Applied International Economics
Midterm Exam
Course Introduction
Applied International Economics examines the practical aspects of international economic relations, focusing on how global markets, trade policies, exchange rates, and financial flows impact nations and businesses. The course integrates economic theory with real-world case studies and data analysis, enabling students to understand the mechanisms of international trade, evaluate the effects of globalization and regional integration, and analyze international economic policies. Students also explore contemporary issues such as trade disputes, foreign direct investment, and the role of international organizations, equipping them with the analytical tools needed to assess challenges and opportunities in the global economy.
Recommended Textbook
International Economics 9th Edition by Steven Husted
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Page 2
Chapter 1: An Introduction to International Trade
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Sample Questions
Q1) In the last 20 years,all of the countries in Africa have experienced positive economic growth.
A)True
B)False
Answer: False
Q2) If a country is industrialized then prolonged periods of negative growth in GNP per capita should not be a cause for concern.
A)True
B)False
Answer: False
Q3) Large countries tend to be more open than small countries. A)True
B)False
Answer: False
Q4) Which of the following statements about the United States was true as of 2007?
A)It was the world's largest exporter.
B)It had the world's largest deficit in its current account.
C)It had the world's largest surplus in its current account.
D)None of the above are true.
Answer: B
Page 3
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Chapter 2: Tools of Analysis for International Trade Models
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Q1) Refer to the figure above.In autarky,the economy would be in general equilibrium at point
A)I.
B)D.
C)E.
D)F.
Answer: C
Q2) Indifference curves intersect at the point of utility maximization.
A)True
B)False
Answer: False
Q3) If the relative price of S in terms of T is 2 and S has a nominal price of $1,then the relative price of T is
A)$2.
B)50 cents.
C)1/2 S.
D)Need more information to answer.
Answer: C
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Chapter 3: The Classical Model of International Trade
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Sample Questions
Q1) Can a country have comparative advantage in all products?
Answer: No,a country can never have comparative advantage in all products,no matter how productive it is in general.Comparative advantage has to do with the relative price a country can produce one good or another in autarky versus the cost at which they can trade those goods with other economies.There will always be goods that are cheaper to produce in another country than at home,relative to the opportunity cost of not producing goods in which the country has comparative advantage.
Q2) Refer to the figure above.In equilibrium,this country produces at point A)B.
B)C.
C)D.
D)E.
Answer: A
Q3) A country must have absolute advantage in a good in order to have comparative advantage in that good.
A)True
B)False
Answer: False
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5
Chapter 4: The Heckscher-Ohlin Model
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Q1) Let Kj and Lj denote the capital and labor stocks of country j (j = A,B),then country A is said to be capital abundant relative to country B if
A)KA > KB.
B)KA/LA > KB/LB.
C)LA < LB.
D)All of the above.
Q2) According to the factor price equalization theorem,the ________ factor should oppose free trade policies in any given country.
A)abundant
B)scarce
C)neither
D)Can't tell without more information
Q3) According to the factor price equalization theorem,if country B is labor abundant,then if country B initiates trade with country A
A)wages and rents should fall in A.
B)rents and rents should rise in A.
C)wages should rise and rents should fall in A.
D)wages should fall and rents should rise in A.
Q4) Compare and contrast the classical and HO theories of international trade.
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Chapter 5: Tests of Trade Models: the Leontief Paradox and Its Aftermath
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Q1) Leontief used an input-output table in order to test the A)classical theory.
B)the Heckscher-Ohlin theory.
C)the Linder hypothesis.
D)All of the above.
Q2) A problem with Leontief's methodology is that A)he had no information on U.S. and foreign factor endowments.
B)he did not use information on foreign factor intensities.
C)he ignored the roles of other factors of production such as natural resources.
D)All of the above are problems.
Q3) Linder's hypothesis provides an explanation for A)increasing returns to scale.
B)imperfect competition.
C)intraindustry trade.
D)All of the above.
Q4) Compare and contrast the predictions of the Heckscher-Ohlin and classical models about likely trading partners of various countries with the predictions of the Linder hypothesis.
Q5) Describe some of the problems in testing the Heckscher-Ohlin theory.
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Chapter 6: Tariffs
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Sample Questions
Q1) A prohibitive tariff has
A)only revenue effects.
B)only protective effects.
C)both protective and revenue effects.
D)neither protective nor revenue effects.
Q2) Refer to the figure above.Domestic producers gain ________ because of the tariff.
A)$5
B)$62,500
C)$15
D)$125,000
Q3) Refer to the figure above.The deadweight cost of the tariff equals A)$10,000.
B)$25,000.
C)$50,000.
D)cannot be calculated without further information.
Q4) Although current U.S.tariffs are quite low on average,tariffs remain high for some products.
A)True
B)False
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Chapter 7: Nontariff Barriers and Arguments for Protection
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Sample Questions
Q1) Export subsidies lead to
A)greater production of exportables and higher internal prices for these goods.
B)greater production of exportables and lower internal prices for these goods.
C)greater production of importables and higher internal prices for these goods.
D)None of the above.
Q2) A less costly alternative to protection of national defense industries would be a production subsidy.
A)True
B)False
Q3) Voluntary export restraints and quotas are essentially identical in their welfare effects.
A)True
B)False
Q4) If the pollution havens hypothesis is true,we should expect world pollution to decline as a result of international trade and globalization.
A)True
B)False
Q5) Why do countries impose protection even if it lowers economic welfare? Explain fully.
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Chapter 8: Commercial Policy: History and Practice
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Q1) Under U.S.law,foreign ________ is (are)illegal in U.S.markets.
A)dumping and export subsidies
B)dumping only
C)export subsidies only
D)None of the above are illegal
Q2) As of 2008,the members of the WTO account for 97 percent of the world's international trade.
A)True
B)False
Q3) According to the Constitution,the President sets tariff rates.
A)True
B)False
Q4) In terms of overall welfare,dumping is good for the importing country.
A)True
B)False
Q5) As of 2008,the members of the WTO account for what percentage of world trade?
A)3 percent.
B)23 percent.
C)57 percent.
D)97 percent
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Chapter 9: Preferential Trade Agreements
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Sample Questions
Q1) Refer to the figure above.In free trade A will import
A)70 units from country C.
B)70 units from C and 100 units from B.
C)120 units from B.
D)100 units from B.
Q2) An argument in favor of multilateral trade liberalization (multilateralism)over preferential trade agreements (regionalism)is that multilateralism results in less trade diversion.
A)True
B)False
Q3) Refer to the figure above.If A forms a customs union with C,the quantity of trade creation will be
A)100 units.
B)70 units.
C)30 units.
D)None of the above.
Q4) Compare and contrast NAFTA and the EU in terms of the types of agreements that they are,the institutions that operate under the agreement,and the long term goals of the arrangements.
Q5) Why is NAFTA controversial? Briefly describe both sides of this controversy.
Page 11
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Chapter 10: International Trade and Economic Growth
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Sample Questions
Q1) The ratio of the percentage change in consumption of a good divided by the percentage change in income (as measured by GDP)is known as the
A)income elasticity of demand.
B)income expansion path.
C)demand elasticity equivalent.
D)trade effectiveness.
Q2) Sale of U.S.government bonds to foreigners is an example of direct foreign investment in the United States.
A)True
B)False
Q3) A government program that relies on high barriers to imported goods in order to stimulate domestic production of competing goods is an example of a(n)________ policy.
A)primary-export-led
B) import-substitution development
C) outward-looking development
D) linkage-effect
Q4) What does the "brain drain" refer to and why is it a problem for developing countries?
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Chapter 11: The Balance of Payments
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Q1) Large current account deficits imply large financial account surpluses.
A)True
B)False
Q2) Direct investment and security purchases are included in
A)current account items.
B)capital account items.
C)basic balance account items.
D)unilateral transfers.
Q3) Debit entries on the Balance of Payments are the entries that would
A)mean a loss of foreign exchange.
B)bring foreign exchange into the country.
C)indicate a surplus exists.
D)exist at the bottom line after all accounts are totaled.
Q4) Answer the following questions briefly.
(a) Is it possible for each nation to have BOP surpluses? Explain.
(b) What is the "statistical anomaly" that imparts a bias to trade balances?
(c) Is it correct to argue that deficit countries are harmed while surplus countries benefit by international free trade?
(d) How is the balance of payments linked to national saving and investment?
Q5) How are the current account and the financial account related?
Page 13
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Chapter 12: The Foreign Exchange Market
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Q1) A European option can only be exercised on the final day,the expiration date.
A)True
B)False
Q2) An important feature of a ________ is that the holder has the right,but not the obligation,to buy or sell currency.
A)swap
B)foreign exchange arbitrage
C)foreign exchange option
D)futures market contract
Q3) The euro is said to be selling at a ________ if the spot dollar price is $1.18 and the nine-month forward rate is $1.16.
A)forward discount
B)forward premium
C)forward spread
D)none of the above
Q4) The U.S.and the Canadian currencies are the only two in the world that are called "dollars."
A)True
B)False
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Chapter 13: International Monetary Systems
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Sample Questions
Q1) An exchange rate arrangement with a free market determined floating exchange rate for capital account transactions and a fixed exchange rate for current account transactions is called
A)capital-current account exchange rate system.
B)dual exchange rate system.
C)managed exchange rate system.
D)crawling peg exchange rate system.
Q2) Before World War I,most countries belonged to a system of fixed exchange rates in which currencies were tied to which of the following assets?
A)The U.S. dollar
B)The British pound
C)Silver
D)Gold
Q3) The European central bank is located in Frankfurt,Germany.
A)True
B)False
Q4) Countries that have flexible exchange rates are known to possess some certain economic characteristics. What are they?
Q5) Explain what a dual exchange rate system is.
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Chapter 14: Exchange Rates in the Short Run
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Sample Questions
Q1) Suppose we observe the following 1-year interest rates:
Euro $ = 15%
Euro SF = 12%
The exchange rate is quoted as the dollar price of Swiss francs and is currently E = 0.40.
(a) Given the information above,what is the 12-month forward rate?
(b) Suppose the actual 12-month forward rate is not what you found from (a),but instead is $0.42. What would profit-seeking arbitrageurs do?
Q2) Nominal interest rates tend to be higher in countries with A)higher rates of inflation.
B)lower rates of inflation.
C)lower real interest rates.
D)Both B and C.
Q3) Explain briefly PPP and IRP. Why might the latter hold better than the former over time?
Q4) We can expect very small deviations from interest rate parity in
A)the domestic markets.
B)the Eurocurrency market.
C)the goods market.
D)All of the above.
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Chapter 15: Exchange Rates in the Long Run
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Sample Questions
Q1) If the price of Big Mac is $3.61 in the U.S.and 3.405 in France,and PPP holds,what is the value of the euro in dollars that is implied by The Economist magazine's Big Mac index?
A)$1.060
B)$0.943
C)$1.943
D)None of the above.
Q2) If absolute PPP holds,then the real exchange rate must equal 1.
A)True
B)False
Q3) PPP is a theory of real exchange rate determination.
A)True
B)False
Q4) Arbitrage operations can be executed
A)in foreign exchange markets.
B)in goods markets.
C)Both A and B.
D)None of the above.
Q5) Empirical studies find that exchange rates are much more variable than inflation differentials. How can we explain this empirical result?
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Chapter 16: Theories of the Current Account Balance
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Q1) Which of the following is not correct for a small open economy?
A)She cannot improve her BOT.
B)She cannot affect the international price of goods.
C)She cannot affect the foreign interest rate.
D)All of the above.
Q2) Which of the following is not appropriate,if we live in a world of fixed exchange rates?
A)monetary approach to the exchange rate
B)elasticities approach
C)monetary approach to the BOP
D)absorption approach
Q3) Explain the elasticities and absorption approaches to the BOT. What is the most notable shortcoming of these approaches?
Q4) If the price of a good rises by 10% and the quantity purchased falls by 15%,then demand for the good is ________ and total spending on the good will ________.
A)elastic; increase
B)inelastic; increase
C)elastic; decrease
D)me and so inelastic; decrease
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Chapter 17: Open Economy Macroeconomics
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Sample Questions
Q1) The BP curve presents combinations of y and i that yield balance of trade equilibrium.
A)True
B)False
Q2) Which of the following statements about the financial crisis that began in 2008 is true?
A)It was a great illustration of how interdependent national economies are.
B)Most economists agree that it originated in China.
C)It only lasted 3 weeks.
D)It only affected housing markets.
Q3) If the United States follows an expansionary monetary policy relative to Japan and Germany,which of the following is not likely to occur?
A)U.S. interest rates will rise relative to Japan and Germany
B)a larger U.S. capital account deficit
C)a depreciation of the dollar
D)lower level of U.S. income
Q4) What policies would you recommend to the U.S.government to lower the balance of trade deficit and decrease net capital inflows?
Q5) What was the Plaza Agreement about?
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Chapter 18: International Banking, debt and Risk
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Q1) Eurodollar deposits arising from OPEC trade surpluses are called
A)OECD-dollars.
B)OPEC-dollars.
C)petrodollars.
D)None of the above.
Q2) The difference between a Euroloan interest rate and Eurodeposit interest rate is called
A)net interest rate.
B)the forward premium.
C)net profit rate.
D)the spread.
Q3) The growth of the Eurodollar market is due to the ________ spreads offered by
A)narrower, Eurobanks
B)narrower, governments
C)narrower, domestic banks
D)Both A and B
Q4) What is Islamic Banking?
Q5) What are Eurobanks and how are they different from domestic banks?
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