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This Document Contains Chapters 21 to 22 Chapter 21 International Trade Restrictions MULTIPLE CHOICE 1. Commercial policy is government policy that influences: A. the operation of commercial banks. B. domestic trade flows. C. domestic private corporations. D. international trade flows. E. the operation of capital markets. Answer: D 2. If international trade is restricted by the government: A. domestic consumers are benefited. B. domestic producers are adversely affected. C. consumers in the importing country are required to pay higher prices for the goods. D. consumers can access to better quality product at lower prices. E. the resources are allocated to their highest paid uses. Answer: C 3. When restrictions alter the pattern of international trade, the _____ benefit and the _____ suffer(s). A. domestic consumers; domestic producers B. domestic consumers; government C. domestic producers; domestic consumers D. foreign producers; domestic producers E. foreign producers; domestic consumers Answer: C 4. Which of the following statements about international trade restrictions is true? A. They ensure that only efficient producers survive. B. They ensure that countries specialize only in those products that they can produce most efficiently. C. In the majority of cases, they harm domestic consumers. D. They typically benefit foreign producers at the expense of domestic consumers. E. They ensure that higher-quality goods are provided at lower prices. Answer: C 5. Generally speaking, protection from foreign competition benefits: A. both domestic producers and foreign producers. B. both domestic consumers and foreign consumers C. domestic consumers and foreign consumers. D. neither domestic producers nor foreign producers. E. domestic producers at the expense of domestic consumers. Answer: E 6. It is often argued that if foreign goods are kept out of the domestic economy: A. jobs will be lost at home. B. jobs will be created abroad. C. foreign consumers will enjoy product surpluses. D. jobs will be created at home. E. foreign consumers will suffer product shortages. Answer: D 7. Which of the following statements is true of the impact of trade restrictions on domestic employment? A. Domestic firms will produce the goods that otherwise would have been produced abroad, thus employing foreign workers instead of domestic workers. B. Beside the protected industry, other industries will also benefit in terms of employment. C. Domestic consumers will be required to pay lower prices for the output of the protected industry. D. Restrictions imposed on trade simply redistribute jobs by creating employment in the protected industry and reducing employment elsewhere. E. If other countries retaliate by restricting the entry of the domestic exports, the output of domestic firms that produce for export will rise. Answer: D 8. Typically, restrictions to “save domestic jobs” simply redistribute jobs by creating: A. employment in the protected industry and reducing employment elsewhere. B. employment in nonprotected industries and reducing employment in the protected industry. C. inflation in the overall economy. D. employment in the primary sector at the expense of the secondary sector. E. labor unions in the protected industries at the expense of employment in nonunionized industries Answer: A 9. Employers and workers in the protected industry know that the consequences of protection are principally: A. lower prices for their output, lower profits for owners, and lower wages for workers. B. higher prices for their output, lower profits for owners, and lower wages for workers. C. higher prices for their output, lower profits for owners, and higher wages for workers. D. lower prices for their output, higher profits for owners, and higher wages for workers. E. higher prices for their output, higher profits for owners, and higher wages for workers. Answer: E 10. Which of the following probably best explains why trade restrictions are imposed even if the costs to consumers are greater than the benefits to protected industries? A. Indifference on the government’s part to the interests of domestic workers B. A desire to make other countries suffer C. Successful lobbying by consumers D. Successful lobbying by employers and workers E. The government’s preference to safeguard the interest of the producers at the expense of the consumers Answer: D 11. According to empirical observations, the cost of restricting international trade in the U. S. is much greater than the benefits generated from restriction. In the light of the above observation, which of the following statements is true? A. The benefits of protecting domestic jobs typically outweigh the costs. B. Consumers end up paying much more for the goods they buy in order to subsidize the relatively inefficient domestic producer. C. U. S. GDP would be over $14 billion higher with import restrictions than without restrictions. D. Protection of the U. S. textile and sugar industries means that all consumers pay a lower price for clothing and sugar. E. Protection of the domestic industries enable the producers to charge lower prices for their products. Answer: B 12. Steel producers in the United States observe that foreign sales of U. S. steel has drastically declined due to stringent trade policies adopted by the foreign governments and unfair treatment of U. S. steel exports in foreign countries. The lobbying efforts of such loss making U. S. steel manufacturers induces the domestic government to restrict the entry of imported steel and help stimulate the sales of domestically produced steel. Which of the following is most similar to the example mentioned above? A. A tariff imposed by the government to stimulate domestic production of a high-technology good with positive spillover effects B. A tariff imposed by the government on the import of cotton textiles because it is an infant industry in the domestic country C. An import tariff applied against a foreign monopoly supplying the domestic market D. Taxes imposed by the government on an import competing industry that generates a negative production externality E. Reciprocal tariffs introduced by the government of Mexico on tobacco imports from Brazil in retaliation to unfair treatment of Mexican tobacco exports to the latter Answer: E 13. The notion of reciprocity means that one nation will impose import restrictions on another in order to: A. stimulate an increase in trade restrictions in the latter. B. stimulate a decrease in trade restrictions in the latter. C. eliminate trade restrictions immediately in both countries. D. improve the government revenue collections through tariffs in both countries. E. enforce standards of product quality in the latter. Answer: B 14. People who call for creating a “level playing field” believe that: A. a country with relatively low wages is typically a country with an abundance of low-skilled labor. B. trading on the basis of comparative advantage benefits both domestic and foreign firms. C. creating a “level playing field” undermines the basis for specialization and economic efficiency. D. production in accordance with comparative advantage is unfair. E. free trade allocates the scarce resources in an efficient way. Answer: D 15. Developing countries often justify imposition of tariffs because: A. it creates a burden on government budget. B. it is easy to collect direct taxes from people in the developing countries. C. a large number of people in the developing countries earn a taxable income. D. developing countries find income taxes difficult to levy and collect. E. the volume of imports of these countries is considerably low. Answer: D 16. The infant industry argument is that: A. those industries that produce products for infants should be protected. B. protectionism will provide consumers with lower prices. C. protectionism should be used to create a level playing field for the domestic firms to compete with foreign firms. D. protectionism promotes complete specialization in the country on the basis of comparative advantage. E. new industries should be protected from foreign competition until they have had adequate time to develop. Answer: E 17. Nascent industries require adequate protection from foreign competition because: A. they experience economies of scale. B. they experience diseconomies of scale. C. the quality of the products of such industries are comparatively inferior than the products of their foreign competitors. D. they do not have adequate resources to undertake research and development. E. their initial costs of production are considerably higher than the foreign firms. Answer: E 18. Protection of an infant industry should be withdrawn once that industry: A. charges the same price as foreign competitors. B. goes public on the stock exchange. C. raises a large amount of sales revenue. D. achieves sufficient size to compete with foreign firms. E. earns enough profit as a result of the subsidies to remain in business. Answer: D 19. In the light of the infant industry argument, identify the industry which is likely to have substantially high initial costs. A. Fashion designing B. Retail industry C. Iron and steel industry D. Dairy industry E. Software industry Answer: C 20. Protection provided to the infant industries is rarely withdrawn because: A. the costs of withdrawing protection outweigh the benefits. B. the industries begin to experience diseconomies of scale. C. it leads to a loss of government revenue. D. the industries produce goods which are close substitutes of the imported goods. E. the larger and more successful the industry becomes, the more political power it wields. Answer: E 21. Which of the following statements about an increasing-returns-to-scale industry is not true? A. It will tend to concentrate production in the hands of a very few large firms. B. Firms in the industry face higher costs per unit of production as their level of output increases. C. Opportunity costs may fall with the level of output. D. Proponents of strategic trade policy contend that tariffs can be used to stimulate production by a domestic industry capable of achieving increasing returns to scale. E. The costs of producing a unit of output fall as more output is produced. Answer: B 22. If average costs of production decline with increases in output for a particular firm: A. many small firms will be more efficient than a single large firm. B. one large producer will be more efficient than many small producers. C. product diversification is necessary to spread the overhead. D. diseconomies of scale become significant as output increases. E. the variable cost of production must exceed the fixed costs. Answer: B 23. Proponents of strategic trade policy contend that: A. government should tax domestic firms to generate greater revenues. B. government should encourage imports to prevent monopoly in the domestic market. C. government should provide subsidies to domestic firms with decreasing costs. D. government should discourage domestic firms with decreasing costs from continuing production. E. government should tax domestic import competing firms. Answer: C 24. According to strategic trade policy, international trade largely involves firms which: A. enjoy monopolistic power in the domestic market. B. has a high initial cost of production. C. pursues economies of scale. D. experiences diseconomies of scale. E. generates adequate employment in the domestic economy. Answer: C 25. Suppose the production of helicopters is an industry characterized by increasing returns to scale and an Argentine firm, Cicare, is the only player in this market. The firm caters to the global market and earns a profit of $10 million. Flettner, a German firm has been considering entering this market for a while, but it is aware that its entry will cause each firm to lose about $4 million. However, a government subsidy allows Flettner to enter the helicopter market and Cicare incurs a loss of $4 million due to its entry. Eventually, Flettner evolves as the monopoly supplier of helicopters while Cicare is forced to shut down. This conclusion rests on which of the following assumptions? A. The German government was experiencing a budget surplus. B. There was low demand for Cicare automobiles in the world market. C. The German government was able to forecast accurately the subsidy required to induce Flettner to produce helicopters. D. The quality of Flettner's helicopters were inferior compared to that of Cicare's. E. Cicare diversified into the production of automobiles. Answer: C 26. Suppose the production of helicopters is an industry characterized by increasing returns to scale and an Argentine firm, Cicare, is the only player in this market. The firm caters to the global market and earns a profit of $10 million. Flettner, a German firm has been considering entering this market for a while, but it is aware that its entry will cause each firm to lose about $4 million. Although a government subsidy allows Flettner to enter the helicopter market, the company is unable to reap profits in the long run. Which of the following could have led to this outcome? A. Flettner experienced high production costs due to inadequate supply of inputs. B. New firms had entered the helicopter industry. C. The German government ran a balance of payment deficit. D. The Argentine government retaliated by subsidizing Cicare. E. There was very low investment in research and development in this industry. Answer: D 27. Which of the following is a tool of commercial policy? A. Corporate income tax B. Payroll tax C. Excise duty D. Tariff E. Octroi duty Answer: D 28. The abbreviation GATT stands for: A. General Analysis of Taxes and Transfers. B. General Agreement on Tariffs and Trade. C. Government Agency for Trade and Transportation. D. Government Agency for Treaties and Taxes. E. General Agreement on Terms of Trade. Answer: B 29. One of the primary objectives of the WTO is: A. to create trade restrictions across the countries. B. to reduce trade barriers created by the different countries. C. to enable certain countries to maintain their autarkic conditions. D. to enable the western countries to emerge as major players in the international trade. E. to redistribute wealth from the first world to the third world countries. Answer: B 30. Which of the following is true of a tariff? A. It is a tax levied by the government on domestic production of goods and services. B. It is a quantitative restriction on imports imposed by the government. C. It is a monetary benefit received by exporters from the government. D. It is a monetary benefit received by importers from the government. E. It is a tax on import and export levied by the government. Answer: E 31. Which of the following tools of commercial policy yields a revenue to the government? A. Quota B. Tariff C. Export subsidy D. Government procurement policy E. Health and safety standards Answer: B 32. According to economists, which of the following acts was partially responsible for the Great Depression of the 1930s? A. The Robinson-Patman Act B. The National Recovery Act C. The Smoot-Hawley Tariff Act D. The Sarbanes-Oxley Act E. The Sherman Antitrust Act Answer: C 33. One important unintended consequence of the Smoot-Hawley Tariff Act was to: A. lessen the severity of the Great Depression by increasing exports. B. provide the federal government with an effective tool for exercising monetary policy. C. increase the efficiency of domestic automobile production. D. increase the severity of the Great Depression by causing other countries to retaliate, and thus leading to a decline in exports. E. increase the U. S. government budget deficit by $15 million. Answer: D NARRBEGIN: Figure 21. 1 The figure below shows the demand (D) and supply (S) curves of a good produced domestically in an economy as well as traded in the international market. Figure 21. 1 In the figure, P1: Price of the good in the international market. P2: Price of the good in the domestic market after the imposition of tariff by the government. P3: No-trade price of the good in the domestic market. NARREND 34. According to Figure 21. 1, the domestic equilibrium quantity of the good is: A. Q1. B. Q5. C. Q2. D. Q3. E. Q4. Answer: D 35. According to Figure 21. 1, if the international price of the good is P1, which of the following statements is true? A. The domestic market is in equilibrium. B. There is an excess supply in the domestic market by the amount Q4 - Q2. C. The country will export Q3 - Q1 units of the good. D. There is an excess demand of Q4 - Q2 units in the domestic market. E. The country needs to import Q5 - Q1 units of the good to satisfy domestic demand. Answer: E 36. Refer to Figure 21. 1. If the government imposes a tariff such that the price of the good in the domestic market is P2 when the international price is P1: A. the import of the good by the domestic country increases by Q5 - Q4 units. B. the import of the good by the domestic country declines. C. the quantity of the good exported by the domestic country declines. D. the domestic country is in equilibrium. E. the quantity of the good exported by the domestic country increases. Answer: B 37. Refer to Figure 21. 1. If the government imposes a tariff such that the price of the good in the domestic market is P2 while the international price is P1, the dollar value of the tariff is equal to: A. P3 - P1. B. P2 - P3. C. P2 - P1. D. P1 - P2. E. P1 - P3. Answer: C 38. According to Figure 21. 1, the tariff revenue earned by the domestic government is equal to the: A. area ABEFH. B. area FEQ4Q2. C. area ABH. D. area HFP1P2. E. area BEFH Answer: E 39. Which of the following would result from a tariff? A. An increase in government budget deficit B. An increase in domestic production C. A greater volume of international trade D. Increased domestic consumption E. Decrease in prices of the imported goods Answer: B 40. If the world price of a good is lower than its domestic equilibrium price, the country will: A. import a quantity of the good equal to the difference between the quantity demanded domestically and the quantity supplied domestically. B. export a quantity of the good equal to the difference between the quantity demanded domestically and the quantity supplied domestically. C. import a quantity of the good equal to the difference between the quantity demanded domestically and the quantity supplied by foreign producers. D. export a quantity of the good equal to the difference between the quantity demanded by foreign consumers and the quantity supplied domestically. E. import a quantity of the good equal to the difference between the quantity demanded by foreign consumers and the quantity supplied by foreign producers. Answer: A 41. Which of the following countries is forbidden to impose export tariff by its constitution? A. The United States B. Brazil C. United Kingdom D. Japan E. Mexico Answer: A NARRBEGIN: Figure 21. 2 The figure given below depicts the negatively sloped demand and positively sloped supply curves of wheat in a country. Figure 21. 2 NARREND 42. Refer to Figure 21. 2. In the absence of international trade, what are the domestic equilibrium price and quantity? A. $30 and 200 bushels B. $50 and 400 bushels C. $30 and 400 bushels D. $50 and 300 bushels E. $25 and 150 bushels Answer: D 43. According to Figure 21. 2, if the world price per bushel of wheat is $25, what is the domestic production? A. 300 bushels B. 450 bushels C. 400 bushels D. 150 bushels E. 200 bushels Answer: D 44. According to Figure 21. 2, if the world price per bushel of wheat is $25, how much is the domestic demand? A. 400 bushels B. 450 bushels C. 200 bushels D. 300 bushels E. 150 bushels Answer: B 45. In Figure 21. 2, if the world price per bushel of wheat is $25, how much wheat will be imported? A. 450 bushels B. 350 bushels C. 200 bushels D. 150 bushels E. 300 bushels Answer: E 46. In Figure 21. 2, if the world price per bushel of wheat is $25, and a tariff of $10 is imposed, what is the domestic production? A. 300 bushels B. 450 bushels C. 400 bushels D. 150 bushels E. 200 bushels Answer: E 47. In Figure 21. 2, if the world price per bushel of wheat is $25 and a tariff of $10 is imposed by the domestic government, what is the domestic demand? A. 400 bushels B. 450 bushels C. 200 bushels D. 300 bushels E. 150 bushels Answer: A 48. In Figure 21. 2, if the world price of wheat is $25 and a $10 tariff is imposed: A. imports will decrease from 300 to 200 bushels of wheat. B. imports will increase from 200 to 400 bushels of wheat. C. imports will remain unchanged. D. domestic production will decrease from 200 to 150 bushels of wheat. E. domestic production will remain unchanged. Answer: A 49. In Figure 21. 2, if the world price of wheat is $35 and a $15 tariff is imposed: A. domestic consumption will decrease from 400 to 350 bushels of wheat. B. the government will collect $200 in revenue from the tariff. C. domestic consumption will increase from 150 to 200 bushels of wheat. D. imports will be eliminated. E. domestic consumption will increase from 150 to 300 bushels of wheat. Answer: D 50. According to Figure 21. 2, if the world price of wheat is $25 and a tariff of $10 is imposed by the domestic government, the total tariff revenue collected by the government is: A. $4,000. B. $0. C. $5,000. D. $2,000. E. $1,000. Answer: D 51. According to Figure 21. 2, if the world price of wheat is $25 and a tariff of $25 is imposed by the domestic government, the total tariff revenue collected by the government is: A. $2,000. B. $0. C. $200. D. $100. E. $4,000 Answer: B 52. Suppose that the world price of kiwi fruit ($10 per box) is below the domestic price ($12 per box). A tariff of $1 per box would: A. cause foreign producers to be better off, because the price they charge is now higher by $1 per box. B. cause domestic producers to be worse off by $5 per box. C. allow domestic consumers to enjoy kiwi fruit for $5 more per box than the free trade price, but still $2 less than the domestic price. D. allow domestic consumers to enjoy kiwi fruit for $1 more per box than the free trade price, but still $1 less than the domestic price. E. cause domestic producers to be worse off by $10 per box. Answer: D 53. Which of the following tools of commercial policy acts as a quantitative restriction on imports? A. Tariff B. Subsidy C. Health and Safety regulations D. Quota E. Government procurement Answer: D 54. By restricting the amount of a good that may be imported, quotas: A. increase the price, thus causing domestic producers to sell less than they would with free trade. B. lower the price, thus allowing domestic producers to sell more than they would with free trade. C. increase the price and allow domestic producers to sell more at a higher price than they would with free trade. D. lower the price, thus causing domestic producers to realize lower total revenue from the quota item. E. simply replace foreign production with domestic production. Answer: C NARRBEGIN: Figure 21. 3 The figure below shows the demand (D) and supply (S) curves of corn syrups. Figure 21. 3 NARREND 55. In Figure 21. 3, what are the equilibrium price and quantity in the absence of trade? A. $8, 50 gallons B. $12, 35 gallons C. $8, 35 gallons D. $4, 20 gallons E. $16, 50 gallons Answer: B 56. In Figure 21. 3, suppose an import quota of 30 gallons of corn syrup is imposed. If the world price per gallon is $4: A. there will be an excess domestic demand of approximately 35 gallons. B. the domestic market will be in equilibrium. C. there will be an excess domestic demand for 10 gallons. D. there will be an excess supply of 20 gallons. E. there will be an excess domestic demand for 20 gallons. Answer: B 57. In Figure 21. 3, if the world price per gallon is $8, then without quotas: A. 50 gallons of corn syrup will be imported. B. 35 gallons of corn syrup will be imported. C. 30 gallons of corn syrup will be imported. D. 20 gallons of corn syrup will be imported. E. 45 gallons of corn syrup will be imported. Answer: C 58. In Figure 21. 3, with an import quota of 30 gallons of corn syrup, what is the new equilibrium price? A. $4 B. $6 C. $8 D. $10 E. $12 Answer: C 59. In Figure 21. 3, with an import quota of 30 gallons of corn syrup, what is the new equilibrium quantity demanded? A. 35 gallons B. 50 gallons C. 20 gallons D. 65 gallons E. 5 gallons Answer: B 60. The effect of an import quota on the domestic market is to shift the: A. demand curve to the right by the amount of the quota. B. demand curve to the left by the amount of the quota. C. supply curve to the right by the amount of the quota. D. supply curve to the left by the amount of the quota. E. consumers’ marginal utility curves if they prefer foreign goods to domestic goods. Answer: C 61. The basic difference between a tariff and quota is that: A. quota can be imposed both on imports and exports whereas a tariff can be imposed only on imports. B. quota yields revenue to the government whereas tariff does not yield any revenue. C. tariff reduces the import of the goods with greater certainty than quota as the amount of import restricted by quota depends on the price elasticity of demand for importable. D. tariff is a quantitative restriction on imports whereas quota is an import duty. E. a tariff raises the price of the product only in the domestic market whereas with a quota, both domestic and foreign producers receive a higher price. Answer: E 62. Which of the following can be considered as a cultural barrier to trade? A. Prohibition on Zimbabwean aircrafts from flying over or landing in Canada. B. Restriction on the export of luxury goods to the Democratic Peoples Republic of Korea from Canada. C. An arms embargo imposed on China by the U. K. government D. Japanese law requiring a new retail firm to receive permission from other retailers in the area in order to open a business. E. Restriction on the export of strategic goods to Ghana imposed by the government of U. K. Answer: D 63. Subsidies are payments made by the government of a country to: A. foreign firms to encourage imports. B. foreign firms to encourage domestic exports. C. domestic firms to encourage exports. D. domestic firms to encourage imports. E. domestic firms to ensure domestic consumption of their goods. Answer: C 64. One of the negative impacts of export subsidy is that: A. the price of the domestic good increases in the world market. B. the domestic supply of the goods increases more than proportionately than increase in demand. C. the domestic cost of production of the exportable increase. D. it results in a general deflation and hence the domestic producers incur losses. E. the domestic consumers are harmed as the subsidies are financed by taxing them. Answer: E 65. Suppose, in the United States, each farmer is given a federal agricultural subsidy worth $30,000. What will be the effect of such subsidy? A. They discourage domestic agricultural production. B. They allow U. S. farmers to sell their products for lower prices in foreign markets. C. They give foreign producers an unfair cost advantage. D. They increase the amount of agricultural imports into the United States. E. The price of the primary products decline in the U. S. market. Answer: B 66. As a result of the government procurement policy in the U. S. : A. the domestic consumers are required to pay a higher price than the government for the domestically produced goods. B. the government wields the sole authority of importing goods from abroad. C. the government wields the sole authority of exporting goods. D. the government is required to buy the domestic goods if the domestic price is less than the world price. E. the government is required to sponsor research and development for the domestic firms. Answer: D 67. After the U. S. government had approved the feeding of hormones to U. S. beef cattle, several western European nations restricted the import of beef from the U. S. Which of the following tools of commercial policy had been put to use in this situation? A. Tariff B. Quota C. Health and safety standards D. Subsidy E. Government procurement Answer: C 68. Agreements to abolish most barriers to trade among nations are known as: A. free trade cartels. B. discriminatory trade agreements. C. neutral trade agreements. D. preferential trade agreements. E. retaliatory trade agreements. Answer: D 69. A customs union is an organization of nations whose members: A. have impenetrable trade barriers among themselves but impose no trade barriers on nonmembers. B. have no trade barriers among themselves but impose common trade barriers on nonmembers. C. have no trade barriers among themselves but each member country chooses its own trade policies toward nonmember countries. D. retaliate each other by raising reciprocal tariffs. E. neither have trade barriers among themselves nor impose any restriction on the nonmember countries. Answer: B 70. The European Economic Community was created in 1957 by: A. France, the United Kingdom, Italy, Belgium, the Netherlands, and Luxembourg. B. France, West Germany, Italy, Belgium, the Netherlands, and Luxemburg. C. France, West Germany, Italy, Belgium, the Netherlands, and the United Kingdom. D. France, West Germany, Italy, the United Kingdom, Belgium, the Netherlands, and Luxembourg. E. France, West Germany, Italy, Belgium, the United Kingdom, and Luxembourg. Answer: B 71. In 1992 the EEC was replaced by the EU with an agreement to: A. reduce trade barriers among the member countries. B. reduce trade barriers against nonmember countries. C. mutually restrict imports from nonmember countries. D. create a single market for goods and services in western Europe. E. enable the countries of Western Europe to emerge as major world powers. Answer: D 72. Trade diversion reduces worldwide efficiency, because: A. production is diverted to the country with the comparative advantage. B. production is diverted from the country with the comparative advantage. C. unnecessary trade restrictions are created in the economies. D. consumption is diverted to the country having inadequate demand. E. the cost of transshipment of the goods increases thus raising their prices in the world market. Answer: B 73. The trade-creation effect refers to: A. a reduction in economic efficiency as a result of a preferential trade agreement. B. a production shift to a higher-cost producer as a result of a preferential trade agreement. C. the outcome of a preferential trade agreement that allows a country to obtain goods at a lower cost than is available at home. D. diversion of production from a country that has comparative advantage. E. a production shift to a country that does not have comparative advantage. Answer: C 74. The most successful free trade agreements achieve all of the following goals, except: A. benefiting exporters by increasing exports to member countries. B. ensuring that production occurs on the basis of comparative advantage. C. benefiting consumers by making a wider variety of goods available at a lower price. D. stimulating trade creation to allow the benefits of trade to be realized. E. protecting domestic industries from foreign competition. Answer: B NARRBEGIN: Figure 21. 4 The figure below shows the demand (D) and supply (S) curves of cocoa in the U. S. Figure 21. 4 NARREND 75. According to Figure 21. 4, the no-trade equilibrium price and quantity of cocoa in the U. S. market are: A. $8 and 150 pounds. B. $10 and 250 pounds. C. $4 and 200 pounds. D. $10 and 200 pounds. E. $6 and 300 pounds. Answer: D 76. Refer to Figure 21. 4. If cocoa sells for $6 per pound in the world market, determine the volume of U. S. cocoa imports. A. 250 pounds B. 350 pounds C. 300 pounds D. 150 pounds E. 200 pounds Answer: E 77. From Figure 21. 4, determine the total volume of U. S. cocoa imports if its government imposes tariff at the rate of $2 per pound on cocoa. A. 200 pounds B. 250 pounds C. 100 pounds D. 300 pounds E. 350 pounds Answer: C 78. Refer to Figure 21. 4. Assume that Ghana is the only cocoa exporter supplying cocoa in the world market at $6 per pound. If the U. S. enters into a free trade agreement (FTA) with Ghana, what would be its total cocoa imports? A. 100 pounds B. 300 pounds C. 200 pounds D. 150 pounds E. 250 pounds Answer: C TRUE/FALSE 1. In reality international trade is determined solely by comparative advantage and the free market forces of supply and demand. Answer: False 2. International trade on the basis of comparative advantage maximizes world output and allows consumers to access better-quality products at lower prices than would be available in the domestic market alone. Answer: True 3. When barriers to trade are imposed, we should expect some groups to be harmed at the expense of other groups. Answer: True 4. Protection from foreign competition benefits domestic producers in the protected industry at the expense of domestic consumers. Answer: True 5. The world output is higher if the countries follow restrictive trade policies rather than free trade. Answer: False 6. When production does not proceed on the basis of comparative advantage, resources are expended on their most efficient uses. Answer: False 7. While it is possible to erect barriers to foreign competition and save domestic jobs, restricting international trade may impose large costs on an economy. Answer: True 8. Since individual consumers do not know how much of the price they pay for a commodity is due to protection, consumers rarely lobby their political representatives to eliminate protection and reduce prices. Answer: True 9. Domestic firms often claim that foreign firms have an unfair advantage because foreign workers are willing to work for very low wages. Answer: True 10. One danger associated with calls for fairness based on reciprocity is that, calls for fair trade may be invoked in cases where, foreign restrictions on U. S. imports do not actually exist. Answer: True 11. Creating conditions for fair trade by limiting imports will make the domestic consumers better off, as they will be required to pay low prices for the products. Answer: False 12. Tariffs are considered to be a popular tax in the first world countries, who justify them on the basis of the revenue they generate for government spending. Answer: False 13. Tariff accounts for 32% of the total government revenue in the U. K. and only 1. 2% in India. Answer: False 14. Industries that are truly critical to the national defense should be protected from foreign competition if that is the only way to ensure their existence. Answer: True 15. The United States has no comparative advantage in shipping, so a domestic shipping industry has no reason to exist. Answer: False 16. Protection is rarely withdrawn from infant industries because such firms are necessary to ensure creation of domestic jobs. Answer: False 17. Protecting infant industries from foreign competition may make sense, but only until the industry matures. Answer: True 18. If an infant industry truly has a good chance to become competitive and produce profitably once it is well established, it is not at all clear that government should even offer protection to reduce short-run losses. Answer: True 19. When dealing with strategic trade policy, one practical problem for government is the likelihood of retaliation by the foreign government. Answer: True 20. If the average costs of production decline with increases in output, then the larger a firm is, the lower its per unit costs will be. Answer: True 21. A monopoly exists when there is only one producer in an industry, and no close substitutes for the product exist. Answer: True 22. Every country imposes tariffs on at least some imports. Answer: True 23. In order to protect key industries, some countries impose taxes on their exports instead of imports, mainly because it is easier to collect taxes from the export industry. Answer: False 24. The total tariff revenue to the government of an imported good is found by adding the tariff to the quantity of the good imported. Answer: False 25. When the world price of the traded good is lower than the domestic no-trade equilibrium price, free trade causes domestic production to fall and domestic consumption to rise. Answer: True 26. Many economists believe that the collapse of world trade and the depression in the 1930s were linked by a decrease in real income caused by producing on the basis of comparative advantage. Answer: False 27. A limit on the dollar worth of oranges imported into the United States is an example of a quantity quota. Answer: False 28. In the United States, a “buy American” act was passed in 1933 to create larger markets for domestic goods. Answer: True 29. Government standards for products sold in the domestic market can have the effect of protecting domestic producers from foreign competition. Answer: True 30. In a free trade area, member nations have no trade barriers among themselves but are free to set their own trade policies toward nonmembers. Answer: True 31. Preferential trade agreements have a beneficial trade-diversion effect when they reduce prices for traded goods and stimulate the volume of international trade. Answer: False Chapter 22 Exchange Rates and Financial Links Between Countries MULTIPLE CHOICE 1. If $1 was equivalent to 120 Japanese yen in 2008 and 125 Japanese yen in 2010, it implies in 2010, there was: A. a depreciation of the dollar against the yen. B. a depreciation of the yen against the dollar. C. an appreciation of the yen against the dollar. D. no change in the value of yen, but the dollar had weakened. E. no change in the value of dollar, but the yen had strengthened. Answer: B 2. Consider a country Atlantica, using dollars ($) as its currency. If this country sets a price for gold, and then issues currency such that the amount in circulation is equivalent to the value of gold held in reserve, it is said to be following: A. a gold exchange standard. B. a gold standard. C. a reserve currency standard. D. a crawling peg standard. E. a currency board standard. Answer: B 3. A country on a gold standard was able to maintain people’s confidence in the value of its currency by: A. printing more and more paper money. B. restricting international exchange of goods and services. C. ensuring the convertibility of paper money into gold. D. maintaining a fixed stock of foreign currencies. E. ensuring balance of payment surplus. Answer: C 4. If the price of an ounce of gold is 200 ZARs in South Africa and $75 in Canada, what will be the South African Rand (ZAR) per Canadian dollar (C$) exchange rate? A. C$1 = 4. 25 ZAR B. C$1 = 1. 75 ZAR C. C$1 = 2 ZAR D. C$1 = 2. 67 ZAR E. C$1 = 4 ZAR Answer: D 5. A commodity money standard exists when exchange rates are: A. artificially pegged to the price of oil. B. fixed in terms of gold, thus creating flexible exchange rates between countries. C. fixed in terms of gold, thus creating fixed exchange rates between countries. D. allowed to fluctuate based on the values of different currencies. E. fixed, based on the values of different currencies, in terms of some commodity. Answer: E 6. Economists typically date the beginning of the gold standard to the period: A. before 1500. B. before 1776. C. between 1880 and 1914. D. between the two world wars. E. between 1970 and 2000. Answer: C 7. Suppose the price of an ounce of silver is 100 nuevos soles in Peru and $400 in the United States. This implies: A. the Peruvian nuevo sol is worth four times the value of a U. S. dollar. B. the Peruvian nuevo sol is worth one-fourth the value of a U. S. dollar. C. Peru’s economy must be four times larger than the U. S. economy. D. the U. S. economy must be four times larger than that of Peru. E. the U. S. dollar is worth four times the value of a Peruvian nuevo sol. Answer: A 8. The gold standard fixes the: A. future price of gold in terms of silver. B. price of gold in terms of international currencies. C. future price of silver in terms of gold. D. money supply in terms of paper currency. E. past exchange rate and the future exchange rate. Answer: B 9. The gold standard ended with the: A. rise of Napoleon to power. B. American Declaration of Independence. C. outbreak of World War I. D. first Arab oil embargo. E. presidency of Richard Nixon. Answer: C 10. Which of the following can be categorized as a commodity money standard? A. The pegged exchange rate standard B. The free float standard C. The managed float standard D. The reserve currency standard E. The gold standard Answer: E 11. The exchange-rate arrangement that emerged from the Bretton Woods conference is often referred to as the: A. dollar exchange standard. B. euro exchange standard. C. gold exchange standard. D. silver exchange standard. E. flexible exchange rate standard. Answer: C 12. A reserve currency is a currency that is: A. used exclusively to settle domestic debts. B. specifically designed for use by commercial banks to settle accounts. C. held only by bureaucrats. D. used to settle international debts by private corporations. E. held by governments to facilitate foreign exchange market interventions. Answer: E 13. The focal point of the Bretton Woods system was the: A. Great Britain pound. B. institution of special drawing rights. C. U. S. dollar. D. gold reserve. E. management of commodity money. Answer: C 14. In effect, during the period immediately following World War II, the world was on a(n): A. gold standard. B. flexible-exchange-rate standard. C. U. S. dollar standard. D. exchange-rate standard dictated by Germany E. pegged-exchange rate standard. Answer: C 15. Which of the following was the reserve currency under the gold exchange standard? A. U. S. dollar B. Euro C. Great Britain pound D. Australian dollar E. Deutsche mark Answer: A 16. Under the Bretton Woods system, international debts were settled in: A. gold. B. U. S. dollars. C. British pounds. D. silver. E. German marks. Answer: B 17. The Bretton Woods System of exchange rates was established: A. to solidify support for the then-existing gold standard. B. to peg the worldwide price of silver to the price of gold. C. in Europe before World War II to establish a flexible exchange rate regime. D. in the United States in 1944 to develop a gold exchange standard. E. by a mechanism that made gold the reserve currency of the system. Answer: D 18. Which of the following statements concerning the International Monetary Fund is true? A. The IMF was created to help finance economic development in poor countries. B. One of the principal aims of the IMF is to discourage international trade and encourage countries to become self-sufficient. C. The IMF lends money to countries experiencing large balance-of-payments surpluses. D. When the IMF lends currencies, it always insists on the borrowing country taking action to reduce its balance-of-payments surplus. E. The IMF obtains funds from annual membership fees charged to member countries. Answer: E 19. The U. S. provides about _____ percent of the annual membership fees of IMF member countries. A. 5. 6 B. 10. 2 C. 15. 3 D. 17. 3 E. 22. 4 Answer: D 20. The World Bank obtains the funds it lends by: A. selling bonds on the international bond market. B. selling bonds to countries it has loaned funds to. C. collecting each country’s annual membership fee or quota. D. levying a small tax on every foreign exchange conversion worldwide. E. depending on voluntary subsidies from member nations. Answer: A 21. The annual membership fees of the 185 member countries of the IMF are called: A. annuities. B. quotas. C. vetos. D. conditionalities. E. petrodollars. Answer: B 22. Foreign exchange market intervention is most effective when: A. each country’s political leaders agree to cooperate fully with the process. B. leading economists in each country concur that intervention is needed. C. permanent differences between the free market exchange rate and the fixed exchange rate are expected. D. temporary differences between the free market exchange rate and the fixed exchange rate are expected. E. all the countries restrict the international movement of goods and services. Answer: D 23. Suppose the official gold value of the Brazilian real changes from 457 reals per ounce to 528 reals per ounce. We can then say that: A. the Brazilian real has been devalued. B. the Brazilian economy is expected to experience rapid inflation. C. gold has been devalued. D. the Brazilian real has appreciated in value. E. gold is now cheaper to purchase in Brazil than it was before. Answer: A 24. Suppose the official gold value of the Brazilian real changes from 527 reals per ounce to 508 reals per ounce. We can then say that: A. the Brazilian real has depreciated in value as a consequence of free market fluctuations. B. the Brazilian real has appreciated in value. C. gold is now more expensive to purchase in Brazil than it was before. D. the Brazilian real has been devalued. E. the Brazilian economy is expected to experience rapid inflation. Answer: B 25. The exchange rate that is established in the absence of foreign exchange market intervention by the government is known as a(n): A. historical anachronism. B. fixed exchange rate. C. “dirty float” exchange rate. D. unmanaged exchange rate. E. free market equilibrium exchange rate. Answer: E 26. The Bretton Woods system required countries to actively buy and sell dollars to maintain fixed exchange rates when: A. a country experienced a severe bout of inflation. B. the free market equilibrium exchange rate differed from the fixed rate. C. a country experienced serious unemployment. D. the threat of recession began to spread from one country to another. E. worldwide trade began to deteriorate. Answer: B 27. Which of the following had resulted from the Smithsonian agreement of 1971? A. Devaluation of the U. S. dollar B. Dissolution of a fixed exchange rate regime C. Appreciation of the U. S. dollar D. Establishment of an equilibrium exchange rate E. Laissez-faire in the foreign exchange market Answer: A 28. The primary function of the World Bank is to: A. lend money to the World Trade Organization. B. provide loans to countries experiencing huge budget deficit. C. finance economic development in poor countries. D. assist countries experiencing balance of payments deficits. E. finance the fiscal stabilization program of the U. S. government. Answer: C 29. The IMF mostly receives its funds from: A. the subscription fees paid by the member nations. B. selling of bonds. C. the loans given by the World Bank. D. the central banks of the major industrialized nations. E. the gold reserves available with the Fed. Answer: A 30. What is a currency board? A. A fixed exchange rate that, by law, exchanges domestic currency for a specified foreign currency at a fixed exchange rate. B. A floating exchange rate. C. A managed floating exchange-rate policy that the government adjusts periodically according to some economic indicator. D. A laissez-faire exchange-rate policy. E. An interventionist exchange-rate policy. Answer: A 31. Assume that a country’s government influences the exchange rate through active central bank intervention, with no pre-announced path. This policy is known as a(n): A. floating exchange-rate policy. B. managed floating exchange-rate policy. C. fixed exchange-rate policy. D. crawling-peg exchange-rate policy. E. interventionist exchange-rate policy. Answer: B 32. When the exchange rate fluctuates around a fixed central target, allowing for a moderate amount of fluctuation, while tying the currency to the target central rate, the exchange rate is under: A. a horizontal band. B. a crawling peg. C. a managed float. D. an independent float. E. a currency board. Answer: A 33. Under the _____ arrangement, the exchange rate is adjusted periodically by small amounts at a fixed, pre-announced rate or in response to certain indicators. A. currency board B. crawling peg C. reserve currency D. conventional fixed peg E. independent float Answer: B 34. Which of the following exchange rate systems have a legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate? A. Gold standard B. Gold exchange standard C. Crawling band D. Horizontal band E. Currency board Answer: E 35. Equilibrium in the foreign exchange market occurs: A. at the point where the foreign exchange demand and supply curves intersect. B. at the point where the foreign exchange demand and supply curves reach maximum separation. C. when two nations’ economic leaders agree on the appropriate exchange rate. D. when two nations’ diplomatic leaders agree on an exchange rate that meets both countries’ needs. E. only by chance, if at all, because they change very frequently. Answer: A 36. An upward-sloping supply curve of Korean won in terms of Canadian dollars indicates that: A. the higher the dollar price of Korean won, the more won will be demanded. B. the higher the dollar price of Korean won, the fewer won will be supplied. C. the lower the dollar price of Korean won, the more won will be demanded. D. the lower the dollar price of Korean won, the fewer won will be supplied. E. the Korean economy is stronger than the Canadian economy. Answer: D 37. Assume that you have just returned to the United States from a summer vacation in Russia, where you exchanged American dollars for Russian rubles. Your economic actions can be said to have: A. increased the supply of American dollars in Russia. B. decreased the supply of Russian rubles in America. C. decreased the supply of American dollars in Russia. D. increased the demand for American dollars in America. E. increased the supply of Russian rubles in Russia. Answer: A NARRBEGIN: Figure 22. 1 The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market. Assume that the market operates under a flexible exchange rate regime. Figure 22. 1 In the figure: D1 and D2: Demand for Brazilian reals S1 and S2: Supply of Brazilian reals NARREND 38. Refer to Figure 22. 1. Determine the equilibrium exchange rate and equilibrium quantity of Brazilian reals, if D1 and S1 are the relevant demand and supply curves for Brazilian reals in this market. A. 10 pesos per real and a quantity of 150 reals B. 6 pesos per real and a quantity of 250 reals C. 8 pesos per real and a quantity of 150 reals D. 8 pesos per real and a quantity of 250 reals E. 6 pesos per real and a quantity of 200 reals Answer: D 39. Refer to Figure 22. 1. Assume that the initial equilibrium exchange rate is 8 Mexican pesos per Brazilian real and 150 brazilian reals are traded in the market. Suppose, there is an increase in the Brazilian demand for Mexican exports. Other things remaining equal, which of the following can be concluded? A. The demand curve for Brazilian reals will shift to the the right. B. The supply curve of Brazilian reals will shift to the the right. C. The Mexican pesos will depreciate in value. D. The Brazilian reals will appreciate in value. E. Around 100 Brazilian reals will be traded in the forex market. Answer: B 40. Refer to Figure 22. 1. Suppose the initial equilibrium exchange rate is 10 pesos per real. A decrease in the Mexican demand for Brazilian coffee, other things equal, is most likely to result in a new equilibrium exchange rate of: A. 6 pesos per real and an equilibrium quantity of 200 Brazilian reals. B. 6 pesos per real and an equilibrium quantity of 250 Brazilian reals. C. 8 pesos per real and an equilibrium quantity of 150 Brazilian reals. D. 8 pesos per real and an equilibrium quantity of 100 Brazilian reals. E. 10 pesos per real and an equilibrium quantity of 200 Brazilian reals. Answer: C 41. Refer to Figure 22. 1. Assume that the initial equilibrium exchange rate is 6 pesos per real. Other things remaining equal, an increase in the number of Brazilian tourists to Mexico is most likely to: A. keep the equilibrium exchange rate constant. B. shift the demand curve for pesos to the right. C. shift the supply curve of pesos to the left. D. shift the demand curve for pesos to the left. E. shift the supply curve of pesos to the right. Answer: E 42. Refer to Figure 22. 1. If the initial equilibrium exchange rate is 6 pesos per real, then other things equal, a decrease in the number of Brazilian tourists to Mexico would: A. increase the demand for Brazilian reals from D2 to D1 and increase the exchange rate to 8 pesos per real. B. decrease the supply of Brazilian reals from S1 to S2 and increase the exchange rate to 8 pesos per real. C. decrease the supply of Brazilian reals from S1 to S2 and increase the exchange rate to 10 pesos per real. D. decrease the demand for Brazilian reals from D1 to D2 and increase the exchange rate to 8 pesos per real. E. decrease the supply of Brazilian reals from S1 to S2 and increase the demand for Brazilian reals from D2 to D1, thereby changing the exchanging rate to 10 pesos per real. Answer: B 43. Refer to Figure 22. 1. The supply curves shown for Brazilian reals are based on: A. the supply of Brazilian goods in the international market. B. the Brazilian demand for Mexican products. C. the supply of Mexican pesos in the market. D. the Brazilian demand for Brazilian products. E. the Mexican demand for Brazilian products. Answer: B 44. Refer to Figure 22. 1. The demand curves shown for Brazilian reals are based on: A. the supply of Brazilian reals in the market. B. the demand for Mexican pesos. C. Brazilian demand for Brazilian products. D. Brazilian demand for Mexican products. E. Mexican demand for Brazilian products. Answer: E 45. Suppose you observe that with a given supply curve, the Peruvian demand for Argentinean pesos steadily decreases. This will most likely mean: A. the supply of Peruvian nuevos soles has increased on the foreign exchange market. B. the Argentinean peso will appreciate in value relative to the Peruvian nuevo sol. C. the Argentinean peso will depreciate in value relative to the Peruvian nuevo sol. D. the Peruvian demand for Argentinean goods has increased. E. the supply of Argentinean pesos has increased on the foreign exchange market. Answer: C 46. The supply of Thai baht in the foreign exchange market originates with: A. tourists who go on vacation to Thailand. B. the export of Thailand oranges and other goods. C. Thai residents who wish to purchase goods from other countries. D. the Thai royal family. E. Thai central bank intervention to stop the peseta from depreciating. Answer: C 47. In 1991, the French mineral water Perrier was temporarily taken off the market in the United States because of suspected impurities. Other things equal, this action brought about: A. an increase in the demand for Perrier. B. a decrease in the price of Perrier in terms of French francs. C. a depreciation of the French franc relative to the U. S. dollar. D. an appreciation of the French franc relative to the U. S. dollar. E. an increased supply of dollars in the foreign exchange market. Answer: C 48. Carlos Silva, a Colombian singer, goes on tour to the United States for one month, following high American demand for his live shows. Assuming that all the show’s expenses are paid by the U. S. promoters, other things equal, the U. S. tour will bring about: A. a decreased supply of Colombian pesos in the foreign exchange market. B. an increased supply of American dollars in the foreign exchange market. C. an increased supply of Colombian pesos in the foreign exchange market. D. a decreased demand for Colombian pesos in the foreign exchange market. E. an increased demand for American dollars in the foreign exchange market. Answer: B NARRBEGIN: Figure 22. 2 The figure given below depicts the foreign exchange market for British pounds traded for U. S. dollars. Figure 22. 2 NARREND 49. Refer to Figure 22. 2. At the initial equilibrium point, with demand curve D and supply curve S1: A. the price of dollar per British pound is $1. 50 and the quantity of British pounds being traded is 225. B. the price of dollar per British pound is $1. 60 and the quantity of British pounds being traded is 225. C. the price of dollar per British pound is $1. 60 and the quantity of British pounds being traded is 300. D. the price of dollar per British pound is $1. 75 and the quantity of British pounds being traded is 350. E. the price of dollar per British pound is $1. 75 and the quantity of British pounds being traded is 300. Answer: C 50. Refer to Figure 22. 2. Suppose S1 is the initial supply curve and the British demand for U. S. manufactured computers decreases. Then, with flexible exchange rates: A. the price per British pound decreases by $0. 10 and the quantity of British pounds increases by 50. B. the price per British pound decreases by $0. 10 and the quantity of British pounds decreases by 50. C. the price per British pound increases by $0. 15 and the quantity of British pounds decreases by 50. D. the price per British pound increases by $0. 15 and the quantity of British pounds decreases by 75. E. the price per British pound and the quantity of British pounds remain unchanged. Answer: D 51. Refer to Figure 22. 2. An increase in the equilibrium quantity of British pounds from 300 to 350 would most likely mean that: A. the demand for British pounds has decreased. B. the supply of British pounds has decreased. C. increased demand for dollars has caused the dollar to depreciate and the pound to appreciate. D. increased demand for dollars has caused the dollar to appreciate and the pound to depreciate. E. the equilibrium exchange rate is $1. 60 per British pound. Answer: D 52. Refer to Figure 22. 2. Suppose that the British central bank wishes to maintain a fixed exchange rate of £1 = $1. 60. If supply decreases from S1 to S2, the bank must: A. buy 25 pounds to shift the supply curve from S2 to S1. B. buy 50 pounds to shift the supply curve from S2 to S1. C. sell 75 pounds to shift the supply curve from S2 to S1. D. buy 75 pounds to shift the supply curve from S2 to S1. E. sell 10 pounds to shift the supply curve from S2 to S1. Answer: C 53. Refer to Figure 22. 2. Suppose the British central bank is committed to maintaining an exchange rate of £1 = $1. 50, but there is a permanent shift in supply from S1 to S3. According to the Bretton Woods agreement: A. the pound should be devalued. B. the dollar should be devalued. C. the British central bank should buy pounds in exchange for dollars. D. the British central bank should encourage speculation. E. the Fed should intervene to maintain the exchange rate of £1 = $1. Answer: A 54. Suppose a permanent increase in demand for the Argentinean peso causes a chronic shortage of this currency in the foreign exchange market. The Argentinean government should then: A. request other countries to revalue their currency. B. devalue the peso. C. allow the peso to appreciate. D. restricts exports. E. restrict imports. Answer: C 55. A permanent shift in the foreign exchange market supply and demand curves such that the fixed exchange rate is no longer an equilibrium rate is referred to as: A. permanent devaluation. B. speculative disequilibrium. C. permanent revaluation. D. speculative equilibrium. E. fundamental disequilibrium. Answer: E 56. Currency speculators are traders who seek to profit from a(n): A. shift in global demand and supply patterns. B. increase in the price of oil. C. sudden shift in interest rates. D. exchange rate change by selling the currency expected to appreciate and buying the currency expected to depreciate. E. exchange rate change by selling the currency expected to depreciate and buying the currency expected to appreciate. Answer: E 57. Suppose a hefty rise in the demand for Mexican pesos create a chronic shortage of this currency in the foreign exchange market. Which of the following steps should be adopted by the Mexican government to eliminate this shortage? A. The government should impose a ban on Mexican exports. B. The government should devalue the peso. C. The government should print more pesos to increase its supply. D. The government should allow the peso to appreciate. E. The government should allow the peso to depreciate. Answer: D 58. If prices rise within a country, then, other things equal, the value of a unit of domestic currency will: A. rise in both the domestic and the foreign exchange markets. B. fall in both the domestic and the foreign exchange markets. C. rise in the domestic market and fall in the foreign exchange market. D. fall in the domestic market and rise in the foreign exchange market. E. fluctuate unpredictably in both domestic and foreign exchange markets. Answer: B 59. Under the flexible exchange rate system, when a country tries to stimulate economic growth and improve its employment rates, it is likely to cause: A. the domestic inflation rate to rise and the domestic currency to depreciate. B. the domestic inflation rate to rise and the domestic currency to appreciate. C. the domestic inflation rate and the value of the domestic currency to remain constant. D. the domestic inflation rate to fall and the domestic currency to appreciate. E. the domestic inflation rate to fall and the domestic currency to depreciate. Answer: C 60. Fixed exchange rates require the economic policies of countries linked by the exchange rate to be: A. completely independent. B. complementary to each other. C. determined by the World Bank. D. similar in nature. E. determined by the International Monetary Fund. Answer: D 61. Under a fixed exchange-rate system, in order to maintain the exchange rate: A. governments must adopt a laissez-faire economic policy. B. all trading partners must enjoy the same level of economic growth. C. currencies must be inconvertible. D. the imports of one country must equal the exports of its trading partner. E. governments must intervene in the foreign exchange market. Answer: E 62. One of the advantages of floating exchange rates is that: A. consumers always know how much imported goods cost. B. businesses always know, in advance, what future exchange rates will be. C. countries are free to pursue their own macroeconomic policies without maintaining exchange rates. D. countries cannot act independently and must thus coordinate their macroeconomic policies. E. the global interest rate tends to decline to the lowest possible level. Answer: C 63. How many dollars do you need to buy a Swedish Kronor (SEK) when the exchange rate is $1 = 6. 429 SEK? A. $0. 016 B. $1. 056 C. $0. 649 D. $0. 156 E. $1. 56 Answer: D 64. How many U. S. dollars does a U. S. importer need to pay for 100,000 yen worth of stereo equipment when the price of 1 yen is $0. 008? A. $125 million B. $1. 25 million C. $80,000 D. $1,250 E. $800 Answer: E 65. When a U. S. importer needs $22,000 to settle an invoice for 25,520 Swiss francs, the exchange rate must be: A. 1 Swiss franc = $1. 16. B. 1 Swiss franc = $0. 16. C. 1 Swiss franc = $0. 84. D. $1 = 1. 16 Swiss franc. E. $1 = 1. 84 Swiss franc. Answer: D 66. A decrease in the price of a currency in terms of another under a flexible exchange rate regime is called: A. capital flight. B. depreciation. C. revaluation. D. devaluation. E. currency adjustment. Answer: B 67. When the exchange rate moves from $1 = CAD1. 5 to $1 = CAD1. 66, it implies: A. the U. S. dollar has depreciated in relation to the Canadian dollar. B. U. S. imports of Canadian goods will rise. C. the dollar price of the Canadian dollar has risen. D. the Canadian dollar has appreciated in relation to the U. S. dollar. E. Canadian imports of U. S. goods will rise. Answer: B 68. When the U. S. dollar depreciates against other currencies: A. foreign goods become less expensive to U. S. buyers. B. U. S. goods become more expensive to foreign buyers. C. foreign currencies depreciate against the U. S. dollar. D. the volume of U. S. imports decline. E. the volume of U. S. exports decline. Answer: D 69. When the U. S. dollar depreciates in relation to the Swiss franc: A. a U. S. importer will need more dollars to pay for an invoice denominated in Swiss francs. B. a Swiss exporter will receive more Swiss francs for an invoice denominated in the exporter’s currency. C. Swiss imports of U. S. goods will fall. D. the Swiss franc is now worth less in terms of the U. S. dollar. E. a U. S. exporter will receive fewer dollars for an invoice denominated in Swiss francs. Answer: A 70. Suppose a U. S. importer agrees to pay a Japanese firm 55,000 yen for a shipment of goods. If the agreement is made when the exchange rate is $1 = ¥100, what is the change in the dollar value of the goods if the exchange rate changes to $1 = ¥110, on the payment-due date? A. -$50 B. $550,000 C. -$550,000 D. $50 E. -$55,000 Answer: A 71. Assume an Australian importer expects to pay 16,000 Australian dollars (AUD) for $8,000 worth of U. S. goods, but on the shipment date 30 days later, the same volume of U. S. goods costs the Australian importer only 10,000 Australian dollars. This means that between the contract date and the payment date, the exchange rate has changed: A. from $1 = 1. 25 AUD to $1 = 2. 0 AUD. B. from $1 = 2. 0 AUD to $1 = 1. 25 AUD. C. from $1 = 0. 8 AUD to $1 = 0. 5 AUD. D. from $1 = 0. 5 AUD to $1 = 0. 8 AUD. E. from $1 = 0. 5 AUD to $1 = 2. 0 AUD. Answer: B 72. Suppose a U. S. importer purchases “Mexican Oaxaca” cheese for $500. If the present exchange rate is Mexican peso (MXP) 10 per U. S. dollar, and the MXP appreciates 10 percent against the U. S. dollar between the date of purchase and the date of payment, then the peso value of the invoice when payment is due is: A. MXP 500. B. MXP 550. C. MXP 4,500. D. MXP 5,500. E. MXP 4,450. Answer: C 73. An appreciation of the Norwegian kroner in relation to the U. S. dollar is most likely to cause: A. an increase in the U. S. demand for Norwegian goods. B. an increase in the Norwegian demand for U. S. goods. C. an increase in the supply of U. S. goods to Norway. D. a decrease in the supply of Norwegian goods to the United States. E. no change in the demand or supply of goods for either country. Answer: B 74. Which of the following holds true, if goods sell for the same price worldwide when converted to a common currency? A. A high rate of inflation exists B. A fixed exchange-rate system exists C. Purchasing power parity exists D. The foreign exchange market is in equilibrium E. Arbitrage opportunities exist Answer: C 75. Purchasing power parity exists when domestic currency: A. maintains a fixed exchange rate with foreign currency. B. is not convertible into foreign currency. C. buys more goods at home than abroad. D. buys as many goods at home as it does abroad. E. appreciates in value against foreign currency. Answer: D 76. Deviations from purchasing power parity will be increasingly higher as international trade tariffs become more restrictive. The main reason for this phenomenon is that: A. arbitrage activities become less profitable. B. governments prefer purchasing power parity not to hold. C. the interest rate parity fails to hold. D. goods become more differentiated across countries. E. individuals develop hatred toward closed economies. Answer: A 77. Assume that a Chrysler automobile sells for $15,000 in the United States and that the exchange rate is $1 = €1. 3. For purchasing power parity to hold, the same car should sell in Germany for: A. €15,000. B. €11,538. C. €19,500. D. €1,538. E. €15,500. Answer: C 78. If a bushel of corn sells for $2 in the United States and for 4,000 COP (Colombian peso) in Colombia, and if 1 dollar is worth 2,200 COP, then: A. the corn is 400 COP more expensive in Colombia. B. the corn is 400 COP cheaper in Colombia. C. the price of a bushel of corn equals $2 in both the United States and Colombia. D. the price of corn is 4,000 COP lower in Colombia than in the United States. E. the price of corn is $0. 20 lower in the United States than in Colombia. Answer: B 79. Suppose purchasing power parity exists in the car stereo market in the United States and Australia. If a car stereo costs $230 in the United States and the exchange rate is $1 = $AUD1. 67, the same car stereo may be purchased in Australia for approximately: A. $AUD 138. B. $AUD 230. C. $AUD 2,300. D. $AUD 384. E. $AUD 108. Answer: D 80. Suppose a U. S. investor buys a Canadian government bond with a face value of Canadian dollar (CAD) 100 and an annual yield of 8. 8 percent. Which of the following statements is true? A. At maturity, the dollar return from the Canadian bond will be $108. 8, regardless of what happens to the exchange rate. B. The Canadian bond will yield the same dollar return from the time of purchase to the time of maturity. C. An American will make a profit on the Canadian bond only when the CAD-denominated return is higher on the Canadian bond than the dollar-denominated return on a comparable U. S. bond. D. The dollar return on the Canadian bond depends on the dollar price of the Canadian dollar at the time of maturity. E. The decision to buy the Canadian bond should be based solely on the CAD interest return and not on changes in the exchange rate. Answer: D 81. Suppose a U. S. firm buys a one-year U. K. bond for 6,000 British pounds when 1 British pound is worth $1. 50 on the foreign exchange market. What is the firm’s approximate rate of return on the bond if the interest rate on the bond is 15 percent and the exchange rate is 1 British pound is worth $1. 93 at maturity? A. 11 percent B. 15 percent C. 25 percent D. 33 percent E. 48 percent Answer: E 82. Assume a U. S. firm invests $1,500 to buy a one-year U. K. bond. What is the dollar value of the proceeds if the dollar return on the U. K. bond is 20 percent at maturity? A. $1,800 B. $1,500 C. $1,200 D. $1,000 E. $500 Answer: A 83. Assume a U. S. investor buys a Mexican bond with a face value of MXP 1,000 and a 20 percent annual interest yield while the exchange rate is MXP 10 per dollar. What is the dollar return from the bond if the exchange rate at the end of the year is MXP 11 per dollar? A. 9. 1% B. 10. 0% C. 18. 2% D. 20. 0% E. 32. 0% Answer: A 84. An Australian investor buys a U. S. Treasury bond that has a price of $10,000, pays 5 percent interest, and matures in a year. Between the purchase date and the maturity date, the exchange rate changes from $1 = AUD 5. 0 to $1= AUD 5. 2. What will be the Australian investor’s rate of return from the U. S. bond? A. 4 percent B. 7 percent C. 9. 2 percent D. 12 percent E. 25 percent Answer: C 85. Suppose a U. S. citizen invests $1,000 to purchase a one-year Japanese bond that has an interest yield of 10 percent. If the dollar appreciates 20 percent against the Japanese yen by the maturity date, the dollar value of the proceeds is _____. A. $900 B. $1,100 C. $1,300 D. $1,500 E. $1,200 Answer: A 86. Suppose a Japanese investor purchases a dollar deposit that yields 5 percent interest at the end of a year. What will be the approximate return in terms of yen at maturity if the exchange rate moves from $1 = ¥100 to $1 = ¥105 during the year? A. 1 percent B. 5 percent C. 10 percent D. 20 percent E. 0 percent Answer: C 87. If you receive a dollar return of 6 percent on a one-year Korean bond that yields 10 percent annually, this means that between the purchase date and the time of maturity: A. the Korean won (KRW) has depreciated 4 percent against the U. S. dollar. B. the dollar price of the Korean won (KRW) has risen by 10 percent. C. the percentage change in the dollar per Korean won exchange rate is 6 percent. D. the dollar proceeds from the Korean bond are 4 percent higher than the initial dollar investment. E. the dollar has depreciated 16 percent against the Korean won. Answer: A 88. What is the interest rate on a 12-month U. K. certificate of deposit if the dollar return on the certificate is 4 percent and the dollar has appreciated 9 percent against the British pound? A. 15 percent B. 13 percent C. 9 percent D. 5 percent E. 4 percent Answer: B 89. Given a one-year Canadian bond with a yield of 8 percent, what will be the U. S. investor’s rate of return at maturity if the Canadian dollar appreciates 10 percent against the U. S. dollar? A. 2 percent B. 8 percent C. 10 percent D. 18 percent E. 25 percent Answer: D 90. Assume that a one-year Malaysian bond yields 10 percent interest and that the dollar return on maturity is 5 percent. If the exchange rate at maturity is $1 = MYR 4. 00 (Malaysian ringgit), what was the exchange rate at the time the bond was purchased? A. $1 = MYR 4. 2 B. $1 = MYR 3. 8 C. $1 = MYR 3. 6 D. MYR 1 = $0. 26 E. MYR 1 = $0. 4 Answer: B 91. Suppose a U. S. citizen purchases a one-year Norwegian bond that yields 10 percent interest. Between the purchase date and the maturity date, the exchange rate changes from to How much was initially invested in the bond if the dollar value of the proceeds at maturity is $3,500? (roundoff up to the nearest whole number) A. $2,916 B. $3,150 C. $3,500 D. $3,850 E. $4,200 Answer: A 92. Interest rate parity can be summarized by which of the following equilibrium conditions? A. The foreign interest rate must equal the domestic interest rate plus the expected inflation. B. The foreign interest rate must equal the domestic interest rate. C. The foreign interest rate must equal the expected change in the exchange rate. D. The domestic interest rate must equal the foreign interest rate plus the expected change in exchange rate. E. The domestic interest rate must equal the foreign interest rate minus any expected inflation. Answer: D 93. If a dollar invested in the United States yields the same return as a dollar's worth of yen invested in Japan, then it implies that: A. purchasing power parity exists. B. the exchange market is in equilibrium. C. the dollar/yen exchange rate is fixed. D. interest rate parity exists. E. both the currencies are pegged to a fixed amount of gold. Answer: D 94. Suppose a Canadian investor buys a one-year U. S. government bond that pays 7 percent interest. If the U. S. dollar appreciates 4 percent against the Canadian dollar during the year, what must be the yield on a comparable Canadian government bond for interest rate parity to hold? A. 3 percent B. 4 percent C. 7 percent D. 10 percent E. 11 percent Answer: E 95. Suppose you are a U. S. exporter expecting to receive a payment of NZD1,000 (New Zealand dollars) in 12 months. The annual interest rate on NZD deposits is 5 percent, and the annual interest rate on dollar deposits is 9 percent. If the present exchange rate is $0. 50 per NZD and interest rate parity holds, how many dollars do you expect to receive at the maturity date of the export contract? A. $2,000 B. $1,923 C. $1,000 D. $580 E. $520 Answer: E 96. In the foreign exchange market where French francs are traded for Japanese yen, a decrease in the interest rate in France is most likely to cause: A. a decrease in the yen price of the French franc. B. an increase in the interest rate in Japan. C. an increase in the yen price of the French franc. D. an increase in the demand for French francs. E. an increase in the supply of yen. Answer: A 97. Assume a one year U. S. bond pays 4. 0% interest and a similar U. K. bond pays 5. 2% interest. Which of the following changes will establish interest rate parity? A. The British pound would be expected to appreciate by 1. 2% against the U. S. dollar. B. The U. S. dollar would be expected to depreciate by 1. 2% against the British pound. C. The British pound would be expected to depreciate by 1. 2% against the U. S. dollar. D. The British pound would be expected to appreciate by 9. 2% against the U. S. dollar. E. The U. S. dollar would be expected to appreciate by 9. 2% against the British pound. Answer: C 98. Suppose the 12-month interest rate on a U. S. Treasury bill is 16 percent, and the one-year interest rate on a comparable British Treasury bill is 6 percent. The exchange rate today is $2. 00 per pound. What must be the expected exchange rate at maturity for interest rate parity to hold? A. $1. 00 = 0. 50 pound B. $1. 00 = 0. 75 pound C. 1 pound = $2. 20 D. 1 pound = $1. 80 E. 1 pound = $2. 50 Answer: C TRUE/FALSE 1. Countries that maintain a constant gold value for their currencies are said to be on a gold standard. Answer: True 2. Suppose that the price of an ounce of gold is 120 pesos in Mexico and 2,400 yen in Japan. Then the Japanese yen is worth two hundred times the value of a Mexican peso. Answer: False 3. The gold standard ended in the 1970s because the gold supplies failed to keep pace with the increase in money supplies required for industrialization and rapid economic growth witnessed in this era. Answer: False 4. The exchange-rate arrangement that emerged from the Bretton Woods conference is often called a managed float standard. Answer: False 5. No currency ever appreciated or depreciated under the Bretton Woods system as it was based on a system of fixed exchange rates. Answer: False 6. Under both the gold standard and the gold exchange standard countries bought and sold U. S. dollars to maintain a fixed exchange rate with the dollar. Answer: False 7. The World Bank was created to help finance economic development in poor countries. Answer: True 8. The IMF comprises of 50 member countries including all developed countries, and a few countries of Asia and Latin America. Answer: False 9. If the official gold value of the Australian dollar changes from 470 Australian dollars per ounce to 493 Australian dollars per ounce, we can say that the Australian dollar has appreciated in value. Answer: False 10. World Bank funds are largely acquired through interest earned on the deposits of member nations. Answer: False 11. When an exchange rate is established as a fixed peg, active intervention may be required to maintain the target-pegged rate. Answer: True 12. The euro floats against other currencies, but the member nations of the euro have no separate national money. For this reason, Spain, that uses the euro as its currency is listed under the managed float arrangement. Answer: False 13. A downward-sloping demand curve for Korean won in terms of Canadian dollars indicates that the higher the dollar price of Korean won, the more won will be demanded. Answer: False 14. Fixed exchange rates serve as a constraint on inflationary government policies. Answer: True 15. An increase in the demand for rubles causes the ruble to appreciate. Answer: True 16. Because of their greediness, speculators are considered bad for exchange-rate markets. Answer: True 17. Demand for U. S. dollars by speculators is likely to increase if the dollar is expected to depreciate in the near future. Answer: False 18. A fixed exchange rate can be an equilibrium rate even if there is a permanent shift in the foreign exchange market supply and demand curves. Answer: False 19. Under a floating exchange-rate system, a country needs to pay more attention to the economic policies of the rest of the world. Answer: False 20. Fixed exchange rates allow countries to formulate their economic policies independently of other nations. Answer: False 21. The exchange rate affects the trade in goods and services between California and NewYork. Answer: False 22. Appreciation of the dollar means that now it takes more dollars to buy one unit of foreign currency. Answer: False 23. If the euro per dollar exchange rate changes from $1 = 0. 8 euros to $1 = 0. 7 euros, it implies that the euro has depreciated against the dollar. Answer: False 24. When a U. S. importer needs $20,000 to settle an invoice for 228,000 Uruguayan pesos, the price of 1 dollar is 11. 4 Uruguayan pesos. Answer: True 25. When the domestic currency depreciates, domestic goods become more expensive to foreign buyers. Answer: False 26. Suppose the yen value of a $100,000 wheat import contract rises from ¥12,000,000 to ¥13,000,000 between the contract and the payment date. This implies that the yen value of 1 dollar has declined so that, other things equal, we can expect an increase in Japanese demand for U. S. goods. Answer: False 27. Other things equal, an appreciation of the Algerian dinar in relation to the euro will act to increase Algerian demand for European goods and to decrease European demand for Algerian goods. Answer: True 28. Other things equal, the higher the deviations from purchasing power, the lesser will be the arbitrage opportunities. Answer: False 29. Purchasing power parity holds when the exchange rate is equal to the product of the foreign price level and the domestic price level. Answer: False 30. Suppose a 10-mile taxi ride costs £6. 50 in London and $10. 00 in Los Angeles. If the exchange rate is £1 = $1. 70 purchasing power parity holds. Answer: False 31. The dollar return on a foreign investment is less than the interest rate on the foreign asset, if the foreign currency depreciates against the U. S. dollar between the purchase date and the maturity date. Answer: True 32. Assume that a British investor buys a one-year U. S. Treasury bill that pays 6 percent annual interest. Given a yield of 4 percent on a comparable British Treasury bill, the U. S. dollar must depreciate 2 percent against the British pound during the year for interest rate parity to hold. Answer: True 33. If interest rates in Europe fall below interest rates in the United States, then, other things equal, the demand for euros will decrease. Answer: True 34. To ensure interest rate parity, a decrease in the interest rate on Euroyen relative to Eurodollar deposits will require a greater expected appreciation of the Japanese yen against the U. S. dollar. Answer: False Test Bank for Microeconomics William Boyes, Michael Melvin 9781111826154

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