the United States rose, and U.S. clothing
production fell. (Incorrect)
x The price of clothing in the United States rose, and U.S. clothing
production rose. (Incorrect)
162
Suppose that the U.S. government imposes a 20% tariff to

protect U.S. clothing manufacturers adversely affected by the
expiration of the Multifibre Agreement. Compared with a freetrade situation, what will happen to the price of clothing in the
United States and to U.S. production of clothing?
x The price of clothing will fall, and U.S. clothing production will
fall. (Incorrect)
x The price of clothing will fall, and U.S. clothing production will
rise. (Incorrect)
x The price of clothing will rise, and U.S. clothing production will
rise. (True Answer Correct)
x The price of clothing will rise, and U.S. clothing production will
fall. (Incorrect)
163
Suppose, instead, that the U.S. government imposes quotas to

replace the Multifibre Agreement. As U.S. demand for clothing
increases over time, U.S. clothing consumers will find that:
x the price of clothing in the United States will fall. (Incorrect)
x the price of clothing in the United States will rise. (True Answer
Correct)
x the price of clothing in the United States will not
change. (Incorrect)
x U.S. clothing production will fall. (Incorrect)
164
Downgrading is:
x the slope of the import demand curve. (Incorrect)
x the fall in tariffs. (Incorrect)
x a decline in average quality when protection is eliminated. (True
Answer Correct)
x the result of deadweight loss. (Incorrect)
165
The WTO allows no leeway in the ability of its members to raise

or apply tariffs.
x True ()
166
There are exceptions, but the WTO says nations should not
place any restrictions on the quantity of a good that may be
imported.
x False ()
167
Suppose that the U.S. ITC determines that Brazilian steel

exporters are guilty of dumping steel on the U.S. market. The
World Trade Organization then determines what tariffs the
United States can levy against imports of Brazilian steel.
x True ()
168
The WTO was formed immediately following World War II.

x True ()
169
Dumping is the sale of export goods in another country at a

price less than that charged at home, or alternatively, at a price
less than its costs of production plus shipping.
x False ()
170
A customs union is a free-trade area in which member

countries also agree to the same tariffs against their imports.
x False ()
171
Producers' surplus represents producers' monopoly profits.

x True ()
172
If the United States is a small country and imposes a tariff on

imported T-shirts of 30% and the world price is $5 per T-shirt,
then the value of T-shirts once they have cleared U.S. customs is
$6.50.
x False ()
173
Economic welfare always falls for a small country that imposes

a tariff.
x False ()
174
Developing countries often use tariffs because they are easy to

collect.
x False ()
175
The importance of tariffs in the government revenues of

developing countries has decreased during the past 20 years.
x False ()
176
The data indicate that developing countries are shifting toward

taxing imports more than domestic tax bases.
x True ()

177
Section 421 of the amended Trade Act of 1974 allows the United
States to impose tariffs in the case of exceptional surges in
imports from China.
x False ()
178
If the United States is a large country and imposes a 30% tariff

on imported T-shirts that have a world price of $5 per T-shirt,
then the value of T-shirts once they have cleared U.S. customs is
$6.50.
x True ()
179
A country's terms of trade improve whenever import prices are

rising faster than export prices.
x True ()
180
Suppose that the Chinese import and export price indexes were
both 100 in 2000. In 2010, the import price index was 110 and
the export price index was 120. China's terms of trade
improved between 2000 and 2010.
x False ()
181
An optimal tariff is an amount that leads to the maximum

increase in welfare for the importing country.
x False ()
182
The optimal tariff for a small country is zero.

x False ()
183
The optimal tariff increases as the foreign elasticity of supply

increases.
x True ()
184
Analysis indicates that all U.S. tariffs on steel lowered U.S.

welfare.
x True ()
185
Quota licenses are permits to import the quantity under the

quota system.
x False ()
186
The government always collects the quota rent when it imposes

quotas on imports.
x True ()
187
Welfare losses of a quota are the same as with a tariff when

quota licenses are given to domestic producers.
x False ()
188
A quota's welfare losses will be the same as a tariff's welfare

losses if the government gives quota licenses to domestic
producers.
x False ()
189
The government can collect quota rents if it auctions quota

licenses.
x True ()
190
The exporting country administers quotas when voluntary

export restraints are used.
x False ()
191
Most quota rents are captured by domestic producers

competing with imports.
x True ()
19
2
The following equations represent a small country's home supply and demand
curves for widgets: S = 0 + 2P and D = 1,000 2P.
A) Find the equilibrium price and quantity for widgets in autarky.
B) Now let the world price be $200. Find domestic production, domestic consumption,
and the amount of imports.
C) Derive the country's import demand curve for widgets.
D) Let the country impose a 10% tariff. Calculate its deadweight losses.
x ()
193
Reference: Ref 7-12
(Figure: The Soybean Market) What is the price of U.S.

soybeans before trade?
x ()
194
Reference: Ref 7-12
(Figure: The Soybean Market) What is the price of U.S.

soybeans after trade?
x ()
195
Reference: Ref 7-12
(Figure: The Soybean Market) After trade, what will be the

quantity of soybeans consumed in the United States?
x ()
196
Reference: Ref 7-12
(Figure: The Soybean Market) After trade, how many tons will
be produced by the United States?
x ()
197
Reference: Ref 7-12
(Figure: The Soybean Market) Suppose the U.S. government

imposes a tariff of $3 per ton on imported soybeans. What will
be the new U.S. price?
x ()
198
Reference: Ref 7-12

imposes a tariff of $3 per ton on imported soybeans. What is the
new U.S. quantity produced domestically?
x ()
199
Reference: Ref 7-12

imposes a tariff of $3 per ton on imported soybeans. What is the
new level of imports?
x ()
200
Reference: Ref 7-12

imposes a tariff of $3 per ton on imported soybeans. How much
revenue is going to the U.S. government?
x ()
201
Reference: Ref 7-12

imposes a tariff of $3 per ton on imported soybeans. How much
would a prohibitive tariff have to be?
x ()
202
Which U.S. government agency did George W. Bush ask to

investigate the need for protection in the steel industry in 2001?
x ()
203
Why did Europe choose to use retaliatory tariffs on U.S.

exports of oranges, apples, and other agricultural goods?
x ()
204
The recently imposed 35% tariff on imported Chinese tires

initiated a small trade war between the United States and
China. Describe what happened following the imposition of
these tariffs.
x ()
205
The graph below gives the relationship between a large-country

importer of a good, say steel, and its tariff rate (in percentages).
Explain why the curve reaches maximum and then declines.
x ()
206
Explain why the exporting foreign country will always lose

when a large home country imposes a tariff.
x ()
20
7
A) Is a country a small or large country if it faces a perfectly price elastic foreign export
supply curve?
B) What is the optimal tariff for a country facing a perfectly price elastic foreign export
supply curve?
C) If the foreign export supply is less than the perfectly price elastic foreign export
supply curve, will the optimal tariff increase or decrease as the price elasticity of
demand increases?
D) What happens to the country's welfare if it applies a tariff higher than the optimal
tariff?
x ()
20
8
Rank the following in ascending order of an imposing small country's welfare. If

there are any two that are equivalent, explain their equivalencies.
A) A tariff of t in a small country resulting in imports of M units.
B) A quota of M units of imports with the government auctioning quota licenses to the
highest bidders.
C) A quota of M units of imports in which domestic firms engage in rent-seeking
activities.
D) An arrangement in which the exporting country voluntarily agrees to limit its
exports to M units.
x ()
209
Several instances of U.S. agreements with its trading partners

to limit their exports to the United States have come under the
category of voluntary export restraint agreements. What are
these and why do nations engage in them? Give at least one
example.
x ()
A foreign discriminating monopolist is engaging in:

x
x
x
x
The tariff imposed to punish a foreign discriminating

monopolist is called:
x
x
x
x
infant industry protection. (Incorrect)

dumping its product. (True Answer Correct)
giving preferential treatment to domestic consumers. (Incorrect)
charging higher prices to foreign consumers. (Incorrect)
antidumping duty. (True Answer Correct)

a subsidy. (Incorrect)
punitive damages. (Incorrect)
a fine. (Incorrect)
A monopoly firm operating with no trade will produce the

profit-maximizing quantity where:
x the firm's MC = MR, where MR is declining and below
x MR begins to increase and MC begins to decrease. (Incorrect)
x P = MC. (Incorrect)
x the firm's MC = MR, where MR is declining and equal to
price. (Incorrect)
A profit-maximizing monopolist will produce at the point where:

x total revenue = total costs. (Incorrect)
x marginal revenue = marginal cost. (True Answer Correct)
x average revenue = average cost. (Incorrect)
x the difference between average revenue and average cost is
maximized. (Incorrect)
The no-trade equilibrium in a monopolistic market occurs

where:
x
x
x
x
marginal revenue = price. (Incorrect)

marginal cost = marginal revenue. (True Answer Correct)
market demand = market supply. (Incorrect)
marginal cost = average revenue (Incorrect)
SCENARIO: A MONOPOLIST
A monopolist faces a demand curve given by P = 20 Q and has
total costs given by TC = Q2. By using a bit of calculus, you should

be able to determine that the firm's marginal revenue is MR = 20
2Q and its marginal cost is MC = 2Q.
Reference: Ref 8-1
(Scenario: A Monopolist) What is its profit-maximizing output

level?
x 6 (Incorrect)
x 7 (Incorrect)
x 8 (Incorrect)
7
Reference: Ref 8-1
(Scenario: A Monopolist) What is its profit-maximizing price?

x $20 (Incorrect)
x $10 (Incorrect)
x $5 (Incorrect)
8
Reference: Ref 8-1
(Scenario: A Monopolist) If its profit-maximizing output level is

5 and its profit-maximizing price is $15, what are its monopoly
profits at this price and quantity?
x $25 (Incorrect)
x $75 (Incorrect)
x $100 (Incorrect)
9
A monopoly firm will sell ________output and charge a

________ price than a perfectly competitive firm.
x less; higher (True Answer Correct)
x more; higher (Incorrect)
x more; lower (Incorrect)

x less; lower (Incorrect)
10
If a monopoly suddenly became a perfectly competitive industry,

equilibrium output would _________ , and the equilibrium price
would _________ .
x increase; decrease (True Answer Correct)
x decrease; increase (Incorrect)
11
Figure: The Home Market
Reference: Ref 8-2
(Figure: The Home Market) Under conditions of no-trade, the

domestic monopolist will produce and sell _______ at a price of
_________ .
x 18; $15 (Incorrect)
x 12; $25 (True Answer Correct)
12
Reference: Ref 8-2
(Figure: The Home Market) If the world price is $15, the

domestic monopolist will produce ______ and the country will
import ________ .
x 18; 10 (True Answer Correct)
x 12; 6 (Incorrect)
x 18; 16 (Incorrect)
13
Comparing the monopoly firm with a perfectly competitive firm

reveals that:
x
x
x
x
14
the competitive firm sells less quantity. (Incorrect)

the monopoly firm charges a lower price. (Incorrect)
the competitive firm's price is above MC. (Incorrect)
None of these answer choices are correct. (True Answer Correct)
The no-trade equilibrium in a perfectly competitive market

occurs where:
x marginal revenue = price. (Incorrect)
x marginal cost = total revenue. (Incorrect)
x market quantity demanded = market quantity supplied. (True
Answer Correct)
x average revenue = price. (Incorrect)
15
If a perfectly competitive industry suddenly became a

monopolist, equilibrium output would _________ , and the
equilibrium price would _________ .

16
What will happen to domestic monopolists' prices and outputs

when a small country engages in international trade?
x
x
x
x
17
Prices will rise and outputs will fall. (Incorrect)

Prices will rise and outputs will rise. (Incorrect)
Prices will fall and outputs will rise. (True Answer Correct)
Prices will fall and outputs will fall. (Incorrect)
If we allow free trade in a small nation's industry where there is

a domestic monopolist, the monopoly firm:
x gains even more power. (Incorrect)
x sees its profits rise. (Incorrect)
x becomes a price taker, is not able to charge a higher price, and
behaves like a competitive firm. (True Answer Correct)
x is able to charge a higher price. (Incorrect)
18
The small-country monopolist's free-trade equilibrium occurs:

x where MC = MR, where MR is declining and below
price. (Incorrect)
x at the world price, which becomes a perfectly elastic demand
curve for the monopoly firm and the firm's marginal cost
curve. (True Answer Correct)
x where the home demand is completely satisfied by foreign
importers. (Incorrect)
x at minimum marginal cost. (Incorrect)
19
The small-country monopolist's free-trade equilibrium features

a marginal revenue curve equal to __________ and coincident
with _____________ .
x marginal cost; the consumer's demand curve for the
product (Incorrect)
x the world price; the new competitive demand curve for the
firm (True Answer Correct)
x one; profits (Incorrect)
x imports at each price; the supply curve (Incorrect)
20

Reference: Ref 8-3
(Scenario: A Monopolist) Now suppose that the country in

which this monopolist is located decides to engage in
international trade. The world price of the product produced by
the monopolist is $12. What is its profit-maximizing output
level?
x 5 (Incorrect)
x 7 (Incorrect)
x 8 (Incorrect)
21
Reference: Ref 8-3

the monopolist is $12. What is its profit-maximizing price?
x $20 (Incorrect)
x $15 (Incorrect)
x $10 (Incorrect)
22
Reference: Ref 8-3

the monopolist is $12. The profit-maximizing output level is 6,
and the profit-maximizing price equals $12. What are its
monopoly profits at this price and quantity?
x $25 (Incorrect)

x $50 (Incorrect)
x $75 (Incorrect)
23
Reference: Ref 8-4
(Figure: The Home Market) With free trade, the consumer

surplus is _________ than in the case of no-trade domestic
monopoly.
x lower (Incorrect)
x higher (True Answer Correct)
x constant (Incorrect)
x More information is needed to answer this question. (Incorrect)
24
Reference: Ref 8-4
(Figure: The Home Market) For a home monopolist, free trade

results in:
x more control over the domestic market. (Incorrect)
x more control over the foreign market. (Incorrect)

x an inability to control prices. (True Answer Correct)
x no change in the monopolistic behavior. (Incorrect)
25
When a domestic monopolist becomes subject to international

competition, it faces:
x
x
x
x
26
a perfectly inelastic demand curve. (Incorrect)

a unitary elastic demand curve. (Incorrect)
a perfectly elastic demand curve. (True Answer Correct)
no demand curve. (Incorrect)
When a domestic monopolist in a small country becomes subject

to international competition, it behaves as a(n):
x
x
x
x
monopolist. (Incorrect)
duopolist. (Incorrect)
imperfect competitor. (Incorrect)
perfect competitor. (True Answer Correct)
27
Because the small-country monopolist loses the ability to control

the market price, consumers enjoy more quantity, competitive
prices, and:
x a bonus because the foreign goods are of higher
quality. (Incorrect)
x a loss because the monopoly loses profits. (Incorrect)
x higher consumer surplus because the monopolist's producer
surplus is reduced. (True Answer Correct)
x a loss because now unions have less power than
before. (Incorrect)
28
If we allow free trade in a small nation's industry where there is

a domestic monopolist, the monopoly firm:
x gains even more power. (Incorrect)
x earns higher profits. (Incorrect)
x charges a lower price and produces more output. (True Answer
Correct)
x charges a higher price and produces less output. (Incorrect)
29
The small country monopolist's free-trade equilibrium occurs:

x where MC = MR and where MC is greater than the world
price. (Incorrect)
x at the same price as in autarky. (Incorrect)
x at a higher price than the autarkic price. (Incorrect)
x where MC = the world price. (True Answer Correct)
30
With free trade, the demand curve facing a small-country

monopolist:
x
x
x
x
31
is horizontal at the world price. (True Answer Correct)

shifts upward by the amount of imports demanded. (Incorrect)
shifts downward by the amount of imports demanded. (Incorrect)
is horizontal at the firm's MC. (Incorrect)
SCENARIO: HOME MONOPOLIST

A monopolist faces a demand curve given by P = 60 2Q and has
total costs given by TC = Q2. Its marginal revenue is MR = 60 4Q
and its marginal cost is MC = 2Q.
Reference: Ref 8-5
(Scenario: Home Monopolist) In autarky, what is the firm's

equilibrium output?
x 5 (Incorrect)
x 15 (Incorrect)
x 20 (Incorrect)
32

Reference: Ref 8-5
(Scenario: Home Monopolist) What price does the monopolist

charge with no trade?
x $5 (Incorrect)
x $10 (Incorrect)
x $15 (Incorrect)
33

Reference: Ref 8-5
(Scenario: Home Monopolist) Now suppose that the country in

the monopolist is $10. What is the firm's profit-maximizing
output level?
x 20 (Incorrect)
x 30 (Incorrect)
x 40 (Incorrect)
34

Reference: Ref 8-5
(Scenario: Home Monopolist) Now suppose that the country in

the monopolist is $10. Calculate the value of the firm's profits.
x $400 (Incorrect)
35

Reference: Ref 8-5
(Scenario: Home Monopolist) Compared to the no-trade

equilibrium, consumer surplus ___________ when the
monopolist engages in free trade.
x increases (True Answer Correct)
x decreases (Incorrect)
x remains the same (Incorrect)
x first decreases, then increases (Incorrect)
36

Reference: Ref 8-5
(Scenario: Home Monopolist) Compared to the no-trade

equilibrium, producer surplus ___________ when the
monopolist engages in free trade?
x increases (Incorrect)
x decreases (True Answer Correct)
x first increases, then decreases (Incorrect)
37
When the small home nation imposes a tariff of $10, the

domestic price:
x
x
x
x
rises by more than $10. (Incorrect)

rises by $10. (True Answer Correct)
rises by less than $10. (Incorrect)
does not change. (Incorrect)
38
If the home nation allows free trade but imposes a tariff on a

product currently produced by a home firm monopoly, what is
the outcome?
x The home firm then will regain its monopoly control over the
price. (Incorrect)
x The home firm will be able to charge a higher price (world price +
tariff), but it will become a price taker, just like a competitive
firm. (True Answer Correct)
x The home nation's firm will be able to limit quantity and charge a
higher price. (Incorrect)
x The monopoly firm will lower price, increase sales, and undercut
the foreign competition. (Incorrect)
39
In comparison to the case of a perfectly competitive home

market, the welfare effects of a tariff under a home monopoly
are _______ , and the deadweight loss for the home monopoly is
________.
x the same; the same (True Answer Correct)
x higher; lower (Incorrect)
x lower; higher (Incorrect)
x lower; lower (Incorrect)
40
Figure: The Home Monopolist's Market
Reference: Ref 8-6
(Figure: The Home Monopolist's Market) The graph shows a

home monopolist market with the imposition of a tariff. Under
free trade, the home country will produce ________ and import
________ .
x 110, 185 (Incorrect)
41
Reference: Ref 8-6

home monopolist market with the imposition of a tariff.
According to the graph, the consumer surplus under free trade
is:
x $78,625. (True Answer Correct)
x $850. (Incorrect)
42
Reference: Ref 8-6

According to the graph, the home country imposed a tariff of
_____ , and the new quantity of imports is _____ .
43
Reference: Ref 8-6

According to the graph, the decrease in consumer surplus due to
the tariff is:
x
x
x
x
44
$11,725. (True Answer Correct)
Reference: Ref 8-6

home monopolist market with the imposition of a tariff. After
the imposition of the tariff, the home monopolist saw an increase
in production of ______ and the producer surplus increased by
________.
x 55 units; $5,250 (Incorrect)
x 35 units; $6,475 (True Answer Correct)
45
Reference: Ref 8-6

home monopolist market with the imposition of a tariff. Due to
the tariff, the home government collects ______ in tariff revenue.
46
Reference: Ref 8-6

home monopolist market with the imposition of a tariff. The
deadweight loss due to the tariff is:
47
Comparing a tariff levied on an import where the home firm is a

monopoly to a situation where the home firms are competitive,
we find:
x the exact same resultboth firms charge world price + tariff and
both firms produce Q where MC = MR = world price + tariff. (True
Answer Correct)
x that the monopoly firm will be able to charge a higher price and
limit its quantity. (Incorrect)
x that the competitive firm will not be able to survive the impact of
the tariff. (Incorrect)
x that quantity is not the issue; the monopoly firm will pay its
workers less and earn higher profits. (Incorrect)
48
When a country imposes a tariff to protect a domestic

monopolist from international competition, it will produce
_______ output and charge _______ in a perfectly competitive
domestic industry.
x more; a higher price than (Incorrect)
x the same; the same price as (True Answer Correct)
x less; a higher price than (Incorrect)
x less; a lower price than (Incorrect)
49
When home is small, an increase in the tariff will do what to the

home monopolist's demand curve?
x
x
x
x
shift it up in a parallel fashion (True Answer Correct)

pivot it up around the vertical intercept (Incorrect)
shift it down in a parallel fashion (Incorrect)
pivot it down around the vertical intercept (Incorrect)
50
How do the deadweight losses of a tariff differ when the

domestic industry is perfectly competitive and when it is a
monopoly?
x They are the same. (True Answer Correct)
x Deadweight losses are larger for a perfectly competitive industry
than for a monopoly. (Incorrect)
x Deadweight losses are larger for a monopoly than for a perfectly
competitive industry. (Incorrect)
x It is not possible to compare deadweight losses of a monopoly to
those of a perfectly competitive industry (Incorrect)
51
The WTO has encouraged nations to replace their import

quotas with tariffs. Why?
x Quotas are more difficult to administer for the customs
people. (Incorrect)
x Quotas are more discriminatory. (Incorrect)
x Quotas hurt domestic firms more than tariffs. (Incorrect)
x None of these answer choices are correct. (True Answer Correct)
52
For a home monopolist, a quota allows the firm to charge

_______________ the tariff.
x
x
x
x
a higher price than (True Answer Correct)

a lower price than (Incorrect)
the same price as (Incorrect)
Not enough information is provided to answer the
question. (Incorrect)
53
How does the demand curve facing a home monopolist compare

in a no-trade situation to a situation in which a quota protects
the monopolist's output?
x They are identical. (Incorrect)
x The quota-protected demand curve lies to the right of the no-trade
demand curve. (Incorrect)
x The quota-protected demand curve lies to the left of the no-trade
demand curve. (True Answer Correct)
x The no-trade demand curve is perfectly price elastic at the world
price; the quota-protected demand curve has a negative
slope. (Incorrect)
54
Figure: Supply and Demand at Home
Reference: Ref 8-7
(Figure: Supply and Demand at Home) The new demand

curve for the monopolist after the quota is which line?
x A (Incorrect)
x B (True Answer Correct)
x C (Incorrect)
x D (Incorrect)
55
Reference: Ref 8-7
(Figure: Supply and Demand at Home) The new MR curve after

the quota is which line?
x A (Incorrect)
x B (Incorrect)
x C (True Answer Correct)
x D (Incorrect)
56
Reference: Ref 8-7
(Figure: Supply and Demand at Home) Under the quota, what

will be the quantity imported?
x
x
x
x
57
50 (Incorrect)
100 (Incorrect)
150 (Incorrect)
Reference: Ref 8-7
(Figure: Supply and Demand at Home) With a quota of 200

units, what would be the price if the home market were
competitive?
x $18 (Incorrect)
x $25 (Incorrect)
x $30 (Incorrect)
58
Reference: Ref 8-7

units, what would be the price in a home monopoly situation?
x $18 (Incorrect)
x $23 (Incorrect)
x $25 (Incorrect)
59
Reference: Ref 8-7

units, in a monopoly situation what would be the total quantity
available to consumers?
x
x
x
x
60
400 (Incorrect)
650 (Incorrect)
850 (Incorrect)
Reference: Ref 8-7
(Figure: Supply and Demand at Home) In the situation

illustrated by the figure, the monopoly firm's quantity produced
after a quota is imposed ________ , thus leading to a worse
situation for the employees of the firm compared with a freetrade situation.
x increases (Incorrect)
x decreases (True Answer Correct)
x changes to different products (Incorrect)
61
With a home monopolist, the imposition of a tariff results in:

x
x
x
x
a higher deadweight loss than a quota. (Incorrect)

a higher price for consumers than a quota. (Incorrect)
a lower deadweight loss than a quota. (True Answer Correct)
the same welfare effects as a quota. (Incorrect)
62
When the monopoly firm is able to charge a higher price, the

amount of ________ increases as well, thus magnifying the
importing nation's __________ .
x quota rents; losses (True Answer Correct)
x comparative advantage; gains from trade (Incorrect)
x profits; welfare (Incorrect)
x protection; employment gains (Incorrect)
63
When a quota is used to protect a domestic monopolist from

international competition, quota rents will ________ and
domestic prices will ________.
x fall, fall (Incorrect)
x fall, rise (Incorrect)
x rise, rise (True Answer Correct)
x rise, fall (Incorrect)
64
What will a home monopolist prefer?

x
x
x
x
65
high quotas (Incorrect)

low quotas (True Answer Correct)
low tariffs (Incorrect)
All of these answer choices are equivalent. (Incorrect)
Will a home monopolist prefer a quota or a tariff to protect its

output?
x A tariff, because it will allow the home monopolist to earn higher
profits than a quota. (Incorrect)
x A quota, because it will allow the home monopolist to earn higher
profits than a tariff. (True Answer Correct)
x It is immaterial to the home monopolist because it will earn the
same higher profits with each form of protection. (Incorrect)
x Neither, because it earns higher profits in a free-trade
situation. (Incorrect)
66
A case study of Japanese auto imports during the 1980s focuses

on an agreement between Japan and the United States to
undertake a:
x coordinated effort to improve gas mileage. (Incorrect)
x study of wage concessions by Japanese car makers in the United
States. (Incorrect)
x review of unionization and employee benefits in both
x voluntary export restraint. (True Answer Correct)
67
In order to avoid congressional action in the United States, in

the early 1980s the Japanese resorted to:
x
x
x
x
68
infant industry protection. (Incorrect)

dumping of automobiles. (Incorrect)
voluntary export restraint (VER). (True Answer Correct)
price discrimination. (Incorrect)
If a foreign country imposes a voluntary export restraint, then

the:
x consumer surplus will be lower than in the case of a tariff by the
home country. (Incorrect)
x producer surplus will be lower than in the case of a tariff by the
home country. (Incorrect)
x area of government revenue will be taken by the foreign
x deadweight loss is smaller than in the case of a tariff by the home
69
The U.S. and Japanese automakers __________ during the

automobile VER of the 1980s.
x both suffered losses (Incorrect)
x were locked in a contentious trade war (Incorrect)
x both enjoyed higher prices and higher profits (True Answer
Correct)
x felt that the other side had more gains (Incorrect)
70
Under the VER of the 1980s, Japan's automakers received:

x additional quota rents of about $2.2 billion. (True Answer
Correct)
x approximately 10% lower prices. (Incorrect)
x censure by the WTO for failing to behave in a competitive
manner. (Incorrect)
x wage concessions from their U.S. employees to keep plants open
in the United States. (Incorrect)
71
Roughly ________ of the increased prices of Japanese

automobiles during the 1980s was due to the voluntary export
restraints.
x 25% (Incorrect)
x 50% (Incorrect)
x 95% (Incorrect)
72
Following the tariff on Japanese autos, other auto exporters to

the United States __________ due to ___________ .
x lost market share; the Japanese agreement (Incorrect)
x enjoyed higher prices and quota rents; the reduced competition
from Japanese producers (True Answer Correct)
x were shut out of the market; the domination by the
Japanese (Incorrect)
x were outraged; the favoritism shown to the Japanese
firms (Incorrect)
73
Under the voluntary export restraints, the Japanese government

allocated each Japanese auto producer a certain number of cars
that they could export to the United States. As a result, Japanese
auto producers exported:
x fewer and more luxurious cars to the United States. (True Answer
Correct)
x fewer and less luxurious cars to the United States. (Incorrect)
x more luxurious cars to the United States. (Incorrect)
x less luxurious cars to the United States. (Incorrect)
74
Under the VER of the 1980s, U.S. automakers:

x continued their downward slide. (Incorrect)
x could not recover because they had other issues, such as labor
unrest, increased oil and steel prices, and higher taxes. (Incorrect)
x were able to raise prices and improve quality to get even higher
prices. (True Answer Correct)
x were able, with the quota, to ignore world market
conditions. (Incorrect)
75
The GATT prohibits quotas. Why didn't the United States or

other countries try to stop the voluntary export restraint on
automobiles implemented by the Japanese during the early
1980s?
x At the time, the GATT did not prohibit quotas administered by the
exporting country, that is, voluntary export restraints. (True Answer
Correct)
x Other countries did try to stop the voluntary export restraints but
were unsuccessful in their efforts. (Incorrect)
x The GATT only prohibited quotas after the WTO was established
in 1995. (Incorrect)
x The GATT only prohibits developing countries from using
quotas. (Incorrect)
76
The WTO opposes quotas. Why did the WTO not stop the U.S.Japanese quota during the 1980s?
x There was a loophole in the GATT (at the time) that did not
restrict nations from voluntarily curtailing their own
exports. (True Answer Correct)
x Quotas are permitted under the GATT and WTOas long as they
are implemented for an approved reason. (Incorrect)
x The political situation at the time was tense; the GATT did not
want to take on the powerhouses of the United States and Japan over
such a small issue. (Incorrect)
x The WTO operates by consensus; all parties wanted the
quotas. (Incorrect)
77
The voluntary export restraint that the United States negotiated

with Japan:
x violated provisions of the GATT that encouraged countries to
avoid using quotas. (Incorrect)
x exploited a loophole in the GATT because the quota was
administered by the exporting country. (True Answer Correct)
x did not allow U.S. auto producers to raise their prices. (Incorrect)
x did not impose any deadweight losses on the United
States. (Incorrect)
78
When there is a foreign monopoly exporting to the home nation,

under free trade it will sell a quantity where the home ______ is
just equal to the foreign ______ .
x MC; MR (Incorrect)
x supply; demand (Incorrect)
x demand; supply (Incorrect)
x MR; MC (True Answer Correct)
79
When a tariff is applied to a good exported by a foreign

monopoly (with no home producer), the increase in the
equilibrium price is ________ the tariff applied.
x more than (Incorrect)
x less than (True Answer Correct)
x the same as (Incorrect)
x more than twice as much as (Incorrect)
80

monopoly (with no home producer), the price net of the tariff
received by the seller is _________ .
x lower than under free trade (True Answer Correct)
x higher than under free trade (Incorrect)
x the same as under free trade (Incorrect)
x so high that no sales are possible (Incorrect)
81
If a country imposes a $10 tariff on a foreign monopolist, the

domestic price will rise by:
x
x
x
x
82
more than $10. (Incorrect)

$10. (Incorrect)
less than $10. (True Answer Correct)
$0. (Incorrect)
If a country imposes a $10 tariff on a foreign monopolist, the

price received by the monopolist, net of the tariff, will:
x
x
x
x
fall by $10. (Incorrect)

fall by less than $10. (True Answer Correct)
fall by more than $10. (Incorrect)
fall by $0. (Incorrect)
83
Suppose that a foreign monopolist supplies the entire domestic

market (there is no domestic production). The home country
then applies a 5% tariff on imports from the foreign monopolist.
How will the tariff affect the price in the home market?
x It will increase by more than 5%. (Incorrect)
x It will increase by 5%. (Incorrect)
x It will increase by less than 5%. (True Answer Correct)
84
If there is a straight line demand curve, geometrically, a tariff

imposed on a foreign monopoly seller will raise the domestic
price by _______________ and lower the seller's net by
_______________ of the tariff.

x
x
x
x
one-fourth; three-fourths (Incorrect)

10%; 90% (Incorrect)
one-half; one-half (True Answer Correct)
85
The effect of a tariff on a foreign monopolist is similar to a large

nation imposing a tariff on a small nation. What is the
implication for the welfare of the home nation?
x Only very large tariffs bring any benefit to the home
nation. (Incorrect)
x No tariffs are the best policy; all tariffs have a deadweight net
loss. (Incorrect)
x Small tariffs can be beneficial, but only to a certain point. (True
Answer Correct)
x The foreign producer may actually raise prices to make the tariff
impossible to impose. (Incorrect)
86
A country's net welfare will increase when it imposes a tariff on

a foreign monopolist if its:
x terms-of-trade gain is greater than its increase in tariff
revenues. (Incorrect)
x terms-of-trade gain is less than its increase in tariff
revenues. (Incorrect)
x terms-of-trade gain is greater than its lost consumer surplus. (True
Answer Correct)
x increase in tariff revenues is greater than its lost consumer
87
A country is more likely to have net welfare gains when it

imposes a tariff on a foreign monopolist if the:
x
x
x
x
88
tariff is small. (True Answer Correct)

tariff is large. (Incorrect)
tariff revenues are large. (Incorrect)
deadweight losses are large. (Incorrect)
Suppose that a foreign monopolist supplies the entire domestic

market (there is no domestic production). The home country
then applies a $10 tariff on imports from the foreign monopolist.
The home country will be better off if the:
x terms-of-trade gain is less than the deadweight loss from the

tariff. (Incorrect)
x price change is more than the deadweight loss of the
tariff. (Incorrect)
x deadweight loss is more than the price change from the
tariff. (Incorrect)
x terms-of-trade gain is more than the deadweight loss from the
tariff. (True Answer Correct)
89
It is generally easier for a firm to get _______________ than

_______________ ; therefore, many more of the former are in
place than the latter.
x import quotas; tariffs (Incorrect)
x safeguard tariffs; antidumping duties (Incorrect)
x subsidies; tariffs (Incorrect)
x antidumping and countervailing duties; safeguard tariffs (True
Answer Correct)
90

monopoly, such as was the case when the United States raised
the tariff on small Japanese truck imports, are the predictions of
the model affirmed?
x No, the imports of trucks declined from 1980 to 2000. (Incorrect)
x Yes, the rise in market price was less than the tariff imposed,
implying that Japanese producers lowered their prices to maintain
market share. (True Answer Correct)
x Yes, but trucks and SUVs became indistinguishable, and a
number of conclusions can be drawn. (Incorrect)
x No clear conclusions can be drawn. (Incorrect)
91
At one time, most compact trucks (like the Toyota Tacoma) were
imported under the classification cab and chassis with some
final assembly needed. These were classified as ___________
with a tariff of ______ .
x complete or unfinished trucks; 4% (Incorrect)
x complete or unfinished trucks; 25% (Incorrect)
x parts of trucks; 25% (Incorrect)
x parts of trucks; 4% (True Answer Correct)
92
The U.S. Customs Service reclassified imports of compact trucks

(like the Toyota Tacoma) from cab and chassis with some final
assembly needed to complete or unfinished trucks. As a
result of this reclassification, a tariff of _____ was applied, and
U.S. prices of Japanese compact trucks rose by _____ .

x
x
x
x

25%; more than 25% (Incorrect)
25%; less than 25% (True Answer Correct)
4%; more than 4% (Incorrect)
93
Why did the U.S. price of imports of compact trucks (like the
Toyota Tacoma) not increase by 25% when the U.S. Customs
Service reclassified them as complete or unfinished trucks
with a tariff of 25%?
x U.S. truck dealers that retailed imported compact trucks lowered
their retail prices and absorbed part of the tariff. (Incorrect)
x U.S. consumers negotiated lower retail prices from U.S. truck
dealers selling imported compact trucks. (Incorrect)
x The U.S. government decided not to collect the 25% tariff on
imported Japanese compact trucks and instead made them subject to
voluntary export restraints. (Incorrect)
x Japanese truck manufacturers lowered their prices on trucks sold
in the U.S. market and absorbed part of the tariff. (True Answer
Correct)
94
When the United States imposed a 25% tariff on imported

pickup trucks, the price of Japanese pickup trucks in the United
States:
x rose by 25%. (Incorrect)
x rose by less than 25%. (True Answer Correct)
x rose by more than 25%. (Incorrect)
x fell by less than 25%. (Incorrect)
95
International dumping occurs when:

x Monopolistic firms charge the same price in domestic and foreign
x Monopolistic firms charge a higher price in the domestic market
and a lower price in the foreign market. (True Answer Correct)
x Monopolistic firms charge a lower price in the domestic market
and a higher price in the foreign market. (Incorrect)
x Domestic monopolistic firms relocate operations
abroad. (Incorrect)
96
Antidumping duties are a type of:

x
x
x
x
97
When a firm sells products at lower prices to foreign

purchasers, it is known as:
x
x
x
x
98
tariff. (True Answer Correct)

quota. (Incorrect)
export. (Incorrect)
trade agreement. (Incorrect)
international dumping. (True Answer Correct)

restraint of trade. (Incorrect)
price gouging. (Incorrect)
reciprocal dumping. (Incorrect)
Monopolistic firms that practice international dumping:

x suffer losses on their sales in foreign markets. (Incorrect)
x suffer losses on their sales in domestic markets. (Incorrect)
x maximize their monopoly profits. (True Answer Correct)
x are subject to antidumping taxes in their home
99
What is meant by a discriminating monopolist?

x The monopolist discriminates on the basis of hiring
x The firm violates all antitrust laws. (Incorrect)
x The firm evades taxes. (Incorrect)
x The firm sells its product at different prices in different
markets. (True Answer Correct)
100
An internationally discriminating monopolist will maximize its

profits if it sets quantity where:
x MC = P in the home market and MC = MR in the foreign
market. (Incorrect)
x MC = MR in the home market and MC = P in the foreign
market. (Incorrect)
x MC = P in both the home and foreign markets. (Incorrect)
x MC = MR in both the home and foreign markets. (True Answer
Correct)
101
An internationally discriminating monopolist is one that:

x can charge different prices to each customer in its domestic
market. (Incorrect)
x can charge different prices in its domestic and foreign
x faces a downward-sloping demand curve in its domestic market
and a perfectly elastic demand curve in its foreign
market. (Incorrect)
x faces a perfectly elastic demand curve in its domestic market and
a downward-sloping demand curve in its foreign market. (Incorrect)
102
Dumping goods is profitable whenever:

x the firm does not get caught. (Incorrect)
x the firm can hire illegal workers to process the
production. (Incorrect)
x the foreign market price (after transportation costs) is higher than
marginal cost but lower than the home price. (True Answer
Correct)
x the foreign firm eventually closes because it cannot
compete. (Incorrect)
103
Why do monopolistic firms practice international dumping?

x They face the same demand conditions in their domestic and
foreign markets. (Incorrect)
x They face more elastic demand conditions in their domestic
market than in their foreign markets. (Incorrect)
x They face more elastic demand conditions in their foreign market
than in their domestic market. (True Answer Correct)
x They are able to take advantage of increasing costs. (Incorrect)
104
To maximize profits, the discriminating monopolist sells abroad

rather than additional units at home because:
x the home market is just too competitive. (Incorrect)
x there would be more incentive for entry from other
firms. (Incorrect)
x the market price at home would rise and the firm would lose
customers. (Incorrect)
x it would lower total profits if the additional production sold at

home lowered the market price. (True Answer Correct)
105
Table: Information on a Firm

Total fixed costs
$100
Marginal costs
$10/unit
Domestic price
$20
Domestic quantity
Foreign price
Foreign quantity
25 units
$15
25 units
Reference: Ref 8-8
(Table: Information on a Firm) What are this firm's monopoly

profits if it only sells in the domestic market?
x $250 (Incorrect)
x $200 (Incorrect)
x $100 (Incorrect)
106

Total fixed costs
$100
Marginal costs
$10/unit
Domestic price
$20
Domestic quantity
Foreign price
Foreign quantity
25 units
$15
25 units
Reference: Ref 8-8
(Table: Information on a Firm) Should this firm enter the

foreign market?
x Yes, because it can increase its monopoly profits. (True Answer
Correct)
x No, because its monopoly profits will fall. (Incorrect)
x No, because its monopoly profits will not change if it enters the
foreign market. (Incorrect)
x Yes, because its total fixed costs will fall if it enters the foreign
market. (Incorrect)
107

Total fixed costs
$100
Marginal costs
$10/unit
Domestic price
$20
Domestic quantity
Foreign price
Foreign quantity
25 units
$15
25 units
Reference: Ref 8-8
(Table: Information on a Firm) Calculate the extra monopoly

profits that this firm will earn if it enters the foreign market.
x $375 (Incorrect)
x $250 (Incorrect)
x $125 (Incorrect)
108
SCENARIO: DISCRIMINATING MONOPOLIST

The demand curve in its home market is P = 200 Q; the demand
curve in its foreign market is P = 160 2Q; and its marginal cost
is a constant $20 per unit.
Reference: Ref 8-9
(Scenario: Discriminating Monopolist) What is the

discriminating monopolist's profit- maximizing output in the
domestic market?
x 110 (Incorrect)
x 70 (Incorrect)
x 35 (Incorrect)
109

Reference: Ref 8-9

discriminating monopolist's profit- maximizing output in the
foreign market?
x 90 (Incorrect)
x 110 (Incorrect)
x 70 (Incorrect)

110

Reference: Ref 8-9

discriminating monopolist's price in the domestic market?
x $90 (Incorrect)
x $70 (Incorrect)
x $35 (Incorrect)
111

Reference: Ref 8-9

discriminating monopolist's profit in the foreign market?
x $110 (Incorrect)
x $70 (Incorrect)
x $35 (Incorrect)
112
Dumping occurs when a foreign monopolist charges ______

price in the domestic market than as in a foreign market.
x
x
x
x
113
a lower (True Answer Correct)

a higher (Incorrect)
the same (Incorrect)
an equivalent (Incorrect)
Which of the following is a criterion for determining whether a

foreign nation is dumping?
x The good is not produced at home. (Incorrect)
x The good is selling below the price in the exporting
nation. (Incorrect)
x The good is priced below average total cost. (Incorrect)
x The good is selling below the price in the exporting nation and is
priced below average total cost. (True Answer Correct)
114
An imported product is being dumped on the home country if

the foreign firm:
x sells the product at a lower price in the home market. (Incorrect)
x sells the product below cost in the home market. (Incorrect)
x raises the price in the home country. (Incorrect)
x sells the product at a lower price and below cost in the home
115
Which type of tariff is used to offset subsidies on exports

entering the United States?
x
x
x
x

countervailing duties (True Answer Correct)
export duties (Incorrect)
safeguard duties levied under the escape clause (Incorrect)
116
Suppose that the U.S. International Trade Commission

determines that there is material injury to the U.S. furniture
industry because of Brazilian subsidies on its exports of
furniture to the United States. Which type of tariff will be
applied on U.S. imports of Brazilian furniture?
x antidumping duties (Incorrect)
x countervailing duties (True Answer Correct)
x export duties (Incorrect)
x safeguard duties levied under Section 421 of the amended U.S.
Trade Act of 1974 (Incorrect)
117
A foreign firm that is selling below cost and is accused of

dumping often:
x lowers its price further to increase the tariff imposed. (Incorrect)
x moves its production to the importing nation to avoid the tariff
completely. (Incorrect)
x raises its export prices to reap the rents and avoid the
antidumping tariff completely. (True Answer Correct)
x calls for a ruling by the WTO. (Incorrect)
118
Countervailing duties are:

x applied to dumped imports. (Incorrect)
x applied to subsidized imports. (True Answer Correct)
x another name for safeguard duties. (Incorrect)
x not allowed under terms of the GATT. (Incorrect)

119
Countervailing duties are used to offset any advantages that

foreign exporters might gain over domestic producers because
of foreign:
x tariffs. (Incorrect)
x subsidies. (True Answer Correct)
x infant industry protection. (Incorrect)
x quotas. (Incorrect)
120
Until recently, China had made little use of the WTO

procedures in trade disputes with Europe. But in 2009, it
requested consultations on which two products that the
European Union imposed antidumping standards on:
x steel fasteners and shoes. (Incorrect)
x steel fasteners and shirts. (Incorrect)
x shirts and shoes. (Incorrect)
x shirts and coated paper. (True Answer Correct)
121
Who will lose if the European Union imposes an antidumping

duty on shoes imported from China?
x European consumers and European shoe
manufacturers (Incorrect)
x Chinese consumers and Chinese shoe manufacturers (True
Answer Correct)
x Chinese consumers and European shoe manufacturers (Incorrect)
x European consumers and Chinese shoe manufacturers (Incorrect)
122
An antidumping duty equals the difference between:

x the price charged by the exporter in its home market and the price
charged in the export market. (True Answer Correct)
x the price charged by the exporter in the export market and the
price charged in its home market. (Incorrect)
x the price charged by the exporter in its home market and the price
of an equivalent product in the export market. (Incorrect)
x the price of an equivalent product in the export market and the
price charged by the exporter in the export market. (Incorrect)
123
The United States currently imposes antidumping duties

ranging from 11 to 36% (depending on the exporting country)
on imports of about 10 million tons of galvanized corrosion-
resistant steel. What would you predict will happen if the

United States decides to eliminate these duties?
x The U.S. price of galvanized corrosion-resistant steel will
fall. (True Answer Correct)
x U.S. production of galvanized corrosion-resistant steel will
rise. (Incorrect)
x U.S. imports of galvanized corrosion-resistant steel will
fall. (Incorrect)
x The U.S. price of galvanized corrosion-resistant steel will
rise. (Incorrect)
124
Suppose that British Steel, Ltd., sells steel in Britain at $600 per
ton and the same steel in the United States at $450 per ton. The
price of equivalent steel produced in the United States is $550
per ton. How large an antidumping tariff (in percentage) will be
applied on imports from British Steel if it is found that it
dumped steel on the U.S. market?
x 9.11% (Incorrect)
x 22.22% (True Answer Correct)
x 25% (Incorrect)
x 33.33% (Incorrect)
125
Suppose that the United States imposes an antidumping duty on

imported steel. Which of the following is likely to occur?
x The U.S. terms of trade will improve, and U.S. steel imports will
rise. (Incorrect)
x The U.S. price of steel will rise, and U.S. steel consumption will
x The foreign price of steel will rise, and foreign steel consumption
x U.S. steel companies will earn lower profits. (Incorrect)
126
SCENARIO: FAR NORTH CANADIAN LUMBER

Suppose that Far North Canadian Lumber, Ltd., sells lumber in
Canada at a price of $1,000 per 1,000 board feet and exports the
same lumber to the United States at a price of $600 per 1,000
board feet. U.S. Lumber, Inc., produces and sells lumber for $700
per 1,000 board feet in the United States.
Reference: Ref 8-10
(Scenario: Far North Canadian Lumber) Is Far North

Canadian Lumber dumping lumber in the United States?
x Yes, because its price in Canada is greater than its price in the
United States. (True Answer Correct)

x Yes, because its price in Canada is greater than U.S. Lumber's
price. (Incorrect)
x No, because its price in the United States is less than U.S.
Lumber's price. (Incorrect)
x No, because it is maximizing its profits when it price
discriminates between the United States and Canada. (Incorrect)
127

Reference: Ref 8-10
(Scenario: Far North Canadian Lumber) How large an

antidumping duty will the United States apply to lumber
imports from Far North Canadian Lumber, Ltd.?
x $100 (Incorrect)
x $200 (Incorrect)
x $300 (Incorrect)
128

Reference: Ref 8-10
(Scenario: Far North Canadian Lumber) What might Far

North Canadian Lumber, Ltd., do to avoid the antidumping
duty?
x appeal to the U.S. International Trade Commission (Incorrect)
x raise its price in the Canadian market (Incorrect)
x raise its price in the U.S. market (True Answer Correct)
x lower its price in the U.S. market (Incorrect)
129


Reference: Ref 8-10
(Scenario: Far North Canadian Lumber) What other condition

must be satisfied in order for the U.S. government to impose an
antidumping duty on Canadian lumber imports?
x There must be material injury to a Canadian lumber
producer. (Incorrect)
x There must be material injury to a U.S. lumber producer. (True
Answer Correct)
x There must be material injury to both a U.S. and a Canadian
lumber producer. (Incorrect)
x All these choices are correct answers to this question. (Incorrect)
130
A monopolist's price is less than fair value when it sells in

export markets at prices ________ prices in its domestic
markets or at prices _________ its average costs of production.
x above; above (Incorrect)
x above; below (Incorrect)
x below; above (Incorrect)
x below; below (True Answer Correct)
131
A recent antidumping case charged Canadian tomato

producers with dumping tomatoes on the U.S. market. In order
for the United States to impose antidumping duties, Canadian
tomatoes must be sold at _______ than their fair value in the
United States, and there must be injury to the ________ tomato
industry.
x more; U.S. (Incorrect)
x less; U.S. (True Answer Correct)
x more; Canadian (Incorrect)
x less; Canadian (Incorrect)
132
The United States currently imposes antidumping duties

ranging from 11 to 36% (depending on the exporting country)
on imports of about 10 million tons of galvanized corrosionresistant steel. Which statement below is correct?
x Prior to the duties, U.S. prices of galvanized corrosion-resistant
steel imports were 11 to 36% higher than prices in the exporting
x Following imposition of the duties, U.S. prices of galvanized
corrosion-resistant steel imports were 11 to 36% lower than prices
in the exporting country. (Incorrect)
x Prior to the duties, U.S. prices of galvanized corrosion-resistant
steel imports were 11 to 36% lower than prices in the exporting

x Following imposition of the duties, U.S. prices of galvanized
corrosion-resistant steel imports were 11 to 36% higher than prices
in the exporting country. (Incorrect)
133
The U.S. government imposes countervailing duties ranging

from 11 to 21% on coated paper imported from China to offset
alleged Chinese subsidies. Suppose that the U.S. duty-free price
of Chinese coated paper imports is $500 per 1,000 meter roll.
An equivalent roll of U.S.-made coated paper sells for $600 per
1,000 meter roll. What is the U.S. government's estimate of the
dollar value of the Chinese subsidies?
x $55 to $105 per 1,000 meter roll (True Answer Correct)
x $66 to $126 per 1,000 meter roll (Incorrect)
x $55 to $126 per 1,000 meter roll (Incorrect)
x $66 to $1,105 per 1,000 meter roll (Incorrect)
134
The U.S. government imposes countervailing duties ranging

from 11 to 21% on coated paper imported from China to offset
alleged Chinese subsidies. Suppose that the U.S. duty-free price
of Chinese coated paper imports is $500 per 1,000 meter roll.
An equivalent roll of U.S.-made coated paper sells for $600 per
1,000 meter roll. What is the likely response of Chinese coated
paper exporters to the U.S. countervailing duties?
x They will not change their U.S. duty-free price of their exports
and absorb all of the duties. (Incorrect)
x They are likely to reduce their U.S. duty-free price of their
exports by one-half. (Incorrect)
exports so that their U.S. prices, including the duties, are less than
$600 per 1,000 meter roll. (True Answer Correct)
exports so that their U.S. prices, including the duties, are only
slightly more than $600 per 1,000 meter roll. (Incorrect)
135
Suppose that the discriminating monopolist faces antidumping

actions in its foreign market. Why might it volunteer to raise its
price by $10 in the foreign market in order to settle the action
without imposition of an antidumping duty?
x It might avoid an even higher antidumping duty. (True Answer
Correct)
x It wants to avoid the trouble of defending itself in an
antidumping action. (Incorrect)
x It should charge a higher price to maximize its profits in the

foreign market. (Incorrect)
x It will receive good public relations when it raises its
price. (Incorrect)
136
Which U.S. government agency determines the magnitude of

antidumping duties?
x The U.S. International Trade Commission (True Answer
Correct)
x The Office of the Special Trade Representative (Incorrect)
x The International Monetary Fund (Incorrect)
x The Department of Commerce (Incorrect)
137
The U.S. International Trade Commission rejects many

antidumping and countervailing duty allegations because there
is:
x insufficient evidence that a U.S. industry is materially injured as
a result of dumping or export subsidization. (True Answer Correct)
x insufficient evidence of dumping or export
subsidization. (Incorrect)
x insufficient evidence of dumping or export subsidization and
insufficient evidence that a U.S. industry is materially injured as a
result of dumping or export subsidization. (Incorrect)
x no evidence of dumping or export subsidization, but there is
evidence that a U.S. industry is materially injured. (Incorrect)
138
Which of the following unfair-trade remedies is used least

often?
x
x
x
x
139

countervailing duties (Incorrect)
safeguard or escape clause duties (True Answer Correct)
antidumping and countervailing duties. (Incorrect)
Why are antidumping actions used more frequently than

safeguard actions?
x It is easier to meet the criterion that imports have caused
material injury to a domestic industry than the criterion that
imports were a substantial cause of serious injury. (Incorrect)
x The president does not need to approve antidumping
duties. (Incorrect)
x The president has to approve duties imposed under safeguard
actions. (Incorrect)
x All of the answer choices are reasons for the greater use of
antidumping actions. (True Answer Correct)
140
What are the likely effects of a U.S. antidumping duty on

imported steel?
x The U.S. terms of trade will improve and U.S. steel imports will
rise. (Incorrect)
x The U.S. terms of trade will worsen and U.S. steel imports will
rise. (Incorrect)
x The foreign price of steel will rise and the United States will
avoid deadweight losses. (Incorrect)
x The U.S. price of steel will rise and the United States will suffer
deadweight losses. (True Answer Correct)
141
Which of the following industries is a good candidate for infant

industry protection?
x one that needs skills that are quickly learned by most
people. (Incorrect)
x one in which only a handful of people are ever able to achieve
the needed mastery. (Incorrect)
x one in which with 2 years of study, most people achieve
competency. (True Answer Correct)
x one in which with 4 years of study, most people achieve
competency. (Incorrect)
142
Infant industry protection is mainly used in:

x industrialized countries. (Incorrect)
x agricultural economies. (Incorrect)
x developing countries. (True Answer Correct)
x former republics of the Union of Soviet Socialist
Republics. (Incorrect)
143
Infant industry protection refers to:

x countries' use of protection (tariffs and quotas) to protect their
domestic manufacturing activities. (Incorrect)
x countries' use of protection to protect their export
activities. (Incorrect)
x countries' use of short-term protection to protect young industries
while they mature. (True Answer Correct)

x countries' use of short-term protection to protect their agricultural
activities. (Incorrect)
144
Infant industries are:

x manufacturing activities that make baby products. (Incorrect)
x industries that cannot currently withstand foreign competition but
are expected to grow and mature so that they can compete
internationally. (Incorrect)
x industries that can currently withstand foreign competition in the
domestic market but are expected to mature into export
industries. (True Answer Correct)
x industries that cannot currently withstand foreign competition in
either the domestic or the export market but are expected to mature
into multinational firms. (Incorrect)
145
Some nations try to nurture and encourage new firms with lots
of promise, so they protect them from foreign competition. This
is called the _________ argument for trade protection.
x home nation unemployment (Incorrect)
x level playing field (Incorrect)
x efficiency (Incorrect)
x infant industry (True Answer Correct)
146
To justify infant industry protection:

x a firm must move down its average cost curve to produce more
output. (Incorrect)
x a firm's average cost curve must shift upward over
time. (Incorrect)
x a firm's total cost curve must shift leftward over time. (Incorrect)
x a firm's average cost curve must shift downward over time. (True
Answer Correct)
147
Which of the following is a justification for infant industry

protection?
x The firm's learning must shift its average cost curve down over
time so that it becomes competitive at world prices. (True Answer
Correct)
x The firm's output must increase so that it moves down along its
average cost curve over time and becomes competitive at world

prices. (Incorrect)
x The firm's total cost curve must shift leftward over time so that it
becomes competitive at world prices. (Incorrect)
x The firm's learning allows it to produce more output and take
advantage of increasing returns to scale. (Incorrect)
148
In order to justify limiting imports to ensure the survival of the

infant industry, and to justify government protection, what
conditions should exist?
x Knowledge spillovers should be likely. (Incorrect)
x The firm should have a good chance of lowering its future costs
of production through learning. (Incorrect)
x There should not be access by the firm to a credit market or
financing source. (Incorrect)
x Knowledge spillovers should be likely, the firm should have a
good chance of lowering its future costs of production through
learning, and there should not be access by the firm to a credit
market or financing source. (True Answer Correct)
149
A positive externality occurs whenever:

x an increase in the output of one firm lowers costs for other
firms. (True Answer Correct)
x a decrease in the output of one firm lowers costs for other
firms. (Incorrect)
x an increase in costs of one firm lowers costs for other
firms. (Incorrect)
x a decrease in one firm's hiring of labor lowers labor costs for
other firms. (Incorrect)
150
A knowledge spillover occurs when firms:

x restrict trade of inputs with each other. (Incorrect)
x have wasteful expenditure. (Incorrect)
x mimic the successful innovations of other firms. (True Answer
Correct)
x keep secrets from other firms. (Incorrect)
151
A knowledge spillover is:
x
x
x
x
152
a negative externality. (Incorrect)

a positive externality. (True Answer Correct)
a constant externality. (Incorrect)
an externality. (Incorrect)
To make a correct decision about limiting imports on behalf of

an infant industry, the government should look at:
x political pressure from key constituents. (Incorrect)
x a cost-benefit analysis measuring the present value of the likely
benefits from lower production costs compared with the cost to
society of higher prices in the present. (True Answer Correct)
x the value of retaining U.S. jobs versus the small cost of higherpriced units. (Incorrect)
x the difficulty of keeping out imports from established trading
partners and weigh the number of workers employed in the industry
who could not easily get other jobs. (Incorrect)
153
It is better to protect an infant industry with a _______ than a

________.
x
x
x
x
154
voluntary export restraint; quota (Incorrect)

voluntary export restraint; tariff (Incorrect)
tariff; quota (True Answer Correct)
quota; tariff (Incorrect)
Why is it better to protect an infant industry with a tariff than

a quota?
x A tariff causes production to increase, whereas a quota causes
production to decrease. (True Answer Correct)
x A tariff causes production to decrease, whereas a quota causes
production to increase. (Incorrect)
x A tariff will raise the domestic price above the world price,
whereas a quota will not. (Incorrect)
x A quota will raise the domestic price above the world price,
whereas a tariff will not. (Incorrect)
155
Assuming a firm would not survive without protection, if the

present value of the profits and value added from operating an
infant industry firm exceed the deadweight loss of imposing
protection, what should the government do?
x It should impose the tariffthe gains exceed the losses. (True
Answer Correct)
x It should not impose the tariffthe losses exceed the

gains. (Incorrect)
x If it imposes the tariff, it may actually create more problems that
cannot be foreseendo not impose the tariff. (Incorrect)
x The government should just ban all imports of that product until
the infant is able to compete on its own. (Incorrect)
156
All but one of the following are examples of infant industry

protection cited in the text. Which one is not?
x
x
x
x
157
the Chinese auto industry (Incorrect)

the Brazilian computer industry (Incorrect)
Harley-Davidson (Incorrect)
Daimler-Chrysler Corporation (True Answer Correct)
Which one of the examples cited in the text was the most
successful case of infant industry protection?
x
x
x
x
the Chinese auto industry (True Answer Correct)

the Brazilian computer industry (Incorrect)
Harley-Davidson (Incorrect)
Daimler-Chrysler Corporation (Incorrect)
158
The case of ________ has been referred to in the press and

business publications as an example of right-minded import
protection.
x U.S. steel (Incorrect)
x Dole bananas (Incorrect)
x the Chrysler corporation (Incorrect)
x Harley-Davidson motorcycles (True Answer Correct)
159
The following formula is used to estimate the deadweight loss

from a tariff:
Where PM is import value; PW is the world price and M is the
volume of imports.
Suppose that the United States imposes a 20% antidumping
duty on Chinese steel imports when the world price is $500 per
ton, the value of imports with the duty is $400 million, and the
volume of imports with the duty fell by 10%. Find the
deadweight loss.
x $0.01 million (Incorrect)
x $4.0 million (True Answer Correct)

160
An analysis of the case of Harley-Davidson reveals that the

deadweight loss of import protection ___________ the gain in
future producer surplus.
x was slightly less than (True Answer Correct)
x slightly exceeded (Incorrect)
x vastly exceeded (Incorrect)
x was roughly the same as (Incorrect)
161
Measuring the impact of the protection on the U.S. economy

and on Harley-Davidson:
x is very clearit was a success. (Incorrect)
x is very clearit was a failure. (Incorrect)
x is not as black and white as the numbers might show, but saving
a profitable company at a low cost has some merit for the U.S.
economy. (True Answer Correct)
x should take into consideration that Harley-Davidson was a
private firm with private stockholders. Most economists disagree
with government efforts to save it from bankruptcy. (Incorrect)
162
An example of infant industry protection is the computer

industry in Brazil from 1977 to 1988. It is widely concluded that
the effort was:
x a failure. (True Answer Correct)
x a complete success, because now Brazil manufactures nearly all
computer CPUs. (Incorrect)
x successful, although there were costs to pay in higher prices,
making PCs unattainable for most Brazilian consumers. (Incorrect)
x still unclear due to potential future gains, as measured on a costbenefit basis. (Incorrect)
163
A lesson from the Brazilian experiment was that:

x infant industry protection is almost never successful. (Incorrect)
x there are many determinants other than market price that also
factor into an industry's successfirms had supplier difficulties and
were hampered by excessive regulation. (True Answer Correct)
x government usually knows better than the market whether an
industry has potential. (Incorrect)
x when politicians get involved, rational decisions and good
business practices are more difficult. (Incorrect)

164
Which one of the following is NOT a reason why Brazil's infant

industry protection of its personal computer industry was not
successful?
x Imported silicon chips were expensive to obtain. (Incorrect)
x Local regulations limited the entry of new firms in the
x Domestically produced parts required by the Brazilian PC
industry were expensive. (Incorrect)
x The Brazilian government continued to purchase imported
PCs. (True Answer Correct)
165
The Chinese protected its automobile industry through

restrictive tariffs and quotas. Which of the following best
describes this practice?
x antidumping duties (Incorrect)
x infant industry protection (True Answer Correct)
x voluntary export restraint (Incorrect)
x price discrimination (Incorrect)
166
Why might infant industry protection of the Chinese

automobile industry be considered successful?
x Many foreign auto producers established operations in China
behind the high infant industry tariff protection. (True Answer
Correct)
x The tariff rate on Chinese imports of automobiles fell from 260%
in the early 1980s to about 25% today. (Incorrect)
x Chinese demand for automobiles increased dramatically in the
past 20 years. (Incorrect)
x China has become the world's second-largest consumer of
autos. (Incorrect)
167
China protected its fledgling auto industry through restrictive

tariffs and quotas. What were their effects on the Chinese
market?
x China was able to lower the prices of autos domestically
produced and imported. (Incorrect)
x China's auto prices from 1995 to 2001 substantially increased due
to the home firm being a monopoly. (True Answer Correct)
x China's auto industry really never got off the ground despite high
protection. (Incorrect)
x China made a decision to import autos from Japan and export

autos to the United States. (Incorrect)
168
Although tariff and quota protections for China auto imports

were very costly to consumers, which of the following was a
benefit?
x Auto prices, compared with other prices in the economy, actually
fell. (Incorrect)
x Auto consumption skyrocketed, but there were environmental
effects. (Incorrect)
x Firms that were involved in joint ventures were able to learn
and to significantly lower their costs. (True Answer Correct)
x China's government realized it had to keep its hands off
entrepreneurial concerns. (Incorrect)
169
As China's auto production capability has evolved, it is unclear

whether protection was beneficial or harmful. Why?
x Accounting data must be translated from Chinese to English, and
that is a difficult task. (Incorrect)
x Even greater progress in moving toward exports was made by
firms that did not gain from tariffs or technology transfer. (True
Answer Correct)
x China will probably never achieve exports, so whether any gains
were made is unclear. (Incorrect)
x Chinese consumers are exerting more market power, and they are
opposed to any kind of import protection. (Incorrect)
170
Which of the following is one of the concerns over having U.S.

auto producers in China?
x They will dump back onto U.S. markets. (Incorrect)
x They will allow technology to leak to Chinese competitors. (True
Answer Correct)
x They cannot compete with the Japanese. (Incorrect)
x They will allow the Chinese competitors to steal their business
model. (Incorrect)
171
The tariff and free-trade equilibria are the same for a domestic
monopoly and equivalent perfectly competitive industry.
x False ()
172
The deadweight losses from a tariff are higher for a domestic

monopoly than an equivalent perfectly competitive industry.
x True ()
173
The deadweight loss from a tariff is always higher when the

home firm is a monopoly firm than if it is in a competitive
industry.
x True ()
174
For a home monopolist the imposition of a tariff is better than a

quota.
x True ()
175
A quota used to protect a domestic monopolist from

international competition will result in higher deadweight losses
than a tariff imposed on the same amount of imports.
x False ()
176
The effects of a tariff and a quota are equivalent under perfect

competition.
x False ()
177
The effects of a tariff and a quota are equivalent under

monopoly or competition.
x True ()
178
After the voluntary export restraint agreement was

implemented between the United States and Japan, Japanese
automakers shipped higher-end, more profitable models
because they had a limited allocation by their government.
x False ()
179
The International Trade Commission (of the United States) did

not agree that U.S. automakers needed additional protection
during the 1980s.

x False ()
180
A minimum estimate of the value of quota rents from the

Japanese voluntary export restraints is $2.2 billion.
x False ()
181
It is possible that a country's net welfare can increase when it

imposes a tariff on a foreign monopolist.
x False ()
182
One reason why Japan produces pickup trucks in the United

States is the United States' 25% tariff on imported pickup
trucks.
x False ()
183
Pass-through of tariffs for U.S. truck imports from Japan is

100%.
x True ()
184
The rules of the World Trade Organization allow dumping.

x True ()
185
The WTO provides that nations can impose an antidumping

tariff whenever a foreign firm is found to be selling goods below
the price in its own market.
x False ()
186
A countervailing duty is used to offset goods being sold below

cost due to dumping.
x True ()
187
A countervailing duty is used when the foreign government

subsidizes its own exporting firms so that they can charge lower
prices for the exports.

x False ()
188
When threatened with an antidumping duty, many foreign

firms raise their prices to avoid it completely.
x False ()
189
Simple threats of antidumping duties have no effect on import

prices.
x True ()
190
Because threats of antidumping duties get quick responses from

foreign firms, there have been excessive filings for both
antidumping and countervailing duties, in the opinion of your
authors.
x False ()
191
A safeguard tariff is a temporary one that is set to prevent

injury to a domestic firm.
x False ()
192
Infant industry protection lowers the average cost of domestic

firms.
x True ()
193
An infant industry matures when it takes advantage of its

increasing returns to scale.
x True ()
194
An infant industry matures when it learns better production

techniques and reduces its costs.
x False ()
195
If there are no externalities associated with an infant industry,

then there must be capital market imperfections in order to
justify infant industry protection.
x False ()
196
When deciding on the type of protection for an infant industry,

economists say there is a much better chance of success if a
tariff is applied versus a quota.
x False ()
197
In response to the Japanese competition, Harley-Davidson

Motor Company resorted to voluntary export restraint.
x True ()
198
Harley-Davidson received infant industry protection through

antidumping tariffs imposed on U.S. imports of Japanese
motorcycles.
x True ()
199
Brazil banned all imports of personal computers in order to

protect its domestic computer industry.
x False ()
200
Suppose that the demand curve for a good is represented by the straight
line
P = 20 2Q
A. Fill in the missing information in the following chart:
Quantity
Price
Total Revenue
Marginal Revenue
0
2
4
6
10
B. What is the slope of the marginal revenue curve? How does that slope
compare with that of the demand curve?
x ()
20
1
Suppose that a domestic monopolist in a small country faces demand of P = 200

Q and has a constant MC of $40 per unit.
A. Calculate the value of consumer and producer surplus in autarky.
B. Now suppose that trade occurs with a world price of $50. Calculate the value of
consumer and producer surplus.
C. By how much did the monopolist's profits fall as a result of the opening of trade?
x ()
202
Rank the following in ascending order of welfare for the

country imposing the duty or quota. If two items are equivalent,
indicate this accordingly.
A. Tariff t in a small country with perfect competition
B. Tariff t in a small country with a Home monopoly
C. Quota with the same imports M in a small country, with a
Home monopoly
x ()
203
Why might imperfect competition lead to small countries

imposing positive optimal tariffs against imports?
x ()
20
4
Use this information for a discriminating monopolist to answer this question: The
home market demand curve is P = 200 Q; the foreign market demand curve is P
= 160 2Q; and its marginal cost is a constant $20 per unit.
A. Find the discriminating monopolist's price and quantity in each market.
B. Find the discriminating monopolist's profit in each market.
C. Suppose the foreign country imposes an antidumping tariff. How large is the tariff?
D. What is the discriminating monopolist's profit in the foreign market after the
antidumping tariff is applied?
x ()
205
Describe the process for an antidumping complaint.

x ()
206
Why are antidumping actions used more frequently than

safeguard actions?
x ()
207
Is Harley-Davidson a good example of an infant industry?

x ()
208
The text estimated the deadweight loss of protection on HarleyDavidson motorcycles during the 1980s was about 3.8% of the
annual value of imports or about $1,125.5 million over the four
years that the tariffs were used. This estimate is based upon this
formula for the deadweight loss of a tariff, measured relative to
the import value:
Recalculate these deadweight losses assuming that there were
200,000 comparable motorcycles imported before the tariff and
150,000 comparable motorcycles imported after the tariff was
imposed; that average import sales were $800 million in each
year that the tariff was applied; and that the tariff was 50%
over the four-year period (as opposed to the declining tariff of
45%, 35%, 20%, and 15% actually used over the four- year
period).
x ()
During which round of negotiations did the WTO toughen its

stance against domestic policies that limit trade?
x Bretton Woods (Incorrect)
x Uruguay (True Answer Correct)
x Doha (Incorrect)
x The WTO never toughened its stance against domestic
policies. (Incorrect)
Where was the Climate Summit held in December 2009?

x
x
x
x
Brussels (Incorrect)
New York (Incorrect)
Seattle (Incorrect)
Copenhagen (True Answer Correct)
What was the result of the Climate Summit held in December

2009?
x All countries signed binding agreements to reduce their
greenhouse gases by 20% during the next 10 years. (Incorrect)
x No countries signed binding agreements to reduce their
greenhouse gases. (True Answer Correct)
x Only developed industrialized countries agreed to reduce their
greenhouse gases by 20% during the next 10 years. (Incorrect)
x Only China and India agreed to reduce their greenhouse gases by
20% during the next 10 years. (Incorrect)
The World Trade Organization is called a _______________

because it involves many if not most of the nations in the world.
x
x
x
x
bilateral trade organization (Incorrect)

trilateral trade organization (Incorrect)
multilateral trade agreement (True Answer Correct)
quasi-political trade organization (Incorrect)
A regional trade agreement involves:

x most if not all the nations in the world. (Incorrect)
x several nations, usually trading partners, with a common agenda
or geographically linked. (True Answer Correct)
x nations who agree to trade only with nations in their
region. (Incorrect)
x a region of the world with not only trade issues but also political
cohesiveness. (Incorrect)
6
In which type of trade agreement does the WTO allow

exclusions to the most favored nation principle?
x
x
x
x
multilateral trade agreements (Incorrect)

free-trade areas (Incorrect)
customs unions (Incorrect)
free-trade areas and customs unions (True Answer Correct)
Many regional trade agreements include other provisions that

are not part of the treaty, but they are add-ons that might be
important to trade issues. These are called:
x addenda. (Incorrect)
x side agreements. (True Answer Correct)
x environmental pacts. (Incorrect)
x worker rights documents. (Incorrect)
Which of the following is NOT a part of the NAFTA?

x eliminating tariff between members (Incorrect)
x an agreement on worker rights in each country (Incorrect)
x an agreement on environmental conditions in each
country (Incorrect)
x elimination of restrictions on movement of labor between member
countries (True Answer Correct)
Which of the following is included in the NAFTA agreement?

x tariff elimination on trade among Canada, Mexico, and the United
States (True Answer Correct)
x a common tariff structure adopted by Canada, Mexico, and the
United States (Incorrect)
x free mobility of labor and capital among Canada, Mexico, and the
United States (Incorrect)
x tariff elimination on trade among Canada, Mexico, and the United
States; a common tariff structure adopted by Canada, Mexico, and
the United States; and free mobility of labor and capital among
Canada, Mexico, and the United States (Incorrect)
10
What is the most favored nation principle of the WTO?

x It means that trading partners may choose a favorite nation to
trade with. (Incorrect)
x It means that any nation can refuse to trade with another that is
not its most favored nation. (Incorrect)
x It means that the WTO has the right to choose the nation that has
performed best within the WTO guidelines as its most favored
nation. (Incorrect)
x It means that every nation must grant the same rights and
treatment to other nations in the WTO as its most favored
nation. (True Answer Correct)
11
The most favored nation principle means that:

x Member countries can enter into exclusive favorable agreements
with some countries. (Incorrect)
x Member countries are barred from forming agreements outside
their geographic vicinity. (Incorrect)
x Member countries must extend the same low tariff to all WTO
member countries. (True Answer Correct)
x Member countries can charge differential tariff on other
12
The WTO is considered a _________, whereas NAFTA and the

European Union are __________ .
x free-trade area; cartels (Incorrect)
x cartel; multilateral agreements (Incorrect)
x free-trade area; multilateral agreements (Incorrect)
x multilateral agreement; regional trade agreements (True Answer
Correct)
13
Of the following, which is NOT a regional trade agreement?

x
x
x
x
the World Trade Organization (True Answer Correct)

the European Union (Incorrect)
the North American Free Trade Agreement (Incorrect)
the Central American Free Trade Agreement (Incorrect)
14
In a large-country case, an optimal tariff would be:

x one that increases the producer surplus. (Incorrect)
x one that raises the price of the product imported. (Incorrect)
x one in which the terms-of-trade gain exceeds the deadweight
loss. (True Answer Correct)
x one that easily passes the legislative process. (Incorrect)
15
In a large-country case, an optimal tariff is one for which the

terms-of-trade gain exceeds the:
x
x
x
x
16

increased price of the product imported. (Incorrect)
deadweight loss. (True Answer Correct)
consumer surplus. (Incorrect)
In the large-country case, when a tariff is imposed, the country:

x sees a terms-of-trade gain. (Incorrect)
x is able to reduce world price of the imported good. (Incorrect)
x is going to experience an increase in consumer surplus. (Incorrect)
x sees a terms-of-trade gain and is able to reduce world price of the
imported good. (True Answer Correct)
17
When a large nation imposes a tariff, which of the following is

NOT a cost incurred?
x deadweight efficiency loss (Incorrect)
x reduced consumer surplus (Incorrect)
x deterioration of terms of trade for the trading partners (Incorrect)
x falling government revenues of the importing nation (True
Answer Correct)
18
Figure: The Home and World Markets

The supplied graph shows the case for a tariff imposed by a large
country.
Reference: Ref 9-1
(Figure: The Home and World Markets) If the world price of

the product is given as $30, then home market firms will
produce _______ and the total demand for the good will be
_______ .
19

country.
Reference: Ref 9-1
(Figure: The Home and World Markets) The amount imported

by the home market under free trade is:
x 20. (Incorrect)
x 40. (Incorrect)
x 60. (Incorrect)
20

country.
Reference: Ref 9-1
(Figure: The Home and World Markets) If a tariff of $10 is

imposed by the home country, it causes a loss in the world
market of:
x $160. (Incorrect)
x $200. (Incorrect)
x $80. (Incorrect)
21

country.
Reference: Ref 9-1
(Figure: The Home and World Markets) The loss of consumer

surplus in the home country is:
x $480. (Incorrect)
x $160. (Incorrect)
x $600. (Incorrect)
22

country.
Reference: Ref 9-1
(Figure: The Home and World Markets) The terms-of-trade

gain is _______, and the deadweight loss is ______ .
x $120; $160 (Incorrect)
x $160; $120 (True Answer Correct)
23
Suppose that a large country imposes optimal tariffs on imports

from another large country. The second country then responds
with optimal tariffs on imports from the first country. For these
two countries, the Nash equilibrium results in ___________ for
the first country and __________ for the second country.
x losses; losses (True Answer Correct)
x gains; gains (Incorrect)
x losses; gains (Incorrect)
x gains; losses (Incorrect)
24
What happens when two countries apply tariffs against each

other in an attempt to capture their terms-of-trade gain?
x Both countries lose because the terms-of-trade gain for one
country is canceled by the tariff in the other country. (True Answer
Correct)
x Both countries gain because the terms-of-trade gain for one
country is canceled by the tariff in the other country. (Incorrect)
x Neither country gains nor loses because the terms-of-trade gain
for one country is canceled by the tariff in the other
x The country initially applying the tariff gains because it captures
the terms-of-trade gain; the other country neither gains nor
loses (Incorrect)
25
Using game theory as an analytical tool, if one large nation

imposes tariffs, the total cost is small; however, when several
trading partners do the same:
x the costs are even smaller. (Incorrect)
x the costs balance out and there is no harm. (Incorrect)
x the costs are the same but the potential gains are much
smaller. (True Answer Correct)
x then all nations gain. (Incorrect)
26
In a prisoner's dilemma:
x
x
x
x
all competing parties gain. (Incorrect)

one competitor gains at the expense of another. (Incorrect)
all competing parties lose. (True Answer Correct)
one competitor loses. (Incorrect)
27
It can be shown that the Nash equilibrium would indicate that

without any agreements, the best outcome for each large nation
would be to:
x not impose a tariff. (Incorrect)
x impose a tariff. (True Answer Correct)
x find other ways to reward their domestic firms. (Incorrect)
x impose a consumption tax. (Incorrect)
28
Which is a better outcome for income and standard of living

levels in each nation?
x no tariffs (True Answer Correct)
x low tariffs (Incorrect)

x high tariffs (Incorrect)
x equal tariffs for all nations (Incorrect)
29
A prisoner's dilemma can arise when:

x two large countries simultaneously and independently apply
tariffs on imports from each other. (True Answer Correct)
x two large countries simultaneously and independently eliminate
tariffs on imports from each other. (Incorrect)
x one large country eliminates tariffs on imports from another large
x one small country eliminates tariffs on imports from a large
30
An international trade agreement that provides an incentive and

reward for nations NOT to impose tariffs would have what
effect?
x an increase in world welfare and standard of living (Incorrect)
x higher efficiency (Incorrect)
x opportunity for low-income nations to exploit the gains from
trade (Incorrect)
x an increase in world welfare and standard of living, higher
efficiency, and opportunity for low-income nations to exploit the
gains from trade (True Answer Correct)
31
The WTO (under the GATT agreement) provides that nations

may enter into regional trade agreements as long as they:
x limit such agreements to one. (Incorrect)
x extend the provisions to all other nations in the WTO. (Incorrect)
x do not jointly increase tariffs against outside countries. (True
Answer Correct)
x make sure they include smaller nations in their
regions. (Incorrect)
32
Which principle of the GATT/WTO do regional trade

agreements violate?
x the principle of first mover (Incorrect)
x the targeting principle (Incorrect)
x the most favored nation principle or normal trade relations
status (True Answer Correct)
x the principle of comparative advantage (Incorrect)

33
Which is NOT another name for a free-trade agreement?

x
x
x
x
preferential trade agreement (Incorrect)

discriminatory trade agreement (Incorrect)
customs union (True Answer Correct)
impartial trade agreement (Incorrect)
34
Because regional trade agreements discriminate, giving better

tariff treatment to other nations in the agreement over outside
nations, they are often called:
x super-regionals. (Incorrect)
x preferential trade agreements. (True Answer Correct)
x exclusive trade arrangements. (Incorrect)
x equity trade agreements. (Incorrect)
35
A free-trade area is:

x a group of countries that agrees there will be no rules about
tradeanything goes. (Incorrect)
x a group of countries that agrees to eliminate customs fees and
containerized shipping charges on goods traded among
them. (Incorrect)
x a group of countries agreeing to eliminate barriers to trade
between themselves but keeping tariffs in place against the rest of
the world. (True Answer Correct)
x a group of countries that eliminates trade barriers among
themselves and erects a common tariff against all other
36
Which of the following statements characterizes economic

arrangements among NAFTA member countries (Canada,
Mexico, and the United States)?
x There are no restrictions on the movement of labor from one
country to another. (Incorrect)
x There are no restrictions on the movement of capital from one
country to another. (Incorrect)
x All three countries have adopted the same identical tariff
system. (Incorrect)
x There is free trade among the three member countries. (True
Answer Correct)
37
Which agreement, established in 1989, was the precursor to

NAFTA?
x
x
x
x
38
The U.S.-Mexico Free Trade Agreement (Incorrect)

The Canada-Mexico Free Trade Agreement (Incorrect)
The Canada-U.S. Free Trade Agreement (True Answer Correct)
The Canada-Mexico-U.S. Free Trade Agreement (Incorrect)
A customs union is:

x a group of countries that agrees there will be no rules about
tradeanything goes. (Incorrect)
x a group of countries that agrees to eliminate customs fees and
containerized shipping charges on goods traded among
them. (Incorrect)
x a group of countries agreeing to eliminate barriers to trade
between themselves but keeping tariffs in place against the rest of
the world. (Incorrect)
x a group of countries that eliminates trade barriers among
themselves and erects a common tariff against all other
nations. (True Answer Correct)
39
Which statement about the European Union (EU) is correct?

x EU member countries maintain separate tariff
schedules. (Incorrect)
x There is free trade among EU member countries. (True Answer
Correct)
x All EU member countries use a common currency (the
euro). (Incorrect)
x All EU member countries have eliminated tariffs on imports from
non-EU member countries. (Incorrect)
40
What is the main difference between a customs union and a freetrade area?
x There are no restrictions on the movement of labor and capital
among customs union member countries, whereas labor and capital
cannot move freely among free-trade member countries. (Incorrect)
x Customs union member countries use the identical tariffs, whereas
free-trade area member countries have different tariff
structures. (True Answer Correct)
x There is free trade among customs union member countries but

not among free-trade area member countries. (Incorrect)
x Customs union member countries have adopted a common
currency, whereas free-trade member countries use their separate
national currencies. (Incorrect)
41
A customs union is a trade agreement:

x where member countries are free to set their separate tariffs on
other countries. (Incorrect)
x where members agree to set similar tariffs on nonmembers. (True
Answer Correct)
x where resources are free to move between member
x where member countries have common currency. (Incorrect)
42
Which of the following regional trade agreements is a free-trade

area?
x
x
x
x
NAFTA (True Answer Correct)

the European Union (Incorrect)
Mercosur (Incorrect)
NATO (Incorrect)
43
To be able to enforce the rules of a free-trade area, goods from

outside the region imported into the lowest-tariff nation cannot
be shipped ________ into another nation in the area.
x with no transportation costs (Incorrect)
x without a labor certificate (Incorrect)
x with no customs inspection (Incorrect)
x duty free (True Answer Correct)
44
What complex set of regulations has been devised to protect a

free-trade area from outside encroachment?
x
x
x
x
45
environmental certification (Incorrect)

rules of origin (True Answer Correct)
health and safety standards (Incorrect)
a codified trade agreement (Incorrect)
Automobiles imported from Canada or Mexico must have 60%

North American content to be eligible for tariff elimination
under NAFTA rules. This is an example of a(n):
x
x
x
x
46
rules of origin requirement. (True Answer Correct)

environmental standard. (Incorrect)
health and safety requirement. (Incorrect)
preferential trade agreement. (Incorrect)
Why isn't NAFTA a customs union, making the rules of origin

irrelevant?
x A free-trade agreement allows politically sensitive tariffs of each
nation to remain unchanged. (True Answer Correct)
x A customs union also requires rules of origin. (Incorrect)
x The overall level of U.S. tariffs was much higher than the overall
level of tariffs in Mexico and Canada. (Incorrect)
x The overall levels of tariffs in Canada, Mexico, and the United
States are similar, making rules of origin irrelevant. (Incorrect)
47
Rules of origin are required in which form of regional trading

agreement?
x
x
x
x
48
a free-trade area (True Answer Correct)

a customs union (Incorrect)
a common market (Incorrect)
an economic union (Incorrect)
Which of the following represents the stage where economic

integration is least complete?
x
x
x
x
free-trade area (True Answer Correct)

customs union (Incorrect)
common market (Incorrect)
economic union (Incorrect)
49
Implementing a regional free-trade agreement may have an

effect in which, due to reduced tariffs, a nation in the agreement
begins to import a product it had produced itself. This effect is
called:
x trade creation. (True Answer Correct)
x trade diversion. (Incorrect)
x reciprocal trade agreements. (Incorrect)
x the employment effect of FTAs. (Incorrect)
50
Implementing a regional free-trade agreement may have an

effect in which, due to reduced tariffs, a nation begins to import
a product from another nation in the agreement that it had
imported from outside the region. This effect is called:

x
x
x
x
trade creation. (Incorrect)

trade diversion. (True Answer Correct)
reciprocal trade agreements. (Incorrect)
the employment effect of FTAs. (Incorrect)
51
When products from a high-cost country within a customs union

replace imports from a low-cost country that is not a member of
the union, this is called:
x trade creation. (Incorrect)
x trade diversion. (True Answer Correct)
x trade deflection. (Incorrect)
x trade development. (Incorrect)
52
A customs union will increase the welfare of its members and

the rest of the world if:
x trade creation is greater than trade diversion. (True Answer
Correct)
x trade creation is less than trade diversion. (Incorrect)
x trade creation is positive. (Incorrect)
x trade diversion is positive. (Incorrect)
53
Suppose country X currently produces widgets. Then it

establishes a preferential trading agreement with country Y.
Following the formation of the PTA, it no longer produces
widgets and imports widgets from country Y. What has
occurred?
x There is trade diversion and a welfare gain for both country X and
country Y. (Incorrect)
x There is trade diversion, a welfare gain for country Y, and a
welfare loss for country X. (Incorrect)
x There is trade creation and a welfare gain for both country X and
country Y. (True Answer Correct)
x There is trade creation, a welfare gain for country Y, and a
welfare loss for country X. (Incorrect)
54
Suppose country X currently does not produce widgets. Instead,

it imports widgets from country Z. Then it establishes a
preferential trading agreement with country Y. Following the
formation of the PTA, it imports widgets from country Y. What
has occurred?
x There is trade diversion and a welfare loss for country X. (True

Answer Correct)
x There is trade creation and a welfare loss for country
Y. (Incorrect)
x There is trade diversion and a welfare gain for country
X. (Incorrect)
x There is trade creation and a welfare gain for country
Y. (Incorrect)
55
Indian exporters are concerned about trade diversion because

_________ made an agreement with the ASEAN free-trade area.
x
x
x
x
India (Incorrect)
China (True Answer Correct)
the United States (Incorrect)
Mexico (Incorrect)
56
India is not a member of the China-ASEAN (Association of

South East Asian Nations) free-trade area implemented on
January 1, 2010. India fears that some of its:
x exports to China will be diverted to ASEAN countries. (Incorrect)
x exports to the United States will be diverted to China. (Incorrect)
x exports to China and to ASEAN countries will be diverted to trade
among members of the China-ASEAN free-trade area. (True
Answer Correct)
x imports from ASEAN countries will be diverted to
China (Incorrect)
57
An example of how trade diversion results in a suboptimal

situation is auto parts trade between Mexico and the United
States. After NAFTA:
x Mexico decreased its sales of auto parts to the United
States. (Incorrect)
x the United States purchased more auto parts from Mexico due to
the elimination of tariffs but reduced purchases from East Asia,
which was the lowest-cost producer. (True Answer Correct)
x the United States brought a complaint against Mexico for lowquality auto parts. (Incorrect)
x tariff revenues to the U.S. government increased. (Incorrect)
58
SCENARIO: ELECTRIC FAN TRADE

U.S. firms can produce and sell electric fans for $25. The United
States can also import electric fans from China at $40 each and
from Canada at $45 each. Electric fans made in the United States,
China, and Canada are identical. Currently, the United States
imposes a 30% tariff on imported electric fans.
Reference: Ref 9-2
(Scenario: Electric Fan Trade) From which country will the

United States import fans?
x China (Incorrect)
x Canada (Incorrect)
x both China and Canada (Incorrect)
x neither China nor Canada (True Answer Correct)
59

Reference: Ref 9-2
(Scenario: Electric Fan Trade) Now suppose that the United

States forms a free-trade area (NAFTA) with Canada and
Mexico. From which country will the United States import fans?
x China (Incorrect)
x Canada (True Answer Correct)
x both China and Canada (Incorrect)
x neither China nor Canada (Incorrect)
60

Reference: Ref 9-2
(Scenario: Electric Fan Trade) For the United States, are there
trade diversion losses, trade creation gains, or both as a result of
the formation of NAFTA?
x only trade diversions losses (Incorrect)
x only trade creation gains (True Answer Correct)
x both trade creation gains and trade diversion losses (Incorrect)
x neither trade creation gains nor trade diversion losses (Incorrect)
61

Reference: Ref 9-2
(Scenario: Electric Fan Trade) Suppose that the United States

levied a 10% tariff on imported electric fans (rather than the
30% tariff described in the scenario). Would there be trade
diversion losses, trade creation gains, or both as a result of the
formation of NAFTA?
x only trade diversions losses (Incorrect)
x only trade creation gains (True Answer Correct)
x both trade creation gains and trade diversion losses (Incorrect)
x neither trade creation gains nor trade diversion losses (Incorrect)
62
In terms of efficiency, trade diversion is a _____ desirable

outcome of a regional free-trade agreement, because trade is
diverted from the ___________ producer to the __________
producer.
x more; high-cost; low-cost (Incorrect)
x more; less deserving; more deserving (Incorrect)
x less; low-cost; high-cost (True Answer Correct)
x less; foreign; domestic (Incorrect)
6
3
Table: Demand and Supply for Gloves

Price
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
Quantity Supplied
10
11
12
13
14
Quantity Demanded
20
19
18
17
15
14
13
12
11
10
Reference: Ref 9-3
(Table: Demand and Supply for Gloves) The United States can also import gloves
from China at $4 per pair and from Mexico at $5 per pair. Currently, the United
States imposes a specific tariff of $2 on its glove imports. Suppose that the United
States and Mexico form a free-trade area. How much trade in gloves is created?
x zero pairs of gloves (Incorrect)
x six pairs of gloves (Incorrect)
x two pairs of gloves (True Answer Correct)
x four pairs of gloves (Incorrect)
6
4

Price
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
Quantity Supplied
10
11
12
13
14
Quantity Demanded
20
19
18
17
15
14
13
12
11
10
Reference: Ref 9-3
States imposes a specific tariff of $2 on its glove imports. How much trade in gloves
is diverted in the U.S.-Mexican free-trade area?
x zero pairs of gloves (Incorrect)
x six pairs of gloves (Incorrect)
x two pairs of gloves (Incorrect)
x four pairs of gloves (True Answer Correct)
6
5

Price
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
Quantity Supplied
10
11
12
13
14
Quantity Demanded
20
19
18
17
15
14
13
12
11
10
Reference: Ref 9-3
States imposes a specific tariff of $2 on its glove imports. Is the United States better
off or worse off in its trade in gloves following the free-trade agreement with
Mexico?
x It is better off because trade creation gains exceed trade diversion losses. (Incorrect)
x It is worse off because trade diversion losses exceed trade creation gains. (True
Answer Correct)
x It is worse off because trade creation losses exceed trade diversion gains. (Incorrect)
x It is better off because trade diversion gains exceed trade creation losses. (Incorrect)
6
6

Price
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
Quantity Supplied
10
11
12
13
14
Quantity Demanded
20
19
18
17
15
14
13
12
11
10
Reference: Ref 9-3
States imposes a specific tariff of $2 on its glove imports. Suppose instead that the
United States negotiated a free-trade agreement with China. Will the United States
be better off or worse off as a result of its trade in gloves in the free-trade area with
China?
x It is better off because there are no trade diversion losses. (True Answer Correct)
x It is worse off because there are no trade creation gains. (Incorrect)
x It is worse off because trade creation gains exceed trade diversion losses. (Incorrect)
x It is better off because trade diversion gains exceed trade creation losses. (Incorrect)
67
If a regional trading agreement causes products from member

countries to replace imports from nonmember countries, then
the regional trading agreement will experience:
x economic gains. (Incorrect)
x trade creation gains. (Incorrect)
x trade diversion losses. (True Answer Correct)
x trade perversion. (Incorrect)
68
If a customs union includes the lowest-cost world producer of a

product, then member countries:
x will always be better off in trade with that product. (True Answer
Correct)
x will always be worse off in trade with that product. (Incorrect)
x can be better off or worse off depending on the strengths of the
trade diversion and trade creation effects for that product. (Incorrect)
x will no longer export or import that product. (Incorrect)
69
The customs union could lead to losses for the home country if:
x the other country in the customs union is the most efficient
producer. (Incorrect)
x the other country in the customs union is not the most efficient
producer. (True Answer Correct)
x there are other countries outside the customs union who are
inefficient. (Incorrect)
x all countries are efficient producers. (Incorrect)
70
Figure: U.S. Imports from Mexico and Asia
Reference: Ref 9-4
(Figure: U.S. Imports from Mexico and Asia) Refer to the figure,
which illustrates a customs union between the United States and
Mexico. Under free trade the United States will import ________
units of the good from _______ at the price of _______ .
x 600; Mexico; $150 (Incorrect)
x 600; China; $250 (Incorrect)
x 350; China; $150 (True Answer Correct)
x 500; China; $250 (Incorrect)
71
Reference: Ref 9-4
(Figure: U.S. Imports from Mexico and Asia) Suppose the

United States imposes a tariff of $100; then the total imports will
be:
x 600. (Incorrect)
x 250. (Incorrect)
x 400. (Incorrect)

72
Reference: Ref 9-4
(Figure: U.S. Imports from Mexico and Asia) With the $100
tariff, the United States will import ______ from Mexico and
_______ from China.
73
Reference: Ref 9-4
(Figure: U.S. Imports from Mexico and Asia) The $100 tariff by
the United States results in a tariff revenue of:

74
Reference: Ref 9-4
(Figure: U.S. Imports from Mexico and Asia) If the United

States forms a customs union with Mexico, it will result in a(n)
_______ in producer surplus of ______ for Mexico.
x increase; $25,000 (Incorrect)
x increase; $50,000 (Incorrect)
x increase; $32,500 (True Answer Correct)
x decrease; $50,000 (Incorrect)
75
Reference: Ref 9-4
(Figure: U.S. Imports from Mexico and Asia) The combined

welfare of the United States and Mexico is _______ by ______ .
x lower; $7,500 (True Answer Correct)
x higher; $10,000 (Incorrect)

x lower; $25,000 (Incorrect)
x higher; $25,000 (Incorrect)
76
Reference: Ref 9-4
(Figure: U.S. Imports from Mexico and Asia) Suppose initially

there is no customs union and that the $100 tariff is imposed by
the United States. Now, Mexico invests in productive technology
and it shifts the Mexican supply curve to Smex. The United States
now forms a customs union with Mexico. This will result in a
price of _______ and imports of _______ .
77
Trade diversion may be such that the combined welfare of two

nations in the agreement actually ____ because of _____ , not
completely offset by the _____ .
x falls; loss of tariff revenue for the importing nation; gain in the
exporting nation's producer surplus (True Answer Correct)
x rises; gains from trade; loss of jobs in the importing
x rises; gain in tariff revenue; gain in jobs (Incorrect)
x remains the same; loss of tariff revenue; gains from product
variety (Incorrect)
78
Trade diversion is one reason that some economists:
x believe we should not even bother to promote free

trade. (Incorrect)
x recommend we change our focus from regional trade agreements
to the WTO, a multilateral trade agreement. (True Answer Correct)
x recommend we reinstate some tariffs that were actually beneficial
to all nations. (Incorrect)
x think we should exclude low-wage nations from trade
agreements. (Incorrect)
79
Which of the following statements are false?

x
x
x
x
80
Trade creation is always bad for countries. (Incorrect)

Trade diversion is always good for countries. (Incorrect)
Regional trade agreements never cause welfare losses. (Incorrect)
All of these statements are false. (True Answer Correct)
The negative effects of trade diversion are reduced when:

x trade diversion is more than offset by trade creation. (True
Answer Correct)
x consumers in the importing nation have a change in their buying
habits. (Incorrect)
x there is a cost increase in nations outside the region. (Incorrect)
x the free-trade agreement includes more members. (Incorrect)
81
Because it is difficult to negotiate multilateral trade agreements,

some economists argue that preferential trade agreements are
always beneficial since they represent a movement toward freer
trade, which is better than no movement at all. Is this argument
always correct?
x Yes, any movement toward freer trade is better than no movement
at all. (Incorrect)
x No, some preferential trade agreements may have higher trade
diversion costs than trade creation gains. (True Answer Correct)
x Yes, all preferential trade agreements have higher trade creation
gains than trade diversion losses. (Incorrect)
x No, all preferential trade agreements have higher trade diversion
losses than trade creation gains. (Incorrect)
82
A case study of NAFTA, with regard to the benefits for Canada

from U.S. trade, found that:
x Canada was not able to increase its exports due to barriers still
remaining. (Incorrect)
x Canada had modest gains but was harmed by immigration into the
United States from Mexico. (Incorrect)
x Canada had more trade diversion than trade creation and so was
harmed overall. (Incorrect)
x Canada had more trade creation than trade diversion and so was
benefited overall. (True Answer Correct)
83
Professor Daniel Trefler at the University of Toronto concluded

that Canada ________ from free trade with the United States
because _______________ .
x gained; trade creation exceeded trade diversion with the United
States (True Answer Correct)
x lost; trade diversion exceeded trade creation with the United
States (Incorrect)
x first gained, then lost; trade diversion exceeded trade creation
after NAFTA was fully implemented (Incorrect)
x neither gained nor lost; trade creation equaled its trade diversion
with the United States (Incorrect)
84
Labor standards include which of the following?

x minimum wages (Incorrect)
x safety standards (Incorrect)
x child labor regulations (Incorrect)
x minimum wages, safety standards, and child labor
regulations (True Answer Correct)
85
Why are trading partners often concerned about the other's

labor standards?
x From a humanitarian perspective, people do not want to buy
products if workers are in oppressive conditions. (Incorrect)
x Unions realize that low standards for labor will be less costly, and
those products will compete more effectively with products
produced at home. (Incorrect)
x Some nations do not enforce their own lax labor standards, which
are part of trade agreements. (Incorrect)
x All of these answer choices are correct. (True Answer Correct)
86
Why do some say labor standards are disguised protection?

x They favor the nations who already have high labor standards and
eliminate competition from nations who do not. (True Answer
Correct)
x Nations with low labor standards often disguise the
fact. (Incorrect)
x Raising labor standards is not the issueit is disguised by the fact
that shoddy materials are used in production. (Incorrect)
x Often children who should be in school work anyway, and their
participation is disguised as if an adult held the job. (Incorrect)
87
Why are economists sometimes skeptical about international

labor standards?
x They are difficult to enforce. (Incorrect)
x They create more competition for U.S. workers. (Incorrect)
x The GATT does not allow labor standards. (Incorrect)
x They may be used as a rationale to protect domestic activities that
can no longer compete with imports. (True Answer Correct)
88
The purpose of the Labor Side Agreement under NAFTA is to:

x increase standards in Mexico only. (Incorrect)
x increase standards throughout NAFTA. (Incorrect)
x enforce existing standards throughout NAFTA. (True Answer
Correct)
x renegotiate standards. (Incorrect)
89
There is a side agreement to _______________ that calls for the

enforcement of existing worker rights in _______________ .
x the European Union; the European nations (Incorrect)
x the World Trade Organization; the less developed
nations (Incorrect)
x NAFTA; the South American nations (Incorrect)
x NAFTA; Mexico, Canada, and the United States (True Answer
Correct)
90
Under NAFTA, labor disputes and issues will be dealt with by

the:
x U.S. Department of Labor. (Incorrect)
x North American Agreement on Labor Cooperation. (True Answer

Correct)
x National Labor Relations Board. (Incorrect)
x U.S. Department of Justice. (Incorrect)
91
Although it has had some criticism for ineffectiveness, in what

way has the North American Agreement on Labor Cooperation
had some positive benefits?
x by creating an institutional forum for the discussion of labor
issues in Canada, the United States, and Mexico (Incorrect)
x by allowing nations to reveal in a public way violations of labor
laws in any of the three countries (Incorrect)
x by putting emphasis on labor rights as a legitimate trade
issue (Incorrect)
x All of these answer choices are examples of the positive
benefits. (True Answer Correct)
92
Surveys of consumers regarding labor standards indicate that

they are willing to pay:
x a large amount for a large improvement in working
x a small amount for a large improvement in working
conditions. (True Answer Correct)
x nothing for a large improvement in working
x a small amount for a small decline in working
93
A study of consumer attitudes toward labor standards for the

products they buy revealed that consumers:
x just do not care. (Incorrect)
x would completely change their buying patterns and want to be
100% sure that products they buy are made in foreign factories with
good working conditions. (Incorrect)
x would pay a slight premium to ensure good working
conditions. (True Answer Correct)
x are more concerned about the prices they pay than working
conditions overseas. (Incorrect)
94
Surveys of consumers indicate that:
x they do not care at all about labor standards in other

x many are willing to pay at least a small amount more for imports
to ensure good labor standards in other countries. (True Answer
Correct)
x most are willing to pay a large amount more for imports to ensure
good labor standards in other countries. (Incorrect)
x they will not buy imports from any country with poor labor
standards. (Incorrect)
95
Surveys of consumers regarding labor standards reveal that

they:
x treat potential losses and potential gains equally. (Incorrect)
x weigh potential losses more than potential gains. (True Answer
Correct)
x weigh potential losses less than potential gains. (Incorrect)
x do not experience losses in gains. (Incorrect)
96
Wal-Mart has been pursuing improvements in its reputation in

response to growing criticism on environmental, labor, and
social issues in its foreign supplier factories. Among others,
which requirement has Wal-Mart imposed upon its Chinese
suppliers?
x They must demonstrate compliance with Chinese environmental
laws. (True Answer Correct)
x There must be a 100% improvement in energy efficiency at
China's 200 largest suppliers. (Incorrect)
x They must increase their wages to the equivalent of the U.S.
minimum wage. (Incorrect)
x All of the answer choices are correct. (Incorrect)
97
What is the role of nongovernmental organizations (NGOs) in

promoting labor standards?
x They have no enforcement power, but they can investigate and
bring attention to and put pressure on firms, governments, and other
groups to effect change. (True Answer Correct)
x Because they are nongovernmental, they have no
power. (Incorrect)
x They can change laws for labor in many situations. (Incorrect)
x Because they are part of the United Nations, they often report
their findings and cause major policy changes. (Incorrect)
98
According to one research study focusing on Indonesia, actions

by nongovernmental organizations (NGOs) are
___________than importing countries' threats to raise tariffs.
x less effective in raising wages and limiting declines in
employment (Incorrect)
x more effective in raising wages and limiting declines in
employment (True Answer Correct)
x less effective in raising wages but more effective in limiting
declines in employment (Incorrect)
x more effective in raising wages but less effective in limiting
declines in employment (Incorrect)
99
NGOs seem to do a better job than national policies because

they:
x
x
x
x
100
can enforce regulations. (Incorrect)

are better organized. (Incorrect)
target the worst offenders. (True Answer Correct)
target the worst offenders and are better organized. (Incorrect)
Most economists are opposed to the living wage concept in

foreign labor agreements because:
x it is barely enough for survival. (Incorrect)
x most workers in low-income nations already earn
more. (Incorrect)
x workers should never earn more than the managers. (Incorrect)
x it is well above the market wage, and many workers in poor
nations would lose the opportunity to be employed. (True Answer
Correct)
101
Suppose that the U.S. government required firms to pay a living

wage to workers in their subsidiaries or contracting firms in
developing countries. As a consequence of this requirement,
wages would likely _______ to the living wage and employment
would likely _________ .
x rise; increase (Incorrect)
x fall; increase (Incorrect)
x rise; decrease (True Answer Correct)
x fall; decrease (Incorrect)
102
With respect to environmental issues, the GATT:
x does not allow countries to adopt environmental laws that affect

imports. (Incorrect)
x allows countries to adopt environmental laws that affect domestic
production but not imports. (Incorrect)
x allows countries to adopt environmental laws that are applied
uniformly against domestic producers and imports. (True Answer
Correct)
x allows countries to adopt more stringent laws affecting imports
than domestic producers. (Incorrect)
103
There is some misunderstanding of the WTO's provisions for

environmental protection in trade. The WTO actually:
x allows nations to bar all imports from nations that do not
conform to their own standards. (Incorrect)
x provides that nations may enforce any standards for particular
products as long as the standards apply equally to domestic
producers and importers. (True Answer Correct)
x does not make any pretense of caring at all about the
environment. (Incorrect)
x is very inconsistent in its rulings. (Incorrect)
104
Do the provisions of the GATT and WTO permit countries to

apply their own environmental regulations against imports?
x No, environmental regulations applying to domestic production
and imports need to be negotiated internationally under treaties
such as the Kyoto Protocol. (Incorrect)
x No, environmental regulations applying only to imports need to
be negotiated internationally under treaties such as the Kyoto
Agreement. (Incorrect)
x Yes, and countries may require stricter environmental regulations
for imports than for domestic production. (Incorrect)
x Yes, as long as environmental regulations apply uniformly to
domestic production and imports. (True Answer Correct)
105
The tuna-dolphin dispute was ruled by the WTO in favor of

nations that _______________. The ruling said that trading
partners _______________ bar imports based on
_______________.
x exported tuna to the United States and Europe; could not; a
production process such as the size of the nets used (True Answer
Correct)
x imported tuna; could; the production process (Incorrect)
x cared about wildlife in the seas; could; concerns over the safety
of dolphins (Incorrect)
x produced seafood products; could not; the way the products were
used, such as pet food (Incorrect)
106
The ruling in the shrimp-turtle case resulted in:

x the United States being able to ban shrimp caught with nets
unsafe for sea turtles. (Incorrect)
x the WTO upholding the environmental standard but ruling
against the United States on technical grounds that it did not
provide sufficient notice; after negotiation the WTO reversed its
decision. (True Answer Correct)
x the WTO refusing to hear the case. (Incorrect)
x a ruling that upheld the environmental standard. (Incorrect)
107
The WTO also ruled on the U.S. restriction of gasoline imports

from Venezuela and Brazil in 1994 on environmental grounds.
What was the outcome?
x The United States could ban those imports because they violated
the U.S. Clean Air Act. (Incorrect)
x They could not ban the imports because they had not given
Venezuela and Brazil a grace period as they had given their own
U.S. companies. (True Answer Correct)
x The United States could not use environmental protection as an
excuse for every trade dispute that came along. (Incorrect)
x The United States could bring countercharges against Venezuela
and Brazil on the banana issue. (Incorrect)
108
Europe had refused to import genetically modified food

products. The WTO ruled that:
x if Europe was afraid of these products, it could put an import ban
on them. (Incorrect)
x Europe needed to base its ban on scientific evidence rather than
fear of something unproven. (True Answer Correct)
x Europe could declare a moratorium until an investigation could
be undertaken. (Incorrect)
x the products could be treated and then they would be
safe. (Incorrect)
109
WTO rulings, with respect to environmental issues, have:
x generally had very adverse effects on the

environment. (Incorrect)
x generally not had adverse effects on the environment. (True
Answer Correct)
x caused substantial decreases in international trade. (Incorrect)
x caused countries to adopt more stringent laws affecting imports
than domestic producers. (Incorrect)
110
Because of the relationship among ethanol production, sugar,

and corn, the authors of your text concluded that:
x the corn subsidy is a big problem for ethanol exports. (Incorrect)
x the sugar quota makes sugar so cheap in the United States that
producers are using it instead of corn. (Incorrect)
x due to the sugar quota and sugar's high price, there is a huge
demand for less environmentally friendly corn as a substitute in
food products and for ethanol. (True Answer Correct)
x ethanol should be imported rather than exported. (Incorrect)
111
The VER between the United States and Japan was shown to
_______________ gas consumption, _______________ the use of
energy, and _______________ gas mileage from automobiles.
x raise; raise; lower (True Answer Correct)
x lower; lower; raise (Incorrect)
x raise; lower; lower (Incorrect)
x lower; raise; raise (Incorrect)
112
The tragedy of the commons refers to the idea that:

x trade inherently results in losses. (Incorrect)
x common property often results in an abuse of the property, such
as overfishing. (True Answer Correct)
x trade restrictions can be useful. (Incorrect)
x common property is always beneficial for people. (Incorrect)
113
Which of the following best explains the term the tragedy of the
commons?
x the plight of the common people, who are doomed to low-paying
jobs and discrimination (Incorrect)
x the fact that public resources are becoming scarce (Incorrect)
x the idea that what we have in common is often not why we
trade (Incorrect)
x the idea that when everyone has free access to a resource, it will
be overused and depleted (True Answer Correct)
114
The fundamental cause of the tragedy of the commons is:

x
x
x
x
115
international trade. (Incorrect)

lack of defined property rights. (True Answer Correct)
ignorance. (Incorrect)
tariffs. (Incorrect)
The phenomenon known as the tragedy of the commons occurs

whenever:
x the private sector owns resources and manages them
tragically. (Incorrect)
x the government owns resources and manages them
tragically. (Incorrect)
x there is no ownership of resources, so they become depleted due
to lack of management. (True Answer Correct)
x two countries own the same resource and cannot agree on its
management. (Incorrect)
116
Which of the following is the best example of the tragedy of the

commons?
x
x
x
x
117
overproduction of Saudi Arabian crude oil (Incorrect)

overregulation of the U.S. steel industry (Incorrect)
overharvesting of many species of fish (True Answer Correct)
U.S. farm subsidies (Incorrect)
An example of the tragedy of the commons is:

x no worldwide fuel economy standard. (Incorrect)
x overfishing in international waters. (True Answer Correct)
x unsafe fishing practices that trap dolphins and sea
turtles. (Incorrect)
x illegal copyright infringement. (Incorrect)
118
The story about the mass slaughter of buffalo in the United

States, which allowed the products to be exported during the
1870s, is an example of:
x the first-mover principle. (Incorrect)
x the principle of comparative advantage. (Incorrect)
x the tragedy of the commons. (True Answer Correct)

x export subsidies. (Incorrect)
119
A prisoner's dilemma exists for global pollutants because:

x countries do not face the full cost of pollution that they
generate. (True Answer Correct)
x countries that regulate pollution gain more than countries that do
not regulate pollution. (Incorrect)
x countries that regulate pollution lose more than countries that do
not regulate pollution. (Incorrect)
x no country follows international agreements to limit
pollution. (Incorrect)
120
International agreements to limit pollution can lead to:

x a Nash equilibrium where no countries face the full cost of
pollution that they generate. (True Answer Correct)
x a Nash equilibrium where countries that regulate pollution gain
more than countries that do not regulate pollution. (Incorrect)
x a Nash equilibrium where countries that regulate pollution lose
more than countries that do not regulate pollution. (Incorrect)
x a Nash equilibrium where no country regulates
pollution. (Incorrect)
121
Which of the following is not an example of a global pollutant?

x
x
x
x
122
chlorofluorocarbons (CFCs) (Incorrect)

carbon monoxide (True Answer Correct)
carbon dioxide (Incorrect)
carbon dioxide and chlorofluorocarbons (Incorrect)
In the case of global pollution, a nation that pollutes gets benefit

from production but:
x has to pay for it in terms of dirty air and water. (Incorrect)
x never receives any negative consequences. (Incorrect)
x cannot control the amount of pollution by private
firms. (Incorrect)
x will not suffer the full costs of its own pollution and so has little
incentive to control it. (True Answer Correct)
123
SCENARIO: PAYOFF MATRIX

The payoff matrix shows outcomes of various strategies that a
Home and Foreign country can follow to decide to regulate or not
regulate pollution. The columns give Foreign's actions, and the
rows give Home's actions. The values in the upper right-hand side
of each element give Foreign's net benefits; the values in the
lower left-hand side of each element give Home's net benefits. Net
benefits are the environmental benefits from regulation minus
costs associated with installing pollution control equipment.
Reference: Ref 9-5
(Scenario: Payoff Matrix) How can you tell that the

governments of each country favor producer profits over
consumer well-being when calculating net benefits?
x A country's net benefits are higher when the other country
regulates pollution. (Incorrect)
x A country's net benefits are lower when the other country
regulates pollution. (Incorrect)
x A country's net benefits are lower when it regulates pollution
than when it does not. (True Answer Correct)
x A country's net benefits are higher when it regulates pollution
than when it does not. (Incorrect)
124

Reference: Ref 9-5
(Scenario: Payoff Matrix) What is likely to happen if there are

no international agreements to limit pollution?
x Neither country will regulate pollution. (True Answer Correct)
x Both countries will regulate pollution. (Incorrect)
x Foreign will regulate pollution but Home will not. (Incorrect)
x Home will regulate pollution but Foreign will not. (Incorrect)
125

Reference: Ref 9-5
(Scenario: Payoff Matrix) Which element represents a Nash

equilibrium?
x A (Incorrect)
x B (Incorrect)
x C (Incorrect)
x D (True Answer Correct)
126
In the case of global pollution, the Nash equilibrium shows that

if one nation does not regulate its pollution, other nations:
x will have to regulate even more strictly. (Incorrect)
x will not regulate either because of international price
competition. (True Answer Correct)
x will regulate but will bring charges in the WTO against the
other. (Incorrect)
x will regulate so they will not harm their own citizens. (Incorrect)
127
In a situation in which there is no incentive to cut pollution

because it will make domestic firms less competitive, it will
improve world welfare if:
x nations impose tariffs on polluters. (Incorrect)
x there is an international agreement so that every nation regulates
global pollutants and no firms have competitive advantages because
of lax pollution laws. (True Answer Correct)
x there is a ban on production until we can scientifically solve our
pollution problems. (Incorrect)
x we allow the market to work in this case. (Incorrect)
128
What is the Kyoto Protocol?

x It is a treaty on abolishing child labor and forced labor
camps. (Incorrect)
x It is a guideline for using force when interrogating
prisoners. (Incorrect)
x It is based on the 1992 U.N. climate treaty that set specific air
pollution reduction targets for each nation. (True Answer Correct)
x It is a set of rules for shipping dangerous chemicals to avoid
harm and to lower the risk of a terrorist attack. (Incorrect)
129
Did the United States ratify the Kyoto Protocol? Why or why
not?
x Yes, but it has failed to meet targets for a number of
years. (Incorrect)
x No, but it promised to sign on January 1, 2008. (Incorrect)
x Yes, and it has met its target each year. (Incorrect)
x No, because it believed the targets were impossible to meet

without great harm to the industrial base in the United States. (True
Answer Correct)
130
Other U.S. issues with the Kyoto Protocol are all but which of
the following.
x Major U.S. trading partners (such as China and India) are exempt
from the provisionsnot fair! (Incorrect)
x Europe's targets were set ridiculously low. (True Answer
Correct)
x We don't really know if pollution causes global
warming. (Incorrect)
x There are less costly ways to deal with environmental
problems. (Incorrect)
131
The United States has not signed on to the Kyoto Protocol for
all the following reasons except which of the following?
x We still do not understand all the consequences of policy
actions. (Incorrect)
x Meeting the Kyoto targets would negatively affect the U.S.
economy. (Incorrect)
x Kyoto failed to include the developing countries, especially
China and India. (Incorrect)
x There is not enough cash incentive being provided to the United
States to sign the protocol. (True Answer Correct)
132
The United States did not sign the Kyoto Protocol because it
believed that:
x exemptions for some of its major developing-country trading
partners (such as China and India) were unfair. (True Answer
Correct)
x Europe's targets were set ridiculously low. (Incorrect)
x pollution does not cause global warming. (Incorrect)
x targets for some of its major developing-country trading partners
(such as China and India) were too low. (Incorrect)
133
Unlike the Kyoto Protocol, the Copenhagen Accord will:

x count India and China as participants. (True Answer Correct)
x strongly curtail emissions. (Incorrect)
x seek to reverse global warming. (Incorrect)

x be noncontroversial. (Incorrect)
134
If two large countries impose a tariff on the same imported

good, then the gains from trade are twice as much.
x True ()
135
Two large countries will both be better off if they both impose
small tariffs against imports from the other country.
x True ()
136
Two large countries will both be better off if one imposes small
tariffs against imports from the other country.
x True ()
137
Two large countries will both be better off if neither imposes

small tariffs against imports from the other country.
x False ()
138
The WTO ensures international cooperation by levying fines

against offending nations.
x True ()
139
The WTO (under the GATT agreement) allows countries to

form regional trade agreements.
x False ()
140
Tariff reductions or eliminations on trade among members of a

regional trading agreement do not need to be extended to other
nations under the WTO's most favored nation principle.
x False ()
141
The GATT does not allow countries to form preferential trade

agreements.
x True ()
142
Under terms of NAFTA (the North American Free Trade

Agreement) Canada, the United States, and Mexico have
adopted a common tariff structure.
x True ()
143
There is no need for rules of origin requirements in a customs

union.
x False ()
144
All customs unions result in welfare losses for member

countries.
x True ()
145
Regional trade agreements always lower welfare of

participating nations.
x True ()
146
There is no evidence of corporate responsibility in Wal-Mart.

x True ()
147
Nike is unconcerned about the potential for abusive labor

practices in its (or its suppliers') factories.
x True ()
148
The WTO does not allow any environmental restriction to be a

trade barrier for any nation.
x True ()
149
An exporter can complain to the WTO if it feels that an

importing country's environmental laws adversely affect its
activities.

x False ()
150
Under GATT rules, countries can complain to the WTO if they

believe that their exports are excluded from a foreign market
because of unreasonable environmental standards.
x False ()
151
The WTO permits no use of trade policy to protect the

environment.
x True ()
152
The WTO ruled that the United States could not ban dolphinunsafe tuna.
x True ()
153
Global pollutants are pollutants that cross national borders.

x False ()
15
4
Suppose that this figure gives the U.S. supply (S) of and demand (D) for auto parts
(say steering wheels). U.S. automakers can also import steering wheels from
Mexico at $50 each and from Japan at $40 each. Currently, there is a 60% tariff
on imported steering wheels.
A. How many steering wheels will the United States import?

B. How much tariff revenue will the U.S. government collect?
C. Suppose that the United States and Mexico become part of NAFTA and there is free
trade between the two countries. Now how many steering wheels will the United
States import?
D. Calculate the trade creation gains from free trade in steering wheels with Mexico.
E. Calculate the trade diversion losses from free trade in steering wheels with Mexico.
F. Does the United States gain or lose as a result of free trade in steering wheels with
Mexico?
x ()
155
Why do some economists prefer multilateral trade agreements

over regional trade agreements?
x ()
156
Suppose that the U.S. government required U.S. firms to pay a

living wage to workers in its subsidiaries or contracting firms
in developing countries.
A. What are the likely consequences of this requirement?
B. How would one determine a living wage?
x ()
157
Have the GATT-WTO rulings on environmental cases

adversely affected the U.S. environment?
x ()
158
The U.S. sugar quota sometimes causes the U.S. domestic price
of sugar to be as high as twice the world price. How does the
sugar quota affect the U.S. price of corn and the U.S.
environment?
x ()
Exchange rates affect:

x
x
x
x
The price of a foreign currency expressed in terms of the home

currency is called:
x
x
x
x
international trade flows. (Incorrect)

international investment flows. (Incorrect)
corporate earnings. (Incorrect)
All of the above are affected. (True Answer Correct)
the exchange rate. (True Answer Correct)

the rate of depreciation. (Incorrect)
the dollar/yen ratio. (Incorrect)
the opportunity cost. (Incorrect)
Normally, exchange rates are expressed as:

x the number of units of the currency per one ounce of
gold. (Incorrect)
x the GDP of one nation as a percentage of the GDP of the
other. (Incorrect)
x the price of one unit of foreign currency expressed in terms of the
domestic currency. (True Answer Correct)
x ratios of the value of one nation's wealth compared to the
other. (Incorrect)
To keep things straight and avoid confusion, it is important to:

x know exactly what the exchange rate signifies in terms of which
currency is the denominator. (True Answer Correct)
x watch for ways the currency might lose value. (Incorrect)
x learn about recent behavior of the exchange rate. (Incorrect)
x know exactly what the rate is at any moment in time. (Incorrect)
The notation for the euro/dollar exchange rate is:

x FX/$. (Incorrect)
x FX$/. (Incorrect)
x E/$
(True Answer Correct)
x E$/. (Incorrect)
Generally, exchange rates are quoted as a single price of a unit

of foreign currency rather than a ratio because:
x the ratio of the units of home currency to units of foreign currency
is always equal to one. (Incorrect)
x the denominator is always equal to 1. (True Answer Correct)
x the price is fixed by the government. (Incorrect)
x the rate is adjustable in increments of 25 basis points. (Incorrect)
The equation E$/ = 2 means that:

x 1 dollar buys 2 pounds. (Incorrect)
x 1 dollar buys of a pound. (True Answer Correct)
x 2 pounds buy 1 dollar. (Incorrect)
x 1 dollar buys 1 pound. (Incorrect)
If the dollar-euro exchange rate on June 30, 2010, is $1.225 per

euro, then the euro-dollar exchange rate would be:
x
x
x
x
2.45 per dollar. (Incorrect)

0.816 per dollar. (True Answer Correct)
1.225 per dollar. (Incorrect)
1 per dollar. (Incorrect)
The equation E/ = 10 means that:

x
x
x
x
1 yen buys 10 pounds. (Incorrect)

0.1 yen buys 1 pound. (Incorrect)
10 yen buy 1 pound. (True Answer Correct)
0.01 yen buys 1 pound. (Incorrect)
10
If we compare the exchange rate between two nations, expressed

in the domestic currency with the same rate expressed in units of
the foreign currency, it will be obvious that:
x they are both equal to 1. (Incorrect)
x they cancel each other out. (Incorrect)
x one is always the reciprocal of the other. (True Answer Correct)
x they can never coexist. (Incorrect)
11
If, in 2000, $1 = 1.5 euro, and in 2007, $1 = 0.9 euro, which of the
following statements would be true?
x More American tourists will find it cheaper to travel to

Europe. (Incorrect)
x More Europeans will stay home as visits to the United States
become more expensive. (Incorrect)
x Europeans will import fewer products from the United
States. (Incorrect)
x Americans will import fewer products from Europe. (True
Answer Correct)
12
A dining table costs $3,000 in New York and the same table costs
5,000 euros in Rome. Thus, $1 is equal to:
x
x
x
x
13
1 euro. (Incorrect)
2 euros. (Incorrect)
1.67 euros. (True Answer Correct)
0.6 euro. (Incorrect)
Table: Exchange Rates across Currencies

Country
Price per dollar (January 1, 2006)
Canada
$1.2
Japan
120 yen
Mexico
12 pesos
India
45 rupees
Reference: Ref 10-1
(Table: Exchange Rates across Currencies) If the exchange rate

on January 1, 2007, is $1 = 144 yen, then:
x the dollar has appreciated 10% against the yen. (Incorrect)
x the dollar has depreciated 24% against the yen. (Incorrect)
x the yen has depreciated 12% against the dollar. (Incorrect)
x the yen has depreciated 20% against the dollar. (True Answer
Correct)
14

Country
Canada
$1.2
Japan
120 yen
Mexico
12 pesos
India
45 rupees
Reference: Ref 10-1
(Table: Exchange Rates across Currencies) Based on the

information provided, which of the following statements is true?
x 1 peso = 10 yen. (True Answer Correct)
x 1 rupee = 10 yen. (Incorrect)
x 1 peso = 3 rupees. (Incorrect)
x $1 Canadian = 35 rupees. (Incorrect)
15

Country
Canada
$1.2
Japan
120 yen
Mexico
12 pesos
India
45 rupees
Reference: Ref 10-1
(Table: Exchange Rates across Currencies) Based on the

information provided, 1 Canadian dollar is equal to _____
Mexican pesos and _____ Indian rupees.
x 12; 73.5 (Incorrect)
x 10; 37.5 (True Answer Correct)
x 12; 37.5 (Incorrect)
16
If a nation's currency buys fewer units of a foreign currency

today than yesterday, we say the value of its currency has:
x
x
x
x
17
If today 1 exchanges for 135, and tomorrow 1 exchanges

for 150, we say the euro has:
x
x
x
x
18
appreciated. (Incorrect)
depreciated. (True Answer Correct)
stagnated. (Incorrect)
become inverted. (Incorrect)
appreciated. (True Answer Correct)

depreciated. (Incorrect)
stagnated. (Incorrect)
become inverted. (Incorrect)
When a nation's currency appreciates, it purchases _____ units

of a foreign currency and it is said to _____.
x
x
x
x
fewer; strengthen (Incorrect)

more; strengthen (True Answer Correct)
fewer; weaken (Incorrect)
more; weaken (Incorrect)
19
If one nation's currency strengthens against a foreign currency,

the other nation's currency must _____ against the domestic
currency.
x strengthen (Incorrect)
x equalize (Incorrect)
x weaken (True Answer Correct)
x appreciate (Incorrect)
20
When the dollar declines in value against a foreign currency, it

is called:
x
x
x
x
21
In European terms, when the exchange rate for the U.S. dollar
increases:
x
x
x
x
22
an appreciation. (Incorrect)
a depreciation. (True Answer Correct)
an inflation. (Incorrect)
a deflation. (Incorrect)
the dollar has appreciated. (True Answer Correct)

the dollar has depreciated. (Incorrect)
the euro has appreciated. (Incorrect)
the dollar has weakened. (Incorrect)
Which of the following statements are equivalent to an

appreciation of the dollar relative to the euro?
x The dollar buys more euros now. (Incorrect)
x The euro buys fewer dollars now. (Incorrect)
x The dollar buys more euros now, and the euro buys fewer dollars
now. (True Answer Correct)
x The euro buys more dollars now. (Incorrect)
23
Ironically, when the dollar cost of a unit of foreign currency

falls, the dollar is actually _____ against the foreign currency.
x depreciating (Incorrect)
x appreciating (True Answer Correct)
x equalizing (Incorrect)
x holding its own (Incorrect)

24
If a euro costs $1.25 today, and it costs $1.50 tomorrow, what

has happened to the dollar-euro exchange rate?
x The dollar has depreciated and the euro has
x The dollar has appreciated and the euro has
x The dollar has depreciated and the euro has appreciated. (True
Answer Correct)
x The dollar has appreciated and the euro has
appreciated. (Incorrect)
25
It is customary to express changes in the exchange rates of two

currencies over time as:
x the loss of purchasing power of one currency divided by the loss
of purchasing power of the other currency. (Incorrect)
x the percentage change expressed as an appreciation or
depreciation of one against the other. (True Answer Correct)
x a ratio of the absolute values (without signs). (Incorrect)
x a ratio of the price of gold in each nation. (Incorrect)
26
In general, the percentage of appreciation of one nation's

currency is equal to:
x its rate of growth of real GDP. (Incorrect)
x its purchasing power. (Incorrect)
x its population growth. (Incorrect)
x the percentage of depreciation of the foreign nation's
currency. (True Answer Correct)
27
Slight discrepancies in the rates of appreciation versus

depreciation of two currencies are related to:
x a mathematical quirk that percentage increases are always larger
than percentage decreases because in the first case the denominator
is smaller. (True Answer Correct)
x the imprecise nature of the calculations. (Incorrect)
x the lack of reliable information. (Incorrect)
x the volatile nature of exchange rates. (Incorrect)
28
Changes in exchange rates are usually expressed in percentage

terms. The percentage rate of appreciation for one currency will
be close to the rate of depreciation for the other nation
whenever:
x the change in the rate is very small. (True Answer Correct)
x the exchange rates are very different in quantitative
terms. (Incorrect)
x the change in the rate is very large. (Incorrect)
x one exchange rate is 50% more than the other one at the time of
the change. (Incorrect)
29
If E$/ moves from 2 to 3, this is a percentage change of:

x
x
x
x
30
If E$/ increases by 20%, this is consistent with:

x
x
x
x
3
1

33.3%. (Incorrect)
33.3%. (Incorrect)
50%. (Incorrect)
an increase from 4 to 5. (Incorrect)

an increase from 5 to 6. (True Answer Correct)
Table: Currency Values I

Currency
2007
$1
1.5 euros
2008
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-2
(Table: Currency Values I) The U.S. dollar appreciated against the _________.
x Mexican peso and Japanese yen. (True Answer Correct)
x Mexican peso and Indian rupee. (Incorrect)
x euro and Japanese yen. (Incorrect)
x euro and the Indian rupee. (Incorrect)
3
2

Currency
2007
$1
1.5 euros
2008
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-2
(Table: Currency Values I) The U.S. dollar depreciated against the _________ and
the ________.
x euro; Indian rupee (True Answer Correct)
x Indian rupee; Japanese yen (Incorrect)
x Mexican peso; Japanese yen (Incorrect)
x euro; Japanese yen (Incorrect)
3
3

Currency
2007
$1
1.5 euros
2008
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-2
(Table: Currency Values I) The U.S. dollar appreciated against the peso by _____.
x 2.4% (Incorrect)
x 10% (Incorrect)
x 12.4% (Incorrect)
3
4

Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-2
(Table: Currency Values I) The U.S. dollar depreciated against the euro by ______.
x
x
x
x
35
0.6% (Incorrect)
1% (Incorrect)
100% (Incorrect)
Table: Currency Values II: How Much 1 U.S. Dollar Will Buy of Other
Currencies in 2007 and 2008
Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-3
(Table: Currency Values II) The dollar appreciated against which

currencies?
x the euro (Incorrect)
x the real (Incorrect)
x the pound and the rupee (True Answer Correct)
x the euro and the pound (Incorrect)
36
Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-3
(Table: Currency Values II) The dollar depreciated against which

currencies?
x the euro (Incorrect)
x the pound (Incorrect)
x the euro and the real (True Answer Correct)
37
Currency
$1
2007
1.5 euros
2008
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-3
(Table: Currency Values II) The dollar rose against the rupee by
_____.
x 111% (Incorrect)
x 1% (Incorrect)
x 1% (Incorrect)
38
Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-3
(Table: Currency Values II) The dollar depreciated against the euro by
______.
x 33% (Incorrect)
x 3% (Incorrect)
x 50% (Incorrect)
39
Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-3
(Table: Currency Values II) In 2007, how many euros would it take to
buy 1 pound?
x 1.33 (Incorrect)
x 1.5 (Incorrect)
x 3 (Incorrect)
40
Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-3
(Table: Currency Values II) Between 2007 and 2008, how did the euro
do against the British pound?
x It appreciated. (True Answer Correct)
x It held steady. (Incorrect)
x It depreciated. (Incorrect)
x Not enough information is provided to know how well the euro
did. (Incorrect)
41
Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-3
(Table: Currency Values II) All else being equal, if you want to invest
dollars in 2007 and then convert them back into dollars in 2008, which
is the best currency to invest in?
x the euro (True Answer Correct)
x the pound (Incorrect)
x the rupee (Incorrect)

42
A bilateral exchange rate is:

x an exchange rate that has two sides: maximal and
minimal. (Incorrect)
x an exchange rate that has exhibited both appreciation and
depreciation. (Incorrect)
x an exchange rate that is a hybrid between fixed and
floating. (Incorrect)
x an exchange rate between two currencies. (True Answer Correct)
43
What is a multilateral exchange rate?

x It is an exchange rate that is measured by using a number of
different techniques. (Incorrect)
x It is an exchange rate that calculates the overall movement of the
rate against more than just one other currency. (True Answer
Correct)
x It is an exchange rate that is measured once every 10
years. (Incorrect)
x It is a rate that is set by the IMF for many different
44
The average of the bilateral rate changes for a nation, weighted

by the importance of the trading partner, is known as:
x
x
x
x
45
the real exchange rate. (Incorrect)

the nominal exchange rate. (Incorrect)
the effective exchange rate. (True Answer Correct)
the direct exchange rate. (Incorrect)
To calculate the multilateral effective exchange rate for a nation

for each trading partner:
x add the share of trade to the % change in the exchange rate and
add the sums. (Incorrect)
x divide the share of trade by the % change in the exchange rate and
add the dividends. (Incorrect)
x subtract the share of trade from the % change in the exchange rate
and add the differences. (Incorrect)
x multiply the share of trade by the change in the exchange rate and
add the products. (True Answer Correct)

46
Your textbook refers to a basket of currencies. What is it?

x a random selection of currencies (Incorrect)
x currencies that are low-valued and unstable (Incorrect)
x currencies that represent the average increase in value for all
currencies (Incorrect)
x currencies most used by the nation in its trade and other
transactions, weighted by their importance (True Answer Correct)
47
We use the effective exchange rate calculation to tell us:

x the underlying rate of inflation. (Incorrect)
x how international finance affects a nation's exchange
rate. (Incorrect)
x how the overall international purchasing power of a nation has
changed. (True Answer Correct)
x the natural (real) exchange rate taking out the effects of
inflation. (Incorrect)
48
Suppose 80% of U.S. trade is with England and the rest is with
Japan. If the dollar rises by 10% against the pound and rises by
20% against the yen, what is the percentage change in the
effective exchange rate of the United States?
x 16% (Incorrect)
x 8% (Incorrect)
x 4% (Incorrect)
49
Suppose 60% of U.S. trade is with England and the rest is with
Japan. If the dollar rises by 20% against the pound but falls by
20% against the yen, what is the percentage change in the
effective exchange rate of the United States?
x 12% (Incorrect)
x 0% (Incorrect)
x 8% (Incorrect)
50
If the dollar falls by 20% against the euro and rises by 10%
against the yen, which of the following values for European and
Japanese trade with the United States are consistent with a 10%
increase in the effective exchange rate of the United States?

x
x
x
x
Europe: 33%; Japan: 66% (Incorrect)

None of the answer choices is correct. (True Answer Correct)
51
The U.S. dollar's effective exchange rate since 2002 has steadily
declined. However, that decline was not as steep against all
major currencies as it was with the well-known major currencies
because:
x the U.S. government has a strong dollar policy. (Incorrect)
x the large trading partners, China and Japan, did not allow their
currencies to appreciate greatly against the U.S. dollar. (True
Answer Correct)
x the rate of appreciation is always somewhat greater than the rate
of depreciation. (Incorrect)
x the United States does not trade with some nations, so the
effective rate is biased. (Incorrect)
52
When exchange rates change and prices stay the same:

x relative prices of traded goods in the two nations
change. (Incorrect)
x the price of foreign goods expressed in the home currency will
change. (Incorrect)
x imports get more expensive as the home currency
depreciates. (Incorrect)
x All of the answers are correct. (True Answer Correct)
53
The fall in the U.S. dollar has not affected Chinese trade as
much as that for other countries because:
x China has appreciated its currency. (Incorrect)
x China has reduced its exports. (Incorrect)
x China has depreciated its currency. (Incorrect)
x China has pegged its currency to the dollar. (True Answer
Correct)
54
Using exchange rates, it is possible to price-compare in different

nations. If an iPod costs $90 in the United States and 45 in
France, in which nation would you get the better deal? The
dollar-euro exchange rate is now $2/.

x The iPod would be cheaper in France. (Incorrect)
x The iPod would be cheaper in the United States. (Incorrect)
x The iPod would cost the same in both countries. (True Answer
Correct)
x From the information provided, it is impossible to answer this
55
Using exchange rates, it is possible to price-compare in different

nations. If an iPod costs $90 in the United States and 45 in
France, in which nation would you get the better deal? The
dollar-euro exchange rate is now $2.50/.
x The iPod would be cheaper in France. (Incorrect)
x The iPod would be cheaper in the United States. (True Answer
Correct)
x The iPod would cost the same in both countries. (Incorrect)
x From the information provided, it is impossible to answer this
56
In general, when a nation's currency depreciates, goods priced

in foreign currencies:
x become cheaper. (Incorrect)
x become more expensive. (True Answer Correct)
x either become more or less expensive depending on the value of
the currency in that nation. (Incorrect)
57
In general, when a nation's currency appreciates, goods priced

in foreign currencies:
x become cheaper. (True Answer Correct)
x become more expensive. (Incorrect)
x either become more or less expensive, depending on the value of
the currency in that nation. (Incorrect)
58
A depreciation of the dollar will benefit:

x a firm that sells in the United States but produces in
Japan. (Incorrect)
x a firm that sells in the United States and produces in the United
States. (Incorrect)
x a firm that produces in the United States and sells in Japan. (True
Answer Correct)
x no domestic producers. (Incorrect)
59
An appreciation of the dollar will benefit:

x a firm that sells in the United States but produces in Japan. (True
Answer Correct)
x a firm that sells in the United States and produces in the United
States. (Incorrect)
x a firm that produces in the United States and sells in
Japan. (Incorrect)
x no foreign consumers. (Incorrect)
60
When the dollar depreciates, which of the following is unlikely

to happen?
x German consumers will buy more U.S. products. (Incorrect)
x U.S. consumers will find German goods to be more
expensive. (Incorrect)
x Chinese consumers will not buy U.S. goods. (True Answer
Correct)
x Americans will not travel abroad as much for
vacations. (Incorrect)
61
Imports from Europe to the United States have risen. This

suggests that:
x
x
x
x
62
the dollar has depreciated. (Incorrect)

the euro has appreciated. (Incorrect)
the dollar has appreciated. (True Answer Correct)
the euro has depreciated. (Incorrect)
Exports from Australia to Brazil have increased. This suggests

that the Australian dollar:
x has appreciated against the Brazilian real. (Incorrect)
x has depreciated against the Brazilian real. (True Answer Correct)
x has not changed. (Incorrect)
x has appreciated against all currencies except the Brazilian
real. (Incorrect)
63
If the euro depreciates relative to the dollar but does not change
relative to the pound, then one might expect:
x Europeans to import more from the United States and less from
the United Kingdom. (Incorrect)
x Europeans to export more to the United States and the same
amount to the United Kingdom. (Incorrect)
x Europeans to import less from the United States and the same
amount from the United Kingdom. (True Answer Correct)
x Europeans to import more from the United States and more from
64
Table: Currency Values II

Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-4
(Table: Currency Values II) In 2007, a product that costs $50 should
cost:
x 57 euros. (Incorrect)
x 25 reais. (Incorrect)
x 100 pounds. (True Answer Correct)
x 450 rupees. (Incorrect)
65

Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-4
(Table: Currency Values II) In 2008, a good that costs 60 pounds should
cost:
x 30 reais. (True Answer Correct)
66

Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-4
(Table: Currency Values II) From 2007 to 2008, the U.S. dollar rose
against the pound by _____.
x 25% (Incorrect)
x 10% (Incorrect)
x 0% (Incorrect)
67

Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-4
(Table: Currency Values II) In 2007, the dollar-real exchange rate is:
x 0.2. (Incorrect)
x 0.15. (Incorrect)
x 0.66. (Incorrect)
x 0.5. (True Answer Correct)
68

Currency
2007
$1
1.5 euros
2008
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-4
(Table: Currency Values II) In 2008, the dollar-pound exchange rate is:
x 0.5. (Incorrect)
x 0.2. (Incorrect)
x 0.3. (Incorrect)
69

Currency
2007
2008
$1
1.5 euros
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-4
(Table: Currency Values II) If the United States imports trades in equal
amounts with all four countries, then the percentage change in the U.S.
effective exchange rate from 2007 to 2008 is approximately:
x 50%. (Incorrect)
x 20%. (Incorrect)
x 20%. (Incorrect)
x 1.5%. (True Answer Correct)
70

Currency
2007
$1
1.5 euros
2008
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-4
(Table: Currency Values II) If there are no arbitrage possibilities, then

the pound-euro exchange rate in 2008 is:
x 1.33. (Incorrect)
x 66. (Incorrect)
x 33. (Incorrect)
71

Currency
2007
$1
1.5 euros
2008
1 euro
$1
2 Brazilian reais
1.5 Brazilian reais
$1
2 British pounds
3 British pounds
$1
45 Indian rupees
50 Indian rupees
Reference: Ref 10-4
(Table: Currency Values II) If there are no arbitrage possibilities, then

the pound-real exchange rate in 2007 is:
x 1. (Incorrect)
x 5. (Incorrect)
x 3. (Incorrect)
72
Table: Currency Values III

Currency
2001
$1
1 euro
2002
.6 euro
$1
3 Brazilian reais
2 Brazilian reais
$1
.75 British pounds
.5 British pounds
$1
40 Indian rupees
30 Indian rupees
Reference: Ref 10-5
(Table: Currency Values III) In 2001, a product that costs $10 should
cost:
x 16.66 euros. (Incorrect)
x 6 euros. (Incorrect)
x 40 rupees. (Incorrect)
x None of the answer choices is correct. (True Answer Correct)
73

Currency
2001
2002
$1
1 euro
.6 euro
$1
3 Brazilian reais
2 Brazilian reais
$1
.75 British pounds
.5 British pounds
$1
40 Indian rupees
30 Indian rupees
Reference: Ref 10-5
(Table: Currency Values III) In 2002, a good that costs 10 euros

should cost:
x
x
x
x
74
16.66 dollars. (True Answer Correct)

10 dollars. (Incorrect)

Currency
2001
2002
$1
1 euro
.6 euro
$1
3 Brazilian reais
2 Brazilian reais
$1
.75 British pounds
.5 British pounds
$1
40 Indian rupees
30 Indian rupees
Reference: Ref 10-5
(Table: Currency Values III) From 2001 to 2002, the U.S. dollar fell
against:
x the euro. (Incorrect)
x the real. (Incorrect)
x the pound. (Incorrect)
x None of the answer choices is correct. (True Answer Correct)
75

Currency
2001
$1
1 euro
2002
.6 euro
$1
3 Brazilian reais
2 Brazilian reais
$1
.75 British pounds
.5 British pounds
$1
40 Indian rupees
30 Indian rupees
Reference: Ref 10-5
(Table: Currency Values III) In 2001, the dollar-pound exchange rate

is:
x 75. (Incorrect)
x 1.5. (Incorrect)
x 5. (Incorrect)
76

Currency
2001
2002
$1
1 euro
.6 euro
$1
3 Brazilian reais
2 Brazilian reais
$1
.75 British pounds
.5 British pounds
$1
40 Indian rupees
30 Indian rupees
Reference: Ref 10-5
(Table: Currency Values III) In 2002, the dollar-rupee exchange rate

is:
x 33. (Incorrect)
x 0.033 (Incorrect)
x 0.0033 (Incorrect)
77

Currency
2001
2002
$1
1 euro
.6 euro
$1
3 Brazilian reais
2 Brazilian reais
$1
.75 British pounds
.5 British pounds
$1
40 Indian rupees
30 Indian rupees
Reference: Ref 10-5
(Table: Currency Values III) If the United States imports trades in

equal amounts with all four countries, then the effective exchange rate
in 2001 is:
x 1.61%. (Incorrect)
x 16.1%. (Incorrect)
x 1611%. (Incorrect)
78

Currency
2001
2002
$1
1 euro
.6 euro
$1
3 Brazilian reais
2 Brazilian reais
$1
.75 British pounds
.5 British pounds
$1
40 Indian rupees
30 Indian rupees
Reference: Ref 10-5
(Table: Currency Values III) If there are no arbitrage possibilities,
then the euro-pound exchange rate in 2002 is:

x
x
x
x
79
1.2. (True Answer Correct)

83. (Incorrect)
6. (Incorrect)
5. (Incorrect)

Currency
2001
2002
$1
1 euro
.6 euro
$1
3 Brazilian reais
2 Brazilian reais
$1
.75 British pounds
.5 British pounds
$1
40 Indian rupees
30 Indian rupees
Reference: Ref 10-5
(Table: Currency Values III) If there are no arbitrage possibilities,

then the pound-real exchange rate in 2001 is:
x 600. (Incorrect)
x 60. (Incorrect)
x 1.2. (Incorrect)
80
A term that categorizes patterns of exchange rate behavior is

known as:
x
x
x
x
81
exchange rate regimes. (True Answer Correct)

exchange rate realms. (Incorrect)
exchange rate principles. (Incorrect)
exchange rate observations. (Incorrect)
If a government wishes to limit or prohibit fluctuations in

exchange rates, it will choose:
x to fix, or peg, the value of its currency to some base currency over
a sustained period. (True Answer Correct)
x to allow its currency to rise or fall in price, depending on a variety
of supply and demand factors. (Incorrect)
x to suspend purchases and sales of its currency. (Incorrect)
x to allow the rate to be set by international banks. (Incorrect)
82
A flexible or floating exchange rate system is one in which the:

x government closely monitors and controls the value due to the
impact on trade flows. (Incorrect)
x government makes no attempt to fix it against any base
x government actively tries to achieve fluctuations in the
rate. (Incorrect)
x government fixes the rate against the currency of its largest
trading partner. (Incorrect)
83
When exchange rates are limited to small fluctuations, but not

totally fixed, economists refer to the situation as:
x
x
x
x
84
Which of the following exchange rate systems is in the right

order, from most control to least control?
x
x
x
x
85
floating, fixed, managed float (Incorrect)

fixed, floating, managed float (Incorrect)
managed float, floating, fixed (Incorrect)
fixed, managed float, floating (True Answer Correct)
When exchange rates are very volatile, with a wide range of

variation, the currency is said to be:
x
x
x
x
86
essentially fixed. (Incorrect)

essentially floating. (Incorrect)
relatively floating. (Incorrect)
intermediate regimes. (True Answer Correct)
in limbo. (Incorrect)
in free float. (True Answer Correct)
perfectly flexible. (Incorrect)
in sluggish float. (Incorrect)
What is a currency band?

x a limit below which the currency is not allowed to fall (Incorrect)
x a limit above which the currency is not allowed to rise (Incorrect)
x a fixed rate regime with some small variation allowed, up or
down (True Answer Correct)
x a very rigid control of the currencyno variation
allowed (Incorrect)
87
A middle-ground exchange rate regime, between fixed and

floating, is often called:
x a managed float. (Incorrect)
x a dirty float. (Incorrect)
x limited flexibility. (Incorrect)
x a managed float, a dirty float, and limited flexibility. (True
Answer Correct)
88
A large and sudden currency depreciation is widely known as:

x
x
x
x
89
A sudden and pronounced loss of value of one nation's currency

against others is known as:
x
x
x
x
90
a managed float. (Incorrect)

a crawling peg. (Incorrect)
an exchange rate or currency crisis. (True Answer Correct)
a free float. (Incorrect)
a currency crisis. (True Answer Correct)

a forced devaluation. (Incorrect)
a thinning of value. (Incorrect)
a default. (Incorrect)
An exchange rate crisis is:

x when the currency is stable. (Incorrect)
x when the value of a currency declines dramatically. (True Answer
Correct)
x when the value of a currency increases dramatically. (Incorrect)
x when a country fixes the price of its currency. (Incorrect)
91
A crawling peg refers to:

x a large and sudden currency depreciation. (Incorrect)
x a fixed exchange rate regime in which the currency is adjusted
very frequently to reflect market conditions. (True Answer Correct)
x a managed or dirty float, depending on the business
cycle. (Incorrect)
x a drag on exchange rate adjustment caused by imperfect
92
Which nation took the bold step of abandoning its own currency
and adopting the U.S. dollar?
x
x
x
x
93
Which European nation has kept its own currency and

maintains a fixed value against the euro?
x
x
x
x
94
China (Incorrect)
India (Incorrect)
Mexico (Incorrect)
Ecuador (True Answer Correct)
Great Britain (Incorrect)

Belgium (Incorrect)
Denmark (True Answer Correct)
Russia (Incorrect)
Since the mid-1990s, the Argentine peso has experienced:

x a one-to-one peg with the U.S. dollar. (Incorrect)
x a large devaluation and crisis. (Incorrect)
x limited flexibility after which it was kept in a narrow band with
the dollar. (Incorrect)
95
A nation that allowed its currency to steadily depreciate (crawl)

over a 6-year period is:
x
x
x
x
96
France. (Incorrect)
Canada. (Incorrect)
Colombia. (True Answer Correct)
Some nations such as Ecuador chose dollarization because:

x the currency was depreciating so rapidly it became nearly
worthless. (True Answer Correct)
x Ecuadorians wanted to save dollars for eventual emigration to the
U.S. (Incorrect)
x the Ecuadorian currency was backed by gold, which was
confiscated by government officials. (Incorrect)
x All of the answers are correct. (Incorrect)
97
The International Monetary Fund has classified 192 economies

comparing:
x the value of their currencies. (Incorrect)
x the percentage of women in the workforce. (Incorrect)
x the effectiveness of governance and institutions. (Incorrect)
x the flexibility of their exchange rate regimes. (True Answer
Correct)
98
Across the globe, exchange rate regimes are:

x
x
x
x
99
A currency board is set up:

x
x
x
x
100
mostly fixed. (Incorrect)

a mix of fixed and floating. (True Answer Correct)
mostly floating. (Incorrect)
hard to pinpoint. (Incorrect)
to manage free-floating currencies. (Incorrect)

to gradually eliminate currency pegs. (Incorrect)
to give a peg added durability. (True Answer Correct)
to immediately eliminate currency pegs. (Incorrect)
Some nations use a currency board to manage their currencies.

How does this work?
x It is all in the hands of international banks. (Incorrect)
x The International Monetary Fund manages the
currency. (Incorrect)
x There is a fixed rate regime with a set of strict rules and policy
guidelines to keep the currency's value stable. (True Answer
Correct)
x The currency is allowed to float, but its fluctuations are reviewed
periodically by a board of economists. (Incorrect)
101
Eurozone countries:
x
x
x
x
have no separate legal tender. (True Answer Correct)

all are pegged to the euro. (Incorrect)
all are pegged to the dollar. (Incorrect)
are fixed against a single currency. (Incorrect)
102
If a nation abandons its own currency and decides to use

another nation's currency as its own circulating currency, this
is known as:
x euro-zoning. (Incorrect)
x dollarization. (True Answer Correct)
x a managed float. (Incorrect)
x a Western regime. (Incorrect)
103
Dollarization refers to:

x increased trade with the United States, resulting in a glut of
dollars circulating in the domestic economy. (Incorrect)
x the fall of the U.S. dollar. (Incorrect)
x the dominance of the U.S. dollar in international
finance. (Incorrect)
x the adoption of the U.S. dollar as an official currency by nations
outside the United States, such as El Salvador and Ecuador. (True
Answer Correct)
104
The foreign exchange market refers to:

x a physical place in the heart of New York City's financial district,
where traders come to trade other currencies. (Incorrect)
x a collection of all purchases and sales of one currency for
another, where exchange rates are determined. (True Answer
Correct)
x the discount window of the Federal Reserve. (Incorrect)
x the commodity futures market. (Incorrect)
105
From 19922007, the volume of currency traded worldwide:

x
x
x
x
106
slumped due to the world recession. (Incorrect)

increased approximately 290%. (True Answer Correct)
fluctuated wildly due to investor expectations. (Incorrect)
was concentrated in trades in the developing world. (Incorrect)
Which of the following correctly ranks the size of the three

largest foreign currency trading centers in dollar volume?
x 1-Paris; 2-Miami; 3-London (Incorrect)
x 1-New York; 2-Rome; 3-Chicago (Incorrect)
x 1-London; 2-New York; 3-Tokyo (True Answer Correct)

x 1-Tokyo; 2-Los Angeles; 3-Paris (Incorrect)
107
Which of the following is NOT a major foreign exchange

center?
x
x
x
x
108
London (Incorrect)
New York (Incorrect)
Tokyo (Incorrect)
Chicago (True Answer Correct)
Foreign exchange is traded:

x weekly on the Internet in special auctions arranged by the Federal
Reserve. (Incorrect)
x continuously all over the world 24/7. (True Answer Correct)
x only in officially designated trading centers such as London or
New York. (Incorrect)
x None of the answers is correct. (Incorrect)
109
The spot market for foreign exchange is(are):

x a market that exists only in one place at one time. (Incorrect)
x when a person borrows to speculate in the market. (Incorrect)
x purchases and sales of currencies for immediate delivery. (True
Answer Correct)
x the rate of exchange quoted during the next business
day. (Incorrect)
110
A spot contract is:

x a promise to purchase a foreign currency in 30 days. (Incorrect)
x a promise to purchase a foreign currency in 90 days. (Incorrect)
x a contract for the immediate exchange of currencies. (True
Answer Correct)
x an agreement to sell currencies at a fixed price
indefinitely. (Incorrect)
111
In 2007, the volume of currency traded in the foreign market

was:
x $3.2 billion. (Incorrect)
x $32 billion. (Incorrect)

x $321 billion. (Incorrect)
x $3210 billion. (True Answer Correct)
112
What percent of currency transactions involve a trade in the

spot market?
x
x
x
x
113
30% (Incorrect)
40% (Incorrect)
60% (Incorrect)
A transaction cost associated with spot trading is:

x travel to and from the market. (Incorrect)
x shipping costs. (Incorrect)
x brokerage commissions. (Incorrect)
x the spread, which is earned mostly by large banks. (True Answer
Correct)
114
Spreads in quotations of exchange rates are:

x the geographical dispersion of nations that use the
x a measure of contagion involved in changes in exchange
rates. (Incorrect)
x the difference in the price the buyer pays versus the price the
seller receives. (True Answer Correct)
x the percentage of interest one pays when borrowing to purchase
currencies. (Incorrect)
115
Market spreads usually range from _____ on large contracts to

______ on small contracts.
x
x
x
x
116
3%; 0.5% (Incorrect)

10%; 2% (Incorrect)
1%; 2% (Incorrect)
0.01%; 5% (True Answer Correct)
The difference between the buy at and sell at price is referred to

as:
x market friction. (Incorrect)
x transaction cost. (Incorrect)

x menu cost. (Incorrect)
x market friction and transaction cost. (True Answer Correct)
117
A derivative is a:
x
x
x
x
118
Forwards, swaps, futures, and options are examples of:

x
x
x
x
119
contract derived from a spot market rate. (True Answer Correct)

fixed exchange rate. (Incorrect)
flexible exchange rate. (Incorrect)
contract derived from an exchange rate. (Incorrect)
spot market transactions. (Incorrect)

transaction costs. (Incorrect)
market frictions. (Incorrect)
derivatives. (True Answer Correct)
The difference between the spot contract and a forward

contract is that:
x the former is a flexible price on the currency, and the latter is a
fixed price. (Incorrect)
x the former is a contract to be settled immediately, and the latter is
a contract to be settled at a future agreed-upon date. (True Answer
Correct)
x the former is a derivative, and the latter is not a
derivative. (Incorrect)
x the former has a fixed price but the contract can be settled at a
later date, and the latter is a contract to be settled
immediately. (Incorrect)
120
In which of the following categories would an agreement to

trade currencies in pre-set amounts at a certain date in the
future be included?
x an option (Incorrect)
x a futures contract (True Answer Correct)
x a forward contract (Incorrect)
x a swap (Incorrect)
121
The forward contract differs from a futures contract in that:
x the forward contract is to be settled immediately. (Incorrect)

x the futures contract is for a fixed amount and matures at certain
arranged dates, whereas the forward contract can be for any
amount. (True Answer Correct)
x the futures contract cannot be traded in a market, whereas the
forward contract can be bought in the market. (Incorrect)
x forward contracts are standardized, whereas futures contracts are
not standardized. (Incorrect)
122
Foreign exchange contracts, such as futures, swaps, and options

are collectively known as:
x
x
x
x
123
derivatives. (True Answer Correct)

deposits. (Incorrect)
spot contracts. (Incorrect)
spreads. (Incorrect)
The forward market is:

x a market that exists only in one place at one time. (Incorrect)
x when a person borrows to speculate in the market. (Incorrect)
x purchases and sales of currencies for delivery at a later timeup
to 1 year. (True Answer Correct)
x the rate of exchange quoted during the next business
day. (Incorrect)
124
In which of the following categories would an agreement to buy

or sell a certain quantity of a specified currency at a fixed price
at a date 30, 60, 90, 120, or 360 days in the future be included?
x an option (Incorrect)
x a futures contract (Incorrect)
x a forward contract (True Answer Correct)
125
Foreign exchange swaps involve:

x selling one currency on the spot market and at the same time
purchasing it forward. (True Answer Correct)
x trading goods rather than money to improve
efficiency. (Incorrect)
x delaying payment of a spot contract until the currency is actually
delivered. (Incorrect)
x a promissory note with repayment in 60 days. (Incorrect)

126
In which of the following categories would the sale of foreign

currency with a forward repurchase agreement be included?
x
x
x
x
127
an option (Incorrect)
a futures contract (Incorrect)
a forward contract (Incorrect)
a swap (True Answer Correct)
A foreign exchange option is:

x the right to engage in buying or selling on the spot
market. (Incorrect)
x the right to purchase (call) or sell (put) foreign currency at a
specified price on a specified date in the future. (True Answer
Correct)
x when the price of foreign currency exceeds the spot
rate. (Incorrect)
x when a speculator must decide whether to move into the
market. (Incorrect)
128
An agreement that gives one party the right to buy or sell from
or to another party a specified quantity of currency at a
specified price would be included in which of the following
transactions?
x an option (True Answer Correct)
x a futures contract (Incorrect)
x a forward contract (Incorrect)
129
In international finance, hedging indicates:

x not being able to make a commitment to buy or sell. (Incorrect)
x delaying a purchase of foreign exchange hoping the price will
fall. (Incorrect)
x simultaneously buying several currencies to ensure that at least
one will rise in value. (Incorrect)
x avoiding risk of loss by offsetting an obligation to buy a foreign
currency by locking in a contract to sell it at the same time. (True
Answer Correct)
130
When exchange rates are ______, agreeing to an international

transaction 1 week from today carries ______.
x
x
x
x
131
flexible rather than fixed; less risk (Incorrect)

flexible rather than fixed; the same amount of risk (Incorrect)
flexible rather than fixed; more risk (True Answer Correct)
fixed rather than flexible; the same amount of risk (Incorrect)
In international finance, speculation involves:

x not being able to make a commitment to buy or sell. (Incorrect)
x taking a risk by purchasing (or selling) a foreign currency asset,
holding it in anticipation of a rate increase (decrease). (True
Answer Correct)
x simultaneously buying several currencies to ensure that at least
one will rise in value. (Incorrect)
x avoiding risk of loss by offsetting an obligation to buy a foreign
currency by locking in a contract to sell it at the same
time. (Incorrect)
132
Interbank trading is:

x a monopoly business in the United States. (Incorrect)
x controlled by just 10 banks. (True Answer Correct)
x a state-mandated business. (Incorrect)
x a highly competitive market, with hundreds of banks offering
services. (Incorrect)
133
Why does a government impose controls or restrictions on

converting domestic currency to foreign currency (capital
controls)?
x The government is trying to stop the rapid decline in value of the
domestic currency. (Incorrect)
x The government wants to stave off an attack by a currency
speculator. (Incorrect)
x If the government is trying to maintain a fixed rate, it cannot
allow free trade of the currency. (Incorrect)
x Any of the above answers could be reasons. (True Answer
Correct)
134
When a government sets limits or puts any restrictions on the

international flow of currency or payments, those measures are
called:
x
x
x
x
135
forex regulation and restriction. (Incorrect)

capital controls. (True Answer Correct)
safeguard measures. (Incorrect)
black-market measures. (Incorrect)
Why may a black market develop in nations in which

government has imposed capital controls?
x All foreign currency purchases and sales are conducted and
controlled by the government, and it is illegal to trade
privately. (True Answer Correct)
x Traders are trying to avoid the taxes they must pay on each
transaction. (Incorrect)
x The government makes a huge profit on currency trades that the
private sector wants access to. (Incorrect)
x None of the answers is correct. (Incorrect)
136
To bypass capital controls, people who need foreign currency

sometimes resort to:
x
x
x
x
137
forward foreign exchange markets. (Incorrect)

stock markets. (Incorrect)
black markets. (True Answer Correct)
farmers markets. (Incorrect)
Foreign exchange market intervention refers to:

x actions taken by speculators to increase profits from
trading. (Incorrect)
x actions taken to lower currency trading risks and make the
markets safer. (Incorrect)
x the forgiving of penalties and other punishments for illegal
foreign exchange activities. (Incorrect)
x government purchases or sales of a nation's own currency in
international markets to change or stabilize the value of the
138
To avoid the imposition of capital controls, a government

wishing to keep its exchange rate at a certain level may rely on:
x forbidding all sales or purchases of foreign currency. (Incorrect)
x asking the large banks to keep the prices at a certain

level. (Incorrect)
x asking for loans from the International Monetary Fund
(IMF). (Incorrect)
x intervention in the foreign exchange market to raise or lower the
exchange rate. (True Answer Correct)
139
To maintain a fixed exchange rate via intervention in the

markets, a government should:
x be ready to crack down on illegal traders. (Incorrect)
x be ready to buy the home currency with foreign currency reserves
when the home currency's value declines. (True Answer Correct)
x be ready to sell the home currency when the home currency's
value declines. (Incorrect)
x be ready to borrow funds from international banks when the
home currency's value declines. (Incorrect)
140
Foreign exchange arbitrage refers to:

x the simultaneous purchase and sale of a foreign currency asset in
different markets to take advantage of a price differential. (True
Answer Correct)
x actions taken to lower currency trading risks and make the
markets safer. (Incorrect)
x the forgiving of penalties and other punishments for illegal
foreign exchange activities. (Incorrect)
x government purchases or sales of a nation's own currency in
international markets to change or stabilize the value of the
141
Capital control is described by all of the following except:

x restricting merchandise trade. (True Answer Correct)
x restricting the trade in foreign exchange. (Incorrect)
x channeling the currency trade through the
government. (Incorrect)
x restricting cross-border financial transactions. (Incorrect)
142
Parallel markets is another term for:

x government interventions. (Incorrect)
x interbank trades. (Incorrect)

x black markets. (True Answer Correct)
x trade in goods and in services. (Incorrect)
143
Arbitrage is:
x capital controls. (Incorrect)
x interest rate management by the central bank. (Incorrect)
x exploiting profit opportunities in the market resulting from price
differences. (True Answer Correct)
x investing in junk bonds or businesses that are not
ethical. (Incorrect)
144
Whenever there is a difference in the same exchange rate

offered in two markets, an arbitrageur would:
x wait for the markets to come to equilibrium. (Incorrect)
x buy in the market where the currency is offered at the cheaper
rate, and simultaneously sell the currency where the rates are
higher. (True Answer Correct)
x sell the cheaper-rate currency in the home market. (Incorrect)
x not consider the trade since prices would undoubtedly change
before it could be executed. (Incorrect)
145
Suppose $1 = 10.5 pesos in New York and $1 = 9.6 pesos in

Mexico City. If you had $10,000 using arbitrage, your profits
would be:
x 937 pesos. (Incorrect)
x 9600 pesos. (Incorrect)
x $790. (Incorrect)
146
If the U.S. interest rate is 4% per year and the U.K. interest
rate is 9% per year, then:
x an investor will see no reason to invest in the United
Kingdom. (Incorrect)
x an investor will borrow money in the United Kingdom and invest
it in the United States. (Incorrect)
x an investor can borrow money in the United States and invest in
the United Kingdom and profit. (True Answer Correct)
x an investor will find that the returns are the same in both
147
Arbitrage with two currencies is not possible when:

x there is an exchange rate difference in two markets. (Incorrect)
x traders are familiar with markets. (Incorrect)
x the exchange rates are in equilibrium: the same is occurring in all
x the exchange rates are extremely volatile. (Incorrect)
148
Suppose $1 = 1.5 euros in London and $1 = 1.2 euros in New

York. Which of the following would be the right trade for you
to make money?
x You sell 1000 euros in London and buy euros in New
York. (Incorrect)
x You sell dollars in New York and buy dollars in
London. (Incorrect)
x You sell dollars in London and buy dollars in New York. (True
Answer Correct)
x You sell euros in London and buy dollars in New
York. (Incorrect)
149
Suppose $1 = 120 yen in New York, $1 = 2 euros in London, and

1 euro = 75 yen in Tokyo. A speculator with $1 million would
get a profit of _____ by engaging in a 3-point arbitrage.
x $1.20 (Incorrect)
x 150,000 yen (Incorrect)
150
When it is possible to trade two separate currencies for a

common third currency, economists refer to profit
opportunities as:
x backward arbitrage. (Incorrect)
x speculation. (Incorrect)
x triangular arbitrage. (True Answer Correct)
x forced equilibrium. (Incorrect)
151
Approximately how many different national currencies exist in

the world today?
x more than 150 (True Answer Correct)
x more than 5,000 (Incorrect)
x 12 (Incorrect)
x 535 (Incorrect)
152
If 1 euro is priced at $1.25 and if 1 euro will also buy 88

Japanese yen (1 = 88), in equilibrium, with no arbitrage
opportunities, how much is the cross rate between the yen and
the dollar (yen-dollar rate)?
x 150/$ (Incorrect)
x 70.4/$ (True Answer Correct)
x 20/$ (Incorrect)
x 5/$ (Incorrect)
153
A vehicle currency is:

x contrabandit is used to smuggle other assets into controlled
economies. (Incorrect)
x a widely accepted, tradable currency that serves as a currency to
use for buying or selling one's own. (True Answer Correct)
x a currency whose value changes rapidly and
erratically. (Incorrect)
x a currency used to purchase imports of autos, buses, and other
transportation equipment. (Incorrect)
154
Suppose the average interest rate on euro bonds is 4%, and the
average interest rate on U.S. dollar bonds is 6%. Which should
the investor choose?
x neitherbonds have high default rates. (Incorrect)
x bothan investor will choose some euro bonds and some U.S.
bonds to diversify. (Incorrect)
x the euro bond because their economies are usually more
stable. (Incorrect)
x It is not possible to answer without information on exchange
rates. (True Answer Correct)
155
The forward exchange rate:

x allows investors to be sure of the price at which they can trade
forex in the future. (True Answer Correct)
x is the rate at which a trader can purchase currency for immediate
delivery. (Incorrect)
x is the rate of discount that international banks get when they
purchase. (Incorrect)
x is the rate that speculators consider if they are looking for bargain
prices. (Incorrect)
156
If investors can cover themselves in the forward market, they

will take advantage of interest rate differentials by:
x buying assets (lending) denominated in the high-interest rate
currency, and selling assets (borrowing) in the low-interest rate
x removing funds from both investments. (Incorrect)
x turning over their investment portfolio to an expert in one of the
two nations. (Incorrect)
x selling assets denominated in high-interest rate currency and
buying assets in the low-interest rate currency. (Incorrect)
157
There can be an opportunity for covered interest arbitrage if:

x the interest rate is low and the exchange rate is high. (Incorrect)
x the forward/spot rate difference is either larger or smaller in
percentage terms than the difference in the interest rates on two
currencies. (True Answer Correct)
x there is a time lag on the settlement of the
transactions. (Incorrect)
x the interest rate is high and the exchange rate is low. (Incorrect)
158
Covered interest parity refers to the situation in which:

x interest rates are the same in both currencies. (Incorrect)
x spot and forward rates are the same in both
x the forward rate between the two currencies is equal to the ratio
of their returns times the spot rate between the two
x there is an opportunity for arbitrage whenever prices are sluggish
and sticky. (Incorrect)
159
If the future rate equals the spot rate, then in equilibrium:

x
x
x
x
the exchange rate must depreciate. (Incorrect)

interest rates should be different. (Incorrect)
the exchange rate will appreciate. (Incorrect)
None of the answer choices is correct. (True Answer Correct)
160
Whenever nations impose capital controls on their currencies:

x returns are equalized and arbitrage opportunities
disappear. (Incorrect)
x there is no opportunity for trade or arbitrage, and differences in
returns persist. (True Answer Correct)
x the government sets the returns on its currency, so traders cannot
make profits. (Incorrect)
x in those nations, because government has ensured its safety,
capital is free to move. (Incorrect)
161
Risky interest arbitrage refers to:

x borrowing in the low-interest currency and lending in the highinterest currency without covering against a change in the exchange
x foolish actions that usually are not successful. (Incorrect)
x activities that are designed to raise or lower interest rates but are
risky. (Incorrect)
x the practice of depositing all of one's funds in one currency
without regarding the pros and cons of such a
transaction. (Incorrect)
162
Liquidity of an asset refers to:

x
x
x
x
its level of risk. (Incorrect)

whether it is held domestically or overseas. (Incorrect)
the ease with which it can be sold. (True Answer Correct)
its volatility. (Incorrect)
163
The situation in which the difference in interest rates between

two currencies is equal to the expected change in the spot rate
over the same time period is known as:
x covered interest arbitrage. (Incorrect)
x covered interest parity. (Incorrect)
x uncovered interest parity. (True Answer Correct)
x the forward-spot reversal. (Incorrect)
164
As the expected future spot rate moves closer to the spot rate,
uncovered interest parity indicates that:
x interest rates should remain constant. (Incorrect)
x interest rates should converge. (True Answer Correct)

x interest rates should diverge. (Incorrect)
x The answer depends on whether the expected future spot rate is
higher or lower than the spot rate. (Incorrect)
165
In equilibrium, the expected future spot rate is equal to:

x
x
x
x
166
If the U.S. interest rate is 4% per year and the U.K. interest
rate is 9% per year, which of the following statements is true?
x
x
x
x
167
the current spot rate. (Incorrect)

the current interest rate. (Incorrect)
the interest rate spread. (Incorrect)
the current forward rate. (True Answer Correct)
The dollar will depreciate 4% in 1 year. (Incorrect)

The pound will depreciate 9% in 1 year. (Incorrect)
The pound will depreciate 5% in 1 year. (True Answer Correct)
The dollar will appreciate 4% in 1 year. (Incorrect)
In equilibrium, if both uncovered and covered interest parity

hold, what condition should exist?
x World interest rates will be equal. (Incorrect)
x Rates of inflation will equalize. (Incorrect)
x The forward rate will equal the expected future spot rate. (True
Answer Correct)
x The forward rate will decrease as the spot rate rises. (Incorrect)
168
Whenever a nation's currency is expected to depreciate because

of various market conditions, the following situation exists with
respect to its forward rate for another currency:
x there is a forward discount from the spot rate by the rate of
depreciation. (Incorrect)
x there is a forward premium from the spot rate by the rate of
depreciation. (True Answer Correct)
x there is no difference between the spot and forward
rates. (Incorrect)
x there is no predictable relationship between the spot and forward
rates. (Incorrect)
169
The expected rate of currency depreciation is equal to the

proportional difference between the forward rate and the spot
rate. This is known as:

x
x
x
x
170
the forward depreciation. (Incorrect)

the backward depreciation. (Incorrect)
the forward premium. (True Answer Correct)
the backward premium. (Incorrect)
The total rate of return on an international asset is:

x the spot rate plus the forward rate. (Incorrect)
x the rate of return on the asset plus or minus the expected capital
gain or loss on currency changes. (True Answer Correct)
x the rate of return on the asset minus commissions. (Incorrect)
x the rate of return plus inflation minus taxes. (Incorrect)
171
In equilibrium, the interest parity condition requires that:

x all rates of returns will equalize. (Incorrect)
x all spot and forward rates will equalize. (Incorrect)
x the home interest rate minus its expected rate of currency
depreciation (against the foreign country) will equal the foreign
interest rate on similar assets. (True Answer Correct)
x all rates of returns and forward rates will equalize. (Incorrect)
172
From uncovered interest parity, we know that when the

domestic currency is expected to depreciate, the domestic
interest rate should be:
x greater than the foreign interest rate. (True Answer Correct)
x greater than the foreign exchange rate. (Incorrect)
x less than the foreign interest rate. (Incorrect)
x less than the foreign exchange rate. (Incorrect)
173
From uncovered interest parity, we know that when the

domestic interest rate is greater than the foreign one:
x the domestic currency is expected to appreciate. (Incorrect)
x the domestic currency is expected to depreciate. (True Answer
Correct)
x the foreign currency is expected to appreciate. (Incorrect)
x the foreign currency is expected to depreciate. (Incorrect)
174
An appreciation of the dollar is the same as a fall in the eurodollar exchange rate.
x True ()
175
An appreciation of the dollar is the same as a fall in the dollareuro exchange rate.
x False ()
176
A bilateral exchange rate refers to the rate between two

nations' currencies.
x False ()
177
Since the introduction of the euro, the dollar has appreciated

relative to the euro.
x True ()
178
A pegged exchange rate system is characterized by frequent

changes in the currency price by market forces.
x True ()
179
Exchange rates in the developing countries can be much more

volatile than those in developed countries.
x False ()
180
Almost 90% of foreign currency purchases and sales occur in

the spot market.
x False ()
181
Most foreign currency sales and purchases in the spot market

are conducted by government officials.
x True ()
182
A spread in foreign exchange markets refers to a buying price

greater than the selling price of a currency.
x True ()
183
A futures contract requires that the same individual who

bought the contract must settle the contract.
x True ()
184
An option provides the buyer the right to purchase or sell

currencies, without the obligation to trade.
x False ()
185
Hedging is the opposite of speculation.

x False ()
186
Most foreign exchange trading and speculation is done in the

interbank trading market, where large banks trade and
transfer deposits.
x False ()
187
Interbank trades among 10 international banks are generally

the basis for currency rates in the foreign exchange market.
x False ()
188
An investor can eliminate risk on fixed-interest foreign assets

by covering herself in the forward market.
x False ()
189
Compared to current times, during the 1960s and 1970s, profits

from arbitrage were very large, and interest parity was upheld.
x True ()
190
If uncovered interest parity holds, the current euro spot rate

can be calculated if we know the expected future exchange rate,
the dollar interest rate, and the euro interest rate.
x False ()
191
Forecasting future exchange rates is one of the most certain

aspects of international financial analysis.
x True ()
192
If uncovered interest parity holds, the difference in two nations'

interest rates is just equal to the expected rate of depreciation
of the higher rate currency versus the lower rate currency.
x False ()
193
Covered interest parity refers to the equilibrium condition in

which all interest rates are equal when the spot and forward
rates are equal to each other.
x True ()
194
There is no evidence that covered interest parity holds.

x True ()
195
Interest arbitrage can exist when two currencies have different

deposit rates on liquid cash balances.
x False ()
196
You have studied how nations have adopted a wide variety of

exchange rate regimes, from freely floating with almost no
intervention, to rigid and fixed with complete control by the
government. Other nations have chosen different paths,
relinquishing some or all control over their currencies. Discuss
two such systems and comment on their differences.
x ()
19
7
Assume your company has a contract to purchase 100,000 computers from a

Korean company. The payment is due on receipt of the shipment and must be
delivered in Korea on December 31, 2010. In July 2010, when you are arranging
the contract, the computers are priced at 500,000 won each. The spot rate in July
2010 is $1 exchanging for 1250 won.
A) Calculate the U.S. dollar price (in July 2010) of 1 unit of Korean currency.
B) What is the total price of the computers in dollars?
C) What is the total price of the computers in won?
D) What would you advise your firm to do to avoid a loss on the deal if the Korean won
costs 10% more compared to the U.S. dollar when payment is due in December?
x ()
198
In July 2010, the spot rate is $1 exchanging for 1250 won. You
are convinced that the won will appreciate by the end of the
year. How might you profit if your hunch is correct?
x ()
199
Explain how a trader can exploit an arbitrage opportunity

using the spot market and the forward market, after
discovering a difference in interest rate returns on two
currencies.
x ()
20
0
Suppose the U.S. dollar interest rate is 5% and the euro interest rate is 6%.
Assume no transaction costs, fees, or commissions. In all markets, the spot rate for
euros is $1.25. You believe in one year's time the spot rate for euros will be $1.30.
An investor would like to invest $100,000 for one year and is willing to take on risk
for a higher return.
A) How would you advise her?
B) What if you are incorrect and the euro rate is lower? Calculate the break-even
exchange rate; that is, an investment that returns the same as investing $100,000 at
5%.
x ()
The relative purchasing power of a currency is:

x the exchange rate expressed in ounces of gold. (Incorrect)
x the value of one currency in terms of the goods and services a unit
will purchase compared to an equivalent amount of another
x the official value of one nation's currency compared to the official
value of another currency. (Incorrect)
x the value of the currency during an economic expansion compared
to the value during a recession. (Incorrect)
The monetary approach to exchange rates describes:

x long-run relationships between money, prices, and exchange
x a short-run relationship between exchange rates and interest
rates. (Incorrect)
x a short-run measure of fluctuations in exchange rates. (Incorrect)
x a theory based on the idea that exchange rates are constant in the
long run. (Incorrect)
The idea that with frictionless trade all goods traded

internationally will have the same equilibrium price no matter
which currency they are priced in, is known as:
x covered interest parity. (Incorrect)
x arbitrage. (Incorrect)
x the law of one price. (True Answer Correct)
x relativity. (Incorrect)
In equilibrium, all traded goods sell at the same price

internationally because of:
x government direction. (Incorrect)
x arbitrage. (True Answer Correct)
x markets in which buyers and sellers do not interact. (Incorrect)
x the fact that the underlying value is the same
everywhere. (Incorrect)
The law of one price requires:

x trade frictions. (Incorrect)
x perfect competition. (True Answer Correct)
x trade frictions and perfect competition. (Incorrect)

x neither trade frictions nor perfect competition. (Incorrect)
6
The law of one price works under some assumptions. Which of

the following is NOT an assumption for the law of one price?
x There is free competition. (Incorrect)
x There is no transportation cost. (Incorrect)
x There are no tariffs. (Incorrect)
x The skill level of workers is identical in both countries. (True
Answer Correct)
If an automobile costs $32,000 in New York and $1 = 0.8 euros,

then under the condition of the law of one price, the cost of the
automobile in Rome should be:
x 32,000 euros. (Incorrect)
x 25,600 euros. (True Answer Correct)
If a pound of coffee beans costs 85 pesos in Mexico City and 10

pesos = 35 rupees, then the same pound of coffee should cost
_________ in New Delhi, under the condition of the law of one
price.
x 300 rupees (Incorrect)
x 297.50 rupees (True Answer Correct)
x 29,750 rupees (Incorrect)
x 3,500 rupees (Incorrect)
When the price of a good in the United States is $2, in Spain is

2, and the nominal exchange rate is E$/=1.5, what is the
relative price of the good in Spain versus the United States?
x 1 (Incorrect)
x 2/3 (Incorrect)
x 1/2 (Incorrect)
10
When the relative price of a good in Germany versus the United

States is 3, if the nominal exchange rate is E$/=1.5 and the U.S.
price is $10, what is the German price?
x 4 (Incorrect)
x 15 (Incorrect)
x 45 (Incorrect)
11
Purchasing power parity exists when:

x there are no arbitrage opportunities. (Incorrect)
x prices are the same when expressed in a common
x the goods in question are identical. (Incorrect)
12
In equilibrium, all traded goods sell at the same price

internationally. If the same goods are expressed in their home
prices, then the ratio of the prices is equal to:
x 1. (Incorrect)
x 0. (Incorrect)
x the rate of interest. (Incorrect)
x the exchange rate between the two currencies. (True Answer
Correct)
13
While the law of one price relates prices on individual goods to

the exchange rate, the theory of PPP relates:
x the relative price level of a basket of goods to the exchange
rate. (True Answer Correct)
x prices of individual goods to consumer demand. (Incorrect)
x exchange rates to interest rates. (Incorrect)
x goods markets to the market for services. (Incorrect)
14
In the international goods market, prices of goods in different

countries expressed in a common currency must be equalized.
This concept is called ______.
x exchange rate theory (Incorrect)
x depreciation (Incorrect)
x appreciation (Incorrect)
x purchasing power parity (PPP) (True Answer Correct)
15
If a basket of goods in the United States costs $1,000, and the

same basket of goods in Japan costs 125,000, then for PPP to
exist, $1 should trade for ____ Japanese yen.
x 4 (Incorrect)
x 50 (Incorrect)
x 125,000 (Incorrect)
16
If a pair of Nike shoes cost $45 in New York and $65 in Berlin,
then:
x we would expect the price to drop in New York and increase in
Berlin. (Incorrect)
x we would expect the prices to remain the same in both
places. (Incorrect)
x we would expect the price to increase in New York and decrease
in Berlin. (True Answer Correct)
x we would expect the price to increase in Berlin and stay constant
in New York. (Incorrect)
17
Absolute purchasing power parity implies that:

x the price of a basket of goods is cheaper in one country than in
another. (Incorrect)
x the price of a basket of goods is more expensive in one country
than in another. (Incorrect)
x the price of a basket of goods is the same in the two
countries. (True Answer Correct)
x the exchange rate is artificially held constant. (Incorrect)
18
The nominal exchange rate between two currencies tells us:

x changes in the exchange rate over time. (Incorrect)
x how many units of one currency can be purchased with one unit of
the home currency. (True Answer Correct)
x how much in terms of goods and services the home currency will
buy in the foreign nation compared to the home nation. (Incorrect)
x how much depreciation or appreciation has occurred in the home
exchange rate. (Incorrect)
19
The real exchange rate between two currencies tells us:

x changes in the exchange rate over time. (Incorrect)
x how many units of one currency can be purchased with one unit of
the home currency. (Incorrect)
x how much in terms of goods and services the home currency will
buy in the foreign nation compared to the home nation. (True
Answer Correct)
x how much depreciation or appreciation has occurred in the home

20
If the real exchange rate for a foreign currency rises (a real

depreciation), what is the situation?
x It takes more home goods to purchase the same quantity of
foreign goods. (True Answer Correct)
x It takes fewer home goods to purchase the same quantity of
foreign goods. (Incorrect)
x The nominal exchange rate has risen as well. (Incorrect)
x The nominal exchange rate has fallen. (Incorrect)
21
If the real exchange rate for a foreign currency falls (a real

appreciation), what is the situation?
x It takes more home goods to purchase the same quantity of
foreign goods. (Incorrect)
x It takes fewer home goods to purchase the same quantity of
foreign goods. (True Answer Correct)
x The nominal exchange rate has risen as well. (Incorrect)
x The nominal exchange rate has fallen. (Incorrect)
22
If the prices of goods in Europe increase, while the nominal

exchange rate between the euro and the U.S. dollar has not
changed, we say that the U.S. dollar has:
x experienced a nominal appreciation. (Incorrect)
x experienced a nominal depreciation. (Incorrect)
x experienced a real appreciation. (Incorrect)
x experienced a real depreciation. (True Answer Correct)
23
If more home goods are required to buy the same amount of

foreign goods, then we say that foreign currency has
experienced:
x a nominal appreciation. (Incorrect)
x a nominal depreciation. (Incorrect)
x a real appreciation. (Incorrect)
x a real depreciation. (True Answer Correct)
24
If fewer home goods are required to buy the same amount of

foreign goods, then we say that foreign currency has
experienced:
x a nominal appreciation. (Incorrect)
x a nominal depreciation. (Incorrect)
x a real appreciation. (True Answer Correct)

x a real depreciation. (Incorrect)
25
When the law of one price holds, the real exchange rate is
always equal to:
x
x
x
x
26
1. (True Answer Correct)

the nominal exchange rate. (Incorrect)
relative prices across countries. (Incorrect)
1/nominal exchange rate. (Incorrect)
Whenever the absolute purchasing power of two currencies is

the same, the real exchange rate between them is equal to:
x
x
x
x
0. (Incorrect)
1. (True Answer Correct)
125. (Incorrect)
1/PPP. (Incorrect)
27
What is the situation when a home currency purchases more

goods and services at home than abroad when converted to a
foreign currency?
x The currency is undervalued. (True Answer Correct)
x The currency is overvalued. (Incorrect)
x The currency is unstable. (Incorrect)
x The currency is depreciating. (Incorrect)
28
What is the situation when a home currency purchases fewer

goods and services at home than abroad when converted to a
foreign currency?
x The currency is undervalued. (Incorrect)
x The currency is overvalued. (True Answer Correct)
x The currency is unstable. (Incorrect)
x The currency is appreciating. (Incorrect)
29
In equilibrium, with purchasing power parity, the nominal

exchange rate will be equal to:
x
x
x
x
the two nations' real exchange rate. (Incorrect)

the ratio of the two nations' GDPs. (Incorrect)
the ratio of the two nations' price levels. (True Answer Correct)
1. (Incorrect)
30
Under what circumstances would there be a no-arbitrage

situation in goods markets between two nations?
x when one of the currencies is undervalued (Incorrect)
x when one of the currencies is overvalued (Incorrect)
x when both of the currencies are overvalued (Incorrect)
x when the relative price of the currencies is equal to one (True
Answer Correct)
31
If a nation experiences 10% inflation and its trading partner

does not, and if PPP holds, what happens to its nominal
exchange rate?
x It depreciates by 10%. (True Answer Correct)
x It appreciates by 10%. (Incorrect)
x It does not change. (Incorrect)
x It becomes negative. (Incorrect)
32
If a nation experiences 10% inflation and its trading partner

does not, and if PPP holds, what happens to its real exchange
rate?
x It depreciates by 10%. (Incorrect)
x It appreciates by 10%. (Incorrect)
x It does not change. (True Answer Correct)
x It becomes negative. (Incorrect)
33
When the inflation rate in any nation changes ceteris paribus:

x only absolute PPP is disturbed. (Incorrect)
x only relative PPP is disturbed. (Incorrect)
x both absolute and relative PPP are disturbed. (True Answer
Correct)
x the inflation rates in other nations will have to change as
well. (Incorrect)
34
Whenever two nations experience inflation, and the nominal

exchange rates move by the same percentage to offset, we say
there is:
x absolute PPP. (Incorrect)
x indeterminate PPP. (Incorrect)
x inverted PPP. (Incorrect)
x relative PPP. (True Answer Correct)
35
Absolute PPP and relative PPP differ in what way?

x Absolute PPP always holds but relative PPP may not. (Incorrect)
x Relative PPP may hold even when absolute PPP does not. (True
Answer Correct)
x Relative and absolute PPP always hold. (Incorrect)
x Absolute PPP relates to changes in inflation and exchange rates,
whereas relative PPP relates to their levels. (Incorrect)
36
Which of the following situations would exhibit relative PPP?

x Europe's yearly inflation rate rises from 5% to 7%, ceteris
paribus, and the euro-yen rate depreciates by 7%. (Incorrect)
paribus, and the euro-yen rate depreciates by 2%. (True Answer
Correct)
paribus, and the euro-yen rate appreciates by 2%. (Incorrect)
paribus, and the euro-yen rate appreciates by 5%. (Incorrect)
37
With relative PPP, a rise in a nation's inflation rate is always

offset by an increase in the rate of __________ of its currency.
x
x
x
x
38
appreciation (Incorrect)
revaluation (Incorrect)
depreciation (True Answer Correct)
devaluation (Incorrect)
When the Japanese inflation rate is less than the Australian

inflation rate:
x Japanese prices are rising faster than Australian prices. (Incorrect)
x Japanese prices are rising more slowly than Australian
prices. (True Answer Correct)
x Japanese prices are rising at the same rate as Australian
prices. (Incorrect)
x Japanese prices are not rising. (Incorrect)
39
When the Chinese yuan is appreciating against the U.S. dollar, if

relative PPP holds, then this suggests that the U.S. inflation rate:
x exceeds the Chinese inflation rate. (True Answer Correct)
x equals the Chinese inflation rate. (Incorrect)

x exceeds the Chinese interest rate. (Incorrect)
x equals the Chinese interest rate. (Incorrect)
40
Evidence on the existence of relative PPP shows that:

x the evidence for relative PPP is scanty and the theory is largely
discredited. (Incorrect)
x the evidence for relative PPP is hit or miss, and so one should
exercise caution in using relative PPP to predict changes in a
nation's exchange rates. (Incorrect)
x relative PPP is an approximate guide to predicting the relationship
between changes in inflation and exchange rates over long periods
such as decades. (True Answer Correct)
x both absolute and relative PPP hold nearly perfectly in the short
and long run, and are used with great accuracy to make
predictions. (Incorrect)
41
Considering data on exchange rate and price-level fluctuations

in the United States and the United Kingdom from 1975 to 2009,
it is clear that:
x absolute and relative PPP hold in the long run. (True Answer
Correct)
x absolute and relative PPP hold in the short run. (Incorrect)
x absolute and relative PPP do not hold in the long run. (Incorrect)
x It is impossible to determine the relationship between inflation
and exchange rates between the two nations. (Incorrect)
42
As economies adjust to inflation, there is an adjustment of

exchange rates to reflect the changed price level. This
adjustment is called:
x real exchange rates. (Incorrect)
x convergence. (True Answer Correct)
x adjustment costs. (Incorrect)
x revaluation. (Incorrect)
43
Economists have developed models to predict changes in

exchange rates based on inflation trends. To forecast exchange
rates, economists calculate the average ____.
x speed of convergence (True Answer Correct)
x PPP (Incorrect)
x interest parity (Incorrect)
x price deviation (Incorrect)

44
Evidence suggests that convergence to PPP occurs:

x instantly, as arbitrageurs take advantage of profit
opportunities. (Incorrect)
x rapidly, as arbitrageurs learn of profit opportunities. (Incorrect)
x slowly, as arbitrageurs operate, and production, prices, and
exchange rates adjust. (True Answer Correct)
x Convergence to PPP has never been observed. (Incorrect)
45
The half-life of PPP deviations is about:

x
x
x
x
46
4 months. (Incorrect)
4 quarters. (Incorrect)
4 years. (True Answer Correct)
4 decades. (Incorrect)
The half-life of a PPP divergence indicates:

x
x
x
x
how long it takes to disappear. (Incorrect)

how long it takes for half to disappear. (True Answer Correct)
how long it takes to appear. (Incorrect)
how long it takes to reach half its greatest value. (Incorrect)
47
Short-run PPP may not hold for a variety of reasons. Which of

the following is NOT cited in your textbook as one of those
reasons?
x weather and other environmental conditions that affect trade (True
Answer Correct)
x transactions costs (Incorrect)
x non-traded goods (Incorrect)
x imperfect competition and price stickiness (Incorrect)
48
Which of the following statements is NOT a reason for

explaining the deviations from PPP?
x Some goods are not tradeable. (Incorrect)
x Markets are imperfect and there could be legal
obstacles. (Incorrect)
x Prices can be sticky in different countries. (Incorrect)
x There are no transportation costs. (True Answer Correct)

49
An example of a non-traded product would be:

x
x
x
x
50
corn. (Incorrect)
haircuts. (True Answer Correct)
shoes. (Incorrect)
aircraft. (Incorrect)
How could conditions of imperfect competition explain

deviations from PPP?
x Imperfect competition means that prices are higher than costs and
may not converge. (True Answer Correct)
x Governments often restrict trade in those goods. (Incorrect)
x Goods sold under conditions of imperfect competition are often
inferior. (Incorrect)
x Arbitrageurs do not recognize profit opportunities in these
51
Globalization trends may ____ the tendency for prices to

converge.
x
x
x
x
52
retard (Incorrect)
speed up (True Answer Correct)
eliminate (Incorrect)
render irrelevant (Incorrect)
What is the Big Mac index?

x It is a price index for the top 20 stocks traded
internationally. (Incorrect)
x It reflects inflation trends through trade in laptop computers and
international price competition. (Incorrect)
x It is an index of the price of McDonald's hamburgers quoted in
one currency designed to measure whether absolute PPP holds for
Big Macs. (True Answer Correct)
x It is a measure of unemployment in the service industries of poor
nations where Western retailers such as McDonalds have
infiltrated. (Incorrect)
53
Table: Exchange Rates and Prices

Exchange Rate per
Price of a Computer
Country
Brazil (real)
Dollar
2.2
in Local Currency
1,200
Mexico (peso)
10
6,000
India (rupee)
45
18,000
South Africa (rand)
3,500
Reference: Ref 11-1
(Table: Exchange Rates and Prices) Suppose a computer costs $500 in

the United States. If PPP were to hold, then the price of a computer in
Mexico would be _____ pesos.
x 500 (Incorrect)
x 50 (Incorrect)
x 0.02 (Incorrect)
54

Exchange Rate per
Country
Dollar
Brazil (real)
2.2
Price of a Computer
in Local Currency
1,200
Mexico (peso)
10
6,000
India (rupee)
45
18,000
South Africa (rand)
3,500
Reference: Ref 11-1

the United States. If PPP were to hold, then the price of a computer in
South Africa would be _____ rands.
x 40 (Incorrect)
x 800 (Incorrect)
x 8,000 (Incorrect)
55

Exchange Rate per
Country
Dollar
Price of a Computer
in Local Currency
Brazil (real)
2.2
1,200
Mexico (peso)
10
6,000
India (rupee)
45
18,000
South Africa (rand)
3,500
Reference: Ref 11-1

the United States. According to the information provided, under
conditions of PPP, the price of a computer should be ____ reais in
Brazil.
x 2,200 (Incorrect)
x 1,200 (Incorrect)
x 550 (Incorrect)
56

Exchange Rate per
Country
Dollar
Price of a Computer
in Local Currency
Brazil (real)
2.2
1,200
Mexico (peso)
10
6,000
India (rupee)
45
18,000
South Africa (rand)
3,500
Reference: Ref 11-1

the United States. With the price of the computer given in local
currency, the Indian rupee is _____ by ______%.
x overvalued; 9.1 (Incorrect)
x overvalued; 20 (Incorrect)
x undervalued; 12.5 (Incorrect)
x undervalued; 20 (True Answer Correct)
57

Exchange Rate per
Country
Dollar
Price of a Computer
in Local Currency
Brazil (real)
2.2
1,200
Mexico (peso)
10
6,000
India (rupee)
45
18,000
South Africa (rand)
3,500
Reference: Ref 11-1

the United States. With the price of the computer given in the local
currency, the South African rand is _______ by _____%.
x undervalued; 12. (Incorrect)
x overvalued; 3. (Incorrect)
x undervalued; 12.5 (True Answer Correct)
x undervalued; 1.25 (Incorrect)

58

Exchange Rate per
Country
Dollar
Price of a Computer
in Local Currency
Brazil (real)
2.2
1,200
Mexico (peso)
10
6,000
India (rupee)
45
18,000
South Africa (rand)
3,500
Reference: Ref 11-1

the United States. With the price of the computer given in the local
currency, the Brazilian real is _______ by _____%.
x undervalued; 22 (Incorrect)
x undervalued; 12 (Incorrect)
x overvalued; 9.1 (True Answer Correct)
x overvalued; 20 (Incorrect)
59
Price stickiness refers to:

x
x
x
x
slow movements in prices. (True Answer Correct)

the sticker price for big-ticket items. (Incorrect)
the price of oil. (Incorrect)
the price of a Big Mac across countries. (Incorrect)
60
Better communication technology has made it easier to conduct

____ in international markets, thus ____ exchange rate
adjustments to economic conditions and inflation.
x open market operations; eliminating (Incorrect)
x arbitrage; speeding up (True Answer Correct)
x sales and purchases of currency; slowing down (Incorrect)
x portfolio investment; fundamentally changing (Incorrect)
61
Money can be defined as:

x a unit of account. (Incorrect)
x a store of value. (Incorrect)
x a medium of exchange. (Incorrect)
x a unit of account, a store of value, and a medium of
exchange. (True Answer Correct)
62
Money's function as a medium of exchange is important

because:
x if there were no money, there would be no common unit of
account. (Incorrect)
x if there were no money, society's wealth would be
zero. (Incorrect)
x it eliminates the need for inefficient barter. (True Answer
Correct)
x if there were no money, exchanges would be
impossible. (Incorrect)
63
The most restrictive measurement of money is:

x
x
x
x
64
Currency is a part of which measure of money?

x
x
x
x
65
M0 (Incorrect)
M1 (Incorrect)
M2 (Incorrect)
M0, M1, and M2 (True Answer Correct)
The M1 measure of money includes demand deposits but

excludes:
x
x
x
x
66
M0. (True Answer Correct)

M1. (Incorrect)
M2. (Incorrect)
M3. (Incorrect)
currency in circulation. (Incorrect)

Federal Reserve notes. (Incorrect)
travelers' checks. (Incorrect)
bank reserves. (True Answer Correct)
The criterion for including an asset in any measure of money is

whether it is:
x
x
x
x
used for transactions and highly liquid. (True Answer Correct)

used as a store of value. (Incorrect)
used as collateral for loans. (Incorrect)
stable and durable. (Incorrect)
67
The broad measure of money is referred to as:

x
x
x
x
68
The entity in any nation that accurately controls directly or

indirectly the supply of money is referred to as:
x
x
x
x
69
nominal income divided by real income. (Incorrect)

a constant proportion of nominal income. (True Answer Correct)
the demand for money held as an asset. (Incorrect)
real income divided by velocity. (Incorrect)
In general, monetary economic theory states that the demand

for money is proportional to:
x
x
x
x
72
the supply of money will rise. (Incorrect)

the demand for money will rise. (Incorrect)
the supply of money will decrease. (Incorrect)
the demand for money will decrease. (True Answer Correct)
According to the quantity theory of money, the demand for

money is equal to:
x
x
x
x
71
the executive branch. (Incorrect)

the central bank. (True Answer Correct)
the treasury. (Incorrect)
the legislative branch. (Incorrect)
If nominal income in a nation decreases, economists would

predict:
x
x
x
x
70
M0. (Incorrect)
M1. (Incorrect)
M2. (True Answer Correct)
M3. (Incorrect)
nominal income. (True Answer Correct)

the unemployment rate. (Incorrect)
the population. (Incorrect)
the exchange rate. (Incorrect)
The demand for real money balances is:

x proportional to nominal income. (Incorrect)
x proportional to real income. (True Answer Correct)
x disproportional to real GDP. (Incorrect)

x determined by the real rate of interest. (Incorrect)
73
Assume nominal GDP = PY, and k = the proportion of nominal

income that the nation holds (demands) as money to cover its
transactions. Because nominal money supply = nominal money
demand, then:
x increases in nominal income cause an increase in the money
supply. (Incorrect)
x decreases in nominal income cause an increase in the money
supply. (Incorrect)
x price increases cause an increase in the money supply. (Incorrect)
x an increase in the money supply causes a proportional increase in
nominal income. (True Answer Correct)
74
If all else is equal, a nation with greater income will have:

x
x
x
x
lower prices. (True Answer Correct)

higher prices. (Incorrect)
lower money supply. (Incorrect)
higher prices and higher money supply. (Incorrect)
75
If we adjust the supply of money for changes in the price level,

we get real balances. The demand for real balances is
proportional to ____.
x real GDP (True Answer Correct)
x the unemployment rate (Incorrect)
x the population (Incorrect)
x the exchange rate (Incorrect)
76
If prices are held constant and income increases by 12%, the

demand for money will ______ by _______%.
x
x
x
x
77
decrease; 21 (Incorrect)
increase; 12 (True Answer Correct)
decrease; 12 (Incorrect)
remain unchanged (Incorrect)
The price level in the country is determined by ______ and

_______.
x nominal money supply; demand for real money (True Answer
Correct)
x demand for real money; average tax rate (Incorrect)

x demand for real money; growth of GDP (Incorrect)
x supply of real money; demand for real money (Incorrect)
78
If money growth is bigger than income growth, then we can:

x
x
x
x
79
expect unemployment to increase. (Incorrect)

expect inflation to decrease. (Incorrect)
expect inflation to increase. (True Answer Correct)
expect inflation and unemployment to decrease. (Incorrect)
Using monetary theory, one can show that the price level (index)
in an economy is equal to:
x the inflation rate minus the interest rate. (Incorrect)
x the average change in the level of trade over the past 5
quarters. (Incorrect)
x the velocity of money. (Incorrect)
x the ratio of the nominal supply of money to the demand for real
balances. (True Answer Correct)
80
According to the long-run monetary model, we can rearrange

terms in the money demand/supply in our long-run relationship
to show that when the nominal supply of money is increased
ceteris paribus:
x the demand for money is decreased. (Incorrect)
x the price level is increased. (True Answer Correct)
x real income is increased. (Incorrect)
x the price level is decreased. (Incorrect)
81
The long-run monetary model of the price level provides that:

x the demand for money is always proportional to the supply of
money. (Incorrect)
x when the demand for money decreases, prices respond very
slowly. (Incorrect)
x as long as prices are flexible, a change in the supply of money or
the demand for money will result in a change in the price level to
restore equilibrium. (True Answer Correct)
x equilibrium conditions require a change in real GDP to lower
82
If we assume that prices adjust in the long run so that the

nominal demand for money equals the nominal supply of money,
then:
x we can determine changes in exchange rates if absolute PPP
holds. (True Answer Correct)
x absolute PPP will hold. (Incorrect)
x relative PPP will hold. (Incorrect)
x exchange rates will not change. (Incorrect)
83
The long-run monetary model of exchange rates provides that

real income changes result in a(n) _______ change in the price
level and a(n) ________ change in the strength of the currency.
x corresponding; opposite (Incorrect)
x corresponding; corresponding (Incorrect)
x opposite; corresponding (True Answer Correct)
x opposite; opposite (Incorrect)
84
If there is an increase in the money supply in the United States,

using the monetary model of the exchange rate, one would
predict that the U.S. dollar would:
x become stronger. (Incorrect)
x appreciate in the short run, but not in the long run. (Incorrect)
x depreciate. (True Answer Correct)
x depreciate in the short run, but not in the long run. (Incorrect)
85
If U.S. real income increases, then the prediction of the

monetary model of exchange rates would be that the U.S. dollar
would:
x become stronger. (True Answer Correct)
x appreciate in the short run, but not in the long run. (Incorrect)
x depreciate. (Incorrect)
x depreciate in the short run, but not in the long run. (Incorrect)
86
Under the monetary approach to exchange rates, if real money

demand is greater at home but relative money supply is greater
in foreign markets, then the exchange rate should be:
x greater than 1. (Incorrect)
x equal to 1. (Incorrect)
x less than 1. (True Answer Correct)
x There is not enough information provided to know what it should
be. (Incorrect)
87
Under the monetary approach to exchange rates, if both real

money demand and money supply are greater at home than in
foreign markets, then the exchange rate should be:
x greater than 1. (Incorrect)
x equal to 1. (Incorrect)
x less than 1. (Incorrect)
x There is not enough information provided to know what the
exchange rate should be. (True Answer Correct)
88
Under the monetary approach to exchange rates, if there is a

rise in a country's home money supply, and all else is equal, then
the exchange rate should:
x hold steady. (Incorrect)
x appreciate. (Incorrect)
x appreciate and then remain steady. (Incorrect)
89
Under the monetary approach to exchange rates, if there is a

rise in a foreign market's income, and all else is equal, then the
exchange rate should:
x hold steady. (Incorrect)
x appreciate. (Incorrect)
x appreciate and then remain steady. (Incorrect)
90
Under the monetary approach to exchange rates, if the exchange

rate has appreciated, this suggests that:
x the home country's money supply has risen. (Incorrect)
x the foreign country's money supply has risen. (True Answer
Correct)
x the home country's income has fallen. (Incorrect)
x the foreign country's money supply has fallen (Incorrect)
91
Under the monetary approach to exchange rates, if the exchange

rate has appreciated, this suggests that:
x the home country's money supply has fallen. (True Answer
Correct)
x the foreign country's income has risen. (Incorrect)
x the home country's income has fallen. (Incorrect)
x the home country's money supply has risen. (Incorrect)
92
When we consider growth rates of the variables, the growth of

the price level (inflation) is equal to:
x growth in nominal GDP. (Incorrect)
x growth in real GDP. (Incorrect)
x growth of the monetary aggregate. (Incorrect)
x growth of the nominal supply of money minus the growth rate of
real income. (True Answer Correct)
93
The long-run relationship between money growth, income

growth, and the change in the price level in a nation is:
x money growth = real income growth change in the price
level. (Incorrect)
x real income growth money growth = change in the price
level. (Incorrect)
x change in the price level = money growth real income
growth. (True Answer Correct)
x real income growth / change in the price level = money
growth. (Incorrect)
94
Combining the relative PPP with the monetary model of

exchange rates, we find: the rate of depreciation of a currency
(relative to another nation) in the long run is equal to:
x the sum of nominal money supply growth rates in each
nation. (Incorrect)
x the difference between the nominal money supply growth rates in
each nation minus the difference between growth rates of real
GDP. (True Answer Correct)
x the average of growth rates of real GDP in each nation. (Incorrect)
x the sum of population growth plus technology growth. (Incorrect)
95
Which of the following statements about the relationship

between money, prices, and exchange rates in the long run is
NOT correct?
x Since money is neutral in the long run, real income growth has no
effect on inflation or the nominal exchange rate for a nation. (True
Answer Correct)
x The rate of growth of prices (inflation rate) = the difference
between money growth and real income growth. (Incorrect)
x The rate of depreciation of the nominal exchange rate between
one nation and another is directly related to the difference in the
inflation rates in the nations. (Incorrect)
x When a nation's real income grows, its inflation rate
decreases. (Incorrect)
96
If Europe has a real GDP growth rate of 5%, and the United
States has a real GDP growth rate of 6%, while money growth
in Europe is 7%, and money growth in the United States is 5%,
what would the monetary exchange rate model predict for
exchange rates in the long run?
x The U.S. dollar would appreciate by 3% against the euro. (True
Answer Correct)
x The U.S. dollar would depreciate by 3% against the
euro. (Incorrect)
x The U.S. dollar and the euro would not change against each other
because the growth rates are offsetting. (Incorrect)
x The U.S. dollar would appreciate by 1% against the
euro. (Incorrect)
97
If the U.S. growth rate is greater than that of Canada, then the
dollar will depreciate:
x only if the U.S. inflation rate exceeds Canada's. (True Answer
Correct)
x regardless of the relative inflation rates. (Incorrect)
x only if the U.S. inflation rate is less than Canada's. (Incorrect)
x only if the U.S. inflation rate is less than that of Canada's other
trade partners. (Incorrect)
98
An increase in money supply by 15% in the United States would

cause the exchange rate to:
x
x
x
x
99
appreciate by 15%. (Incorrect)

appreciate by 7.5%. (Incorrect)
depreciate by 15%. (True Answer Correct)
stay the same. (Incorrect)
Forecasting exchange rates involves:

x knowing the history of exchange rate behavior. (Incorrect)
x assessing data on money supply growth and potential real income
growth. (True Answer Correct)
x understanding the relationship between monetary policy and
unemployment. (Incorrect)
x assessing data on money supply and unemployment. (Incorrect)
100
If we can accurately predict monetary growth, and if the

assumption that demand for real money balances is constant,
then we may predict:
x changes in exchange rates only. (Incorrect)
x changes in price levels only. (Incorrect)
x both changes in price levels and changes in exchange rates. (True
Answer Correct)
x neither changes in price levels nor changes in exchange
rates. (Incorrect)
101
If prices are flexible and PPP holds, it is possible to forecast the

exchange rate in the long run whenever ______ change in a
nation ceteris paribus.
x real income and nominal growth rate of the money supply (True
Answer Correct)
x levels of trade and financial flows (Incorrect)
x capital controls (Incorrect)
x short-run nominal interest rates (Incorrect)
102
Whenever the supply of money is growing at a constant rate, if

there is price flexibility and real income is constant, then:
x
x
x
x
the price level is growing at a faster rate. (Incorrect)

the price level is decreasing. (Incorrect)
the price level is constant. (Incorrect)
the price level grows at the same rate. (True Answer Correct)
103
Empirically, during the period 19752005, the relationship

between the growth rate of money, changes in the price level,
and changes in the exchange rate was:
x perfect. (Incorrect)
x strong but not perfect. (True Answer Correct)
x weak, but showing some correlation. (Incorrect)
x completely uncorrelated, with a correlation coefficient of
zero. (Incorrect)
104
Factors that could weaken the relationship between money

growth rates and changes in price levels and rates of exchange
include:
x national differences in variables affecting growth of real income
or the demand for money. (True Answer Correct)
x differences in transportation costs, making trade nearly
impossible. (Incorrect)
x differences in the willingness of government to address economic

problems with fiscal versus monetary policy. (Incorrect)
x national differences in variables, differences in transportation
costs, and differences in the willingness of government to address
economic problems with fiscal policy. (Incorrect)
105
Evidence on hyperinflationary periods indicates:

x a complete breakdown of the monetary exchange rate theory in
the short run. (Incorrect)
x that it takes longer for monetary and price level swings to show
up in the exchange rate data. (Incorrect)
x that the relationship between high inflation and exchange
depreciation is much tighter even in the short run. (True Answer
Correct)
x that the government's inability to control monetary growth led to
the currency becoming completely worthless domestically but
ironically more valuable outside the nation. (Incorrect)
106
Hyperinflation is a condition described by:

x a 5% increase in price each year. (Incorrect)
x a sustained increase in price of 50% each month. (True Answer
Correct)
x any kind of price increase. (Incorrect)
x the rise in price during a recession. (Incorrect)
107
With an annual inflation of 3.5%, prices will double in _____

years, and if inflation increases to 10%, prices will double in
_______ years.
x 35; 1 (Incorrect)
x 2; 4 (Incorrect)
108
Which of the following nations has NOT suffered bouts of

extreme hyperinflation?
x
x
x
x
Germany (Incorrect)
Japan (True Answer Correct)
Zimbabwe (Incorrect)
Argentina (Incorrect)
109
Currency reform refers to:

x setting new rules so that currency is more efficient to
use. (Incorrect)
x replacing paper money and coins with electronic
deposits. (Incorrect)
x more oversight for banks and other institutions handling large
quantities of currency. (Incorrect)
x replacing currency whose value has fallen with new units of
higher value. (True Answer Correct)
110
It is not surprising to learn that, during hyperinflations, the

demand for real money balances:
x accelerates because people need to hold more money to cover
higher prices. (Incorrect)
x remains constant because we are talking about real, not nominal,
balances. (Incorrect)
x decreases as the value of the nominal money decreases. (True
Answer Correct)
x is unpredictable. (Incorrect)
111
When there is a hyperinflationary period, large changes in

exchange rates and price levels happen ________ during
periods of more stable prices and exchange rates.
x at about the same rate as (Incorrect)
x more slowly than (Incorrect)
x much more rapidly than (True Answer Correct)
x slightly more rapidly than (Incorrect)
112
A lesson from hyperinflationary periods is that:

x real GDP seems not to be affected. (Incorrect)
x the price level rises but soon a period of decreasing prices
ensues. (Incorrect)
x the demand for real money balances decreases during periods of
extreme instability. (True Answer Correct)
x the demand for real money balances is always
113
Zimbabwe's ability to limit hyperinflation was hindered by:

x
x
x
x
114
price controls. (Incorrect)

black markets. (True Answer Correct)
foreign exchange markets. (Incorrect)
rampaging elephants. (Incorrect)
In the general model of the demand for money, the demand for
real balances is based on which two variables?
x the supply of money and the price level (Incorrect)
x the demand for assets and the supply of assets (Incorrect)
x the level of real income and the nominal rate of interest (True
Answer Correct)
x expectations of inflation and money velocity (Incorrect)
115
The cost of holding money is primarily:

x
x
x
x
the interest given up by not investing it. (True Answer Correct)

the weight of it in your pocket. (Incorrect)
the inverse relationship between liquidity and prices. (Incorrect)
the relationship between liquidity and prices. (Incorrect)
116
Even though we assume the nominal interest rate on money is

zero, there is a benefit to holding money. This is generally
thought to be:
x the prestige of having a large income. (Incorrect)
x the interest earned from investing it. (Incorrect)
x the ease of conducting transactions by having a perfectly liquid
payment system. (True Answer Correct)
x the depreciation of the value of the dollar as prices
117
For a given level of real income, the demand for real money
balances is inversely related to:
x
x
x
x
the nominal rate of interest. (True Answer Correct)

the real rate of interest. (Incorrect)
nominal GDP. (Incorrect)
the price level. (Incorrect)
118
In the long run, the demand for real balances rises whenever:
x nominal interest rates fall. (Incorrect)
x real GDP rises. (Incorrect)
x the exchange rate rises. (Incorrect)
x nominal interest rates fall and real GDP rises. (True Answer
Correct)
119
We can use the existence of arbitrage and the idea of uncovered

interest parity (UIP) to assume that any interest rate
differential between two currencies must be offset by:
x the change in the quantity of money. (Incorrect)
x an offsetting differential in the expected exchange rates. (True
Answer Correct)
x offsetting changes in real income. (Incorrect)
x resulting increases in borrowing denominated in the low-interest
120
Using the relationship between expected exchange rates and

inflation differentials in combination with uncovered interest
parity, we find:
x changes in inflation rates are directly related to changes in
nominal interest rates. (True Answer Correct)
x changes in inflation rates are inversely related to changes in
nominal interest rates. (Incorrect)
x changes in inflation rates are unrelated to changes in nominal
interest rates. (Incorrect)
x changes in inflation rates are directly related to changes in real
121
If the exchange rate between the dollar and yen has risen, this
would be consistent with:
x a rise in the U.S. interest rate. (Incorrect)
x a rise in U.S. inflation. (Incorrect)
x a fall in the Japanese interest rate. (Incorrect)
x a rise in the U.S. interest rate, a rise in U.S. inflation, and a fall in
the Japanese interest rate. (True Answer Correct)
122
The long-run Fisher effect links rises in inflation with rises in

nominal interest rates by the same proportion, resulting in ____
the demand for real money balances.
x no effect on (Incorrect)
x an increase in (Incorrect)
x a decrease in (True Answer Correct)
x an increase in the supply of money offsetting the increase
in (Incorrect)
123
If PPP and uncovered interest parity hold, then the long-run

real rate of interest in each nation:
x
x
x
x
124
will never change. (Incorrect)

will equalize. (True Answer Correct)
will increase. (Incorrect)
will decrease. (Incorrect)
The Fisher effect creates a link between _____ and ______.

x
x
x
x
expected profits; unemployment rates (Incorrect)

exchange rates; expected profits (Incorrect)
inflation rates; unemployment rates (Incorrect)
inflation rates; interest rates (True Answer Correct)
125
If inflation in the United States is 4% per year and in the

United Kingdom it is 8% per year, and interest rate in the
United Kingdom is 6%, then the Fisher effect predicts that:
x the interest rate in the United States is 2%. (True Answer
Correct)
x the interest rate in the United States is 4%. (Incorrect)
126
The real interest rate is equal to:

x
x
x
x
127
the nominal interest rate plus inflation. (Incorrect)

the nominal interest rate minus inflation. (True Answer Correct)
inflation minus the nominal interest rate. (Incorrect)
inflation multiplied by the nominal interest rate. (Incorrect)
Real interest parity indicates that, when PPP and UIP hold:
x nominal interest rates are equal across countries. (Incorrect)
x inflation rates are equal across countries. (Incorrect)
x real interest rates are equal across countries. (True Answer

Correct)
x nominal interest rates vary across countries. (Incorrect)
128
When real interest parity holds:

x nominal interest rates are equal all over the world. (Incorrect)
x real interest rates are equal across nations with different
x real interest rates on dollar assets are equal but not for all
x real interest rates will follow a pattern of convergence but
equilibrium will never occur. (Incorrect)
129
For real interest parity to hold, we require:

x
x
x
x
130
PPP. (Incorrect)
UIP. (Incorrect)
both PPP and UIP. (True Answer Correct)
neither PPP nor UIP. (Incorrect)
Data indicates that the Fisher effect:

x holds perfectly in the short run. (Incorrect)
x holds perfectly in the long run. (Incorrect)
x holds perfectly in the long run and the short run. (Incorrect)
x holds in neither the long run nor the short run. (True Answer
Correct)
131
More realistically, the liquidity function is not ______ but a(n)

______ function of the demand for real balances based on
changes in the ______.
x constant; decreasing; nominal rate of interest (True Answer
Correct)
x increasing; constant; real rate of interest (Incorrect)
x decreasing; increasing; level of real income (Incorrect)
x constant; increasing; real rate of interest (Incorrect)
132
Incorporating the liquidity preference function into the simple

model changes its outcome somewhat. What is the impact?
x Changes in the growth of the money supply cause inflation and

nominal interest rates to change, which affects demand for real
balances and causes further discontinuous impacts on prices. (True
Answer Correct)
x Changes in the inflation rate no longer affect nominal interest
rates: the Fisher effect is no longer operative. (Incorrect)
x Changes in nominal interest rates have an immediate effect on
the real exchange rate, bypassing the adjustment
process. (Incorrect)
x Changes in the money growth rate increase real balances, since
prices are no longer flexible. (Incorrect)
133
When we incorporate a relationship between expected inflation

and liquidity preference (demand for real balances) into our
long-run model, the results change as follows:
x the exchange rate is unaffected. (Incorrect)
x the exchange rate rises in direct proportion to the increase in the
quantity of money and the price level. (Incorrect)
x the exchange rate rises in direct proportion to the increase in the
quantity of money, but inflation actually falls because of an
increase in the demand for money. (Incorrect)
x the increase in interest rates and inflation after a change in the
monetary growth rate affect exchange rates but also cause
secondary effects on exchange rates and price levels because of a
decrease in the demand for real balances. (True Answer Correct)
134
When we incorporate a relationship between expected inflation

and liquidity preference (demand for real balances) into our
long-run model, it can help to explain:
x erratic shifts in exchange rates. (Incorrect)
x how changes in expectations can move the markets
quickly. (Incorrect)
x why sometimes PPP seems not to hold in the short
run. (Incorrect)
x erratic shifts in exchange rates, how changes in expectations can
move the markets quickly, and why sometimes PPP seems not to
hold in the short run. (True Answer Correct)
135
The primary difference between the simple quantity theory of

money and one in which interest rates matter is that with the
more general model:
x there are jumps in exchange rates. (True Answer Correct)
x there are no effects of inflation. (Incorrect)
x monetary policy autonomy is maintained. (Incorrect)

x exchange rates are held constant. (Incorrect)
136
The difference between the simple model and the general model
of exchange rate determination in the long run is that:
x the simple model refers to only one nation, while the general
model includes all nations. (Incorrect)
x the simple model has only one equation, while the general model
includes a number of simultaneous equations. (Incorrect)
x the simple model assumes a constant demand function for real
balances, while the general model assumes that the demand for real
balances is a decreasing function of the nominal interest rate. (True
Answer Correct)
x the general model applies to increases and decreases in the
relevant variables; the simple model does not allow relevant
variables to decrease. (Incorrect)
137
Economists consider high and volatile inflation to be:

x a positive factor in economic growth, since higher prices = higher
profits for firms. (Incorrect)
x a negative factor in economic growth, as firms and workers deal
with uncertainty about profitability, investments, and wages. (True
Answer Correct)
x neutral with respect to economic growth. (Incorrect)
x beneficial to the government, which often spends before it
taxes. (Incorrect)
138
Of the following targets or nominal anchors, which is NOT

useful for controlling domestic inflation?
x nominal exchange rates (Incorrect)
x money supply measures (Incorrect)
x nominal interest rates (Incorrect)
x All of the these are useful in controlling domestic inflation. (True
Answer Correct)
139
Nominal anchors restrain inflation and rising interest rates by:

x putting limits on trade. (Incorrect)
x imposing capital controls. (Incorrect)
x forcing restrictions on easy monetary policies. (True Answer

Correct)
x imposing price and wage controls. (Incorrect)
140
If conditions hold for the long-run monetary exchange rate

model, it can provide opportunities for nations to achieve less
price-level volatility by:
x constraining policy choices to respect a nominal anchor, such as
a target for a nominal exchange rate. (True Answer Correct)
x allowing international organizations such as the IMF to control
economic variables. (Incorrect)
x conducting a currency reform effort. (Incorrect)
x embarking on a campaign for dollarization. (Incorrect)
141
Other nominal anchors or targets, such as rules for monetary

growth, sometimes fail to optimize economic conditions in the
short run because:
x monetary growth rates are unrelated to inflation. (Incorrect)
x it is complicated to figure out how to hold down money
creation. (Incorrect)
x corrupt politicians pay no attention and give out extra currency to
political supporters. (Incorrect)
x low monetary growth may curb inflation but may also constrain
growth of real income. (True Answer Correct)
142
Combining the concepts of uncovered interest parity (UIP) and

relative purchasing power parity (PPP), the ________ shows
that differences in inflation rates between two nations will be
equal to the difference in their nominal rates of interest.
x Lerner theorem (Incorrect)
x Samuelson doctrine (Incorrect)
x Fisher effect (True Answer Correct)
x Friedman dilemma (Incorrect)
143
If the Fisher effect holds (when a nation's nominal rate of

interest equals the world interest rate plus the nation's own
expected inflation rate), then keeping the ____ fixed would
force nations to keep inflation stable.
x world real interest rate (Incorrect)
x nominal interest rate (True Answer Correct)
x exchange rate (Incorrect)
x real interest rate (Incorrect)
144
If a nation uses one or a combination of nominal anchors, a

trade-off is that it loses:
x international respect. (Incorrect)
x control over its inflation rate. (Incorrect)
x the ability to control its exchange rate. (Incorrect)
x the ability to control its own monetary-related variables, such as
various interest rates, which might affect its economy
adversely. (True Answer Correct)
145
According to Sterne's article, have nominal anchors used by

various nations been effective in the real world?
x Yes, for the most part. Central banks have become more
independent, and inflation rates have fallen on average. (True
Answer Correct)
x There has been very little progress toward reducing inflation
using these artificial criteria. (Incorrect)
x Not at all. This highlights the inevitable conclusion that much
more needs to be learned about the effectiveness of economic
policy. (Incorrect)
x Energy and natural resource prices have risen and, unfortunately,
offset any efforts to reduce inflation worldwide. (Incorrect)
146
In which decade did the use of nominal anchors and explicit

targets begin to be common in many nations?
x
x
x
x
147
the 1960s (Incorrect)

the 1990s (True Answer Correct)
Economists consider central bank independence to be a key

factor in keeping inflation under control. Why?
x Elected officials (legislators and the executive branch) tend to
pursue policies popular with the public that may increase
inflationary tendencies, whereas the Central Bank does not have
such pressure. (True Answer Correct)
x The central bank should be able to use stimulative monetary
policy whenever it chooses without worrying about inflationary
tendencies. (Incorrect)
x Inflation is generated by legislative deficit spendingthe central
bank can offset that spending and the inflation it causes. (Incorrect)
x The central bank's directors and executives are always political
appointees, and it is clear that low inflation is popular with the

public. (Incorrect)
148
During the economic crisis of 20082010, efforts to keep

inflation pinned at 2%:
x made things more difficult, since real interest rates cannot fall
below zero. (True Answer Correct)
x made things more difficult, since real interest rates cannot rise
above zero. (Incorrect)
x made things easier, since real interest rates cannot fall below
zero. (Incorrect)
x made things easier, since real interest rates cannot rise above
zero. (Incorrect)
149
The law of one price relates exchange rates to relative price

levels for a basket of goods.
x True ()
150
Whenever the ratio of prices of two goods expressed in the same

currency equals 1, the law of one price holds.
x False ()
151
Absolute PPP requires that the price of a good be the same

across countries when expressed in their own currency.
x True ()
152
If absolute PPP holds for each individual good, then absolute

PPP must also hold for any basket of goods.
x False ()
153
When the nominal exchange rate for a currency rises by 3%,

the currency is said to have appreciated by 3%.
x True ()
154
If absolute PPP holds, then there must also be relative PPP.

x False ()
155
If relative PPP holds, then there must also be absolute PPP.

x True ()
156
If absolute PPP fails, then relative PPP must fail.

x True ()
157
If relative PPP fails, then absolute PPP must fail.

x False ()
158
Evidence suggests that PPP predicts more accurately in the

short run than in the long run.
x True ()
159
In the long run, the evidence indicates that PPP holds perfectly.
x True ()
160
A good rule of thumb is that PPP deviations disappear after

about 4 years.
x True ()
161

Exchange Rate per
Country
Dollar
Brazil (real)
2.2
Price of a Computer in
Local Currency
1200
Mexico (peso)
10
6,000
India (rupee)
45
18,000
South Africa (rand)
3,500
Reference: Ref 11-2
(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the
United States. The price of a computer in local currency in Brazil reflects the
law of one price.
x True ()
162

Exchange Rate per
Country
Dollar
Price of a Computer in
Local Currency
Brazil (real)
2.2
1200
Mexico (peso)
10
6,000
India (rupee)
45
18,000
South Africa (rand)
3,500
Reference: Ref 11-2
(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the
United States. The information contained in the table provided shows that PPP
works in the case of Brazil.
x True ()
163
Central banks directly control the money supply.

x True ()
164
The quantity theory of money suggests that the demand for

money is inversely proportional to dollar income.
x True ()
165
The quantity theory of money suggests that any change in the

money supply must be offset by a change in prices so that real
money balances are constant.
x True ()
166
The quantity theory of money suggests that, if all else is equal,

any change in money supply must be offset by a change in
prices so that real money balances are constant.
x False ()
167
Ordinarily, short-run effects of monetary growth are not

predictable, except in the special case of hyperinflationary
periods, in which there are much more pronounced short-run
effects, such as erratic jumps in nominal interest rates and
large currency depreciations.
x False ()
168
The opportunity cost of holding money is the interest and

returns on other assets that could have been purchased.
x False ()
169
Relative PPP allows us to forecast future exchange rates by

using expected short-run growth rates of real GDP between two
nations.
x True ()
170
All else equal, a rise in the expected inflation rate in a country

will lead to an equal rise in its nominal interest rate.
x False ()
171
If PPP and UIP hold, then the Fisher effect tells us that each
nation's interest rate is equal to the long-run real world rate of
interest plus the expected rate of inflation.
x False ()
172
The evidence on the convergence of real interest rates

worldwide is that real interest parity does not hold in the long
run.
x True ()
173
Real interest parity conditions depend on PPP being upheld

and will likely hold only in the long run.
x False ()
174
A monetary regime is a framework of short-run flexibility and

long-run anchors.
x False ()
175
A nominal anchor is possible only with a regime of fixed

exchange rates.
x True ()
176
A basket of goods sold in the Eurozone is priced and weighted

as follows:
Good
Price
Weight
Meat
33/ton
0.3
Textiles
20/ton
0.5
Grain
10/ton
0.2
And the same basket for the United States is priced and
weighted as follows:
Good
Price
Weight
Meat
$14/ton
0.5
Textiles
$20/ton
0.3
Grain
$10/ton
0.2
The exchange rate for $/ is 1.25.

Reference: Ref 11-3
Does purchasing power parity hold?

x ()
177
A basket of goods sold in the Eurozone is priced and weighted

as follows:
Good
Price
Weight
Meat
33/ton
0.3
Textiles
20/ton
0.5
Grain
10/ton
0.2
And the same basket for the United States is priced and
weighted as follows:
Good
Price
Weight
Meat
$14/ton
0.5
Textiles
$20/ton
0.3
Grain
$10/ton
0.2
The exchange rate for $/ is 1.25.

Reference: Ref 11-3
In which nation should an arbitrageur purchase goods to resell

in the other nation?
x ()
178
If PPP fails to hold today, making a good cheaper overseas,

should you buy it immediately?
x ()
179
It has been abundantly demonstrated that nominal interest

rates, exchange rates, and inflation are very tightly linked. In
Italy, during the 1970s and 1980s, the inflation rate of the
Italian lira was very erratic, changing each year in a range of
7% to 20% per year. Predict the effect on Italy's nominal
interest rates and its exchange rates with other nations during
that period.
x ()
180
Discuss the benefits and drawbacks of low inflation, and

describe issues in central bank policy following the financial
crisis that began in 2008.
x ()
When currencies are viewed as assets, the price of a currency is

its:
x
x
x
x
interest rate. (Incorrect)

inflation rate. (Incorrect)
growth rate. (Incorrect)
Explaining exchange rate behavior in the long run assumes that

changes in price levels and real interest rates affect nominal
exchange rates so that interest parity and PPP hold. Short-run
deviations from PPP may be explained by an alternative theory
called the:
x relative PPP approach. (Incorrect)
x asset approach to exchange rate determination. (True Answer
Correct)
x long-run equilibrium approach. (Incorrect)
x law of one price. (Incorrect)
When PPP does not hold in the short run, economists have
developed an alternative short run explanatory theory based on
the idea that:
x currency values are different from other prices, since currencies
are not considered assets. (Incorrect)
x currency values are influenced in the short run by the fact they
serve as short-term assets. (True Answer Correct)
x currency values will eventually result in PPP over time, so no
short-run theory is needed. (Incorrect)
x currency values are set by government entities and the IMF so that
the value often does not result in PPP. (Incorrect)
Which of the following is NOT an assumption of the behavior of

exchange rates in the short run?
x The adjustment period of time involves weeks rather than
years. (Incorrect)
x Market forces are irrelevant and do not matter. (True Answer
Correct)
x Prices of goods adjust slowly and are therefore
sticky. (Incorrect)
x Economic actors behave in their own self-interest. (Incorrect)
Using the UIP equation to determine the spot exchange rate

requires:
x a knowledge of expected future exchange rates. (Incorrect)
x a knowledge of observed rates of interest. (Incorrect)
x a knowledge of expected returns on foreign deposits. (Incorrect)
x a knowledge of expected future exchange rates, observed rates of
interest, and expected returns on foreign deposits. (True Answer
Correct)
A key component of the asset approach to exchange rates is

being able to gauge accurately:
x
x
x
x
the price level. (Incorrect)

the rate of inflation. (Incorrect)
expected future exchange rates. (True Answer Correct)
the GDP gap. (Incorrect)
If the U.S. interest rate is 5% and the interest rate in Germany

is 2% and the euro is expected to appreciate by 2% over the
next year, then:
x investors would sell dollars in the spot market. (Incorrect)
x investors would buy euros. (Incorrect)
x investors would seek to invest in the United States. (True Answer
Correct)
x investors would seek to invest in Germany. (Incorrect)
SCENARIO: FUTURE EXPECTED EXCHANGE RATE

Assume that the U.S. interest rate is 5%, the European interest rate
is 2%, and the future expected exchange rate in 1 year is $1.224.
Reference: Ref 12-1
(Scenario: Future Expected Exchange Rate) If the spot rate is

$1.16, then the expected dollar return on euro deposits is:
x 7.52%. (True Answer Correct)
x 5% (Incorrect)
x 3%. (Incorrect)
x 2%. (Incorrect)
9

Reference: Ref 12-1
(Scenario: Future Expected Exchange Rate) If the spot rate is
$1.24, then the expected dollar return on euro deposits is:

x
x
x
x
10
4%. (Incorrect)
7.1%. (Incorrect)
0.71%. (True Answer Correct)
0.129%. (Incorrect)

Reference: Ref 12-1
(Scenario: Future Expected Exchange Rate) At approximately

what exchange rate will the returns between the United States
and Europe be equalized?
x $1.20 (Incorrect)
x $1.224 (Incorrect)
x $1.98 (Incorrect)
11
According to UIP, when interest rates are equal, the exchange

rate of the country's home currency is expected to:
x
x
x
x
12
If UIP holds, the interest rate at home is 4%, and the exchange
rate is expected to rise by 3%, then the foreign interest rate is:
x
x
x
x
13
fall. (Incorrect)
remain constant. (True Answer Correct)
rise. (Incorrect)
Not enough information is provided. (Incorrect)

3%. (Incorrect)
7%. (Incorrect)
12%. (Incorrect)
If UIP holds, the foreign interest rate is 10%, and the home
currency is expected to depreciate by 4%, then the home interest
rate is:
x 4%. (Incorrect)
x 6%. (Incorrect)
x 10%. (Incorrect)
14
If UIP holds, the foreign interest rate is 6%, and the home
currency is expected to appreciate by 2%, then the home interest
rate is:
x 10%. (Incorrect)
x 8%. (Incorrect)
x 3%. (Incorrect)
15
If UIP holds and the home currency is expected to appreciate by

4%, then the home interest rate is:
x
x
x
x
16
6%. (Incorrect)
5%. (Incorrect)
4%. (Incorrect)
Not enough information is provided. (True Answer Correct)
If UIP holds and if the home currency is expected to depreciate,

then:
x the home interest rate must be greater than the foreign interest
x interest rates cannot be changing. (Incorrect)
x the home interest rate must be less than the foreign interest
rate. (Incorrect)
x Not enough information is provided. (Incorrect)
17
Using the UIP equation to determine the spot exchange rate,

assume that the expected spot rate (after 1 year) for euros (in
terms of dollars) = $1.50, the current interest rate on euro
deposits is 4.5%, and the current interest rate on dollar deposits
is 5.5%. What current spot rate would satisfy the equation?
x $1.65 (Incorrect)
x $1.50 (Incorrect)
x $1.25 (Incorrect)
18
If the spot rate for euros increases, and all other variables and
expected values remain constant, U.S. investors contemplating
European investments would:
x get larger returns in terms of dollars. (Incorrect)
x get smaller returns in terms of dollars. (True Answer Correct)
x get very similar returns because of arbitrage. (Incorrect)
x lose the principal of the investment. (Incorrect)
19
If the domestic dollar return (home nominal interest rate) is 5%,

and the foreign nominal interest rate is 3%, and there is no
expected change in future exchange rates, then:
x as the spot exchange rate increases, the foreign return
rises. (Incorrect)
x as the spot exchange rate increases, the foreign return falls. (True
Answer Correct)
x as the spot exchange rate increases, the domestic return
rises. (Incorrect)
x as the spot exchange rate increases, the domestic return
falls. (Incorrect)
20
When the expected dollar-euro exchange rate rises, the domestic

dollar return curve shifts:
x
x
x
x
21
When expected dollar-euro exchange rates rise, the foreign

expected dollar return curve shifts:
x
x
x
x
22
in. (Incorrect)
out. (True Answer Correct)
not at all. (Incorrect)
When the European interest rate falls, the foreign expected

dollar return curve shifts:
x
x
x
x
23
in. (Incorrect)
out. (Incorrect)
not at all. (True Answer Correct)
in. (True Answer Correct)

out. (Incorrect)
When the U.S. interest rate falls, the foreign expected dollar
return curve shifts:
x
x
x
x
in. (Incorrect)
out. (Incorrect)
not at all. (True Answer Correct)
24
Using the UIP equation, equilibrium in the short run occurs

when:
x arbitrage is possible. (Incorrect)
x the spot rate is such that foreign and domestic investment returns
are equalized. (True Answer Correct)
x the spot rate is less than the forward rate. (Incorrect)
x foreign interest rates are higher than domestic rates of
interest. (Incorrect)
25
If the spot exchange rate is undervalued, the foreign rate of

return is:
x
x
x
x
26
equal to the domestic rate of return. (Incorrect)

greater than the domestic rate of return. (True Answer Correct)
less than the domestic rate of return. (Incorrect)
diverging from the domestic rate of return. (Incorrect)
Equilibrium in the short run is achieved as:

x differences in rates of return cause investors to purchase and sell
currency and thereby change the spot rate of exchange. (True
Answer Correct)
x government recognizes a problem and takes action to correct
it. (Incorrect)
x traders adjust their expectations to match reality. (Incorrect)
x inflation falls to zero. (Incorrect)
27
Using the UIP equation, what would happen to the spot rate for
euros if the interest rate on U.S. dollar deposits rises ceteris
paribus?
x the spot rate to purchase euros would rise (dollar
depreciation). (Incorrect)
x the spot rate to purchase euros would fall (dollar
appreciation). (True Answer Correct)
x the spot rate to purchase euros would be unchanged. (Incorrect)
x the U.S. Federal Reserve would have to raise U.S. short-term
28
euros if the interest rate on euro deposits rises ceteris paribus?
x the spot rate to purchase euros would rise (dollar
depreciation). (True Answer Correct)

x the spot rate to purchase euros would fall (dollar
appreciation). (Incorrect)
x the spot rate to purchase euros would be unchanged. (Incorrect)
x the U.S. Federal Reserve would have to raise U.S. short-term
29
When exchange rates are not in alignment, traders see

opportunities for _____, which move the rates _____
equilibrium.
x speculation; away from (Incorrect)
x arbitrage; toward (True Answer Correct)
x investments; away from (Incorrect)
x liquidation; toward (Incorrect)
30
Given expectations of future exchange rates, when foreign

returns are greater than domestic returns, investors will ____
domestic assets, _____ domestic currency, ____ foreign
currency, and _____ foreign assets.
x sell; sell; buy; buy (True Answer Correct)
x sell; buy; sell; buy (Incorrect)
x buy; sell; buy; sell (Incorrect)
x buy; buy; sell; sell (Incorrect)
31
The asset approach to short-run exchange rate determination

relies on which three variables?
x prices, interest rates, and inflation (Incorrect)
x the reserve ratio, aggregate wealth, and interest rates (Incorrect)
x nominal domestic and foreign interest rates, and expectations of
exchange rate changes (True Answer Correct)
x prices, aggregate wealth, and inflation (Incorrect)
32
If the U.S. interest rate is 9% and the Eurozone interest rate is

5%, then in the short run we would expect:
x
x
x
x
33
the dollar to appreciate. (Incorrect)

the dollar to depreciate. (True Answer Correct)
the euro to appreciate. (Incorrect)
no change in the exchange rate. (Incorrect)
If domestic returns are greater than foreign returns, then:
x the spot rate is too high. (True Answer Correct)

x the spot rate is too low. (Incorrect)
x expectations of future exchange rates will change in the long
run. (Incorrect)
x There is no opportunity for arbitrage. (Incorrect)
34
euros if the expected dollar-euro exchange rate fell?
x The spot rate to purchase euros would rise (dollar
depreciation). (Incorrect)
x The spot rate to purchase euros would fall (dollar
appreciation). (True Answer Correct)
x The spot rate to purchase euros would remain
x GDP, GNI, and GNE (Incorrect)
35
Figure: The Domestic Interest Rate
Reference: Ref 12-2
(Figure: The Domestic Interest Rate) If the dollar rate of

interest increases from 5% to 7%, what result will occur in the
short run?
x Expectations of future exchange rates will change. (Incorrect)
x U.S. real GDP will fall and the dollar will also fall. (Incorrect)
x The spot rate for euros will decrease to $1.10. (True Answer
Correct)
x The nominal interest rate on the euro will decrease. (Incorrect)
36
Reference: Ref 12-2
(Figure: The Domestic Interest Rate) If i falls, the result is:

x the dollar interest rate line shifts up and the spot rate
rises. (Incorrect)
x the dollar interest rate line shifts down and the spot rate
rises. (Incorrect)
x the foreign return line shifts up and to the right and the spot rate
rises. (Incorrect)
x the foreign return line shifts down and to the left and the spot rate
37
Reference: Ref 12-2
(Figure: The Domestic Interest Rate) If the expected future

exchange rate falls from $1.224 to $1.15:
x the dollar interest rate line shifts up and the spot rate
rises. (Incorrect)
x the dollar interest rate line shifts down and the spot rate
rises. (Incorrect)
x the foreign return line shifts up and to the right and the spot rate
rises. (Incorrect)
x the foreign return line shifts down and to the left and the spot rate
38
What assumptions are made to create a model to determine

short-run changes in exchange rates using the asset approach?
x Prices are completely flexible. (Incorrect)
x In the long run, money is neutral. (Incorrect)
x Prices are sticky, yet nominal interest rates are flexible. (True
Answer Correct)
x Prices and nominal interest rates are sticky. (Incorrect)
39
We assume flexible prices in the long run, but whenever it is

costly to change prices (menu costs) or when there are long-term
contracts for labor or capital:
x short-run prices tend to be flexible. (Incorrect)
x short-run prices tend to be sticky. (True Answer Correct)
x long-run prices tend to be sticky. (Incorrect)
x firms have to pay higher costs and therefore have to raise

prices. (Incorrect)
40
The money market (short-run) equilibrium equation states that

the demand for real balances (M/P) is always equal to the supply
of real balances (M/P) because ____ adjust(s) to ensure that
people are willing to hold the entire stock.
x nominal interest rates (True Answer Correct)
x real interest rates (Incorrect)
x the price level (Incorrect)
x nominal GDP (Incorrect)
41
Nominal interest rates are considered to be _____ in the shortrun model.

x
x
x
x
42
flexible (True Answer Correct)

rigid (Incorrect)
zero (Incorrect)
set by the central bank (Incorrect)
In the money market, equilibrium is achieved:

x in the long run by the adjustment of interest rates. (Incorrect)
x in the short run by the adjustment of prices. (Incorrect)
x in the long run by the adjustment of prices. (True Answer
Correct)
x in the short run by changes in the money supply. (Incorrect)
43
Nominal rigidity is another term for:

x
x
x
x
44
sticky prices. (True Answer Correct)

fixed exchange rates. (Incorrect)
menu prices. (Incorrect)
the trilemma. (Incorrect)
Menu costs are the:

x
x
x
x
cost of changing interest rates. (Incorrect)

cost of converting currencies. (Incorrect)
cost of changing prices. (True Answer Correct)
cost of changing exchange rates. (Incorrect)
45
Which of the following are explanations for sticky prices?

x
x
x
x
46
A rise in real income will have which of the following effects on

money demand?
x
x
x
x
47
long-term labor contracts (Incorrect)

fixed exchange rates (Incorrect)
menu costs (Incorrect)
long-term labor contracts and menu costs (True Answer Correct)
The money demand curve will shift out. (True Answer Correct)
The money demand curve will not shift at all. (Incorrect)
The money demand curve will shift in. (Incorrect)
Real income has no effect on money demand. (Incorrect)
The demand for real money balances is a function of:

x the supply of real money balances. (Incorrect)
x the nominal GDP. (Incorrect)
x the nominal rate of interest on alternative assets and the level of
real GDP. (True Answer Correct)
x policy decisions by the central bank. (Incorrect)
48
In the short run, when the central bank increases the quantity of
money, what happens to real balances?
x They do not change since prices will rise by the same
x They will fall since prices will rise by a greater
x They will rise since prices overall will fall. (Incorrect)
x They will rise since prices will not change in the short run. (True
Answer Correct)
49
At higher nominal rates of interest, the demand for real

balances is:
x higher because savers can earn higher returns. (Incorrect)
x lower because the opportunity cost of holding those funds is
higher. (True Answer Correct)
x invariant with respect to the nominal interest rate. (Incorrect)
x inversely related to the price level. (Incorrect)
50
Whenever there is excess demand for real balances, short-run

adjustment occurs because:
x savers and investors buy bonds and drive up their prices (drive
down nominal rates of interest). (Incorrect)
x investors and borrowers sell bonds (convert to cash) and drive
down their prices (drive up nominal rates of interest). (True Answer
Correct)
x the price level falls to restore real balances. (Incorrect)
x aggregate demand is decreased to restore equilibrium. (Incorrect)
51
The money market clears as people with excess real balances:

x buy bonds and drive down nominal rates of interest until the
demand for real balances equals supply. (True Answer Correct)
x sell bonds and drive up nominal rates of interest until the demand
for real balances equals supply. (Incorrect)
x increase spending, driving up nominal GDP and raising nominal
rates of interest. (Incorrect)
x sell financial assets such as stocks to increase the total supply of
real balances. (Incorrect)
52
Increases in the supply of money (with inflexible prices) result

in:
x
x
x
x
an increase in the nominal rate of interest. (Incorrect)

an increase in the U.S. dollar exchange rate. (Incorrect)
a decrease in the nominal rate of interest. (True Answer Correct)
increased price and wage flexibility. (Incorrect)
53
Assuming short-run sticky prices, the same monetary policy

result may be achieved by targeting the money supply or the
nominal rate of interest whenever:
x the demand for money is stable. (True Answer Correct)
x interest income is not taxable. (Incorrect)
x changes in the supply of money are small and
predictable. (Incorrect)
x real income is constant. (Incorrect)
54
An increase in nominal GDP (with inflexible prices) results in:

x an increase in the nominal rate of interest. (True Answer Correct)
x an increase in the U.S. dollar exchange rate. (Incorrect)

x a decrease in the nominal rate of interest. (Incorrect)
x increased price and wage flexibility. (Incorrect)
55
Normally, whenever the central bank lowers the rate it charges

banks for overnight loans:
x market rates of interest are not affected. (Incorrect)
x market rates of interest fall at the same rate. (True Answer
Correct)
x market rates of interest increase. (Incorrect)
x market rates of interest are unstable. (Incorrect)
56
During the financial crisis of 20072008, the U.S. central bank

lowered its discount rate from 5.25% to 0%. What was the effect
on market rates of interest?
x Market rates increased by 5%. (Incorrect)
x Market rates fell by 5%. (Incorrect)
x Market rates fell below zero. (Incorrect)
x Market rates barely moved at all. (True Answer Correct)
57
What are options for monetary easing using interest rate policy
instruments when the rate has hit the zero lower bound?
x At that point, interest rate policy cannot be used. (True Answer
Correct)
x Monetary easing can still occur whenever interest rates are greater
than zero at the retail level. (Incorrect)
x The central bank can increase the money supply, and interest rates
can be less than zero. (Incorrect)
x Borrowing can be stimulated in ways other than lower rates of
58
To move quickly to turn around the crisis during 20072008, the

U.S. Federal Reserve relied on:
x lowering taxes. (Incorrect)
x removing restrictions on collateral, adding more categories of
securities purchased by the Federal Reserve, and expanding its
operations with nonbank dealers. (True Answer Correct)
x tightening up credit rules and keeping banks out of
trouble. (Incorrect)
x admonishing the administration for its excessive debt
situation. (Incorrect)
59
What happened to the measure of money, M0, which includes

only cash, bank reserves, and deposits at the Federal Reserve
during the crisis?
x It shrank measurably. (Incorrect)
x It expanded slightly. (Incorrect)
x It more than doubled. (True Answer Correct)
x There was no change in M0. (Incorrect)
60
Aggressive policy measures taken by the monetary authority

during the 20072008 financial crisis in the United States
resulted in:
x avoidance of a recession caused by a tight credit
market. (Incorrect)
x almost no transmission of the monetary stimulus to market rates
of interest, increased lending, and expansion of GDP. (True Answer
Correct)
x lower rates of interest and increased investment
activity. (Incorrect)
x an increase of real GDP and a fall in the core unemployment
rate. (Incorrect)
61
An increase in real income _____ the demand for real money

balances and thereby causes a ____ in the nominal rate of
interest.
x lowers; rise (Incorrect)
x lowers; fall (Incorrect)
x raises; rise (True Answer Correct)
x raises; fall (Incorrect)
62
In the short run, an expanded money supply leads to:

x
x
x
x
63
a higher nominal interest rate. (Incorrect)

no change in the nominal interest rate. (Incorrect)
a lower nominal interest rate. (True Answer Correct)
an increase in the exchange rate. (Incorrect)
In the short run/long run, a strong currency goes with:

x a low interest rate/a high interest rate. (Incorrect)
x a high interest rate/a high interest rate. (Incorrect)
x a high interest rate/a low interest rate. (True Answer Correct)
x a low interest rate/a low interest rate. (Incorrect)

64
An increase in the money supply in the short run change ____,

whereas in the long run, ____ change.
x
x
x
x
65
exchange rates; nominal interest rates (Incorrect)

price levels; interest rates (Incorrect)
interest rates; interest rates (Incorrect)
interest rates; inflation rates (True Answer Correct)
A perceived permanent rise in the rate of money growth will

cause what long-run effects in the economy?
x a rise in the nominal rate of interest and a rise in inflation by the
same percentage (True Answer Correct)
x a rise in the nominal rate of interest and a rise in real GDP by the
same percentage (Incorrect)
x a fall in the nominal rate of interest and a rise in inflation by the
x a fall in the nominal rate of interest and a fall in real GDP by the
66
When the public perceives that a monetary expansion will be

temporary, what happens to nominal interest rates in the short
run?
x They will rise. (Incorrect)
x They will overshoot their target. (Incorrect)
x They will fall. (True Answer Correct)
x They will be unchanged. (Incorrect)
67
The dependent variable (vertical axis) in standard graphical

treatments of the money market is:
x
x
x
x
68
the exchange rate. (Incorrect)

the real rate of interest. (Incorrect)
real GDP. (Incorrect)
the nominal rate of interest. (True Answer Correct)
A key assumption to ensure that domestic returns and foreign

returns are in equilibrium is:
x there are perfectly flexible prices. (Incorrect)
x the quantity of money is fixed. (Incorrect)
x there are no capital controls preventing the movement of
capital. (True Answer Correct)
x trade is not subject to any restrictions. (Incorrect)

69
Combining the home money market and the uncovered interest

parity relationship, we can see how changes in variables
determine:
x real GDP. (Incorrect)
x the exchange rate. (True Answer Correct)
x the price level. (Incorrect)
x the quantity of money. (Incorrect)
70
When policy changes are temporary, then:

x
x
x
x
71
exchange rates do not change. (Incorrect)

expectations do not change. (True Answer Correct)
interest rates do not change. (Incorrect)
expectations can change based on results. (Incorrect)
The returns from the home country and foreign country capital
markets are equalized if:
x
x
x
x
the home country interest rates are higher. (Incorrect)

the foreign country interest rates are higher. (Incorrect)
the foreign country has a higher price level. (Incorrect)
both countries have no capital controls. (True Answer Correct)
72
Using the asset model of short-run exchange rate determination,

once the domestic rate of return is determined by MS and MD,
the short-run equilibrium _____ can be determined if prices are
inflexible and expectations are given.
x interest rate (Incorrect)
x exchange rate (True Answer Correct)
x price level (Incorrect)
x income level (Incorrect)
73
Assume sticky prices and given expectations of future exchange

rates, what is the immediate effect on the exchange rate of the
U.S. dollar (purchasing euros) if there is a temporary increase in
the quantity of U.S. dollars?
x U.S. nominal and real returns rates decline while euro rates hold
steady, and the U.S. dollar depreciates against the euro. (True
Answer Correct)
x U.S. nominal returns rise, U.S. real returns fall, euro rates rise,
and the U.S. dollar appreciates against the euro. (Incorrect)
x U.S. nominal returns fall, U.S. real returns rise, euro rates fall, and
the U.S. dollar appreciates against the euro. (Incorrect)
x U.S. dollar returns and euro returns both rise, leaving the
exchange rate unchanged. (Incorrect)
74
If there is a temporary shock (increase) to the money supply in

the Eurozone, ceteris paribus, what is the result for the United
States?
x The money supply in the United States must decrease by the same
x The U.S. dollar nominal interest rate will increase, as the euro rate
is unchanged. (Incorrect)
x Long-run expectations shift to expect a stronger euro. (Incorrect)
x The dollar appreciates against the euro. (True Answer Correct)
75
Assuming sticky prices and given expectations of future

exchange rates, what is the short-run effect on the exchange rate
of the U.S. dollar (purchasing euros) and on domestic and
foreign rates of return if there is a temporary increase in the
quantity of U.S. dollars?
x Rates of return on domestic and foreign assets diverge as the
dollar appreciates. (Incorrect)
x Domestic and foreign rates of return both fall as the dollar
x Domestic and foreign rates of return converge as the dollar
depreciation lowers returns for U.S. investors who purchase eurobased assets. (True Answer Correct)
x Rates of return on euro assets fall causing investors to switch into
U.S. assets and, therefore, the U.S. dollar appreciates against the
euro. (Incorrect)
76
Assuming sticky prices and given expectations of future

exchange rates, what is the short-run effect on the exchange rate
of the U.S. dollar (purchasing euros) and on domestic and
foreign rates of return if there is a temporary increase in the
quantity of euros?
x Rates of return on domestic and foreign assets diverge as the
dollar appreciates. (Incorrect)
x Domestic and foreign rates of return both fall as the dollar
x Domestic and foreign rates of return converge as depreciation of
the euro raises returns for U.S. investors who purchase euro-based
assets. (True Answer Correct)
x Rates of return on dollar assets fall, causing investors to switch

into euro assets and, therefore, the U.S. dollar depreciates against the
euro. (Incorrect)
77
If the British pound has depreciated in the short run, this would
be consistent with:
x a temporary fall in the British money supply. (Incorrect)
x a temporary fall in the European money supply. (True Answer
Correct)
x a temporary rise in the European money supply. (Incorrect)
x either a temporary fall in the British money supply or a temporary
rise in the European money supply. (Incorrect)
78
If the British pound has appreciated in the short run, this would
be consistent with:
x a temporary fall in the British money supply. (Incorrect)
x a temporary fall in the European money supply. (Incorrect)
x a temporary rise in the European money supply. (Incorrect)
x either a temporary fall in the British money supply or a temporary
rise in the European money supply. (True Answer Correct)
79
When a country's central bank temporarily switches from an

expansionary to a more conservative monetary policy, one
would expect the exchange rate to:
x depreciate in the short run, then return to its initial
value. (Incorrect)
x appreciate in the short run, then return to its initial value. (True
Answer Correct)
x depreciate in the short run and then stay higher. (Incorrect)
x appreciate in the short run and then stay lower. (Incorrect)
80
During the period 20012004 the U.S. Federal Reserve lowered

nominal interest rates on the dollar by more than the European
Central Bank (ECB) did on the euro, a move that most market
participants viewed as temporary. What was the effect on the
dollar-euro exchange rate?
x The dollar depreciated against the euro. (Incorrect)
x The dollar appreciated against the euro. (True Answer Correct)
x There was no change in the dollar-euro rate because expectations
would adjust. (Incorrect)
x There was no change in the dollar-euro rate because real interest
rates would be unchanged. (Incorrect)
81
From 19992001, the U.S. Federal Reserve _____ nominal

interest rates, and it _____ the policy in 2001 due to concerns
over ______.
x lowered; continued; recession (Incorrect)
x raised; reversed; inflation (Incorrect)
x raised; reversed; recession (True Answer Correct)
x lowered; continued; inflation (Incorrect)
82
Interest rates set by the European central bank during the

period 19992004 resulted in what situation compared to that in
the United States?
x European rates were exactly the same as those in the United
States, resulting in uncovered interest parity. (Incorrect)
x European rates were consistently higher than U.S. rates. (True
Answer Correct)
x European rates were consistently lower than U.S. rates. (Incorrect)
x At first the European rates were much higher, but then the ECB
acted aggressively to lower them. (Incorrect)
83
The behavior of exchange rates during the period 19992004

____ predictable based on the short run asset model if we
assume that _________.
x was not; changes in the money supply were assumed to be
temporary (Incorrect)
x was; changes in the money supply were assumed to be
temporary (True Answer Correct)
x was not; changes in the money supply were assumed to be
permanent (Incorrect)
x was; changes in the money supply were assumed to be
permanent (Incorrect)
84
To arrive at a complete theory of exchange rate determination,

we use:
x the short-run monetary approach, the long-run monetary
approach, and a good dose of common sense. (Incorrect)
x the short-run asset approach, the long-run monetary approach, and
real interest parity. (True Answer Correct)
x real-world phenomena such as sticky prices, government
inefficiency, and imperfect markets. (Incorrect)
x information on financial markets, political realities, and the large
government debt. (Incorrect)
85
Which of the following is NOT a method of forecasting exchange

rates?
x
x
x
x
86
technical methods (Incorrect)

animal methods (True Answer Correct)
economic fundamental methods (Incorrect)
All of these are methods. (Incorrect)
To complete the theory of exchange rates, a model should be

created that:
x accommodates short-run changes in variables. (Incorrect)
x accommodates long-run changes in variables. (Incorrect)
x accommodates changes in expectations. (Incorrect)
x accommodates short-run and long-run changes in variables and
changes in expectations. (True Answer Correct)
87
The asset approach basically looks at ____ as the fundamental

variable affecting _____ exchange rates.
x
x
x
x
88
The monetary approach basically looks at ____ as the

fundamental variable affecting _____ exchange rates.
x
x
x
x
89
interest rates; short-run (Incorrect)

interest rates; long-run (Incorrect)
the price level; short-run (Incorrect)
the price level; long-run (True Answer Correct)
Survey evidence from forex traders indicates support for the

economic fundamental's impact on exchange rates:
x
x
x
x
90
interest rates; short-run (True Answer Correct)

interest rates; long-run (Incorrect)
the price level; short-run (Incorrect)
the price level; long-run (Incorrect)
in the short run. (Incorrect)

in the moderate run. (True Answer Correct)
only in the long run. (Incorrect)
Which of the following are true in the short run?

x Short-term interest rates are fixed. (Incorrect)
x Prices are flexible. (Incorrect)

x Long-run expectations of the exchange rate are unchanged. (True
Answer Correct)
x Monetary shocks are deemed permanent. (Incorrect)
91
When analyzing the complete model, which can predict shortrun and long-run changes in the exchange rate, one must:
x start with short-run changes and move toward long-run changes,
and thereby determine expectations. (Incorrect)
x use only the long-run model because the short-run model is
largely irrelevant. (Incorrect)
x start with the long-run equilibrium positions where expectations
of future exchange rates can be determined and use those
expectations to feed into the short-run model. (True Answer
Correct)
x use the short-run model only, because the long run is only a
theoretical concept. (Incorrect)
92
From full long-run equilibrium, expectations of future exchange

rates can only change when there is:
x a political change. (Incorrect)
x a permanent change in the quantity of money. (True Answer
Correct)
x a change in short-run interest rates. (Incorrect)
x a temporary decrease in the quantity of money. (Incorrect)
93
The overriding factor in analyzing long-run changes in the

exchange rate is:
x the exchange rate in the period t-1. (Incorrect)
x how a permanent change in the supply of money is transmitted to
prices and interest rates. (True Answer Correct)
x the reaction of traders as they conduct arbitrage and
speculation. (Incorrect)
x the notion that there is no long run, only a series of short-run
measurements. (Incorrect)
94
When there is a permanent fall in the domestic money supply,

the exchange rate:
x falls in the short run and rises slightly in the long run. (True
Answer Correct)
x falls in the short run and falls more in the long run. (Incorrect)
x rises in the short run and falls slightly in the long run. (Incorrect)
x rises in the short run and rises more in the long run. (Incorrect)
95
When there is a permanent fall in the foreign money supply, the

exchange rate:
x falls in the short run and rises slightly in the long run. (Incorrect)
x falls in the short run and falls more in the long run. (Incorrect)
x rises in the short run and falls slightly in the long run. (True
Answer Correct)
x rises in the short run and rises more in the long run. (Incorrect)
96
When traders perceive a permanent money supply adjustment,

long-term nominal interest rates ___ affected, the expected
exchange rate ____ affected, and the spot exchange rate _____
affected.
x are not; is; is (True Answer Correct)
x are; is; is not (Incorrect)
x are not; is not; is not (Incorrect)
x are; is not; is (Incorrect)
97
When traders perceive a permanent money supply adjustment,

short-term nominal interest rates ___ affected, the expected
exchange rate ____ affected, and the spot exchange rate _____
affected.
x are; is; is (True Answer Correct)
x are; is; is not (Incorrect)
x are not; is not; is not (Incorrect)
x are; is not; is (Incorrect)
98
If you observe that the dollar is appreciating because of a

permanent change in the U.S. monetary supply, then the money
supply must have:
x fallen. (Incorrect)
x stayed the same. (Incorrect)
x risen. (Incorrect)
x Not enough information is provided. (True Answer Correct)
99
Which conditions do NOT exist in long-run equilibrium?

x Domestic nominal interest rates are such that the supply of real
balances is equal to demand. (Incorrect)
x The domestic real return is equal to the foreign real return through
the equilibrium exchange rate. (Incorrect)
x There are no price level or exchange rate changes and therefore
the expected future exchange rate is equal to the actual exchange
rate. (Incorrect)
x Domestic nominal interest rates are such that the supply of real
balances is greater than demand. (True Answer Correct)
100
When the exchange rate has fallen in the short run and then
risen slightly in the long run, it implies that:
x the foreign money supply has temporarily risen. (Incorrect)
x the foreign money supply has permanently risen. (True Answer
Correct)
x the foreign money supply has temporarily fallen. (Incorrect)
x the foreign money supply has permanently fallen. (Incorrect)
101
In the short run, the nominal interest rate is affected by

changes in the money supply perceived to be temporary, but
once ____ adjust(s), the nominal interest rate ____ in the long
run.
x the supply of money; rises (Incorrect)
x the price level; will revert to its former level (True Answer
Correct)
x expectations of interest rates; falls (Incorrect)
x real GDP; does not change (Incorrect)
102
rises to its original level in the long run, it implies that:
x the foreign money supply has temporarily risen. (True Answer
Correct)
x the foreign money supply has permanently risen. (Incorrect)
103
When the exchange rate has risen in the short run and then
fallen slightly in the long run, it implies that:
x the domestic money supply has temporarily risen. (Incorrect)
x the domestic money supply has permanently risen. (True Answer
Correct)
x the domestic money supply has temporarily fallen. (Incorrect)
x the domestic money supply has permanently fallen. (Incorrect)
104
fallen to its original level in the long run, it implies that:
x the domestic money supply has temporarily risen. (True Answer
Correct)
x the domestic money supply has permanently risen. (Incorrect)
105
rises slightly in the long run, it implies that:
x the domestic money supply has permanently fallen. (True
Answer Correct)
106
rises to its original level in the long run, it implies that:
x the domestic money supply has temporarily fallen. (True Answer
Correct)
107
fallen slightly in the long run, it implies that:
x the foreign money supply has permanently fallen. (True Answer
Correct)
108
fallen to its original level in the long run, it implies that:
x the foreign money supply has temporarily fallen. (True Answer
Correct)
109
If there is a permanent increase in the domestic money supply,

then in the short run, which of the following will be true?
x
x
x
x
110
The prices will adjust lower. (Incorrect)

Domestic interest rates will increase. (Incorrect)
Real money supply will increase. (True Answer Correct)
Domestic money demand will permanently increase. (Incorrect)
If there is a permanent increase of 8% in the domestic money

supply, then which of the following will be true in the long run?
x Prices will decrease by 8%. (Incorrect)
x Prices will increase by 4%. (Incorrect)
x The home country currency will depreciate by 8%. (True Answer
Correct)
x The home country currency will appreciate by 4%. (Incorrect)
111
If the Bank of Japan permanently increases its money supply,

then which of the following is most likely to take place in the
short run?
x Japanese prices will immediately decrease. (Incorrect)
x Japanese prices will immediately increase. (Incorrect)
x Japanese interest rates will increase. (Incorrect)
x Japanese interest rates will decrease. (True Answer Correct)
112
When an increase in the quantity of money is considered to be

permanent and prices are sticky, then in the short run the
exchange rate depreciates and overshoots because:
x domestic nominal returns fall relative to foreign returns, and
traders expect a permanent depreciation in future exchange
x traders do not change their expectations of the exchange rate, and
lower domestic rates make it easier to borrow. (Incorrect)
x inflationary expectations eventually cause a rise in domestic real
returns. (Incorrect)
x traders quickly realize that their expectations of future exchange
rates are incorrect, and that eventually prices will become
unstuck. (Incorrect)
113
In the United States, where there is a permanent increase in the

money supply, the exchange rate overshooting is caused in part
by:
x higher domestic interest rates. (Incorrect)
x an appreciation of the dollar. (Incorrect)

x lower foreign interest rates. (Incorrect)
x a depreciation of the dollar. (True Answer Correct)
114
Overshooting occurs because:

x
x
x
x
115
expectations adjust slower than prices. (Incorrect)

expectations adjust at the same rate as prices. (Incorrect)
expectations adjust faster than prices. (True Answer Correct)
expectations do not adjust. (Incorrect)
Overshooting is when exchange rates:

x adjust more in the short run than they need to for long-run
equilibrium. (True Answer Correct)
x adjust less in the short run than they need to for long-run
equilibrium. (Incorrect)
x are unable to adjust because of fixed exchange rates. (Incorrect)
x adjust at the same rate as prices. (Incorrect)
11
6
Put the following events related to an increase in the money supply leading to
overshooting in their proper order:
i. The price level is sticky in the short run, but rises in proportion to the change in the
money supply in the long run.
ii. In the short run, the exchange rate rises even more, resulting in overshooting the
equilibrium level.
iii. A perceived permanent shock to the money supply instantaneously raises real money
balances, which revert to their former level in the long run.
iv. The exchange rate rises (depreciates) to a new higher level in the long run in
proportion to the change in the money supply.
x
x
x
x
117
i, ii, iii, iv (Incorrect)

ii, i, iv, iii (Incorrect)
iii, i, iv, ii (True Answer Correct)
iv, iii, i, ii (Incorrect)
A nominal anchor is a commitment to keep nominal variables

within limits, often tied to an external value or price. When
nations do not incorporate such discipline into their monetary
policy, exchange rates are often:
x irrelevant to economic activity. (Incorrect)
x extremely volatile, because traders consider monetary shocks to

be permanent. (True Answer Correct)
x less dependent on monetary variables. (Incorrect)
x determined by political considerations rather than economic
fundamentals. (Incorrect)
118
Nominal anchors limit overshooting by:

x fixing exchange rates. (Incorrect)
x distinguishing between permanent and temporary changes. (True
Answer Correct)
x slowing down expectations formation. (Incorrect)
x limiting temporary changes to exchange rates. (Incorrect)
119
In general, which of the following is NOT a characteristic of a

fixed exchange rate regime as defined by the text?
x Capital is mobile. (Incorrect)
x Exchange rates are determined by the market in the short
run. (True Answer Correct)
x Arbitrage is free to operate. (Incorrect)
x Government takes an active role in foreign currency market
intervention. (Incorrect)
120
Central banks control exchange rates by intervention. If a

nation such as Japan wished to peg its market rate at a certain
level, such as 100 = $1, what should it do if the actual market
rate began to depreciate to 125 = $1?
x It should purchase dollars with its own currency. (Incorrect)
x It should sell dollars from its treasury and retire its own
x It should increase its GDP to increase exports. (Incorrect)
x It should petition the IMF for a rate change. (Incorrect)
121
Exchange rate interventions occur when a government:

x buys and sells its own currency on forex markets. (Incorrect)
x buys and sells other currencies on forex markets. (Incorrect)
x increases its interest rate. (Incorrect)
x buys and sells its own currency and other currencies on forex
122
Which of the following is true about the role of the government

in a fixed exchange rate regime?
x establishing capital controls (Incorrect)
x controlling budget deficits (Incorrect)
x the buying and selling of currency by the central bank (True
Answer Correct)
x expanding the money supply (Incorrect)
123
With fixed exchange rates and capital mobility:

x interest rates in the home country and in foreign countries are
equalized. (True Answer Correct)
x interest rates in the home country are higher. (Incorrect)
x interest rates in foreign countries are higher. (Incorrect)
x monetary policy maintains its autonomy. (Incorrect)
124
In the short run, the chain of causality between monetary policy

and the exchange rate under fixed rates differs from a floating
rate. How?
x In a fixed rate regime, the money supply is determined first, then
interest rates, then the short-run exchange rate. (Incorrect)
x In a fixed rate regime, interest rates are determined first, then the
money supply, and then the short-run exchange rate. (Incorrect)
x In a floating rate regime, exchange rates are determined first,
then the nominal interest rate (according to uncovered interest
parity), and then the money supply. (Incorrect)
x In a fixed rate regime, exchange rates are determined first, then
the nominal interest rate (according to uncovered interest parity),
and then the money supply. (True Answer Correct)
125
If Japan, for instance, wished to keep its exchange rate with the
dollar at 100 = $1, what monetary policy options are available
to lower unemployment in the short run?
x Japan has all the options available to it, because domestic
monetary policy is conducted inside the nation and has no bearing
on its international variables. (Incorrect)
x Traders would realize that any monetary policy actions taken
inside a nation would improve economic conditions without
affecting international variables. (Incorrect)
x Japan cannot use any monetary policy that would cause its shortrun exchange rate to depreciate against the dollar. (True Answer
Correct)
x Japan's monetary action would restore confidence and help keep

the yen stable. (Incorrect)
126
Why would lowering its own interest rates affect a nation's

exchange rate?
x International interest arbitrage (the ability to borrow in low-rate
markets and deposit in higher-rate markets) would cause investors
to sell domestic currency assets and purchase foreign assets based
in other currencies. (True Answer Correct)
x A nation's central bank controls both interest rates and exchange
rates. Unfortunately they do not have sufficient funds to take care
of both at the same time. (Incorrect)
x When interest rates fall, borrowing is cheaper, spending and GDP
rise and so do exports, thus causing the exchange rate to
appreciate. (Incorrect)
x In the short run, exchange rates have to adhere to PPP; otherwise,
traders will make profits by purchasing in the cheap market and
selling in the more expensive market, thus aligning exchange rates
at the proper level. (Incorrect)
127
Why would making a permanent change in a monetary

aggregate have an effect on exchange rates in a nation?
x Permanent rates are mostly set by short-run fluctuations in the
rate of interest caused by monetary instability. (Incorrect)
x A permanent change is never quite as permanent as policy
makers claimpeople form expectations on past performance
rather than declarations. (Incorrect)
x The central bank is always aware of the effect on exchange rates
as it formulates policy, so it is very careful to make small
permanent changes that have no effect on exchange
rates. (Incorrect)
x Traders form expectations of future exchange rates based on the
anticipated long-run effects of monetary operations. (True Answer
Correct)
128
Which of the following is correct?

x If a nation changes its money supply, it disrupts the long-run PPP
equilibrium, which causes traders to purchase in the cheaper
markets and sell in the pricier markets, which, in turn, causes
demand for the domestic currency (vis--vis the international
currency) to be lower. (True Answer Correct)
x The peg changes the long-run expectation of exchange rates, and

this is a determinant of short-run rates which, in turn, affect deposit
rates of return. (Incorrect)
x The Federal Reserve has complete control of monetary policy; it
is independent of political control, so, in the United States at least,
monetary policy can coexist with an exchange rate peg. (Incorrect)
x Pegging its own currency causes a nation to lose political control,
and it is forced to sell its own resources at world prices. (Incorrect)
129
If Japan seeks to control its exchange rates so that 100 = $1,

which of the following policies should it not maintain?
x interest rates that provide the same return as alternative
international rates (Incorrect)
x a stable rate of price level changes that will not cause currency
depreciation or appreciation (Incorrect)
x a willingness to raise interest rates when its currency begins to
depreciate (Incorrect)
x a willingness to raise price levels (True Answer Correct)
130
A country with a fixed exchange rate faces:

x no monetary policy constraints in the long run. (Incorrect)
x no monetary policy constraints in the short run. (Incorrect)
x no monetary policy constraints in the long run and the short
run. (Incorrect)
x monetary policy constraints in the long run and the short
run (True Answer Correct)
131
Why would a monetary policy in a nation with an exchange rate

peg, such as Denmark, not be possible?
x The nation must keep its import tariffs in sync with the import
tariffs of the nation to which it pegs. (Incorrect)
x The nation must keep its price level and nominal interest rate
equal to the price level and nominal interest rate in the nation to
which it pegs. (True Answer Correct)
x The nation must keep its taxes and budget deficit in sync with
taxes and budget deficit in the nation to which it pegs. (Incorrect)
x The nation is no longer able to print its own money, since it is
using the currency of the nation to which it pegs. (Incorrect)
132
The trilemma refers to all the following except:

x
x
x
x
133
a fixed exchange rate. (Incorrect)

international capital mobility. (Incorrect)
monetary policy autonomy. (Incorrect)
price controls. (True Answer Correct)
If an economy wants to maintain monetary policy autonomy,

then:
x it can maintain a fixed exchange rate and international capital
mobility. (Incorrect)
x it can impose strict capital controls and maintain a fixed
x it can maintain capital mobility but not a fixed exchange
rate. (Incorrect)
x it can impose strict capital controls and maintain a fixed
exchange rate or it can maintain capital mobility but not a fixed
134
International variables are linked through trade and financial

flows. Therefore, what trilemma is faced by a nation that wishes
to keep its exchange rates with other nations fixed?
x It can have fixed exchange rates only when it allows free flows of
capital and maintains control of its interest rates. (Incorrect)
x It cannot have fixed exchange rates if it does not restrict foreign
investment and also wants to control its own monetary
policy. (True Answer Correct)
x Fixed exchange rates are not possible if the nation allows free
flows of capital both into and out of the nation. (Incorrect)
x Fixed exchange rates are not possible if the nation also wants to
control its monetary policy. (Incorrect)
135
What are the consequences for a nation that keeps its exchange
rate fixed, holds its own domestic interest rates below market to
encourage domestic spending, and allows free foreign
investment?
x Foreign investors will not invest, so the only consequence will be
a decline in the inflow of foreign investment. (Incorrect)
x Domestic and foreign investors will invest in other nations,
causing a sell-off of the domestic currency and, to maintain fixed
rates, the central bank will have to buy its own currency, depleting
its treasury reserves. (True Answer Correct)
x There will be upward pressure on the rate of interest as more

borrowing occurs, so the central bank will have to increase the
stock of money. (Incorrect)
x Interest rates in other nations will also fall as banks and other
firms have to compete for international borrowers. (Incorrect)
136
Comparing the examples of Denmark and the United Kingdom

in relationship to the European Monetary Union, the krone is
pegged to the euro, whereas the British pound is not. What
could be predicted about their interest rates?
x The United Kingdom has the ability to set its own interest rates
and pursue an independent monetary policy, whereas Denmark's
rates are virtually the same as those of the euro. (True Answer
Correct)
x Denmark gets the benefits of having fixed exchange rates as well
as having an independent monetary policy and the ability to set its
own rates of interest. (Incorrect)
x Denmark's price level in the long run will be much higher than
the Eurozone because it has to keep exchange rates
fixed. (Incorrect)
x The United Kingdom will discover that it cannot lower its own
interest rates after all, or the pound will depreciate so far that no
investors will make investments in the United Kingdom. (Incorrect)
137
During the U.S. Civil War (18611865), the Confederate States

printed their own currency. Events occurred during the war
that affected the exchange value of the Confederate dollars.
What evidence was there that supports the theory of long- and
short-run exchange rate determination?
x The Union soldiers burned Confederate dollars at every
opportunity, making them more valuable than the Union
dollar. (Incorrect)
x The Confederate dollar became worth more as it became clear
that the South would lose, because they would become
collectibles. (Incorrect)
x The Confederate dollar's value was closely linked to the
difference in the deposit rates in southern states' banks. (Incorrect)
x Speculators traded for profit and based their valuation on the
long-run expectation of the exchange rate, which tracked closely
the probability of a victory for the South. (True Answer Correct)
138
The outcome of the Civil War in the United States was that:
x the Confederates were allowed to keep their currency. (Incorrect)

x the value of the Confederate dollar increased at the end of the
war. (Incorrect)
x the Confederate dollar became worthless. (True Answer Correct)
x the northern currency declined in value. (Incorrect)
139
Two currencies existed in Iraq before the U.S. invasion and

subsequent conflict. What lessons are there for students of
exchange rates?
x Exchange rate values are influenced not only by economic
fundamentals but by political events that change long-run
expectations of future currency values. (True Answer Correct)
x Iraq did not back its currency with gold and, therefore, it was
worth much less than the U.S. dollar. (Incorrect)
x Eventually, each Iraqi sect developed its own currency and
payments system. (Incorrect)
x Exchange rate values are solely influenced by economic
policy. (Incorrect)
140
In 2003, which of the following currencies was used in Iraq?

x
x
x
x
141
After the United States dropped an atomic bomb on Japan,

what do you expect happened to the yen?
x
x
x
x
142
Swiss dinar (Incorrect)

Saddam (or print) dinar (Incorrect)
American dinar (Incorrect)
Swiss dinar and Saddam (or print) dinar (True Answer Correct)
The yen appreciated. (Incorrect)

The yen was unaffected. (Incorrect)
The yen depreciated. (True Answer Correct)
There is no way to predict the effect on the yen. (Incorrect)
A short-run theory of exchange rate behavior is not compatible

with the long-run monetary approach to exchange rates.
x True ()
143
Evidence indicates that PPP fails in the short run.

x False ()
144
The asset approach to exchange rate behavior helps explain

short-run movements in floating exchange rates and can be
applied to issues involving fixed exchange rates.
x False ()
145
The fundamental equation of the asset approach to exchange

rates is the equation of exchange: MV = PQ.
x True ()
146
The UIP equation is the fundamental equation of the asset

approach to exchange rates.
x False ()
147
The FX market will find short-run equilibrium where domestic

and foreign returns are equalized.
x False ()
148
The long-run model of exchange rates is unimportant for

understanding short-term exchange rate movements.
x True ()
149
In the short run, prices are flexible but interest rates are sticky.
x True ()
150
In the long run, a money market achieves equilibrium by

adjustments to the interest rates.
x True ()
151
The short-run model of exchange rate determination assumes

that prices, such as wages or product prices, usually adjust
instantaneously to market forces of supply and demand.
x True ()
152
In long-run equilibrium, exchange rates adjust so that there is

PPP, prices adjust to bring about domestic equilibrium, and
real interest rates are equalized worldwide.
x False ()
153
The asset approach usually looks at the short run, whereas the
monetary approach looks at the long run.
x False ()
154
The short-run asset approach to exchange rate determination

assumes that nominal interest rates are fixedonly real rates
change because of changes in the price level.
x True ()
155
When there is a short-run increase in the money supply, the

excess balances are used to purchase assets, which drives up
their prices and lowers rates of return.
x False ()
156
If a nation's central bank lowers its nominal rate of return on

domestic assets, it will cause an appreciation in its exchange
rate in the short run.
x True ()
157
In the short run, changes in the money supply and in interest

rates are equivalent.
x False ()
158
If there is a 5% growth in the supply of money during one year,

the short-run effects are exactly the same whether the public
judges them to be temporary or longer lasting.
x True ()
159
In practice, most central governments affect the money market

by changing the money supply.
x True ()
160
Whenever capital controls exist between two nations, the

domestic and foreign returns when investing the home currency
do not necessarily converge because of arbitrage.
x False ()
161
A temporary expansion in the supply of money in a foreign

nation will immediately lower interest rates in the home nation.
x True ()
162
If expectations are changing, then a temporary change must

have occurred.
x True ()
163
Just prior to 2001, the U.S. Federal Reserve was concerned

about overheating. As a result, it was increasing the U.S. money
supply.
x True ()
164
The experience with the dollar following September 11, 2001,

indicates that the asset approach to exchange rates does not
work.
x True ()
165
A complete theory of exchange rate determination is possible

with knowledge of the money supply in just one nation and how
it behaves.
x True ()
166
A survey of foreign exchange traders reveals that they

incorporate political events, economic fundamentals, and
statistical trends in their attempts to forecast short-run
exchange rate fluctuations.

x False ()
167
Surveys of forex traders find no evidence for Keynes's animal

spirits.
x True ()
168
A change in the long-run exchange rate can only be caused by a

permanent change in the supply of money.
x False ()
169
A permanent increase in money supply will cause the exchange

rate, in the short run, to overshoot its long-run level.
x False ()
170
Overshooting only happens when the short-run exchange rate

rises more than the long-run exchange rate.
x False ()
171
Overshooting the exchange rate is more of a problem when the

change in the stock of money is considered to be temporary
rather than permanent.
x True ()
172
A fixed exchange rate regime cannot allow people to freely

purchase and sell foreign currency.
x True ()
173
Under a fixed exchange rate, the exchange rate is an exogenous

variable and the money supply is an endogenous variable.
x False ()
174
The trilemma illustrates the impossibility of fixing exchange

rates while at the same time maintaining fiscal balance in the
domestic economy.
x True ()
175
A nation that pursues an exchange rate band policy, allowing

some fluctuations, may still pursue an independent monetary
policy within limits and allow free international capital inflows.
x False ()
176
Data indicate that the effect of political expectations on

exchange rates began only after World War II.
x True ()
177
Explain why an increase in the European interest rate increases

the dollar-euro exchange rate.
x ()
178
Explain the intuition for the fact that short-run nominal

interest rates fall in response to an increase in the money
supply.
x ()
179
Explain the intuition for the fact that short-run nominal

interest rates rise in response to an increase in the real income.
x ()
180
On the outlined graphs that follow, label each axis and each linear
relationship. If the money supply in the United States is temporarily
increased from M1 to M2, and prices are sticky, trace the effects of
the change and predict the effect on the dollar, assuming other
variables remain constant.
x ()
181
Briefly describe the three elements of a complete theory of

exchange rate determination. List variables in each element,
and explain whether the theory addresses short-run exchange
rate changes or long-run exchange rates.
x ()
182
Describe the effect of a permanent increase in the quantity of

money on exchange rates in both the long and short run.
x ()
183
The case of Denmark illustrates the effects on a nation of a

fixed exchange rate regime. Briefly discuss the trade-offs from a
fixed exchange rate and the ability to conduct monetary policy.
x ()
184
Suppose Japan wishes to maintain its exchange rate with the

U.S. dollar at 100 = $1. It would also like to attract foreign
investors to provide funds to build its aircraft sector, and it
would like to keep inflation low. Is it capable of doing that?
x ()
A short-run open-economy model with demand shocks can

analyze the effect on _____ if output prices and factor prices are
sticky.
x inflation (Incorrect)
x real economic activity (real GDP and unemployment) (True
Answer Correct)
x long-run variables (Incorrect)
x expectations (Incorrect)
A Keynesian model is one in which prices are sticky:

x
x
x
x
in the short run only. (True Answer Correct)

in the short run and in the long run. (Incorrect)
in the long run only. (Incorrect)
so that they never depend on the money supply. (Incorrect)
To simplify the analysis of demand shocks in an open, twoeconomy, short-run model, we assume all of the following
except:
x fixed prices and wages. (Incorrect)
x levels of government spending and taxes; foreign GDP and
foreign rates of interest are given. (Incorrect)
x no net unilateral transfers or foreign factor income. (Incorrect)
x foreign GDP and foreign rates of interest are constant. (True
Answer Correct)
Assumptions that output is fixed and factor prices have adjusted

to reach the level of full employment are:
x useful for long-run analysis. (True Answer Correct)
x necessary for short-run analysis. (Incorrect)
x unrealistic to the extent that economists should not make such
assumptions. (Incorrect)
x always true and therefore useful both in the long run and short
run. (Incorrect)
The assumption of short-run price stickiness implies:

x that we must adjust nominal quantities for changes in
x that we must always allow for unexpected inflation. (Incorrect)
x that expected inflation is zero and nominal quantities are the same
as real. (True Answer Correct)

x a balanced budget. (Incorrect)
6
The short-run model makes use of the ______, which assumes

that private consumption expenditure is sensitive to changes in
current income.
x Pareto-optimal condition (Incorrect)
x consumer sovereignty model (Incorrect)
x Keynesian consumption function (True Answer Correct)
x consumption-smoothing model (Incorrect)
The slope of the consumption function relates changes in

consumer spending to changes in disposable income received by
consumers. This is called:
x the marginal propensity to consume (MPC). (True Answer
Correct)
x the average propensity to consume (APC). (Incorrect)
x the utility-maximization function (UMC). (Incorrect)
x the marginal rate of transformation (MRT). (Incorrect)
If the marginal propensity to consume for a nation is 0.8, it

means:
x consumers save 80% of their incomes. (Incorrect)
x consumers spend 80% of their incomes. (Incorrect)
x consumers pay 20% tax on their earnings. (Incorrect)
x consumers decrease their spending by $0.80 for each $1 of a
decrease in their income. (True Answer Correct)
Consider the following information for a family. If the income

for the family is $58,000, then an increase in income by $20,000
will result in an:
x increase in consumption by $15,000 if the MPC is 0.9. (Incorrect)
x increase in consumption by $10,000 if the MPC is 0.5. (True
Answer Correct)
10
Consider the following information for a family. The income for

the family is $58,000; if the MPC is 0.6, and income increases by
$13,000, then the increase in savings for the family is:
x $420. (Incorrect)
11
Consider the following information for a family. The income for

the family is $58,000; if the MPS is 0.25, and the income for the
family decreases by $15,000, then the decrease in consumption
will be:
12
If taxes go up and all else remains equal, then consumption

should:
x
x
x
x
13
If consumption has fallen, which of the following could be true?

x
x
x
x
14
rise by more than the tax increase. (Incorrect)

rise by the same amount as the tax increase. (Incorrect)
rise by less than the tax increase. (Incorrect)
Taxes have fallen. (Incorrect)

Income has fallen. (True Answer Correct)
Taxes and income have fallen. (Incorrect)
Disposable income has risen. (Incorrect)
When analyzing the effects of changes in demand in an open

economy, we assume that firms:
x have only one fixed rate of return on various projects when
deciding investment activity. (Incorrect)
x have differing returns on various projects when deciding
investment activity. (True Answer Correct)
x are required to borrow only from domestic banks when funding
investment activity. (Incorrect)
x consider the effects of inflation on investment activity. (Incorrect)
15
Investment occurs when:

x firms are very profitable and have lots of extra cash on
hand. (Incorrect)
x there is a reduction in risk-aversion. (Incorrect)
x the expected real interest rate is less than the expected real return
on the investment project. (True Answer Correct)
x individuals realize that there are greater long-term gains in the
equity and credit markets. (Incorrect)
16
Normally, a firm's borrowing cost is the expected real interest

rate, which takes expected inflation into account. With price
stickiness, however, the firm will consider only:
x expected inflation. (Incorrect)
x expected wages. (Incorrect)
x the nominal rate of interest. (True Answer Correct)
x the expected appreciation of the asset. (Incorrect)
17
With expected inflation equal to zero in the model, investment

activity for an economy is:
x a positive function of the nominal rate of interest. (Incorrect)
x a negative function of the nominal rate of interest. (True Answer
Correct)
x constant in the face of differing nominal rates of
x limited to the rate of growth of nominal GDP minus the inflation
rate. (Incorrect)
18
When the expected real rate of interest declines, ceteris paribus,

we expect:
x more investment projects will be undertaken. (True Answer
Correct)
x lenders will need to lower their average default rate to maintain
their profit margins. (Incorrect)
x firms will borrow less and cut back on their investment
projects. (Incorrect)
x individuals will steer clear of equity markets. (Incorrect)
19
What assumption results in investment depending only on the

nominal interest rate?
x
x
x
x
rationality (Incorrect)
zero inflation (True Answer Correct)
uncertainty (Incorrect)
The MPC is less than 1. (Incorrect)
20
If a government must run a balanced budget, then tax revenues

and government spending:
x
x
x
x
move roughly in opposite directions. (Incorrect)

move exactly in opposite directions. (Incorrect)
move exactly in the same direction. (True Answer Correct)
move roughly in the same direction. (Incorrect)
21
When analyzing the impact of government consumption and

taxes in an open economy, we exclude transfer payments
because:
x they are not paid for by taxes. (Incorrect)
x in the aggregate, they do not generate a change in total spending
on goods and services. (True Answer Correct)
x the sums are so large as to be incalculable. (Incorrect)
x the sums are so small as to be insignificant. (Incorrect)
22
When analyzing the impact of government consumption and

taxes in an open economy, we assume that:
x the reasons for changing fiscal policy are not important to the
effect. (True Answer Correct)
x government deficits are a problem for the domestic and
international economy. (Incorrect)
x governments always have a balanced budget. (Incorrect)
x governments often do not coordinate their tax and spending
policies with those of other nations. (Incorrect)
23
The TB (X M) is part of the short-run spending equation. With

sticky prices, what would be the effect on the TB with an
increase (depreciation) of the home nation's exchange rate?
x Consumers in the home nation would find it more expensive to
buy domestic goods compared to foreign goods, and the trade
balance would decrease. (Incorrect)
x Consumers in the home nation would cut back on both domestic
and foreign goods and the trade balance would decrease. (Incorrect)
x Consumers in the home nation would increase spending on both
domestic and foreign goods, and the trade balance would be
x Consumers in the home nation would increase spending on
domestic goods and decrease spending on foreign goods, causing the
trade balance to increase. (True Answer Correct)
24
A result of an exchange rate increase (depreciation), _____

would occur as the spending patterns change in response to a
change in the exchange rate.
x expenditure switching from domestic to foreign
products (Incorrect)
x expenditure switching from foreign to domestic products (True
Answer Correct)
x expenditure switching from rural to urban producers (Incorrect)
x terms-of-trade deterioration (Incorrect)
25
What is the real exchange rate?

x It is the ratio of the cost (in the home currency) of a foreign basket
of products compared to the cost of the same domestic basket of
products. (True Answer Correct)
x It is the exchange rate minus the rate of domestic
x It is the exchange rate plus the rate of domestic
x It is the original exchange rate that was in effect when the nations
were on a gold standard. (Incorrect)
26
If the dollar appreciates against the Mexican peso, consumers in

Mexico are likely to buy more local products, and consumers in
the United States are likely to buy more Mexican products. This
phenomenon is known as:
x forward exchange rates. (Incorrect)
x currency pass through. (Incorrect)
x expenditure switching. (True Answer Correct)
x depreciation of the dollar. (Incorrect)
27
Calculate the relative price of a basket of goods sold in the

United States and Japan in terms of dollars if the yen/$
exchange rate = 90. The basket costs $100 in the United States
and 9,000 in Japan.
x The relative price is 0.9, which means the U.S. basket costs
more. (Incorrect)
x The relative price is 1.1010, which means the Japanese basket
costs more. (Incorrect)
x The relative price is 0.9, which means the Japanese basket costs
more. (Incorrect)
x The relative price is 1.0, which means they both cost the
same. (True Answer Correct)

28
If a basket of goods costs $100 in the United States and 300 pesos
in Mexico, and if the exchange rate is $1 = 5 pesos, then the
dollar price of the basket of goods in Mexico is:
x $250. (Incorrect)
x $56. (Incorrect)
x $75. (Incorrect)
29
When the real exchange rate decreases in the United States, then
there is a(n) ______ in U.S. demand for U.S. goods and a(n)
_________ in U.S. demand for Mexican goods.
30
A major factor in changing levels of imports in an open economy

is:
x
x
x
x
31
If the trade surplus has fallen, which of the following is a

possible explanation?
x
x
x
x
32
The real exchange rate rose. (Incorrect)

Foreign income fell. (True Answer Correct)
Domestic income fell. (Incorrect)
The foreign price level rose. (Incorrect)
If domestic income falls, what must happen to keep the trade

balance the same?
x
x
x
x
33
real international rates of interest. (Incorrect)

relative international price levels. (Incorrect)
a change in a nation's disposable income. (True Answer Correct)
a change in transportation costs. (Incorrect)
The real exchange rate must fall. (True Answer Correct)

Foreign income must rise. (Incorrect)
The domestic price level must fall. (Incorrect)
Domestic income must fall. (Incorrect)
If domestic and foreign prices rise by the same relative amount,

what will happen to the trade balance?
x
x
x
x
It will rise. (Incorrect)

Nothing will happen. (True Answer Correct)
It will fall. (Incorrect)
34
An increase in the home country's income will result in a(n)

_____ in the home country trade balance, and an increase in
foreign income will result in a(n) _____ in the home country
trade balance.
x increase; fall (Incorrect)
x fall; increase (True Answer Correct)
35
The functional relationship between the trade balance and the

real exchange rate is:
x a negative, or decreasing, function. (Incorrect)
x a positive, or increasing, function. (True Answer Correct)
x a parabolic function. (Incorrect)
x impossible to quantify because there are so many unknown
variables. (Incorrect)
36
When income levels in the home nation increase, what is the

effect on the home TB?
x It decreases because of expenditure switching. (Incorrect)
x It decreases because of an increase in imports. (True Answer
Correct)
x It increases because of an increase in exports. (Incorrect)
x It increases because of expenditure switching. (Incorrect)
37
When income levels in the rest of the world increase, what is the
effect on the home TB?
x It decreases because of expenditure switching. (Incorrect)
x It decreases because of an increase in imports. (Incorrect)
x It increases because of an increase in exports. (True Answer
Correct)
x It increases because of expenditure switching. (Incorrect)
38
The marginal propensity to consume goods and services can be

broken out into:
x the marginal propensity to invest plus the marginal propensity to

save. (Incorrect)
x the marginal propensity to consume home-produced goods and
services plus the marginal propensity to consume imports. (True
Answer Correct)
x the marginal propensity to spend minus the marginal propensity to
save. (Incorrect)
x the marginal propensity to consume goods plus the marginal
propensity to consume services. (Incorrect)
39
When the marginal propensity to consume foreign imports

(MPCF) rises, ceteris paribus, what happens to the trade
balance?
x It increases. (Incorrect)
x It decreases. (True Answer Correct)
x It depends on what happens to the MPC of domestic
goods. (Incorrect)
40
If the marginal propensity to consume foreign imports (MPCF)

is equal to 0.15, then:
x an increase in domestic consumption will generate a 15% rise in
x a decrease in domestic consumption will generate a 15% rise in
x an increase in domestic income will generate a 15% rise in
imports. (True Answer Correct)
x a decrease in domestic income will generate a 15% rise in
41
Suppose the MPC is 0.8 in Canada and the MPC of home goods
(MPCh) is 0.55. If income increases by $100 million in Canada,
then the increase in consumption of domestic goods will be
_____.
x $25 million (Incorrect)
x $55 million (True Answer Correct)
42
Suppose the MPC is 0.8 in Canada and the MPCh is 0.55. If

income increases by $100 million in Canada, then the increase in
consumption of foreign goods will be _____.
x
x
x
x
43
$35 million (Incorrect)

$25 million (True Answer Correct)
In 2004, retailers and exporters in the United States were happy,

along with their customers from abroad due to:
x a reduction in import tariffs by the EU. (Incorrect)
x a lifting of an embargo on U.S. exports to Germany. (Incorrect)
x the high value of the U.S. dollar compared to other
x the low value of the U.S. dollar compared to other
44
In 2009, there was an unlikely boom in British cross-Channel

grocery deliveries to France due to:
x an increase in French income. (Incorrect)
x an increase in French preferences for British food
items. (Incorrect)
x crop failures in France due to a year-long drought. (Incorrect)
x a dramatic weakening of the British pound against the euro over
the previous 18 months. (True Answer Correct)
45
When we measure the impact of exchange rate changes on a

nation's trade balance, the bilateral exchange rates explain only
part of the change. To assess the overall change, we need to
calculate:
x the home multilateral exchange rate, or real effective exchange
x a nation's income versus income changes in the rest of the
world. (Incorrect)
x a nation's marginal propensity to consume imports. (Incorrect)
x the movement over time of the trade balance along with long-run
expectations of the exchange rate. (Incorrect)
46
In order to assess the relationship between the real exchange

rate and total exports for any nation, one must construct a real
effective exchange rate that measures:
x a composite of each trading partner's real exchange rate change
weighted by the share of trade. (True Answer Correct)
x the exchange rate that would exist with no inflation and balanced
trade. (Incorrect)
x the average of all nominal exchange rates since we assume no

x nominal trade adjusted for inflation. (Incorrect)
47
Data on the relationship between the U.S. multilateral real

exchange rate and the U.S. trade balance shows:
x a surprising result that the decrease in the trade balance is
correlated with an increase (depreciation) of the U.S. dollar
multilateral real exchange rate. (Incorrect)
x a predictable result that the increase in the trade balance is
correlated with an increase (depreciation) of the U.S. dollar
multilateral real exchange rate. (True Answer Correct)
x a correlation that is so weak it cannot be used to support the
theory that the trade balance is related to the real effective exchange
rate of the U.S. dollar. (Incorrect)
x a surprising result that the increase in the U.S. trade balance
occurs with a decrease (appreciation) in the real effective exchange
rate of the dollar. (Incorrect)
48
Sometimes a change in the real effective multilateral exchange

rate has the opposite result from what one would expect. One
explanation may be:
x that buying habits are very strong and firms and consumers
continue their behavior despite large changes in prices of
x that price changes do not bring about immediate responses in
import or export volume because of contracts, or firms' difficulty in
changing suppliers quickly. (True Answer Correct)
x that the theory is fundamentally flawed and does not predict
well. (Incorrect)
x that there are other factors we are not considering that affect the
trade balance. (Incorrect)
49
If a proportion of traded goods (such as oil) are priced in a

foreign currency, the real exchange rate becomes:
x lower. (Incorrect)
x higher. (Incorrect)
x less responsive to changes in the nominal exchange rate. (True
Answer Correct)
x more responsive to changes in the nominal exchange
rate. (Incorrect)
50
The larger the percentage of U.S. imports already priced in

dollars, the less likely depreciation in the U.S. dollar will be to:
x
x
x
x
decrease prices of imports. (Incorrect)

increase prices of imports. (True Answer Correct)
limit trade imbalances. (Incorrect)
increase trade with third-party nations. (Incorrect)
51
Consider the following information on Mexico's trade. Thirty

percent of the trade is conducted with country A; 55% of trade
with country B, and 15% of trade with country C. If the peso
appreciates 10% against country A, depreciates 30% against
country B, and depreciates 10% against country C, then the
effective trade-weighted real exchange rate experiences a
______.
x 15% appreciation (Incorrect)
x 15% depreciation (True Answer Correct)
x 25% depreciation (Incorrect)
x 20% appreciation (Incorrect)
52
Suppose that the dollar real exchange rate falls by 10% against
the euro, 20% against the pound, and 25% against the yen. If
the United States trades equally with each country, what is the
percentage decline in the real effective exchange rate?
x 22.5% (Incorrect)
x 15.1% (Incorrect)
x 20.3% (Incorrect)
53
Suppose that the United States does 1/2 of its trade with Canada,
1/4 with the United Kingdom, and 1/4 with Mexico. If the dollar
real exchange rate rises by 10% with Canada, rises by 20% for
the United Kingdom, and falls by 10% for Mexico, what is the
percentage change in the real effective exchange rate?
x 11.5% (Incorrect)
x 10% (Incorrect)
x 2.5% (Incorrect)
54
If a nation trades with another nation in a foreign currency

(such as some commodities sold that are priced in U.S. dollars),
then, when nominal exchange rates change, the real effective
exchange rate will:
x change by more. (Incorrect)
x change by less. (True Answer Correct)

x change in exactly the same proportion. (Incorrect)
x not change at all. (Incorrect)
55
Full pass-through means that a 10% rise in the overseas price of

an imported good leads to:
x
x
x
x
56
a 100% rise in the domestic price. (Incorrect)

a greater-than 10% rise in the domestic price. (Incorrect)
a 10% rise in the domestic price. (True Answer Correct)
a less-than 10% rise in the domestic price. (Incorrect)
The devaluation of a currency results in:

x an initial increase in trade balance, but an eventual decline in trade
balance. (Incorrect)
x a permanent decline in trade balance. (Incorrect)
x a permanent increase in trade balance. (Incorrect)
x an initial decrease in trade balance, but an eventual increase in
trade balance. (True Answer Correct)
57
If we assume sticky prices in both foreign and domestic trading

nations, the rate of pass-through from the nominal to the real
exchange rate falls as:
x the percentage of traded goods priced in foreign currencies
rises. (True Answer Correct)
x the percentage of traded goods priced in the domestic currency
rises. (Incorrect)
x the percentage change in the exchange rate exceeds the percentage
increase in inflation. (Incorrect)
x traders find new markets and are able to avoid nations with
currency depreciations. (Incorrect)
58
Trade dollarization refers to the phenomenon of:

x the practice of insisting on trade in U.S. dollars. (Incorrect)
x the fact that many international commodities are traded in U.S.
dollars only. (True Answer Correct)
x the fact that many dollars have flowed out of the U.S. and are
used in other nations as their national currency. (Incorrect)
x the falling dollar combined with a rising trade balance. (Incorrect)
59
The final market price of imports may not reflect 100% of

changes in the real effective exchange rate because:
x exchange rates in many nations are fixed. (Incorrect)
x there are restrictions on capital inflows. (Incorrect)
x domestic price distortions, such as markups or taxes, reduce the
impact of the exchange rate change. (True Answer Correct)
x the government has instituted price controls. (Incorrect)
60
When a depreciation in the nation's real effective exchange rate

initially lowers the trade balance and then increases it,
economists refer to the phenomenon as:
x the K-curve effect. (Incorrect)
x the J-curve effect. (True Answer Correct)
x the real balances effect. (Incorrect)
x the marginal propensity to import. (Incorrect)
61
The J-curve effect means that import prices are higher, thus
revenues paid out increase while export prices are lower and
incoming revenues decrease. Therefore, after a currency
depreciation:
x the trade balance will improve, then decline, then improve, and
then decline, appearing to be a series of J shapes. (Incorrect)
x the trade balance will increase, then decrease, then jump higher,
which economists call the J-curve effect. (Incorrect)
x the nation will cut back on imports immediately causing the trade
balance to improve, which gives the curve an inverted J
shape. (Incorrect)
x the trade balance decreases and then increases over time giving
the curve a J shape. (True Answer Correct)
62
Because of international time lags between ordering and the

receipt of goods, a depreciation of a currency:
x will not change import or export volumes for a time, since prices
on orders already placed cannot be renegotiated. (True Answer
Correct)
x will immediately change import and export volumes, because
buyers and sellers always include an opt-out clause. (Incorrect)
x will affect import and export volumes in third countries not party
to the particular transaction. (Incorrect)
x will never change import or export volumes. (Incorrect)
63
The J-curve effect in reference to the trade balance may persist:

x
x
x
x
for up to 1 year after the depreciation. (True Answer Correct)

permanently. (Incorrect)
for a few weeks only. (Incorrect)
for up to 10 years after the depreciation. (Incorrect)
64
In addition to government purchases or changes in taxes,

demand shocks in the economy can increase or decrease GDP,
leading to a fall or rise in the trade balance. Which of the
following would not represent a demand shock?
x a change in household wealth leading to a rise in consumption
expenditures. (Incorrect)
x a rise in inflation. (True Answer Correct)
x a change in the marginal propensity to import, causing imports to
rise. (Incorrect)
x an increase in technology, causing investment spending to
rise. (Incorrect)
65
A belief that high-tech companies would be highly profitable led

to the dot.com boom in the 1990s, which is known as:
x
x
x
x
66
an investment shock. (True Answer Correct)

an investment boom. (Incorrect)
a technology surge. (Incorrect)
a technology reversal. (Incorrect)
The Keynesian model of aggregate demand includes:

x government purchases and taxes. (Incorrect)
x consumer spending and investment spending. (Incorrect)
x exports plus imports. (Incorrect)
x consumer spending, business investment spending, government
consumption, and the trade balance (exports minus imports). (True
Answer Correct)
67
Aggregate supply is the same thing as:

x total national spending. (Incorrect)
x total domestic production. (True Answer Correct)
x aggregate demand. (Incorrect)
x a supply shock. (Incorrect)

68
The trade balance component of aggregate demand is a function

of all the following except:
x
x
x
x
69
Because a change in consumer spending is positively related to a

change in income, the slope of the aggregate demand function is:
x
x
x
x
70
foreign disposable income. (Incorrect)

domestic disposable income. (Incorrect)
the real exchange rate. (Incorrect)
consumer spending. (True Answer Correct)
0. (Incorrect)
1. (Incorrect)
equal to the MPC. (True Answer Correct)
equal to the marginal propensity to save. (Incorrect)
The MPC shows the relationship between:

x interest rates and investment. (Incorrect)
x disposable income and consumer spending. (True Answer
Correct)
x saving and investing. (Incorrect)
x inflation and unemployment. (Incorrect)
71
An increase in income in an open economy nation will cause a

change in consumer spending on home production, and:
x an increase in taxes. (Incorrect)
x a decrease in savings. (Incorrect)
x an increase in foreign production. (Incorrect)
x an increase in imports if MPCF is greater than zero. (True Answer
Correct)
72
Unlike in the long-run model, in the short-run Keynesian model,

we make two critical assumptions: that firms adjust production
depending on _______, and that _______.
x total demand; prices are fixed (True Answer Correct)
x resource limitations; prices are flexible (Incorrect)
x the market rate of interest; consumers maximize utility (Incorrect)
x consumer spending; there is full employment (Incorrect)
73
In the Keynesian model, when is the economy in short-run

equilibrium?
x when there is no inflation (Incorrect)
x when there is full employment (Incorrect)
x when there is a balanced federal budget (Incorrect)
x when total spending (demand) is equal to production
(supply) (True Answer Correct)
74
The goods market adjusts to an equilibrium right at the point of

the Keynesian cross. Why?
x At that point, the Keynesian theory of sticky prices is
correct. (Incorrect)
x At only that point, total spending is equal to total
production. (True Answer Correct)
x At only that point, consumers are fully satisfied and firms have
maximized profits. (Incorrect)
x At only that point, the unemployment rate is zero and workers
need not seek higher wages. (Incorrect)
75
The greater the MPC, the _______ the slope of the demand
curve.
x greater (True Answer Correct)
x smaller (Incorrect)
x It depends on the trade balance. (Incorrect)
x The slope of the demand curve does not depend on
this. (Incorrect)
76
If output (Y) falls, which of the following could be an

explanation?
x a rise in the interest rate (Incorrect)
x a fall in foreign income (Incorrect)
x a decline in government spending (Incorrect)
x a rise in the interest rate, a fall in foreign income, or a decline in
government spending (True Answer Correct)
77
The total demand line will shift whenever:

x the MPC increases. (Incorrect)
x the MPC decreases. (Incorrect)
x there is an exogenous change in one of its components (C, I, G, or
X). (True Answer Correct)

x aggregate supply increases. (Incorrect)
78
If the interest rate rises and government spending falls, what

will happen to output (if all else is equal)?
x
x
x
x
79
If taxes fall and foreign income falls, what will happen to output
(if all else is equal)?
x
x
x
x
80

It will stay the same. (Incorrect)
It will fall. (True Answer Correct)
It is uncertain what will happen. (Incorrect)

It will stay the same. (Incorrect)
It will fall. (Incorrect)
It is uncertain what will happen. (True Answer Correct)
What is the reason given in the book for Australian firms

looking to move operations overseas?
x
x
x
x
uncertainty in the Australian market (Incorrect)

the rising value of the Australian dollar (True Answer Correct)
increased German competition (Incorrect)
uncertainty over the value of the euro (Incorrect)
81
A fall in the real exchange rate (appreciation) will decrease the

trade balance in the short run and cause a(n) ________ of the
total demand curve.
x downward shift (True Answer Correct)
x increase in the slope (Incorrect)
x upward shift (Incorrect)
x decrease in the slope (Incorrect)
82
Along the IS curve, which of the following markets are in

equilibrium?
x
x
x
x
the money and forex markets (Incorrect)

the goods and forex markets (True Answer Correct)
the goods and money markets (Incorrect)
the goods, money, and forex markets (Incorrect)
83
Every point on an open-economy IS curve represents:

x combinations of interest rates and the supply of money, which
result in equilibrium in the money market. (Incorrect)
x combinations of interest rates and levels of production, which
result in equilibrium in the goods market. (Incorrect)
result in equilibrium in the money market, the goods market, and the
forex market. (Incorrect)
result in equilibrium in the goods market and the forex
84
At a given nominal rate of interest, when spending is equal to

output and there is uncovered interest parity, we have:
x real exchange rate parity. (Incorrect)
x equilibrium in the goods market and in the forex market. (True
Answer Correct)
x stable inflation and low unemployment. (Incorrect)
x depreciation of the home currency. (Incorrect)
85
Traders operate on the principle that the ______ the value of the
nominal exchange rate (E), the ______ it is to purchase foreign
currency, and the _____ its return measured in the domestic
currency.
x higher; more expensive; lower (True Answer Correct)
x higher; less expensive; higher (Incorrect)
x lower; more expensive; higher (Incorrect)
x higher; more expensive; higher (Incorrect)
86
The principle involved in short-run uncovered interest parity is

that home interest rates will be equal to:
x the world equilibrium real rate of interest. (Incorrect)
x the foreign interest rate minus foreign inflation. (Incorrect)
x the foreign rate of interest plus the expected rate of depreciation
of the home currency. (True Answer Correct)
x the domestic nominal rate of interest plus domestic
87
Under uncovered interest parity, if the domestic interest rate is

greater than the foreign interest rate, then:
x
x
x
x
exchange rates are expected to rise. (True Answer Correct)

exchange rates are expected to stay constant. (Incorrect)
exchange rates are expected to fall. (Incorrect)
exchange rates are uncertain. (Incorrect)
88
At some rate of interest, i, domestic demand is equal to output,

and at some exchange rate, the domestic return is equivalent to
the foreign return. This must be one point on:
x the IS curve. (True Answer Correct)
x the aggregate expenditure line. (Incorrect)
x the supply curve. (Incorrect)
x the LM curve. (Incorrect)
89
The open-economy IS curve slopes down because any change in

the foreign or home interest rate will inversely affect demand,
along with a secondary effect from a change in:
x the rate of depreciation of assets. (Incorrect)
x the exchange rate and the trade balance. (True Answer Correct)
x the real interest rate. (Incorrect)
x the growth rate of money. (Incorrect)
90
Assume the economy is in equilibrium. If the interest rate falls,

what sequence of events will return the economy to equilibrium?
x Total spending rises as investors move funds into foreign assets,
causing the exchange rate to rise (depreciate), and the trade balance
increases, causing output to rise. (True Answer Correct)
x Savers save more to replace lost interest earnings, consumption
falls, imports rise, and the trade balance falls, causing output to
fall. (Incorrect)
x Total spending falls, unemployment rises, government transfers
increase, inflation rises, and the exchange rate falls
(appreciates). (Incorrect)
x Bond prices rise, causing foreign investment to flow in, causing
the exchange rate to fall (appreciate). (Incorrect)
91
Considering only the goods and forex markets, as the economy

adjusts to lower rates of interest and equilibrium is restored, the
level of GDP will:
x fall. (Incorrect)
x rise. (True Answer Correct)
x become unstable. (Incorrect)
x decline very gradually. (Incorrect)
92
Factors that shift the IS curve involve:

x interest rates and levels of GDP. (Incorrect)
x the quantity of money and the demand for money. (Incorrect)
x the trade balance. (Incorrect)
x exogenous variables affecting demand, such as a change in
government spending or a change in the exchange rate. (True
Answer Correct)
93
If the United States cuts its government budget deficit, what

impact would there be on the IS curve?
x It would shift right due to higher levels of total
spending. (Incorrect)
x It would shift left due to lower levels of total spending. (Incorrect)
x It would shift left because of lower levels of total spending, and it
would shift right if U.S. interest rates decline due to lower
borrowing. (True Answer Correct)
x It would shift left because of higher nominal and real interest rates
due to increased borrowing. (Incorrect)
94
If there is an increase in government spending, then, all else

being equal, the IS curve:
x will shift to the left. (Incorrect)
x will shift to the right. (True Answer Correct)
x will not shift at all. (Incorrect)
x will shift to the left if there is a corresponding decrease in
taxes. (Incorrect)
95
If the central bank in a foreign country increases its interest

rate, then the IS curve of the domestic economy will:
x
x
x
x
96
shift to the right. (True Answer Correct)

shift to the left. (Incorrect)
will not shift. (Incorrect)
shift to the right because U.S. exports will decrease. (Incorrect)
A shift to the left by the IS curve can be achieved by all of the

following except:
x a decrease in government spending. (Incorrect)
x an increase in taxes. (Incorrect)
x an increase in the foreign interest rate. (True Answer Correct)

x an increase in the domestic price level. (Incorrect)
97
Which of the following is a general rule for how demand shocks

affect the IS curve?
x Demand shocks will always show up as changes in the expected
real exchange rate. (Incorrect)
x Demand shocks are usually rare and have little effect. (Incorrect)
x When any exogenous variable works to increase demand, IS shifts
to the right and, conversely, when any exogenous variable works to
decrease demand, IS shifts to the left. (True Answer Correct)
x When any exogenous variable works to increase demand, IS shifts
to the left and conversely, when any exogenous variable works to
decrease demand, IS shifts to the right. (Incorrect)
98
A set of combinations of nominal interest rates and GDP, for

which the demand for money is equal to the supply of money, is:
x
x
x
x
99
100
the IS curve. (Incorrect)

the aggregate expenditure line. (Incorrect)
the LM curve. (True Answer Correct)
The LM curve shows that, with a fixed supply of money, as GDP

rises, the demand for money ____ and the rate of interest will
____.
x rise; rise (True Answer Correct)
x rise; fall (Incorrect)
x fall; rise (Incorrect)
The quantity of real balances demanded varies ____ with the
nominal rate of interest. Why?
x directly; because at higher interest rates people want more
money (Incorrect)
x inversely; because at lower interest rates people want less
money (Incorrect)
x inversely; because when people hold more money, they forego
interest on other assets (True Answer Correct)
x directly; because real balances are independent of inflation and
would not be affected by it (Incorrect)
101
The relationship between the quantity of real balances

demanded and the rate of interest (called the demand for
money curve) will ____ when GDP increases. Why?
x increase (shift right); because more transactions balances are
needed to make purchases and to hold between pay periods (True
Answer Correct)
x increase (shift right); because more asset balances are needed for
saving or precautionary reasons (Incorrect)
x decrease (shift left); because fewer transactions balances are
needed to make purchases and to hold between pay
periods (Incorrect)
x decrease (shift left); because lower asset balances are needed for
saving or precautionary reasons (Incorrect)
102
The LM curve shows equilibrium in the _______ market at

various levels of interest rates and GDP.
x
x
x
x
forex (Incorrect)
goods (Incorrect)
equities (Incorrect)
money (True Answer Correct)
103
After identifying one combination of interest rates and GDP for

which the demand for money is equal to the supply of money
(equilibrium), to maintain the equilibrium if GDP rises:
x interest rates would not be affected. (Incorrect)
x interest rates would have to fall. (Incorrect)
x interest rates would have to rise. (True Answer Correct)
x interest rates would not be in parity with foreign rates of
104
The LM curve describes the relationship between interest rates

and GDP for which the supply of money is equal to the demand
for real balances, holding _____ constant.
x expectations (Incorrect)
x tastes and preferences (Incorrect)
x the quantity of money (True Answer Correct)
x expectations, tastes, and the quantity of money (Incorrect)
105
If the supply of money increases, what happens in the IS-LM

framework?
x The IS curve shifts right. (Incorrect)
x The LM curve shifts right. (True Answer Correct)

x The IS curve shifts left. (Incorrect)
x The LM curve shifts left. (Incorrect)
106
If the demand for money increases, what happens in the IS-LM

framework?
x
x
x
x
The IS curve shifts right. (Incorrect)

The LM curve shifts right. (Incorrect)
The IS curve shifts left. (Incorrect)
The LM curve shifts left. (True Answer Correct)
107
With a fixed supply of money, as GDP rises, the demand for

money ____ and therefore ____ must rise to encourage savers to
hold financial assets instead of cash.
x falls; prices (Incorrect)
x rises; incomes (Incorrect)
x rises; rates of interest (True Answer Correct)
x falls; taxes (Incorrect)
108
The LM curve will shift to the right, if:

x
x
x
x
109
there is a decrease in money supply. (Incorrect)

there is an increase in real money demand. (Incorrect)
there is an increase in money supply. (True Answer Correct)
there is an increase in output. (Incorrect)
If the LM curve shifts down, this would be consistent with:

x a rise in the money supply. (True Answer Correct)
x a fall in interest rates. (Incorrect)
x a rise in interest rates. (Incorrect)
x both a rise in the money supply and a fall in interest
rates. (Incorrect)
110
If the demand for money decreases, ceteris paribus, the LM

curve would:
x
x
x
x
shift right. (Incorrect)

shift left. (True Answer Correct)
remain constant. (Incorrect)
slope more steeply. (Incorrect)
111
A government policy deemed to be temporary indicates:

x only long-run expectations are unchanged. (Incorrect)
x only expected exchange rates are unchanged. (Incorrect)
x only prices are not flexible in the short run. (Incorrect)
x there are sticky prices, fixed expected exchange rates, and
constant long-run expectations. (True Answer Correct)
112
If we start from long-run general equilibrium of goods, forex,

and the money markets, and there is a temporary expansion of
the money supply, what will be the outcome?
x GDP rises, the interest rate falls, and the exchange rate rises
(depreciation). (True Answer Correct)
x GDP rises, the interest rate rises, and the exchange rate falls
(appreciation). (Incorrect)
x GDP falls, the interest rate falls, and the exchange rate rises
(depreciation). (Incorrect)
x GDP falls, the interest rate rises, and the exchange rate rises
(depreciation). (Incorrect)
113
Consider an economy with flexible exchange rates. If there are

high levels of inflation in the economy, then the appropriate
monetary policy would be ________, which will cause ______.
x an increase in the money supply; the LM curve to shift
left (Incorrect)
x a decrease in the money supply; the LM curve to shift
right (Incorrect)
x a decrease in the money supply; the LM curve to shift left (True
Answer Correct)
x an increase in the money supply; the IS curve to shift
left (Incorrect)
114
Consider the IS-LM curves for an economy with flexible

exchange rates. An increase in the foreign income will result in
the:
x LM curve shifting to the right. (Incorrect)
x IS curve shifting to the right. (True Answer Correct)
x LM curve shifting to the left. (Incorrect)
x IS curve shifting to the left. (Incorrect)
115
Changing the rate at which the central bank makes loans

counts as:
x
x
x
x
116
Increasing the transfers from workers to the unemployed

counts as:
x
x
x
x
117
fiscal policy. (Incorrect)

monetary policy. (True Answer Correct)
both fiscal and monetary policy. (Incorrect)
neither fiscal nor monetary policy. (Incorrect)
fiscal policy. (Incorrect)

monetary policy. (Incorrect)
both fiscal and monetary policy. (Incorrect)
neither fiscal nor monetary policy. (True Answer Correct)
It can be shown using the IS-LM-FX model that a temporary

expansion in the supply of money is effective in:
x raising rates of interest. (Incorrect)
x raising the rate of unemployment. (Incorrect)
x combating temporary downturns in the economy. (True Answer
Correct)
x increasing consumer confidence. (Incorrect)
118
If the central bank expands the money supply under floating

exchange rates, it potentially stimulates the economy in two
ways, namely:
x by raising the price level and by increased
competition. (Incorrect)
x by lowering the rate of interest and by causing a depreciation of
the currency. (True Answer Correct)
x by creating higher spending and by increasing the budget
deficit. (Incorrect)
x by increasing worker productivity and creating R&D incentives
for firms. (Incorrect)
119
The direction of change in trade balance is uncertain because

expansionary monetary policy may exert forces in the opposite
direction. What are they?
x An increase in income tends to lower the trade balance, whereas
a fall in interest rates through depreciation tends to raise the trade
balance. (True Answer Correct)
x An increase in the supply of money raises interest rates, which
lowers the trade balance, whereas the increase in the demand for
money raises it. (Incorrect)
x Exchange rates rise (depreciation) and expected exchange rates
fall (appreciation). (Incorrect)

x An increase in financial assets raises foreign inflows and raises
the trade balance, whereas decreases in interest rates lower the trade
balance. (Incorrect)
120
When exchange rates are fixed, a temporary expansion in the

money supply will:
x
x
x
x
increase output. (Incorrect)

leave output unchanged. (True Answer Correct)
lower output. (Incorrect)
increase the exchange rate. (Incorrect)
121
All else being equal, an increase in government spending would

shift the ______ line to the ______, causing interest rates to
_______ and the trade balance to _______.
x LM; right; fall; fall (Incorrect)
x IS; right; rise; rise (True Answer Correct)
x LM; left; rise; rise (Incorrect)
x IS; right; fall; fall (Incorrect)
122
Whenever U.S. government spending increases, thereby

increasing the demand for real balances and the rate of interest,
the currency will appreciate and there is a potential for:
x overshooting. (Incorrect)
x crowding out. (True Answer Correct)
x a Republican backlash. (Incorrect)
x recession. (Incorrect)
123
Crowding out occurs because expansionary fiscal policy:

x
x
x
x
124
appreciates the exchange rate. (True Answer Correct)

lowers foreign income. (Incorrect)
lowers the interest rate. (Incorrect)
increases net exports. (Incorrect)
Which of the following would NOT lead to crowding out?

x Expansionary fiscal policy depreciates the exchange
rate. (Incorrect)
x Expansionary fiscal policy raises foreign income. (Incorrect)
x Expansionary fiscal policy raises the money supply. (Incorrect)
x Expansionary fiscal policy increases net exports. (True Answer

Correct)
125
Under a fixed exchange rate regime, an expansionary fiscal

policy would ____ interest rates and GDP, which would cause
____ pressure on the exchange rate, forcing the monetary
authority to undertake a(n) ______ monetary policy.
x raise; downward (appreciation); expansionary (True Answer
Correct)
x lower; upward (depreciation); contractionary (Incorrect)
x raise; upward (depreciation); contractionary (Incorrect)
x lower; downward (appreciation); expansionary (Incorrect)
126
When exchange rates are fixed, to counter a temporary

negative demand shock a government should, in part:
x
x
x
x
127
reduce taxes. (True Answer Correct)

reduce defense spending. (Incorrect)
reduce the money supply. (Incorrect)
reduce defense spending and the money supply. (Incorrect)
President Ronald Reagan's 19801982 economic policy in the

United States focused on:
x expanding the domestic infrastructure and balancing the
budget. (Incorrect)
x increasing health care and expanding the Department of
Education. (Incorrect)
x raising taxes and cutting spending. (Incorrect)
x lowering taxes and increasing government spending while the
central bank of the United States, the Federal Reserve, curtailed
monetary growth. (True Answer Correct)
128
The result of Reagan's 19801982 policy was:

x increased GDP and lower unemployment. (Incorrect)
x reduced GDP, higher unemployment, and high rates of
interest. (True Answer Correct)
x increased business investment and lower inflation. (Incorrect)
x higher taxes, lower interest rates, and lower government
129
In the United States during the 1970s, inflation was very high.
The Federal Reserve enacted policies to ______ the interest
rate, which caused the ______.
x decrease; LM curve to shift right (Incorrect)
x decrease; LM curve to shift left (Incorrect)
x increase; LM curve to shift left (True Answer Correct)
x increase; IS curve to shift left (Incorrect)
130
The U.S. monetary policy between 1979 and 1983 was partially
offset by:
x U.S. policy to raise taxes. (Incorrect)
x U.S. decrease in government spending. (Incorrect)
x a decrease in taxes and an increase in government
spending. (True Answer Correct)
x an increase in taxes and a decrease in government
131
Comparing monetary and fiscal policy under fixed and floating

exchange rate regimes, which of the following statements is
false?
x In a floating exchange rate regime, an expansionary monetary
policy is effective by stimulating spending and by depreciating the
x In a floating exchange rate regime, an expansionary fiscal policy
is effective by stimulating spending, though there may be
crowding-out effects due to higher rates of interest and currency
appreciation. (Incorrect)
x In a fixed exchange rate regime, an expansionary monetary
policy is effective by stimulating spending; it has no impact on the
currency value or trade balance. (True Answer Correct)
x In a fixed exchange rate regime, an expansionary fiscal policy is
effective by stimulating spending, as long as the parallel
expansionary monetary policy keeps exchange rates
stable. (Incorrect)
132
During the Asian currency crisis, the Australian economy

withstood the economic impact by:
x
x
x
x
decreasing the money supply. (Incorrect)

increasing the taxes. (Incorrect)
increasing the money supply. (True Answer Correct)
appreciating its currency. (Incorrect)
133
Excessive use of monetary or fiscal policies to achieve

stabilization may:
x require the cooperation of firms and the public in order to be
effective. (Incorrect)
x backfire if the economy becomes destabilized through erratic
application. (True Answer Correct)
x never be necessary as long as the economy can rely on automatic
stabilizers. (Incorrect)
x be better than weaker measures that may not hit the
target. (Incorrect)
134
The time gap between a nation's decision to implement a

corrective economic policy and the actual results of the policy is
known as the:
x inside lag. (Incorrect)
x inside lapse. (Incorrect)
x outside lag. (True Answer Correct)
x outside lapse. (Incorrect)
135
The inside lag is:

x the time between observing a shock and countering it. (True
Answer Correct)
x the time between taking an action and observing its
effect. (Incorrect)
x the time between short-term and long-term goals. (Incorrect)
x the time between taking an action and determining future longterm goals. (Incorrect)
136
Which of the following is NOT a reason for the inability to

stabilize output?
x lags between observation and action (Incorrect)
x Policy actions can immediately take effect. (True Answer
Correct)
x policy constraints (Incorrect)
x preference to maintain long-range goals (Incorrect)
137
SCENARIO: EXCHANGE RATE

In 2002, $1 = 1 euro, and in 2006, $1 = 0.6 euro.
Reference: Ref 14-1
(Scenario: Exchange Rate) If a Ferrari cost $100,000 in 2002,
then it should cost ______ in 2006.

x
x
x
x
138
$166,666 (True Answer Correct)
$60,000 (Incorrect)
SCENARIO: EXCHANGE RATE

In 2002, $1 = 1 euro, and in 2006, $1 = 0.6 euro.
Reference: Ref 14-1
(Scenario: Exchange Rate) If the price of a Ferrari is $125,000

in 2006, then:
x U.S. consumers partially benefited, even though the dollar
depreciated. (True Answer Correct)
x U.S. consumers paid the full price because of the depreciated
dollar. (Incorrect)
x U.S. consumers benefited because of the appreciation of the
dollar. (Incorrect)
x one can say that the J-curve effect is not valid. (Incorrect)
139
Even though it may seem that nations have a wide variety of

policy options to stabilize their economies, there are a number
of issues to be considered and overcome. Which of the following
is NOT an issue confronting policy makers?
x the desire to maintain fixed exchange rates or membership in a
pegged currency bloc (Incorrect)
x long and uncertain time lags when policy effects will
occur (Incorrect)
x the pass-through issue, when little effect occurs on the real
effective exchange rate (Incorrect)
x international controls that limit the ability of any nation to
determine its exchange rate policy (True Answer Correct)
140
The financial crisis of 2008 resulted in extreme policy measures

by the Federal Reserve. Which of the following is the best
characterization of its policy?
x It was a complete reversion to the idea that eventually the
economy is self-correcting and the best policy is to wait it
out. (Incorrect)
x It was a massive injection of liquidity to banks and major
purchases of U.S .government securities, which resulted in a nearzero federal funds rate. (True Answer Correct)
x It was a moderate approach that limited monetary growth to the

rate of growth of real GDP. (Incorrect)
x It was based on a realization that the Federal Reserve was
ineffective in the face of such a crisis. (Incorrect)
141
When the interest rate is so low that the opportunity cost of

holding money is zero, then economists say we have reached:
x the era of total liquidity. (Incorrect)
x the zero-lower-bound situation, which means the U.S. economy
may be in a liquidity trap. (True Answer Correct)
x full monetary saturation. (Incorrect)
x a situation in which a nation must use caution, since monetary
policy is super effective. (Incorrect)
142
Why wasn't the stimulus passed in 2009 effective in reducing

unemployment during the recession of 20092010?
x Congress cut the size of the final package, it was skewed toward
tax cuts, and it was only 25% of the amount needed to restore GDP
to full employment. (True Answer Correct)
x The administration mismanaged itand it was much too
large. (Incorrect)
x Fiscal policy is ineffective in a liquidity trap. (Incorrect)
x Tax cuts and interest rate cuts would have been effective, but
they were politically undesirable. (Incorrect)
143
Investment demand is inversely related to the expected real rate

of interest.
x False ()
144
Investors pay attention only to the nominal interest rate, not the
real interest rate.
x True ()
145
Government consumption spending includes such items as

military, transportation, and infrastructure, as well transfer
payments such as Social Security benefits, research grants, and
unemployment benefits.
x True ()
146
The percentage change in a nation's real effective exchange rate

accounts for percentage changes in exchange rates with all
trading partners, weighted by the percentage of total trade with
each nation.
x False ()
147
The correlation between a nation's real effective exchange rate

and changes in a nation's trade balance is nearly perfectly
positively correlated.
x True ()
148
For the United States, such events as tax cuts and wartime
spending may have affected the correlation between the real
effective exchange rate and the U.S. trade balance.
x False ()
149
If prices and quantities are sticky in the very short run, then it
is always possible to tell what has happened to the exchange
rate when the trade balance falls.
x True ()
150
Currency pass-through refers to the sensitivity of import prices

to changes in the nominal exchange rate.
x False ()
151
Expenditure switching occurs when spending patterns

change in response to a change in the real exchange rate.
x False ()
152
Home income levels are positively associated with home imports

and a fall in the trade balance.
x False ()
153
Home income levels are positively associated with home exports

and a rise in the trade balance.
x True ()
154
Foreign income levels have no measurable association with

home exports.
x True ()
155
From 2001 to 2004, the U.S. dollar began a sustained

depreciation against many currencies.
x False ()
156
The lag between changes in the real exchange rate and the
trade balance can be partially explained by the slow or weak
response of import and export flows to exchange rate
movements.
x False ()
157
The pass-through effect measures how changes in a nation's

nominal exchange rate are translated completely into changes
in the real exchange rate.
x False ()
158
The prevalence of add-on intermediate services or goods priced

in another currency will dilute the pass-through effect of
exchange rate changes.
x False ()
159
Exogenous changes in demand occur only when government

purchases change substantially.
x True ()
160
Goods market equilibrium is maintained when total spending is

equal to total domestic disposable income.
x True ()
161
All else equal, a change in the domestic price level or the

foreign price level will cause the demand curve to shift, since it
will change the real exchange rate.
x False ()
162
Using the IS curve analysis, a rise in government spending, a

decrease in the tax rate on consumers, or an increase in the
exchange rate (depreciation) will tend to decrease GDP at each
possible level of interest rate.
x True ()
163
If a nation desires to maintain fixed exchange rates with trading

partners, it cannot also conduct expansionary monetary policy.
x False ()
164
Monetary policy under fixed exchange rates is impotent

because of the adjustments required to maintain the fixed rate.
x False ()
165
When a nation is operating with fixed exchange rates, an

expansionary fiscal policy is less effective than it would be
under floating exchange rates.
x True ()
166
A contractionary fiscal policy under fixed exchange rates would

lower rates of interest, causing the exchange rate to rise
(depreciate) and force the monetary authority also to contract
the money supply to keep the exchange rate steady.
x False ()
167
Crowding out refers to a rise in interest rates or a fall in

exchange rates that limits domestic investment or exports that
would have occurred without the policy.
x False ()
168
Fiscal policy has greater output effects when exchange rates are
fixed.
x False ()
169
Governments are able to instantly take measures to counteract

economic shocks.
x True ()
170
An inside lag describes a situation in which there is a time lag

between the economic shock and the corrective policy action.
x False ()
171
The outside lag is likely to be longer when Congress is in recess.

x True ()
172
In a liquidity trap during a severe recession, fiscal policy is the

only way to stimulate the economy.
x False ()
173
There are a number of factors that can increase demand and

affect the equilibrium level of total output and, therefore, affect
the trade balance. Discuss several of these and indicate in which
direction total demand would change, and in which direction
the trade balance would change.
x ()
174
A series of stories in the popular press in early 2004 reflected

the effect of the depreciation of the U.S. dollar vis--vis other
currencies. Describe some of these effects. Should the United
States be worried? What about trading partners of the United
States?
x ()
175
Explain why the IS curve slopes down.

x ()
176
As the level of real GDP rises, with a fixed quantity of money,

something must give. Describe the process of deriving the LM
curve whereby a rise in GDP is associated with an increase in
the rate of interest, resulting in an upward-sloping LM curve.
x ()
177
If the government attempts to stimulate the economy under a

fixed-rate regime, it must also conduct a parallel expansionary
monetary policy. Why? And, what impact would there be on
the domestic economy?
x ()
178
In response to the Asian currency crisis in 1999, the monetary

authorities in Australia and New Zealand carried out policies
that helped stabilize demand in those economies and limit
damage to banks and the export sector. Explain the policies and
why they seemed to work.
x ()
179
What are the possible constraints on the decision to conduct an

expansionary economic policy?
x ()

Exambank

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Exambank

Hochgeladen von

Copyright:

Verfügbare Formate

1

The Mariel boatlift of Cuban immigrants into Miami caused

The immigration of Russian Jews to Israel:

The results of the influx of workers into Miami in 1980 as a

Interesting real-life examples tell us that labor migration often:

When some factors are fixed, it is a short-run model. This is

To study labor migration using the specific-factors model, we

When we use the specific-factors model to study immigration,

Which model can we use to analyze the short-run effects of

specific-factors (True Answer Correct)

x The wages for workers will rise. (Incorrect)

The specific-factors model predicts that after immigration, the

If a person leaves Sweden to work in the United States, she is

One example of emigration from Europe was during the period

Large-scale immigration into the New World between 1870 and

The large-scale labor migration that occurred during 1870 to

Emigration and immigration are:

The specific-factors model can also apply to recent immigration

U.S. immigrants from Mexico are mainly _________workers

Which group of U.S. citizens competes with illegal immigrants in

medical doctors (Incorrect)

The H1-B visa program is designed to:

Of the 10% of the U.S. workforce with advanced degrees, the

more than 50%. (Incorrect)

The combination of legal and illegal immigrants in the United

Foreign-born workers in the United States tend to:

In the United States the share of foreign-born workers with 8

Illegal immigrants into the United States tend to compete mainly

highly educated American workers. (Incorrect)

Legal immigrants into the United States tend to compete mainly

less than 10%. (Incorrect)

highly educated American workers. (True Answer Correct)

Because most immigrants into the United States are either

immigration. (True Answer Correct)

In Europe, which of the following industries welcomed

In the specific-factors model, migration of labor will cause:

In the specific-factors model, labor migration from Mexico to

If capital is specific to manufacturing and land is specific to

Emigration causes __________ in the capitallabor ratio and

Immigration causes __________ in the capitallabor ratio and

increases; decreases (True Answer Correct)

increases; decreases (Incorrect)

What would the owners of capital and land do?

In destination countries, as immigration occurs and more labor

In destination countries, as immigration occurs and more labor

Because immigration raises the marginal products and the

U.S. and European immigration policies are best described as

all foreign workers. (Incorrect)

The effect of immigration on industry output in the short run is:

Which of the following would U.S. labor unions support?

In the specific-factors model, immigration causes:

x a leftward shift in the receiving country's production possibilities

In order to analyze migration in the long run, it is appropriate

Which of the following events will cause the production

In the specific-factors model, how will immigration affect the

Which is the best approach to analyzing migration in the long

Consider an economy that only produces steel and shoes; steel is

Immigration will lead to a rightward shift in the receiving

Immigration will shift the sending country's production

In the HO model, a box diagram describes the distribution of:

Consider a hypothetical economy in which only computers and

Consider an economy that only produces steel and shoes; steel is

In the long run (the HO model), immigration will lead to:

In the long run, when there is immigration of labor and all