International Economics, 7th Edition James Gerber Test Bank

International Economics, 7th Edition BY James Gerber

Email: richard@qwconsultancy.com

International Economics, 7e (Gerber) Chapter 1 The United States in a Global Economy 1.1 Introduction: International Economic Integration 1) There are no questions for this section.

Topic: Introduction: International Economic Integration 1.2 Elements of International Economic Integration 1) Countries such as the United States that have large populations tend to have A) higher trade-to-GDP ratios.

B) lower trade-to-GDP ratios.

C) relatively greater capital outflows.

D) relatively smaller capital outflows.

Answer: B Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.2 Compute the trade-to-GDP ratio and explain its significance.

AACSB: Application of knowledge 2) The trade-to-GDP ratio for a nation that had $600 million in exports, $400 million in imports, and GDP of $2,000 million would be A) 0.1.

B) 0.2.

C) 0.5.

D) -0.1.

Answer: C Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.2 Compute the trade-to-GDP ratio and explain its significance.

AACSB: Application of knowledge 3) The trade-to-GDP ratio is calculated by A) exports divided by GDP. B) imports divided by GDP. C) exports plus imports divided by GDP. D) exports minus imports divided by GDP. Answer: C Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.2 Compute the trade-to-GDP ratio and explain its significance.

AACSB: Application of knowledge

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4) A relative measure of the importance of trade is A) the dollar value of trade.

B) trade as a percentage of GDP. C) the dollar value of trade adjusted for inflation.

D) trade as a percentage of investment.

Answer: B Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.2 Compute the trade-to-GDP ratio and explain its significance.

AACSB: Application of knowledge 5) An important factor that increased international capital flows in the latter part of the 1800s was A) the creation of the International Monetary Fund.

B) the creation of numerous regional trade agreements.

C) the rapid rate of East Asian economic growth.

D) technological innovations.

Answer: D Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

AACSB: Application of knowledge 6) Labor mobility was A) less in 1900 than in 2010.

B) unimportant to global integration until the 1960s.

C) greater in 1900 than in 2010.

D) never controversial.

Answer: C Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

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7) A major impact of the transatlantic telegraph was A) a reduction in time required to complete a financial transaction between New York and London B) an increase in labor flows across the Atlantic.

C) a decrease in trade barriers between the United States and Europe.

D) an increase in trade conflicts between the United States and Europe.

Answer: A Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

AACSB: Application of knowledge 8) The trade-to-GDP ratio for the United States reached its lowest point of the last 100 years A) around 1970.

B) around World War II. C) around World War I. D) around 2008.

Answer: B Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

AACSB: Application of knowledge 9) Countries that have high rates of savings also have A) high rates of investment.

B) low rates of investment.

C) stock market bubbles.

D) low rates of growth.

Answer: A Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

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10) Since the end of World War II, A) world trade has grown more slowly than world GDP in the same time period.

B) world trade has grown more slowly than during the years leading up to World War II. C) the trade-to-GDP ratios of most countries have fallen.

D) world trade has grown more rapidly than world output.

Answer: D Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

AACSB: Application of knowledge 11) One of the reasons we know that international labor mobility has been higher at other times is because A) the percent of our population that was foreign born was higher.

B) wages were lower.

C) labor was important in agriculture.

D) the population was younger.

Answer: A Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

AACSB: Application of knowledge 12) One important difference between the international economy of today and the economy of 100 years ago is A) that labor is much more mobile.

B) for the first time, technological innovations have reduced the barrier of distance.

C) for the first time, capital is mobile.

D) the presence of international bodies such as the IMF and World Bank.

Answer: D Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

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13) One of the distinguishing characteristics of capital mobility today is that A) there are far more kinds of financial instruments than there were 100 years ago.

B) nations are no longer dependent on their own national savings for their investment funds.

C) the bulk of foreign capital flows are tied to labor flows.

D) currency markets play a less significant role than they did in the past.

Answer: A Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

AACSB: Application of knowledge 14) Which of the following is FALSE? A) Capital flows today are larger mainly because economies are larger.

B) The last two decades are the first time in history that a nation has borrowed more than 10 percent of its GDP. C) There are important qualitative differences between capital flows today and in the past.

D) Today most international financial transactions involve buying and selling assets denominated in foreign currencies.

Answer: B Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

AACSB: Application of knowledge 15) Your text mentions several ways that international trade flows are qualitatively different than they were a century ago. Which of the following is NOT one of those ways?

A) Firms' investment spending on capital goods is more important than in the past.

B) International trade in raw commodities and agricultural products is more important than it was in the past.

C) It is possible to trade some types of services in a way that was not possible in the past.

D) Multinational corporations play a bigger role in production than they did in the past.

Answer: B Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

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16) Financial capital flows could include A) real estate purchases.

B) construction of factories.

C) the purchase of the physical assets and operations of a multinational corporation by another.

D) currency market transactions.

Answer: D Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

AACSB: Application of knowledge 17) An example of a foreign direct investment (FDI) would include A) a U.S. couple buying land for their dream retirement home in Costa Rica.

B) a U.S. mutual fund manager buying shares of stock in a Brazilian oil company.

C) a U.S. firm expanding its U.S. operations.

D) a wealthy Mexican buying U.S. Treasury bills.

Answer: A Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

AACSB: Application of knowledge 18) All of the following are differences in capital flows today from the past, EXCEPT A) the increasing variety of financial instruments.

B) the larger number of companies listed on world stock exchanges.

C) the need to protect from sudden changes in currency values.

D) the problem of volatility in financial capital flows.

Answer: D Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

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19) Which of the following is true?

A) Domestic policies are never barriers to trade.

B) Tariffs and quotas in industrial nations are significantly higher now than they were in 1950.

C) Tariffs and quotas are the primary trade barrier in industrialized countries.

D) Domestic policies intended to protect consumers or the environment may become trade barriers.

Answer: D Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

AACSB: Application of knowledge 20) Economists A) describe reducing tariffs and quotas as shallow integration.

B) describe reducing tariffs and quotas as deep integration.

C) believe that changing domestic policies affecting trade is a relatively simple process.

D) believe that the work of reducing trade barriers is done since most tariffs are low and most quotas eliminated.

Answer: A Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

AACSB: Application of knowledge 21) Deep integration A) is easier to achieve than shallow integration.

B) is less controversial than shallow integration.

C) does not require changing domestic policies unrelated to tariffs and quotas.

D) requires cooperation with other national governments or international bodies.

Answer: D Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

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22) Made in the USA or Made in China has less meaning for products that A) are a commodity such as iron ore.

B) are an agricultural product such as wheat.

C) are technological and involve assembling many different types of sometimes sophisticated components.

D) are produced and consumed domestically.

Answer: C Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

AACSB: Application of knowledge 23) Which of the following kinds of agreements between two or more countries would be an example of a shallow integration measure?

A) An agreement to accept another nation's certification of architects B) An agreement to unify customs forms in order to speed up cross-border traffic C) An agreement to use the same environmental standards D) An agreement to impose the same limits on cartels and monopolies Answer: B Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

AACSB: Application of knowledge 24) Which of the following kinds of agreements between two or more countries would be an example of a deep integration measure?

A) An agreement to reduce tariffs and quotas B) An agreement to unify customs forms in order to speed up cross-border traffic C) An agreement to impose the same limits on cartels and monopolies D) An agreement to reduce exports Answer: C Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

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25) While the world was fairly integrated at the turn of the last century, most trade was in agricultural and raw materials, whereas today manufactured consumer and producer goods play a much greater role in determining exports and imports.

Answer: TRUE Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

AACSB: Application of knowledge 26) Capital and labor only very recently have been free to move across international borders.

Answer: FALSE Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

AACSB: Application of knowledge 27) Capital flows between countries are smaller than in past decades in absolute terms.

Answer: FALSE Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

AACSB: Application of knowledge 28) Open economies grow more slowly than closed economies.

Answer: FALSE Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.4 List the three types of evidence to support the idea that trade supports economic growth.

AACSB: Application of knowledge 29) Daily foreign exchange transactions have grown from about $15 billion in 1973 to over $5 trillion today.

Answer: TRUE Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.4 List the three types of evidence to support the idea that trade supports economic growth.

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30) Most economists support open trade because it increase our choices as consumers, lowers costs for producers, increases competition and innovation, and leads to greater diffusion of technological change.

Answer: TRUE Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.4 List the three types of evidence to support the idea that trade supports economic growth.

AACSB: Application of knowledge 31) Domestic agricultural subsidies intended to support the nation's farmers would not be considered a trade barrier so would not be disputed internationally.

Answer: FALSE Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.4 List the three types of evidence to support the idea that trade supports economic growth.

AACSB: Application of knowledge 32) Most of what we buy and sell never makes it out of domestic markets.

Answer: TRUE Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.4 List the three types of evidence to support the idea that trade supports economic growth.

AACSB: Application of knowledge 33) The four criteria for economic integration include trade flows, capital flows, people flows, and the similarity of prices in separate markets.

Answer: TRUE Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.4 List the three types of evidence to support the idea that trade supports economic growth.

AACSB: Application of knowledge 34) Transactions costs in international financial markets are higher today than they were in the past.

Answer: FALSE Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

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35) Why are high domestic savings rates important?

Answer: High savings rates are correlated with high domestic investment.

Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.4 List the three types of evidence to support the idea that trade supports economic growth.

AACSB: Application of knowledge 36) What are the positive impacts of migration on migrants and the firms that hire them?

Answer: Higher incomes for migrants and lower labor costs for firms Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.4 List the three types of evidence to support the idea that trade supports economic growth.

AACSB: Application of knowledge 37) What are the negative impacts of migration for the nation receiving migrants?

Answer: More competition for other workers and greater social tensions Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.4 List the three types of evidence to support the idea that trade supports economic growth.

AACSB: Application of knowledge 38) Which type of integration requires adapting domestic policies to coordinate with those of trading partners?

Answer: Deep integration Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.4 List the three types of evidence to support the idea that trade supports economic growth.

AACSB: Application of knowledge 39) What do economists call movements of labor and capital between nations?

Answer: Factor flows Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.4 List the three types of evidence to support the idea that trade supports economic growth.

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40) Compare and contrast globalization as it existed in the late nineteenth century with globalization today.

Answer: I would expect my students to address the following: • That in percentage terms, a significant portion of world economic activity was engaged in trade in both periods.

• That in the prior period, trade was mostly in agricultural products and commodities, whereas today capital goods play an increasingly important role.

• That labor may have been more mobile in the past than it is today due to changes in immigration policies.

• That capital was mobile in both periods, but might be more so today, especially given new instruments.

• That changes in transportation and communication were significant in both periods in terms of reducing transaction costs and encouraging product and factor mobility.

Topic: Elements of International Economic Integration Difficulty: Difficult Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

AACSB: Analytical thinking 41) What are some of the main advantages and disadvantages of the extensive financial and commercial networks linking nations today?

Answer: Some of the advantages are that buyers receive lower prices, more choice, and more access to innovative technology. The major disadvantage is that a crisis is more likely to spread from one part of the world to another.

Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

AACSB: Application of knowledge 42) How has the composition of trade flows changed from the early 20th century to today?

Compared to the past, is anything about trade today new?

Answer: Prior to World War I, most trade consisted of agricultural commodities and raw materials, while today trade is primarily manufactured consumer goods and capital goods. Given recent advances in telecommunications, services now can be outsourced and service industries face growing international competition.

Topic: Elements of International Economic Integration Difficulty: Moderate Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

AACSB: Application of knowledge

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43) Describe at least three ways that global capital markets are different today from what they were like in the late 19th century.

Answer: There are more varieties of financial instruments available. A major difference is that exchange rates were fixed then which meant less exchange rate risk and uncertainty then and now higher costs and transactions volume given the need to manage that risk. Transaction costs are significantly lower today than in the past.

Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

AACSB: Application of knowledge 44) How is the international economy qualitatively different in the first part of the 21st century from what it was like in the first part of the 20th century?

Answer: Since tariffs and quotas have been reduced (and would have been the common barriers in the past), now nations are addressing issues related to deeper levels of integration, which involve domestic policies such as labor or environmental standards or investment policies. Today there are multilateral international governmental organizations that address global economic issues where none existed then. There has been a significant increase in the number of regional trade agreements.

Topic: Elements of International Economic Integration Difficulty: Easy Objective: LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

AACSB: Analytical thinking 1.3 Twelve Themes in International Economics 1) Which region of the world experienced a decade-long crisis and stagnant or even negative growth rates during the 1980s?

A) Latin America B) East Asia C) The United States and Canada D) The European Union Answer: A Topic: Twelve Themes in International Economics Difficulty: Easy Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

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2) Which nations does the acronym BRIC stand for?

Answer: Brazil, Russia, India and China Topic: Twelve Themes in International Economics Difficulty: Easy Objective: LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

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International Economics, 7e (Gerber) Chapter 2 International Economic Institutions Since World War II 2.1 Introduction: International Institutions and Issues Since World War II 1) Institutions are A) the same thing as organizations.

B) associations of individuals or groups.

C) always embodied in a written set of rules.

D) a set of rules governing behavior, whether written or not.

Answer: D Topic: Introduction: International Institutions and Issues Since World War II Difficulty: Easy Objective: LO 2.1 Classify with examples the main types of international economic organizations.

AACSB: Application of knowledge 2) Which of the following is an example of an institution whose primary concern is global stability?

A) NAFTA (North American Free Trade Agreement) B) OPEC (Oil Producing and Exporting Countries) C) IMF (International Monetary Fund) D) Asian Development Bank Answer: C Topic: Introduction: International Institutions and Issues Since World War II Difficulty: Easy Objective: LO 2.1 Classify with examples the main types of international economic organizations.

AACSB: Application of knowledge 3) Many of the important international governmental institutions that deal with the global economy have their roots in the Bretton Woods conference at the end of World War II. Answer: TRUE Topic: Introduction: International Institutions and Issues Since World War II Difficulty: Easy Objective: LO 2.1 Classify with examples the main types of international economic organizations.

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2.2 The IMF, the World Bank, and the WTO 1) The international organization that serves as a forum for trade discussions and the development of trade rules is called A) the WTO. B) the World Bank.

C) the IMF. D) the United Nations.

Answer: A Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 2) Which of the following was NOT a creation of the Bretton Woods conference?

A) World Bank B) IMF C) IBRD D) WTO Answer: D Topic: The IMF, the World Bank, and the WTO Difficulty: Moderate Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 3) One of the strongest motivations for holding the Bretton Woods Conference was to design new international institutions that would A) contain communism.

B) help countries avoid the mistakes of the 1920s and 1930s.

C) provide a collective defense security for Western Europe and North America.

D) ensure that world prices were not rising too rapidly.

Answer: B Topic: The IMF, the World Bank, and the WTO Difficulty: Moderate Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

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4) One of the most important and most visible roles of the IMF is to A) hold regular negotiations over tariff reductions.

B) investigate countries that are charged with being unfair traders.

C) provide loans to countries that need capital to develop their economies.

D) intercede by invitation when countries cannot pay their international debts.

Answer: D Topic: The IMF, the World Bank, and the WTO Difficulty: Moderate Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 5) The original mission of the World Bank was to A) provide capital to underdeveloped countries.

B) provide capital to firms around the world.

C) provide financial assistance for the reconstruction of war-damaged nations.

D) help countries manage their exchange rates.

Answer: C Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 6) The primary mission of the World Bank today is to A) provide capital to underdeveloped countries.

B) provide capital to firms around the world.

C) provide financial assistance for the reconstruction of war-damaged nations.

D) help countries manage their exchange rates.

Answer: A Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

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7) From the late 1940s until the creation of the WTO, the organization that was primarily responsible for conducting rounds of trade negotiations was the A) World Bank.

B) IMF. C) United Nations.

D) GATT. Answer: D Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 8) Until the Uruguay Round of trade negotiations, which of the following sectors were NOT included in the rules for international trade?

A) Steel and agriculture B) Agriculture and apparel C) Steel and textiles D) Automobiles and agriculture Answer: B Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 9) Most favored nation (MFN) status means that a country treats another country A) better than its other trading partners.

B) the same as its other trading partners.

C) worse than its other trading partners.

D) any way it chooses since it is the "most favored nation."

Answer: B Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

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10) When the United States gives MFN status to China, it means that A) China is treated better than other U.S. trading partners.

B) China is treated the same as other U.S. trading partners.

C) China is treated worse than other U.S. trading partners.

D) China is legally bound to reciprocate.

Answer: B Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 11) The Tokyo Round of the GATT negotiations was notable because it was the first round A) that included Japan.

B) that included textiles and apparel.

C) to begin establishing rules on subsidies.

D) to begin discussions of exchange rates.

Answer: C Topic: The IMF, the World Bank, and the WTO Difficulty: Moderate Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 12) IMF conditionality refers to the A) technical assistance the IMF gives.

B) minimum-sized loan the IMF will make.

C) maximum-sized loan the IMF will make.

D) changes a country must make in order to receive IMF financial assistance.

Answer: D Topic: The IMF, the World Bank, and the WTO Difficulty: Moderate Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

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13) Which of the following is true?

A) A country experiencing a debt or currency crisis would contact the World Trade Organization.

B) The World Trade Organization was formed at the Bretton Woods conference.

C) The General Agreement on Tariffs and Trade created the World Trade Organization in the negotiations and treaty known as the Uruguay Round.

D) The World Trade Organization has no power to resolve trade disputes and to enforce their resolution.

Answer: C Topic: The IMF, the World Bank, and the WTO Difficulty: Moderate Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 14) A country's foreign exchange reserves refers to A) the currency of the nation itself.

B) the country's holdings of gold and internationally accepted currencies.

C) the total amount of a country's currency held by other nations.

D) the country's Special Drawing Rights (SDRs) at the IMF. Answer: B Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 15) Having MFN status means that the country is getting the most favorable trade terms possible with a trading partner.

Answer: FALSE Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 16) A country experiencing a debt or currency crisis would contact the World Bank.

Answer: FALSE Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

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17) The World Bank was created as a result of the Bretton Woods conference and was originally focused on the reconstruction of Europe after World War II. Answer: TRUE Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 18) The IMF, because it can force nations to take loans and bail out packages, has more power than other international governmental organizations dealing with the global economy.

Answer: FALSE Topic: The IMF, the World Bank, and the WTO Difficulty: Moderate Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 19) The World Bank formed the World Trade Organization when it became clear that to alleviate poverty in developing nations, agricultural trade barriers were going to have to be reduced.

Answer: FALSE Topic: The IMF, the World Bank, and the WTO Difficulty: Moderate Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 20) A nation's votes at the IMF are proportional to its population.

Answer: FALSE Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 21) MFN status means that a trading partner is getting the best trade deal possible given current national trade policies.

Answer: FALSE Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

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22) WTO talks in the late 1990s led to openings in both financial services and telecommunications.

Answer: TRUE Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 23) Trade policies in which industries have been the most contentious in the Doha Round?

Answer: Agriculture and services Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 24) Which round of GATT first addressed subsidies?

Answer: The Tokyo Round Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 25) What result of the Uruguay Round was the most significant for global trade?

Answer: The creation of the WTO Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 26) How is the IMF funded?

Answer: It collects fees called quotas from it members.

Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge

8 .

27) The International Bank for Reconstruction and Development (IBRD) part of the World Bank is set up to lend to whom and for what types of projects?

Answer: Developing nations' governments for specific development projects or major government economic policy adjustments Topic: The IMF, the World Bank, and the WTO Difficulty: Moderate Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 28) Which round of GATT led to the formation of the WTO? Answer: The Uruguay Round Topic: The IMF, the World Bank, and the WTO Difficulty: Easy Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Application of knowledge 29) Describe the primary functions of the World Bank, the IMF, and the WTO. When was each of these organizations formed?

Answer: The IMF and the World Bank were outlined at the Bretton Woods Conference and began operations at the end of World War II. Both function as banks for national governments, with the IMF playing the role of lender of last resort and the World Bank focusing its loans on economic development. A nation facing a payments crisis can contact the IMF for a loan, but it may have to change its domestic policies as part of the price of the loan package. The World Bank initially focused its lending on rebuilding war-torn areas, but then broadened its focus to development. Only developing countries can borrow from the World Bank.

The World Trade Organization was not formed until 1994. An international organization to establish rules related to world trade, business practices, and international investment was proposed at the end of World War II, but was not created. A series of trade negotiations that focused primarily on lowering tariffs were launched. A number of rounds of GATT were completed and ultimately the round known as the Uruguay Round led to the formation of the WTO. The WTO focuses on the multilateral resolution of trade disputes and on continued negotiations to further reduce barriers to trade.

Topic: The IMF, the World Bank, and the WTO Difficulty: Difficult Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Analytical thinking

9 .

30) What is MFN status? How does the WTO reconcile the principle of equal treatment with the preferential treatment created by regional trade agreements?

Answer: MFN status is basically that you will treat all nations participating in the agreement the same. A regional trade agreement creates preferential treatment for nations that are participants.

(For example, because of NAFTA, Mexico and Canada get more preferential terms with the United States than other WTO members would.) The WTO recognizes that regional agreements destroy some opportunities for trade (by making nonmembers face higher barriers than members), but believes they create more trade between participants than they destroy. The regional agreements also allow nations to try out new arrangements that may later be adopted more broadly.

Topic: The IMF, the World Bank, and the WTO Difficulty: Difficult Objective: LO 2.2 Identify economic circumstances in which the IMF, the World Bank, and the WTO are active.

AACSB: Analytical thinking 2.3 Regional Trade Agreements 1) A free trade agreement plus a common set of tariffs toward non-members is called A) a common market.

B) a customs union.

C) a free trade area.

D) an economic union.

Answer: B Topic: Regional Trade Agreements Difficulty: Easy Objective: LO 2.3 Compare the different levels of integration found in regional trade agreements with examples.

AACSB: Application of knowledge 2) Which of the following is FALSE? A) A common market is more deeply integrated than an economic union.

B) NAFTA is an example of a free trade area.

C) The European Union is a deeper form of integration than NAFTA. D) Common markets allow for labor mobility between participating nations.

Answer: A Topic: Regional Trade Agreements Difficulty: Easy Objective: LO 2.3 Compare the different levels of integration found in regional trade agreements with examples.

AACSB: Application of knowledge

10 .

3) Which of the following is true?

A) A common market is more deeply integrated than a customs union.

B) The European Union is a shallower and broader form of integration than NAFTA. C) NAFTA is an example of a customs union.

D) Customs unions require the creation of a common currency.

Answer: A Topic: Regional Trade Agreements Difficulty: Easy Objective: LO 2.3 Compare the different levels of integration found in regional trade agreements with examples.

AACSB: Application of knowledge 4) Which of the following is NOT a feature of a common market?

A) Substantial coordination of macroeconomic policies among the members B) Free trade in goods and services between the members C) Common external barriers to trade D) Factor mobility Answer: A Topic: Regional Trade Agreements Difficulty: Easy Objective: LO 2.3 Compare the different levels of integration found in regional trade agreements with examples.

AACSB: Application of knowledge 5) Which of the following is a problem that arises when trying to classify regional trade agreements?

A) Many agreements combine elements from different categories.

B) The definition of free trade area includes that of a customs union.

C) Some agreements include cultural issues while others do not.

D) The most favored nation clause includes all of them.

Answer: A Topic: Regional Trade Agreements Difficulty: Moderate Objective: LO 2.3 Compare the different levels of integration found in regional trade agreements with examples.

AACSB: Application of knowledge

11 .

6) The United States is an example of A) a customs union.

B) a free trade area.

C) an economic union.

D) a common market.

Answer: C Topic: Regional Trade Agreements Difficulty: Easy Objective: LO 2.3 Compare the different levels of integration found in regional trade agreements with examples.

AACSB: Application of knowledge 7) With a partial trade agreement, A) goods and services are allowed to cross boundaries without tariffs.

B) two or more countries agree to liberalize trade in a selected group of categories.

C) two or more countries set common tariffs toward non-members.

D) two or more countries allow the free mobility of inputs such as labor and capital.

Answer: B Topic: Regional Trade Agreements Difficulty: Moderate Objective: LO 2.3 Compare the different levels of integration found in regional trade agreements with examples.

AACSB: Application of knowledge 8) Describe the potential benefits and the potential costs to global trade of the tremendous growth in regional trade agreements.

Answer: A regional trade agreement creates preferential treatment for nations that are participants, which violates the idea of MFN status in multilateral agreements, where nations agree to treat all participants the same. The WTO recognizes that regional agreements destroy some opportunities for trade by making non-members face higher barriers than members of the regional agreement. But it believes that they create more trade than they divert, and the regional agreements allow nations to try out arrangements that may later be adopted more broadly.

Topic: Regional Trade Agreements Difficulty: Difficult Objective: LO 2.3 Compare the different levels of integration found in regional trade agreements with examples.

AACSB: Analytical thinking

12 .

2.4 The Role of International Economic Institutions 1) One reason markets may fail to provide the optimal quantity of public goods is the problem of A) determining what the public wants.

B) nondiscrimination.

C) free riders.

D) economic integration.

Answer: C Topic: The Role of International Economic Institutions Difficulty: Easy Objective: LO 2.4 Analyze the roles of international economic organizations.

AACSB: Application of knowledge 2) If a good or service does not get used up as it is consumed, then it is said to be A) nonexcludable.

B) nonrival.

C) nondiscrimination.

D) nonconsumable.

Answer: B Topic: The Role of International Economic Institutions Difficulty: Easy Objective: LO 2.4 Analyze the roles of international economic organizations.

AACSB: Application of knowledge 3) An important function of international institutions during times of crisis is to A) make goods nonrival.

B) make goods nonexcludable.

C) prevent free riding.

D) prevent nondiscrimination.

Answer: C Topic: The Role of International Economic Institutions Difficulty: Easy Objective: LO 2.4 Analyze the roles of international economic organizations.

AACSB: Application of knowledge 4) Which of the following is NOT an example of an international public good?

A) Capital flows to less-developed countries B) Last-resort lending C) Open markets during a recession D) Regional trade agreements Answer: D Topic: The Role of International Economic Institutions Difficulty: Moderate Objective: LO 2.4 Analyze the roles of international economic organizations.

AACSB: Application of knowledge

13 .

5) International economic crises are relatively rare events.

Answer: FALSE Topic: The Role of International Economic Institutions Difficulty: Moderate Objective: LO 2.4 Analyze the roles of international economic organizations.

AACSB: Application of knowledge 6) A lender of last resort can prevent the spread of financial crises.

Answer: TRUE Topic: The Role of International Economic Institutions Difficulty: Easy Objective: LO 2.4 Analyze the roles of international economic organizations.

AACSB: Application of knowledge 7) Which multilateral institution serves as the lender of last resort?

Answer: The IMF Topic: The Role of International Economic Institutions Difficulty: Easy Objective: LO 2.4 Analyze the roles of international economic organizations.

AACSB: Application of knowledge 2.5 Criticism of International Institutions 1) Which of the following is NOT a criticism of international institutions such as the IMF, the World Bank, or the WTO? A) They violate national sovereignty by imposing unwanted domestic policies.

B) They fail to understand the effects of their policies on the vulnerable.

C) Their decision-making is biased in favor of underdeveloped nations.

D) They ignore potentially large adjustment costs for developing nations of implementing their policies.

Answer: C Topic: Criticism of International Institutions Difficulty: Moderate Objective: LO 2.5 Debate the pros and cons of international economic organizations.

AACSB: Application of knowledge 2) Which of the following criticisms is NOT directed at the IMF? A) It lacks openness in its decision-making process.

B) It serves the interests of wealthier countries.

C) It creates a free-riding problem.

D) It violates national sovereignty.

Answer: C Topic: Criticism of International Institutions Difficulty: Moderate Objective: LO 2.5 Debate the pros and cons of international economic organizations.

AACSB: Application of knowledge 14 .

3) Which of the following is FALSE? A) National sovereignty limits outsiders' ability to change the trade laws and practices of individual nation states.

B) Because of international recognition of national sovereignty, individual nations are unaffected by global trade and capital flows.

C) Foreign investors may not have a legal right to impose policies on a nation state, but the nation state may still experience consequences of poor policies.

D) Because trade policies are laws of individual nations, it is difficult for other nations and international organizations to force changes on unwilling nation states.

Answer: B Topic: Criticism of International Institutions Difficulty: Difficult Objective: LO 2.5 Debate the pros and cons of international economic organizations.

AACSB: Application of knowledge 4) Which of the following is a FALSE statement about the International Monetary Fund (IMF)?

A) The IMF was created after the Bretton Woods Conference to help to maintain the international fixed exchange rate system that was introduced.

B) The IMF lends to national governments, initially to maintain the fixed exchange rate system, and today to deal with debt or currency crises.

C) Multinational corporations can get IMF loans if they agree to invest in economies that are internationally perceived as risky and otherwise unlikely to receive direct foreign investment.

D) One of the criticisms of the IMF and other international governmental organizations that deal with the global economy is that their decision making may be biased toward policies that favor industrialized nations.

Answer: C Topic: Criticism of International Institutions Difficulty: Moderate Objective: LO 2.5 Debate the pros and cons of international economic organizations.

AACSB: Application of knowledge 5) China's alternative to the IMF is called A) AIIB. B) ASEAN. C) MERCOSUR. D) TIIP. Answer: A Topic: Criticism of International Institutions Difficulty: Easy Objective: LO 2.5 Debate the pros and cons of international economic organizations.

AACSB: Application of knowledge

15 .

6) Because of the recognition internationally of the principles of national sovereignty, nations cannot be affected by the policies of other nations and international governmental organizations.

Answer: FALSE Topic: Criticism of International Institutions Difficulty: Easy Objective: LO 2.5 Debate the pros and cons of international economic organizations.

AACSB: Application of knowledge 7) The majority of economists favor open capital flows.

Answer: FALSE Topic: Criticism of International Institutions Difficulty: Easy Objective: LO 2.5 Debate the pros and cons of international economic organizations.

AACSB: Application of knowledge 8) Describe the criticisms about decision making at the IMF and the World Bank. Which types of policies are thought to reflect bias? What types of costs are not considered? What is the fundamental question critics raise about the operations of the international governmental economic institutions?

Answer: Voting structures at the IMF and World Bank give developed nations, and the U.S. especially, control over decision making, making it hard to delineate whose interests are being served. For example, policies favoring free capital flows and privatization of publicly owned industries are thought to reflect the biases of industrialized countries rather than overwhelming economic consensus. Implementation and adjustment costs may be much greater in developing countries because they have higher overall levels of unemployment, less diversification in their economies, and fewer resources to develop new infrastructure or to do other spending necessary to take advantage of new opportunities. Fundamentally, critics ask whether they are fostering development and economic security or generating greater economic inequality and compounding risks to vulnerable groups.

Topic: Criticism of International Institutions Difficulty: Difficult Objective: LO 2.5 Debate the pros and cons of international economic organizations.

AACSB: Analytical thinking

16 .

International Economics, 7e (Gerber) Chapter 3 Comparative Advantage and the Gains from Trade 3.1 Introduction: The Gains from Trade 1) Which of the following is true?

A) Adam Smith proposed the theory of comparative advantage as the basis for trade in The Wealth of Nations.

B) David Ricardo proposed the theory of absolute advantage as the basis for trade.

C) Absolute advantage is based on comparing the opportunity costs of trading partners.

D) The Ricardian model assumes labor is perfectly mobile.

Answer: D Topic: Introduction: The Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge 2) The economic philosophy that favors strict limits on imports and strong support for exports is called A) zero sum.

B) mercantilism.

C) comparative advantage.

D) absolute advantage.

Answer: B Topic: Introduction: The Gains from Trade Difficulty: Easy Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge 3) Wheat Cloth

U.S. 12 6

U.K 6 18

The table above shows United States and United Kingdom production of wheat (bushels per hour) and cloth (yards per hour).

According to Adam Smith, which of the following is true?

A) The United States has an absolute advantage in the production of wheat.

B) The United States has an absolute advantage in the production of cloth.

C) There is no basis for trade between these countries.

D) The United States will gain more from trade than the United Kingdom.

Answer: A Topic: Introduction: The Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 1 .

4) Wheat Cloth

U.S. 12 6

U.K 6 18

The table above shows United States and United Kingdom production of wheat (bushels per hour) and cloth (yards per hour).

In order for both countries to gain from trade, one bushel of wheat must trade for A) between 6 and 18 yards of cloth.

B) between 1/2 and 2 yards of cloth.

C) between 1/3 and 3 yards of cloth.

D) between 1/2 and 1/3 yards of cloth.

Answer: D Topic: Introduction: The Gains from Trade Difficulty: Difficult Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge 5) A country will gain relatively more from trade when A) trade is regulated.

B) the world price is close to the country's opportunity cost of the good.

C) the world price is below the country's opportunity cost of the good.

D) the world price is much greater than the country's opportunity cost for the good.

Answer: D Topic: Introduction: The Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge 6) Mercantilists perceived trade as a zero sum game.

Answer: TRUE Topic: Introduction: The Gains from Trade Difficulty: Easy Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge 7) Adam Smith created the theory of comparative advantage.

Answer: FALSE Topic: Introduction: The Gains from Trade Difficulty: Easy Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge

2 .

8) What type of policies did Adam Smith attack in his book, An Inquiry into the Nature and Causes of the Wealth of Nations?

Answer: Mercantilism Topic: Introduction: The Gains from Trade Difficulty: Easy Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge 9) What did Adam Smith perceive was primarily responsible for improving standard of living?

Answer: Increased specialization in production Topic: Introduction: The Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge 10) What is productivity?

Answer: The amount of output from a unit of an input Topic: Introduction: The Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge 11) In the simple trade model, what is assumed about labor?

Answer: It is perfectly mobile between the two industries within a nation.

Topic: Introduction: The Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge 12) Which economist introduced the simple trade model and the concept of trade based on comparative advantage?

Answer: David Ricardo Topic: Introduction: The Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge 13) Why did Adam Smith criticize the trade barriers imposed by the mercantilists?

Answer: Smith was highly critical of trade barriers because they decrease specialization, technological progress, and wealth creation. He also recognized that imports enable a country to obtain goods that it cannot make or cannot make as cheaply, while exports are made for someone else and are useful only if they lead to imports.

Topic: Introduction: The European Union Difficulty: Difficult Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 3 .

3.2 Comparative Productivity Advantage and the Gains from Trade Use the data in the table below to answer the following question(s): Table 3.1 Output per Hour Worked

1) Based on Table 3.1, the opportunity cost of a pair of shoes in the United States is A) three computers.

B) two computers.

C) one computer.

D) one-half computer.

Answer: D Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 2) Based on Table 3.1, the pre-trade relative price of a computer in Mexico is A) three pairs of shoes.

B) one pair of shoes.

C) one-half pair of shoes.

D) one-third pair of shoes.

Answer: A Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 3) Based on Table 3.1, trade between the United States and Mexico will occur as long as the relative price of shoes is between A) three computers and one computer.

B) three computers and two computers.

C) one-half computer and one-third computer.

D) six computers and three computers.

Answer: C Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge

4 .

4) Based on Table 3.1, which country or countries has an absolute advantage and a comparative advantage in shoes?

A) Mexico has an absolute and comparative advantage in shoes.

B) The United States has an absolute and comparative advantage in shoes.

C) The United States has a comparative advantage, and Mexico has an absolute advantage in shoes.

D) Mexico has a comparative advantage, and the United States has an absolute advantage in shoes.

Answer: D Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 5) Based on Table 3.1, if the world price of computers is four pairs of shoes, then the optimal strategy for each country would be A) to specialize in shoes.

B) to specialize in computers.

C) for Mexico to specialize in shoes, and the United States in computers.

D) for the United States to specialize in shoes, and Mexico in computers.

Answer: B Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 6) Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20 corn. If opportunity costs are constant for both countries, then A) the United States has a comparative advantage in corn production.

B) Mexico has a comparative advantage in corn production.

C) the United States cannot gain from trade with Mexico.

D) the United States has a comparative advantage in auto production.

Answer: A Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking

5 .

7) Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20 corn. If opportunity costs are constant for both countries, which of the following would NOT be a potential terms of trade?

A) 1 auto for 3 corn B) 1 auto for 4 corn C) 1 corn for 1/3 of an auto D) 1 corn for 1 auto Answer: D Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 8) Suppose Paraguay can produce 12 wheat or 3 corn. Suppose Bolivia can produce 4 wheat or 2 corn. Suppose opportunity costs are constant. Given these production possibilities, A) Paraguay has a comparative advantage in wheat.

B) Paraguay has a comparative advantage in corn.

C) Paraguay has a comparative advantage in both goods.

D) Paraguay has an absolute advantage in neither good.

Answer: A Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 9) Suppose that Paraguay can produce 12 wheat or 3 corn and Bolivia can produce 4 wheat or 2 corn. Suppose that opportunity costs are constant. Which of the following is a potentially agreeable trade arrangement for Paraguay and Bolivia?

A) Paraguay trades one corn to Bolivia for three units of wheat.

B) Bolivia trades one corn to Paraguay for three units of wheat.

C) Bolivia trades one corn to Paraguay for one wheat.

D) Paraguay trades one wheat to Bolivia for two corn.

Answer: B Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Application of knowledge

6 .

10) Suppose that Canada can produce 15 timber or 3 film and Mexico can produce 9 timber or 3 film. Suppose that opportunity costs are constant. Which of the following is FALSE? A) Canada has an absolute advantage in timber production.

B) Mexico has a comparative advantage in film production.

C) The opportunity costs for producing timber are lower in Canada than in Mexico.

D) Canada and Mexico would find trade mutually advantageous at a ratio of one unit of film to six units of timber.

Answer: D Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 11) Suppose that Canada can produce 15 units of timber or 3 units of grain. Suppose that Mexico can produce 6 units of timber or 2 units of grain. Which of the following is CORRECT? A) Mexico has a comparative advantage in grain production.

B) Mexico has an absolute advantage in timber production.

C) Canada has a comparative advantage in grain production.

D) The countries would find trade mutually beneficial at a trading ratio of 1 grain for 2 timber.

Answer: A Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 12) Suppose that Sandy can produce 10 economic reports or make 2 sales calls. Suppose Tim can produce 2 economic reports or make 1 sales call. Which of the following is CORRECT? A) The opportunity cost for Sandy of producing one economics report is 1/5 of a sales call.

B) The opportunity cost for Sandy of producing one sales call is 10 economics reports.

C) The opportunity cost for Tim of producing one sales call is 1/2 of an economics report.

D) The opportunity cost for Tim of producing one economics report is 2 sales calls.

Answer: A Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking

7 .

13) Given that Sandy can produce 10 economics reports or make 2 sales calls and Tim can produce 2 economics reports or make 1 sales call, we can conclude that A) Sandy should specialize in economics reports, and Tim should specialize in sales calls.

B) Sandy should produce both economics reports and sales calls since she cannot possibly gain from trade with Tim. C) Tim should specialize in producing economics reports, and Sandy should specialize in producing sales calls.

D) Tim should produce both economics reports and sales calls.

Answer: A Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 14) Given that Sandy can produce 10 economics reports or 2 sales calls and Tim can produce 2 economics reports or 1 sales call, which of the following is FALSE? A) Sandy has a comparative advantage in sales calls.

B) Tim has a comparative advantage in sales calls.

C) Sandy has a comparative advantage in economics reports.

D) Sandy has an absolute advantage in both economics reports and sales calls.

Answer: A Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking 15) Given that Sandy can produce 10 economics reports or 2 sales calls and Tim can produce 2 economics reports or 1 sales call, which of the following would NOT be a mutually agreeable terms of trade for Sandy and Tim? A) 1 economics report for 1 sales call B) 1 sales call for 3 economics reports C) 1 sales call for 4 economics reports D) 1 economics report for 1/4 of a sales call Answer: A Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.1 Analyze numerical examples of absolute and comparative advantage.

AACSB: Analytical thinking

8 .

16) For a country in autarky, the opportunity cost of the good on the horizontal axis is the same as A) the relative price of the good on the vertical axis.

B) the relative price of the good on the horizontal axis.

C) the opportunity cost of the good on the vertical axis.

D) the nominal price of the good on the horizontal axis.

Answer: B Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.2 Draw a diagram showing gains from trade.

AACSB: Application of knowledge

9 .

17)

The graphs above show the production possibilities curves for the U.S. and Canada, which both produce cars and wheat.

Based on the graphs above, which of the following is true?

A) The U.S. has an absolute advantage in both goods.

B) Canada has an absolute advantage in cars.

C) The U.S. has a comparative advantage in cars.

D) The U.S. has a comparative advantage in wheat.

Answer: C Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.2 Draw a diagram showing gains from trade.

AACSB: Analytical thinking

10 .

18)

The graphs above show the production possibilities curves for the U.S. and Canada, which both produce cars and wheat.

Based on the graphs above, which of the following is true?

A) The opportunity cost of a car in the U.S. is 1 unit of wheat.

B) The opportunity cost of a car in the U.S. is 5 units of wheat.

C) The opportunity cost of a car in Canada is 1/2 unit of wheat.

D) The opportunity cost of a car in Canada is 2 units of wheat.

Answer: A Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.2 Draw a diagram showing gains from trade.

AACSB: Analytical thinking

11 .

19) With trade, the slope of the Consumption Possibilities Curve (CPC) is equal to A) the world price of the good on the horizontal axis.

B) the world price of the good on the vertical axis.

C) the opportunity cost of the good on the horizontal axis.

D) the opportunity cost of the good on the vertical axis.

Answer: A Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Moderate Objective: LO 3.3 Numerically compare and contrast absolute and comparative advantage.

AACSB: Application of knowledge 20) Assume that both the United States and Germany produce beef and computers. The U.S. can produce 200 computers or 1,000 pounds of beef per day. Germany can produce 500 computers or 250 pounds of beef per day.

What is the opportunity cost of beef and computer chips in each country? In which good does each country have a comparative advantage? What is the range for mutually beneficial trade in computers?

Answer: In the U.S., the opportunity cost of computers is 5 pounds of beef. The opportunity cost of a pound of beef is 1/5 computer. In Germany, the opportunity cost of a computer is 1/2 pound of beef. The opportunity cost of a pound of beef is 2 computers. Since 1/5 is less than 1/2, the U.S. has a comparative advantage in beef, and likewise, Germany has a comparative advantage in computers. For both nations to benefit, a computer must trade for between 1/5 and 1/2 pounds of beef.

Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Difficult Objective: LO 3.2 Draw a diagram showing gains from trade.

AACSB: Analytical thinking 21) Assume that both the United States and Germany produce beef and computers. The U.S. can produce 200 computers or 1,000 pounds of beef per day. Germany can produce 500 computers or 250 pounds of beef per day.

Graph the PPCs for each country, putting computers on the horizontal axis. Then identify the slopes of the PPCs. What does the slope represent?

Answer: Graphs should show: Germany: horizontal intercept = 500, vertical intercept = 250, slope = -1/2.

U.S.: horizontal intercept = 200, vertical intercept = 1,000, slope = -1/5 The slope of the line represents the opportunity cost of the good on the horizontal axis (computers).

Topic: Comparative Productivity Advantage and the Gains from Trade Difficulty: Difficult Objective: LO 3.2 Draw a diagram showing gains from trade.

AACSB: Analytical thinking

12 .

22)

The graphs above show the production possibilities curves for the U.S. and Canada, which both produce cars and wheat.

Determine comparative advantage for each country, and then draw the CPC for each country, assuming that the world price of cars is 1.5 wheat. (Assume that wheat is measured in thousands of bushels.) How would the gains from trade change if the price of cars rose to 1.75 wheat?

Answer: In the U.S., the opportunity cost of a car is 1 wheat. The opportunity cost of wheat is 1 car. In Canada, the opportunity cost of a car is 2 wheat. The opportunity cost of wheat is 1/2 car.

The U.S. has a comparative advantage in cars, and likewise, Canada has a comparative advantage in wheat. With trade, the U.S. CPC begins at the horizontal intercept and has a slope of -1.5. The Canadian CPC begins at the vertical intercept and has a slope of -1.5. A rise in the price of cars rotates the Canadian CPC inward and the U.S. CPC outward. The gains from trade increase in the U.S. and decrease in Canada.

Topic: Absolute and Comparative Productivity Advantage Contrasted Difficulty: Difficult Objective: LO 3.2 Draw a diagram showing gains from trade.

AACSB: Analytical thinking

13 .

3.3 Absolute and Comparative Productivity Advantage Contrasted 1) The United States' comparative advantage over Japan in the production of rock-n-roll music implies that (for a similar quality of music) the A) opportunity cost of production is less in Japan.

B) absolute cost of production is less in the United States.

C) absolute cost of production is less in Japan.

D) opportunity cost of production is less in the United States.

Answer: D Topic: Absolute and Comparative Productivity Advantage Contrasted Difficulty: Easy Objective: LO 3.3 Numerically compare and contrast absolute and comparative advantage.

AACSB: Application of knowledge 2) If one nation is able to produce a good at a lower opportunity cost than another, it has A) an absolute advantage in that good.

B) a comparative advantage in that good.

C) a productivity advantage in that good.

D) a technological advantage in that good.

Answer: B Topic: Absolute and Comparative Productivity Advantage Contrasted Difficulty: Easy Objective: LO 3.3 Numerically compare and contrast absolute and comparative advantage.

AACSB: Application of knowledge 3) The basis for free trade is the concept of A) absolute advantage.

B) differences in natural resources and climate.

C) differences in nominal wages.

D) comparative advantage.

Answer: D Topic: Absolute and Comparative Productivity Advantage Contrasted Difficulty: Easy Objective: LO 3.3 Numerically compare and contrast absolute and comparative advantage.

AACSB: Application of knowledge 4) In our simple trade model, having a comparative advantage in a product implies that a country will specialize completely in the product A) with the highest opportunity cost.

B) with the lowest opportunity cost.

C) where total output is lower per worker-hour.

D) where total output is greater per worker-hour.

Answer: B Topic: Absolute and Comparative Productivity Advantage Contrasted Difficulty: Easy Objective: LO 3.3 Numerically compare and contrast absolute and comparative advantage.

AACSB: Application of knowledge 14 .

5) A country possesses a comparative advantage in the production of a product if A) the opportunity cost, in terms of the amount of other products that it gives up to produce this product, is lower than it is for its trading partners.

B) it possesses an absolute advantage in the production of this good compared to its trading partners.

C) it is able to produce less of this good per worker than its trading partners.

D) it can produce more of this good per hour than its trading partners.

Answer: A Topic: Absolute and Comparative Productivity Advantage Contrasted Difficulty: Easy Objective: LO 3.3 Numerically compare and contrast absolute and comparative advantage.

AACSB: Application of knowledge 6) The gains from trade rely on overall productivity (absolute advantage).

Answer: FALSE Topic: Absolute and Comparative Productivity Advantage Contrasted Difficulty: Easy Objective: LO 3.3 Numerically compare and contrast absolute and comparative advantage.

AACSB: Application of knowledge 7) A nation must have an absolute advantage in order to have a comparative advantage in producing a good or service.

Answer: FALSE Topic: Absolute and Comparative Productivity Advantage Contrasted Difficulty: Easy Objective: LO 3.3 Numerically compare and contrast absolute and comparative advantage.

AACSB: Application of knowledge 8) Explain how a country with no absolute advantage can gain from trade.

Answer: Even if a country cannot produce absolutely more of a good, it can still have a comparative advantage. This means that it is relatively better at producing a given good. Thus if it specializes in producing the good that it produces at a relatively lower cost and trades for goods that it can only produce at a relatively higher cost, it will gain from trade.

Topic: Absolute and Comparative Productivity Advantage Contrasted Difficulty: Moderate Objective: LO 3.3 Numerically compare and contrast absolute and comparative advantage.

AACSB: Application of knowledge

15 .

3.4 Gains from Trade with No Absolute Advantage 1) If a nation has no absolute advantage, then it A) cannot gain from trade.

B) still gains from trade.

C) can only gain from trade if it raises its productivity levels.

D) can only gain from trade if it produces outside its production possibilities curve.

Answer: B Topic: Gains from Trade with No Absolute Advantage Difficulty: Easy Objective: LO 3.4 Explain how a country with no absolute advantage can still gain from trade.

AACSB: Analytical thinking 2) Which of the following statements is FALSE? A) Comparative advantage is the principle upon which trade patterns are based.

B) Opportunity cost measures the real cost to a country of producing a certain product.

C) The gains from trade are the result of differences in opportunity cost and comparative advantage.

D) A country that possesses an absolute advantage will always have a comparative advantage.

Answer: D Topic: Gains from Trade with No Absolute Advantage Difficulty: Easy Objective: LO 3.4 Explain how a country with no absolute advantage can still gain from trade.

AACSB: Analytical thinking 3) If a country has lower overall productivity levels than its trading partners, then it will A) be unable to export.

B) have a trade deficit.

C) not be able to obtain gains from trade.

D) have a lower standard of living than its trading partners.

Answer: D Topic: Gains from Trade with No Absolute Advantage Difficulty: Easy Objective: LO 3.4 Explain how a country with no absolute advantage can still gain from trade.

AACSB: Analytical thinking

16 .

4) If two countries agree to specialize and trade based on comparative advantage, which of the following is most likely to be true?

A) Both of the countries will consume outside their respective production possibilities curves.

B) One of the countries will end up receiving all of the gains from trade.

C) One of the countries will both consume and produce on its production possibilities curve.

D) Only one of the countries will produce on and consume outside its production possibilities curve.

Answer: A Topic: Gains from Trade with No Absolute Advantage Difficulty: Easy Objective: LO 3.4 Explain how a country with no absolute advantage can still gain from trade.

AACSB: Analytical thinking 5) If the world price for a good is above a nation's pre-trade equilibrium price, then the nation A) will export the good.

B) will import the good.

C) will neither export nor import the good.

D) cannot gain from trade.

E) Both C and D. Answer: A Topic: Gains from Trade with No Absolute Advantage Difficulty: Easy Objective: LO 3.4 Explain how a country with no absolute advantage can still gain from trade.

AACSB: Analytical thinking 6) When did the Republic of Korea change its economic policies?

Answer: The 1960s Topic: Gains from Trade with No Absolute Advantage Difficulty: Easy Objective: LO 3.4 Explain how a country with no absolute advantage can still gain from trade.

AACSB: Analytical thinking 7) What results has the Republic of Korea experienced from its change in policies?

Answer: It has successfully industrialized. Its index of openness is many times greater and incomes have grown almost 6 percent per year over the period.

Topic: Gains from Trade with No Absolute Advantage Difficulty: Easy Objective: LO 3.4 Explain how a country with no absolute advantage can still gain from trade.

AACSB: Analytical thinking

17 .

8) Given the Republic of Korea's experience, what can we conclude about comparative advantage?

Answer: It can change over time. More skill and more capital can be developed as income rises, changing productivity.

Topic: Gains from Trade with No Absolute Advantage Difficulty: Easy Objective: LO 3.4 Explain how a country with no absolute advantage can still gain from trade.

AACSB: Analytical thinking 9) If a nation is more productive than a trading partner, can it still gain from trade with that partner? Use the concepts of absolute and comparative advantage to explain.

Answer: The gains from trade do not rely on overall productivity (absolute advantage) but on differences in relative prices (comparative advantage). In producing a good or service, as long as a trading partner gives up fewer units of an alternate product, we can gain from trade with them.

Topic: Gains from Trade with No Absolute Advantage Difficulty: Easy Objective: LO 3.4 Explain how a country with no absolute advantage can still gain from trade.

AACSB: Analytical thinking 3.5 Comparative Advantage and "Competitiveness" 1) Certain kinds of tropical fruits are impossible to grow outdoors in the United States. Suppose, however, that in order to create jobs in Wyoming, the U.S. government offered extensive subsidies to firms to produce bananas. With the subsidies, firms could build greenhouses and offer the fruit at world prices.

A) The United States now has a comparative advantage in bananas.

B) The United States has a comparative advantage, but is not competitive.

C) The United States is competitive, but does not have a comparative advantage.

D) The United States has a comparative advantage and is competitive.

Answer: C Topic: Comparative Advantage and "Competitiveness" Difficulty: Easy Objective: LO 3.5 Contrast the concepts of comparative advantage and competitiveness.

AACSB: Analytical thinking 2) Competition between the United States and Mexico is A) equivalent to the competition between two giant corporations.

B) a struggle over which country will get the best jobs.

C) unfair if wages in Mexico are lower than in the United States.

D) not a meaningful way to analyze trade.

Answer: D Topic: Comparative Advantage and "Competitiveness" Difficulty: Easy Objective: LO 3.5 Contrast the concepts of comparative advantage and competitiveness.

AACSB: Analytical thinking

18 .

3) A country that creates competitive advantage where there are not comparative advantages misallocates its resources and has lower national well-being.

Answer: TRUE Topic: Comparative Advantage and "Competitiveness" Difficulty: Easy Objective: LO 3.5 Contrast the concepts of comparative advantage and competitiveness.

AACSB: Analytical thinking 4) Explain why government actions that make industries more competitive do not create comparative advantage.

Answer: Because governments spend resources in order to make industries more competitive, price of goods in these industries no longer reflects the true costs of production (on which comparative advantage is based.

Topic: Comparative Advantage and "Competitiveness" Difficulty: Difficult Objective: LO 3.5 Contrast the concepts of comparative advantage and competitiveness.

AACSB: Analytical thinking 3.6 Economic Restructuring 1) Economic restructuring that takes place as a result of opening to trade with other countries A) contradicts the idea of gains from trade.

B) causes some trading activity to be zero sum.

C) worsens the nation's allocation of resources.

D) improves the nation's allocation of resources.

Answer: D Topic: Economic Restructuring Difficulty: Easy Objective: LO 3.6 Discuss the economic and ethical considerations of economic restructuring caused by international trade.

AACSB: Application of knowledge 2) All of the following are true EXCEPT A) trade between two nations reduces their opportunity costs.

B) trade makes nations dependent on each other.

C) trade between nations will not benefit all citizens.

D) the principle of comparative advantage does not apply to countries with limited resources.

Answer: D Topic: Economic Restructuring Difficulty: Moderate Objective: LO 3.6 Discuss the economic and ethical considerations of economic restructuring caused by international trade.

AACSB: Application of knowledge

19 .

3) When economists talk about the gains from trade they mean that A) no one ever gets hurt by trade.

B) the benefits of trade outweigh the losses.

C) business firms benefit from trade but not necessarily individuals.

D) trade increases government revenue through taxes on imports.

E) economic restructuring is usually quick and painless.

Answer: B Topic: Economic Restructuring Difficulty: Easy Objective: LO 3.6 Discuss the economic and ethical considerations of economic restructuring caused by international trade.

AACSB: Application of knowledge 4) Based on the theory of comparative advantage, nations maximize their well-being when they A) create more jobs.

B) allocate resources more efficiently.

C) increase trade surpluses.

D) increase exports.

Answer: B Topic: Economic Restructuring Difficulty: Moderate Objective: LO 3.6 Discuss the economic and ethical considerations of economic restructuring caused by international trade.

AACSB: Application of knowledge 5) The nation as a whole is better off from trade as long as the gains from the winners exceed the losses from the losers.

Answer: TRUE Topic: Economic Restructuring Difficulty: Easy Objective: LO 3.6 Discuss the economic and ethical considerations of economic restructuring caused by international trade.

AACSB: Application of knowledge 6) All individuals and firms in a country must gain from trade in order for it to be beneficial to the nation.

Answer: FALSE Topic: Economic Restructuring Difficulty: Easy Objective: LO 3.6 Discuss the economic and ethical considerations of economic restructuring caused by international trade.

AACSB: Application of knowledge

20 .

7) Comparative advantage can change over time.

Answer: TRUE Topic: Economic Restructuring Difficulty: Easy Objective: LO 3.6 Discuss the economic and ethical considerations of economic restructuring caused by international trade.

AACSB: Application of knowledge 8) A country is likely to be better off in the long run if it pursues self-sufficiency.

Answer: FALSE Topic: Economic Restructuring Difficulty: Easy Objective: LO 3.6 Discuss the economic and ethical considerations of economic restructuring caused by international trade.

AACSB: Application of knowledge 9) Free trade may be good for a nation, but not for everyone in the nation. Explain why free trade is controversial and the list the justifications that proponents of trade adjustment assistance offer in support of those policies.

Answer: The nation as a whole is better off as long as the gains from the winners exceed the losses from the losers. Restructuring means that some industries are dying and workers and producers have to find other opportunities. This may be difficult for not only those directly involved in the industry, but also for the surrounding communities. Adjustment assistance states that since the nation as a whole benefits from trade, there are newly added resources that can be used for compensation. Second, there is a potential ethical obligation to assist those hurt by economic change. Third, compensation reduces the incentives for those hurt by trade to fight against free trade policies.

Topic: Economic Restructuring Difficulty: Difficult Objective: LO 3.6 Discuss the economic and ethical considerations of economic restructuring caused by international trade.

AACSB: Analytical thinking

21 .

10) Describe some of the key controversies regarding global cotton trade between high cost and low cost cotton producers.

Answer: Low cost cotton producers produce less cotton in total, but rely more on cotton exports for income. Their low incomes put them on the edge of survival and the fact that they make less in total to export makes cotton export revenues critical. High cost cotton producers depend much less on their cotton exports and have much higher incomes. High cost cotton producers are assisted through direct and indirect payments from their governments, tariffs on cotton imports, farm support programs including subsidized loans, insurance, marketing and promotion assistance, and revenue guarantees. These programs keep cotton production where it is less efficient and have the potential to harm living standards in developing nations and keep them from fully exploiting their comparative advantage in cotton.

Topic: Economic Restructuring Difficulty: Difficult Objective: LO 3.6 Discuss the economic and ethical considerations of economic restructuring caused by international trade.

AACSB: Analytical thinking

22 .

International Economics, 7e (Gerber) Chapter 4 Comparative Advantage and Factor Endowments 4.1 Introduction: The Determinants of Comparative Advantage 1) There are no questions for this section.

Topic: Introduction: The Determinants of Comparative Advantage 4.2 Modern Trade Theory 1) A production possibilities curve that is bowed out represents the case of A) constant costs.

B) increasing costs.

C) decreasing costs.

D) external costs.

Answer: B Topic: Modern Trade Theory Difficulty: Easy Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge 2) A production possibilities curve that is a straight line represents the case of A) constant costs.

B) increasing costs.

C) constant opportunity costs but increasing real costs.

D) constant opportunity costs but decreasing real costs.

Answer: A Topic: Modern Trade Theory Difficulty: Easy Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge 3) The straight-line production possibilities curve A) does not show increasing opportunity costs.

B) fails to reflect tradeoffs.

C) fails to benefit trading nations.

D) refutes the principles of comparative advantage.

Answer: A Topic: Modern Trade Theory Difficulty: Easy Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge

1 .

Use the table for the following question(s).

Suppose that all goods are made with two factors—labor and capital. The table below shows the total endowments of each factor in the United States and Canada.

Table 4.1 Endowment of Labor and Capital

4) Based on Table 4.1, according to the Heckscher-Ohlin Theorem, U.S. exports should be goods that A) intensively use labor input.

B) intensively use capital input.

C) use capital and labor in about equal proportions.

D) use either labor or capital input, depending on the good.

Answer: A Topic: Modern Trade Theory Difficulty: Moderate Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge 5) The Heckscher-Ohlin Theorem predicts A) who benefits and who loses from trade.

B) which factors are abundant.

C) the income distribution effects of trade.

D) which goods will be exported.

Answer: D Topic: Modern Trade Theory Difficulty: Easy Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge

2 .

6) Suppose that a country is producing on its PPC at a point to the left of the tangency between the trade line and the PPC. At the production point, A) the opportunity cost in production of the good on the horizontal axis is less than its trade price.

B) the opportunity cost in production of the good on the horizontal axis is more than its trade price.

C) the opportunity cost in production of the good on the vertical axis is less than its trade price.

D) the opportunity cost in production of the good on the horizontal axis may be either less than or more than its trade price.

Answer: A Topic: Modern Trade Theory Difficulty: Difficult Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge 7) If a country is currently producing at a production point such that the trade line has a slope that is flatter than the slope of the PPC at the same point, then A) the country can get greater gains from trade if it moves production away from the good on the vertical axis.

B) the country can get greater gains from trade if it moves production toward the good on the vertical axis.

C) the country cannot improve on its gains from trade.

D) There are no gains from trade in this example.

Answer: B Topic: Modern Trade Theory Difficulty: Difficult Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Analytical thinking 8) Which of the following is NOT a proposition of the Heckscher-Ohlin model?

A) A country has a comparative advantage in the production of that commodity which uses more intensively the country's more abundant resource.

B) The effect of international trade is to tend to equalize factor prices between the trading nations.

C) If the United States is a skilled labor abundant country, then the United States has a comparative advantage in the production of goods that use skilled labor more intensively.

D) Countries will completely specialize in the product in which they have a comparative advantage if free trade is allowed to occur.

Answer: D Topic: Modern Trade Theory Difficulty: Moderate Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge 3 .

9) Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is natural resource intensive and computers are capital intensive, then A) Chile will produce more computers after trade begins with Brazil.

B) Brazil will produce more timber after trade begins with Chile.

C) Chile will produce more timber after trade begins with Brazil.

D) Brazil will completely specialize in computers once trade begins with Chile.

Answer: C Topic: Modern Trade Theory Difficulty: Easy Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge 10) Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is natural resource intensive and computers are capital intensive, then according to the HeckscherOhlin Theorem, Chile should export goods that A) intensively use labor input.

B) intensively use capital input.

C) intensively use natural resources.

D) use capital and labor in about equal proportions.

Answer: C Topic: Modern Trade Theory Difficulty: Easy Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge 11) Using the HO model, assume that the United States is capital abundant and Mexico is labor abundant. If soybeans are capital intensive and avocados are labor intensive, A) Mexico will produce more soybeans once trade is introduced.

B) the United States will produce more avocados once trade is introduced.

C) avocado prices in the United States will fall once trade begins.

D) soybean prices in Mexico will rise once trade begins.

Answer: C Topic: Modern Trade Theory Difficulty: Easy Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge

4 .

12) Using the HO model, assume that the United States is capital abundant and Mexico is labor abundant. If soybeans are capital intensive and avocados are labor intensive, it would be reasonable to expect the United States to A) specialize completely in soybean production.

B) specialize completely in avocado production.

C) increase soybean production, but still produce some avocados.

D) increase avocado production, but still produce some soybeans.

Answer: C Topic: Modern Trade Theory Difficulty: Easy Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge 13)

The graph above shows the PPC for a country that can produce oil or televisions.

The straight line is the trade line and CPC if production is at Point A. Which of the following is a true statement?

A) This country should produce relatively more oil and relatively fewer televisions.

B) This country should produce relatively more televisions and relatively less oil.

C) This country should produce more of both goods.

D) This country is producing the optimal mix of oil and televisions to maximize its income.

Answer: A Topic: Modern Trade Theory Difficulty: Moderate Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Analytical thinking

5 .

14)

The graph above shows the PPC for a country that can produce oil or televisions.

The straight line is the trade line and CPC if production is at Point A. Which of the following is a true statement?

A) This country should produce relatively more butter and relatively less coffee.

B) This country should produce relatively less butter and relatively more coffee.

C) This country should produce more of both goods.

D) This country is producing the optimal mix of butter and coffee to maximize its income.

Answer: B Topic: Modern Trade Theory Difficulty: Moderate Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Analytical thinking 15) What is the source of comparative advantage in the Heckscher-Ohlin model?

Answer: Differences in factor endowments Topic: Modern Trade Theory Difficulty: Easy Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge 16) In the Heckscher-Ohlin model, what assumption is made about opportunity costs?

Answer: Opportunity costs increase with increased production of any good.

Topic: Modern Trade Theory Difficulty: Moderate Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Analytical thinking

6 .

17)

The graph above shows the PPC for a country that can produce oil or televisions.

The straight line is the trade line and CPC if production is at Point A. Is this country producing the optimal mix of oil and televisions to maximize its income?

Carefully explain how you know.

Answer: No, the country is not producing the optimal production mix. Since the slope of the trade line is steeper than the slope of the PPC at point A, the country could increase its income by producing relatively more oil and relatively fewer televisions, until the trade line is tangent to the PPC. Topic: Modern Trade Theory Difficulty: Difficult Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Analytical thinking 18) What is the Heckscher-Ohlin theorem? Using the case studies in the chapter on U.S. trade with China describe the theory and the resulting trade patterns that would support it.

Answer: Students should address the following: • A clear statement of the HO Theorem along the lines that nations differ in their endowments of factors of production, products differ in how intensively they use various factors of production, so a nation that has a relative abundance in a specific factor of production compared to its trading partner will have a comparative advantage in products that use that factor of production more intensively.

• The U.S. would have an abundance of capital and skilled labor and China unskilled labor.

The text offers data that supports this.

Topic: Trade and Income Distribution Difficulty: Moderate Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge

7 .

4.3 Trade and Income Distribution Use the table for the following question(s).

Suppose that all goods are made with two factors—labor and capital. The table below shows the total endowments of each factor in the United States and Canada.

Table 4.1 Endowment of Labor and Capital

1) Based on Table 4.1, according to the Stolper-Samuelson Theorem, the income distribution effects of free trade in the United States are likely to favor A) capital.

B) labor.

C) either capital or labor, depending on U.S. productivity.

D) neither capital nor labor.

Answer: B Topic: Trade and Income Distribution Difficulty: Moderate Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge 2) The Stolper-Samuelson Theorem predicts A) the level of productivity in export industries.

B) which factors are abundant.

C) the income distribution effects of trade.

D) which goods will be exported.

Answer: C Topic: Trade and Income Distribution Difficulty: Easy Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge 3) If the price of a good rises, then the effect on the income of the factors that are used intensively in its production will be A) to raise income by an absolute amount that is less than the rise in prices.

B) to raise income by an absolute amount that is more than the rise in prices.

C) to raise income by a smaller percentage than the rise in prices.

D) to raise income by a greater percentage than the rise in prices.

Answer: D Topic: Trade and Income Distribution Difficulty: Difficult Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge 8 .

4) After trade opens, the short run impact on the income of the variable factor will be A) a decrease.

B) an increase.

C) zero.

D) indeterminate, depending on the consumption pattern of the owners of the variable factor.

Answer: D Topic: Trade and Income Distribution Difficulty: Moderate Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge 5) After trade opens, the short run impact on the income of the specific factor that is relatively scarce will be A) a decrease in its income.

B) an increase in its income.

C) no change in its income.

D) indeterminate, income effects are not possible to know.

Answer: A Topic: Trade and Income Distribution Difficulty: Moderate Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge 6) Suppose that Brazil is capital abundant and Chile is natural resource abundant. If timber is natural resource intensive and computers are capital intensive, then according to the StolperSamuelson Theorem, the incomes of the owners of ________ are likely to rise in Brazil after trade with Chile begins.

A) capital B) labor C) natural resources D) It is impossible to determine which will be favored.

Answer: A Topic: Trade and Income Distribution Difficulty: Moderate Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge

9 .

7) Using the specific factors model, assume that strawberry production requires the specific factor of land, tractor production requires the specific factor of capital, and labor is variable. If the United States is capital abundant compared to Mexico, and Mexico is land abundant compared to the United States, then in the short run with trade we would expect A) the income of U.S. land owners to increase.

B) the income of U.S. workers to increase.

C) the income of Mexican workers to increase.

D) the income of Mexican land owners to increase.

Answer: D Topic: Trade and Income Distribution Difficulty: Moderate Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge 8) Using the specific factors model, assume that strawberry production requires the specific factor of land, tractor production requires the specific factor of capital, and labor is variable. If the United States is capital abundant compared to Mexico, and Mexico is land abundant compared to the United States, then in the short run with trade, which of the following is true?

A) Mexican wages will rise more than the increase in the price of tractors in Mexico.

B) U.S. wages will rise less than the fall in the price of tractors in the United States.

C) The owners of capital in the United States will see a larger increase in their incomes in percentage terms than the increase in the price of tractors.

D) The owners of land in Mexico will see a smaller increase in their incomes in percentage terms than the increase in the price of strawberries.

Answer: C Topic: Trade and Income Distribution Difficulty: Moderate Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge

10 .

9)

The graph above shows the PPC for a country that can produce oil, which is labor intensive, or televisions, which are capital intensive.

The country is currently producing at point A and not trading with the rest of the world. With trade, the world price can be represented by slope of the straight line through Point A. Which of the following is a true statement?

A) When this country produces the optimal amount with trade, workers in this country will be better off.

B) When this country produces the optimal amount with trade, capital in this country will be better off.

C) When this country produces the optimal amount with trade, both factors of production will be better off.

D) When this country produces the optimal amount with trade, the income of factors of production will not change.

Answer: A Topic: Trade and Income Distribution Difficulty: Difficult Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Analytical thinking

11 .

10) The demand for labor is said to be a derived demand because it comes from the demand for goods that labor produces.

Suppose that strawberries are a labor-intensive good. An increase in the price of strawberries will ________ the demand for strawberries, which will ________ the demand for strawberry pickers.

A) increase, increase B) increase, decrease C) decrease, increase D) decrease, decrease Answer: A Topic: Trade and Income Distribution Difficulty: Easy Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge 11) Nations that have only a single abundant resource face significant risks, even when that resource is highly valued.

Answer: TRUE Topic: Trade and Income Distribution Difficulty: Moderate Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge 12) Which types of workers are most likely to favor lowering trade barriers in the United States?

Answer: Highly educated and more skilled workers Topic: Trade and Income Distribution Difficulty: Moderate Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge 13) How would the opening of trade affect the incomes of workers in the U.S. and China? Use the case studies in the chapter on U.S. trade with China to support your answer.

Answer: Students should have a clear statement of the Stolper-Samuelson theorem.

• Trade benefits the nation's abundant factor and harms the nation's scarce factor.

• Thus, since the U.S. is abundant in skilled labor, skilled workers should be better off, and unskilled workers should be worse off. The reverse is true in China.

Topic: Trade and Income Distribution Difficulty: Moderate Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge

12 .

4.4 Empirical Tests of the Theory of Comparative Advantage 1) Empirical tests of the theory of comparative advantage have provided A) strong support for both the Ricardian and Heckscher-Ohlin models.

B) mixed support for the Ricardian model and strong support for the Heckscher-Ohlin model.

C) strong support for the Ricardian model and mixed support for the Heckscher-Ohlin model.

D) mixed support for both Ricardian and Heckscher-Ohlin models.

E) no support for either the Ricardian or the Heckscher-Ohlin models.

Answer: C Topic: Empirical Tests of the Theory of Comparative Advantage Difficulty: Easy Objective: LO 4.3 Discuss the limits of the HO model.

AACSB: Analytical thinking 2) Empirical tests of the HO model have had mixed results. One explanation for this is that A) the Ricardian model is more detailed.

B) it is difficult to measure factor endowments.

C) it does not explain the effects of trade on income.

D) it assumes that countries have different technologies.

Answer: B Topic: Empirical Tests of the Theory of Comparative Advantage Difficulty: Easy Objective: LO 4.3 Discuss the limits of the HO model.

AACSB: Application of knowledge 3) Test of the HO theory have clearly been successful.

Answer: FALSE Topic: Empirical Tests of the Theory of Comparative Advantage Difficulty: Easy Objective: LO 4.3 Discuss the limits of the HO model.

AACSB: Analytical thinking 4) Since empirical tests of the HO theory have given mixed results, the theory has little value.

Answer: FALSE Topic: Empirical Tests of the Theory of Comparative Advantage Difficulty: Easy Objective: LO 4.3 Discuss the limits of the HO model.

AACSB: Analytical thinking

13 .

5) Explain some of the reasons why the HO model is difficult to test empirically. Does this mean that it is not a useful model of trade?

Answer: Problems with accurately measuring factor endowments and standardizing units for that they can be compared make it difficult to test the HO model. The model also cannot capture technological differences between countries, as well as a variety of other factors, such as economic policy, economies of scale, and corporate structure. Even with these issues, economists generally believe that endowments matter and that the HO model is a useful way of explaining the effects of trade on factors of production.

Topic: Empirical Tests of the Theory of Comparative Advantage Difficulty: Difficult Objective: LO 4.3 Discuss the limits of the HO model.

AACSB: Analytical thinking 4.5 Extension of the Heckscher-Ohlin Model 1) Tijuana, Mexico is across the border from San Diego, California. It has become a worldleading producer and exporter of television sets and computer monitors, which it assembles in modern factories owned by multinational consumer electronics firms such as Sony. Initially, these electronics were produced in the industrialized countries of their parent companies, and after several years, the production moved to Tijuana. This is an example of A) the product cycle.

B) intraindustry trade.

C) the specific factors model.

D) the magnification effect.

Answer: A Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.3 Discuss the limits of the HO model.

AACSB: Application of knowledge 2) Which of the following would NOT be associated with the LATE PHASE of the product cycle?

A) Consumption in high income countries begins to exceed production.

B) Increasing share of output is moving to developing countries where abundant low skilled and semi-skilled labor keep production costs low.

C) Consumption continues to grow in low income countries.

D) There is experimentation and improvement in design and manufacturing.

Answer: D Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.3 Discuss the limits of the HO model.

AACSB: Application of knowledge

14 .

3) Which of the following would be associated with the early phase of the product cycle?

A) Large amounts of production in low-income, developing countries B) A standardized product with an assembly-line style production process C) Sophisticated marketing and customer feedback mechanisms D) More consumption in low-income, developing countries Answer: C Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.3 Discuss the limits of the HO model.

AACSB: Application of knowledge 4) Which of the following is true according to the case study on U.S. / China trade presented in the chapter?

A) China has relative abundance in capital.

B) China has relative abundance in skilled labor.

C) The United States has relative scarcity in unskilled labor.

D) The United States has relative scarcity in capital.

Answer: C Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.1 Use the Heckscher-Ohlin Trade Model to analyze trade patterns between two countries with two inputs and two outputs.

AACSB: Application of knowledge 5) If the case study on U.S. / China trade is correct in its analysis of factor abundance, A) Chinese capital owners should see their income rise as trade increases.

B) U.S. skilled labor inputs should see their incomes fall as trade increases.

C) U.S. capital owners should see their income fall as trade increases.

D) Chinese unskilled labor should see their income rise as trade increases.

Answer: D Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.2 Predict the impacts on different factors of production of trade-opening.

AACSB: Application of knowledge 6) The opportunity cost of producing in low-income, developing countries rises over the product cycle, according to theory.

Answer: FALSE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.3 Discuss the limits of the HO model.

AACSB: Application of knowledge

15 .

7) Chinese exports of toys and footwear can be explained by factor endowments, while Chinese exports of telecommunications equipment and computers and accessories can be explained by product-cycle analysis.

Answer: TRUE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.3 Discuss the limits of the HO model.

AACSB: Application of knowledge 8) The O in OLI theory stands for ownership, and the asset owned can be tangible or intangible.

Answer: TRUE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 9) The L in OLI theory stands for loyalty, and this factor makes it more difficult for firms to substitute foreign operations for domestic as they fear a loss of sales due to negative publicity.

Answer: FALSE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 10) According to OLI theory, a firm might be unwilling to license its production to a foreign firm for fear that its technology may be stolen or its brand name harmed, which leads the firm to internalize control over its asset and set up its own foreign subsidiary.

Answer: TRUE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 11) OLI theory is a direct contradiction of trade theory, especially trade theory based on comparative advantage.

Answer: FALSE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge

16 .

12) Offshoring became a concern in the 1980s when modern communication and transport technology made it possible for firms to relocate production abroad.

Answer: TRUE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 13) Offshoring by domestic firms causes job losses rather than job expansion in the home market.

Answer: FALSE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 14) The bulk of offshoring is vertical, relating to producing a component piece in an overall supply chain production.

Answer: FALSE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 15) The primary interest of firms engaging in offshoring is to find lower wages and to decrease production costs.

Answer: FALSE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 16) Most migrants move from developing to developed nations.

Answer: TRUE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.5 Give examples of the determinants of international migration and its impact on comparative advantage.

AACSB: Application of knowledge

17 .

17) The United States has the largest percentage of foreigners in its overall population of any nation.

Answer: FALSE Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.5 Give examples of the determinants of international migration and its impact on comparative advantage.

AACSB: Application of knowledge 18) How is offshoring of services different from past trade patterns?

Answer: Services were consumed where they were produced and not traded.

Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 19) Offshoring required which types of advances?

Answer: Advances in communications technology, such as fax machines, video conferencing, the Internet, and in general, lower prices for long distance communication Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 20) What does research thus far suggest about job loss and offshoring?

Answer: That outsourcing can be complementary and not just a substitute for domestic labor Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 21) Forces inside a nation that cause people to think about leaving that nation are called what in migration theory?

Answer: Supply-push factors Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.5 Give examples of the determinants of international migration and its impact on comparative advantage.

AACSB: Application of knowledge

18 .

22) The relocation of service industry functions to another country is called what?

Answer: Offshoring Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 23) If General Motors imports parts from its plants in Canada and Mexico for finished trucks that it will sell across the NAFTA region, what type of trade does this represent?

Answer: Intrafirm Topic: Extension of the Heckscher-Ohlin Model Difficulty: Easy Objective: LO 4.4 Explain the trade-offs for firms between trading and investing internationally.

AACSB: Application of knowledge 24) Describe the product cycle, including addressing the various inputs that are required over time and the resulting production location decisions.

Answer: Manufactured products go through a product cycle in which inputs change over time.

The early phase is characterized by experimentation in both the product and the manufacturing process used to produce it. Sophisticated marketing and consumer feedback mechanisms are some of the inputs needed that necessitate manufacturing being near a high-income market.

Experimentation and improvement in design and manufacturing require scientific and engineering inputs and capital that is willing to risk failure and some periods of little or no profits. As time passes, the product becomes standardized in size, features, and the manufacturing process. Production begins to shift to countries with low labor costs as manufacturing routines are standardized, assembly line type operations. In the early stage, opportunity costs are lowest in high-income countries because of their unique resource endowments. In the later stages, opportunity costs are lower in low wage countries as the factors of production in the manufacturing process shift to being more labor intensive.

Topic: Extension of the Heckscher-Ohlin Model Difficulty: Difficult Objective: LO 4.3 Discuss the limits of the HO model.

AACSB: Application of knowledge

19 .

25) What are the factors that have been identified that affect a migration decision? Give examples of each.

Answer: Supply push factors are forces inside a country that cause people to think about leaving, such as poor economic opportunities or instability. Demand pull factors are forces that pull migrants to a particular country or region. These could include high rates of economic growth or high demand for particular types of workers. Social networks are made up of family or community members that have previously migrated. They can share information and help recent migrants transition to the new community.

Topic: Extension of the Heckscher-Ohlin Model Difficulty: Moderate Objective: LO 4.5 Give examples of the determinants of international migration and its impact on comparative advantage.

AACSB: Analytical thinking 4.6 The Impact of Trade on Wages and Jobs 1) Wage inequality has been on the rise in virtually all high-income industrial economies since the 1970s. The causes are probably numerous, but the leading explanation for the greatest share of the increase in inequality is A) the growth of trade with developing countries.

B) the growth of trade with other high income industrial countries.

C) technological change which increased the relative demand for skilled workers.

D) technological change which increased the relative demand for unskilled workers.

Answer: C Topic: The Impact of Trade on Wages and Jobs Difficulty: Moderate Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on wages and jobs.

AACSB: Application of knowledge 2) Most economists attribute the growing income inequality in the United States to A) trade.

B) macroeconomic policies.

C) technological change.

D) changing values.

E) taxes.

Answer: C Topic: The Impact of Trade on Wages and Jobs Difficulty: Moderate Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on wages and jobs.

AACSB: Application of knowledge

20 .

3) Which of the following is NOT a primary determinant of the number of jobs in a nation in the long run?

A) Age and size of the population B) Labor market policies C) Macroeconomics policies D) International trade Answer: D Topic: The Impact of Trade on Wages and Jobs Difficulty: Moderate Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on wages and jobs.

AACSB: Application of knowledge 4) International trade is the major cause of rising income inequality in the United States.

Answer: FALSE Topic: The Impact of Trade on Wages and Jobs Difficulty: Easy Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on wages and jobs.

AACSB: Application of knowledge 5) In the long run, the number of jobs in country is primarily determined by macroeconomic factors, not international trade.

Answer: TRUE Topic: The Impact of Trade on Wages and Jobs Difficulty: Moderate Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on wages and jobs.

AACSB: Application of knowledge 6) Carefully explain the relationship between the number of jobs in a country and international trade.

Answer: International trade has little effect on the number of jobs in a country in the long run.

The number of jobs is far more closely linked to the age and size of the population, labor market policies, the business cycle, and macroeconomic policies. However, trade may have an impact on the kinds of jobs that are available in an economy. Trade may also have some impact on wages, particularly on the wage stagnation observed in the last decade or so, although evidence on this is mixed.

Topic: The Impact of Trade on Wages and Jobs Difficulty: Difficult Objective: LO 4.6 Describe the controversies surrounding the impact of international trade on wages and jobs.

AACSB: Analytical thinking

21 .

International Economics, 7e (Gerber) Chapter 5 Beyond Comparative Advantage 5.1 Introduction: More Reasons to Trade 1) Comparative advantage has mixed results when it comes to predicting a country's trade patterns. Which of the following is FALSE? A) There are many potential products an economy might export that use the same comparative advantage.

B) A large share of international trade is not based on comparative advantage.

C) Comparative advantage has proven completely incapable of predicting trade.

D) Comparative advantage is a dynamic concept, which means that the spread of technology, improvement in skills, and learning-by-doing may alter a country's comparative advantage over time.

Answer: C Topic: Introduction: More Reasons to Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 2) Comparative advantage cannot account for a significant portion of world trade.

Answer: TRUE Topic: Introduction: More Reasons to Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 5.2 Intraindustry Trade 1) Intraindustry trade refers to A) international trade in products made within the same industry.

B) international trade in products made across different industries.

C) trade that occurs as a result of comparative advantage.

D) the exchange of dissimilar items.

Answer: A Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge

1 .

2) Interindustry trade refers to A) international trade in products made within the same industry.

B) domestic trade in products made within the same industry.

C) international trade in products made across different industries.

D) the exchange of similar items that are differentiated.

Answer: C Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 3) Intraindustry trade is characterized by what two features of the industry and market?

A) Diseconomies of scale and homogeneous products B) Non-tariff barriers and large-scale foreign investment C) Quota auctions and low effective rates of protection D) Economies of scale and differentiated products Answer: D Topic: Intraindustry Trade Difficulty: Moderate Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 4) Intraindustry trade relies on A) economies of scale.

B) the product cycle.

C) differences in factor endowments.

D) monopoly pricing.

Answer: A Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 5) One reason that a large share of the trade between high-income industrial economies is intraindustry trade is because A) it is more advantageous than interindustry trade.

B) high-income industrial economies produce in the first stage of the product cycle.

C) high-income industrial economies have dissimilar resource endowments in absolute terms.

D) it allows firms to take advantage of internal economies of scale.

Answer: D Topic: Intraindustry Trade Difficulty: Moderate Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge

2 .

6) An internal economies of scale is defined as A) an industry with costs that fall for all firms.

B) a firm with falling costs over a specific level of output.

C) a firm with falling costs over a relatively large range of output.

D) a firm with falling costs over a relatively large range of output, but definite declining profits.

Answer: C Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.2 Compare and contrast internal and external economies of scale.

AACSB: Application of knowledge 7) Which of the following is true about monopolistic competition?

A) One firm serves as the entire industry.

B) A small number of firms serve the entire market.

C) It is competition among many firms producing similar but differentiated products.

D) Firms do not have economies of scale.

Answer: C Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.3 Analyze the effects of international trade in a monopolistically competitive market.

AACSB: Application of knowledge 8) Which of the following is FALSE about intraindustry trade?

A) Intraindustry trade creates gains from trade.

B) Intraindustry trade is due to comparative advantage.

C) Intraindustry trade may involve heightened competition and lower prices for consumers.

D) Intraindustry trade increases consumer choice.

Answer: B Topic: Intraindustry Trade Difficulty: Moderate Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge

3 .

9) Internal economies of scale means that A) firms are experiencing lower average production costs due to a geographical concentration of firms in their industry that make it cheaper and easier to hire highly specialized workers and inputs.

B) firms will have lower profits after international trade begins, because costs will be higher than when they just focused on the domestic market.

C) consumers will have less choices once trade begins, because firms will be squeezed out of the market.

D) expanding the size of the market the firm serves reduces overall per unit costs, since the firm can spread costs over more output.

Answer: D Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.2 Compare and contrast internal and external economies of scale.

AACSB: Application of knowledge 10) Which of the following is NOT an example of intraindustry trade?

A) Trading Jeeps for Toyotas B) Trading Boeing airplanes for Airbus airplanes C) Trading Bush beer for Heineken beer D) Trading oil for trucks Answer: D Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 11) Which of the following is an example of intraindustry trade?

A) Trading peanut oil for tractors B) Trading crude oil for automobiles C) Trading Nokia smartphones for Apple iPhones D) Trading jeans for cotton Answer: C Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge

4 .

12) Which of the following is NOT a likely result of intraindustry trade based on internal economies of scale?

A) Job creation at domestic firms entering international trade B) Lower prices for the domestic consumers of the product now being traded C) Increased sales and lower per unit costs for the firm doing the exporting D) Higher prices for the exported product Answer: D Topic: Intraindustry Trade Difficulty: Moderate Objective: LO 5.4 Describe the gains from intraindustry trade.

AACSB: Application of knowledge 13) If trade in a particular good interindustry, the expansion of an industry in one country is likely to lead to the ________ of that industry in the other country. If trade in that good is intraindustry, expansion of the industry in one country is likely to lead to the ________ in the other country.

A) decline, decline B) decline, expansion C) expansion, decline D) expansion, expansion Answer: B Topic: Intraindustry Trade Difficulty: Moderate Objective: LO 5.4 Describe the gains from intraindustry trade.

AACSB: Application of knowledge 14) An internal economy means that ________, while an external economy means that ________.

A) firm costs fall as firm output increases, firm costs fall as industry output increases B) firm costs fall as industry output increases, firm costs fall as firm output increases C) firm costs fall as firm output increases, firm costs rise as industry output increases D) firm costs fall as industry output increases, firm costs rise as firm output increases Answer: A Topic: Intraindustry Trade Difficulty: Moderate Objective: LO 5.2 Compare and contrast internal and external economies of scale.

AACSB: Application of knowledge 15) Interindustry trade is not based on comparative advantage since it consists of the export and import of similar goods.

Answer: FALSE Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge

5 .

16) Economies of scale are an important determinant of comparative advantage-based trade.

Answer: FALSE Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.3 Analyze the effects of international trade in a monopolistically competitive market.

AACSB: Application of knowledge 17) If countries have similar factors of production and similar productivities, most of their trade is likely to be intraindustry.

Answer: TRUE Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 18) Intraindustry trade can lead to lower prices and job creation in both the exporting and the importing nation.

Answer: TRUE Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.4 Describe the gains from intraindustry trade.

AACSB: Application of knowledge 19) Intraindustry trade tends to be more controversial than interindustry trade.

Answer: FALSE Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.4 Describe the gains from intraindustry trade.

AACSB: Application of knowledge 20) A substantial amount of trade between industrialized countries is intraindustry or intrafirm trade rather than interindustry trade.

Answer: TRUE Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 21) If countries have similar factor endowments and productivities, their trade is likely to be interindustry.

Answer: FALSE Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 6 .

22) Trading French wine for California wine is an example of intraindustry trade.

Answer: TRUE Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 23) Intraindustry trade is characterized by what two features?

Answer: Economies of scale and differentiated products Topic: Intraindustry Trade Difficulty: Moderate Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 24) If countries have similar factor endowments and productivities, what type of trade are they most likely to have?

Answer: Intraindustry Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 25) If the United States and Canada trade hydro-powered electricity for Hollywood films, what type of trade does this represent?

Answer: Interindustry Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 26) If the United States and Mexico trade Budweiser for Modelo beer, what type of trade does this represent?

Answer: Intraindustry Topic: Intraindustry Trade Difficulty: Easy Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge 27) Which industry was first covered by a free trade agreement between Canada and the United States?

Answer: Automobiles Topic: Intraindustry Trade Difficulty: Moderate Objective: LO 5.1 Give examples of interindustry and intraindustry trade.

AACSB: Application of knowledge

7 .

28) Carefully explain why there are gains from intraindustry trade.

Answer: The increased size of markets leads to lower costs through the effect of scale economies. At the same time, competition among firms forces them to pass on their lower costs to consumers in the form of lower prices. The expansion of the market that occurs with trade leads eventually to an increase in the number of firms (although the distribution of firms between countries is unclear). Consumers benefit both from lower prices and from an increase in the variety of goods available to them.

Topic: Intraindustry Trade Difficulty: Difficult Objective: LO 5.4 Describe the gains from intraindustry trade.

AACSB: Application of knowledge 29) Describe the two sources of economies of scale and how these economies of scale lead to intraindustry trade.

Answer: Internal economies of scale come from decreasing average costs as production increases. The source of the decrease in average costs could be the spread of fixed costs over a greater number of units of output, which might come from plant size, significant research and development costs, marketing or market research costs, engineering, etc. Increasing the size of the firm's market decreases average production costs. Consumers benefit from more choices and lower prices. Product differentiation is enhanced through the introduction of a foreign firm's products in the domestic market. External economies of scale come from a concentration of an industry in a specific geographic location. There is no cost advantage to the firm being larger, but because the industry is focused in a specific location, labor and other input markets are deep and highly specialized. Firms benefit from knowledge spillover in both formal and informal ways.

Topic: Intraindustry Trade Difficulty: Difficult Objective: LO 5.2 Compare and contrast internal and external economies of scale.

AACSB: Application of knowledge 5.3 Trade and Geography 1) Under some circumstances, trade could stifle the development of new industries and reduce global efficiency. All of the following describe conditions that could lead to that situation EXCEPT A) an initial head start gives a scale advantage to already existing firms in one country.

B) diseconomies of scale make it impossible for new firms to enter the market.

C) a location has a better-developed linkage between suppliers and producers, giving it a cost advantage.

D) a historical accident, such as the shifting of airplane production to the United States to avoid World War II bombings, causes firms in one location to have a competitive advantage.

Answer: B Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 8 .

2) Which of the following is FALSE? A) Economies of scale may be internal, external, or both.

B) With internal economies of scale, the gains from trade include a wider selection of consumer choices and lower prices.

C) With external economies of scale, the gains from trade are less certain since, in theory, they can lock in production in a less efficient country and prevent the development of production in a more efficient country.

D) Internal economies of scale lead firms to regionally concentrate their industry.

Answer: D Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 3) Which of the following is NOT a situation providing a potential advantage for Mexico that makes it competitive compared to China in trade with the United States?

A) The product line requires quick turn-around time from or to delivery.

B) The need to manage a just-in-time inventory system C) Wages are low and the production process is labor intensive.

D) The product is heavy and bulky relative to its final value.

Answer: C Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 4) Which of the following is FALSE? A) Most of the maquiladora industry is located in the states of Mexico that border the United States.

B) The maquiladora industry has not created much employment in Mexico because most of the production is capital intensive.

C) The maquiladora industry accounts for more than half of Mexico's exports today.

D) Growth in Mexico's northern border cities , such as Tijuana and Ciudad Juarez, took off almost a decade before NAFTA because of the maquiladora industry.

Answer: B Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge

9 .

5) Which of the following is a reason why trade and geography are linked?

A) There are high costs of locating in large urban areas.

B) Many industries have no economies of scale.

C) Competition means that all firms want to locate near each other.

D) Some locations give access to pools of skilled labor or special resources.

Answer: D Topic: Trade and Geography Difficulty: Moderate Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 6) In an industry where transportation costs are high and there are limited scale economies, A) firms will locate close to the market.

B) firms will locate close to their input sources.

C) firms might locate in either area.

D) firms will locate where policy makers decide.

Answer: A Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 7) Most foreign investment is today is directed towards high-income countries because A) there are tax breaks and subsidies available.

B) markets are larger, so transportation costs are minimized by producing near the market.

C) high-income countries are politically stable.

D) there are no economies of scale in low-income countries.

Answer: B Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 8) When there are external economies of scale in an industry A) firm costs decrease as individual firms expand output.

B) firm costs decrease as the industry expands in size.

C) firms will generally increase their size.

D) firms must be located in different regions.

Answer: B Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 10 .

9) Concentration of industries can lead to external economies for all of the following reasons EXCEPT A) concentrated industries will not be competitive.

B) concentrated industries will attract a network of input suppliers.

C) concentrated industries will attract a deep pool of skilled labor.

D) concentrated industries will experience knowledge spillovers.

Answer: A Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 10) Most trade between Mexico and the United States is intrafirm.

Answer: TRUE Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 11) Paul Krugman has stated that international trade is really about geography.

Answer: TRUE Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 12) The geographical distribution of resources such as skilled labor has little effect on firm location decisions.

Answer: FALSE Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 13) To minimize costs, firms should have plants close to every market.

Answer: FALSE Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 11 .

14) Concentration of firms in a particular region is likely to attract skilled labor to that area.

Answer: FALSE Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 15) Trade can stifle the development of industries than might be more efficient than existing ones.

Answer: TRUE Topic: Trade and Geography Difficulty: Moderate Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 16) Explain how concentration of industries in a particular region can lead to external economies.

Answer: If the firms in a region produce similar products, there are likely to be knowledge spillovers that help keep all firms abreast of the latest technology and newest developments.

Close physical proximity enhances knowledge spillovers because it creates more opportunities for information exchange through formal and informal networks of people. The presence of a large number of producers in one area helps to create a deep labor market for specialized skills.

A third potential advantage to a large geographical concentration is that it can lead to a dense network of input suppliers. Manufacturers of intermediate inputs prefer to locate near the market for their products since it holds down transportation costs and may keep them better informed.

Topic: Trade and Geography Difficulty: Difficult Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 17) Is it possible that trade could prevent the development of new and more efficient industries?

Answer: Yes, under certain circumstances. Using the textbook example, suppose that Europeans are potentially more efficient at making commercial aircraft than Americans. Their potential can only be realized, however, after a period of experimentation and development. The initial problem they face is that the efficiency advantage goes to the United States because of its better developed linkages between suppliers and producers. The availability of existing planes at a cost that is lower than initial costs will be in the European industry may deter the development of the industry.

Topic: Trade and Geography Difficulty: Difficult Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 12 .

18) Describe how Mexico's manufacturing has changed location and type over time.

Answer: Most of the trade between the United States and Mexico is intrafirm and this occurs within the context of Mexico's special export processing sector (the maquiladora industry), which was originally limited to its border with the United States but has expanded to the whole country, The original purpose of the industry was to generate employment along Mexico's northern border. American firms could set up in Mexico and pay no tariffs on the inputs they brought into the country as long as they exported the output. The export processing industry grew steadily, but most manufacturing in Mexico was still focused on the domestic market. In the 1980s, Mexico's development strategy was inward looking, and most firms found that it was less profitable to export than to produce for the home market since goods sold domestically were protected from competition and goods sold abroad were not. Focus on production for the domestic market caused most firms to locate near Mexico City or one or two other urban areas, so that they were close to their final markets. When policy makers shifted their focus to a more neutral policy with respect to production for domestic or foreign markets, following the 1982 financial crisis, they removed many trade protections, creating a more level playing field for exporters. This made it relatively more profitable to produce goods for sale in foreign markets since it took away the advantages of producing for the domestic market. Partly as a consequence of these policy changes, the export processing industry along Mexico's northern border took off.

By the middle of 2000, the maquiladora was responsible for more than half of Mexico's total exports. The new incentives caused both Mexican and non-Mexican firms to locate near the border with the United States, rather than in Mexico City. Under the new rules, the largest profitable market is the United States rather than Mexico City, and thus it was cost effective to locate closer to that market.

Topic: Trade and Geography Difficulty: Difficult Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge

13 .

19) How can regional concentration of firms in an industry lead to external economies of scale?

Give examples of these types of industrial clusters in the United States. Are they always beneficial?

Answer: When an industry is highly concentrated in a specific location, this leads to a decrease in costs for firms that are located there regardless of their individual size. Close physical proximity enhances knowledge spillovers that keep all firms abreast of the latest technology and newest developments. Information can be exchanged through both formal and informal networks, and this is particularly important in frontier industries undergoing rapid technological change. Labor markets deepen for highly specialized skills, which reduces search costs and gives firms a choice of workers with the best skills. Dense networks of highly specialized input suppliers can also develop. All of these function to enhance production and to reduce costs.

Hollywood, Silicon Valley, Nashville, and many other examples of industrial concentration exist in the United States. A potential problem for world trade is that an industrial cluster may develop and prevent potentially more efficient foreign producers from entering a market. These regional concentrations become self-reinforcing. Small initial differences in costs lead to feedback mechanisms that create large differences in costs based on production location. Hypothetically, a region could get an early advantage, form an agglomeration, and the cost advantages may prevent the development of the industry in another location that could have been more efficient.

Production is thus concentrated with the less efficient producer because the more efficient producer never has the chance to get off the ground.

Topic: Trade and Geography Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 5.4 Industrial Policy 1) Which of the following is NOT a problem in the implementation of industrial policies?

A) Choosing the industry to target B) Knowing the optimum amount of resources to provide the targeted industry C) The encouragement of rent seeking by firms in other industries D) The benefits are captured only by domestic firms.

Answer: D Topic: Industrial Policy Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge

14 .

2) Market failures are less likely to occur whenever A) private returns are greater than social returns.

B) social returns are greater than private returns.

C) the free market produces less than what is socially optimal.

D) new firms can easily attract start-up capital.

Answer: D Topic: Industrial Policy Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 3) Which of the following is NOT a reason social returns might be greater than private returns?

A) Excess competition between firms B) Knowledge spillovers C) Spillovers from research and development D) Capital market imperfections Answer: A Topic: Industrial Policy Difficulty: Moderate Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 4) If social returns to the production of a good are greater than private returns, then we can conclude that relative to the social optimum, the good will be A) overproduced and underpriced.

B) underproduced and overpriced.

C) overproduced and overpriced.

D) underproduced and underpriced.

Answer: B Topic: Industrial Policy Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge

15 .

5) If social returns to the production of a good are less than private returns, then we can conclude that relative to the social optimum, the good will be A) overproduced and underpriced.

B) underproduced and overpriced.

C) overproduced and overpriced.

D) underproduced and underpriced.

Answer: A Topic: Industrial Policy Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 6) Suppose that the United States decided to subsidize a major research and development effort

by U.S. firms in the semiconductor industry. Under the current rules of the WTO and GATT, the U.S. effort is A) allowed as long as the subsidies are a small percent of the total cost.

B) allowed as long as the subsidies do not involve a direct payment to the industry.

C) not allowed.

D) allowed as long as the subsidies are for developing a "precompetitive" technology.

Answer: D Topic: Industrial Policy Difficulty: Moderate Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 7) Suppose that the United States decided to subsidize a major competitive effort by the semiconductor industry to bring to market the next generation computer chip. Under the current rules of the WTO and GATT, the U.S. effort is A) allowed as long as the subsidies are a small percent of the total cost.

B) allowed as long as the subsidies do not involve a direct payment to the industry.

C) not allowed.

D) allowed as long as the subsidies do not succeed in creating a new product.

Answer: C Topic: Industrial Policy Difficulty: Moderate Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge

16 .

8) WTO rules allow subsides A) when there are external economies.

B) of "precompetitive" activities such as research.

C) when there are internal economies.

D) when there are positive externalities in production.

Answer: B Topic: Industrial Policy Difficulty: Moderate Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 9) Which of the following is NOT a true statement about industrial policies?

A) Industrial policies can lead to the development of successful industries.

B) Not all industrial policies are successful.

C) Not all industrial policies are the best use of a nation's resources.

D) Most industrial policies are legal under WTO rules.

Answer: D Topic: Industrial Policy Difficulty: Moderate Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 10) Free market economies underproduce goods with positive externalities because A) there are no benefits to the production of these goods.

B) the additional social benefits are not taken into account by the marketplace.

C) the additional social benefits cannot be measured.

D) the additional social benefits are too small to matter.

Answer: B Topic: Industrial Policy Difficulty: Moderate Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 11) One problem with industrial policies is that A) R&D only benefits the firm that conducts it.

B) governments usually target the wrong industries.

C) it is difficult to measure the extent of market failure.

D) it is not politically popular to support industries.

Answer: C Topic: Industrial Policy Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 17 .

12) The United States does not use subsidies as part of its policies.

Answer: FALSE Topic: Industrial Policy Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 13) Industrial policies have not been effective in encouraging investment in clean energy.

Answer: FALSE Topic: Industrial Policy Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 14) Benefits of R&D spending to foreigners may be as much as 1/4 of the total value of the spending.

Answer: TRUE Topic: Industrial Policy Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 15) Sound macroeconomic policies are less important than industrial policies in promoting growth.

Answer: FALSE Topic: Industrial Policy Difficulty: Moderate Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 16) Explain what rent seeking is and how it may reduce the benefits of industrial policies.

Answer: Rent seeking is any activity by firms, individuals, or special interests that is designed to alter the distribution of income in their favor without adding to the amount of total income in the economy. If firms know that governments are willing to use industrial policies, they will spend resources to obtain some of the subsidies. This may require the hiring of lobbyists, economists, or engineers who will work to persuade the legislature or some other rule makers. The downside is that it uses resources but does not add to total output.

Topic: Industrial Policy Difficulty: Moderate Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 18 .

17) Japan and Korea use or have used many industrial policies, and they are both considered to be countries that have developed successfully. Does that mean that the industrial policies caused their successful development?

Answer: Opponents of industrial policies continue to argue that sound macroeconomic policies, high rates of saving and investment, and high levels of schooling were the keys to success in those two countries, and that industrial policies were a distraction at best. It is difficult to determine cause and effect in economic development.

Topic: Industrial Policy Difficulty: Easy Objective: LO 5.5 Explain how transportation costs and internal economies of scale help determine firm location decisions.

AACSB: Application of knowledge 18) Explain why industrial policies are controversial.

Answer: In some cases, they end up wasting large sums of money. It is difficult to know what the best industries to promote are, and so government resources may not be used effectively.

Better outcomes may be achieved by simply providing the basic components of a wellfunctioning economy, including education, stable institutions, and sound macroeconomic policies. Additionally, there are a number of problems such as the difficulty of measure the size of market failures and rent seeking.

Topic: Industrial Policy Difficulty: Moderate Objective: LO 5.6 Present the pros and cons of industrial policies.

AACSB: Analytical thinking

19 .

International Economics, 7e (Gerber) Chapter 6 The Theory of Tariffs and Quotas 6.1 Introduction: Tariffs and Quotas 1) In a small country, the net national cost of tariff protection is equal to the reduction in consumer surplus minus A) the increase in government revenue and the increase in producer surplus.

B) the increase in government revenue.

C) the increase in producer surplus.

D) the efficiency loss and the consumption side loss.

Answer: A Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Application of knowledge Scenario 6.1 Suppose that United States furniture makers import $100 of wood and parts in order to make a dining room table selling for $500. The imports have no tariff or quota restrictions.

2) Based on Scenario 6.1 above, value added in the United States is A) $500.

B) $600.

C) $400.

D) $300.

Answer: C Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 3) Based on Scenario 6.1 above, if a tariff of 20 percent is placed on imports of dining room tables, the effective rate of protection is A) 20 percent.

B) 25 percent.

C) 30 percent.

D) 40 percent.

Answer: B Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.4 Use tariff data on inputs and outputs to compare effective and nominal rates of protection.

AACSB: Application of knowledge 1 .

4) Based on Scenario 6.1 above, if a tariff of 20 percent is placed on imports of dining room tables, and another tariff of 50 percent is placed on imports of wood and parts, then the effective rate of protection on tables made in the United States is A) 70 percent.

B) 50 percent.

C) 20 percent.

D) 12.5 percent.

Answer: D Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.4 Use tariff data on inputs and outputs to compare effective and nominal rates of protection.

AACSB: Application of knowledge 5) Consumer surplus is equal to the area A) under the demand curve and above the supply curve.

B) above the supply curve and below the price line.

C) under the demand curve.

D) under the demand curve and above the price line.

Answer: D Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Application of knowledge 6) Producer surplus is equal to the area A) under the demand curve and above the supply curve.

B) above the supply curve and below the price line.

C) under the supply curve.

D) under the demand curve and above the price line.

Answer: B Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Application of knowledge

2 .

7) Tariffs reallocate income from A) consumers to producers.

B) producers to consumers.

C) government to producers.

D) consumers to foreigners.

Answer: A Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 8) The production side efficiency loss of a tariff is caused by A) higher profits gained by foreign producers.

B) the expansion of relative inefficient domestic production.

C) the contraction of domestic consumption.

D) the increase in government revenue.

Answer: B Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 9) Which of the following would be a deadweight loss from a tariff?

A) The shift of consumer surplus to government B) The increase in producer surplus C) The decrease in consumer surplus D) The decrease in consumer surplus due to a drop in consumption Answer: D Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.2 Graphically demonstrate the effects of tariffs and quotas on prices, output, and consumption for small and large countries.

AACSB: Application of knowledge 10) Large countries can improve their welfare by levying a tariff if it does NOT A) reduce rent seeking elsewhere in the economy.

B) create a deadweight loss.

C) lead to retaliation by the nation's trading partners.

D) increase domestic production of the good.

Answer: C Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 3 .

11) Suppose a manufacturer of software develops a new computer program that sells for $50.

The $50 cost includes $0.25 for the CD it is stored on, $5 for the labor of the company software programmers, and $1.75 for packaging materials and transportation costs. Value added by the software company is A) $49.75.

B) $48.25.

C) $48.

D) $44.75.

Answer: C Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.4 Use tariff data on inputs and outputs to compare effective and nominal rates of protection.

AACSB: Application of knowledge 12) High tariffs on intermediate inputs A) increase the effective rate of protection on final goods.

B) have no impact on the effective rate of protection on final goods.

C) decrease the effective rate of protection on final goods.

D) lower the nominal rate of protection on final goods.

Answer: C Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.4 Use tariff data on inputs and outputs to compare effective and nominal rates of protection.

AACSB: Application of knowledge 13) Which of the following is NOT correct about the effects of a tariff on an imported product?

A) Tariffs benefit domestic producers by raising price and domestic output.

B) Tariffs increase government revenue.

C) Tariffs mean higher prices and less consumption for consumers of the product.

D) Tariffs increase the efficiency of how resources are allocated.

Answer: D Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge

4 .

14) Which of the following is FALSE? A) Consumer surplus increases after a tariff is placed on imports.

B) Producer surplus increases after a tariff is imposed.

C) Government revenue increases after a tariff is imposed.

D) Deadweight losses result from tariffs.

Answer: A Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 15) Efficiency losses are A) deadweight losses caused by consumers being prevented by tariffs from buying products at the world price, products that they value more highly than that price.

B) the total loss in consumer surplus from a tariff.

C) the increase in producer surplus that is created by a tariff.

D) the deadweight loss that is created because domestic firms have to charge higher prices to produce units of output than foreign firms would have to charge.

Answer: D Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 16) In order for large countries to successfully use tariffs to increase well-being, A) they must have significant market power .

B) the deadweight loss created by the tariff must be greater than the government revenue the tariff generates.

C) domestic production must increase more significantly than for the small country case.

D) domestic consumption and imports must decrease more significantly than in the small country case.

Answer: A Topic: Introduction: Tariffs and Quotas Difficulty: Difficult Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge

5 .

17) Nominal rates of protection A) are always greater than effective rates of protection.

B) are always smaller than effective rates of protection.

C) refer to the tariffs placed on intermediate goods used to make the final good or service.

D) cannot be negative.

Answer: D Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.4 Use tariff data on inputs and outputs to compare effective and nominal rates of protection.

AACSB: Application of knowledge 18) Which of the following is a FALSE statement about issues/negotiations in the Doha Development agenda?

A) It is intended to deal with economic development issues and trade barriers facing developing countries that were not adequately addressed in the Uruguay Round.

B) Many developing countries are upset with the levels of tariffs and other barriers that industrialized countries use to protect agriculture, clothing and textiles.

C) Industrialized countries want developing countries to reduce their tariffs, which on average are higher than the rates of richer countries.

D) Developing countries don't use tariffs, and they want higher income countries to follow their model.

Answer: D Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 19) Average tariff rates are highest for A) high-income countries.

B) middle-income countries.

C) low-income countries.

D) industrialized countries.

Answer: C Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.4 Use tariff data on inputs and outputs to compare effective and nominal rates of protection.

AACSB: Application of knowledge

6 .

Use the graph below and the following information to answer the next question(s). The world price of soybeans is $2.00 per bushel, and the importing country is small enough not to affect the world price.

Figure 6.1 20) Based on Figure 6.1, suppose the government puts a tariff of $0.25 per bushel on soybean imports. How much will the tariff reduce imports?

A) Imports will decrease by 10 million bushels.

B) Imports will decrease by 20 million bushels.

C) Imports will decrease by 60 million bushels.

D) Imports will not change after the tariff.

Answer: B Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Application of knowledge

7 .

21) Based on Figure 6.1, given a tariff of $0.25 per bushel on soybean imports, how much will domestic production increase?

A) Domestic firms will increase output by 10 million bushels.

B) Domestic firms will increase output by 20 million bushels.

C) Domestic firms will increase output by 70 million bushels.

D) Domestic firms' production will not be changed by the tariff.

Answer: A Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Application of knowledge 22) Based on Figure 6.1, how much revenue will the government raise from a $0.25 per bushel tariff on soybean imports?

A) The government will raise $2.5 million.

B) The government will raise $5 million.

C) The government will raise $15 million.

D) The government will raise $32.5 million.

E) The government will see no increase in income; because the country is small, foreign firms will simply not serve it after the tariff is imposed.

Answer: C Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Application of knowledge 23) Which of the following is FALSE? A) Tariffs are a relatively easy tax to administer and often form an important part of revenue for low-income countries.

B) Taxes on income, sales, and property require more complex accounting systems than do tariffs.

C) Low-income countries often have large informal markets with the sales of many goods and services not being recorded, which makes it difficult to apply many kinds of taxes.

D) Tariffs are not an attractive tax option for most low-income countries, so they mostly rely on quota licenses for revenue.

Answer: D Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge

8 .

24)

The graph above shows supply and demand in the domestic market without trade. Consumer surplus without trade is represented by area A) P1-E-Po B) P1-E-0 C) Po-E-0 D) P1-E-Qo Answer: A Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Analytical thinking

9 .

25)

The graph above shows supply and demand in the domestic market without trade. Producer surplus without trade is represented by area A) P1-E-Po B) P1-E-0 C) Po-E-0 D) P1-E-Qo Answer: B Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Analytical thinking 26) The new GATS and TRIPS are separate agreements negotiated within the WTO framework as part of the Uruguay Round that apply to A) services and transportation.

B) agriculture and textiles.

C) services and intellectual property.

D) textiles and transportation.

Answer: C Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.2 Graphically demonstrate the effects of tariffs and quotas on prices, output, and consumption for small and large countries.

AACSB: Application of knowledge

10 .

27)

The graph above shows domestic supply and demand with trade. With trade, this country can purchase at the world price, Pw. Which of the following areas represents consumer surplus with trade?

A) Pw-A-0 B) Pw-B-Qd-0 C) P1-B-Pw D) P1-B-A-0 Answer: C Topic: Introduction: Tariffs and Quotas Difficulty: Difficult Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Analytical thinking

11 .

28)

The graph above shows domestic supply and demand with trade in a SMALL country. With trade, this country can purchase at the world price, Pw. Suppose that this country imposes a $5 per unit tariff on this good. Which of the following will NOT occur?

A) Government revenue will increase.

B) Domestic consumers will be worse off.

C) Domestic producers will be better off.

D) The gains to the winners will exceed the losses to the losers from the tariff.

Answer: D Topic: Introduction: Tariffs and Quotas Difficulty: Difficult Objective: LO 6.2 Graphically demonstrate the effects of tariffs and quotas on prices, output, and consumption for small and large countries.

AACSB: Analytical thinking

12 .

29)

The graph above shows domestic supply and demand with trade in a SMALL country. With trade, this country can purchase at the world price, Pw. Suppose that this country imposes a $5 per unit tariff on this good. Which of the following is true?

A) The domestic price will rise by $5.

B) Consumers will be better off.

C) There will not be deadweight losses due to this tariff, since it is a small country.

D) Producers will not increase domestic production.

Answer: A Topic: Introduction: Tariffs and Quotas Difficulty: Difficult Objective: LO 6.2 Graphically demonstrate the effects of tariffs and quotas on prices, output, and consumption for small and large countries.

AACSB: Analytical thinking

13 .

30)

The graph above shows domestic supply and demand with trade. With trade, this country can purchase at the world price, Pw. Which of the following areas represents producer surplus with trade?

A) Pw-A-0 B) Pw-B-Qd-0 C) P1-B-Pw D) P1-B-A-0 Answer: A Topic: Introduction: Tariffs and Quotas Difficulty: Difficult Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Analytical thinking 31) Relative to the domestic market without trade, when the country is able to import from abroad at a price less than the domestic price, which of the following will NOT occur?

A) The country will be worse off.

B) CS + PS will increase.

C) Producer surplus will decrease.

D) Consumer surplus will increase.

Answer: A Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Analytical thinking 32) Nontariff barriers to trade are less transparent than tariffs.

Answer: TRUE Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 14 .

33) If the effective rate of protection is greater than the nominal rate of protection, there must be tariffs on intermediate products.

Answer: FALSE Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.4 Use tariff data on inputs and outputs to compare effective and nominal rates of protection.

AACSB: Application of knowledge 34) Since the mid-1980s, tariff rates in most nations have risen.

Answer: FALSE Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.4 Use tariff data on inputs and outputs to compare effective and nominal rates of protection.

AACSB: Application of knowledge 35) Tariff revenue is an important source of operating revenue for many governments of high income countries.

Answer: FALSE Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 36) Deadweight losses are the only potential cost associated with tariffs, which is why they are preferred to quotas.

Answer: FALSE Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 37) The rules for respecting property rights as they relate to trade were negotiated during the Uruguay Round (1986-1994) and culminated in the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement.

Answer: TRUE Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge

15 .

38) How is the Agreement on Textiles and Clothing impacting trade today?

Answer: It phased out quotas as of 2005, but allows for temporary restrictions which the U.S. and EU have used regarding Chinese clothing exports.

Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 39) Why is the Doha Round called the Doha Development Round?

Answer: Because it pays particular attention to the trade issues facing developing countries Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 40) What has been the most significant obstacle to progress in the Doha Round?

Answer: Agriculture and agricultural support policies Topic: Introduction: Tariffs and Quotas Difficulty: Easy Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 41) What are some of the long-run costs of tariffs?

Answer: Increased rent seeking, slower innovation, possible loss of exports due to retaliation Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 42) Developing countries have identified which key issues as important to them in current trade talks?

Answer: The costs and benefits to them of implementing the commitments they made in the Uruguay Round; access to life-saving medicines under the terms of TRIPS is a problem; industrialized countries' protection of sectors such as agriculture, clothing and textiles, that are important to developing countries.

Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge

16 .

43) What do developing countries want regarding agriculture in the Doha Round?

Answer: To limit government practices that block their access to markets or that subsidize production in high income countries Topic: Introduction: Tariffs and Quotas Difficulty: Moderate Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Application of knowledge 44) Draw a graph showing the effects of imposing a tariff in the small country case. Describe the results, using the concepts of producer surplus, consumer surplus and deadweight loss.

Specifically address the effects on consumers, producers, government revenue and overall national well-being, connecting those effects to areas of your graph.

Answer: Students should create a graph similar to Figure 6.3 and to describe results similar to Table 6.1.

Topic: Introduction: Tariffs and Quotas Difficulty: Difficult Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Application of knowledge 45) Carefully explain why tariffs create deadweight losses.

Answer: Tariffs reduce domestic consumption and increase domestic production. This means that some consumers that value this good more than its cost are not able to purchase it, which reduces consumer surplus without benefitting anyone. Likewise, domestic producers increase their production, but their costs are higher than world costs. Thus that additional cost of production does not benefit the producers; it is simply a waste of resources.

Topic: Introduction: Tariffs and Quotas Difficulty: Difficult Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Analytical thinking

17 .

46) Carefully explain how the imposition of a tariff is different for a large country (that can affect the world price) than a small country.

Answer: For a small country, imposition of a tariff unambiguously reduces total benefits to the country. For a large country, the effect is less clear. Since a large country can have an impact on the world price, the reduction in domestic demand due to the tariff may be sufficiently large to cause the world price to fall or to encourage foreign producers to reduce their prices to avoid losing market share. In this case, while domestic producers still gain and domestic consumers still lose, the overall benefits to the country may or may not fall. If the fall in the world price is sufficient, foreign producers are essentially paying for much of the tariff in the form of lower prices, and this gain may exceed the deadweight losses.

Topic: Introduction: Tariffs and Quotas Difficulty: Difficult Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution effects of tariffs and quotas.

AACSB: Analytical thinking 47)

The graph above shows a small country that can import at the world price of Pw. Suppose that the government imposes a tariff of $T per unit (and suppose that this does not raise the domestic price so much that there will be no trade.

Use the graph above to illustrate the effects of the tariff. Show the new areas of consumer surplus, producer surplus, and government revenue, and the deadweight losses due to the tariff.

Who wins and who loses from the tariff?

Answer: See Figure 6.3 in the text. Consumer surplus decreases, producer surplus and government revenue increase, and total surplus falls, since there are deadweight losses.

Consumers lose, producers and the government win, and the country as a whole loses (since there are deadweight losses).

Topic: Introduction: Tariffs and Quotas Difficulty: Difficult Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Analytical thinking

18 .

6.2 Analysis of Quotas 1) In which way are tariffs different from quotas?

A) They reduce the volume of imported products.

B) They raise the price of the imported products to consumers.

C) They increase the domestic quantity supplied of the product.

D) They raise government revenue.

Answer: D Topic: Analysis of Quotas Difficulty: Moderate Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 2) In the case of a small country, consumer surplus A) decreases less with a tariff than with an equivalent quota.

B) decreases less with a quota than with an equivalent tariff.

C) decreases the same with tariffs and equivalent quotas.

D) increases more with quotas.

Answer: C Topic: Analysis of Quotas Difficulty: Moderate Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 3) Which of the following is NOT an expected benefit of reducing nontariff barriers to trade?

A) Fewer firms to compete with B) Lower prices for many goods C) Increase in the volume of exports and imports D) Improved overall economic welfare Answer: A Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 4) In economic terms, tariffs are preferred to quotas because A) domestic manufacturers gain more producer surplus.

B) there is less loss of consumer surplus.

C) quotas create a greater production inefficiency.

D) given the way quotas are usually administered, tariffs cause a smaller net national welfare loss.

Answer: D Topic: Analysis of Quotas Difficulty: Moderate Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 19 .

5) A real cost of tariffs and quotas that is difficult to measure is that they A) encourage rent seeking.

B) shift income from consumers to producers.

C) limit the quantity of imports.

D) reduce wages.

Answer: A Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 6) Which of the following is FALSE? A) At the end of the twentieth century, more and more traded goods and services incorporated specialized knowledge and unique ideas.

B) Pharmaceuticals, computer hardware, telecommunications equipment, and other high technology products are valuable because of the innovation and research they incorporate.

C) Developing countries usually strongly advocate the protection of intellectual property rights.

D) The protection given to creators and innovators varied greatly internationally until standardization began with the signing of the TRIPs agreement.

Answer: C Topic: Analysis of Quotas Difficulty: Moderate Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 7) Which type of restriction on quantity of imports is the most transparent?

A) Quota B) Licensing requirements C) Voluntary export restraints D) Government procurement policies Answer: A Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 8) In the case of a small country, producer surplus A) increases more with a tariff than with an equivalent quota.

B) increases more with a quota than with an equivalent tariff.

C) is not changed by tariffs or quotas.

D) increases the same amount with tariffs and equivalent quotas.

Answer: D Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 20 .

9) Both tariffs and quotas lead to a decrease in imports, a decrease in domestic consumption, and an increase in domestic production.

Answer: TRUE Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 10) Over time, quotas usually lead to larger deadweight losses than tariffs.

Answer: TRUE Topic: Analysis of Quotas Difficulty: Moderate Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 11) Nontariff measures are generally much more difficult to eliminate than tariffs and quotas because they are embedded more deeply in national economic policies.

Answer: TRUE Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 12) An increase in domestic demand for a product protected by a quota results in an increase in producer surplus for domestic firms, while for a tariff it would result in more imports.

Answer: TRUE Topic: Analysis of Quotas Difficulty: Moderate Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 13) Intellectual property rights protection is a critical issue for the pharmaceutical industry among others.

Answer: TRUE Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 14) Internationally, the TRIPS agreement is uniformly regarded as a positive step for world prosperity.

Answer: FALSE Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 21 .

15) What are the three major types of quotas?

Answer: Formal quotas outright limit the quantity of imports; import licenses; voluntary export restraints Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 16) When did intellectual property rights become part of trade agreements?

Answer: Uruguay Round Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 17) What is the name of the agreement related to intellectual property rights?

Answer: TRIPS, or Trade-Related Aspects of Intellectual Property Rights agreement Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 18) Give an example of an industry that would seek intellectual property rights protection because its product incorporates innovation and research.

Answer: Pharmaceuticals, computer hardware, telecommunications equipment, other high technology products Topic: Analysis of Quotas Difficulty: Easy Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 19) What is Joseph Stiglitz's main criticism regarding intellectual property rights protection?

Answer: the enforcement costs it imposes on developing countries Topic: Analysis of Quotas Difficulty: Moderate Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 20) Give an example of a nontariff measure that could reduce the quantity of imports or exports.

Answer: Special fees imposed on importers, burdensome and unnecessary customs procedures, unreasonable technical standards, phony health and safety standards, state trading companies, anticompetitive practices, restrictive government procurement rules, corruption Topic: Analysis of Quotas Difficulty: Moderate Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge 22 .

21) If politicians decide to proceed with protection, why might economists prefer tariffs to quotas? Explain at least three reasons.

Answer: • The greater welfare loss from quotas since quota permits are not generally sold • The inability of quotas to respond to increases in domestic demand except through higher prices and increased producer surplus. With tariffs, the volume of imports simply adjusts to changing market conditions and market prices are less volatile.

• Tariffs are more transparent and probably less costly to administer.

• Tariffs favor the most efficient foreign producers. They don't arbitrarily limit entry or discourage innovation by foreign firms (but they do for domestic firms, meaning we are creating a situation that rewards foreigners for being innovative and efficient, something not in the long run best interests of domestic firms).

Topic: Analysis of Quotas Difficulty: Difficult Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Analytical thinking 22) Describe intellectual property rights. What agreements have been reached regarding their protection? What are the benefits and the costs of protecting intellectual property rights?

Answer: Intellectual property rights included copyright and related rights for literary and artistic work as well as industrial property rights such as trademarks and patents. TRIPS is an international agreement specifying the rules for respecting intellectual property rights as they relate to trade and was reached as part of the Uruguay Round. If intellectual property rights are not protected, it restricts trade flows. Exporters are reluctant to sell into a market if they know their ideas or brand will be stolen or copied by local firms. Research and innovation are more likely because protecting intellectual property gives financial incentives to firms and individuals to do research and continue to innovate. But protecting intellectual property rights means that high costs for enforcement are imposed on developing countries; it is not well established empirically that the benefits of innovation outweigh the costs of access, especially for developing countries that find access to new technology curtailed by having to pay royalties and fees.

Topic: Analysis of Quotas Difficulty: Moderate Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Application of knowledge

23 .

23)

The graph above shows a small country that can import at the world price of Pw and currently imports (Qd-Qs). Suppose that the government imposes quota of 80% of the current import amount (and suppose that this does not raise the domestic price so much that there will be no trade).

Use the graph above to illustrate the effects of the quota. Show the new areas of consumer surplus, producer surplus, and any other relevant areas, and the deadweight losses due to the quota. Who wins and who loses from the tariff?

Answer: See Figure 6.7 in the text. Consumer surplus decreases, and producer surplus increases, and total surplus falls, since there are deadweight losses. Consumers lose, producers win, and the country as a whole loses (since there are deadweight losses. The unclear piece of this analysis is what happens to the area that would have represented tariff revenue, for an equivalent tariff (area c in Figure 6.7). If the government auctions import licenses, this area goes to the government, and there is no difference from the analysis of a tariff. If import licenses are distributed to foreign producers, then area c is a loss to the domestic economy (although not to the world economy.

Topic: Analysis of Quotas Difficulty: Difficult Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and producer surplus.

AACSB: Analytical thinking 24) Use a graph to demonstrate why quotas are likely to cause increased deadweight losses over time.

Answer: Over time, demand for most goods rises, as populations increase (as well as for other reasons). The graph should show an increase in demand, given a constant quota amount. Since the quota does not change, the effect of the quota will be to raise price even more than previously. This increases the size of the deadweight loss due to underconsumption of the good and increase the deadweight loss due to domestic overproduction.

Topic: Analysis of Quotas Difficulty: Difficult Objective: LO 6.5 Compare and contrast quotas and tariffs.

AACSB: Analytical thinking 24 .

International Economics, 7e (Gerber) Chapter 7 Commercial Policy 7.1 Introduction: Commercial Policy, Tariffs, and Arguments for Protection 1) Sixty years after the signing of GATT and following eight completed round of trade negotiations, A) trade barriers are no longer an issue.

B) trade barriers have been successfully reduced.

C) trade barrier have actually increased.

D) there has been no real change in trade barrier.

Answer: B Topic: Introduction: Commercial Policy, Tariffs, and Arguments for Protection Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 2) Which of the following is NOT a true statement?

A) Trade barriers are usually a good way of protecting jobs.

B) There have been significant reductions in trade barriers over the last 60 years.

C) Economists generally favor further reductions in trade barriers.

D) There are diminishing returns to trade negotiations.

Answer: A Topic: Introduction: Commercial Policy, Tariffs, and Arguments for Protection Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 3) The system of trade rounds under GATT and the WTO has been successful at creating trade rules and reducing trade barriers.

Answer: TRUE Topic: Introduction: Commercial Policy, Tariffs, and Arguments for Protection Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 4) Since there are diminishing returns to the removal of further trade barriers, economists do not favor further negotiations.

Answer: FALSE Topic: Introduction: Commercial Policy, Tariffs, and Arguments for Protection Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge

1 .

7.2 Tariff Rates in the World's Major Traders 1) The pattern of protection in industrial countries is particularly harmful to the interests of A) low-income developing countries.

B) high-income industrial countries.

C) Asian nations.

D) European nations.

Answer: A Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 2) High-income industrial nations such as the United States and Japan tend to have their highest tariffs in A) newer, high-technology manufacturing industries.

B) capital-intensive, diversified manufacturing.

C) agriculture, clothing, and textiles D) automobiles.

Answer: C Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 3) At the end of World War II, A) tariffs around the world fell substantially.

B) agricultural subsidies were significantly reduced.

C) most nations began to apply tariffs uniformly across all industries.

D) tariffs increased in low-income countries and fell a small percentage in high-income countries.

Answer: A Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 4) Tariffs are highest in which sector internationally?

A) Agriculture B) Energy C) Technology D) Automobiles Answer: A Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 2 .

5) Developed countries have lost comparative advantage in A) high-tech industries.

B) labor-intensive industries.

C) capital-intensive industries.

D) agricultural industries.

Answer: B Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 6) At this point, potential gains from further tariff reductions worldwide are A) still very large.

B) equal to zero.

C) relatively small.

D) not worth the cost of negotiations.

Answer: C Topic: Tariff Rates in the World's Major Traders Difficulty: Moderate Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 7) Countries like Argentina and Australia protect agriculture less heavily than other agricultural producers because A) they have a large comparative advantage in production.

B) it is illegal under WTO rules.

C) they do not have significant agricultural sectors.

D) they are trying to help other countries.

Answer: A Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 8) The average agricultural tariff in the U.S. is about A) 3 percent.

B) 5 percent.

C) 9 percent.

D) 15 percent.

Answer: B Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge

3 .

9) The average nonagricultural tariff in the U.S. is about A) 3 percent.

B) 5 percent.

C) 9 percent.

D) 15 percent.

Answer: A Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 10) The WTO's Doha Development Agenda is only considering market access issues in agriculture, such as tariffs and quotas, because export subsidies and production subsidies are considered less harmful and have not been part of the GATT or WTO agenda.

Answer: FALSE Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 11) Tariffs are higher in agriculture than any other sector in most countries.

Answer: TRUE Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 12) Large and efficient agricultural producers like Argentina and Australia protect that sector heavily.

Answer: FALSE Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 13) Developed countries have lost comparative advantage in textiles and apparel.

Answer: TRUE Topic: Tariff Rates in the World's Major Traders Difficulty: Easy Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge

4 .

14) Explain how potential gains from further reductions in tariff levels are different from the gains of the past.

Answer: It is likely that tariff cuts have diminishing marginal returns, so that each successive round of cuts leads to a smaller gain than the cuts before, and thus it is reasonable to guess that future cuts are not likely to have a large impact on world trade and income. While it is difficult to measure the gains from tariff reduction precisely, the value of the Doha Round of trade negotiations were estimated to be in the range of 0.1 percent to 0.5 percent of world GDP. This is certainly far smaller than the gains that relatively closed economies experienced when they opened their markets to trade.

Topic: Tariff Rates in the World's Major Traders Difficulty: Moderate Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 15) Why do both developed and less-developed countries protect clothing and textiles heavily?

Answer: For developed countries, comparative advantage has been lost in these labor-intensive industries. For less-developed countries, these are major export sectors that also have a significant domestic market share, and so it is desirable to protect domestic markets while exporting these goods (in which they have a comparative advantage).

Topic: Tariff Rates in the World's Major Traders Difficulty: Moderate Objective: LO 7.1 Describe the differences in tariffs across economic sectors and over time.

AACSB: Application of knowledge 7.3 The Costs of Protectionism 1) One reason why consumers are unlikely to be too upset about tariffs is because A) most consumers benefit from protection.

B) tariffs are an inexpensive way to create jobs.

C) consumer losses are not real losses.

D) the costs are so spread out that no one pays a big share of the total.

Answer: D Topic: The Costs of Protectionism Difficulty: Moderate Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge

5 .

2) One reason why producers have an incentive to organize in favor of protection is because A) producer gains are spread across so many firms that no one gets a large share of the benefits.

B) producer gains are relatively concentrated.

C) there is no real cost to the economy.

D) producer gains outweigh consumer losses.

Answer: B Topic: The Costs of Protectionism Difficulty: Moderate Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 3) Which of the following is FALSE? A) The analysis of agriculture, textiles, and clothing in the EU, the United States, and Japan supports the proposition that older sectors of the economy are most protected, particularly in cases where the nation has lost a substantial part of its comparative advantage.

B) Even when tariffs are relatively low, the cost per job saved tends to be high.

C) Commercial policy is grossly inefficient at achieving the objective of job preservation.

D) Trade barriers in high-income countries do not cause unintended consequences in low-income countries because most of their trade is with other industrialized countries.

Answer: D Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 4) Agriculture, clothing, and textiles are singled out for treatment in the chapter because A) they tend to be the most highly protected sectors of industrial economies.

B) they tend to be the most-protected sectors internationally.

C) the policies of high-income nations in these sectors may have beneficial effects in low-income countries.

D) they are more important to job creation than other sectors.

Answer: A Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.

AACSB: Application of knowledge

6 .

5) Which of the following is NOT a reason people tolerate tariffs and quotas?

A) Their jobs depend on tariffs and quotas.

B) Costs may be hidden and hard to quantify.

C) Costs of the policy are spread over a large number of people.

D) The marginal expenses to fight the protection outweigh the personal marginal costs of the protection.

Answer: A Topic: The Costs of Protectionism Difficulty: Moderate Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 6) Which of the following describes the asymmetry Mancur Olson observed in the incentives to support and oppose trade policy?

A) The benefits of those seeking protection outweigh the costs imposed by the protection.

B) The benefits of protection are spread out over a large number of firms and industries, but the costs are concentrated on consumers.

C) The benefits of policy are concentrated, and the costs are spread out over a large number of participants.

D) The costs of protection are concentrated on a few firms, and the benefits of protection are spread out over a large number of consumers.

Answer: C Topic: The Costs of Protectionism Difficulty: Moderate Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.

AACSB: Application of knowledge 7) During the 1930s, countries closed markets. The effect of these policies was that A) export industries were better off in most countries.

B) import-competing industries did not gain.

C) the reduction in trade worsened the Great Depression.

D) consumers were better off.

Answer: C Topic: The Costs of Protectionism Difficulty: Moderate Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.

AACSB: Application of knowledge

7 .

8) Economists believe that there are many nonmonetary gains from further trade opening. Which of the following is NOT one of those potential gains?

A) Economies of scale from increased production decreases costs.

B) Intensified competition lowers prices.

C) Governments will be less reliant on tariff revenue.

D) Diversification of production lowers risks.

Answer: C Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.

AACSB: Application of knowledge 9) Deadweight losses from tariffs and quotas in high-income countries A) are small enough to be ignored.

B) have been reduced since the mid-1990s.

C) are greater than consumer losses from tariffs and quotas.

D) can be justified by jobs protected.

Answer: B Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.

AACSB: Application of knowledge 10) During the 1990s, deadweight losses per job saved through tariffs and quotas in the apparel industry A) were greater than the wages earned in apparel jobs.

B) were small enough to ignore.

C) were less than the value of the jobs saved.

D) increased net national welfare.

Answer: A Topic: The Costs of Protectionism Difficulty: Moderate Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.

AACSB: Application of knowledge 11) Which of the following is NOT an issues in the reduction of trade protection in agriculture?

A) consumption subsidies.

B) tariffs and quotas.

C) export subsidies.

D) production subsidies.

Answer: A Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 8 .

12) Direct subsidies to agriculture, whether they are export subsidies or production subsides, are viewed as harmful because of all the following reasons EXCEPT A) they lead to overproduction.

B) they crowd out imports.

C) they can lead to dumping of surplus production.

D) they encourage overconsumption through low market prices.

Answer: D Topic: The Costs of Protectionism Difficulty: Moderate Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 13) Some economists argue that free trade is beneficial regardless of the actions of a country's trading partners, including trading partners that heavily protect their home markets.

Answer: TRUE Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.

AACSB: Application of knowledge 14) Australia has one of the most heavily subsidized agricultural sectors as a percentage of domestic GDP. Answer: FALSE Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 15) Trade barriers are an expensive and inefficient way to reach most of the goals for which they are used.

Answer: TRUE Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 16) There are asymmetric incentives to support and to oppose protectionist trade policies, with the stronger incentives going to those that would seek protection.

Answer: TRUE Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.

AACSB: Application of knowledge 9 .

17) In the global recession of 2007-2009, world trade declined because nations closed their markets to trading partners.

Answer: FALSE Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 18) Further trade opening is beneficial even if the monetary value of the gains is not high.

Answer: FALSE Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 19) U.S. sugar quotas cost each person in the U.S. thousands of dollars per year due to higher prices.

Answer: FALSE Topic: The Costs of Protectionism Difficulty: Easy Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 20) How did the Uruguay Round of GATT impact agriculture?

Answer: Many quotas were converted to tariffs; many industrial countries agreed to reduce their direct support of the farm sector Topic: The Costs of Protectionism Difficulty: Moderate Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.

AACSB: Application of knowledge 21) Describe some of the gains from lowering trade barriers that may be difficult to measure.

Answer: Cost savings from scale economies and intensified competition, product differentiation, spreading risks, gaining new knowledge, etc.

Topic: The Costs of Protectionism Difficulty: Moderate Objective: LO 7.2 Cite at least three reasons why economists favor trade openings.

AACSB: Application of knowledge

10 .

22) Carefully explain why agricultural subsidies are viewed as harmful.

Answer: Direct subsidies are viewed as harmful because they lead to overproduction, squeeze out imports, and in some cases result in the dumping of the surplus product in foreign markets.

Topic: The Costs of Protectionism Difficulty: Moderate Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 23) Agricultural subsidies are known to cause overproduction and create other problems. Are there benefits from such subsidies? Explain.

Answer: Subsidies given by high-income countries to support their farmers will lead to cheaper world food prices, all other factors being equal. This benefits some countries where there is a large urban working class. For example, many young Chinese farmers have migrated to the cities where they work in factories. Given that the productivity of these individuals in agriculture is very low, the country as a whole gains when they become city dwellers and factory workers, while cheaper food makes life easier and raises living standards. As a result, agricultural subsidies in high-income countries benefit China and some other developing countries. Also, countries often have cultural reasons to protect agriculture, including its role in the history of the country and worries about self-sufficiency.

Topic: The Costs of Protectionism Difficulty: Difficult Objective: LO 7.3 Explain why costs to consumers of a tariff or quota are greater than the net welfare costs to a nation.

AACSB: Application of knowledge 7.4 Why Nations Protect Their Industries 1) To be effective, infant industry protection requires A) a national security externality.

B) to be extended indefinitely.

C) to be fair to existing producers.

D) a technology externality.

Answer: D Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Application of knowledge

11 .

2) Historically, one of the most common reasons for countries to impose tariffs was A) to protect their national security.

B) to raise revenue for the government.

C) to eliminate unemployment.

D) to counter inflation.

Answer: B Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Application of knowledge 3) The biggest flaw in the logic of the labor argument is the failure to consider A) the needs of developing countries.

B) the impact of tariffs on inflation.

C) the differences in national productivity levels.

D) the impact on employment levels.

Answer: C Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Analytical thinking 4) When comparing the U.S. and Mexican car assembly industries, the disadvantage of higher U.S. wages is offset by A) Mexican trade barriers.

B) trade adjustment assistance in the United States.

C) higher productivity in the United States.

D) a lower opportunity cost in Mexico.

Answer: C Topic: Why Nations Protect Their Industries Difficulty: Moderate Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Application of knowledge 5) If a nation protects an industry because it believes that there are positive externalities in the production process, it is asserting that the free market will A) produce less than is optimal from society's point of view.

B) produce more than is optimal from society's point of view.

C) produce the correct amount but charge too high a price.

D) produce the correct amount but charge too low a price.

Answer: A Topic: Why Nations Protect Their Industries Difficulty: Moderate Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Analytical thinking

12 .

6) A major difficulty with the infant industry argument for protection is that A) government revenue will fall with a tariff.

B) it requires the nation to fall into the large country case for tariff protection.

C) effective rates of protection are usually greater than nominal rates.

D) the measurement of production externalities is difficult and uncertain.

Answer: D Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Analytical thinking 7) Some economists suggest the optimal way for a nation to protect its access to a strategic mineral is with A) an infant industry tariff.

B) a high rate of effective protection to keep local mines in business.

C) a quota on imports of the mineral.

D) a stockpile.

Answer: D Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Application of knowledge 8) Economic sanctions A) usually work to create policy change in the targeted country.

B) are more likely to work if the international community supports them.

C) are more likely to work if military force is not used.

D) never work to create policy change in the targeted country.

Answer: B Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Application of knowledge 9) If a large percentage of economic activity in developing countries is unrecorded, then the countries are likely to rely on which of the following taxes to provide government revenue?

A) Sales taxes B) Property taxes C) Income taxes D) Tariffs Answer: D Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Application of knowledge

13 .

10) "Cheap foreign wages" is a poor argument for protection because it fails to recognize the importance of productivity. Which of the following does NOT contribute to increasing productivity?

A) Education and training B) Government subsidies C) Infrastructure D) Capital Answer: B Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Application of knowledge 11) Television programming might be targeted for protection in a country using which of the following arguments?

A) Infant industry B) National security C) Labor argument D) Cultural protection Answer: D Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Application of knowledge 12) It seems likely that economic sanctions ultimately would have led to regime change in Iraq.

Answer: FALSE Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Analytical thinking 13) The more difficult the goal, the more likely military force is going to be needed to back up economic sanctions.

Answer: TRUE Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Analytical thinking 14) Because low tariffs have a high ratio of benefits to costs, they are an especially efficient way for nations to achieve full employment and growth.

Answer: FALSE Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Application of knowledge 14 .

15) Protection in the form of tariffs or quotas is a very inefficient tool for job creation and preservation.

Answer: TRUE Topic: Why Nations Protect Their Industries Difficulty: Easy Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Application of knowledge 16) Choose one of the arguments countries generally use to justify protection for a particular industry. Describe the argument and any inherent problems with it. Is the argument primarily an economic or a noneconomic one?

Answer: The revenue argument says that for low income nations and developing nations it is an easy tax to administer.

The Labor Argument is an economic argument about jobs, but fails to recognize the importance of productivity rather than nominal wages.

The Infant Industry argument is an economic argument, but is often misapplied. The protection makes firms less likely to be efficient and encourages devoting resources to rent seeking.

The national security argument is a noneconomic argument. The problem is largely deciding which products are critical and the encouragement of rent-seeking.

The cultural protection argument says that an industry is valuable for preserving heritage or culture.

The retaliation argument is an economic argument about how to respond to trade barriers but there is not agreement about the harm caused by foreign trade barriers.

Topic: Why Nations Protect Their Industries Difficulty: Moderate Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Analytical thinking 17) Critique the infant industry or the labor argument for protection.

Answer: Critique of the labor argument largely rests on the confusion between nominal wage rate differences and productivity wages.

Critique of the infant industry argument is based on 1) the rent seeking and misapplication of what it means to be an "infant" industry, 2) the government's ability to correctly identify such industries vs. the market's ability to do so, 3) the protection creates disincentives for efficiency and low-cost production.

Topic: Why Nations Protect Their Industries Difficulty: Moderate Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Analytical thinking

15 .

18) Describe traditional knowledge and how it relates to current trade issues about intellectual property rights protection.

Answer: Traditional knowledge is often embedded in cultural practices and every day activities of traditional societies and indigenous communities. It includes their knowledge of plants, animals, and the natural world, which has been gathered over generations. When that knowledge is expropriated and used by outsiders without recognition of its origin, it is not only unfair to the originators of that knowledge but also has the potential to harm them. For example, researchers may collect natural samples shown to them by traditional healers, isolate the key compounds in their laboratories, patent a new pharmaceutical or other product, and ignore the interests of the traditional community or the nation where they live.

Topic: Why Nations Protect Their Industries Difficulty: Moderate Objective: LO 7.4 Analyze the economic validity of common justifications for protectionism.

AACSB: Application of knowledge 7.5 The Politics of Protection in the United States 1) A countervailing duty is a tariff that is levied to counteract A) the dumping of goods in the domestic market by foreign firms.

B) a sudden surge of imports which hurt a domestic industry.

C) subsidies given to foreign firms by their own governments.

D) low prices for imported goods that are made in countries with low wages.

Answer: C Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 2) Dumping occurs when a firm A) sells too much of a good in a foreign country.

B) sells in a foreign country at prices that are below fair value.

C) sells in its home market at prices that are below the average price charged by its competitors.

D) sells in a foreign market at prices that are below the prices charged by firms based in the foreign market.

Answer: B Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge

16 .

3) If a country faces action under Section 301 of the U.S. Trade Act of 1974, it means that the country has A) exceeded average export growth by more than 50 percent.

B) tariffs that are above the legal limit.

C) been charged by the United States with systematically engaging in unfair trade practices.

D) been charged by the WTO with violating its trade obligations.

Answer: C Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 4) Predatory dumping occurs when A) foreign firms sell below cost with the intent to drive firms out of the domestic market.

B) foreign firms sell below cost because the product is perishable.

C) foreign firms sell at a price that is below the price of domestic firms.

D) foreign firms sell at a price that covers the cost of their variable inputs.

Answer: A Topic: The Politics of Protection in the United States Difficulty: Moderate Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 5) Which of the following is an example of a countervailing duty?

A) A tariff is granted because foreign firms are selling below cost.

B) A temporary tariff is granted to allow for adjustment of the domestic industry.

C) A tariff is granted to an industry because foreign firms are subsidized by their governments.

D) A tariff is granted to an industry because another nation persistently uses unfair trade practices.

Answer: C Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 6) Which of the following is an example of an antidumping duty?

A) A tariff is granted because foreign firms are selling below cost.

B) A temporary tariff is granted to allow for adjustment of the domestic industry.

C) A tariff is granted to an industry because foreign firms are subsidized by their governments.

D) A tariff is granted to an industry because another nation persistently uses unfair trade practices.

Answer: A Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 17 .

7) Which of the following is an example escape clause relief?

A) A tariff is granted because foreign firms are selling below cost.

B) A temporary tariff is granted to allow for adjustment of the domestic industry.

C) A tariff is granted to an industry because foreign firms are subsidized by their governments.

D) A tariff is granted to an industry because another nation persistently uses unfair trade practices.

Answer: B Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 8) Which of the following is NOT a true statement about economic sanctions?

A) Economic sanctions are aimed at broad policy objectives, such as the end of apartheid.

B) Economic sanctions can seriously harm the economy of a country on which they are imposed.

C) Economic sanctions are usually effective in achieving policy goals.

D) Economic sanctions may not be sufficient to achieve policy goals without military force or other measures.

Answer: C Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 9) Section 301 actions are more frequently used as a tool of trade policy, especially since the formation of the World Trade Organization.

Answer: FALSE Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 10) The most common form of tariff is a countervailing duty.

Answer: FALSE Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 11) Antidumping duties cannot be levied when the harm to domestic industries is very small.

Answer: TRUE Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge

18 .

12) The fair value of a good is not a subjective measure.

Answer: FALSE Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 13) In the United States, which part of government investigates claims of subsidies or dumping?

Answer: The International Trade Administration in the Department of Commerce Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 14) In the United States, which agency determines whether domestic firms have been harmed by subsidies and dumping or by a sudden surge in imports and whether protection is warranted?

Answer: The United States International Trade Commission Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 15) Under Special 301, what is the U.S. government required to do?

Answer: Monitor intellectual property right enforcement around the world Topic: The Politics of Protection in the United States Difficulty: Easy Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge 16) Describe the four legal procedures available to U.S. firms to seek protection from foreign competition. What circumstances would warrant a request under each? How frequently is each used? What would be the result if the firm won?

Answer: Countervailing duties are granted in response to foreign subsidies.

Anti-dumping duties are granted in response to imports being sold at "unfair" prices or dumping.

Escape clause relief is granted as a temporary protection against a sudden surge in imports.

Section 301 retaliation is used to unilaterally punish a nation for "unfair" trade.

Generally, tariffs are imposed if a firm is successful in its appeal for subsidies, dumping, or escape clause relief. Section 301 is likely to be a broader response to a country's practices. Antidumping duties are the most common today.

Topic: The Politics of Protection in the United States Difficulty: Moderate Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Application of knowledge

19 .

17) Why is it difficult to determine whether a country is dumping? Explain fully.

Answer: According to the WTO rules, dumping occurs when an exporter sells a product at a price below what it charges in its home market. It is not always possible to compare the home market and foreign market prices, however, and wholesalers, transportation costs, and other price add-ons may limit the comparison's usefulness. Two other measures may be used. Comparisons can be made between the price in the import market and either the price charged in third-country markets, or to an estimate of the cost of production. Comparison to prices in third-country markets is similar to that between prices in the exporter's home market and the importer's market, and it may be uninformative for the same reasons. A comparison of the import price and the estimated cost of production, including a normal rate of return on invested capital, assumes that production costs in an exporting country can be measured with accuracy. Thus it is difficult to determine when a country is dumping, and many elements of this determination are somewhat subjective.

Topic: The Politics of Protection in the United States Difficulty: Difficult Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Analytical thinking 18) Carefully explain why political pressure to protect industry has often been intense in the United States.

Answer: There are many reasons why political pressure to protect industry is intense. One reason is that Congressional reforms removed some of the insulation from industry lobbyists that Congress enjoyed in the 1950s and 1960s. Another reason stems from the end of the Cold War and the lessening of U.S. willingness to sacrifice trade issues for the sake of maintaining close geopolitical alliances. A third reason is the rise of the export-oriented East Asian newly industrializing countries (NICs), including China, and the pressure they have put on a number of domestic U.S. industries. Finally, the growth of the U.S. trade deficit and the widespread fear in the 1980s that the United States had lost its competitive edge also contributed to a greater reluctance to open U.S. markets without reciprocity by other countries. More recently, the rapid increase of the U.S. trade deficit and the loss of manufacturing jobs since 2000 are conditions likely to bring back the competition fears of the 1980s. For each of these reasons, trade conflicts have intensified.

Topic: The Politics of Protection in the United States Difficulty: Difficult Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Analytical thinking 19) Are economic sanctions usually effective in achieving policy goals? Explain.

Answer: Table 7.5 in the text presents evidence that economic sanctions are successful in achieving policy goals in, at best, only perhaps half of the time. While economic sanctions can seriously harm the economy of a country on which they are imposed, that alone may not be sufficient to achieve the policy goal, especially if that goal is difficult, such as regime change or major policy changes.

Topic: The Politics of Protection in the United States Difficulty: Difficult Objective: LO 7.5 Define each form of legal protection granted by the U.S. government.

AACSB: Analytical thinking 20 .

International Economics, 7e (Gerber) Chapter 8 International Trade and Labor and Environmental Standards 8.1 Introduction: Income and Standards 1) All of the following are responsible for the removal of the formal trade barriers EXCEPT A) the General Agreement on Tariffs and Trade (GATT).

B) the World Trade Organization (WTO).

C) regional trade agreements such as NAFTA. D) the World Bank and the IMF. Answer: D Topic: Introduction: Income and Standards Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 2) Monopoly powers given to domestic utility companies to create economies of scale might unintentionally A) be an obstacle to increased international trade.

B) be useful for the creation of a comparative advantage for the domestic country.

C) not be used for rent-seeking behaviors.

D) be a positive externality for the world as a whole.

Answer: A Topic: Introduction: Income and Standards Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 3) Which of the following is NOT an obstacle to increased international economic integration?

A) Monopoly powers given to domestic companies of individual nations B) High tariff rates imposed by industrialized nations C) Health and safety standard requirements D) Labor and environmental standard requirements Answer: B Topic: Introduction: Income and Standards Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge

1 .

4) Greater specialization within a country A) increases risks to the country.

B) is rarely beneficial.

C) creates winners and losers and raises issues about fairness.

D) evenly distributes benefits in the long run.

Answer: C Topic: Introduction: Income and Standards Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 5) Which of the following is a true statement about obstacles to increased economic integration?

A) Countries generally agree about appropriate environmental standards.

B) Domestic policies do not affect international trade.

C) Production changes due to trade redistribute income fairly.

D) Adopting common standards gives an advantage to firms that already meet those standards.

Answer: D Topic: Introduction: Income and Standards Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 6) Domestic policies can have unintended effects on international trade.

Answer: TRUE Topic: Introduction: Income and Standards Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 7) Health and safety standards are generally similar in most countries.

Answer: FALSE Topic: Introduction: Income and Standards Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 8) Many conflicts over standards result from the differences in income between countries.

Answer: TRUE Topic: Introduction: Income and Standards Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge

2 .

9) What are two main obstacles to increased international integration?

Answer: Laws and regulations adopted strictly for domestic reasons that unintentionally limit international commerce when economies become more integrated, and conflicts over standards Topic: Introduction: Income and Standards Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 10) Why does a country's increased specialization due to trade raise issues of fairness?

Answer: Comparative advantage based trade causes a nation to shift its production mix in order to produce relatively more of the export good. As discussed in previous chapters, this raise the return to the factor of production that is used intensively and lowers the return to the other factor(s). This in turn increases national income but also redistributes it. This means that there are both winners and losers, and thus there are issues as to fairness.

Topic: Introduction: Income and Standards Difficulty: Moderate Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Analytical thinking 8.2 Setting Standards: Harmonization, Mutual Recognition or Separate?

1) Harmonization of standards refers to A) the elimination of tariffs and quotas by trading partners.

B) common product safety, environment, labor, and fair competition standards agreed upon by trading partners.

C) the acceptance or keeping of a trading partner's standards as valid and sufficient by another trading partner.

D) separate standards held by different trading partners which other partners refuse to recognize.

Answer: B Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 2) Mutual recognition of standards refers to A) the elimination of tariffs and quotas by trading partners.

B) common product safety, environment, labor, and fair competition standards agreed upon by trading partners.

C) the acceptance of a trading partner's standards as valid and sufficient by another trading partner.

D) separate standards held by different trading partners which other partners refuse to recognize.

Answer: C Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 3 .

3) Separate standards refers to A) the elimination of tariffs and quotas by trading partners.

B) common product safety, environment, labor, and fair competition standards agreed upon by trading partners.

C) the acceptance of a trading partner's standards as valid and sufficient by another trading partner.

D) standards held by different trading partners which other partners refuse to recognize.

Answer: D Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 4) Most regional trade and WTO agreements practice A) the harmonization standards only.

B) separate standards only.

C) mutual recognition standards only.

D) a combination of harmonization, mutual recognition, and separate standards.

Answer: D Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 5) When the evolution of new technologies is unknown, or it is unclear which country has the "best" rules for standards, the adoption of ________ is the superior option.

A) a harmonization of standards B) separate standards C) mutual recognition standards D) larger country standards Answer: C Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge

4 .

6) All of the following are reasons countries may be unable to use discriminatory trade practices to enforce labor standards EXCEPT A) countries can never impose trade barriers on other sovereign nations.

B) the WTO requires nations to treat other nations the same.

C) a single country may be unsuccessful in convincing members of its trading block to participate in imposing the sanctions.

D) retaliation or a full blown trade war might result.

Answer: A Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 7) Domestic firms operating abroad may find it economically beneficial to adopt environmentfriendly standards because A) foreign nations may be upset if firms do not use the environment-friendly technology.

B) the least-cost strategy usually involves the adoption of one set of environment-friendly technology rather than multiple standards.

C) they may be forced to replace the old technology whenever the foreign country experiences positive economic development.

D) their environment-unfriendly technology may be replaced by foreign-based technology.

Answer: B Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.2 Give examples of the relationship between income levels and environmental and labor problems.

AACSB: Application of knowledge 8) Requiring a firm with international operations to follow the standards of its home country instead of those of the foreign country has all of the following advantages EXCEPT A) it takes care of the fear of a race-to-the-bottom by making it impossible for a home-based company to exploit low standards.

B) it shifts the costs of improved standards to firms and consumers in high-income countries.

C) it avoids the problems of high-income countries dictating what standards are to be used. In this situation, firms that cross national boundaries must conform to whichever standards are higher.

D) it is a comprehensive measure, since it addresses the problem of production in foreign firms as well as firms from high-standards countries that relocate abroad.

Answer: D Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Moderate Objective: LO 8.2 Give examples of the relationship between income levels and environmental and labor problems.

AACSB: Application of knowledge

5 .

9) Which of the following is true?

A) Generally, the lower the country's average income, the less administrative, scientific, and technical capacity it has to design and enforce standards.

B) National priorities do not change as income changes—countries of all income levels seem to share the same priorities and values.

C) Differences in income are always an obstacle to the harmonization of standards.

D) The adoption of a common set of rules usually narrows the market and raises prices.

Answer: A Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Moderate Objective: LO 8.2 Give examples of the relationship between income levels and environmental and labor problems.

AACSB: Application of knowledge 10) Which of the following is FALSE? A) Most of the world's population lives in countries classified as low- or lower-middle income.

B) All labor and environmental conditions improve with income growth.

C) Percentage wise, more children work in low-income countries than in higher income countries.

D) With such large income differences internationally, it is not surprising that there are very large differences in most social, economic, and environmental indicators.

Answer: B Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.2 Give examples of the relationship between income levels and environmental and labor problems.

AACSB: Application of knowledge 11) Race to the bottom refers to which of the following?

A) Firms have an incentive to relocate to countries with lower standards.

B) Countries have an incentive to conform to the standards of the lowest income country.

C) Countries will compete with each other to offer incentives to firms.

D) Firms will underpay workers in low income countries.

Answer: A Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Moderate Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge

6 .

12) Harmonization of standards A) is costly for high income countries.

B) can reduce firm costs.

C) is less difficult for dissimilar countries.

D) is part of the race to the bottom.

Answer: B Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 13) Imposing the same standards on high- and low-income countries can be a problem because A) it widens the market and lowers prices.

B) there are no economies of scale for low-income countries.

C) high-income countries have few environmental problems.

D) low-income countries may have less ability to enforce standards.

Answer: D Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.2 Give examples of the relationship between income levels and environmental and labor problems.

AACSB: Application of knowledge 14) As national income rises, A) water problems are eliminated.

B) infant mortality falls.

C) emissions from fossil fuels decrease.

D) depletion of forest reserves increases at an increasing rate.

Answer: B Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.2 Give examples of the relationship between income levels and environmental and labor problems.

AACSB: Application of knowledge 15) Harmonization of standards A) can make it less costly for exporting firms to produce.

B) is easy to agree on.

C) is not possible for countries of different income levels.

D) is required under WTO rules.

Answer: A Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge

7 .

16) Low-income countries are largely responsible for excess carbon dioxide emissions globally.

Answer: FALSE Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 17) Mutual recognition is more efficient than other approaches to setting standards.

Answer: FALSE Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 18) Lower income countries may have more difficulties in enforcing standards.

Answer: TRUE Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 19) Harmonization of standards can institutionalize a set of inferior standards.

Answer: TRUE Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 20) What environmental problem gets worse as income rises according to your text?

Answer: Carbon dioxide emissions Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Easy Objective: LO 8.2 Give examples of the relationship between income levels and environmental and labor problems.

AACSB: Application of knowledge

8 .

21) Suppose two nations are seeking to expand their commercial relations. What options do they have in terms of addressing conflicts in standards? Describe each and what conditions might favor different approaches to setting standards.

Answer: With harmonization of standards, the nations create a mutually acceptable common standard. With mutual recognition of standards, each nation keeps its own standards, but accepts the other nation's standard as equally valid and acceptable. With separate standards, each nation keeps its own standards, and any products flowing into the nation must meet that nation's individual standards. Adoption of a common set of standards gives a competitive advantage to firms that are already producing to that standard. Wide variation in world incomes means that economic conditions and living standards are vastly different between low-income and highincome countries, which might make separate standards a better choice. Sharing standards creates a larger, more unified market and creates greater efficiency. If, however, an inferior standard is adopted, it might lock in place a less efficient solution and harm future development.

It may also be difficult for low-income countries to have the administrative, scientific, and technological capacity to design and enforce standards, much less have the same priorities as high-income countries.

Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Moderate Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 22) Describe the connections between rising income and environmental and social indicators.

Which indicators improve and which worsen as national income rises?

Answer: Carbon dioxide emissions get worse as income rises; access to safe drinking water improves. Child mortality and child labor both decrease as national income rises. Other indicators are more mixed. Deforestation occurs more in low- and upper-middle income countries, while lower-middle countries have deforestation but less than the upper middle income group, and high-income countries both experience reforestation.

Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Moderate Objective: LO 8.2 Give examples of the relationship between income levels and environmental and labor problems.

AACSB: Application of knowledge 23) Explain the three options for setting standards in trade rules.

Answer: Harmonization of standards refers to the case where two or more countries share a common set of standards in an area of concern, such as product safety, labor, environment, fair competition, and so on. Another option is mutual recognition of standards, in which countries keep their own product and process standards, but accept the standards of others as equally valid and sufficient. A third option is separate standards. In this case, countries keep their own standards and refuse to recognize those of anyone else.

Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Moderate Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 9 .

24) Explain how harmonization of standards might increase productive efficiency.

Answer: The harmonization of technical standards having to do with product design or performance can create greater efficiency since firms have to consider only one set of standards, reducing the costs of making modifications for different markets.

Topic: Setting Standards: Harmonization, Mutual Recognition, or Separate?

Difficulty: Moderate Objective: LO 8.1 Compare and contrast the three options for setting standards in trade rules.

AACSB: Application of knowledge 8.3 Labor Standards 1) The race-to-the-bottom concept described in the text refers to A) the situation in which countries with high standards are forced to lower their standards or face the loss of jobs and industry.

B) the situation in which human rights are not respected by trading countries.

C) adopting the standards of a few selected middle-income and high-income countries.

D) the use of low per-capita income as a means of comparing the well-being of individuals.

Answer: A Topic: Labor Standards Difficulty: Easy Objective: LO 8.3 Define labor standards.

AACSB: Application of knowledge 2) The use of trade barriers to enforce standards abroad raises all of the following concerns EXCEPT A) the potential deadweight losses in consumption and production at home.

B) the potential for the use of trade barriers to erupt into a bigger trade war.

C) the difficulty of knowing whether some of the concerns are over standards or are veiled protectionism.

D) only small countries may be able to use trade barriers effectively.

Answer: D Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge

10 .

3) Developing countries are usually unwilling to negotiate over labor standards because A) the WTO always tends to rule in favor of industrialized nations.

B) they fear that industrialized nations are trying to undermine their comparative advantage— production of agriculture and textiles/apparel—and close the markets of high-income countries in these areas.

C) they fear that they may be unable to compete without some protection of their industries.

D) organized labor would not allow them to negotiate with other countries.

Answer: B Topic: Labor Standards Difficulty: Moderate Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 4) Discriminatory trade practices are allowed among sister WTO member countries, especially when it comes to A) the use of child labor in agricultural and textile/apparel products.

B) national security and special benefits given to other members of a free trade area.

C) the protection of agriculture and textile/apparel from open trade.

D) environmental protection.

Answer: B Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 5) Low labor standards are usually associated with A) nondemocratic governments.

B) high-income countries.

C) high-wage countries.

D) low foreign investment.

Answer: D Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge

11 .

6) Which of the following is true?

A) Child labor is most common in urban areas.

B) Child labor is most common in the textile industry.

C) If child labor were stopped, families would have greater economic success.

D) Agriculture is the main industry that uses child labor.

Answer: D Topic: Labor Standards Difficulty: Moderate Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 7) When countries try to ban child labor, A) most children start to attend school.

B) family poverty decreases.

C) child labor often moves to the informal economy.

D) GDP increases.

Answer: C Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 8) Using trade barriers to address labor standards does all of the following EXCEPT it A) leads to deadweight losses.

B) redistributes income.

C) works more effectively for countries that are small relative to the total market.

D) potentially makes conditions worse as production moves to the informal sector.

Answer: C Topic: Labor Standards Difficulty: Moderate Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 9) The International Labor Organization has been around since 1919, and has a consistent record of being willing to take action against countries that violate core labor standards.

Answer: FALSE Topic: Labor Standards Difficulty: Easy Objective: LO 8.3 Define labor standards.

AACSB: Application of knowledge

12 .

10) There is clear evidence of a race-to-the-bottom internationally, regarding working conditions and the environment.

Answer: FALSE Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 11) Empirical studies show that countries with low standards are very successful at attracting foreign investment.

Answer: FALSE Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 12) While Africa has the largest numbers of working children, Asia has the highest proportion of working children, with an estimated one in four employed.

Answer: FALSE Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 13) Child labor is a common family survival strategy, especially for farmers in rural areas where it is hard to enforce rules or to reach the poor with any supporting infrastructure or social services.

Answer: TRUE Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 14) One reason why the plants of multinational corporations abroad may have better standards than domestic contractors in low-income countries is because multinational corporations tend to reduce costs by using one standard in terms of capital equipment and technology for all markets.

Answer: TRUE Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 13 .

15) Which region has the largest number of children working?

Answer: Asia Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 16) Which region has the highest proportion of its children working?

Answer: Sub-Saharan Africa Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 17) In what industrial sector are children most likely to be working?

Answer: Agriculture Topic: Labor Standards Difficulty: Easy Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge 18) Define labor standards as proposed by the ILO. Answer: Prohibition of forced labor, freedom of association, the right to organize and bargain collectively, an end to the exploitation of child labor, and nondiscrimination in employment Topic: Labor Standards Difficulty: Moderate Objective: LO 8.3 Define labor standards.

AACSB: Application of knowledge

14 .

19) Why are universal standards for minimum wages and hours worked difficult to agree on?

Answer: Universal standards for minimum wages, limits on the number of hours someone can work in a day, and health and safety issues in the workplace are difficult to define given the wide variation in incomes and living conditions around the world. High-income countries, where unskilled labor is relatively scarce, face an entirely different set of economic constraints compared to those faced by low-income countries where unskilled labor is relatively abundant.

For example, if low-income countries are forced to pay a minimum wage high enough to satisfy critics in high-income countries, many people fear that the result would be the closing down of production and a rise in unemployment rather than an increase in living standards. In other words, too high a minimum wage may be well intentioned, but it may reduce living standards in low-income countries. Even this is ambiguous, however, since it is no easy matter to determine how high is too high.

Topic: Labor Standards Difficulty: Difficult Objective: LO 8.3 Define labor standards.

AACSB: Application of knowledge 20) Critics argue that concern about labor practices in other countries is often used to justify protectionism. Is this a reasonable criticism? Explain.

Answer: Special interests sometimes use the issue of labor standards as a means to justify their real goal, protection against foreign competition. Low- and middle-income countries tend to have abundant supplies of unskilled labor and they depend on low-wage, low-productivity jobs for a large share of their employment. In these countries, proposals to set labor standards and to use trade barriers as an enforcement mechanism are widely viewed as a form of protectionism on the part of high-income countries. Given that most high-income countries continue to protect their markets in key areas of developing country activity such as agriculture, clothing, and textiles, there is a strong suspicion that calls for labor standards are a way to undermine the comparative advantage of low-income countries and to close the markets of high-income countries in selected areas.

Topic: Labor Standards Difficulty: Difficult Objective: LO 8.4 State four potential problems with using trade sanctions to enforce labor standards.

AACSB: Application of knowledge

15 .

8.4 Trade and the Environment 1) Some proponents of trade sanctions argue for changes in policy because they fear low standards will be used to capture markets and foreign investment. While theoretically possible, there is little or no support for the view that countries use low labor standards this way, because A) countries with low labor standards generally have trouble attracting foreign investment.

B) low standards can change a country's comparative advantage.

C) it is impossible to lower labor standards.

D) countries would not have an incentive to have low standards.

Answer: A Topic: Trade and the Environment Difficulty: Easy Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge 2) One claim that trade barrier proponents use to enforce environmental standards is that A) environmental standards do not reduce industrial competitiveness and do not induce race-tothe-bottom, where countries are forced to rescind their standards in order to maintain employment.

B) high standards in industrialized nations motivates some firms to "export pollution" to developing countries by relocating their dirty industries.

C) enforcing environmental standards is essential, as there are no differences between labor standards and environmental standards.

D) all environmental impacts are non-transboundary.

Answer: B Topic: Trade and the Environment Difficulty: Moderate Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge 3) The claim that lower environmental standards in foreign countries reduce industrial competitiveness for high standard countries is on firm theoretical ground because A) higher environmental standards requirements raise the cost of production to a firm or industry abiding by the rules.

B) there will be a race-to-the-bottom competition on environmental standards.

C) the interests of firms that are subject to the high standards coincide with the nation's interests, one-for-one.

D) environmental standards in most countries have gotten more lax over time.

Answer: A Topic: Trade and the Environment Difficulty: Moderate Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge 16 .

4) Countries that compete by offering foreign firms a reduced set of environmental compliance requirements are known as A) transboundary members.

B) pollution havens.

C) pollutants.

D) pollution exporters.

Answer: B Topic: Trade and the Environment Difficulty: Easy Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge 5) Transborder environmental impacts can take place when one country's pollution spills over into a second country in all of the following situations EXCEPT A) when an upstream user pollutes a shared watershed.

B) when industrial production in one country creates acid rain in another country.

C) when heavy traffic between two or more countries creates semi-global warming.

D) the production of exported products degrades the local environment.

Answer: D Topic: Trade and the Environment Difficulty: Easy Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge 6) Is the claim that environmental standards reduce industrial competitiveness valid?

A) Yes, because environmental standards raise costs to businesses.

B) No, because consumers will want to buy from firms that pollute less.

C) No, because environmental standards have little effect in high-income countries.

D) Yes, because environmental standards will cause the imposition of WTO sanctions.

Answer: A Topic: Trade and the Environment Difficulty: Easy Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge

17 .

7) Which of the following is NOT a true statement about the WTO and the protection of endangered species?

A) The environmental movement has been critical of the WTO. B) Under WTO rules, countries have a right to impose import barriers to protect endangered species.

C) The WTO did not allow the U.S. to protect sea turtles.

D) GATT rules prohibit discrimination based on the production process used.

Answer: C Topic: Trade and the Environment Difficulty: Moderate Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge 8) The WTO explicitly stated that in making its sea turtle decision, it was NOT saying that sovereign nations could not adopt effective measures to protect endangered species. Clearly, it said, sovereign nations can and should develop effective measures, including trade measures, to protect endangered species.

Answer: TRUE Topic: Trade and the Environment Difficulty: Easy Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge 9) The WTO encourages nations to take unilateral action on trade issues, including issues involving environmental protection.

Answer: FALSE Topic: Trade and the Environment Difficulty: Easy Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge 10) Low standards reduce production costs and change a nation's comparative advantage.

Answer: FALSE Topic: Trade and the Environment Difficulty: Easy Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge

18 .

11) Over time, most countries have increased environmental standards.

Answer: TRUE Topic: Trade and the Environment Difficulty: Easy Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge 12) The WTO allows trade protection to protect endangered species.

Answer: TRUE Topic: Trade and the Environment Difficulty: Easy Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge 13) What does empirical research suggest about the existence of pollution havens?

Answer: That countries with low standards are actually less successful at attracting foreign investment Topic: Trade and the Environment Difficulty: Easy Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Application of knowledge 14) Is there one optimal environmental standard for the entire world? If not, how might using trade barriers to enforce country-specific environmental standards reduce overall well-being?

Answer: No; because differences in income and preferences make the ideal standards vary by country. Budgets and regulatory efforts are not unlimited, and the pressing problems and environmental resources that need protection are not the same. Countries will likely have different priorities. If one nation tries to impose its standards on another, this may actually reduce global well-being. If resources and opportunities are different, so are the opportunity costs. One answer doesn't fit all.

Topic: Trade and the Environment Difficulty: Moderate Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Analytical thinking

19 .

15) What is a pollution haven, and is there evidence that pollution havens exist?

Answer: Countries that compete by offering foreign firms a reduced set of environmental compliance requirements are known as pollution havens. Empirically, there is evidence that some dirty industries from high-income industrial economies moved to low- and middle-income countries in the 1970s when the industrial economies first began cracking down on environmental polluters. Steel and chemical industries fall into this pattern, although it is possible that the developing countries were gaining a comparative advantage in these areas as high-income countries were losing theirs. Regardless, there is strong evidence showing that the idea of pollution havens is invalid; that is, it is impossible to identify any country that successfully competes for new investment on the basis of low environmental standards.

Topic: Trade and the Environment Difficulty: Difficult Objective: LO 8.5 Compare and contrast transboundary and nontransboundary environmental problems.

AACSB: Analytical thinking 8.5 Alternatives to Trade Measures 1) Trade measures are usually not the best way of addressing problems such as pollution and child labor because A) it is more efficient to address these problems at the production and consumption level.

B) trade measures are not effective in reducing pollution.

C) the governments of high-income countries are not interested in sanctioning pollution and child labor.

D) the WTO prohibits most trade sanctions.

Answer: A Topic: Alternatives to Trade Measures Difficulty: Moderate Objective: LO 8.6 Explain three alternatives to trade measures for enforcing labor and environmental standards.

AACSB: Application of knowledge 2) Labeling that states that a product was produced under environmentally sustainable conditions may not be an effective way to reduce pollution if A) producers do not apply labels.

B) labeling increases costs.

C) consumers do not believe the information on the label.

D) governments require labels.

Answer: C Topic: Alternatives to Trade Measures Difficulty: Easy Objective: LO 8.6 Explain three alternatives to trade measures for enforcing labor and environmental standards.

AACSB: Application of knowledge

20 .

3) Under the Sullivan Principles, a multinational producing in different countries A) should pay the same wages in all countries.

B) should comply with the same environmental standards that exist in the home country.

C) should lobby for better standards in all countries.

D) should produce in pollution havens.

Answer: B Topic: Alternatives to Trade Measures Difficulty: Moderate Objective: LO 8.6 Explain three alternatives to trade measures for enforcing labor and environmental standards.

AACSB: Application of knowledge 4) Which of the following is NOT a problem with finding a solution to global climate change?

A) Countries have not recognized that there is a problem with climate change.

B) Solutions must be adopted globally, not unilaterally.

C) Science can only provide probabilities of future events, not certainties.

D) It is difficult to determine an appropriate level of response to climate change problems.

Answer: A Topic: Alternatives to Trade Measures Difficulty: Easy Objective: LO 8.6 Explain three alternatives to trade measures for enforcing labor and environmental standards.

AACSB: Application of knowledge 5) Harmful carbon emissions A) are increasingly produced by industrializing countries such as China and India.

B) are only a problem in high-income countries.

C) must be reduced by countries individually.

D) have little effect on the environment.

Answer: A Topic: Alternatives to Trade Measures Difficulty: Moderate Objective: LO 8.6 Explain three alternatives to trade measures for enforcing labor and environmental standards.

AACSB: Application of knowledge 6) The best way to address differences in labor and environmental standards is through trade barriers.

Answer: FALSE Topic: Alternatives to Trade Measures Difficulty: Easy Objective: LO 8.6 Explain three alternatives to trade measures for enforcing labor and environmental standards.

AACSB: Application of knowledge

21 .

7) Coffee is an example of a product that has been successfully labeled and marketed based on its production method or environmental protection.

Answer: TRUE Topic: Alternatives to Trade Measures Difficulty: Easy Objective: LO 8.6 Explain three alternatives to trade measures for enforcing labor and environmental standards.

AACSB: Application of knowledge 8) "Certified shade-grown, organic coffee" is an example of requiring home standards in a foreign market instead of trade barriers.

Answer: FALSE Topic: Alternatives to Trade Measures Difficulty: Easy Objective: LO 8.6 Explain three alternatives to trade measures for enforcing labor and environmental standards.

AACSB: Application of knowledge 9) Why would a global carbon tax be desirable?

Answer: Since carbon emissions are a transboundary problem, solutions must be global rather than individual. A harmonized global carbon tax could be adjusted up when estimates of future damage increase in severity and adjusted down if the damage is understood to be less than previously thought, which also reduces some of the problems with the uncertainty related to determining an appropriate global response.

Topic: Alternatives to Trade Measures Difficulty: Moderate Objective: LO 8.6 Explain three alternatives to trade measures for enforcing labor and environmental standards.

AACSB: Application of knowledge 10) Explain the obstacles to more widespread adoption of labeling as a method of reducing environmental and child labor problems.

Answer: First, countries resist what they consider an infringement of their sovereignty when foreign inspectors are allowed to probe into the details of labor and environmental conditions.

Secondly, consumers have to be convinced that the label provides reliable information.

Topic: Alternatives to Trade Measures Difficulty: Moderate Objective: LO 8.6 Explain three alternatives to trade measures for enforcing labor and environmental standards.

AACSB: Application of knowledge

22 .

International Economics, 7e (Gerber) Chapter 9 Trade and the Balance of Payments 9.1 Introduction: The Current Account Use the information in the following table to answer the following question(s).

Table 9.1

1) Based on Table 9.1, the balance on the current account is A) +100.

B) +200.

C) -100.

D) -200.

Answer: B Topic: Introduction: The Current Account Difficulty: Moderate Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 2) Based on Table 9.1, the balance on the financial account is A) +100.

B) +200.

C) -100.

D) -200.

Answer: C Topic: Introduction: The Current Account Difficulty: Moderate Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge

1 .

3) Based on Table 9.1, the statistical discrepancy is A) +100.

B) 0.

C) -100.

D) -200.

Answer: C Topic: Introduction: The Current Account Difficulty: Moderate Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 4) Based on Table 9.1, if the information in the table is typical of current and financial account values over a long period, then it would be reasonable to infer that A) the net international investment position is negative.

B) the net international investment position is positive.

C) national savings are less than domestic investment.

D) government accounts are in deficit.

Answer: A Topic: Introduction: The Current Account Difficulty: Easy Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 5) If the residents of a country receive income from their foreign investments, it is counted as a A) credit in the current account.

B) debit in the current account.

C) credit in the capital account.

D) debit in the capital account.

Answer: A Topic: Introduction: The Current Account Difficulty: Easy Objective: LO 9.2 Explain the importance of the three main components of the current account.

AACSB: Application of knowledge 6) Which of the following is NOT part of the current account?

A) Dividends received on a foreign investment B) Purchase of a plane ticket on a foreign airline C) Shipment of food aid to a poor country D) Purchase of a foreign bond Answer: D Topic: Introduction: The Current Account Difficulty: Easy Objective: LO 9.2 Explain the importance of the three main components of the current account.

AACSB: Application of knowledge 2 .

7) Which of the following is FALSE? A) In 2002, the United States imported more goods and services from foreign suppliers than it exported to foreign purchasers.

B) Services are almost one-third of total exports and are a growing part of U.S. and world trade.

C) The U.S. trade balance in services is in deficit.

D) With the exception of the Gulf War period in 1991, the U.S. current account has been in deficit since the 1980s.

Answer: C Topic: Introduction: The Current Account Difficulty: Easy Objective: LO 8.6 Explain three alternatives to trade measures for enforcing labor and environmental standards.

AACSB: Application of knowledge 8) The current account balance of the United States began to deteriorate in A) the early 1970s.

B) the early 1980s.

C) the late 1980s.

D) the early 1990s.

Answer: B Topic: Introduction: The Current Account Difficulty: Easy Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 9) People sometimes worry that American trade with other countries will lead to large U.S. trade deficits and the movement of massive amounts of American capital out of the country. This worry is unfounded because countries cannot A) increase savings at the same time that a trade deficit grows.

B) spend more than they earn.

C) invest more than they save.

D) have both current account and financial account deficits at the same time.

Answer: D Topic: Introduction: The Current Account Difficulty: Moderate Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge

3 .

10) A current account deficit implies that A) the financial account is negative.

B) the financial account is in surplus.

C) exports of goods and services exceed imports of goods and services.

D) secondary income is positive.

Answer: B Topic: Introduction: The Current Account Difficulty: Moderate Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 11) Which of the following transactions would be recorded in the current account?

A) U.S. investors purchase bonds from Germany.

B) A person living in the United States sends money home to her family in Cuba.

C) The Fed increases its holdings of yen.

D) The U.S. transfers a military base to another country.

Answer: B Topic: Introduction: The Current Account Difficulty: Moderate Objective: LO 9.2 Explain the importance of the three main components of the current account.

AACSB: Application of knowledge 12) Which of the following transactions would be recorded in the capital account?

A) U.S. investors purchase bonds from Germany.

B) The Fed increases its holdings of yen.

C) The U.S. transfers a military base to another country.

D) A U.S. firm sells a machine to a business in another country.

Answer: C Topic: Introduction: The Current Account Difficulty: Moderate Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 13) Which of the following transactions would be recorded in the financial account?

A) U.S. investors purchase bonds from Germany.

B) A person living in the United States sends money home to her family in Cuba.

C) The Fed increases its holdings of yen.

D) The U.S. transfers a military base to another country.

Answer: A Topic: Introduction: The Current Account Difficulty: Moderate Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 4 .

14) If there is a trade deficit, which of the following is true?

A) The current account balance could be positive, negative, or zero.

B) There will be a current account deficit.

C) There will be a current account surplus.

D) There will be a financial account surplus.

Answer: A Topic: Introduction: The Current Account Difficulty: Easy Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 15) Which of the following transactions would be recorded as a CREDIT in the current account?

A) A U.S. citizen purchases goods from Ireland.

B) A U.S. company pays dividends on its stock. Some of the dividends go to foreign owners of the stock.

C) The U.S. sells wheat to Mexico.

D) A person living in the United States sends money home to her family in Cuba.

Answer: C Topic: Introduction: The Current Account Difficulty: Moderate Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 16) Purchases of stocks and bonds are recorded in the capital account.

Answer: FALSE Topic: Introduction: The Current Account Difficulty: Easy Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 17) If the trade balance is negative, the current account balance will be negative.

Answer: FALSE Topic: Introduction: The Current Account Difficulty: Easy Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge

5 .

18) Briefly describe the factors that contributed to the U.S. current account deficits of the 1990s.

Answer: Rapid U.S. economic growth raised income and import demand; economic growth was low or negative for U.S. trading partners, depressing export demand.

Topic: Introduction: The Current Account Difficulty: Easy Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 19) How do recent current account deficits compare to GNP and to past ratios?

Answer: It is over 6 percent of GNP, much larger than it has been in the past, and the percentage has grown sharply over the last few years.

Topic: Introduction: The Current Account Difficulty: Easy Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 20) What were some of the consequences of the large current account deficits that the U.S. ran from the 1990s to 2007?

Answer: The housing boom of the 2000s and the consumption spree and low savings rates of many Americans; housing finance became awash with funds, consumer credit was easy to get, and American lifestyles were indirectly financed by their access to savings from abroad. Because the current account deficits persisted for so long, they encouraged the gradual accumulation of problems that eventually became extremely severe. Financial market regulators were not prepared for the large inflows of foreign capital and did not recognition the danger of these inflows. Firms receiving funds felt pressure to make loans to increase earnings to make interest payments. Interest rates were depressed and encouraged borrowing. Easy access to home loans increased housing demand and home prices, which encouraged even more borrowing and building, adding to the housing bubble.

Topic: Introduction: The Current Account Difficulty: Difficult Objective: LO 9.1 Define the current, capital, and financial accounts of a country's balance of payments.

AACSB: Application of knowledge 21) Explain the difference between primary and secondary income.

Answer: Earned income paid abroad and received from abroad is called primary income. This includes income on investments and compensation of employees. Secondary income is payments made abroad or received from abroad, such as payments made that are not in exchange for a good or service, like foreign aid, gifts, or the remittances (the transfer of wages earned in one country to residents of another country) of immigrants temporarily residing in another country.

Topic: Introduction: The Current Account Difficulty: Moderate Objective: LO 9.2 Explain the importance of the three main components of the current account.

AACSB: Application of knowledge 6 .

9.2 Introduction to the Financial Account 1) Which of the following is an example of a financial derivative?

A) An option to purchase stock in the future B) A share of stock in Microsoft C) A U.S. government bond D) Monetary gold Answer: A Topic: Introduction to the Financial Account Difficulty: Moderate Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 2) All of the following are true about foreign direct investment (FDI) and portfolio investment EXCEPT A) increases in the flow of portfolio investments increase the likelihood of financial crisis.

B) both portfolio investments and FDI are the same in that they both give their holders a claim on the future output of the foreign economy.

C) FDI is relatively illiquid compared to portfolio investment.

D) portfolio investments have been on the decline in recent years (or decades).

Answer: D Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 3) Capital controls are most often aimed at slowing or eliminating movements of A) reserve assets.

B) foreign direct investment.

C) foreign portfolio investment.

D) nonreserve government assets.

Answer: C Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge

7 .

Use the following table to answer the next question(s). All values are net.

Table 9.3

4) Based on Table 9.3, the capital account balance is equal to A) +25.

B) -25.

C) -125.

D) +125.

Answer: D Topic: Introduction to the Financial Account Difficulty: Moderate Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 5) Based on Table 9.3, if values in the table are amended to reflect a net increase in U.S. foreign direct investment of 100, then the new balance for the capital account balance becomes A) -75.

B) -25.

C) +25.

D) +75.

Answer: C Topic: Introduction to the Financial Account Difficulty: Moderate Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 6) Which of the following is an example of foreign direct investment?

A) Toyota builds an automobile plant in Ohio.

B) The Bank of Japan buys dollars.

C) A citizen of Japan buys stock in Microsoft.

D) A citizen of Japan buys a U.S. government bond.

Answer: A Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge

8 .

7) Which of the following is an example of portfolio investment?

A) Toyota builds an automobile plant in Ohio.

B) The Bank of Japan buys dollars.

C) A citizen of Japan buys stock in Microsoft.

D) A citizen of Japan buys an option to purchase Microsoft stock in the future.

Answer: C Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 8) Which of the following is an example of a change in reserve assets?

A) Toyota builds an automobile plant in Ohio.

B) The Bank of Japan buys dollars.

C) A citizen of Japan buys stock in Microsoft.

D) A citizen of Japan buys a U.S. government bond.

Answer: B Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 9) Which of the following is NOT an official reserve asset for the United States?

A) Monetary gold B) British pounds C) SDRs from the IMF D) Mexican pesos Answer: D Topic: Introduction to the Financial Account Difficulty: Moderate Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 10) A country that runs out of official reserve assets A) cannot settle international debts.

B) is bankrupt.

C) will have a current account deficit.

D) will have a current account surplus.

Answer: A Topic: Introduction to the Financial Account Difficulty: Moderate Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge

9 .

11) Looking at the financial account data, it is possible to determine the total amount of official reserves available to a nation.

Answer: FALSE Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 12) Direct foreign investment items have more liquidity than foreign portfolio investment items.

Answer: FALSE Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 13) In most of the financial crises of the last decade, there were large and sudden financial outflows as both home and foreign investors tried to avoid the expected crises.

Answer: TRUE Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 14) A sudden stop will be easier to navigate if the country borrows internationally in foreign currencies and lend locally in its domestic currency.

Answer: FALSE Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 15) A sudden stop refers to a rapid slowing of capital inflows.

Answer: TRUE Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 16) The free movement of financial capital is desirable for all countries.

Answer: FALSE Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge

10 .

17) Capital inflows are desirable because they increase investment in a country.

Answer: TRUE Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 18) All financial account transactions are linked to current account transactions, since the current and financial accounts are mirror images of each other.

Answer: FALSE Topic: Introduction to the Financial Account Difficulty: Moderate Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 19) It is unclear whether the free flow of capital is beneficial to all countries. Explain the benefits and costs of allowing capital to move freely.

Answer: On the one hand, foreign capital inflows are beneficial because they enable countries to increase their investments in factories, ports, and other physical assets that help raise living standards and incomes. On the other hand, the sudden outward flight of foreign financial capital can generate a debt crisis and throw a country into deep depression. Extreme volatility in some financial markets and the severe damage it has caused to many countries has revived interest in regulations to limit the damage caused by unexpectedly large financial outflows.

Topic: Introduction to the Financial Account Difficulty: Difficult Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Analytical thinking 20) What are official reserve assets, and why are they important to countries?

Answer: Reserve assets are mainly the currencies of the largest and most stable economies in the world: U.S. dollars, European Union (EU) euros, British pounds, the Japanese yen, and recently the Chinese yuan, as well as monetary gold and SDRs. All forms of international debts can be settled with reserve assets. When a country runs low on reserve assets, it signals that potentially serious problems are arising. In particular, the country may not be able to pay international debts, and it may harm import businesses if the central bank cannot provide a key currency required for payment of import goods.

Topic: Introduction to the Financial Account Difficulty: Easy Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge

11 .

21) Describe how a sudden stop leads to a financial crisis.

Answer: A sudden shift from positive to negative flows from one year to the next in the foreign owned reserve assets in the nation and loans to domestic firms may cause the financial account to become negative. This means there are no inflows to finance a current account deficit, so it must move from a negative balance to a positive balance, usually by a sudden reduction in imports and an eventual increase in exports. This shift in trade relations may cause a deep recession.

Topic: Introduction to the Financial Account Difficulty: Difficult Objective: LO 9.3 Describe three types of international capital flows.

AACSB: Application of knowledge 9.3 The Current Account and the Macroeconomy 1) If all government budgets are balanced, and S is greater than I, then A) the net international investment position must be positive.

B) the financial account must be positive.

C) the financial account must be negative.

D) the net international investment position must be negative.

Answer: C Topic: The Current Account and the Macroeconomy Difficulty: Easy Objective: LO 9.4 Use a simple algebraic model to relate the current account to savings, investment, and the general government budget balance.

AACSB: Application of knowledge 2) The difference between GNP and GDP is A) GNP includes income received from abroad and excludes income paid abroad.

B) GNP excludes income received from abroad and includes income paid abroad.

C) GNP includes exports and imports.

D) GNP excludes exports and imports.

Answer: A Topic: The Current Account and the Macroeconomy Difficulty: Easy Objective: LO 9.4 Use a simple algebraic model to relate the current account to savings, investment, and the general government budget balance.

AACSB: Application of knowledge

12 .

3) Typically, the most important determinant of private investment in an economy is A) the inflow of foreign investment.

B) the size of the capital account surplus.

C) the size of the current account deficit.

D) the amount of domestic savings.

Answer: D Topic: The Current Account and the Macroeconomy Difficulty: Moderate Objective: LO 9.4 Use a simple algebraic model to relate the current account to savings, investment, and the general government budget balance.

AACSB: Application of knowledge 4) If domestic savings is less than domestic investment, then A) reserve assets will increase.

B) the government runs a budget deficit.

C) there will be negative foreign investment.

D) a trade surplus must result.

Answer: C Topic: The Current Account and the Macroeconomy Difficulty: Moderate Objective: LO 9.4 Use a simple algebraic model to relate the current account to savings, investment, and the general government budget balance.

AACSB: Application of knowledge 5) Which of the following is NOT true about this national income equation: A) For the current account, CA, to improve, we may have to invest less than otherwise would be the case.

B) For the current account, CA, to improve, we may have to save less to maintain the same amount of investment that includes foreign saving.

C) For the current account, CA, to improve, the government may have to run budget surplus.

D) A reduction in the trade deficit with one country will simply show up as an increase in a trade deficit with another country.

Answer: B Topic: The Current Account and the Macroeconomy Difficulty: Moderate Objective: LO 9.4 Use a simple algebraic model to relate the current account to savings, investment, and the general government budget balance.

AACSB: Application of knowledge

13 .

6) Which of the following is NOT true about the national income identity given by the equation: S + (T – G) = I + CA? A) If CA is positive, national saving finances the purchase of our goods by foreign users.

B) If CA is negative, our investment is less than our national savings.

C) A negative CA may imply that foreigners have confidence in the U.S. economy.

D) If CA is negative and large, a country risks foreigners owning a large piece of its assets.

Answer: B Topic: The Current Account and the Macroeconomy Difficulty: Easy Objective: LO 9.4 Use a simple algebraic model to relate the current account to savings, investment, and the general government budget balance.

AACSB: Application of knowledge 7) During the 1990s, which of the following did NOT occur?

A) Private savings fell.

B) Investment rose.

C) The United States received capital inflows.

D) Private savings was greater than investment for most of the 1990s.

Answer: D Topic: The Current Account and the Macroeconomy Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 8) If a country runs a current account surplus and national private savings equals domestic investment, then the combined governmental accounts A) must be balanced.

B) must be positive.

C) must be negative.

D) could be either negative or positive, depending on the net international investment position.

Answer: B Topic: The Current Account and the Macroeconomy Difficulty: Moderate Objective: LO 9.4 Use a simple algebraic model to relate the current account to savings, investment, and the general government budget balance.

AACSB: Application of knowledge

14 .

Use the following table to answer the next question(s). All values are measured as a percent of GNP. Table 9.2

9) Based on Table 9.2, total savings, private plus public, is equal to A) 3 percent of GNP. B) 18 percent of GNP. C) 16 percent of GNP. D) 20 percent of GNP. Answer: C Topic: The Current Account and the Macroeconomy Difficulty: Moderate Objective: LO 9.4 Use a simple algebraic model to relate the current account to savings, investment, and the general government budget balance.

AACSB: Application of knowledge 10) Based on Table 9.2, the current account balance is A) -2 percent of GNP. B) +2 percent of GNP. C) +4 percent of GNP. D) -4 percent of GNP. Answer: B Topic: The Current Account and the Macroeconomy Difficulty: Moderate Objective: LO 9.4 Use a simple algebraic model to relate the current account to savings, investment, and the general government budget balance.

AACSB: Application of knowledge 11) All other things equal, an increase in government spending that is NOT funded by taxes will A) have an undetermined effect on the current account.

B) have no effect on the current account.

C) increase the current account deficit.

D) decrease the current account deficit.

Answer: C Topic: The Current Account and the Macroeconomy Difficulty: Moderate Objective: LO 9.4 Use a simple algebraic model to relate the current account to savings, investment, and the general government budget balance.

AACSB: Application of knowledge

15 .

12) National savings is important for all of the following reasons EXCEPT A) it can be used to consume additional foreign goods.

B) it can be used to fund private investment.

C) it can be used to fund government investment.

D) it can be used to fund foreign investment.

Answer: A Topic: The Current Account and the Macroeconomy Difficulty: Moderate Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 13) The U.S. current account deficit improved slightly from 2007 to 2010 because A) spending on imports fell due to an overall fall in consumption.

B) state, local, and federal government budget deficits increased.

C) worldwide economic growth spurred U.S. exports.

D) capital controls restricted capital inflow.

Answer: A Topic: The Current Account and the Macroeconomy Difficulty: Moderate Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 14) Global capital flows have completely broken the link between domestic savings and domestic investment.

Answer: FALSE Topic: The Current Account and the Macroeconomy Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 15) An increase in government budget deficits will necessarily be associated with an worsening of the current account balance.

Answer: FALSE Topic: The Current Account and the Macroeconomy Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 16) Your text considers both the low savings and high savings nations and concludes what about the relationship between government budgets and the current account?

Answer: The relationship isn't fixed. One does not cause the other in any necessary form.

Topic: The Current Account and the Macroeconomy Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge

16 .

17) What is the difference between the U.S. current account deficits of the 1980s and the 1990s?

Answer: In the 1980s, the government budget balance (T-G) turned into a large negative, and foreign financing filled the gap. In the 1990s, the federal budget moved to a positive balance, but investment expanded and private savings fell, overwhelming the changes in the government budget position.

Topic: The Current Account and the Macroeconomy Difficulty: Moderate Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 18) What does a current account deficit do that is positive for a nation?

Answer: The deficit enables more investment in the economy and investment increases living standards. Capital inflows, in general, indicate foreign confidence in the domestic economy.

Topic: The Current Account and the Macroeconomy Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 19) The government budget deficit and the trade deficit are often called the "twin deficits."

Explain why this name applies, and why it is not always accurate.

Answer: All other things equal, an increase in government spending that is not funded by an increase in taxes will result in an increase in the trade (or current account) deficit. However, it is not necessarily the case that in times of rising budget deficits, the trade (or current account balance) will always worsen. For example, during an economic recession, most countries experience government budget deficits. State, local, and federal governments all saw dramatic increases in their deficits from 2007 to 2010 as unemployment rose and tax collections fell.

Nevertheless, the U.S. current account balance improved slightly due to the fall in consumption and the decline in spending on imports.

Topic: The Current Account and the Macroeconomy Difficulty: Difficult Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 20) Explain why current account deficits may or may not be harmful to a country.

Answer: On the positive side, a current account deficit enables more investment than would be possible otherwise, and since higher investment is correlated with higher living standards, the current account deficit might be interpreted as beneficial. In addition, the capital inflows associated with current account deficits are an implicit vote of confidence by foreigners. On the negative side, capital inflows that occur with a current account deficit increase the stock of foreign-owned assets inside the home country, raising the possibility that a change in investor expectations about the economy's future can lead to a sudden surge in capital outflows. In the worst case scenario, capital flight is followed by a depletion of international reserves and a financial crisis.

Topic: The Current Account and the Macroeconomy Difficulty: Difficult Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 17 .

9.4 International Debt 1) Which of the following is an example of external debt for the United States?

A) A purchase of Apple stock by a person in Canada B) A loan made in yen to a company in the United States C) A loan made by Citibank to the government of Mexico D) A purchase of U.S. Treasury bills by the Bank of Japan Answer: B Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 2) Debt service A) is rarely an issue for high-income countries.

B) always makes a country worse off for having borrowed.

C) is a problem when the amount of debt is small relative to the size of the economy.

D) tends to benefit low- and middle-income countries at the expense of high-income countries.

Answer: A Topic: International Debt Difficulty: Moderate Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 3) Unsustainable debt may occur for all of the following reasons EXCEPT A) when countries are dependent on one or two key export commodities, and there is a sudden drop in the price of those commodities.

B) when natural disasters occur.

C) when civil conflicts are resolved and a peace dividend occurs.

D) when there are corrupt politicians and practices.

Answer: C Topic: International Debt Difficulty: Moderate Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge

18 .

4) Which of the following is NOT a problem with excessive debt?

A) It worsens the central government's budget position by adding large debt service payments to other budget items.

B) It reduces the quantity of resources available to invest in economic development.

C) If debt service is substantial, schools, health clinics, roads, ports, other infrastructure, and social needs are less likely to be addressed.

D) It can reduce the chance of a crisis.

Answer: D Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 5) Which of the following is FALSE about the Highly Indebted Poor Countries initiative?

A) Most of the countries included are in sub-Saharan Africa.

B) Countries qualify for debt relief partly based on their level of poverty.

C) Countries do not have to have established a past track record of economic reform in order to qualify as long as they make future commitments.

D) External debt levels must be high relative to exports in order to qualify.

Answer: C Topic: International Debt Difficulty: Moderate Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 6) Critics of debt relief make all of the following arguments EXCEPT A) it would be wasted money since the conditions that caused the debt would be likely to persist.

B) debt relief can quickly fuel a new round of borrowing that simply restores debt to prior levels.

C) debt relief will encourage other nations to borrow excessively with the hope that their debts may be forgiven in the future.

D) the cost of debt relief to the most severely indebted countries is too large for the high income countries to afford.

Answer: D Topic: International Debt Difficulty: Moderate Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge

19 .

7) Which of the following is FALSE? A) Current account deficits must be financed through inflows of capital.

B) Loans from abroad add to a country's stock of external debt and generate debt service.

C) Borrowed funds are always used in a manner that contributes to the expansion of the country's productive capability.

D) Debt service can become an unsustainable burden that holds back development.

Answer: C Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 8) External debt is not usually a problem for high-income countries for which of the following reasons?

A) High-income countries take out loans denominated in their own currency.

B) High-income countries do not need to borrow.

C) High-income countries are too large to default on loans.

D) High-income countries use loans to build infrastructure and create economic growth.

Answer: A Topic: International Debt Difficulty: Moderate Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 9) Suppose that Mexico has external debt, and the value of the country's currency, the peso, falls.

Which of the following is true?

A) The peso value of the loans will decrease as well.

B) Mexico will find it easier to pay off its external debt.

C) Mexico will declare bankruptcy.

D) The cost of debt service will be higher.

Answer: D Topic: International Debt Difficulty: Moderate Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 10) For countries such as the United States and the United Kingdom, it is important to have trade surpluses in order to service their external debts.

Answer: FALSE Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge

20 .

11) Ultimate solutions to the problems of unsustainable debt must take into account the incentives for lenders to make loans.

Answer: TRUE Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 12) It is important to compare debt levels of low- and middle-income countries to exports because countries must earn foreign exchange in order to service their debts.

Answer: TRUE Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 13) Total debt is more important in figuring out the ability of a country to service its debt than are debt to GDP and debt to export ratios.

Answer: FALSE Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 14) There are debt relief programs currently available for highly indebted poor countries.

Answer: TRUE Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 15) An example of odious debt would be debts on the part of a nation that were incurred by a dictator for the well-being of his family.

Answer: TRUE Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 16) Between 1972 and 1999, the majority of loans to HIPC countries went to regimes considered "not free," and between 1985 and 1995, to places that were considered "corrupt" by international organizations.

Answer: TRUE Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 21 .

17) Borrowing money from other countries is rarely a good idea.

Answer: FALSE Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 18) Borrowing from other countries can lead to economic growth.

Answer: TRUE Topic: International Debt Difficulty: Easy Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 19) Carefully explain the pros and cons of borrowing from other countries.

Answer: Borrowing from other countries can be less costly and there may be more funds available than in the domestic market. All other things equal, if the loans are used to finance economic activities that encourage growth, this can be a desirable things to do, since increased economic growth can more than cover the costs of debt service. However, if the loans are not used wisely, the cost of debt service can use a large amount of already-scarce government resources. These loans also require currency of other nations to repay (which usually means that there must be sufficient exports or other international payments to obtain the currency), and if the value of the nation's currency falls, the cost of debt service can increase significantly over time.

Topic: International Debt Difficulty: Difficult Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Analytical thinking 20) What is odious debt, and how is the Democratic Republic of the Congo (DRC) an example of this?

Answer: Odious debt is legally defined as debt incurred without the consent of the people and that is not used for their benefit. During Joseph Mobutu's reign (1967 to 1997) in the DRC, real GDP, measured in the equivalent of U.S. dollars at 2000 prices, fell from $317 per person to $110 per person, while the regime amassed billions of dollars in foreign aid and loans. Mobutu's personal fortune was estimated to have reached $4 to $6 billion. In 2004, per capita income was at $88 and international debts were around $12 billion. Given the continued decline in incomes and the large number of unfinished projects financed by various governments and multilateral agencies, there is little evidence that the borrowed money was successfully used for development purposes. Furthermore, lenders knew the situation when they made their loans, but they went ahead since they wanted to secure access to the DRC's mineral deposits of cobalt and other strategic metals. In 2003, the DRC was admitted to the HIPC program and qualified for up to 80 percent debt forgiveness, and by 2010, more than half of its debt had been forgiven.

Topic: International Debt Difficulty: Difficult Objective: LO 9.5 Discuss the pros and cons of current account deficits.

AACSB: Application of knowledge 22 .

9.5 The International Investment Position 1) The international investment position is defined as A) the total of all domestic assets owned by foreigners minus the total of all foreign assets owned by residents of the home country.

B) the total of all domestic assets owned by foreigners plus the total of all foreign assets owned by residents of the home country.

C) the total of all foreign assets owned by residents of the home country minus the total of all domestic assets owned by foreigners.

D) the total of all foreign assets owned by residents of the home country times the total of all domestic assets owned by foreigners.

Answer: A Topic: The International Investment Position Difficulty: Easy Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge 2) The international investment position of the United States is negative. This means that A) the U.S. current account balance is positive.

B) foreigners own more U.S. assets than domestic residents own foreign assets.

C) foreigners own fewer U.S. assets than domestic residents own foreign assets.

D) the U.S. current account balance is negative.

Answer: B Topic: The International Investment Position Difficulty: Moderate Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge 3) Negative current account balances are usually associated with A) a shrinking of the international investment position.

B) an improvement of the international investment position.

C) a decrease in external debt.

D) an increase in external debt.

Answer: A Topic: The International Investment Position Difficulty: Moderate Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge

23 .

4) Technology transfer A) is not encouraged by low-income countries.

B) is not beneficial to high-income countries.

C) is a consequence of direct investment.

D) is a consequence of all foreign investment.

Answer: C Topic: The International Investment Position Difficulty: Easy Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge 5) Capital inflows in the form of direct investment can provide ________; this is a ________ of capital inflows.

A) access to political power; cost B) access to political power; benefit C) increases in external debt; cost D) decreases in external debt; benefit Answer: A Topic: The International Investment Position Difficulty: Easy Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge 6) Which of the following is an example of direct foreign investment?

A) A U.S. citizen buys stock in a Mexican company.

B) The Bank of China buys U.S. Treasury bonds.

C) Apple builds a plant in Ireland.

D) A company in England buys inputs to production from a German company.

Answer: C Topic: The International Investment Position Difficulty: Easy Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge

24 .

7) If the current account balance of a country is positive, the country's international investment position A) is positive.

B) is zero.

C) is negative.

D) could be positive, negative, or zero.

Answer: D Topic: The International Investment Position Difficulty: Easy Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge 8) For the United States, U.S. direct foreign investment abroad is more significant than foreign investment in U.S. securities and currency.

Answer: FALSE Topic: The International Investment Position Difficulty: Easy Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge 9) Capital inflows that take the form of direct investment may be particularly beneficial if they bring new technologies, new management techniques, and new ideas to the host country.

Answer: TRUE Topic: The International Investment Position Difficulty: Easy Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge 10) Technology transfer comes only from nations importing new capital goods in the current account.

Answer: FALSE Topic: The International Investment Position Difficulty: Easy Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge 11) Technology transfer is not valuable to high-income countries.

Answer: FALSE Topic: The International Investment Position Difficulty: Easy Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge 25 .

12) The United States international investment position is negative.

Answer: TRUE Topic: The International Investment Position Difficulty: Easy Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge 13) Describe the technology transfer benefit of capital flows into low-income countries.

Answer: Benefits include new technologies, new management techniques, and new ideas.

Developing countries often lack access to these without outside help. If it comes as direct investment, it has the further benefit of not coming from debt and requiring interest payments from scarce national resources.

Topic: The International Investment Position Difficulty: Moderate Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge 14) Describe the political power cost of large capital flows into low-income countries.

Answer: The Odious Debt situation pointed out that among the lowest income countries, corruption and lack of freedom have been a problem in the debt crisis. Similar problems could result from non-debt capital inflows (although tax payers may not be left with the same kinds of IOUs with interest). Large inflows of capital give access to power that may be exploited on the side of those doing the investing (their gain as opposed to the host nation's) or by those with political power in the nation receiving it (the interests of the people in power as opposed to the nation's interests). Large bribes for favorable legal treatment, for example, may be in the interests of the policy makers and the firms, but not the people.

Topic: The International Investment Position Difficulty: Moderate Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge

26 .

15) Use the U.S. current account balance and international investment position to explain the relationship between the current account balance and the international investment position.

Answer: For many years, the U.S. international investment position was positive. The large current account deficits of the 1980s, 1990s, and 2000s have eroded the United States' investment position from a positive $288.6 billion in 1983 to zero in 1989, and negative since then. Each year a country experiences a current account deficit, foreigners acquire more assets inside its boundaries than its residents acquire abroad, and the international investment position shrinks further. Thus a current account deficit in a given year does not imply that the international investment position is negative, but sustained current account deficits must eventually lead to a negative international investment position.

Topic: The International Investment Position Difficulty: Difficult Objective: LO 9.6 Show the relationship between a country's balance of payments and its international investment position.

AACSB: Application of knowledge

27 .

International Economics, 7e (Gerber) Chapter 10 Exchange Rates and Exchange Rate Systems 10.1 Introduction: Fixed, Flexible, or In-Between?

1) There are no questions for this section.

Topic: Introduction: Fixed, Flexible, or In-Between?

10.2 Exchange Rates and Currency Trading 1) A firm that buys foreign exchange in order to take advantage of higher foreign interest rates is A) speculating.

B) demonstrating purchasing power parity.

C) engaging in interest rate arbitrage.

D) responding to fluctuations in the business cycle.

Answer: C Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 2) Suppose the dollar is subject to a floating exchange rate system and that R is the number of dollars per unit of foreign exchange. If R increases, then the dollar A) depreciates.

B) appreciates.

C) is devalued.

D) is revalued.

Answer: A Topic: Exchange Rates and Currency Trading Difficulty: Moderate Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 3) When an individual or firm in the United States requests that a bank sell foreign exchange, the bank will probably A) call a foreign bank and arrange a purchase.

B) call the central bank and arrange a purchase.

C) call another bank customer with foreign exchange holdings.

D) call a foreign exchange broker and arrange a purchase.

Answer: D Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 1 .

4) In order to protect against foreign exchange risk, firms can use A) the spot market for foreign exchange.

B) interest rate arbitrage.

C) the forward market for foreign exchange.

D) the J-curve.

Answer: C Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 5) Covered interest arbitrage involves both A) the purchase of a foreign asset and a forward contract in the market for foreign exchange.

B) the purchase of a domestic asset and a spot contract in the market for foreign exchange.

C) the sale of a foreign asset and the purchase of a forward contract in the market for foreign exchange.

D) the sale of domestic stocks and the purchase of foreign bonds.

Answer: A Topic: Exchange Rates and Currency Trading Difficulty: Moderate Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 6) Which of the following institutions is the most important participant in foreign currency markets?

A) A retail customer B) A commercial bank C) A foreign exchange broker D) A central bank Answer: B Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge

2 .

7) The spot rate is the rate at which foreign currencies will be exchanged a specified number of days in the future.

Answer: FALSE Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 8) A forward exchange market contract obligates the owner to make a trade at a specified exchange rate a fixed number of days in the future.

Answer: TRUE Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 9) If Juana contracts to buy U.S. office equipment in U.S. dollars and her domestic currency depreciates against the U.S. dollar between the time the contract is signed and the bill is paid, she will wind up paying less for the equipment because she stayed in the spot market.

Answer: FALSE Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 10) When Jeneva went to Costa Rica in July 2008, a U.S. dollar was worth 550 colones. If today a U.S. dollar is worth 650 colones, it means that the U.S. dollar has depreciated against the colone.

Answer: FALSE Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 11) If the Costa Rican colone is expected to depreciate in the future, it will temporarily appreciate as people move to take advantage based on this expectation.

Answer: FALSE Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 3 .

12) Speculation would involve using forward contracts and options to reduce the exchange rate risk on future foreign exchange transactions.

Answer: FALSE Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 13) Most currency trades in London do not involve the British pound.

Answer: TRUE Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 14) What is the largest center for currency trading?

Answer: London Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 15) How does the growth in the daily volume of foreign currency transactions compare with the growth rate of the global economy?

Answer: Currency transactions are growing more rapidly.

Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 16) Which currency is most commonly traded?

Answer: The U.S. dollar Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge

4 .

17) If the forward rate is greater than the spot rate, what are markets signaling about their expectations for the future spot rates for the home currency?

Answer: The home currency is expected to depreciate over the maturity period of the forward contact.

Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 18) The most important participants in foreign exchange markets are ________.

Answer: Commercial banks Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 19) Would each of the following groups be happy or unhappy if the Mexican peso appreciates against the U.S. dollar? Answer the question for each of the following: (a) The U.S. pension funds holding Mexican government bonds (b) U.S. tourists planning a trip to Mexico (c) Mexican exporting manufacturers (d) A Mexican firm trying to buy properties overseas Answer: (a) Happy. The Mexican bonds are a safe haven for U.S. pension holders for now. (b) Unhappy. It now costs more to travel to Mexico. (c) Unhappy. The goods and services of Mexican exporters become relatively more expensive than their counterparts in the United States. (d) Happy. The Mexican peso can buy more American dollar and thus more property than would be the case otherwise.

Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 20) Suppose that the U.S. Open ticket costs $100 and the British Open ticket costs £50 and the exchange rate is $1.43. How much does the British Open ticket cost for an American attending the British Open?

Answer: $1.43 ∗ 50 = $71.50 Topic: Exchange Rates and Currency Trading Difficulty: Easy Objective: LO 10.1 List the reasons for holding foreign exchange and the main institutions in the foreign exchange market.

AACSB: Application of knowledge 5 .

10.3 The Supply and Demand for Foreign Exchange 1) All else equal and given the current system of exchange rates, if the United States enters a period of exceptionally strong growth, A) the pressure on the dollar is to revalue.

B) the pressure on the dollar is to devalue.

C) the pressure on the dollar is to depreciate.

D) the pressure on the dollar is to appreciate.

Answer: C Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 2) All else equal, if Canada raises its interest rates, A) the dollar depreciates.

B) the U.S. demand for Canadian dollars decreases.

C) the Canadian supply of Canadian dollars increases.

D) the Canadian dollar will depreciate.

Answer: B Topic: The Supply and Demand for Foreign Exchange Difficulty: Moderate Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge 3) An American firm that buys foreign exchange because its managers expect the dollar to depreciate is A) increasing the supply of foreign exchange.

B) decreasing the demand for foreign exchange.

C) speculating.

D) hedging.

Answer: D Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge

6 .

4) Suppose the exchange rates between the United States and Canada are in long-run equilibrium as defined by the idea of purchasing power parity. If the law of one price holds perfectly, then differences between U.S. and Canadian rates of inflation would A) have no effect on nominal exchange rates.

B) be completely offset by changes in the real exchange rate.

C) be completely offset by changes in the nominal exchange rate.

D) lead to a change in the real purchasing power of each country's currency when it is converted to the other country's currency.

Answer: C Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 5) Which of the following is a FALSE statement concerning purchasing power parity?

A) Purchasing power parity states that dollars will tend to exchange for pounds at a rate that maintains a constant purchasing power of a given quantity of a currency.

B) It is rare to see deviations from the purchasing power parity value of currencies.

C) Over the long run, purchasing power parity exerts influence over exchange rates.

D) An overvalued dollar buys more in Britain than it does in the United States.

Answer: B Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 6) An increase in the U.S. demand for the Mexican peso A) causes an increase in the U.S. dollar price of a Mexican peso.

B) causes the Mexican peso to appreciate.

C) causes the U.S. dollar to depreciate.

D) causes Mexican goods to be cheaper.

Answer: D Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge

7 .

7) According to the text, which of the following factors may make the theory of purchasing power parity unrealistic?

A) Trading countries may stop exchanging goods once prices between them equalize.

B) Shipping, insurance, and transaction costs may reduce the implication of purchasing power parity.

C) Prices may not equalize if goods arbitrage is reduced by trade barriers.

D) The effects of purchasing power parity may not show up until many years have passed.

Answer: A Topic: The Supply and Demand for Foreign Exchange Difficulty: Moderate Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 8) Which of the following would NOT be a cause for an increased American demand for the Mexican peso?

A) The United States having lower interest rates than Mexico B) Increased American demand for Mexican goods C) The expectation by speculators that the value of the peso is edging up D) Greater economic growth in the United States Answer: D Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge 9) Suppose that there are only two countries, the U.S. and Japan. If real interest rates rise in Japan, which of the following is NOT true?

A) More Japanese yen will be supplied in exchange for dollars.

B) More U.S. dollars will be supplied in exchange for yen.

C) The volume of yen traded will increase.

D) Japanese borrowers will be worse off.

Answer: A Topic: The Supply and Demand for Foreign Exchange Difficulty: Moderate Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge

8 .

10) If the dollar/pound exchange rate is $2/£, a Big Mac costs $5 in New York City and costs £4 in London, the pound is ________, and U.S. tourists will be ________.

A) overvalued; better off in London B) overvalued; better off in New York C) undervalued; better off in London D) undervalued; better off in New York Answer: B Topic: The Supply and Demand for Foreign Exchange Difficulty: Difficult Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 11) If the dollar/pound exchange rate is $2/£, a Big Mac costs $5 in New York City and costs £2 in London, the pound is ________, and U.S. tourists will be ________.

A) overvalued; better off in London B) overvalued; better off in New York C) undervalued; better off in London D) undervalued; better off in New York Answer: C Topic: The Supply and Demand for Foreign Exchange Difficulty: Difficult Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 12) In the short run, exchange rates are most directly affected by which of the following?

A) flows of financial capital B) purchasing power parity C) trade barriers D) imports and exports Answer: A Topic: The Supply and Demand for Foreign Exchange Difficulty: Moderate Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge

9 .

13) The nominal interest rate in the U.S. is 5% and the nominal interest rate in Canada is 3%.

The spot value of the U.S. dollar is 1 ($/Canadian dollar) and the forward rate is 1.2 ($/Canadian dollar). Which of the following is NOT true?

A) The dollar is likely to appreciate in spot markets.

B) The interest parity condition does not hold.

C) The dollar is trading at a forward discount.

D) Money will flow into the Canada.

Answer: A Topic: The Supply and Demand for Foreign Exchange Difficulty: Moderate Objective: LO 10.4 Calculate a currency's forward premium or discount based on interest rate differentials.

AACSB: Application of knowledge 14) A weak U.S. dollar leads to a higher volume of U.S. imports.

Answer: FALSE Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge 15) If inflation in the rest of the world is lower than inflation in Brazil, Brazil's currency (the real) would tend to appreciate.

Answer: FALSE Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge 16) If Mexicans increasingly lose confidence in their domestic financial markets and move their assets to other countries, the peso will depreciate.

Answer: TRUE Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge

10 .

17) Imports tend to fall whenever a nation's currency appreciates because foreign products become more expensive to domestic consumers.

Answer: FALSE Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge 18) A country that experiences higher real interest rates than other countries would expect its currency to depreciate.

Answer: FALSE Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge 19) If more European and Japanese firms want to build factories and expand their offshore investments in the United States, the supply of U.S. dollars on foreign exchange markets will increase as a result of this investment activity.

Answer: FALSE Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge 20) If U.S. consumers increase their demand for foreign products and foreign travel, the U.S. dollar would tend to depreciate as more dollars are supplied to foreign exchange markets.

Answer: TRUE Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge 21) If the Japanese central bank sells yen and buys U.S. dollars, the U.S. dollar will appreciate.

Answer: TRUE Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge

11 .

22) If inflation is higher in the home market, what is expected to happen to the real value of the home currency as time passes?

Answer: Appreciates Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge 23) How does rapid economic growth at home affect foreign exchange markets?

Answer: It increases home country demand for foreign currencies as it increases imports. The home currency depreciates.

Topic: The Supply and Demand for Foreign Exchange Difficulty: Easy Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Application of knowledge

12 .

24) Draw the demand for and supply of the U.S. dollar in each of the following cases. Diagram and explain in words the effect of each of the following events in the short run. Make sure to properly label the axes. In each case, assume the two countries under consideration are important trading partners. (a) There is an increase in the real interest rates in the United States relative to Japan. (b) Investment returns in the United States decrease relative to expected returns in Japan. (c) Inflation in Japan fell relative to the inflation rate in the United States. (d) The Japanese expect the value of the U.S. dollar to decline. (e) The Federal Reserve raised interest rates fearing the inflationary pressures of a booming U.S. economy.

Answer: (a) Both holders of yen and holders of U.S. dollars would now favor U.S. assets. This results in a shift of the demand curve for U.S. dollars to the right. The supply curve for U.S. dollars would likely shift to the left. Consequently, the U.S. dollar appreciates while the yen depreciates. (b) Investment in the United States becomes relatively unattractive. As a result, both holders of yen and holders of dollars prefer yen denominated assets. This will increase the supply of U.S. dollars and decrease the demand for U.S. dollars. The dollar depreciates while the yen appreciates. (c) This makes Japan's products more attractive so it will decrease the demand for U.S. dollars and increase the supply of U.S. dollars as more dollar holders seek Japanese goods. The dollar depreciates while the yen appreciates. (d) The demand for U.S. dollars decreases, causing the yen to appreciate while the dollar depreciates. (e) In the short run, the dollar may appreciate due to the higher interest rates, increasing the demand for U.S. dollars and decreasing the supply as people seek to earn these higher rates.

Topic: The Supply and Demand for Foreign Exchange Difficulty: Difficult Objective: LO 10.2 Diagram the effects on the home currency of a change in supply or demand for foreign currency.

AACSB: Analytical thinking 25) The nominal interest rate in the U.S. is 5% and the nominal interest rate in Canada is 3%.

The spot value of the U.S. dollar is 1 ($/Canadian dollar) and the forward rate is 1.2 ($/Canadian dollar). Calculate the forward discount or premium for the dollar. Does the interest parity condition hold? If not explain what is likely to occur in foreign exchange markets. Assume that interest rates cannot change.

Answer: The dollar is trading at a forward discount. [(1-1.2)/1 = -0.2, or -20%]. The interest rate differential is .05-.02 = .03, or 3%. The expected depreciation of the dollar exceeds the interest rate differential, or in other words, the higher U.S. interest rate is not sufficiently attractive given that the dollar is expected to depreciate sharply. Thus funds will flow into Canada. Assuming no changes in interest rates, the Canadian dollar will appreciate and the U.S. dollar will depreciate until interest parity holds.

Topic: The Supply and Demand for Foreign Exchange Difficulty: Difficult Objective: LO 10.4 Calculate a currency's forward premium or discount based on interest rate differentials.

AACSB: Analytical thinking 13 .

10.4 The Real Exchange Rate 1) Suppose that the nominal exchange rate between the U.S. dollar and the Mexican peso is 0.10 dollars per peso. If Mexico's inflation is 10 percent and the United States' inflation is 0 percent, from the U.S. point of view, the real exchange rate A) appreciates to 0.11 dollars per peso.

B) depreciates to 0.11 dollars per peso.

C) appreciates to 0.09 dollars per peso.

D) depreciates to 0.09 dollars per peso.

Answer: B Topic: The Real Exchange Rate Difficulty: Moderate Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge 2) Suppose that the nominal exchange rate between the U.S. dollar and the Canadian dollar is 0.75 U.S. dollars per Canadian dollar. If Canada's rate of inflation is 0 percent and the U.S. rate is 10 percent, then the real exchange rate for the U.S. dollar will A) appreciate by about 9 percent.

B) appreciate by 10 percent.

C) depreciate by about 9 percent.

D) depreciate by 10 percent.

Answer: A Topic: The Real Exchange Rate Difficulty: Moderate Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge 3) According to purchasing power parity, which of the following is FALSE about an overvalued dollar compared to the Japanese yen?

A) U.S. merchants would be motivated to import more Japanese goods.

B) Japanese merchants would tend to export more to the United States.

C) Prices in the United States would tend to fall.

D) Over the long term, the exchange rate would fall.

Answer: D Topic: The Real Exchange Rate Difficulty: Easy Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge

14 .

4) The real exchange rate is defined as A) the market exchange rate adjusted for price differences.

B) the purchasing power parity exchange rate.

C) the exchange rate that causes interest parity to hold.

D) the exchange rate that exists in major currency centers.

Answer: A Topic: The Real Exchange Rate Difficulty: Easy Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge 5) If the nominal exchange rate does not change, but U.S. prices rise, the real exchange rate has ________, and U.S. imports are likely to ________.

A) increased; rise B) increased; fall C) decreased; rise D) decreased; fall Answer: C Topic: The Real Exchange Rate Difficulty: Difficult Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge 6) When the purchasing power of currencies is the same, A) interest parity holds.

B) currencies cannot change in value C) the real exchange rate is equal to the nominal exchange rate.

D) interest rates are the same.

Answer: C Topic: The Real Exchange Rate Difficulty: Easy Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge

15 .

7) Holding nominal exchange rates constant, if inflation in Europe exceeds inflation in the United States, A) the real exchange rate ($/€) will rise, and the euro will buy more in the U.S. B) the real exchange rate ($/€) will rise, and the euro will buy less in the U.S. C) the real exchange rate ($/€) will fall, and the euro will buy more in the U.S. D) the real exchange rate ($/€) will fall, and the euro will buy less in the U.S. Answer: A Topic: The Real Exchange Rate Difficulty: Moderate Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge 8) What matters most to importers and exporters is the nominal exchange rate.

Answer: FALSE Topic: The Real Exchange Rate Difficulty: Easy Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge 9) A rise in the real exchange rate represents an increase in the purchasing power of the home currency.

Answer: FALSE Topic: The Real Exchange Rate Difficulty: Easy Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge 10) A tourist going to Europe would be happy if the real exchange rate ($/€) increased.

Answer: FALSE Topic: The Real Exchange Rate Difficulty: Easy Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge

16 .

11) A rise in the nominal exchange rate ($/€) represents a depreciation of the dollar relative to the euro, but a rise in the real exchange rate ($/€) represent an appreciation of the dollar. Explain why this is true.

Answer: The nominal exchange rate represents the number of dollars required to buy one euro.

An increase in that number means that more dollars are required to purchase a euro. The dollar price of the euro has risen, and the dollar has depreciated because one dollar now buys fewer euros. However, holding nominal rates constant, the reverse is true about real exchange rates.

The real exchange rate is the nominal rate times the ratio of the foreign price level to the domestic price level. For the real rate to increase, the foreign price level must rise more slowly than the domestic price level. All other things equal, that means that a dollar can buy more goods in Europe than it could in the U.S. The dollar has thus appreciated in real terms, because it can purchase more goods abroad than before.

Topic: The Real Exchange Rate Difficulty: Difficult Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge 12) If nominal exchange rates do not change, an increase in the U.S. price level relative to the foreign price level represents a real appreciation of the dollar. However, if nominal exchange rates can change, is an increase in U.S. inflation relative to foreign inflation likely to cause appreciation of the dollar in the short run?

Answer: No. An increase in U.S. inflation relative to foreign inflation is likely to reduce the demand for dollars relative to other currencies. This will cause the nominal exchange rate to increase, a depreciation of the dollar relative to other currencies, and thus the effect on the real exchange rate is unclear.

Topic: The Real Exchange Rate Difficulty: Difficult Objective: LO 10.5 Explain in words and with an equation the relationship between price changes and the real exchange rates.

AACSB: Application of knowledge 10.5 Alternatives to Flexible Exchange Rates 1) Which of the following is true?

A) If an exchange rate is allowed to vary across a fixed basket of currencies, it is called a hard peg.

B) If an exchange rate is not allowed to vary against the target currency, it is called a soft peg.

C) If an exchange is only allowed to fluctuate within a set band, it is considered to be a flexible exchange rate system.

D) A soft peg is when a currency's exchange rate is only allowed to fluctuate within a set band.

Answer: D Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 17 .

2) Which of the following defines a flexible exchange rate?

A) An exchange rate determined by the market B) An exchange rate that fluctuates within a set band C) An exchange rate that is not allowed to vary D) An exchange rate that is backed by gold Answer: A Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 3) Which of the following defines a hard peg?

A) An exchange rate determined by the market B) An exchange rate that fluctuates within a set band C) An exchange rate that is not allowed to vary D) An exchange rate that is backed by gold Answer: C Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 4) Which of the following defines a soft peg?

A) An exchange rate determined by the market B) An exchange rate that fluctuates within a set band C) An exchange rate that is not allowed to vary D) An exchange rate that is backed by gold Answer: B Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge

18 .

5) Under a pure gold standard, A) exchange rates float most of the time.

B) money is worth more than under other systems.

C) nations must buy and sell gold to settle international obligations.

D) there is no inflationary pressure.

Answer: C Topic: Alternatives to Flexible Exchange Rates Difficulty: Moderate Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 6) Which of the following is not a true statement about the Bretton Woods system?

A) The value of the dollar was fixed in terms of gold.

B) Other currencies fixed values in terms of the dollar.

C) The U.S. was able to increase its money supply easily.

D) Trade deficits were eliminated.

Answer: D Topic: Alternatives to Flexible Exchange Rates Difficulty: Moderate Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 7) Soft pegs that are periodically adjusted are called A) crawling pegs.

B) hard pegs.

C) snakes.

D) managed floats.

Answer: A Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 8) Under a gold standard, countries should A) keep the supply of their domestic money constant.

B) keep the supply of their domestic money fixed in proportion to their gold holdings.

C) keep the supply of foreign exchange less than their domestic money supply.

D) restrict the demand for foreign goods.

Answer: B Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 19 .

9) Under a fixed exchange standard, if the domestic demand for foreign exchange increases, A) the central monetary authority must meet the demand out of its reserves.

B) the central monetary authority must increase the supply of domestic money.

C) the fixed exchange standard will breakdown.

D) inflation will increase.

Answer: A Topic: Alternatives to Flexible Exchange Rates Difficulty: Moderate Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 10) The Bretton Woods exchange rate system was an example of a A) managed float.

B) pure gold standard.

C) modified gold standard.

D) floating exchange rate system.

Answer: C Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 11) The Smithsonian Agreement of 1971 was hailed by President Nixon as a fundamental reorganization of the international monetary system. In fact, what it accomplished was A) the revaluation of the dollar.

B) the devaluation of the dollar.

C) an increase of the gold content of the dollar.

D) the elimination of gold backing for the dollar.

Answer: B Topic: Alternatives to Flexible Exchange Rates Difficulty: Moderate Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge

20 .

12) The biggest disadvantage of a fixed exchange rate is the A) increased probability of high inflation.

B) tradeoff between supporting the exchange rate and adjusting the trade balance.

C) tradeoff between supporting the exchange rate and maintaining economic growth.

D) tradeoff between supporting the exchange rate and maintaining a balanced budget.

Answer: C Topic: Alternatives to Flexible Exchange Rates Difficulty: Moderate Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 13) The majority of countries in the world have some type of fixed exchange rate system.

Answer: TRUE Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 14) Economists usually favor a return to the gold standard.

Answer: FALSE Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 15) If a currency has a fixed exchange rate, it is not subject to the forces of supply and demand.

Answer: FALSE Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 16) When did major currencies begin floating against each other, ending the Bretton Woods system?

Answer: March 1973 Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge

21 .

17) Explain the three rules that countries must follow to maintain a gold standard.

Answer: First, they must fix the value of their currency unit in terms of gold. The second rule of the gold standard is that nations keep the supply of their domestic money fixed in some constant proportion to their supply of gold. The third rule of a gold standard is that nations must stand ready and willing to provide gold in exchange for their home country currency.

Topic: Alternatives to Flexible Exchange Rates Difficulty: Moderate Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 18) Explain the three rules that countries must follow to maintain a gold standard.

Answer: First, they must fix the value of their currency unit in terms of gold. The second rule of the gold standard is that nations keep the supply of their domestic money fixed in some constant proportion to their supply of gold. The third rule of a gold standard is that nations must stand ready and willing to provide gold in exchange for their home country currency.

Topic: Alternatives to Flexible Exchange Rates Difficulty: Moderate Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 19) What are the differences and similarities between a depreciation and devaluation of a currency?

Answer: A depreciation of a currency takes place due to the mechanics of supply and demand and belongs to a flexible or floating exchange rate system. On the other hand, devaluation is due to the intervention by the monetary authority of a central bank of a country following a fixed exchange rate system. They both result in a lower value of the currency.

Topic: Alternatives to Flexible Exchange Rates Difficulty: Easy Objective: LO 10.3 Differentiate short-run, medium-run, and long-run forces that help determine the value of a currency.

AACSB: Application of knowledge 10.6 Choosing the Right Exchange Rate System 1) A single currency area requires A) mobile labor and synchronized business cycles.

B) immobile labor and synchronized business cycles.

C) immobile labor and mobile capital.

D) mobile labor and unsynchronized business cycles.

Answer: A Topic: Choosing the Right Exchange Rate System Difficulty: Moderate Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge 22 .

2) Which of the following is NOT one of the determinants of the gains of adopting a single currency?

A) A well-synchronized business cycle involving all member countries B) The possibility of factors of production to freely move across borders C) The willingness and ability of member countries to design policies to address regional imbalances that may develop D) Widening the common market by allowing other countries to join Answer: D Topic: Choosing the Right Exchange Rate System Difficulty: Moderate Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge 3) The traditional view of fixed rate systems was that A) they improved inflation but were worse for growth.

B) they improved stability but were worse for inflation.

C) they improved inflation but worsened stability.

D) they improved growth but worsened inflation.

Answer: A Topic: Choosing the Right Exchange Rate System Difficulty: Moderate Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge 4) A reason why fixed exchange rate systems might lower growth is that A) inflation may be higher.

B) monetary policy cannot be used.

C) they are more risky.

D) they deter international trade.

Answer: B Topic: Choosing the Right Exchange Rate System Difficulty: Easy Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge

23 .

5) Economic research using data from the 1990s has shown that A) floating rate systems are better for economic growth.

B) fixed rate systems are better for economic growth.

C) gold standards are better for economic growth.

D) there is no clear relationship between the exchange rate system and growth.

Answer: D Topic: Choosing the Right Exchange Rate System Difficulty: Moderate Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge 6) When most shocks originate in the monetary sector, it is generally better to have A) a flexible rate system.

B) a fixed rate system.

C) a gold standard.

D) a managed float.

Answer: B Topic: Choosing the Right Exchange Rate System Difficulty: Moderate Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge 7) When most shocks to the economy are external, it is generally better to have A) a flexible rate system.

B) a hard peg.

C) a soft peg.

D) a crawling peg.

Answer: A Topic: Choosing the Right Exchange Rate System Difficulty: Moderate Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge 8) Exchange rate pegs are popular with developing countries because they increase credibility.

Answer: TRUE Topic: Choosing the Right Exchange Rate System Difficulty: Easy Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge

24 .

9) When an economy is closely tied to another, larger economy, floating exchange rates are usually desirable.

Answer: FALSE Topic: Choosing the Right Exchange Rate System Difficulty: Easy Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge 10) Which type of exchange rate system minimizes external shocks to an economy?

Answer: A flexible exchange rate system Topic: Choosing the Right Exchange Rate System Difficulty: Easy Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge 11) How is dollarization different from monetary union?

Answer: The nations do not share a central bank and monetary policy.

Topic: Choosing the Right Exchange Rate System Difficulty: Easy Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge 12) Currently the NAFTA nations do not meet the conditions for an optimal currency area. What are the two main reasons why?

Answer: Historically Mexico's business cycle has not been correlated with the cycles in the United States and Canada; labor mobility is limited.

Topic: Choosing the Right Exchange Rate System Difficulty: Moderate Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge

25 .

13) Why might a group of countries wish to have a common currency? Explain four reasons.

Answer: First, a single currency eliminates the need to convert each other's money and thereby reduces transaction costs. Second, a single currency eliminates price fluctuations caused by changes in the exchange rate. The elimination of misleading price signals that result from exchange rate fluctuations is also a potential gain in efficiency. Third, the elimination of exchange rates through the adoption of a single currency can help increase political trust between countries seeking to increase their integration. Fourth, in some developing countries the adoption of a common currency may give their exchange rate system greater credibility.

Topic: Choosing the Right Exchange Rate System Difficulty: Difficult Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge 14) Explain Mundell's four conditions for adopting a single currency.

Answer: The first condition is that the business cycle must be synchronized and national economies must enter recessions and expansions at more or less the same time, which makes similar monetary policies desirable. The second condition is a high degree of labor and capital mobility between the member countries. This allows workers and capital to leave countries or regions where work is scarce and to join the supply of labor and capital in booming regions. The third condition is that there are regional policies capable of addressing the imbalances that may develop. Depressed areas may remain depressed if people cannot move or choose not to move because the psychological or other costs are too high or resources outside the region are not available. The fourth condition is that the nations involved must be seeking a level of integration that goes beyond simple free trade.

Topic: Choosing the Right Exchange Rate System Difficulty: Difficult Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge 15) What are the disadvantages of adopting a single currency? Explain.

Answer: In addition to its political symbolism, the adoption of a common currency also means that the country no longer has its own money supply as a tool for managing its economic growth.

A second potential cost to adopting a single currency is that countries give up their ability to alter their exchange rates. Exchange rate adjustments are sometimes the least costly way to restore competitiveness after a round of price increases.

Topic: Choosing the Right Exchange Rate System Difficulty: Moderate Objective: LO 10.6 State the necessary conditions for two or more countries to form a successful single currency area.

AACSB: Application of knowledge

26 .

International Economics, 7e (Gerber) Chapter 11 An Introduction to Open Economy Macroeconomics 11.1 Introduction: The Macroeconomy in a Global Setting 1) There are no questions for this section.

Topic: Introduction: The Macroeconomy in a Global Setting 11.2 Aggregate Demand and Aggregate Supply 1) Which of the following is true?

A) Points along the aggregate supply curve show the equilibrium levels of output and prices that are consistent on the demand side of the economy.

B) Points along the aggregate demand curve show the equilibrium levels of output and prices that are consistent on the supply side of the economy.

C) Aggregate demand shows the levels of GDP and prices where expenditure decisions and production decisions match.

D) Aggregate supply shows the levels of GDP and prices where expenditure decisions and production decisions match.

Answer: C Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 2) Along the aggregate supply curve A) the horizontal part represents a situation where the economy is operating above full employment levels.

B) inflation would be a primary concern along the horizontal part of the aggregate supply curve.

C) the horizontal section of the aggregate supply curve represents the limit of production.

D) the middle, upward-sloping part of the aggregate supply curve would be associated with a growing economy that experienced increased prices from resources that are becoming relatively scarce.

Answer: D Topic: Aggregate Demand and Aggregate Supply Difficulty: Moderate Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge

1 .

3) Changes in aggregate demand A) could be caused by changes in the spending decisions of foreigners.

B) are unlikely to change quickly in response to economic events.

C) are primarily based on changes in firms' abilities to produce products.

D) are not affected by changes in government policies.

Answer: A Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 4) Intermediate inputs are A) goods used for household consumption only.

B) goods used for government consumption only.

C) goods purchased by one business from another to use in production.

D) raw materials used in the production process.

Answer: C Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 5) If consumption spending increases because people feel more confident about the future, A) aggregate demand will shift to the left.

B) aggregate demand will shift to the right.

C) aggregate supply will shift to the left.

D) aggregate supply will shift to the right.

Answer: B Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge

2 .

6) Suppose the Asian financial crisis decreased U.S. exports. In the aggregate demand/aggregate supply model, this would be represented as A) a shift to the right of aggregate supply, which would result in more production for the U.S. economy.

B) a shift to the left of aggregate supply, which would result in less production for the U.S. economy.

C) a shift to the right of aggregate demand, leading to more spending and production in the U.S. economy.

D) a shift to the left of aggregate demand, leading to less spending and production in the U.S. economy.

Answer: D Topic: Aggregate Demand and Aggregate Supply Difficulty: Moderate Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 7) Economic growth would be illustrated by A) a rightward shift of aggregate demand.

B) a leftward shift of aggregate demand.

C) a rightward shift of aggregate supply.

D) a leftward shift of aggregate supply.

Answer: C Topic: Aggregate Demand and Aggregate Supply Difficulty: Moderate Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 8) When aggregate demand increases, A) the price level is likely to rise as GDP rises.

B) the price level is likely to fall as GDP rises.

C) aggregate supply will shift to the right.

D) aggregate supply will shift to the left.

Answer: A Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge

3 .

9) If a component of aggregate demand increases, A) GDP in the United States is likely to increase less than that component of spending increased.

B) GDP in the United States is likely to increase more than that component of spending increased.

C) GDP in the United States is likely to decrease.

D) GDP in the United States will not change.

Answer: B Topic: Aggregate Demand and Aggregate Supply Difficulty: Moderate Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 10) When spending and incomes in an economy increase, A) imports are likely to increase.

B) imports are likely to be unchanged.

C) imports are likely to decrease.

D) exports are likely to decrease.

Answer: A Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 11) Government spending and taxes A) do not change aggregate demand.

B) are an important component of aggregate supply.

C) do not play a big role in determining GDP. D) are a major determinant of aggregate demand.

Answer: D Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge

4 .

12) Which of the following is NOT one of the factors that could affect the size of the multiplier?

A) What sector of the economy receives the initial increase in spending B) How the spending is financed C) Whether the economy is in recession or at full employment D) Whether the economy is in autarky equilibrium Answer: D Topic: Aggregate Demand and Aggregate Supply Difficulty: Moderate Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 13) Which of the following would cause an increase in aggregate supply?

A) An increase in factors of production B) An increase in foreign demand for goods C) A decrease in productivity D) An increase in government spending Answer: A Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 14) When aggregate demand meets aggregate supply in the horizontal portion of the aggregate supply curve, A) a decrease in demand will cause prices to rise but no change in output.

B) a decrease in demand will cause output to rise but no change in prices.

C) a decrease in demand will cause prices to fall but no change in output.

D) a decrease in demand will cause output to fall but no change in prices.

Answer: D Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge

5 .

15) When aggregate demand meets aggregate supply in the vertical portion of the aggregate supply curve, A) an increase in demand will cause prices to rise but no change in output.

B) an increase in demand will cause output to rise but no change in prices.

C) an increase in demand will cause prices to fall but no change in output.

D) an increase in demand will cause output to fall but no change in prices.

Answer: A Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 16) For any given increase in spending that is not directly caused by an increase in income, the impact on equilibrium GDP is greater than the initial spending increase.

Answer: TRUE Topic: Aggregate Demand and Aggregate Supply Difficulty: Moderate Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 17) Taxes, savings, and imports tend to magnify the effect of any spending change in the economy; that is, if investment spending initially increases, then spending will grow even more as taxes, savings, and imports increase, so the economic growth will accelerate.

Answer: FALSE Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 18) When the economy is using all of its factors of production, the aggregate supply curve is vertical.

Answer: TRUE Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge

6 .

19) What typically happens to imports as income and spending rise?

Answer: Imports increase. Consumers spend more, and some of that spending will be on goods from other countries.

Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 20) Assume that aggregate supply meets aggregate demand in the upward sloping portion of the AS curve. For each of the following, graph the change in aggregate supply and/or aggregate demand, and state the effect on prices and output.

1. The demand for U.S. exports increases.

2. Taxes increase.

3. Businesses become less optimistic about the future.

4. The labor force increases.

5. Costs of production increase.

Answer: 1. Aggregate demand increases; prices and output rise.

2. Aggregate demand decreases; prices and output fall.

3. Aggregate demand decreases; prices and output fall.

4. Aggregate supply increases (shifts rightward); prices fall and output rises.

5. Aggregate demand increases (shifts leftward); prices rise and output falls.

Topic: Aggregate Demand and Aggregate Supply Difficulty: Easy Objective: LO 11.1 Diagram a shift in aggregate demand or supply and explain the impact on the price level and GDP. AACSB: Application of knowledge 11.3 Fiscal and Monetary Policies 1) Fiscal policy is A) the selling of government bonds by the Treasury.

B) the deliberate manipulation of the money supply designed to affect the interest rate.

C) the deliberate manipulation of taxation and spending designed to affect the economy.

D) the selling of foreign exchange reserves designed to change the exchange rate.

Answer: C Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge

7 .

2) Which of the following may NOT serve as a possible chain reaction for either fiscal or monetary policy?

A) G↑ ⇒ Y↑ ⇒ C↑ ⇒ Y↑ ⇒ C↑....

B) T↓ ⇒ Y↑ ⇒ C↑ ⇒ Y↑ ⇒ C↑....

C) M↑ ⇒ i↓ ⇒ I↓ ⇒ Y↓ ⇒ C↓....

D) M↑ ⇒ i↓ ⇒ I↑ ⇒ Y↑ ⇒ C↑....

Answer: C Topic: Fiscal and Monetary Policies Difficulty: Moderate Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 3) Starting from a balanced budget, which of the following would NOT cause a government budget deficit?

A) A decrease in taxes B) An increase in spending of goods and services C) An increase in transfer payments D) A 50 percent increase in spending accompanied by a 50 percent increase in taxes Answer: D Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 4) Which of the following is NOT a reason why the effects of tax cuts on government spending dissipate and each additional change in consumption and income becomes smaller and smaller?

A) Some of the increase in income will be lost through taxation.

B) Some of the increase is saved and does not result in an increase in consumer demand.

C) Some of the increase in consumption will be an additional demand for imported goods.

D) Some of the increase is used for business investment.

Answer: D Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge

8 .

5) All of the following make the use of fiscal policy less attractive EXCEPT A) that it cannot be effective unless it is accommodated with expansionary monetary policy.

B) the substantial margin of error in the value of the multiplier.

C) the legislative lag, which is the time it takes for Congress and the President to pass and implement the measure.

D) the crowding out effect, which is the decrease in private spending that occurs due to increased government spending.

Answer: A Topic: Fiscal and Monetary Policies Difficulty: Moderate Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 6) All of the following took place during the Great Depression EXCEPT A) an increase in unemployment from about 3.4 percent to about 25 percent and a decrease in real GDP by about 30 percent between 1929 in 1933.

B) an increase in taxes because of the fear that budget deficits would undermine business confidence.

C) a fall in the money supply by more than 30 percent.

D) a rise in inflation during the early 1930s.

Answer: D Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 7) An example of expansionary fiscal policy would be A) a decrease in government spending to reduce budget deficits.

B) an increase in tax collection to reduce budget deficits.

C) a decrease in interest rates to help stimulate the economy.

D) an increase in government spending on infrastructure to create jobs and improve the economy.

Answer: D Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge

9 .

8) Which of the following is an example of expansionary monetary policy?

A) Open market purchases of bonds B) A decrease in government spending C) A decrease in taxes D) An increase in interest rates Answer: A Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 9) Which of the following correctly explains how expansionary monetary policy works?

A) G↑ ⇒ C↑ ⇒ Y↑ B) T↑ ⇒ C↑ ⇒ Y↑ C) M↑ ⇒ i↓ ⇒ I↑ ⇒ Y↑ D) M↑ ⇒ i↓ ⇒ I↓ ⇒ Y↑ Answer: C Topic: Fiscal and Monetary Policies Difficulty: Moderate Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 10) Which of the following correctly explains how expansionary fiscal policy works?

A) G↑ ⇒ C↑ ⇒ Y↑ B) T↑ ⇒ C↑ ⇒ Y↑ C) M↑ ⇒ i↓ ⇒ I↑ ⇒ Y↑ D) M↑ ⇒ i↓ ⇒ I↓ ⇒ Y↑ Answer: A Topic: Fiscal and Monetary Policies Difficulty: Moderate Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 11) Which of the following is an advantage of monetary policy?

A) It is faster to implement than fiscal policy.

B) It acts more directly upon aggregate demand than fiscal policy.

C) It is not subject to multiplier effects.

D) It is unlikely to create inflation.

Answer: A Topic: Fiscal and Monetary Policies Difficulty: Moderate Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 10 .

12) If aggregate supply meets aggregate demand in the vertical part of the AS curve, which of the following is a true statement about expansionary policies?

A) Monetary policy will be more effective in increasing output.

B) Fiscal policy will be more effective in increasing output.

C) Fiscal and monetary policy will be equally effective in increasing output.

D) Both monetary and fiscal policies will only cause prices to increase.

Answer: D Topic: Fiscal and Monetary Policies Difficulty: Moderate Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 13) The recent trend internationally has been for the executive and legislative branches of elected governments to get more control over monetary policy, as has been the case in countries such as the United States.

Answer: FALSE Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 14) Contractionary fiscal policy attempts to shift aggregate demand to the right.

Answer: FALSE Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 15) When a central bank sells bonds, cash reserves throughout the financial system increase, interest rates fall, and investment spending increases.

Answer: FALSE Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge

11 .

16) Expansionary monetary policy involves an increase in the money supply and a fall in interest rates, leading to a positive expansion in income.

Answer: TRUE Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 17) Fiscal policy can be implemented more quickly than monetary policy.

Answer: FALSE Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 18) The gold standard was helpful in stabilizing economies during the Great Depression.

Answer: FALSE Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 19) Describe some of the potential problems with using expansionary fiscal policy.

Answer: Expansionary fiscal policy tends to cause inflation. It is difficult to accurately measure the size of the multiplier. It can cause different effects based on its financing. It is also politically cumbersome in terms of negotiating, enacting, and implementing the changes.

Topic: Fiscal and Monetary Policies Difficulty: Easy Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge

12 .

20) Explain how exchange rate policies affected economies during the Great Depression.

Answer: Many countries were on the gold standard at the beginning of the Great Depression. A gold standard requires that monetary authorities keep the stock of money in a constant ratio relative to the stock of monetary gold that the nation holds. This restricts the ability of a nation to use monetary policy. In 1931, it was widely expected that the United Kingdom would leave the gold standard altogether, and speculation turned against the pound. In September 1931, Britain left the gold standard and speculators immediately shifted their attention to the dollar. Expecting a similar decline in the value of the dollar, they began to sell dollars and dollar denominated assets, all of which resulted in gold outflows. The Fed was forced to respond by raising interest rates, and thus the U.S. economy continued its downward spiral. Countries that left the gold standard more quickly were able to use expansionary monetary policy sooner, and thus they recovered more rapidly. The U.S. did not leave the gold standard until after Roosevelt's election, and after that point, the economy began its recovery.

Topic: Fiscal and Monetary Policies Difficulty: Difficult Objective: LO 11.2 Diagram the effects on GDP and the price level of expansionary and contractionary fiscal and monetary policies.

AACSB: Application of knowledge 11.4 Current Account Balances Revisited 1) Expenditure switching refers to A) a switching back and forth between investment and consumption expenditures.

B) a switching back and forth between domestic and foreign goods in response to changes in the exchange rate.

C) a switching back and forth between domestic and foreign goods in response to changes in the interest rate.

D) a switching of back and forth in the current account from a deficit to a surplus and vice versa.

Answer: B Topic: Current Account Balances Revisited Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge

13 .

2) Which of the following is FALSE concerning the long run?

A) Economists believe that fiscal and monetary policies have no permanent effects on the economy.

B) Economists more or less agree that the economy tends to fluctuate around the level that is consistent with full employment.

C) In the long run, the unemployment rate returns to its normal level.

D) The current account must tend toward balance in the long run.

E) None of the above.

Answer: E Topic: Current Account Balances Revisited Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 3) Which of the following correctly shows the relationship between savings, the government budget balance, and the current account?

A) S + CA = I + (T - G) B) S + CA = I + (T + G) C) S + (T - G) = I + CA D) S + (T + G) = I + CA Answer: C Topic: Current Account Balances Revisited Difficulty: Moderate Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 4) Which of the following correctly describes the relationship between savings, the government budget balance, and the current account?

A) Private savings plus the government budget balance must equal private investment plus the current account.

B) Private savings plus the current account must equal private investment plus the government budget surplus or deficit.

C) Private savings plus private investment must equal the current account plus the government budget balance.

D) Private investment must equal private savings plus the current account minus the government budget balance.

Answer: A Topic: Current Account Balances Revisited Difficulty: Difficult Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge

14 .

5) If the government has a $100 million budget deficit, private saving is equal to $500 million, private investment is equal to $300 million, what is the value of the current account in equilibrium?

A) $100 million surplus B) $700 million surplus C) $100 million deficit D) $700 million deficit Answer: A Topic: Current Account Balances Revisited Difficulty: Moderate Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 6) Contractionary fiscal policy can lead to a depreciation of the nation's currency.

Answer: TRUE Topic: Current Account Balances Revisited Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 7) Expansionary fiscal policy is likely to lead a nation's currency to depreciate.

Answer: FALSE Topic: Current Account Balances Revisited Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 8) Expansionary monetary policy is likely to lead to a depreciation of the nation's currency.

Answer: TRUE Topic: Current Account Balances Revisited Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 9) An increase in interest rates causes that nation to experience an outflow of financial capital and causes its currency to depreciate.

Answer: FALSE Topic: Current Account Balances Revisited Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 15 .

10) Fiscal policy does not have an effect on interest rates.

Answer: FALSE Topic: Current Account Balances Revisited Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 11) A depreciation of the currency can switch spending away from foreign goods and reduce the effect of rising incomes on the current account.

Answer: TRUE Topic: Current Account Balances Revisited Difficulty: Moderate Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 12) Monetary policy is more effective in an open economy than in a closed economy.

Answer: FALSE Topic: Current Account Balances Revisited Difficulty: Moderate Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 13) If interest rates rise, what will happen to the nation's exchange rate?

Answer: It will appreciate.

Topic: Current Account Balances Revisited Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 14) How does expansionary monetary policy affect a nation's exchange rate?

Answer: Because it lowers interest rates, it will cause the exchange rate to depreciate.

Topic: Current Account Balances Revisited Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge

16 .

15) Describe the policies a nation would follow to correct a current account deficit. What are the primary purposes of each type of policy?

Answer: Policy makers need to turn domestic expenditures away from foreign-produced products toward domestic products (expenditure switching) and reduce the overall level of demand in the economy (expenditure reducing). Expenditure reducing policies are intended to avoid inflation. Expenditure switching policies are intended to avoid recession.

Topic: Current Account Balances Revisited Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 16) Describe the difficult choices in macroeconomic policy that Argentina faced in the late 1990s.

Answer: To address its macroeconomic problems in the early 1990s, Argentina fixed its currency to the U.S. dollar at a 1:1 rate and dramatically restricted the creation of new money.

For every new Argentine peso put into circulation, the central bank was required to have a U.S. dollar to back it up and a currency board was created to oversee the system and enforce the rules.

Later in the decade as Argentina faced recession, policy makers faced difficult choices. They could use expansionary macroeconomic policy to deal with the recession or they could maintain the peso's link to the dollar. They could devalue and increase the debt burden or they could maintain the exchange rate and watch the current account deficit grow and the economy shrink.

They could cut spending to maintain fiscal soundness or increase spending to address the recession.

Topic: Current Account Balances Revisited Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 17) Explain why in an economy with fixed exchange rates, monetary policy will not cause expenditure switching.

Answer: Expenditure switching refers to switching back and forth between domestic and foreign goods, in this case, in response to a change in the exchange rate. Expenditure switching magnifies the effects of monetary policy when rates are flexible. In an economy with a fixed exchange rate, changes in the money supply will not cause expenditure switching because the exchange rate does not change.

Topic: Current Account Balances Revisited Difficulty: Moderate Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge

17 .

18) Carefully explain why monetary policy is likely to be more effective in a open economy than fiscal policy.

Answer: Expansionary fiscal policy increases interest rates, causing an exchange rate appreciation. Appreciation switches expenditures toward foreign goods because it makes them relatively cheaper, thereby increasing imports and reducing the current account balance. The expansionary fiscal policy leads to more imports, both from the rise in income and from exchange rate appreciation, which creates a feedback effect on domestic income. The shift in expenditures toward foreign goods offsets some of the increase in the demand for domestic goods and diminishes the impact of expansionary fiscal policy. In contrast, expansionary monetary policy causes the interest rate to fall and the currency to depreciate. Exchange rate depreciation switches some consumer spending from foreign goods (imports) to domestic goods, because foreign goods become relatively expensive. The effect of expenditure switching is to partially or completely offset the increase in imports caused by rising incomes. As a result, there is a more robust expansion of the domestic economy because less of the expansion of demand leaks out of the economy as an increase in imports.

Topic: Current Account Balances Revisited Difficulty: Difficult Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 11.5 Macro Policies for Current Account Imbalances 1) In most cases, expenditure-switching policies must be accompanied by expenditure-reducing policies because A) expenditure-switching policies are completely ineffective without expenditure-reducing policies.

B) inflation ensues as home country domestic expenditures switch away from foreign goods to domestic goods unless overall expenditures are reduced.

C) inflation abroad may increase the demand for domestic goods, causing inflation to rise.

D) the depreciation in the exchange rate may decrease the domestic price of foreign goods, causing an increase in the current account deficit.

Answer: B Topic: Macro Policies for Current Account Imbalances Difficulty: Easy Objective: LO 11.4 Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.

AACSB: Application of knowledge

18 .

2) The J-curve effect that results from currency depreciation results is due to A) the initial effect having positive effects on the current account balance.

B) the value of imports increasing by more than the value of exports at the time of devaluation.

C) exports and imports being totally unresponsive to changes in exchange rates.

D) decreases in the dollar price of imports.

Answer: B Topic: Macro Policies for Current Account Imbalances Difficulty: Easy Objective: LO 11.5 Draw a J-curve and use it to show how exchange rate depreciation does not lead to an immediate reduction in the current account deficit.

AACSB: Application of knowledge 3) All of the following are possible explanations for why it took so long for trade balances to respond to the depreciation of the dollar EXCEPT A) the prior increase in the value of the dollar had padded the profit margins of foreign producers.

B) foreign trade barriers made it impossible for the United States to substantially expand exports it bought.

C) there were still impacts from earlier appreciations working through the system.

D) exports began to increase from a much lower base than imports.

Answer: B Topic: Macro Policies for Current Account Imbalances Difficulty: Easy Objective: LO 11.5 Draw a J-curve and use it to show how exchange rate depreciation does not lead to an immediate reduction in the current account deficit.

AACSB: Application of knowledge 4) Expenditure-reducing policies designed to improve a current account deficit A) turn domestic spending towards domestic goods.

B) reduce the overall level of demand in the economy.

C) turn domestic spending towards foreign goods.

D) increase the overall level of demand in the economy.

Answer: B Topic: Macro Policies for Current Account Imbalances Difficulty: Easy Objective: LO 11.4 Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.

AACSB: Application of knowledge

19 .

5) Expenditure-switching policies designed to improve a current account deficit A) turn domestic spending towards domestic goods.

B) reduce the overall level of demand in the economy.

C) turn domestic spending towards foreign goods.

D) increase the overall level of demand in the economy.

Answer: A Topic: Macro Policies for Current Account Imbalances Difficulty: Easy Objective: LO 11.4 Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.

AACSB: Application of knowledge 6) Used alone, an expenditure-reducing policy that lowers aggregate demand A) will not reduce the current account deficit.

B) is likely to cause a recession.

C) will be likely to increase the current account deficit.

D) is likely to increase domestic inflation.

Answer: B Topic: Macro Policies for Current Account Imbalances Difficulty: Moderate Objective: LO 11.4 Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.

AACSB: Application of knowledge 7) Used alone, an expenditure-switching policy that turns spending from foreign goods to domestic goods A) will not reduce the current account deficit.

B) is likely to cause a recession.

C) will be likely to increase the current account deficit.

D) is likely to increase domestic inflation.

Answer: D Topic: Macro Policies for Current Account Imbalances Difficulty: Easy Objective: LO 11.4 Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.

AACSB: Application of knowledge

20 .

8) The J-curve shows that, after a currency depreciation, A) the current account is likely to worsen before it improves.

B) the current account is likely to improve before it worsens.

C) the current account will remain unchanged after all adjustments have taken place.

D) the current account is difficult to change in the long run.

Answer: A Topic: Macro Policies for Current Account Imbalances Difficulty: Moderate Objective: LO 11.5 Draw a J-curve and use it to show how exchange rate depreciation does not lead to an immediate reduction in the current account deficit.

AACSB: Application of knowledge 9) A common response to stop a depreciation of a currency is to use contractionary monetary policy, which could lead to a recession.

Answer: TRUE Topic: Macro Policies for Current Account Imbalances Difficulty: Easy Objective: LO 11.4 Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.

AACSB: Application of knowledge 10) It is more certain how expansionary monetary policy will affect the current account than how expansionary fiscal policy will affect it.

Answer: FALSE Topic: Macro Policies for Current Account Imbalances Difficulty: Easy Objective: LO 11.4 Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.

AACSB: Application of knowledge 11) Expenditure switching policies are best used on their own.

Answer: FALSE Topic: Macro Policies for Current Account Imbalances Difficulty: Easy Objective: LO 11.4 Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.

AACSB: Application of knowledge 12) If a currency rapidly depreciates, what are the possible negative results to the economy of using contractionary monetary policy to address the depreciation?

Answer: National income falls and perhaps the economy goes into a recession.

Topic: Macro Policies for Current Account Imbalances Difficulty: Easy Objective: LO 11.4 Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.

AACSB: Application of knowledge 21 .

13) How is an exchange rate depreciation likely to affect imports and exports in the short run and over a longer period of time?

Answer: In the short run, the value of imports may increase, increasing the current account deficit. It may take many months before it causes exports to rise and imports to fall.

Topic: Macro Policies for Current Account Imbalances Difficulty: Easy Objective: LO 11.5 Draw a J-curve and use it to show how exchange rate depreciation does not lead to an immediate reduction in the current account deficit.

AACSB: Application of knowledge 14) Use a J-curve to illustrate the effect on the current account of an exchange rate depreciation.

Explain why the curve has the shape that it does.

Answer: Graph should look like Figure 11.6 in the text. After a depreciation, there is usually a short period of no noticeable impact on the flow of goods and services. When imports and exports begin to respond, the immediate change is an increase in the value of imports, pushing the current account balance deeper into deficit. A depreciation makes foreign goods immediately more expensive, but it takes time for households and businesses to find substitutes. Over time, domestic buyers substitute away from imports, and likewise, the appreciation of the foreign currency increases the demand for exports (which are also likely to be slow to adjust in the short run). Thus eventually, the current account balance should improve.

Topic: Macro Policies for Current Account Imbalances Difficulty: Difficult Objective: LO 11.4 Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.

AACSB: Application of knowledge 15) Explain why expenditure switching and expenditure reducing policies need to be used together.

Answer: Policies that switch spending to domestic goods drive up aggregate demand, which is inflationary unless the economy is in the horizontal part of the aggregate supply curve.

Expenditure reductions on their own are recessionary because they reduce aggregate demand without switching the composition of demand toward domestic producers. Thus to be successful, the policies must be used together.

Topic: Macro Policies for Current Account Imbalances Difficulty: Difficult Objective: LO 11.4 Explain how expenditure switching and expenditure reducing policies can be used to reduce a current account deficit.

AACSB: Application of knowledge

22 .

11.6 Macroeconomic Policy Coordination in Developed Countries 1) Which of the following would NOT be a reason why developed nations would try to coordinate their macroeconomic policies?

A) To achieve a desirable level of world economic growth B) To avoid imposing a disproportionate burden on one major country in its attempt to help other world economies C) To stimulate production in other countries using the higher incomes generated by policy coordination D) To coordinate retaliatory policies on developing countries' trade barriers Answer: D Topic: Macroeconomic Policy Coordination in Developed Countries Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 2) Which of the following is NOT a likely goal of macroeconomic coordination between nations?

A) Reducing trade barriers B) Achieving a desirable level of world economic growth C) Avoiding a global economic crisis D) Correcting global economic imbalances Answer: A Topic: Macroeconomic Policy Coordination in Developed Countries Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 3) When macroeconomic policies are not coordinated, A) macroeconomic policies will not be effective.

B) expansionary policies in one country are likely to increase global imbalances.

C) worldwide recessions are likely.

D) low-income countries cannot grow.

Answer: B Topic: Macroeconomic Policy Coordination in Developed Countries Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge

23 .

4) During the worldwide recession of 2007-2009, A) the Fed and the European Central Bank worked together.

B) all countries coordinated macroeconomic policies.

C) nations sacrificed some sovereignty.

D) the IMF coordinated world economic policies.

Answer: A Topic: Macroeconomic Policy Coordination in Developed Countries Difficulty: Moderate Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 5) Coordination of macroeconomic policies between nation is uncommon.

Answer: TRUE Topic: Macroeconomic Policy Coordination in Developed Countries Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 6) Which nations make up the G8?

Answer: Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, the United States Topic: Macroeconomic Policy Coordination in Developed Countries Difficulty: Easy Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge 7) Explain why macroeconomic policies that are coordinated can enhance economic growth, but why policies that are not coordinated can increase global imbalances.

Answer: If a group of industrial economies decide jointly to expand their economies with fiscal and monetary policies, then growth in their incomes raises incomes around the world as their demand for imports stimulates production in other countries. If all economies expand simultaneously, then no country is burdened by a sudden excess of imports over exports. Their exports grow along with their imports and with the growth in demand in their trading partners' economies. If a country uses expansionary policies when other countries are not doing the same, the country is likely to have a deterioration in their current accounts since their trading partners are not growing at the same rate. If expansionary fiscal policies cause interest rates to rise, then a further deterioration in the current account is likely due to the appreciation of the currency resulting from the inflow of foreign capital. Thus global imbalances increase.

Topic: Macroeconomic Policy Coordination in Developed Countries Difficulty: Difficult Objective: LO 11.3 Analyze the effects of fiscal and monetary policies on the current account and the exchange rate.

AACSB: Application of knowledge

24 .

International Economics, 7e (Gerber) Chapter 12 International Financial Crises 12.1 Introduction: The Challenge of Financial Integration 1) There are no questions for this section.

Topic: Introduction: The Challenge to Financial Integration 12.2 Definition of a Financial Crisis 1) An exchange rate crisis is caused by A) a sudden and an unexpected collapse in the value of a nation's currency.

B) the inability of the IMF to predict the immediate collapse of the currency of a country.

C) the adoption of a flexible exchange rate system by a country or group of countries.

D) the adoption of a fixed exchange rate system by a country or group of countries.

Answer: A Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 2) All of the following are possible outcomes of a banking crisis EXCEPT A) depositors, but not banks, may lose all or a portion of their assets.

B) a recession due to decreases in consumption by households.

C) decreases in investment.

D) a contagion effect of the crisis from vulnerable banks to financial institutions on sound basis.

Answer: A Topic: Definition of a Financial Crisis Difficulty: Moderate Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 3) A fixed exchange rate system crisis may be accompanied or followed by A) unexpected gains of international reserves.

B) revaluation of a currency.

C) devaluation of a currency.

D) deflationary pressures within the country.

Answer: C Topic: Definition of a Financial Crisis Difficulty: Moderate Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge

1 .

4) A flexible exchange rate system crisis involves A) a revaluation of the currency.

B) a rapid and uncontrolled depreciation of the currency.

C) a decrease in the dollar value of the country's international debt.

D) a sure political collapse of the ruling government.

Answer: B Topic: Definition of a Financial Crisis Difficulty: Moderate Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 5) All of the following are possible outcomes of a financial crisis EXCEPT A) bank failings and disintermediation.

B) a recession.

C) an increase in domestic consumption.

D) depreciation or devaluation of a currency.

Answer: C Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 6) Which of the following is NOT likely to occur when a bank fails?

A) Everyone that deposits money in the bank loses all or a portion of their money, unless the country has a functioning deposit insurance system.

B) The loss of savings (or the feared loss of savings) causes households to cut back on consumption, which spreads the recessionary effect wider through the country.

C) Unaffected banks may stop making loans as they take a cautious approach, slowing or stopping new investment.

D) Other banks make too many loans to make up for the loans not made by the failed bank, kicking off a cycle of stimulation and inflation.

Answer: D Topic: Definition of a Financial Crisis Difficulty: Moderate Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge

2 .

7) When expansionary fiscal and monetary policies are joined with a ________ exchange rate system, the various components of economic policy often interact in ways that lead to a crisis followed by a steep recession.

A) fixed B) floating C) crawling peg D) flexible Answer: C Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 8) Which of the following does not occur in resolving a debt crisis?

A) Debts are restructured B) Repayment periods are shortened C) Interest rates are reduced D) Some partial debt forgiveness Answer: B Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 9) A flexible exchange rate system guarantees a country will not experience an exchange rate crisis.

Answer: FALSE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 10) Current research suggests that countries that adopt a pegged exchange rate may be more vulnerable to an exchange rate crisis.

Answer: TRUE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 11) Exchange rate crises are only associated with fixed exchange rate systems.

Answer: FALSE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 3 .

12) Disintermediation is a problem associated with a banking crisis.

Answer: TRUE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 13) Exchange rates and banking systems are often the variables through which the contagion effects of a crisis are spread from one country to another.

Answer: TRUE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 14) Unlike a banking crisis, an exchange rate crisis rarely results in a deep recession.

Answer: FALSE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 15) An exchange rate crisis may lead to a banking crisis and disintermediation.

Answer: TRUE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 16) The most common type of macroeconomic imbalance is overly expansionary fiscal policies that create large government budget deficits, often financed by a high growth rate of the money supply.

Answer: TRUE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 17) Many developing countries make the government budget one of the primary tools of longrun industrial development, with the government owning and operating industries such as steel mills, airlines, and phone companies.

Answer: TRUE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 4 .

18) Tax systems in developing countries tend to be efficient and reliable.

Answer: FALSE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 19) Deficits financed by borrowed money lead to inflation, and in a fixed or crawling peg exchange rate system, this leads to the real exchange rate being undervalued.

Answer: FALSE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 20) Small devaluations are usually sufficient to stem capital flight.

Answer: FALSE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 21) A large and growing current account deficit can be an indicator of a potential crisis.

Answer: TRUE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 22) It is normal and typical in a debt crisis for debtors to completely repudiate all their debts.

Answer: FALSE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 23) A debt crisis may lead to a banking crisis.

Answer: TRUE Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge

5 .

24) If the banking sector borrows internationally and lends locally, how does this intensify a financial crisis?

Answer: The borrowed funds have to be repaid with appreciating international currencies while payments received come in the depreciating local currency.

Topic: Definition of a Financial Crisis Difficulty: Easy Objective: LO 12.1 Define three types of crises.

AACSB: Application of knowledge 12.3 Vulnerabilites, Triggers, and Contagion 1) Which of the following is NOT a characteristic of a financial crisis caused by macroeconomic imbalances?

A) Crises can be unpredictable.

B) Crises can be predictable.

C) Crises can by expansionary fiscal policies accompanied by high budget deficits.

D) Crises can be caused by budget surpluses.

Answer: D Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Easy Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge 2) All of the following are symptoms of definite and identifiable macroeconomic imbalances EXCEPT A) large budget deficits.

B) an overvalued currency.

C) a current account deficit.

D) the discovery of emerging markets by financial investors who want to diversify their portfolios.

Answer: D Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Easy Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge

6 .

3) An austerity policy is A) an increase in the money supply.

B) an expenditure reduction and expenditure switching policy.

C) an expansionary fiscal policy accompanied by decreases in taxes, increases in expenditures, or both.

D) an exchange rate switching policy from a fixed to a flexible exchange rate system.

Answer: B Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Easy Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge 4) Which of the following was NOT a cause or a characteristic of the 1994/95 Mexican peso crisis?

A) An overvalued exchange rate B) An inflow of large foreign portfolio capital C) The inability of the IMF, the world bank, and the NAFTA member countries (i.e., the United States and Canada) to predict the looming financial crisis D) Shifts by the world capital markets toward more conservative and risk-averse investments because of interest and exchange rate movements around the world Answer: C Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Moderate Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge 5) The Mexican peso crisis of 1994 and 1995 was directly related to A) a large capital account surplus.

B) a large capital account deficit.

C) an undervalued peso.

D) a large current account surplus.

Answer: A Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Moderate Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge

7 .

6) A financial crisis brought on by volatile capital flows A) is usually inevitable given underlying conditions.

B) does not happen to countries with strong international positions.

C) is often preceded by capital inflows and an increase in foreign liabilities.

D) is usually the result of high budget deficits.

Answer: C Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Moderate Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge 7) Sovereign default refers to A) default due to excessive money supply growth.

B) default on private debt instruments.

C) default on government debt instruments.

D) bankruptcy of firms, resulting in equity losses.

Answer: C Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Easy Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge 8) A financial crisis brought on by macroeconomic imbalances A) is usually inevitable given underlying conditions.

B) often happens to countries with strong international positions.

C) is often preceded by capital inflows and an increase in foreign liabilities.

D) is usually the result of fragility in the banking sector.

Answer: A Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Moderate Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge

8 .

9) Consider the following two statements.

I. The East Asian financial crisis was an example of macroeconomic imbalances.

II. The Latin American debt crisis was an example of macroeconomic imbalances.

A) Both statements are true.

B) I is true, and II is false.

C) I is false and II is true.

D) Both statements are false.

Answer: C Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Easy Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge 10) Which of the following is a true statement about crises caused by volatile capital flows?

A) Volatile capital flows rarely cause contagion effects.

B) Technological advances have increased the volatility of capital flows.

C) Exchange rates appreciate when there are capital outflows.

D) Budget deficits decrease when there are capital outflows.

Answer: B Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Moderate Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge 11) It should be possible to avoid intensifying crises when there are weak financial sectors if A) banks pay closer attention to the maturity match between their debts and assets.

B) governments do not run budget deficits.

C) current account deficits are moderate.

D) banks do not lend to unworthy creditors.

Answer: A Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Moderate Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge

9 .

12) The 2007 subprime crisis spread easily because A) the United States is an important economy.

B) banks in other countries had purchased assets that depended on the U.S. housing market.

C) there was speculation against the U.S. dollar.

D) the Fed failed to act at the right time.

Answer: B Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Moderate Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge 13) Although financial crises can be unpredictable, they are usually preceded by identifiable vulnerabilities.

Answer: TRUE Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Easy Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge 14) Financial crises due to weak financial sectors can often be avoided if international lenders respond appropriately.

Answer: TRUE Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Easy Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge

10 .

15) Describe the Mexican peso crisis in terms of the imbalances that caused it, the policies Mexico used to respond, and the lessons learned.

Answer: Macroeconomic imbalances included an overvalued real exchange rate and a large current account deficit. Global capital markets became more conservative and risk averse. Given some instability in Mexico investors began to reassess whether Mexico was the safe, stable and modernizing economy they thought and began reducing their peso-denominated assets. To deal with the crisis, in the short run, loans and lines of credit were established with the IMF and the U.S. Austerity measures were imposed that included cuts in government spending, increased taxes and reduced consumption. For Mexico, relying too heavily on large foreign inflows to finance investment was unstable. Too much was in short term liquid portfolios rather than long term direct investment. Pegged exchange rate systems make it difficult to arrange an orderly devaluation as a single change may not be viewed as enough and cause the government to lose credibility. Flexible exchange rates or completely fixed exchange rates with no discretionary monetary policy options seem better.

Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Difficult Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge 16) Carefully explain two reasons why domestic crises can become international crises.

Answer: Some crises are contagious. Direct linkages between economies can sometimes spread a crisis that begins in one economy and turn it into an international crisis (example: 2007 subprime crisis). Sometimes, two or more countries face similar financial crises because they share a common set of economic fundamentals (example: Great Depression). Because economies share the same fundamentals, they are affected similarly by shocks.

Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Moderate Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge

11 .

17) How does a weak financial sector intensify the problems created by volatile capital flows?

Answer: For example, consider a banking sector that borrows internationally and lends locally.

If the funds obtained in the international market are short-term and are used to fund long-term loans such as real estate, problems arise when the international loans must be repaid. If lenders believe that there is a problem with a borrowing bank, they refuse to roll over the debt, creating a liquidity problem if the bank's assets are tied up in real estate loans. In the short run, real estate is relatively illiquid and cannot be used to make a payment. When a number of banks are confronted with similar problems, their attempt to unload real estate depresses prices even further and undermines the solvency of the banking system since every bank with real estate investments is suddenly holding a portfolio of declining value. In turn, this reduces the ability of the banking system to lend, which further reduces investment and consumption.

Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Difficult Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge 18) Explain how the global financial crisis of 2007-2009 was the result of macroeconomic imbalances.

Answer: Beginning with the rise of house prices in the United States, the United Kingdom, Spain, and several other countries, private investors had significant incentives to invest in real estate, driving prices to unsustainable levels. Investment was facilitated by global imbalances in which countries with high savings rates and large current account surpluses, such as China, Germany, and oil exporters, lent to the United States, the United Kingdom, Spain, and other countries with large current account deficits and significant investment opportunities. The result was an unsustainable increase in house prices and a housing bubble in many cities. When house prices began to fall, it put pressure on financial systems in countries where large financial institutions were using the home-loans they made as collateral to borrow heavily in short-term credit markets. The failure of U.S. investment bank Lehman Brothers occurred when it was no longer able to obtain short-term credit after its lenders rejected its collateral, triggering the most intense period of the financial crisis. The first phase of the 2007-2009 crisis involved macroeconomic imbalances in current accounts, and savings and investment. These imbalances were the result of private sector decisions regarding spending, saving, and investment. The second phase began as tax revenues declined and social spending automatically increased as countries fell deeper into recession and government budgets came under pressure. The fall in tax collections and the rise in social spending due to recession constitute an automatic stabilizer since the changes are stimulatory and partially counteract the recession. Inevitably, however, they create or worsen budget deficits, and in some cases the deficit becomes unsustainable.

Topic: Vulnerabilities, Triggers, and Contagion Difficulty: Difficult Objective: LO 12.2 Distinguish a crisis caused by economic imbalances from one caused by volatile capital flows.

AACSB: Application of knowledge

12 .

12.4 Domestic Issues in Crisis Avoidance 1) Which of the following may NOT help avoid a financial crisis?

A) Maintaining credible and sustainable fiscal policies B) Regulation and supervision of the financial system C) Immediately bailing out financial intermediaries and standing ready to bail out others in case a financial crisis occurs D) Maintaining credible and sustainable monetary policies Answer: C Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 2) All of the following involve a moral hazard problem EXCEPT A) an individual driving carelessly after buying a comprehensive insurance policy for a Ford Pinto.

B) the IMF bailing Mexico out of a financial crisis, with promises to do the same for other nations that might face financial problems.

C) the requirement of banking institutions that owners invest a substantial portion of their own capital in their bank.

D) membership in FDIC (Federal Deposit Insurance Corporation) by your local bank.

Answer: C Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 3) All of the following statements are true about the real exchange rate,

=

, EXCEPT

A) a greater change in P (domestic price) compared to a change in P* (foreign price) necessitates a rise in the nominal rate, Rn, to keep the real rate unchanged.

B) a pegged exchange rate system requires tight control of the money supply.

C) there is a one-to-one correspondence between the real and nominal exchange rates.

D) an expansionary monetary policy raises the real exchange rate.

Answer: C Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge

13 .

4) Which of the following was NOT one of the causes of the Asian financial crises of 1997 and 1998?

A) A current account deficit and financial account surpluses B) The use of exports as an engine of economic growth by the countries involved C) China's 1994 devaluation of its fixed exchange rate D) The appreciation of the U.S. dollar and depreciation of the Japanese yen Answer: B Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 5) The main policy advice given by the IMF to East Asian countries facing the financial crises of 1997/1998 was A) raising their domestic interest rates to stabilize the collapsing currencies.

B) using their monetary and fiscal policies alone.

C) use capital controls.

D) adopting a flexible exchange rate system.

Answer: A Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 6) Which one of the following countries refused to accept the IMF conditions during the East Asian financial crisis?

A) South Korea B) Malaysia C) Thailand D) Singapore Answer: B Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge

14 .

7) The Basel Capital Accord does NOT include A) requiring bank owners to invest into and have some capital ownership in the banks they own.

B) supervision of banks by an oversight board.

C) information disclosure designed to encourage market discipline.

D) denying access to foreign capital by a country that defaults on its international loans.

Answer: D Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 8) Capital controls for banks A) reduce the chance of bank failures.

B) have been demonstrated to be effective in preventing financial crises.

C) increase the problem of moral hazard.

D) increase the profitability of banks.

Answer: A Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 9) Crawling pegs A) are anti-inflationary because they require monetary discipline.

B) are designed to stabilize real exchange rates when domestic inflation is less than inflation in other nations.

C) reduce a nation's vulnerability to financial crises.

D) lead to undervaluation of the domestic currency.

Answer: A Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge

15 .

10) In theory, the free movement of capital raises world welfare because A) it reduces inflation in some countries.

B) it reduces the chance of financial crises.

C) it allows countries to invest more than they could with domestic savings alone.

D) it increases world income equality.

Answer: C Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 11) Which of the following is NOT a true statement about capital controls?

A) Countries are more able to prevent capital inflows than they were in the 1970s.

B) Capital controls may reduce world welfare by preventing capital from moving to its most valuable use.

C) It is unclear whether it is best to limit capital inflows, capital outflows, or both.

D) Restricting the movement of capital cannot stop a crisis once it has begun.

Answer: A Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 12) If a country has a collapsing currency due to large budget deficits financed by monetary expansion, the cure is to A) default on sovereign debt and restructure the economy.

B) peg the currency to something different.

C) cut the deficit and raise interest rates.

D) increase the rate of inflation to reduce the real value of government debt.

Answer: C Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge

16 .

13) A crisis caused by sudden capital flight A) is easy to resolve with capital controls.

B) might be lessened if investor confidence can be increased.

C) has a clear and unique equilibrium outcome.

D) can be corrected through currency devaluation.

Answer: B Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 14) With crises caused by macroeconomic imbalances, A) it is usually difficult to avoid a recession.

B) austerity programs are not needed.

C) expansionary policies can be used to correct the crisis.

D) the money supply should be increased.

Answer: A Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 15) It is relatively easy to prescribe a cure for financial crises that result from inconsistent macroeconomic policies.

Answer: TRUE Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 16) Austerity programs involving budget cuts and higher interest rates may not be politically feasible.

Answer: TRUE Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge

17 .

17) Economists agree that the free movement of capital is desirable.

Answer: FALSE Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 18) A temporary limitation on capital flows may help stop a financial crisis that has begun.

Answer: TRUE Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 19) Implementing short-term capital controls during the Asian crisis caused Malaysia to recover more slowly than other countries.

Answer: FALSE Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 20) Financial capital is highly volatile, and technological advances have reinforced this volatility.

Answer: TRUE Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 21) What agreement has been reached to reduce the moral hazard problem and what does it require?

Answer: The Basel Capital Accord, which sets capital requirements, requirements for supervisory review, and for requirements for information disclosure.

Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge

18 .

22) What are the costs of capital mobility?

Answer: The cost is potential macroeconomic crisis from volatile capital flows.

Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 23) What are the benefits of capital mobility?

Answer: The benefits include that investors can put financial capital where it earns the highest return, which raises welfare by putting capital in its most valuable use.

Topic: Domestic Issues in Crisis Avoidance Difficulty: Easy Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 24) International financial flows have changed in meaningful ways, and these changes were brought to the attention of policy makers by the Asian financial crisis. Describe three changes.

Answer: First, international financial flows were dramatically greater than in prior decades.

Second, many developing countries became active participants in international finance in a meaningful way. Finally, more so than in the past, contagion effects can instantaneously spread a crisis from one area to another.

Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 25) If governments promise to bail out the financial system in the event of a crisis, this creates a moral hazard problem. Describe this problem.

Answer: If the costs of failure are removed, the incentive for decision makers inside financial institutions to make responsible decisions and to take normal precautions are also removed.

Governments can't afford to let their financial systems go under but can't let their financial sectors expect bailouts.

Topic: Domestic Issues in Crisis Avoidance Difficulty: Moderate Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge

19 .

26) Describe the background factors that contributed to the Asian financial crisis.

Answer: Investors were seeking higher growth and government policies were thought to be very stable and favorable for growth in this region, so there were tremendous capital inflows. Most currencies were pegged to the U.S. dollar and the dollar was appreciating internationally, causing the real exchange rates to be overvalued. Export earnings were damaged by the currency values.

These revealed other weaknesses in corporate structures, regulatory systems, and the financial sector, especially in the area of transparency.

Topic: Domestic Issues in Crisis Avoidance Difficulty: Difficult Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 27) How did the vulnerabilities in Asian economies lead to the Asian financial crisis of 19971998.

Answer: First, a number of Asian countries had large trade and current account deficits. This implied large financial account borrowing and large capital inflows, particularly because rates of growth in these economies were relatively high, making them attractive places to invest.

Secondly, many economies had currencies that were pegged to the dollar, and as the dollar appreciated, these currencies appreciated as well, causing overvaluation and misalignment of currency values, as well as reducing the competitiveness of exports. Third, the financial sectors of these countries were weak, with mismatches between the maturities of assets and liabilities and inadequate regulation due to corporate structures that relied heavily on personal and family relationships. The crisis was triggered by reductions in export earnings in Thailand, which then reduced confidence in the ability of the country to maintain its overvalued exchange rate. The expectation of devaluation of the baht caused speculation against it, and at the same time, monetary authorities were reluctant to devalue because it would increase the cost of dollardenominated international loans. Eventually, the baht had to be devalued, and in turn, this may have caused investors to lose confidence in related economies with similar vulnerabilities, spreading the crisis to other Asian economies.

Topic: Domestic Issues in Crisis Avoidance Difficulty: Difficult Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge

20 .

28) Explain the pros and cons of a crawling peg.

Answer: A crawling peg involves fixing the exchange rate to a major world currency. This involves regular devaluations of a fixed amount in order to stabilize the real exchange rate in a country with higher inflation than its trading partners. Maintaining the peg requires the monetary authority to exercise discipline in the creation of new money and is anti-inflationary in that sense. Countries frequently try to reinforce the anti-inflation tendency of the crawling peg by intentionally devaluing at a slower pace than the difference between home and foreign inflation.

This creates real appreciation in the exchange rate, and is intended to act as a brake on domestic inflation as foreign goods become cheaper in real terms. The use of the exchange rate in this manner has mixed success in helping control inflation, but in a number of cases it has led to severe overvaluation of the real exchange rate and increased the country's vulnerability to a crisis.

Another way in which a crawling peg exchange rate system increases a country's vulnerability to crisis is that it is sometimes politically difficult to exit from the system if it becomes overvalued.

When a government announces a change in the system, it runs the risk of losing its credibility. A sudden large devaluation leads to economic losses and a loss of confidence in the country's policy makers, and thus it is common for countries to delay addressing the problem of overvaluation, so that when the correction comes, it has to be larger.

Topic: Domestic Issues in Crisis Avoidance Difficulty: Difficult Objective: LO 12.3 List and explain three measures countries can take to reduce their exposure to financial crises.

AACSB: Application of knowledge 12.5 Reform of the International Financial Architecture 1) The international institution that serves as a lender of last resort is called the A) IBRD. B) WTO. C) IMF. D) World Bank.

Answer: C Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge

21 .

2) A lender of last resort A) makes loans when no one else will.

B) makes loans without regard for risk.

C) is a firm that is forced to make loans for its own survival.

D) makes loans to all who require them.

Answer: A Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge 3) All of the following issues have been discussed as options for reforming the international financial architecture EXCEPT A) how high an interest rate the lender of last resort should charge when it makes loans.

B) the length of the payback period.

C) the size of the loans.

D) if the lender of last resort (i.e., the IMF) should consult and collaborate with other international institutions such as the United Nations and the WTO. Answer: D Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge 4) IMF conditionality may include A) changes in the fiscal and monetary policies of the country facing the financial crisis.

B) changes in the exchange rate policies.

C) regulating and restructuring the financial sector of the economy of the country in crisis.

D) political regime change.

Answer: D Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge

22 .

5) Which of the following is a macroeconomic factor that contributed to the financial crisis in 2007?

A) Global saving and investment imbalances B) Financial market innovation C) Deeper levels of integration across financial markets D) Challenges and failures in financial regulation Answer: A Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.5 Describe the main forces behind the global financial crisis that began in 2007.

AACSB: Application of knowledge 6) An issue that proposals for international reform agree on is that A) the IMF should intervene more in financial crises.

B) there must be a lender of last resort.

C) IMF quotas are currently set at an appropriate level.

D) the Basel capital requirements for banks should be increased.

Answer: B Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge 7) IMF quotas A) depend on the size of an economy and its strength.

B) strictly limit the amount that a country can borrow.

C) should be increased.

D) are equal to the amount that a country can borrow from the IMF. Answer: A Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge

23 .

8) Which of the following is NOT a true statement about IMF lending?

A) The IMF can usually determine the difference between national crises and those likely to cause system-wide problems.

B) Limits on borrowing have not kept up with the growth of national economies.

C) The IMF does not have the funds to provide the support that a large economy might need.

D) Proposals for lending expansion suggest greater IMF intervention if it can stop crises faster.

Answer: A Topic: Reform of the International Financial Architecture Difficulty: Moderate Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge 9) When a country borrows from the IMF A) it receives all the funds from the loan at once.

B) it receives funds in tranches, each dependent on the completion of reform targets.

C) it is free of conditions.

D) it can be any amount that the country requests.

Answer: B Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge 10) With regard to the IMF, "mission creep" means that A) the IMF was making loans to nonmember countries.

B) the IMF had expanded its lending to an inappropriate level.

C) the IMF had taken on extended responsibilities that it should be authorized to perform.

D) the IMF had taken on responsibilities for which it was not suited.

Answer: D Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge 11) The financial crisis that started in 2007 was unusual because it started in an advanced economy, the United States.

Answer: TRUE Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.5 Describe the main forces behind the global financial crisis that began in 2007.

AACSB: Application of knowledge

24 .

12) The two main types of economies generating current account surpluses from 2000 to 2007 were Asian exporters and oil producers.

Answer: TRUE Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.5 Describe the main forces behind the global financial crisis that began in 2007.

AACSB: Application of knowledge 13) Some countries have borrowed as much as 500 percent of their IMF quotas.

Answer: FALSE Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge 14) One criticism of IMF conditionality is that it is not sufficiently contractionary.

Answer: FALSE Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge 15) Before the 1970s, IMF conditionality focused primarily on correcting the immediate source of the problem.

Answer: TRUE Topic: Reform of the International Financial Architecture Difficulty: Easy Objective: LO 12.5 Describe the main forces behind the global financial crisis that began in 2007.

AACSB: Application of knowledge 16) How were macroeconomic balances different in the period from 2000 to 2007 from past financial crises?

Answer: There was not an issue with devaluing exchange rates but rather the imbalances were between high saving, current account surplus nations and low savings, current account deficit nations which kept interest rates low and contributed to the housing bubble.

Topic: Reform of the International Financial Architecture Difficulty: Moderate Objective: LO 12.5 Describe the main forces behind the global financial crisis that began in 2007.

AACSB: Application of knowledge

25 .

17) How did the global supply of savings impact the formation of the housing bubble?

Answer: Interest rates were lower and demand for housing higher than it would have been otherwise.

Topic: Reform of the International Financial Architecture Difficulty: Moderate Objective: LO 12.5 Describe the main forces behind the global financial crisis that began in 2007.

AACSB: Application of knowledge 18) What three critical factors or preconditions turned a national, U.S. problem into a global financial crisis in 2007? Be sure to address the role securitization played and how it affected regulators.

Answer: The three critical factors were the evolution of new and innovative financial products, the integration of financial markets globally combined with the high rates of savings that were coming out of markets that had not participated significantly in the past, and deregulation. New and innovative financial products evolved including securitization, where large numbers of loans are grouped together and shares of the package are sold to virtually anyone, anywhere. These crossed borders easily and the purchasers lose money if the loans cannot be repaid, but it was often difficult to accurately access risk and for regulators to understand and to keep up with the innovations. In general, there was a failure in regulation as the tremendous amount of innovation of instruments and integration of markets evolved. Close regulation was generally not perceived to be in the national interest as it would reduce innovation and efficiency.

Topic: Reform of the International Financial Architecture Difficulty: Difficult Objective: LO 12.5 Describe the main forces behind the global financial crisis that began in 2007.

AACSB: Application of knowledge 19) Explain how IMF conditionality has changed over time.

Answer: Before the 1970s, IMF conditionality focused primarily on correcting the immediate source of the problem that led to a crisis, and it avoided involvement with underlying economic issues, such as trade policy and privatization. This approach was criticized as short-sighted, and it was agreed that the Fund should involve itself beyond short-run economic policy. New loan programs were developed to provide money and technical assistance to countries that needed help in restructuring their economies. This shift involved the IMF in far more than crisis resolution, as it took on an active role in assisting in privatization, the design of social policies, trade policy reform, agricultural policies, environmental policies, and a number of other areas.

By the late 1990s, there was growing recognition that mission creep had become a problem and that the Fund had taken on responsibilities for which it is not suited, such as economic development in the long run. Several of the proposals for reforming the international financial architecture envision a reduced role for the IMF, particularly in the area of long term economic development.

Topic: Reform of the International Financial Architecture Difficulty: Difficult Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge 26 .

20) Explain the meaning of IMF conditionality and why it has been criticized.

Answer: IMF conditionality refers to the changes in economic policy that borrowing nations are required to make in order to receive IMF loans. Conditionality typically covers monetary and fiscal policies, exchange rate policies, and structural policies affecting the financial sector, international trade, and public enterprises. Each additional installment of an IMF loans is conditional on some of these requirements being met. Often these types of reforms generate significant opposition since they seem to override national sovereignty and generally impose contractionary macroeconomic policies. Some argue that conditionality requirements intensify the recessionary tendencies of a crisis, although there is a debate over whether countries recover faster with IMF assistance than without it. Until the early 1990s, the IMF focused its efforts on economic policy reforms in a way that more or less ignored their social consequences. Public outcry against the effects of conditionality on the vulnerable members of societies have forced a closer look at the social impacts of policies, and the IMF has tried to make adjustments.

However, there are still widespread complaints that IMF conditionality is too punitive and too contractionary, and a few countries in crisis have refused IMF assistance.

Topic: Reform of the International Financial Architecture Difficulty: Difficult Objective: LO 12.4 Explain the need for reforms in the architecture of international finance and international financial institutions.

AACSB: Application of knowledge

27 .

International Economics, 7e (Gerber) Chapter 13 The United States in the World Economy 13.1 Introduction: A New World Economy 1) There are no questions for this section.

Topic: Introduction: A New World Economy 13.2 Background and Context 1) Major trading partners with the United States have not changed significantly over the last several decade with the exception of trade with A) the United Kingdom.

B) Mexico.

C) China.

D) Canada.

Answer: C Topic: Background and Context Difficulty: Easy Objective: LO 13.1 Identify major changes in U.S. economic relations that have led to bilateral and plurilateral agreements.

AACSB: Application of knowledge 2) Which of the following is NOT a true statement about U.S. exports?

A) Services have become more important part of exports.

B) The U.S. is the world's second-largest exporter of goods.

C) Three-fourths of U.S. merchandise exports are manufactured goods.

D) The manufacturing sector in the U.S. is no longer significant.

Answer: D Topic: Background and Context Difficulty: Moderate Objective: LO 13.1 Identify major changes in U.S. economic relations that have led to bilateral and plurilateral agreements.

AACSB: Application of knowledge 3) Which of the following is a correct statement about U.S. manufacturing?

A) U.S. manufacturing output is generally declining.

B) U.S. manufacturing employment has declined sharply since the 1970s.

C) Most relocation of U.S. manufacturing has been from southern states to northern states.

D) Productivity in U.S. manufacturing has fallen as employment has decreased.

Answer: B Topic: Background and Context Difficulty: Moderate Objective: LO 13.1 Identify major changes in U.S. economic relations that have led to bilateral and plurilateral agreements.

AACSB: Application of knowledge 1 .

4) Which of the following countries is NOT involved in a free trade agreement with the U.S.?

A) China B) Australia C) Jordan D) Guatemala Answer: A Topic: Background and Context Difficulty: Easy Objective: LO 13.1 Identify major changes in U.S. economic relations that have led to bilateral and plurilateral agreements.

AACSB: Application of knowledge 5) Free trade agreements A) have increased U.S. exports more than U.S. imports from free trade partners.

B) have limited benefits to the U.S. C) have acted as substitutes for multilateral trade agreements.

D) have decreased in scope since the 1990s.

Answer: A Topic: Background and Context Difficulty: Moderate Objective: LO 13.1 Identify major changes in U.S. economic relations that have led to bilateral and plurilateral agreements.

AACSB: Application of knowledge 6) U.S manufacturing exports have declined since the 1990s.

Answer: FALSE Topic: Background and Context Difficulty: Moderate Objective: LO 12.5 Describe the main forces behind the global financial crisis that began in 2007.

AACSB: Application of knowledge 7) The U.S. has free trade agreements only with Mexico and Canada.

Answer: FALSE Topic: Background and Context Difficulty: Easy Objective: LO 13.1 Identify major changes in U.S. economic relations that have led to bilateral and plurilateral agreements.

AACSB: Application of knowledge

2 .

8) U.S. trade with the rest of the world is a larger share of GDP than is typical for developed countries.

Answer: FALSE Topic: Background and Context Difficulty: Easy Objective: LO 13.1 Identify major changes in U.S. economic relations that have led to bilateral and plurilateral agreements.

AACSB: Application of knowledge 9) The ratio of trade to GDP for the U.S. has roughly tripled since the 1960s.

Answer: TRUE Topic: Background and Context Difficulty: Easy Objective: LO 13.1 Identify major changes in U.S. economic relations that have led to bilateral and plurilateral agreements.

AACSB: Application of knowledge 10) Why is the U.S. putting less emphasis on multilateral and more emphasis on bilateral trade agreements?

Answer: Tariffs are low and quotas have mostly been eliminated; the Cold War is over; remaining trade issues are tough; more participants make multilateral negotiations difficult; bilateral can be testing ground for new arrangements.

Topic: Background and Context Difficulty: Moderate Objective: LO 13.1 Identify major changes in U.S. economic relations that have led to bilateral and plurilateral agreements.

AACSB: Application of knowledge 11) Describe the trends in U.S. manufacturing employment and U.S. manufacturing output over the last 40 years. What factors have contributed to these?

Answer: Manufacturing employment is down while output and exports are up. Rising productivity and a relocation of the sector within the United States are both significant in terms of explaining people's perceptions of the situation versus the reality.

Topic: Background and Context Difficulty: Moderate Objective: LO 13.1 Identify major changes in U.S. economic relations that have led to bilateral and plurilateral agreements.

AACSB: Application of knowledge

3 .

12) Explain the importance of free trade agreements to the U.S. and how they benefit the U.S. economy.

Answer: The United States currently has free trade agreements in force with twenty countries grouped into three strategic geographical regions: the Middle East and North Africa, the Pacific Basin, and the Americas. Most agreements are with small countries that account for a small share of U.S. merchandise trade, but Canada, Mexico, and Korea are major exceptions. Free Trade Agreement countries account for around 47 percent of U.S. exports and approximately 34 percent of imports. Proponents of FTAs make the argument that U.S. markets are relatively more open than many foreign markets. Given the relative openness of the U.S. market, bilateral and plurilateral FTAs that help open foreign markets promote U.S. exports relatively more than U.S. imports instead of causing a proportional increase in both. Consequently, U.S. exports to FTA partners are a larger share of total merchandise trade than U.S. imports from FTA partners. This supports the idea that FTAs have been relatively good for the U.S. insofar as they have helped to open foreign markets.

Topic: Background and Context Difficulty: Moderate Objective: LO 13.1 Identify major changes in U.S. economic relations that have led to bilateral and plurilateral agreements.

AACSB: Application of knowledge 13.3 The NAFTA Model 1) Under NAFTA, environmental standards are A) harmonized around U.S. rules.

B) harmonized around Canadian rules.

C) harmonized around a combination of the rules in all three countries.

D) not harmonized.

Answer: D Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 2) Purchasing power parity (PPP) measurements of income are a way to make international comparisons by correcting for national differences in A) unemployment.

B) inflation.

C) prices of goods and services.

D) economic growth.

Answer: C Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.3 Explain when purchasing power parity estimates of income per person are superior to the alternatives and when they are inferior.

AACSB: Application of knowledge 4 .

3) Twenty-four years before CUSTA, another agreement between the same countries covered trade in A) textiles.

B) steel.

C) autos.

D) agriculture.

Answer: C Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.4 State the reasons why Mexico and Canada sought free trade with the United States.

AACSB: Application of knowledge 4) Which of the following is most important in determining the number of jobs in an economy?

A) Macroeconomic policies B) Trade policies C) Urban policies D) Tax policies Answer: A Topic: The NAFTA Model Difficulty: Moderate Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 5) One area of labor issues that the labor side agreement to NAFTA does not open to foreign consultation or investigation is A) the use of child labor.

B) worker exposure to unsafe conditions.

C) minimum wages.

D) workers' rights to organize.

Answer: D Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge

5 .

6) The main area of economic activity that Canada chose not to open to free trade is A) agriculture.

B) lumber.

C) cultural industries.

D) financial services.

Answer: C Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 7) U.S. opponents of NAFTA argued that the agreement will hurt the United States. In their view, NAFTA's greatest harm is in its A) harmonization of labor policies.

B) harmonization of environmental policies.

C) harmonization of the use of pesticides and herbicides.

D) job destruction and downward pressure on U.S. wages.

Answer: D Topic: The NAFTA Model Difficulty: Moderate Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 8) The single most important reason for Canada's seeking a free trade agreement with the United States was to A) ensure its access to the U.S. market.

B) ensure its ability to join NAFTA. C) harmonize its environmental laws with the United States.

D) avoid international outsourcing in low wage countries.

Answer: A Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.4 State the reasons why Mexico and Canada sought free trade with the United States.

AACSB: Application of knowledge

6 .

9) One problem with NAFTA that is NOT shared by some other trade blocs is that A) national environmental laws differ greatly.

B) the countries are at very different stages of economic development.

C) the countries speak different languages.

D) the countries are not natural trading partners.

Answer: B Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 10) A slowing U.S. economy and increased enforcement of immigration laws will reduce ________ factors for Mexican immigration to the United States.

A) demand growth B) demand pull C) supply push D) supply growth Answer: B Topic: The NAFTA Model Difficulty: Moderate Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 11) President Salinas of Mexico devised a strategy to restore Mexican growth by encouraging A) large inflows of foreign capital.

B) large increases in domestic savings.

C) an expansion of import substitution industrialization policies.

D) more government ownership of industrial firms.

Answer: A Topic: The NAFTA Model Difficulty: Moderate Objective: LO 13.4 State the reasons why Mexico and Canada sought free trade with the United States.

AACSB: Application of knowledge

7 .

12) Which of the following is NOT a reason Mexico and Canada wanted a free trade agreement with the United States?

A) Mexico wanted increased direct foreign investment.

B) Canada wanted to guarantee access to the U.S. market.

C) Mexico wanted the United States to lower its high barriers to Mexican products.

D) Mexico wanted to institutionalize its economic reforms.

Answer: C Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.4 State the reasons why Mexico and Canada sought free trade with the United States.

AACSB: Application of knowledge 13) Few countries have a higher GDP per capita than the weighted average of Canada, Mexico and U.S. GDP. Answer: TRUE Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 14) Even though Mexico is a developing country, the NAFTA market is very rich.

Answer: TRUE Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.3 Explain when purchasing power parity estimates of income per person are superior to the alternatives and when they are inferior.

AACSB: Application of knowledge 15) Free trade agreements between the United States and Canada started with the auto industry in the year 1965.

Answer: TRUE Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 16) In Canada, there are no preferences given to Canadian TV networks and programming over U.S. networks and programming.

Answer: FALSE Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 8 .

17) Most Mexican workers can increase their wages if they migrate to the United States, a demand-pull factor for migration.

Answer: TRUE Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 18) When did NAFTA go into effect?

Answer: January 1, 1994 Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 19) Why are trade agreements between the U.S. and Mexico more controversial than trade agreements between the U.S. and Canada?

Answer: Because of difference in levels of economic development is greater, which leads to larger political and social tensions.

Topic: The NAFTA Model Difficulty: Moderate Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 20) What two trends was Canada trying to address in negotiating CUSTA? Answer: Increasing U.S. trade barriers and protectionism; the need to restructure Canadian industry to become more internationally competitive Topic: The NAFTA Model Difficulty: Moderate Objective: LO 13.4 State the reasons why Mexico and Canada sought free trade with the United States.

AACSB: Application of knowledge 21) In negotiating NAFTA, what two side agreements were reached?

Answer: The North American Agreements on Labor Cooperation and Environmental Cooperation Topic: The NAFTA Model Difficulty: Easy Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge

9 .

22) What is the main problem with rules of origin?

Answer: They increase transactions costs related to accounting process and to slowing trade at the border.

Topic: The NAFTA Model Difficulty: Moderate Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 23) What lessons did Mexico's policy makers learn from the 1980s debt crisis? What reforms did President Salinas pursue? What were his main goals?

Answer: Policy makers learned that their management of the macroeconomy had to improve (don't ignore budget and trade deficits); that markets need to play a larger role in resource allocation to increase competitiveness and attract capital; that ISI policies were no longer best for industrial development, and to instead follow more traditional ideas of comparative advantage.

President Salinas continued working to bring the federal budget under control, increased the rate of privatization of state-owned businesses, put Mexico in line to qualify for U.S. debt relief under the Brady Plan, reduced tariffs and important licensing requirements, and proposed a free trade agreement with the United States. He hoped to tie up the domestic economic reforms Mexico had made through an international treaty and to attract foreign capital for the development of Mexico's economy.

Topic: The NAFTA Model Difficulty: Difficult Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge 24) What type of economic policy did Mexico follow from the end of World War II until the 1980s? Describe the three-stage strategy that supporters of this policy emphasized. What was the outcome of these policies for Mexico's manufacturing sector?

Answer: Import substitution industrialization (ISI), which emphasized self-sufficiency over trade and the substitution of domestic manufacturing industries for imports. First, the nation begins producing simple consumer nondurable products, and then it shifts to more complex consumer goods and intermediate industrial goods. Finally, the nation is able to produce more complex industrial goods. Protection from competition meant that Mexico's manufacturing sector wasn't competitive.

Topic: The NAFTA Model Difficulty: Difficult Objective: LO 13.2 Evaluate the relative importance of the North American Free Trade Agreement, both for what it accomplished and as a model for subsequent agreements.

AACSB: Application of knowledge

10 .

25) Explain what a purchasing power parity adjustment is and why it is necessary. Should it always be used?

Answer: The PPP adjustment enables us to know internal purchasing power, which is defined as the amount an average income can buy inside the country where the income is earned when it is measured in terms of the cost of a similar basket in the United States. PPP adjustments let us make international comparisons of income based on similarly priced baskets of goods and services. The PPP adjustment is necessary in order to compare actual living standards, while the market exchange rates income is useful to know something about the ability of people to buy goods and services in the world economy.

Topic: The NAFTA Model Difficulty: Difficult Objective: LO 13.3 Explain when purchasing power parity estimates of income per person are superior to the alternatives and when they are inferior.

AACSB: Analytical thinking 13.4 New and Old Agreements 1) One reason why most economists forecast that the effects of NAFTA on the U.S. economy would be small is because A) NAFTA does not bring down tariffs far enough.

B) the Mexican economy is small relative to the U.S. economy.

C) NAFTA trade opening provisions only cover a handful of sectors.

D) Mexico was not expected to live up to its obligations under the agreement.

Answer: B Topic: New and Old Agreements Difficulty: Moderate Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge 2) Preferential agreements A) are the same as free trade agreements.

B) provide market access without demanding reciprocation.

C) are not recognized under WTO rules.

D) must be approved by the IMF. Answer: B Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge

11 .

3) Which of the following is a free trade agreement?

A) the Trans-Pacific Partnership (TPP) B) the Transatlantic Trade and Investment Partnership (TTIP) C) the Caribbean Basin Initiative (CBI) D) the African Growth and Opportunity Act (AGOA) Answer: A Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge 4) Which of the following is a preferential agreement?

A) the Trans-Pacific Partnership (TPP) B) the Transatlantic Trade and Investment Partnership (TTIP) C) the Caribbean Basin Initiative (CBI) D) the Asia-Pacific Economic Cooperation (APEC) Answer: C Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge 5) Under the side agreements to the NAFTA, A) low environmental standards should not be used to attract trade or investment.

B) the U.S. sets environmental standards.

C) the U.S. enforces environmental standards in the rest of the free trade area.

D) environmental standards are not specifically discussed.

Answer: A Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge

12 .

6) Estimates of U.S. job gains and losses due to free trade agreements A) show no change in jobs.

B) show clear gains in the number of jobs.

C) show clear losses in the number of jobs.

D) show mixed results, leading to no clear conclusion.

Answer: D Topic: New and Old Agreements Difficulty: Moderate Objective: LO 13.6 State why it is difficult to have precise estimates of job gains and losses due to trade, and give specific examples of how imports may create jobs and exports may occur after a loss of jobs.

AACSB: Application of knowledge 7) Which of the following is a true statement about U.S. job gains and losses under free trade agreements?

A) Whether jobs have been gained or lost, the size of these gains or losses is small relative to total U.S. job creation.

B) Free trade agreements have resulted in a significant loss of jobs in the U.S. C) Free trade agreements have resulted in a significant gain in jobs in the U.S. D) Free trade agreements have resulted in no change in jobs in the U.S. Answer: A Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.6 State why it is difficult to have precise estimates of job gains and losses due to trade, and give specific examples of how imports may create jobs and exports may occur after a loss of jobs.

AACSB: Application of knowledge 8) The Trans-Pacific Partnership (TPP) is a preferential agreement.

Answer: FALSE Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge 9) A preferential agreement requires that the other country also provide market access.

Answer: FALSE Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge

13 .

10) Under the NAFTA, countries must enforce their own labor standards.

Answer: TRUE Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge 11) The TPP incorporates labor standards directly rather than as a side agreement.

Answer: TRUE Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge 12) The NAFTA would probably not have been ratified by Congress without labor and environmental side agreements.

Answer: TRUE Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge 13) Bilateral investment treaties are uncommon.

Answer: FALSE Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge 14) What is the significant feature of a preferential arrangement?

Answer: It is created with unilateral action, as in the U.S. lowers barriers specifically to a nation without asking for reciprocity.

Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge

14 .

15) What are bilateral investment treaties?

Answer: They set out the rules that govern cross border investment and typically emphasize national treatment for foreign investors.

Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge 16) What is the United States' primary trade promotion initiative with Africa?

Answer: The African Growth and Opportunity Act, a preferential arrangement lowering U.S. trade barriers to more than 40 African nations, mostly in oil.

Topic: New and Old Agreements Difficulty: Easy Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge 17) Explain the key principles of the labor and environmental side agreements to the NAFTA. Answer: The key principles of the labor and environmental side agreements to the NAFTA are that countries should enforce their own laws and that low or poorly enforced labor and environmental standards should not be used to attract trade or investment. Enforcement relies on consultations with parties levying a complaint of nonenforcement and investigation by the home country government. The wording of the agreements states that no investigation or enforcement may be performed by one country in the territory of another. Instead, the agreements attempt to create public awareness of noncompliance without setting specific standards or encroaching on the sovereignty of national governments.

Topic: New and Old Agreements Difficulty: Moderate Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge

15 .

18) Explain the criticisms of labor and environmental clauses and how these are being addressed in the TPP. Answer: Some think that trade agreements should not be about labor and the environment, and so these clauses do not belong in trade agreements. They think that including these clauses gives support to protectionists who will inevitably oppose increased trade flows by making arguments, whether based on fact or not, that the trade partner does not enforce its laws adequately. Others argue that the clauses are meaningless because there is no real enforcement mechanism. In the proposed TPP, basic labor standards are incorporated into the agreement and countries must recognize and enforce environmental standards that have multilateral support. In addition, for the first time, trade sanctions would be allowed as a way to enforce standards.

Topic: New and Old Agreements Difficulty: Difficult Objective: LO 13.5 Differentiate free trade agreements from preferential trade agreements and give examples of each.

AACSB: Application of knowledge 19) What evidence is there as to job gains and losses in the U.S. due to free trade agreements?

Answer: Estimates of job gains or losses are mixed and not definitive. Within five years of NAFTA's implementation, the estimates ranged from a net loss of 98,000 a year to a net gain of 42,000 a year. Actual estimates of the number of jobs gained or lost are closer to guesses due to the difficulties in estimation. Pro-trade think tanks and scholars usually show job gains, while anti-trade think tanks show job losses. Neither side of the debate can show large job gains or losses in the United States due to trade agreements.

Topic: New and Old Agreements Difficulty: Moderate Objective: LO 13.6 State why it is difficult to have precise estimates of job gains and losses due to trade, and give specific examples of how imports may create jobs and exports may occur after a loss of jobs.

AACSB: Application of knowledge 20) Why is it difficult to estimate job gains or losses due to free trade agreements?

Answer: It is possible to estimate the number of workers needed to produce a given quantity of exports, and to estimate the number of jobs that would be created if imports were produced at home, but these values are not the same as job creation and destruction due to a trade agreement.

Imports may supply a firm with capital or intermediate goods that make the firm more competitive and better able to survive; and exports may supply a firm that previously produced the entire value of its goods at home but after offshoring some production, it exports to its foreign affiliate. Hence, some imports create jobs, while some exports exist only because jobs at home have been moved abroad. Thus it is not really possible to determine the number of jobs that would exist without the free trade agreements, and so there is no real basis for comparison.

Topic: New and Old Agreements Difficulty: Difficult Objective: LO 13.6 State why it is difficult to have precise estimates of job gains and losses due to trade, and give specific examples of how imports may create jobs and exports may occur after a loss of jobs.

AACSB: Application of knowledge 16 .

International Economics, 7e (Gerber) Chapter 14 The European Union: Many Markets into One 14.1 Introduction: The European Union 1) Originally, the European Union was called A) the European Economic Partnership.

B) the European Economic Community.

C) the European Community.

D) the Common Market.

Answer: B Topic: Introduction: The European Union Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 2) The original European Economic Community A) was a free trade area.

B) had 12 countries.

C) had a common language.

D) was a customs union.

Answer: A Topic: Introduction: The European Union Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 3) The Single European Act A) created a common currency.

B) created a free trade area.

C) created a customs union.

D) created a common market for capital and labor.

Answer: D Topic: Introduction: The European Union Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge

1 .

4) The common currency of the EU, the euro, was created in A) 1985.

B) 1992.

C) 1999.

D) 2004.

Answer: C Topic: Introduction: The European Union Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 5) The European Union is the oldest, largest, and most ambitious integration agreement in the world today.

Answer: TRUE Topic: Introduction: The European Union Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 6) Briefly describe the European Union.

Answer: The European Union (EU) is an economic union of 28 nations. It has its own revenue and budget, a set of institutions for making laws and regulating areas of common interest, a common currency, and freedom of movement for people, money, goods, and services.

Topic: Introduction: The European Union Difficulty: Moderate Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 14.2 The Size of the European Market 1) Which of the following is NOT part of the European Union?

A) Luxembourg B) Austria C) Portugal D) Greece E) Switzerland Answer: E Topic: The Size of the European Market Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge

2 .

2) Which of the following nations DOES use the euro and participate in the Treaty on European Union?

A) Sweden B) Portugal C) The United Kingdom D) Norway Answer: B Topic: The Size of the European Market Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 3) Which nation is NOT one of the current members of the European Union?

A) Greece B) Germany C) Sweden D) Norway Answer: D Topic: The Size of the European Market Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 4) The largest country in the EU is A) Germany.

B) France.

C) the United Kingdom.

D) Italy.

Answer: A Topic: The Size of the European Market Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 5) All countries in the European Union use the euro as their currency.

Answer: FALSE Topic: The Size of the European Market Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge

3 .

6) The combined EU market is far larger than the NAFTA market in terms of GDP and population.

Answer: FALSE Topic: The Size of the European Market Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 7) The majority of countries in the EU are relatively small.

Answer: TRUE Topic: The Size of the European Market Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 14.3 The European Union and Its Predecessors 1) Before the creation of the European Economic Community, there was the A) European Economic Union.

B) European Coal and Steel Community.

C) European Union.

D) European Free Trade Area.

Answer: B Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 2) The primary legislative branch of the European Union is called the A) European Commission.

B) European Parliament.

C) European Council of Ministers.

D) Council of the European Union.

Answer: D Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge

4 .

3) The founding document of the European Economic Community, and the document that continues to provide the basis for the European Union is the A) Treaty of Brussels.

B) Treaty of Rome.

C) Single European Treaty.

D) Maastricht Treaty.

Answer: B Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 4) According to the principle of subsidiarity, in which of the following areas should the authority for making decisions be taken from national governments and given to the EU? A) Pollution of a trans-national waterway B) Limits on the hours retails stores are allowed to be open C) Highway traffic laws D) Recycling requirements on packaging Answer: A Topic: The European Union and Its Predecessors Difficulty: Moderate Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 5) The principle of subsidiarity is a way to A) divide power between local governments and unions.

B) provide support for industries in decline.

C) provide support for industries under pressure from foreign competition.

D) divide power between national governments and the EU. Answer: D Topic: The European Union and Its Predecessors Difficulty: Moderate Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 6) Which of the following treaties/agreements would be associated with creating a free trade area for the European Union?

A) Treaty of Rome B) Single Europe Treaty C) Delors Agreement D) Schengen Agreement Answer: A Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 5 .

7) The principle of subsidiarity states that A) individual countries do not have to give up individual sovereignty for the good of the union.

B) the union only has the authority to deal with issues best handled by international action.

C) the union is the ultimate arbiter of all European issues.

D) the union has no authority within countries.

Answer: B Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 8) Which of the following does NOT finance the EU budget?

A) A European income tax B) Tariffs on goods entering the EU C) A share of national value added taxes D) A contribution from each country based on the size of its economy Answer: A Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 9) The roots of the European Union are in agreements within the coal and steel industries.

Answer: TRUE Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 10) Subsidiarity requires nations to give up some of their national sovereignty.

Answer: TRUE Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 11) Most cohesion funds in the EU budget go to the wealthier EU member nations.

Answer: FALSE Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge

6 .

12) Agricultural support and rural development programs account for nearly half of the EU budget.

Answer: TRUE Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 13) Cohesion funds are used to make EU countries more culturally similar.

Answer: FALSE Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 14) What three sources of revenue finance the EU budget?

Answer: Tariffs on goods entering EU; EU share of national value added taxes; payments from member countries based on the size of their economies Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 15) What are the two largest expenditure categories in the EU budget?

Answer: Agricultural support; cohesion funds Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge 16) Members of which European Union institution are popularly elected?

Answer: The European Parliament Topic: The European Union and Its Predecessors Difficulty: Easy Objective: LO 14.1 Describe the major institutions and treaty agreements of the EU. AACSB: Application of knowledge

7 .

14.4 Deepening and Widening the Community in the 1970s and 1980s 1) A narrow target zone exchange rate band (such as the EEC had until 1992) is most similar to A) a flexible exchange rate system.

B) a single currency.

C) a fixed exchange rate system.

D) a managed floating exchange rate.

Answer: C Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Moderate Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 2) The single most important factor in the 1992 crisis of the EMS was A) ratification of the Single European Act. B) the near failure of the Maastricht Treaty.

C) German reunification efforts.

D) the outbreak of war in the former Yugoslavia.

Answer: C Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Moderate Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 3) A major reason for creating the European Monetary System was to A) create a single currency.

B) unify banking laws and permit cross-border investment.

C) avoid competitive devaluations.

D) eliminate the need for central banks.

Answer: C Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 4) The currency crisis of 1992 caused France and a number of other countries to choose between A) a single currency for the EU and keeping their own currency.

B) doing the right thing for their domestic economy and defending the exchange rate.

C) lowering interest rates and reducing unemployment.

D) competitive devaluations and falling unemployment.

Answer: B Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Moderate Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge

8 .

5) EU widening refers to A) legislation that restricts the sovereignty of individual countries.

B) activities that cause increased levels of integration in the national economies.

C) extending the boundaries of the EU to include new members.

D) adding additional countries into the single currency area.

Answer: C Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 6) EU deepening refers to A) legislation that restricts the sovereignty of individual countries.

B) activities that cause increased levels of integration in the national economies.

C) extending the boundaries of the EU to include new members.

D) adding additional countries into the single currency area.

Answer: B Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 7) The purpose of creating the European exchange rate mechanism (ERM) was to A) base trade and investment on comparative advantage.

B) prevent currencies from appreciating.

C) create barriers to trade.

D) let exchange rates float more freely.

Answer: A Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 8) When Germany increased fiscal spending and raised interest rates in the early 1990s, A) economic growth increased throughout Europe.

B) other countries were forced to raise interest rates to stay in the ERM. C) it was unsuccessful in supporting East Germany.

D) it forced other countries to devalue their currencies.

Answer: B Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Moderate Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge

9 .

9) Before European currencies were linked, countries would competitively devalue their currencies.

Answer: TRUE Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 10) The European Currency Unit (ECU) acted as a means of payment.

Answer: FALSE Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 11) The United Kingdom dropped out of the ERM to avoid worsening a recession.

Answer: TRUE Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 12) In the face of capital outflow, countries had to lower interest rates to stay in the ERM. Answer: FALSE Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 13) Describe why the European exchange rate mechanism (ERM) was founded and how it worked.

Answer: The formation of the EMS in 1979 was a significant deepening of the EC and served to prepare the way for the eventual introduction of a single currency. It was designed to prevent extreme currency fluctuations by tying each currency's value to the weighted average of the others. The ERM was an example of a soft peg with an exchange rate band. Each currency in the band was fixed to the ECU, but was allowed to fluctuate several percentage points up or down. If a currency began to move out of the bandwidth, the central bank of the country was obligated to intervene by either buying its currency to prop it up, or by selling currency to push it down.

Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Moderate Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge

10 .

14) Explain why the European exchange rate mechanism (ERM) ran into problems in the 1990s.

Answer: The ERM effectively linked EC exchange rates for two decades. However, problems began in 1990 with Germany's decision to speed up reunification. Economic conditions in East Germany were worse than expected, requiring that Germany make large investments in infrastructure and the environment. This resulted in a very large fiscal stimulus to the German economy. Such large expenditures were expected to have an inflationary impact, and so Germany's central bank raised interest rates to counteract that possibility. High interest rates in Germany made German financial instruments more attractive and caused capital to flow into Germany from the other EU countries. This resulted in the selling of other currencies to buy German marks (and then German bonds) and caused the pound, the franc, and other currencies to fall in value. Other countries could have raised interest rates to match Germany's, but since some of the countries, particularly the United Kingdom, were in recession, this would have been more contractionary to their economies. Faced with the choice between staying in the ERM and harming their own economies or dropping out of the ERM, countries were caught in a dilemma.

France stayed in the ERM but went into recession. The United Kingdom abandoned the ERM and let the pound float freely. Spain shifted the center of the band. The band was later widened to 15 percent for countries that remained in the ERM. Topic: Deepening and Widening the Community in the 1970s and 1980s Difficulty: Difficult Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 14.5 The Second Wave of Deepening: The Single European Act 1) With the full implementation of the Single European Act, the EU became a(n) A) common market.

B) free trade area.

C) customs union.

D) economic union.

Answer: A Topic: The Second Wave of Deepening: The Single European Act Difficulty: Easy Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge 2) Which of the following is the treaty that took the participating countries from a free trade area to a common market?

A) The Treaty of Rome B) The Maastricht Treaty C) The Single European Act D) The Treaty on European Union Answer: C Topic: The Second Wave of Deepening: The Single European Act Difficulty: Easy Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge 11 .

3) The "Four Freedoms" are an important goal of the A) Treaty of Rome.

B) Single European Act. C) European Monetary System.

D) Maastricht Treaty.

Answer: B Topic: The Second Wave of Deepening: The Single European Act Difficulty: Easy Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge 4) The "Four Freedoms" do NOT include the right to A) vote in local elections.

B) migrate within the EU. C) write insurance policies throughout the EU. D) open bank accounts anywhere in the EU. Answer: A Topic: The Second Wave of Deepening: The Single European Act Difficulty: Moderate Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge 5) After implementation of the Single European Act, value added taxes in the EU were A) completely harmonized.

B) unchanged.

C) partially harmonized with minimum and maximum permissible values set by the EU. D) cut in half in order to increase the role of corporate taxes.

Answer: C Topic: The Second Wave of Deepening: The Single European Act Difficulty: Moderate Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge 6) The Delors Report A) created the single currency.

B) added new countries to the EU. C) created a timetable and steps to economic union.

D) eliminate the ERM. Answer: C Topic: The Second Wave of Deepening: The Single European Act Difficulty: Easy Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge

12 .

7) Gains from the Single European Act were expected to be from A) reduction of transactions costs from having a single currency.

B) reduced trade barriers and customs problems.

C) increased competition and economies of scale.

D) harmonization of environmental and labor standards.

Answer: C Topic: The Second Wave of Deepening: The Single European Act Difficulty: Moderate Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge 8) All the countries of the EU participate in the Schengen Agreement.

Answer: FALSE Topic: The Second Wave of Deepening: The Single European Act Difficulty: Easy Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge 9) When did the European Union become a common market?

Answer: January 1, 1993 Topic: The Second Wave of Deepening: The Single European Act Difficulty: Easy Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge 10) Which agreement removes customs and passport controls at the common borders of many EU countries?

Answer: Schengen Agreement Topic: The Second Wave of Deepening: The Single European Act Difficulty: Easy Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge

13 .

11) How did the Single European Act create economic gains in the EU? Answer: It was predicted that there would be more trade, lower price mark-ups, increased concentration of firms due to the ability to take advantage of scale economies, and increased price convergence. Trade among EC partners rose from 61.2 percent of the total trade of member states to 67.9 percent between 1985 and 1995. The percent of total output in each industry that is produced by the four largest firms rose in most industrial sectors. The share of world mergers and acquisitions that took place in Europe rose. It is estimated that between 300,000 and 900,000 more jobs were created, and GDP in 1994 was 1.1 to 1.5 percent greater than it would have been without the measures taken to implement the SEA and the SMP. Also, income levels began to converge, as the per capita incomes of the low-income European countries began to rise toward the average.

Topic: The Second Wave of Deepening: The Single European Act Difficulty: Difficult Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge 12) Explain the major problems that occurred with the implementation of the SMP. Answer: There were problems with restructuring. Less efficient firms are squeezed out, and the more efficient ones grow; overall economic welfare expands as countries concentrate on what they do best, which inevitably means abandoning some industries and expanding others. A second major obstacle was the problem of harmonizing standards. A third difficulty was the issue of value-added taxes (VAT), which were difficult to harmonize, although the differences were reduced. Finally, it has been difficult to eliminate discrimination in public procurement of goods and services.

Topic: The Second Wave of Deepening: The Single European Act Difficulty: Difficult Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge 14.6 The Third Wave of Deepening: The Maastricht Treaty 1) The single currency project in the EU will be most successful if European labor is relatively A) immobile.

B) immobile and business cycles are not synchronized.

C) mobile and business cycles are synchronized.

D) mobile and business cycles are not synchronized.

Answer: C Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Moderate Objective: LO 14.6 Analyze the EU's single currency program within the theoretical framework of an optimal currency area.

AACSB: Application of knowledge

14 .

2) One drawback to a single currency is that A) the exchange rate is more volatile.

B) bond markets are larger and therefore harder to control.

C) exporters and importers have fewer choices about how they will receive and make payments.

D) individual nations cannot use monetary policy to stabilize the economy.

Answer: D Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Moderate Objective: LO 14.6 Analyze the EU's single currency program within the theoretical framework of an optimal currency area.

AACSB: Application of knowledge 3) As Europe explored monetary union, evidence to date suggests that increased variability in exchange rates A) reduces foreign trade and investment.

B) increases foreign trade and investment.

C) does not seem to have an impact on foreign trade and investment.

D) hurts foreign investment but not trade.

Answer: C Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Easy Objective: LO 14.6 Analyze the EU's single currency program within the theoretical framework of an optimal currency area.

AACSB: Application of knowledge 4) The European Union became an economic union with the implementation of which treaty?

A) Treaty of Rome B) Single Europe Treaty C) Treaty on European Union D) Schengen Agreement Answer: C Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Easy Objective: LO 14.4 Give the economic rationale for each of the three waves of deepening of the EU. AACSB: Application of knowledge

15 .

5) One of the most controversial features of the Maastricht Treaty is A) the lack of ability of individual countries to set their own monetary policies.

B) increased control of health and safety measures by the European Commission.

C) the free movement of labor throughout Europe.

D) the elimination of passport controls in parts of Europe.

Answer: A Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Moderate Objective: LO 14.6 Analyze the EU's single currency program within the theoretical framework of an optimal currency area.

AACSB: Application of knowledge 6) Each of the 15 members of the European Union that joined before May, 2004 use the euro as their currency.

Answer: FALSE Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Easy Objective: LO 14.6 Analyze the EU's single currency program within the theoretical framework of an optimal currency area.

AACSB: Application of knowledge 7) Other nations had tried economic union in the past, and since adopting a common currency had shown economic benefits for them, the nations of Europe decided to try it too.

Answer: FALSE Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Easy Objective: LO 14.6 Analyze the EU's single currency program within the theoretical framework of an optimal currency area.

AACSB: Application of knowledge 8) Adopting the Single European Act had broad popular support; the Treaty on European Union was more controversial.

Answer: TRUE Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Easy Objective: LO 14.4 Give the economic rationale for each of the three waves of deepening of the EU. AACSB: Application of knowledge 9) The Single European Act was expected to create economic benefits by reducing the costs and risks of currency market transactions.

Answer: FALSE Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Easy Objective: LO 14.4 Give the economic rationale for each of the three waves of deepening of the EU. AACSB: Application of knowledge 16 .

10) The Maastricht Treaty eliminated passport controls at borders with the European Union.

Answer: FALSE Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Easy Objective: LO 14.4 Give the economic rationale for each of the three waves of deepening of the EU. AACSB: Application of knowledge 11) Which EU institution has played a significant role is responding to the economic crisis that began in 2007?

Answer: The European Central Bank Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Easy Objective: LO 14.4 Give the economic rationale for each of the three waves of deepening of the EU. AACSB: Application of knowledge 12) Describe the history and consequent deepening as the European Union developed. Which treaties created which level of economic integration? Do countries have the ability to participate in some levels of integration and not others? Give specific examples.

Answer: The Treaty of Rome created the basics for a free trade area as well as a political infrastructure for noneconomic integration.

The Single European Act created a common market among the participants and dealt with an outstanding customs union issues.

The Treaty on European Union (or Maastricht Treaty) brought the participating countries into economic union.

Some countries (such as Norway and Switzerland) participate in the common market but are not members of the EU. Only 12 countries currently participate in the treaty on European Union. For example, the UK, Denmark, and Sweden will never be required to use the euro.

Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Difficult Objective: LO 14.4 Give the economic rationale for each of the three waves of deepening of the EU. AACSB: Application of knowledge

17 .

13) Explain the theories as to why the single currency was implemented quickly.

Answer: One explanation is that EU leaders believed that the potential gains were large and that the potential costs would lessen as countries became more integrated. Another explanation is that EU leaders were swept up in the excitement of the SMP and wanted to push further integration.

A third explanation is that German reunification caused anxiety in some European capitals and this was a strategy to tie Germany ever more deeply into a pan-European project. One of the most widely voiced explanations is that the single currency became necessary after the removal of capital controls that took place under the SMP. Before 1990, many countries had controls on the movement of foreign exchange into their country. The removal of these controls made it easier to speculate in foreign currency markets, which is part of what led to the problems in the early 90s. Creation of a single currency reduces the frictions arising from competitive devaluations and issues of fluctuating exchange rates due to speculation.

Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Difficult Objective: LO 14.5 State two theories as to why the single currency moved forward so quickly.

AACSB: Application of knowledge 14) Explain the costs and benefits of a single currency.

Answer: Benefits include the reduction of transactions costs from currency conversion and reduction of exchange rate uncertainty. Costs include the lack of ability to pursue independent monetary policies, and the lack of ability to use the exchange rate as a buffer against external shocks.

Topic: The Third Wave of Deepening: The Maastricht Treaty Difficulty: Difficult Objective: LO 14.6 Analyze the EU's single currency program within the theoretical framework of an optimal currency area.

AACSB: Application of knowledge 14.7 Widening the European Union 1) The first and biggest problem the EU faces in its expansion to the east is A) the reform of its agricultural subsidy programs.

B) the lack of democracy in the countries that are most likely to become members.

C) the unwillingness of the new members to adopt EU rules.

D) the lack of market economies in the countries that are most likely to become members.

Answer: A Topic: Widening the European Union Difficulty: Moderate Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge

18 .

2) The European Union membership criteria includes all of the following EXCEPT A) the country must participate in free trade with all of its goods and services.

B) the country must follow market-based economics.

C) the country must formally adopt the EU-wide rules such as technical standards, environmental inspections, banking supervision, etc.

D) the country must be a stable functioning democracy.

Answer: A Topic: Widening the European Union Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 3) Which of the following is NOT one of the major problems with expanding the EU? A) Expansion has become a more difficult task because of the unwillingness of the eastern and central European countries to change.

B) The programs that target EU expenditures could be stretched thin by the addition of countries with much lower incomes.

C) The EU may be faced with an unstable eastern border with huge worker migratory flows if the transition economies fail.

D) Most central and eastern European countries have large agricultural sectors and extending subsidies to these countries would entail an enormous flow of funds given the Common Agricultural Policy.

Answer: A Topic: Widening the European Union Difficulty: Moderate Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 4) The fact that 10 additional nations joined the European Union in May 2004 is an example of deepening.

Answer: FALSE Topic: Widening the European Union Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 5) There is no possibility of further widening of the European Union.

Answer: FALSE Topic: Widening the European Union Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge

19 .

6) Emigration is when people leave a country because of supply push factors.

Answer: FALSE Topic: Widening the European Union Difficulty: Easy Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 7) Describe the criteria for membership in the European Union. Given the criteria, what are some of the major challenges with expanding the EU eastward? What are the potential problems of Turkey joining the EU? Answer: The criteria for membership include that the nation must be a stable, functioning democracy, have a market-based economy, and formally adopt the EU-wide rules, called the "acquis communautaire." As the EU expands east, the nations have large agricultural sectors, which creates issues for the Common Agricultural Policy. Concerns about migration, given labor mobility are also a problem. How to govern to bigger blocks as well as general practice with governance for nations in transition can be questions. A major issue remains the difference in income between the old EU members and the new members. Turkey is especially difficult because it has a large population relative to other members, its GDP per capita is about 20 percent of the EU average at market rates, and it has issues in terms of whether it represents a "stable democracy," especially in terms of freedom of speech, torture in prisons, and civilian control over the military. Turkey has troubled relations with Cyprus, an EU member that can veto its accession.

Topic: Widening the European Union Difficulty: Difficult Objective: LO 14.2 Distinguish EU widening from EU deepening.

AACSB: Application of knowledge 14.8 The Demographic Challenge of the Future 1) As populations age, public spending tends to increase.

Answer: TRUE Topic: The Demographic Challenge of the Future Difficulty: Easy Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge 2) According to the text, what is the major long-run issue facing the European Union?

Answer: An aging population Topic: The Demographic Challenge of the Future Difficulty: Easy Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge

20 .

3) What challenges does the European Union face in the short, medium, and long run?

Answer: In the short to medium run, the EU must continue to create convergence in income and living standards between its poorest and most well off members. In the medium run, the EU must prepare for further widening, in particular the possible accession of Turkey. In the long run, the EU must adapt its economies and social support systems for a much older population.

Topic: The Demographic Challenge of the Future Difficulty: Moderate Objective: LO 14.3 Explain the obstacles to regional integration agreements.

AACSB: Application of knowledge

21 .

International Economics, 7e (Gerber) Chapter 15 Trade and Policy Reform in Latin America 15.1 Introduction: Defining a "Latin American" Economy 1) There are no questions for this section.

Topic: Introduction: Defining a "Latin American" Economy 15.2 Population, Income and Economic Growth 1) Latin America A) is significantly smaller than the NAFTA market in terms of population.

B) has a smaller population, but a larger GDP than the NAFTA market.

C) has a larger population than the NAFTA market.

D) is similar in population to the NAFTA market.

Answer: C Topic: Population, Income, and Economic Growth Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 2) From 1900 to 1960, Latin America's real GDP grew A) slower than Europe, Asia, and the U.S. B) as fast or faster than Europe, Asia, and the U.S. C) faster than Europe and the U.S. but slower than Asia.

D) faster than Asia, but slower than Europe and the U.S. Answer: B Topic: Population, Income, and Economic Growth Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 3) Growth in Latin America in the 1970s was largely fueled by A) monetary expansion.

B) government spending.

C) export growth.

D) capital inflows.

Answer: B Topic: Population, Income, and Economic Growth Difficulty: Moderate Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge

1 .

4) Rapid growth of government spending in Latin America in the 1970s led to A) the Debt Crisis.

B) rapid economic growth.

C) direct foreign investment.

D) capital outflows.

Answer: A Topic: Population, Income, and Economic Growth Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 5) Latin America has more trade agreements than any other region, and it has some of the oldest as well.

Answer: TRUE Topic: Population, Income, and Economic Growth Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 6) The 1980s were a Lost Decade for Latin America.

Answer: TRUE Topic: Population, Income, and Economic Growth Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 7) Which four nations account for most of the population and economic activity in Latin America?

Answer: Brazil; Mexico; Colombia; Argentina Topic: Population, Income, and Economic Growth Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge

2 .

8) Briefly describe economic growth in Latin America from 1900 to the 1980s.

Answer: From 1900 to 1960, the region's real GDP per capita grew as fast as or faster than that of Europe, the United States, or Asia. After World War II, most countries in Latin America experienced good rates of growth, and the two largest countries, Brazil and Mexico, had remarkable increases in their per capita income levels. Circumstances began to change as world economic growth slowed in the 1970s, and Latin American experiences became more varied.

Some countries grew faster in the 1970s and some grew slower, but nearly all relied more heavily on government expenditures to stimulate growth. The undoing of this period was the onset of the Latin American Debt Crisis, which led to negative economic growth.

Topic: Population, Income, and Economic Growth Difficulty: Moderate Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 15.3 Import Substitution Industrialization 1) Import substitution industrialization in Latin America A) relied on increased exports.

B) provided subsidies for exports.

C) shifted the bulk of exports away from primary commodities.

D) created disincentives to export.

Answer: D Topic: Import Substitution Industrialization Difficulty: Moderate Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 2) The terms of trade are A) the terms negotiated in a trade agreement.

B) exports plus imports divided by GDP. C) the value of the real exchange rate.

D) the ratio of export prices to import prices.

Answer: D Topic: Import Substitution Industrialization Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge

3 .

3) Raul Prebisch was an Argentine economist who argued that A) the terms of trade would decline for primary commodity exports.

B) the terms of trade would decline for manufactured goods exports.

C) the terms of trade for Latin American economies could not be improved.

D) the terms of trade for high-income countries would inevitably worsen.

Answer: A Topic: Import Substitution Industrialization Difficulty: Moderate Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 4) According to Prebisch and other ISI theoreticians, countries should begin to shift their comparative advantage away from primary commodity production by first producing A) industrial goods such as pumps and generators.

B) complex consumer goods such as autos and appliances.

C) simple consumer goods such as food products and textiles.

D) minerals and agricultural products.

Answer: C Topic: Import Substitution Industrialization Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 5) Proponents of ISI assumed that governments A) were capable of identifying and correcting market failures.

B) were capable of identifying and correcting the excesses of economic populists.

C) should enact orthodox stabilization plans.

D) could control the terms of trade.

Answer: A Topic: Import Substitution Industrialization Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge

4 .

6) Overvalued exchange rates were a persistent problem under ISI policies. In part, this was a deliberate policy in order to A) increase imports.

B) discourage exports.

C) help targeted industries sell their exports.

D) help targeted industries buy imports.

Answer: D Topic: Import Substitution Industrialization Difficulty: Moderate Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 7) Indirectly, overvalued exchange rates in Latin America caused A) a capital shortage in agriculture.

B) a capital shortage in industry.

C) a capital abundance in agriculture.

D) an increase in competitive pressures faced by industry.

Answer: A Topic: Import Substitution Industrialization Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 8) The terms of trade (TOT) is defined as A) (index of export prices)/(index of import prices).

B) (home-country currency)/(foreign-country currency).

C)

.

D) Answer: A Topic: Import Substitution Industrialization Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge

5 .

9) The concept of "economic pessimism" stems from A) the theory and empirical fact which states that developing nations face declining export prices relative to increasing import prices.

B) the fact that economic growth in an era of globalization is difficult to attain.

C) the fact that smaller countries would not enjoy comparative advantage unless they are allowed to subsidize some of their industries.

D) the fact that it is impossible to achieve desired economic development without adopting full democratic principles.

Answer: A Topic: Import Substitution Industrialization Difficulty: Moderate Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 10) ISI policies were brought to an end primarily by A) their inability to solve the crises of the 1980s.

B) authoritarian governments interested in total control over the economy.

C) populist politicians.

D) protests by consumers.

Answer: A Topic: Import Substitution Industrialization Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 11) Rent seeking A) is unlikely the more heavily engaged government planners are with the economy.

B) is more likely where institutions are strong.

C) is not likely to lead to waste and efficiency.

D) is more likely when government policy creates something of value that government officials are charged with distributing.

Answer: D Topic: Import Substitution Industrialization Difficulty: Moderate Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge

6 .

12) Over time, the terms of trade of Latin American countries have generally ________, and the terms of trade of developed countries have generally ________.

A) worsened; worsened B) worsened; improved C) improved; worsened D) improved; improved Answer: B Topic: Import Substitution Industrialization Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 13) Today, primary commodities A) are not a major export for most of Latin America.

B) are highly valued relative to manufactured goods.

C) have benefited from increased demand from growing world economies.

D) are not subject to business cycles.

Answer: C Topic: Import Substitution Industrialization Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 14) One problem of ISI was A) the failure to consider that government officials may make inefficient decisions.

B) the overemphasis on improvements in the rural rather than the urban sector.

C) the oversupply of complex technical goods.

D) the undervaluation of currencies to promote export growth.

Answer: A Topic: Import Substitution Industrialization Difficulty: Moderate Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 15) Overvalued exchange rates benefit consumers in the short run.

Answer: TRUE Topic: Import Substitution Industrialization Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge

7 .

16) ISI policies increased competition and lowered prices in most economies.

Answer: FALSE Topic: Import Substitution Industrialization Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 17) What is the primary reason exchange rates were overvalued under ISI? Answer: Because fixed exchange rates were used and inflation was higher than that of trading partners Topic: Import Substitution Industrialization Difficulty: Easy Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 18) Describe the policies that would be associated with Import Substitution Industrialization.

What are the primary criticisms of these policies?

Answer: Replacing imported manufactured goods with domestically produced products is the basis of import substitution. Tariffs and other trade restrictions were used, the government created or supported new industrial development, and in general the policies were aimed at reducing the need for foreign exchange earnings. Criticisms include that governments misallocate resources when they become too involved in the production process. Exchange rates were often overvalued. The policies favored urban over rural areas. Inequality often worsened.

There was widespread rent seeking activity.

Topic: Import Substitution Industrialization Difficulty: Difficult Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 19) What benefits did an overvalued currency offer a domestic economy in the ISI period?

Which sectors were typically harmed by overvalued currencies?

Answer: Overvalued exchange rates made it easier for targeted industries to buy imported capital goods and kept urban workers more allied with political leaders because foreign goods were relatively less expensive. It made it difficult to export, especially for the traditional commodity producers, which hurt investment and income in rural areas. Non-targeted industries lost sales and production. Industrial investment was too capital intensive and unable to create jobs fast enough to absorb labor leaving rural areas.

Topic: Import Substitution Industrialization Difficulty: Moderate Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge

8 .

20) Explain the reasons for export pessimism in Latin American countries.

Answer: Export pessimism refers to the idea that the relative price of primary commodities will fall over time. Economic theory holds that as incomes rise, people spend a smaller share of their overall income on foodstuffs and other raw-material-based goods such as textiles and apparel, and they spend more on manufactured items. Consequently, the demand for raw materials declines in relation to the demand for manufactured goods.

Topic: Import Substitution Industrialization Difficulty: Moderate Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 21) Why might export pessimism be wrong?

Answer: First, statistical studies do not support the idea that primary commodities necessarily fall over time. Secondly, even though people may spend a smaller share of their income on primary commodities, the terms of trade will not necessarily fall, because productivity increases in manufacturing can overwhelm increases in demand and push down the real prices of manufactured goods relative to the price of primary products.

Topic: Import Substitution Industrialization Difficulty: Difficult Objective: LO 15.1 Describe the strengths, weaknesses, and reasons for import substitution industrialization.

AACSB: Application of knowledge 15.4 Macroeconomic Instability and Economic Populism 1) Inflationary tendencies and even hyperinflation in many Latin American countries have been exacerbated by the tendency of governments to A) tax too heavily.

B) regulate too heavily.

C) print money to finance policies to stimulate the economy.

D) keep out foreign competition.

Answer: C Topic: Macroeconomic Instability and Economic Populism Difficulty: Easy Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge

9 .

2) The first phase of a typical cycle of economic populism is usually A) hyperinflation.

B) rising growth and rising wages.

C) falling growth and falling wages.

D) rising unemployment.

Answer: B Topic: Macroeconomic Instability and Economic Populism Difficulty: Easy Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge 3) Which of the following is NOT a characteristic of populist regimes?

A) Nationalistic ideologies B) Focus on economic growth C) Focus on income redistribution D) Focus on controlling inflation Answer: D Topic: Macroeconomic Instability and Economic Populism Difficulty: Moderate Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge 4) Alan Garcia A) in his first Presidency in Peru, followed free market economic policies.

B) nationalized the property of the financial services sector during his first Presidency.

C) was never freely elected in Peru and ruled with the support of the military.

D) maintained balanced budgets and helped Peru avoid the economic problems most Latin American nations were experiencing in the 1980s.

Answer: B Topic: Macroeconomic Instability and Economic Populism Difficulty: Moderate Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge 5) An economic populist movement A) is likely to create long-term economic stability.

B) favors promotion of export-based industries and fiscal austerity.

C) is less likely to use expansionary policy due to inflation risks.

D) uses economic tools to obtain support from labor and domestically oriented businesses.

Answer: D Topic: Macroeconomic Instability and Economic Populism Difficulty: Easy Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge

10 .

6) The acceleration of inflation that characterizes many economic populist movements is usually the result of A) a rapid increase in the demand for exports.

B) the printing of money to finance government budget deficits.

C) current account deficits.

D) import substitution policies.

Answer: B Topic: Macroeconomic Instability and Economic Populism Difficulty: Moderate Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge 7) Populist policies are not successful even in the immediate short run at stimulating the economy and creating jobs.

Answer: FALSE Topic: Macroeconomic Instability and Economic Populism Difficulty: Easy Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge 8) At the end of the populist cycle, workers are better off than they were before the populist cycle began in terms of real wages and job creation.

Answer: FALSE Topic: Macroeconomic Instability and Economic Populism Difficulty: Easy Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge 9) Many economist believe that misguided macroeconomic policies did more to create the Debt Crisis of the 1980s than ISI. Answer: TRUE Topic: Macroeconomic Instability and Economic Populism Difficulty: Easy Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge

11 .

10) What are the three initial conditions that trigger economic populism?

Answer: Economic populism is usually triggered by three initial conditions. First, there is a deep dissatisfaction with the status quo, usually as a result of slow growth or recession. Second, policy makers reject the traditional constraints on macro policy. Budget deficits financed through printing money are justified by the existence of high unemployment and idle factories, which offer room for expansion without inflation. Third, policy makers promise to raise wages while freezing prices and to restructure the economy by expanding the domestic production of imported goods, thereby lessening the need for foreign exchange.

Topic: Macroeconomic Instability and Economic Populism Difficulty: Moderate Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge 11) Explain how an economic populist regime usually progresses.

Answer: Early in the populist regime, there is a vindication of the policies of reactivating, redistributing, and restructuring. The economic stimulus of government expenditures and newly created money leads rising growth rates and rising wages. Soon, however, bottlenecks begin to appear. Prices begin to rise, and the budget deficit grows. In the next stage, inflation begins an extreme acceleration, and shortages become pervasive throughout the economy. The budget falls into serious deficit as policies become unsustainable, and wage increases cease keeping up with inflation. In the final stage, countries experience massive capital flight as fears of a devaluation develop. The flight of capital out of the country depresses investment and further depresses real wages. In the end, real wages are often lower than before the cycle began.

Topic: Macroeconomic Instability and Economic Populism Difficulty: Difficult Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge 12) How does the IMF approach the problem of failing economic populist regimes?

Answer: Typically, the IMF oversees the implementation of stabilization and structural reform policies that call for serious budget cuts, a slowdown in the growth of the money supply, a reduction in trade barriers, and in general, greater reliance on market mechanisms and less government intervention.

Topic: Macroeconomic Instability and Economic Populism Difficulty: Moderate Objective: LO 15.2 Explain the strategy and performance of economic populism.

AACSB: Application of knowledge

12 .

15.5 The Debt Crisis of the 1980s 1) The Lost Decade refers to the years between approximately A) 1980 and 1990.

B) 1987 and 1997.

C) 1972 and 1980.

D) 1960 and 1970.

Answer: A Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 2) The reform movements that began in many Latin American economies in the late 1980s favored A) competitive devaluations.

B) stronger military budgets.

C) imports substitution policies.

D) a stronger role for markets and more openness.

Answer: D Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 3) The accumulation of international debt increased the debt service requirements of the indebted countries. After the debt crisis began, this caused A) the adoption of expansionary policies to return to growth.

B) large capital inflows to service the debt.

C) the adoption of strongly contractionary policies to reduce consumption and government deficits.

D) an intensification of industrial policies targeted on import substitutes.

Answer: C Topic: The Debt Crisis of the 1980s Difficulty: Moderate Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge

13 .

4) The Baker Plan for addressing the debt crisis was based on the assumption that A) most countries would eventually default on their debt.

B) forgiveness of some of the debt was inevitable.

C) hyperinflation would eventually reduce the real value of the debt.

D) renewed lending by U.S. and European banks would restore growth and make the debt manageable.

Answer: D Topic: The Debt Crisis of the 1980s Difficulty: Moderate Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 5) The main difference between stabilization policies and structural reform policies is that stabilization policies A) focus on microeconomic issues and structural reform policies focus on the macroeconomic environment.

B) focus on macroeconomic issues and structural reform policies focus on the microeconomic environment.

C) are rarely used by reform governments; they prefer to use structural reform policies in their place.

D) create less unemployment than structural reform policies.

Answer: B Topic: The Debt Crisis of the 1980s Difficulty: Moderate Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 6) Reform of a country's trading system, including the reduction or elimination of trade barriers, is an example of A) an orthodox stabilization plan.

B) a heterodox stabilization plan.

C) import substitution industrialization.

D) structural reform.

Answer: D Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge

14 .

7) In order to accumulate the resources that they needed to make interest payments, Latin American countries were forced to used macroeconomic policies that A) devalued their currencies and caused deep recessions.

B) revalued their currencies and caused increased inflation.

C) devalued their currencies and caused increased inflation.

D) revalued their currencies and caused deep recessions.

Answer: A Topic: The Debt Crisis of the 1980s Difficulty: Moderate Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 8) One year into the crisis, Argentina's interest payments were roughly equal to A) 100 percent of exports.

B) 60 percent of exports.

C) 45 percent of exports.

D) 10 percent of exports.

Answer: B Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 9) Initially, the U.S. and the IMF believed that A) the Debt Crisis would require long-term structural changes.

B) Latin American economies did not need assistance.

C) capital inflows would be unable to solve the debt problems.

D) the Debt Crisis was a temporary liquidity problem.

Answer: D Topic: The Debt Crisis of the 1980s Difficulty: Moderate Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 10) Latin American economies have become relatively more closed to international trade since 1985.

Answer: FALSE Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge

15 .

11) The external shock that hit Mexico and other Latin American countries in the early 1980s that caused the Lost Decade was a collapse in world oil prices.

Answer: FALSE Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 12) Most analysts in the United States and the international financial community initially perceived the debt crisis as a temporary, short-run liquidity problem so they advised increasing capital flows to Latin America.

Answer: TRUE Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 13) While the Brady Plan did not end the debt crisis, it was a significant step toward greater stability in the Latin American region.

Answer: TRUE Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 14) Private capital flows in the form of both direct and portfolio investment began to return to Latin America after 1989, effectively marking the end of the Lost Decade.

Answer: TRUE Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 15) The Lost Decade began in 1990 when Colombia announced that it lacked the international reserves it needed to pay the interest and principle due on its foreign debt.

Answer: FALSE Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge

16 .

16) The Baker Plan emphasized renewed commercial bank loans as a way to restart capital flows to Latin America.

Answer: TRUE Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 17) What do structural reform policies emphasize?

Answer: Policies that focus on microeconomic level reforms, such as the privatization of government-owned enterprises, deregulation, and trade policy reform Topic: The Debt Crisis of the 1980s Difficulty: Easy Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 18) Explain the events that triggered the Debt Crisis and the Lost Decade.

Answer: An acceleration in commercial bank lending and the rise in the amount of debt owed by Latin American economies made them vulnerable to a sudden and unforeseen economic shock.

When oil prices fell in 1981, this reduced export earning in Mexico, which eventually made it unable to service its debt. Likewise, recession in many industrial countries reduced the demand for other primary commodities, and at the same time, world interest rates were rising. Thus for many Latin American economies, interest payment (at variable rates) increased at the same time that export earnings were falling, making them unable to pay the loans.

Topic: The Debt Crisis of the 1980s Difficulty: Moderate Objective: LO 15.3 Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI. AACSB: Application of knowledge 15.6 Neoliberal Policy Reform and the Washington Consensus 1) One of the main causes of economic inequality in Latin America is the A) failure of governments to support urban consumers.

B) lack of progress in raising agricultural productivity.

C) lack of governmental interest in solving the problem of inequality.

D) focus of governments on agricultural exports to the detriment of food production.

Answer: B Topic: Neoliberal Policy Reform and the Washington Consensus Difficulty: Moderate Objective: LO 15.4 Discuss the goals of economic policy reforms that began in the late 1980s.

AACSB: Application of knowledge

17 .

2) The difference between an orthodox stabilization plan and a heterodox stabilization plan is that the orthodox plan A) targets the problem of inflation, while the heterodox plan targets unemployment.

B) reduces trade flows less than the heterodox plan.

C) does not include higher taxes and the heterodox plan does.

D) does not include wage and price controls and the heterodox plan does.

Answer: D Topic: Neoliberal Policy Reform and the Washington Consensus Difficulty: Moderate Objective: LO 15.4 Discuss the goals of economic policy reforms that began in the late 1980s.

AACSB: Application of knowledge 3) An orthodox model calls for cutting government spending, reforming the tax system to increase compliance and revenues, and limiting the creation of new money.

Answer: TRUE Topic: Neoliberal Policy Reform and the Washington Consensus Difficulty: Easy Objective: LO 15.4 Discuss the goals of economic policy reforms that began in the late 1980s.

AACSB: Application of knowledge 4) A heterodox model would not call for freezing wages and prices, but an orthodox one would.

Answer: FALSE Topic: Neoliberal Policy Reform and the Washington Consensus Difficulty: Easy Objective: LO 15.4 Discuss the goals of economic policy reforms that began in the late 1980s.

AACSB: Application of knowledge 5) Briefly describe orthodox stabilization policies.

Answer: Minimizes government involvement in the economy and prescribes government spending cuts, tax reform, and control over money supply growth to fight inflation Topic: Neoliberal Policy Reform and the Washington Consensus Difficulty: Easy Objective: LO 15.4 Discuss the goals of economic policy reforms that began in the late 1980s.

AACSB: Application of knowledge 6) What is called for with heterodox stabilization policies?

Answer: Calls for government spending cuts, tax reform, control over money supply growth, and also wage and price freezes to fight inflation and to reduce inflationary expectations Topic: Neoliberal Policy Reform and the Washington Consensus Difficulty: Easy Objective: LO 15.4 Discuss the goals of economic policy reforms that began in the late 1980s.

AACSB: Application of knowledge

18 .

7) What economic problems persist in Latin America? How has this shaped recent policy in the region and why are changes particularly challenging?

Answer: The lack of material improvement for large numbers of the population has forced policy makers to try to find ways to develop a more inclusive economic system by creating opportunities for excluded groups. They are also trying to make the countries less prone to macroeconomic crises and to create greater flexibility by addressing some of the legal and institutional rigidities that may be affecting outcomes. A long history of exclusion has blocked economic opportunity for particular groups. It is politically difficult to address inequality because inevitably it involves increasing tax collections and redirecting expenditures toward groups and regions that tend to be among the least powerful and least influential. Policies that will help include increasing spending on rural infrastructure to connect isolated groups with the national economy, along with spending on education, health care and microcredit programs.

Topic: Neoliberal Policy Reform and the Washington Consensus Difficulty: Easy Objective: LO 15.5 Explain why some Latin American leaders have become impatient with economic policy reforms.

AACSB: Application of knowledge

19 .

International Economics, 7e (Gerber) Chapter 16 Export-Oriented Growth in East Asia 16.1 Introduction: High-Growth Asian Economies 1) Which of the following is NOT a characteristic of high-growth Asian economies?

A) stable macroeconomic policies B) similar governments C) credible commitments to expanding access to health care D) the development of skilled workforces Answer: B Topic: Introduction: High-Growth Asian Economies Difficulty: Easy Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 2) High-growth Asian economies were careful to maintain stable macroeconomic environments.

Answer: TRUE Topic: Introduction: High-Growth Asian Economies Difficulty: Easy Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 16.2 Population, Income, and Economic Growth 1) One of the main differences between the recent economic history of the high-performance Asian economies and most of the rest of the world is that growth in the Asian economies A) increased in the 1960s.

B) continued in the 1980s.

C) slowed down in the 1960s.

D) slowed down in the 1970s.

Answer: B Topic: Population, Income, and Economic Growth Difficulty: Easy Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge

1 .

2) If a country's income grows at the rate of 5 percent a year, it doubles in about A) eight years.

B) six and one-half years.

C) ten years.

D) fourteen and one-half years.

E) twenty years.

Answer: D Topic: Population, Income, and Economic Growth Difficulty: Easy Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 3) All eight countries known as the high-growth Asian economies are outwardly oriented for trade and investment, and all have experienced rapid growth by world standards.

Answer: TRUE Topic: Population, Income, and Economic Growth Difficulty: Easy Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 4) After 2000, rapid economic growth continued for the high-growth Asian economies.

Answer: FALSE Topic: Population, Income, and Economic Growth Difficulty: Easy Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 5) Name the eight high-growth Asian economies.

Answer: Hong Kong, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, Thailand Topic: Population, Income, and Economic Growth Difficulty: Moderate Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge

2 .

16.3 General Characteristics of Growth 1) The experience of the high-growth Asian economies has brought attention to predictions about income inequality made by Kuznets. He predicted that at first income inequality would ________ as economies began to develop. In the HPAE's experience, it ________.

A) rise; rose B) decrease; decreased C) rise; fell D) fall; rose Answer: C Topic: General Characteristics of Growth Difficulty: Moderate Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 2) Movement of the fast-growing Asian nations through the demographic transition may have had an impact on growth rates because it A) reduced expenditures on health care.

B) reduced expenditures on pensions.

C) increased savings.

D) increased consumption relative to GDP. Answer: C Topic: General Characteristics of Growth Difficulty: Moderate Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 3) Investment in education in the high-growth Asian economies was ________ in ________.

A) low; primary schools B) high; primary schools C) low; primary and secondary schools D) high; primary and secondary schools E) high; university education Answer: D Topic: General Characteristics of Growth Difficulty: Easy Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge

3 .

4) Which of the following is a FALSE statement about education in the high-growth Asian economies?

A) An emphasis on state funding of advanced degree programs, such as engineering and computer science, increased manufacturing production significantly.

B) Literacy rates rose dramatically in the high-growth Asian economies and laid a foundation for a skilled labor force.

C) As the average educational level rose, workers could take on more technological, sophisticated production, pushing new investment into product lines.

D) Spending was focused on the primary and secondary level, where it has the greatest social impact.

Answer: A Topic: General Characteristics of Growth Difficulty: Moderate Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 5) All of the following are true of the high-growth Asian economies EXCEPT A) macroeconomic stability has been a high priority of their economic policies.

B) strong, credible commitments to sharing economic growth across all layers of society exist.

C) exports have been promoted while at the same time being more open to imports than other developing countries.

D) restrictions on imports of capital goods have helped to favor the development of domestic technology.

Answer: D Topic: General Characteristics of Growth Difficulty: Moderate Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 6) Which of the following has NOT been promoted by high-growth Asian economies?

A) Large job creation in the government sector B) Land reform C) Free basic health care D) Significant investments in rural infrastructure Answer: A Topic: General Characteristics of Growth Difficulty: Easy Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge

4 .

7) Which of the following is NOT a mechanism the high-growth Asian economies used to share wealth across all layers of society?

A) Significant investments in rural infrastructure B) Free public education C) Tax policies that strongly redistributed income from rich to poor D) Land reform Answer: C Topic: General Characteristics of Growth Difficulty: Moderate Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 8) Each of the high-growth Asian economies promoted manufactured exports.

Answer: TRUE Topic: General Characteristics of Growth Difficulty: Easy Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 9) Macroeconomic stability has been a high priority for the economic policies of the high-growth Asian economies.

Answer: TRUE Topic: General Characteristics of Growth Difficulty: Easy Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 10) Falling inequality has been a feature of the high-growth Asian economies due to land reform, free public education, free basic health care, and significant investments in infrastructure for communication, sanitation, and transportation.

Answer: TRUE Topic: General Characteristics of Growth Difficulty: Easy Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge

5 .

11) Compare macroeconomic policies in the high-growth Asian economies with policies in the rest of the world.

Answer: These economies have prioritized the maintenance of stable macroeconomic environments. On average, budget deficits and foreign debt were not dramatically smaller than in other regions of the world, although there was a significant amount of variation across countries.

The difference in the export-oriented economies, however, is that with the exception of the 19971998 crisis, deficits and debts remained manageable. High growth rates helped ease the constraints imposed by a given level of debt, partly because the high levels of exports earned the foreign assets necessary for debt servicing. The commitment to low inflation helped keep real interest rates stable and enabled firms to take a longer-run view of their investments. In addition, low inflation helped avoid severe real appreciations in the exchange rate. Low inflation also meant that variations in the real exchange rate, the real interest rate, and the inflation rate were relatively low.

Topic: The Institutional Environment Difficulty: Difficult Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge 12) Contrast the economic experience of the high-growth Asian economies with the experience in Latin America, especially with regard to the 1980s and in terms of weathering financial crises.

Answer: The high-growth Asian economies have grown more steadily and consistently and with a broader effect on all income levels in society. The high-growth Asian economies successfully emphasized land reform, free public education, free basic health care, and significant investments in rural infrastructure, such as clean water, transportation, and communication systems, that helped bring a broader sector of society along in terms of development. The difference in growth is especially notable in the 1980s, when growth in the high-growth Asian economies continued and even accelerated while Latin America was experiencing the "Lost Decade." In terms of handling financial crises, the time periods were different, but the highgrowth Asian economies tended to keep budget deficits and foreign debts at generally manageable levels. Governments were committed to low inflation, which helped avoid severe real appreciations in the exchange rate. In the HPAE, differences between the real exchange rate, the real interest rate, and the inflation rate were relatively low, fostering greater security in the minds of investors.

Topic: General Characteristics of Growth Difficulty: Difficult Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge

6 .

13) What did the high-growth Asian economies do to share wealth across all levels of society?

Answer: The high-income Asian economies emphasized land reform, free public education, free basic health care, and significant investments in rural infrastructure, such as clean water, transportation, and communication systems.

Topic: General Characteristics of Growth Difficulty: Moderate Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 14) Identify at least three key factors in the high-growth Asian economies' economic success.

Answer: These would include macroeconomic stability; strong, credible commitments to sharing economic growth across all levels of society, including an emphasis on education that helped raise productivity in the labor force; high levels of savings; an emphasis on exports but an openness to imports Topic: General Characteristics of Growth Difficulty: Moderate Objective: LO 16.1 List four general characteristics of success in the export-oriented East Asian economies.

AACSB: Application of knowledge 16.4 The Institutional Environment 1) In general, the relationship between democracy and economic growth as demonstrated by the high-growth Asian economies is that A) democratic nations grow faster than undemocratic nations.

B) democratic nations grow slower than undemocratic nations.

C) there does not seem to be a relationship between democracy and economic growth.

D) democracies are much more variable in their rates of growth than undemocratic nations.

Answer: C Topic: The Institutional Environment Difficulty: Easy Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge 2) One of the functions of deliberation councils is to A) coordinate foreign investment from different countries.

B) set educational policy for universities and colleges.

C) coordinate government policy and private investment.

D) ensure stability in the country's fiscal and monetary policies.

Answer: C Topic: The Institutional Environment Difficulty: Easy Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge

7 .

3) Which of the following is NOT a contributing factor into why the high-growth Asian economies were able to rapidly accumulate physical and human capital?

A) A stable macroeconomic environment meant low inflation.

B) Loans from multilateral institutions such as the IMF, the World Bank, and regional development banks.

C) The demographic transition meant that the proportion of their population working was higher.

D) A rapid rise in income made greater amounts of savings possible.

Answer: B Topic: The Institutional Environment Difficulty: Moderate Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge 4) The Latin American region has more economic equality than the high-growth Asian economies because nations are more democratic.

Answer: FALSE Topic: The Institutional Environment Difficulty: Easy Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge 5) The voices of business and industry are less likely to influence government policy than the voices of consumers in the high-growth Asian economies.

Answer: FALSE Topic: The Institutional Environment Difficulty: Easy Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge 6) Deliberation councils have no private sector input.

Answer: FALSE Topic: The Institutional Environment Difficulty: Easy Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge 7) In the high-growth Asian economies, inflation is kept under control and budget deficits and foreign debt levels are kept within the ability of the governments and the economies to handle them, which is quite different from the past experience of the Latin American region.

Answer: TRUE Topic: The Institutional Environment Difficulty: Easy Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge

8 .

8) The high-growth Asian economies have been more open to imports than most developing countries.

Answer: TRUE Topic: The Institutional Environment Difficulty: Easy Objective: LO 16.3 Analyze the degree of openness in the export-oriented East Asian economies.

AACSB: Application of knowledge 9) Similarly to the Latin American region, the high-growth Asian economies experienced a Lost Decade in the 1980s.

Answer: FALSE Topic: The Institutional Environment Difficulty: Easy Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge 10) The high-growth Asian economies focused their education spending on the university level to better develop high technology workers.

Answer: FALSE Topic: The Institutional Environment Difficulty: Easy Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge 11) Rent-seeking activities have been a major problem in the high-growth Asian economies and contributed greatly to the Asian financial crisis.

Answer: FALSE Topic: The Institutional Environment Difficulty: Easy Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge 12) Property rights are relatively secure and free from the threat of nationalization in the highgrowth Asian economies.

Answer: TRUE Topic: The Institutional Environment Difficulty: Easy Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge

9 .

13) Describe several components of the institutional environment in the high-growth Asian economies that are critical to their success.

Answer: Property rights are secure, bureaucracies are competent, contracts are enforceable, access to information is widespread, and regulations are clear and well publicized.

Topic: The Institutional Environment Difficulty: Moderate Objective: LO 16.2 Describe how the institutional environment supported economic growth.

AACSB: Application of knowledge 14) Could the high-income Asian economies be characterized as open economies? Explain.

Answer: There has been much debate on this subject. It is possible that high-growth Asian economies promoted their exports and severely restricted imports to protect domestic markets. In that case, their policies were not market-oriented, but instead reflected a high degree of government intervention. Alternatively, East Asian economies might not have set tough constraints on imports, but followed relatively open export promotion policies that contributed to rapid economic growth, more or less in line with market-based incentives. Examination of trade data supports the theory that East Asian economies did not close their import sectors, but rather imported quite a large amount of goods and services.

Topic: The Institutional Environment Difficulty: Difficult Objective: LO 16.3 Analyze the degree of openness in the export-oriented East Asian economies.

AACSB: Analytical thinking 16.5 The Role of Industrial Policies 1) A technique for implementing industrial policies that probably worsened the effects of the 1997 crisis was A) directed credit.

B) protection from imports.

C) export subsidies.

D) research subsidies.

Answer: A Topic: The Role of Industrial Policies Difficulty: Moderate Objective: LO 16.4 Explain the pros and cons of the idea that industrial policies mattered to East Asian success.

AACSB: Application of knowledge

10 .

2) Which of the following was NOT part of Korean industrial policies?

A) An aggressive promotion of exports along with high levels of protection B) Directed credit and tax breaks given to targeted industries C) Bailing out bankrupt firms without any attempt to dispose distressed firms D) Allowing exporting firms to borrow funds at below-market interest rates Answer: C Topic: The Role of Industrial Policies Difficulty: Moderate Objective: LO 16.4 Explain the pros and cons of the idea that industrial policies mattered to East Asian success.

AACSB: Application of knowledge 3) The World Bank's view of the effectiveness of industrial policies in East Asia is that, in general, they A) hindered growth.

B) had little or no effect on growth.

C) encouraged growth.

D) are the main factor in the success of the East Asian economies.

Answer: B Topic: The Role of Industrial Policies Difficulty: Easy Objective: LO 16.4 Explain the pros and cons of the idea that industrial policies mattered to East Asian success.

AACSB: Application of knowledge 4) Critics of the World Bank's analysis of East Asian industrial policies argue that A) even though growth was faster in the non-targeted industries than it was in the targeted ones, the policies were essential to overall economic growth.

B) growth was faster in nearly every targeted industries than it was in the non-targeted ones.

C) even though growth was the same in the targeted industries as it was in the non-targeted ones, they would have grown slower without the policies.

D) growth was slower in the targeted industries; hence the policies did not work.

Answer: C Topic: The Role of Industrial Policies Difficulty: Moderate Objective: LO 16.4 Explain the pros and cons of the idea that industrial policies mattered to East Asian success.

AACSB: Application of knowledge 5) What appears to have been one of the major causes of the Asian financial crisis?

Answer: Government directed credit programs Topic: The Role of Industrial Policies Difficulty: Easy Objective: LO 16.4 Explain the pros and cons of the idea that industrial policies mattered to East Asian success.

AACSB: Application of knowledge 11 .

6) What types of government intervention did the World Bank determine was common in the East Asian economies?

Answer: Government targeted specific industries for promotion using directed credit and export promotion.

Topic: The Role of Industrial Policies Difficulty: Easy Objective: LO 16.4 Explain the pros and cons of the idea that industrial policies mattered to East Asian success.

AACSB: Application of knowledge 7) What evidence is there that industrial policies were a major influence on East Asian success?

Answer: There is no clear answer to this question. One camp is represented by the World Bank's research. In its view, some government interventions fostered economic growth (export promotion and directed credit), but in general industrial policies did not. The World Bank's analysis rests on two pieces of evidence. First, it compares the growth rates of productivity in the targeted and nontargeted sectors in the three countries with sufficient data (Japan, Korea, and Taiwan). In general, it finds that productivity change in the promoted sectors was high but no higher than in the rest of the economy. Second, it examines the change over time in the industrial structure of the countries. If industrial policies worked, they should have led to a different pattern of industrial growth than the pattern caused by a change in factor endowments. The World Bank concluded that industrial policies were at most marginally effective, because the sector-by-sector growth pattern is as expected, given the national endowments of labor and the high savings and investment rates.

Critiques of the World Bank's findings usually rest on two points. First, the fact that productivity growth was generally no faster in promoted sectors is irrelevant, according to the critics. The important issue is what the growth rates would have been without promotion. It is conceivable that without industrial policies, growth in the targeted industries would have been much slower than with the policies. Second, the critics point out that the World Bank analysis is overly general. In their view, it is based on industry groupings that are too broad to uncover the details of selective targeting.

Topic: The Role of Industrial Policies Difficulty: Difficult Objective: LO 16.4 Explain the pros and cons of the idea that industrial policies mattered to East Asian success.

AACSB: Application of knowledge

12 .

16.6 The Role of Manufactured Exports 1) All of the following would be potential problems if developing nations around the world emphasized export promotion EXCEPT A) industrial nations may be unable to absorb the exports of many newly industrializing nations.

B) it would be much harder to emphasize exports under the WTO framework if the emphasis in exports requires some kind of subsidies.

C) export growth may not add to GDP if it crowds out growth in output of goods for domestic consumption.

D) current research has clearly established that there is no causal connection between exports and faster economic growth.

Answer: D Topic: The Role of Manufactured Exports Difficulty: Moderate Objective: LO 16.5 Evaluate the impact of export promotion policies and the debate over their applicability to other world regions.

AACSB: Application of knowledge 2) Which of the following economic conditions cause export growth to be a basis for faster overall economic growth?

A) Diseconomies of scale in production for the domestic market B) A larger-than- average service sector C) A larger-than-average manufacturing sector D) Economies of scale in production for the world market Answer: D Topic: The Role of Manufactured Exports Difficulty: Moderate Objective: LO 16.5 Evaluate the impact of export promotion policies and the debate over their applicability to other world regions.

AACSB: Application of knowledge 3) One economic advantage of a large share of exports in GDP is that countries A) can reduce their budget deficits.

B) can purchase the imports they need.

C) can maintain lower rates of unemployment.

D) develop more labor-intensive industry.

Answer: B Topic: The Role of Manufactured Exports Difficulty: Easy Objective: LO 16.5 Evaluate the impact of export promotion policies and the debate over their applicability to other world regions.

AACSB: Application of knowledge

13 .

4) One obstacle to the adoption of the export promotion model by countries in other regions is that A) the Uruguay Round of the GATT forbids many types of export promotion policies.

B) research and development for new exports is too expensive.

C) only noncommercial R&D is permitted under the rules of the GATT. D) industrial monopolies in the high-income countries will block further exports by developing countries.

Answer: A Topic: The Role of Manufactured Exports Difficulty: Moderate Objective: LO 16.5 Evaluate the impact of export promotion policies and the debate over their applicability to other world regions.

AACSB: Application of knowledge 5) Export promotion is widely regarding by economists as a positive role for government policy makers to play because it is very effective at promoting economic growth.

Answer: FALSE Topic: The Role of Manufactured Exports Difficulty: Easy Objective: LO 16.5 Evaluate the impact of export promotion policies and the debate over their applicability to other world regions.

AACSB: Application of knowledge 16.7 Is There an Asian Model of Economic Growth?

1) Total factor productivity is A) the quantity of output per worker.

B) the quantity of output per unit of capital.

C) the ratio of inputs divided by outputs.

D) the quantity of output per unit of input.

Answer: D Topic: Is There an Asian Model of Economic Growth?

Difficulty: Easy Objective: LO 16.6 Define total factor productivity and explain why economists use it to understand whether growth in East Asia is similar to growth elsewhere.

AACSB: Application of knowledge

14 .

2) Measurements of TFP indicate that the East Asian success story is based on A) a significantly different economic model from the one followed in the West.

B) unusually large amounts of innovation.

C) rapid increases in the education of the work force.

D) high amounts of savings and investment.

Answer: D Topic: Is There an Asian Model of Economic Growth?

Difficulty: Easy Objective: LO 16.5 Evaluate the impact of export promotion policies and the debate over their applicability to other world regions.

AACSB: Application of knowledge 3) The main contributor to growth in the high growth Asian economies, according to empirical research was government industrial policies.

Answer: FALSE Topic: Is There an Asian Model of Economic Growth?

Difficulty: Easy Objective: LO 16.5 Evaluate the impact of export promotion policies and the debate over their applicability to other world regions.

AACSB: Application of knowledge 4) Studies of the high growth Asian economies confirm the importance of savings and investment in increasing economic growth.

Answer: TRUE Topic: Is There an Asian Model of Economic Growth?

Difficulty: Easy Objective: LO 16.5 Evaluate the impact of export promotion policies and the debate over their applicability to other world regions.

AACSB: Application of knowledge 5) Which factors account for most of the growth in the high growth Asian economies?

Answer: Capital formation, savings and investment Topic: Is There an Asian Model of Economic Growth?

Difficulty: Easy Objective: LO 16.5 Evaluate the impact of export promotion policies and the debate over their applicability to other world regions.

AACSB: Application of knowledge

15 .

International Economics, 7e (Gerber) Chapter 17 China and India in the World Economy 17.1 Introduction: New Challenges 1) China's economic reforms began in A) 1960.

B) 1978.

C) 1991.

D) 1998.

Answer: B Topic: Introduction: New Challenges Difficulty: Easy Objective: LO 17.1 State why China and India are considered disruptive to the world's economic status quo.

AACSB: Application of knowledge 2) India's economic reforms began in A) 1960.

B) 1978.

C) 1991.

D) 1998.

Answer: C Topic: Introduction: New Challenges Difficulty: Easy Objective: LO 17.1 State why China and India are considered disruptive to the world's economic status quo.

AACSB: Application of knowledge 3) Which of the following countries has the highest population in the world?

A) Indonesia B) Russia C) India D) China Answer: D Topic: Introduction: New Challenges Difficulty: Easy Objective: LO 17.1 State why China and India are considered disruptive to the world's economic status quo.

AACSB: Application of knowledge

1 .

4) China's economic reforms have focused on A) privatizing state-owned enterprises and increasing efficiency.

B) reducing persistent inflation and current account deficits.

C) transitioning from socialism and toward private ownership.

D) reducing exchange rate instability.

Answer: C Topic: Introduction: New Challenges Difficulty: Moderate Objective: LO 17.1 State why China and India are considered disruptive to the world's economic status quo.

AACSB: Application of knowledge 5) India's economic reforms have focused on A) privatizing state-owned enterprises and increasing efficiency.

B) reducing persistent inflation and current account deficits.

C) transitioning from socialism and toward private ownership.

D) reducing exchange rate instability.

Answer: A Topic: Introduction: New Challenges Difficulty: Moderate Objective: LO 17.1 State why China and India are considered disruptive to the world's economic status quo.

AACSB: Application of knowledge 6) Which of the following countries has the second highest population in the world?

A) Indonesia B) Russia C) India D) China Answer: C Topic: Introduction: New Challenges Difficulty: Easy Objective: LO 17.1 State why China and India are considered disruptive to the world's economic status quo.

AACSB: Application of knowledge

2 .

7) Explain why China and India are considered disruptive to the world's status quo.

Answer: History tells us that when world powers emerge, it usually creates economic, political, and military challenges for other nations and leads to a period filled with transitions and tensions.

This is particularly true in the case of China. China's enormous size, as the second largest economy in the world, together with its aggressive foreign investment and trade policies, and its historically unprecedented rate of growth, have caused it to be more disruptive of the status quo as it has become integrated with world markets.

Topic: Introduction: New Challenges Difficulty: Moderate Objective: LO 17.1 State why China and India are considered disruptive to the world's economic status quo.

AACSB: Application of knowledge 17.2 Demographic and Economic Characteristics 1) Openness and change in the economic models of India and China have meant for the world economy all of the following EXCEPT A) hundreds of millions of people have escaped poverty.

B) many manufactured goods and services have become cheaper.

C) forced some firms to downsize, offshore or otherwise change business practices.

D) increased the market power of firms in industrialized countries as they gained most from this evolving trade.

Answer: D Topic: Demographic and Economic Characteristics Difficulty: Moderate Objective: LO 17.2 Describe the demographic trends in China and India.

AACSB: Application of knowledge 2) Which of the following is true?

A) India is the world's largest democracy.

B) India began reforming and opening its economy prior to China.

C) At the end of the twenty-first century, China will have a larger population than India.

D) India has a larger manufacturing sector than China.

Answer: A Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.2 Describe the demographic trends in China and India.

AACSB: Application of knowledge

3 .

3) For China A) there was a long period of success with the economic results of communism so it was hard to change policies.

B) reform of its economic system was rapid, with a quick dismantling of most of the controls exercised by the state and party over the economic system, but not the political system.

C) economic reforms were intended to create more wealth to distribute, not do undo the communist party.

D) there are no longer state owned enterprises.

Answer: C Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 4) China's initial economic reforms were in which sector?

A) Manufacturing B) Infrastructure C) Agriculture D) Mining Answer: C Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 5) Which primary trade partner of India suffered setbacks that ultimately helped lead India to embark on economic reform?

A) The United Kingdom B) The United States C) The Soviet Union D) South Korea Answer: C Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 6) What did China create to allow more international trade?

A) Special economic zones B) Foreign exchange centers C) More open and transparent government meetings D) New educational efforts Answer: A Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 4 .

7) Which of the following is not a potential source of comparative advantage for China in the manufacturing sector?

A) Abundant low wage, low skill workers B) A large domestic market that can lead to scale economies C) Coastal areas with good logistics for international trade D) Abundant credit from China's government sector to set up manufacturing operations Answer: D Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 8) Analysts that favor a fast transition to market economies argue that China's success with a gradual transition is a special case because A) its trade flows were relatively large.

B) so much of its labor force was in agriculture.

C) heavy industry already had a strong foothold when the transition began.

D) its coastal areas were already relatively well developed.

Answer: B Topic: Demographic and Economic Characteristics Difficulty: Moderate Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 9) Which of the following is FALSE about the transition from communism to capitalism in Russia and China?

A) China chose a dual track strategy.

B) China's transition strategy was considered gradualist.

C) Russia's transition was aided by the large number of workers it had in heavy industry.

D) China's transition was aided by the large number of workers it had in rural agriculture.

Answer: C Topic: Demographic and Economic Characteristics Difficulty: Moderate Objective: LO 17.4 Compare and contrast the transition from socialism to capitalism in China and Russia.

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10) Special economic zones in China have been A) the same as export processing zones.

B) centers of economic reform.

C) controlled by state run enterprises.

D) poor regions that are targeted for industrial development.

Answer: B Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 11) The percentage of world GDP represented by the G7 is ________ and the percentage of world GDP represented by China and India is ________.

A) falling; rising B) falling; falling C) rising; falling D) rising; rising Answer: A Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.2 Describe the demographic trends in China and India.

AACSB: Application of knowledge 12) China has a larger population than India and is expected to be the most populous nation in the world throughout the twenty-first century.

Answer: FALSE Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.2 Describe the demographic trends in China and India.

AACSB: Application of knowledge 13) The largest migration pattern in China at present is from urban centers to more rural areas to escape traffic and pollution.

Answer: FALSE Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 14) China has few state-owned enterprises left in its economy.

Answer: FALSE Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

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15) Russia chose a slow approach to creating a private economy and China chose a fast approach.

Answer: FALSE Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.4 Compare and contrast the transition from socialism to capitalism in China and Russia.

AACSB: Application of knowledge 16) China's economy was much more agricultural than Russia's, and observers believe this aided its economic transition.

Answer: TRUE Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.4 Compare and contrast the transition from socialism to capitalism in China and Russia.

AACSB: Application of knowledge 17) China's economy did not decline at all during its transition from communism to capitalism.

Answer: TRUE Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.4 Compare and contrast the transition from socialism to capitalism in China and Russia.

AACSB: Application of knowledge 18) Why have China and India received so much international attention and investment?

Answer: The potential future market size in China and India is huge, even if only a small percentage of people make it into the middle class.

Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.2 Describe the demographic trends in China and India.

AACSB: Application of knowledge 19) Who was the leader of Chinese economic reforms?

Answer: Deng Xiaoping Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 20) Who was the leader of India's economic reforms?

Answer: Manmohan Singh Topic: Demographic and Economic Characteristics Difficulty: Easy Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 7 .

21) Three forces played a significant role in preparing Indian policy makers for economic reform. Describe them.

Answer: India's primary trade partner, the USSR, suffered a number of setbacks and finally dissolved; other Asian countries were experiencing economic success, particularly Korea; a financial crisis that resulted from heavy government borrowing.

Topic: Demographic and Economic Characteristics Difficulty: Moderate Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 22) Describe China's reform path, including the forces that started China's reform efforts and how they continued through the 1980s and early 1990s.

Answer: A long period of instability and disappointment with the economic results achieved under communism led to reform to create more wealth to distribute; it has been a gradual, steady dismantling of the controls exercised by the state and party over the economy. The first reforms were in agriculture, allowing more individual ownership and control over plots of land. Trade was gradually opened through special economic zones. Eventually other regions pushed for similar policies. China applied to join the WTO in 1986 and joined after a protracted period of negotiations which probably kept economic reforms moving forward.

Topic: Demographic and Economic Characteristics Difficulty: Difficult Objective: LO 17.3 Relate the economic reforms that occurred in China and India.

AACSB: Application of knowledge 23) Why did the USSR collapse and China succeed? Explain.

Answer: In contrast to the Russian experience, the Chinese economy did not decline at all during its transition from communism to capitalism. The proponents of rapid reform see China as a special case. First, central planning was less extensive in China, with the result that its economy was less distorted and less overconcentrated on heavy industry. Second, and most importantly, China's economy is much more agricultural. In 1978, when China began its reforms, 71 percent of the labor force was in agriculture. The figure for Russia in 1990 at the beginning of its transition was 13 percent. China's heavier concentration in agriculture gives it a large rural labor force with very low productivity. If these workers leave the countryside, the resulting loss of output is small, while the offsetting productivity gains from employment in urban and village industrial enterprises are significant. Hence, China can move labor from agriculture into the new enterprises, but Russia had to take labor out of heavy industry to staff the new enterprises.

Topic: Demographic and Economic Characteristics Difficulty: Difficult Objective: LO 17.4 Compare and contrast the transition from socialism to capitalism in China and Russia.

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17.3 China and India in the World Economy 1) The gravity model predicts that China and India will trade with A) smaller economies that are close by.

B) larger economies that are close by.

C) larger economies that are distant.

D) smaller economies that are distant.

Answer: B Topic: China and India in the World Economy Difficulty: Easy Objective: LO 17.6 Use a gravity model to explain Chinese and Indian trade patterns.

AACSB: Application of knowledge 2) What is the best explanation for why China and India have received so much international interest and foreign investment?

A) Their large populations B) Their geographic location C) Their control over natural resources D) Government incentives provided to foreign firms Answer: A Topic: China and India in the World Economy Difficulty: Easy Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge 3) When explaining China and India's trade patterns, A) proximity and GDP explain a significant portion.

B) many complex factors determine trading partners.

C) patterns are very different for each country.

D) exchange rates determine most of the pattern of trade.

Answer: A Topic: China and India in the World Economy Difficulty: Easy Objective: LO 17.6 Use a gravity model to explain Chinese and Indian trade patterns.

AACSB: Application of knowledge 4) Which of the following is the best explanation of exports and imports in China and India?

A) Exports are heavily subsidized through government policy.

B) Many barriers to imports exist.

C) Exports and imports are tied together, with exports depending on imported inputs and technology.

D) Imports are not important to either nation's economy.

Answer: C Topic: China and India in the World Economy Difficulty: Easy Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge 9 .

5) Agriculture in India is protected because A) it is not an important source of employment.

B) it is an infant industry.

C) it is important for national security.

D) it is relatively inefficient.

Answer: D Topic: China and India in the World Economy Difficulty: Moderate Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge 6) Which of the following is NOT a true statement?

A) India can easily relocate workers from the country to the city.

B) India would raise income faster if it moved workers from agriculture to manufacturing.

C) High agricultural tariffs in India protect rural workers.

D) India has low tariffs in manufacturing.

Answer: A Topic: China and India in the World Economy Difficulty: Moderate Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge 7) Which of the following is NOT a true statement?

A) It is unclear whether any of the decline in U.S. manufacturing employment can be attributed to Chinese growth.

B) China's growth has been beneficial to many countries.

C) China does not import many goods.

D) China had large trade surpluses.

Answer: C Topic: China and India in the World Economy Difficulty: Moderate Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge 8) Direct foreign investment has been most critical for China's domestic consumer market.

Answer: FALSE Topic: China and India in the World Economy Difficulty: Easy Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge

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9) China is not an important market for other nations' exports.

Answer: FALSE Topic: China and India in the World Economy Difficulty: Easy Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge 10) Tariffs on non-agricultural goods are much higher in India than in China.

Answer: FALSE Topic: China and India in the World Economy Difficulty: Easy Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge 11) India lags China in the development of a large manufacturing sector.

Answer: FALSE Topic: China and India in the World Economy Difficulty: Easy Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge 12) India would raise income levels faster if workers migrated from the country to the city.

Answer: TRUE Topic: China and India in the World Economy Difficulty: Easy Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge 13) China is the only country that runs large trade surpluses.

Answer: FALSE Topic: China and India in the World Economy Difficulty: Easy Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

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14) Can U.S. manufacturing job losses be attributed to the growth of manufacturing in China?

Answer: The rise of Chinese manufacturing is correlated in time with the decline of manufacturing employment in the United States and Western Europe. We do not know with certainty if China's rising manufacturing sector is responsible for the decline in manufacturing in the United States and elsewhere, but cities and communities that compete directly with Chinese exports have not fared well in recent years, and that this is directly a result of Chinese exports.

But it is uncertain what might have happened to manufacturing in the United States and elsewhere if China had remained isolated. The question that cannot be answered is whether manufacturing employment in high-income countries would have declined more slowly, or not at all, if China had not grown so fast. Some of the forces shaping the economies of advanced industrial nations are completely independent of China. Technological advances in manufacturing such as the increasing use of automated processes and robotics would probably have proceeded anyway. Telecommunications and transportation advances, which enable firms to locate parts of their production in different countries, would also have occurred.

Topic: China and India in the World Economy Difficulty: Difficult Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge 15) Some claim that China's trade surpluses are created by currency undervaluation. Is this true?

Explain.

Answer: Some observers argue that China gets trade surpluses by manipulating its currency and keeping it undervalued. More careful analysis can show that China's currency may have been undervalued against the dollar in the first part of the 2000s, but that has not been the case since 2006 or 2007. In other words, currency manipulation is not the source of its competitiveness.

Topic: China and India in the World Economy Difficulty: Difficult Objective: LO 17.5 Compare and contrast Indian and Chinese economic growth.

AACSB: Application of knowledge 17.4 Four Issues 1) Which of the following is FALSE about services trade for India and China?

A) China exports more services than India does.

B) India has a trade surplus in services.

C) China has a trade surplus in services.

D) India trades primarily information services and other business services.

Answer: C Topic: Four Issues Difficulty: Easy Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

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2) In China A) wages are beginning to rise, reducing its comparative advantage.

B) there is little advantage from scale economies.

C) the middle class is not expanding.

D) poor coastal areas limit trade.

Answer: A Topic: Four Issues Difficulty: Moderate Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

AACSB: Application of knowledge 3) Because of China's growth, natural resources A) are in greater demand, but that demand is mostly going to the previously industrialized nations so it is having little effect on economic development in developing countries.

B) are in greater demand and the natural resources are increasingly coming from developing countries.

C) prices are falling since China has tremendous negotiating power.

D) are not in high demand since labor and capital are the emphasized inputs in Chinese manufacturing.

Answer: B Topic: Four Issues Difficulty: Easy Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

AACSB: Application of knowledge 4) Which of the following would NOT be a sign that China wants to become a high technology producer?

A) More patents are being sought and granted in China.

B) Large spending on infrastructure C) Rapid expansion of science, engineering and research D) Less emphasis on education spending Answer: D Topic: Four Issues Difficulty: Easy Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

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5) Which of the following accurately depicts the situation of India's trade in services and what it might mean for the global economy?

A) It is not perceived as threatening to the industrialized nations so it is likely to grow without any impact.

B) Because it is nothing new, other economies have had time to adjust.

C) It creates only harm to other national economies.

D) It may lead to protectionist sentiment and policies in other nations as comparative advantages shift.

Answer: D Topic: Four Issues Difficulty: Moderate Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

AACSB: Application of knowledge 6) Trade in services such as information technology A) is like other trade; it creates winners and losers, but the gains for national economies likely outweigh the costs.

B) creates gains for India's economy, but national welfare losses for the countries that import these services.

C) make it highly likely that information technology jobs will ultimately disappear in the industrialized countries.

D) is not perceived as threatening by industrialized countries so is unlikely to lead to any protectionist sentiment or pressures in the way the manufacturing does.

Answer: A Topic: Four Issues Difficulty: Moderate Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

AACSB: Application of knowledge 7) Which of the following is NOT a challenge to doing business in China?

A) Issues related to the business climate, such as taxes B) The availability of credit C) Failure to protect intellectual property D) Poor infrastructure and port facilities to support export of products Answer: D Topic: Four Issues Difficulty: Easy Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

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8) The Asian Infrastructure Investment Bank (AIIB) A) has been very effective in reaching its goals.

B) lends only to Chinese businesses.

C) is as large as the IMF. D) provides financing to developing countries.

Answer: D Topic: Four Issues Difficulty: Moderate Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

AACSB: Application of knowledge 9) Environmental problems in China A) increase pressure for decentralization of power and authority from the ruling Communist party.

B) are not recognized by local Chinese interests, but get large amounts of attention from global activists.

C) are improving at a rapid pace in Chinese urban areas.

D) are generally not an issue domestically or globally.

Answer: A Topic: Four Issues Difficulty: Easy Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

AACSB: Application of knowledge 10) China has a trade deficit in services, while India has a trade surplus in services.

Answer: TRUE Topic: Four Issues Difficulty: Easy Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

AACSB: Application of knowledge 11) China exports more services than India.

Answer: TRUE Topic: Four Issues Difficulty: Easy Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

AACSB: Application of knowledge

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12) What is the difference between Chinese and Indian trade in services?

Answer: While China exports more services in total, it has a trade deficit in services and is primarily made up of transportation and travel services. India has a trade surplus in services, which primarily comprise information services and other business services, and this area is growing rapidly for India.

Topic: Four Issues Difficulty: Moderate Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

AACSB: Application of knowledge 13) Why does India argue that the demand for reduction of greenhouse gasses by developed countries is hypocritical?

Answer: India points out that the world's rich economies used the environment in destructive ways in order to reach their current levels of high income. Asking middle-income countries such as India and China to make sacrifices in energy consumption and GDP growth for the sake of future generations is, in their view, somewhat hypocritical. Better, India argues, for the world's rich countries to make sacrifices, particularly since they generated the majority of greenhouse gases.

Topic: Four Issues Difficulty: Difficult Objective: LO 17.7 Discuss the impact of Chinese manufacturing on industrial economies such as the United States.

AACSB: Application of knowledge

16 .