World Economy
Final Test Solutions
Course Introduction
This course provides a comprehensive overview of the structure and dynamics of the world economy, focusing on the patterns of global trade, investment, and economic integration among nations. Students will explore fundamental concepts such as comparative advantage, exchange rates, international economic organizations, and the roles of both developed and developing countries in shaping global economic trends. The course examines contemporary issues, including globalization, financial crises, sustainable development, and the impacts of technology on economic relations. Through case studies and analysis of current events, students will develop a critical understanding of the challenges and opportunities in the evolving global economic landscape.
Recommended Textbook
Introduction to International Economics 3rd Edition by Dominick Salvatore
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Page 2
Chapter 1: Introduction to the Global Economy
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Sample Questions
Q1) Rapid technological changes and increased competition from the manufactured exports of emerging market economies are causing _________________ in the United States.
A)downsizing and job insecurity
B)industrial growth and job security
C)increased wages in competing industries
D)exchange rate fluctuations
Answer: A
Q2) In the last decade,the United States averaged a _______ percent unemployment rate
A)15
B)20
C)Less than 5
D)10
Answer: C
Q3) Globalization is the study of the aggregate economy.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Comparative Advantage
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Sample Questions
Q1) Japan is more efficient in the production of rice,and the United States is more efficient in the production of oranges.In the production of rice,the United States is said to have a(n):
A)comparative advantage
B)absolute disadvantage
C)absolute advantage
D)comparative disadvantage
Answer: B
Q2) ______________ states that the cost or price of a commodity is determined by,or can be inferred exclusively from,its labor content.
A)Mercantilism
B)The law of comparative advantage
C)The labor theory of value
D)The opportunity cost theory
Answer: C
Q3) Adam Smith strongly advocated a policy of laissez-faire.
A)True
B)False
Answer: True
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Page 4
Chapter 3: The Standard Trade Model
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Sample Questions
Q1) Community indifference curves are __________________ sloped and _____________ to the origin.
A)positively,concave
B)negatively,convex
C)positively,convex
D)negatively,concave
Answer: B
Q2) When countries engage in international trade,specialization tends to be:
A)complete with constant costs,and complete with increasing costs
B)incomplete with constant costs and incomplete with increasing costs
C)incomplete with constant costs and complete with increasing costs
D)complete with constant costs and incomplete with increasing costs
Answer: D
Q3) Equilibrium occurs where a nation's community indifference curve is _________________ to its production possibilities frontier.
A)parallel
B)perpendicular
C)tangent
D)equal
Answer: C
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Chapter 4: The Heckscher-Ohlin and Other Trade Theories
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Sample Questions
Q1) Increasing returns to scale refer to the production situation where inputs or factors of production grow proportionately more than output.
A)True
B)False
Q2) Assume a nation where labor is mobile between industries but capital is not.The specific-factors model states that trade leads to which of the following?
A)A reduction in the return to capital used to produce the nation's export commodity
B)A reduction in the return to capital used in the nation's import-competing industry
C)An increase in the return to labor used in the production of both imports and exports.
D)Ambiguous outcomes in the return to all capital.
Q3) Transportation costs include:
A)freight charges.
B)warehousing costs.
C)costs associated with loading and unloading shipments.
D)All of the above.
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Chapter 5: Trade Restrictions: Tariffs
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Sample Questions
Q1) The effects attributed to the decline in the volume of trade in a large nation,considered independently of changes in terms of trade,will
A)reduce the nation's welfare
B)increase the nation's welfare
C)not change the nation's welfare
D)have ambiguous outcomes with respect to gain or loss of welfare
Q2) Suppose,to produce $200,000 worth of finished cloth in the US,textile producers import $150,000 of raw materials.The raw materials are imported duty free.However,the US has imposed a 5% nominal tariff on imports of finished cloth.What is the effective rate of protection enjoyed by the domestic cloth producers in the US?
A)20%
B)10%
C)5%
D)6%
Q3) A(n)______________ is a tariff calculated on the price of a final commodity.
A)optimum tariff
B)prohibitive tariff
C)nominal tariff
D)terms of trade effect on a tariff
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Page 7
Chapter 6: Nontariff Trade Barriers and the Political
Economy of Protectionism
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Q1) In which form of dumping does a domestic monopolist consistently maximize total profits by selling the commodity at a lower price abroad than domestically?
A)Pervasive
B)Persistent
C)Predatory
D)Sporadic
Q2) The purpose of the trade promotion authority that has been granted to the President of the U.S.was to give the government more time to deliberate on trade agreements that have been negotiated with the government.
A)True
B)False
Q3) The Uruguay Round provided that the volume of _______________ is to be reduced by 21 percent over a six-year period?
A)import tariffs
B)import quotas
C)manufacturing export subsidies
D)agricultural export subsidies
Q4) Scientific Tariff seems to be a good thing.What are the problems with it?
Page 8
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Chapter 7: Economic Integration
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Q1) Early in the EU's history,the union had no tariffs on items traded with developing countries.
A)True
B)False
Q2) Free trade access to Mexico allows the US industries to import __________________ from Mexico and maintain other operations in the US rather than risking the loss of all jobs in the industry to low-wage countries.
A)labor-intensive components
B)technology
C)capital-intensive components
D)textiles
Q3) Trade deflection is a problem for customs unions.
A)True
B)False
Q4) Which of the following represents the loosest form of economic integration?
A)Preferential trade arrangement
B)Customs union
C)Common market
D)Free trade area
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Chapter 8: Growth and Development With International Trade
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Q1) Which of the following is one of the advantages of export-oriented industrialization?
A)It overcomes the smallness of the domestic market and allows a developing nation to take advantage of economies of scale
B)The market for the industrial product exists domestically,as evidenced by imports of the commodity,so that risks are reduced in setting up an industry to replace imports
C)It is easier for developing nations to protect their domestic market against foreign competition than to force developed nations to lower trade barriers against their manufactured exports
D)Foreign firms are induced to establish so-called tariff factories to overcome the tariff wall of developing nations
Q2) _____________ is the view that exports were the leading sector propelling the economies of the recently settled regions into rapid growth and development during the 19<sup>th</sup> century.
A)Endogenous growth theory
B)The engine of growth
C)Balanced growth theory
D)Immiserizing growth
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Page 10
Chapter 9: International Resource Movements and Multinational Corporations
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Q1) Why is a portfolio including both domestic and foreign securities likely to have a higher average yield than one only containing domestic securities?
A)Yields on foreign securities are more likely to be inversely related to yields on domestic securities.
B)Yields on foreign securities are less likely to be inversely related to yields on domestic securities.
C)Yields on foreign securities do not depend on economic conditions abroad,as do yields on domestic securities.
D)A portfolio including both foreign and domestic securities is NOT likely to have a higher average yield than one containing only domestic securities.
Q2) IBM does not want to license foreign producers because it wants to retain complete control over its ____________ and to ensure consistence in _____________.
A)trade secrets and patents; workforce
B)accounting process; quality and service
C)trade secrets and patents; quality and services
D)stock; quality and service
Q3) What are the basic reasons for a multinational corporations (MNCs)existence?
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Page 11
Chapter 10: Balance of Payments
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Q1) The official settlements balance is the net credit or debit balance in the official reserve account.
A)True
B)False
Q2) Which of the following is classified as a credit in the US balance of payments?
A)US exports
B)US gifts to other countries
C)A flow of gold out of the US
D)Foreign loans made by US companies
Q3) _____________ are international transactions that take place for business or profit motives and independently of balance-of-payments considerations.
A)Automated transactions
B)Autonomous transactions
C)Accommodating transactions
D)Below-the-line-transactions
Q4) Briefly discuss the international investment position of the United States and how it has changed over the course of the past two decades.
Q5) Why does the balance of good part of the total balance of payment always get prominence?
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Chapter 11: The Foreign Exchange Market and Exchange Rates
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Q1) What is the primary difference between speculation and arbitrage in the foreign exchange market?
A)They are fundamentally the same transaction
B)Arbitrage involves transactions separated by time,while speculative transactions take place in concurrent markets
C)Speculation is risk free,arbitrage is not
D)Speculative transactions are separated by time,while arbitrage occurs in concurrent markets
Q2) Eurobonds are defined as:
A)long-term debt securities sold outside the borrower's country to raise long-term capital in a currency other than the currency of the nation where the securities are sold. B)bank deposits denominated in a currency other than that of the nation in which the deposit is held.
C)commercial bank deposits in one nation denominated in the currency of another nation.
D)Bonds purchased from any nation that is a member of the European Union.
Q3) Name and briefly describe the four levels of agents or participants in the foreign exchange market.
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Chapter 12: Exchange Rate Determination
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Q1) According to the monetary approach,expectation can play a major role in the determination of exchange rate.If between US and EMU there is a significant interest rate differential (US interest rate is significantly higher than the EMU interest rate)but at the same time dollar is also expected to depreciate in the future by more than the positive interest differential,then which of the following is most likely to happen?
A)Dollar will depreciate
B)Dollar will appreciate
C)There will be a significant increase in the supply of Euro in the US
D)There will be a significant decrease in the demand for Euro
Q2) Which of the following approaches to exchange rate determination postulates that exchange rates are determined in the process of equilibrating or balancing the demand and supply of financial assets in each country?
A)The trade approach to exchange rates
B)The portfolio model of exchange rates
C)The elasticities approach to exchange rates
D)All of the above
Q3) In a nutshell,explain what the trade or elasticity approach says about exchange rate determination.
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Chapter 13: Automatic Adjustments With Flexible and Fixed Exchange Rates
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Q1) When depreciation of the US dollar occurs compared to the euro,US residents will find European imports __________,because US residents need _________ dollars to purchase each euro.
A)more expensive; more
B)more expensive; fewer
C)less expensive; more
D)less expensive; fewer
Q2) The US demand for euros is always___________.
A)negatively sloped
B)positively sloped
C)perfectly elastic
D)perfectly inelastic
Q3) The _____ effect explains that,after a depreciation of a nation's currency,the trade balance will worsen for a period of time and then improve.
A)J-curve
B)absorption
C)pass-through
D)Marshall-Lerner
Q4) Please explain the J-Curve effect in exchange rate determination.
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Chapter 14: Adjustment Policies
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Q1) Which of the following is concerned with changing the aggregate demand of the nation?
A)Internal balance
B)Expenditure-changing policies
C)External balance
D)Expenditure-switching policies
Q2) Which of the following is not listed as a policy instruments that nations use to achieve internal and external balance?
A)Expenditure-changing policies
B)Expenditure-switching policies
C)Direct controls
D)Supply management policies
Q3) What is the correct order of events following an expansionary fiscal policy with a fixed exchange rate?
A)Currency may appreciate,capital flows in,interest rate rises
B)Production and income rise,current account worsens,currency may appreciate
C)Capital flows in,income expansion is reduced,currency may appreciate
D)Interest rate rises,current account worsens,production and income rise
Q4) Describe why monetary policy under a fixed exchange rate system is impotent.
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Chapter 15: Flexible Versus Fixed Exchange Rates,european
Monetary Systems,and Macroeconomic Policy
Coordination
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Q1) The currencies of member nations in an optimum currency area float jointly with respect to the currencies of nonmember nations.
A)True
B)False
Q2) What are the advantages and disadvantages of fixed versus flexible exchange rates?
Q3) The institution similar to the Federal Reserve System in the United States that would control the money supply and issue the single currency of the European Union is the:
A)European Monetary System
B)European Currency Unite
C)European Central Bank
D)European Monetary Institute
Q4) In 1997,the ________________ was negotiated to further tighten the fiscal constraint of participating countries in European Monetary Union.
A)Maastricht Treaty
B)Stability and Growth Pact
C)European Currency Unit
D)European Monetary System
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Chapter
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Q1) The Smithsonian Agreement resulted in which of the following?
A)A revaluation of the dollar by about 9 percent
B)A revaluation of other currencies including the Japanese yen and the German mark
C)The dollar convertibility into gold was reintroduced
D)The band of fluctuation was reduced from 2.25% to 1%
Q2) The Smithsonian Agreement resulted in which of the following?
A)A revaluation of the dollar by about 9 percent
B)Exchange rates were allowed to fluctuate by +/- 2.25%
C)The dollar convertibility was reintroduced
D)US was allowed to continue with the 10% import surcharge
Q3) By 2011,how many countries had become a member of the IMF?
A)151
B)186
C)132
D)113
Q4) It is not possible to combine the various international reserve classifications,as they are mutually exclusive by nature.
A)True
B)False
Page 18
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