28135899 Objective Type Questions

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Sample Test Questions for International Economics 300

Below are a set of sample test questions taken from previous exams in International Economics 300. The answers are indicated by the *. Please note that it is possible that questions may have the * in the wrong place. You should think through all of these. Also, these are only sample questions. They are put here becausestudents often think it is helpful to see past exams. The fact that these are h

ere does not represent a commitment that questions on your exam will be like these or on the same subject matter. This is especially so because the subject matter and organization of the course has recently been adjusted.

1. If two countries trade, and if they are both specialized in production, thenworld prices are determined by A) supply conditions only. B) demand conditions only. *C) both supply and demand conditions. D) neither supply and/or demand conditions.

2. An increase in the return to land may be the result of A) an increase in thesupply of labor. B) an increase in the price of food. C) an increase in the supply of capital. E) (A) and (C). *D) (A) and (B).


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3. Suppose an economy is characterized by the relationships specified in the specific factors model. Assume that there are three factors of production, where labor and land are used in agriculture and labor and capital are used in industry.Then in the short-run, an increase in the price of food will lead to: *A) an increase in the real income of landowners, a decrease in the real income of capitalists, and an ambiguous effect on the real income of workers. B) an increase inthe real income of landowners and capitalists and an ambiguous effect on the rea

l income of workers. C) an increase in the real income of landowners and a decrease in the real income of workers and capitalists. D) an increase in the real income of capitalists and a decrease in the real income of landowners.

4. As more labor is allocated to industry there is: A) decreasing returns to scale. B) diminishing returns to capital. *C) diminishing returns to labor. D) increasing returns to scale. E) increasing returns to labor.

5. The optimal tariff of a small country is: A) positive and smaller than that of a large country. B) positive and larger than that of a large country. *C) zero. D) negative.


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6. The theory of collective action suggests that industries are more likely to be protected if *A) the number of firms in the industry is small. B) the number of firms in the industry is large. C) many jobs are at stake. D) many low-wage workers face unemployment.

7. Economists argue that A) countries with export surpluses will have a comparative advantage in the production of all goods. *B) efficiency in international tr

ade requires countries to produce those goods in which they have a comparative advantage. C) efficiency in international trade requires countries to produce those goods in which they have an absolute advantage. D) efficiency in international trade requires countries that have an absolute advantage in the production ofall goods to become self sufficient.

8. Under free trade, world prices for exports and imports would be such that *A)the quantity supplied by exporters would just equal the quantity demanded by importers. B) countries would specialize production along lines of absolute advantage. C) every country would be self sufficient in all goods. D) all countries would show a slight export surplus.

9. Suppose that shoes can be produced with two hours of labor input in Italy andthree hours of labor input in the United States, and that shirts can be produced with four hours of labor in both countries, then it is correct to say that, A)Italy has a comparative advantage in the production of shirts. *B) Italy has anabsolute advantage in the production of shirts.


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C) the U.S. has a comparative advantage in the production of shirts. D) the U.S.has an absolute advantage in the production of shirts.

10. The imposition of a tariff on steel will lead to all but which of the following? A) a lower volume of steel imports. B) higher domestic steel prices. C) reduced domestic demand for steel. *D) reduced domestic production of steel as higher steel prices reduce demand.

11. The difference between a large country and a small country in internationaltrade is A) primarily a matter of the number of different products that a country supplies to the world. B) purely a matter of geography. *C) primarily a matterof influence over world prices. D) exclusively a matter of comparative advantage.

12. Refer to the diagram 1 above. Country A has an ______________ advantage in the production of both good X and good Y and Country B has a ______________ advantage in the production of good X. A) comparative; absolute. B) comparative; comparative. *C) absolute; comparative. D) absolute; absolute.

13. Refer to the diagram above. Equilibrium for these two countries is characterized by A) autarky, trade would not be mutually beneficial. *B) Country A exporting good Y to country B.


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C) Country A exporting both goods X and Y to country B. D) Country A exporting good X to country B.

14. A country is said to be labor abundant if A) (LA/KA) < (LB/KB) B) (w/r)A > (w/r)B *C) (w/r)A < (w/r)B D) none of the above.

15. According to the Heckscher-Ohlin theorem A) increasing the relative supply o

f one factor, holding relative goods prices constant, leads to a biased expansion of production possibilities favoring the relative supply of the good which uses that factor intensively. *B) countries tend to export goods whose production is intensive in factors with which they are relatively abundantly endowed. C) countries tend to specialize in the production of the good in which they have the greatest comparative advantage. D) trade in goods leads to an equalization in therewards to factors across countries.

16. Assume that Zanzibar is labor abundant and that Omnibar is capital abundant.These two countries both produce carpet (which is labor intensive) and radar equipment (which is capital intensive). Assume that capital is immobile in the short run and that labor is mobile between both industries within each country in t

he short and long run. If Zanzibar and Omnibar begin to trade, we would expect that in Omnibar A) the return to capital in the carpet market would fall. B) thereturn to capital in the radar industry would rise. *C) purchasing power would be lower for owners of radar capital and higher for owners of carpet capital.


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D) purchasing power would be higher for owners of radar capital and lower for owners of carpet capital.

17. In trade between a small and a large nation A) the gains from trade are likely to be equally shared. B) the large nation is likely to receive all the gainsfrom trade. *C) the small nation is likely to receive all the gains from trade.D) we cannot say.

18. If Px/Py is lower in country A than in country B under autarky then A) country A has a comparative advantage in commodity Y. *B) country B has a comparativeadvantage in commodity Y. C) country B has a comparative advantage in commodityX. D) none of the above.

19. If the world price, Px/Py, happens to exceed the equilibrium world price Px/Py then, A) the country importing commodity X will want to import more of X thanat equilibrium. B) the country exporting commodity X will want to export less of X than at equilibrium. *C) the country exporting commodity X will want to export more of X than at equilibrium. D) the equilibrium, relative Px/Py will rise.

20. If a country's tastes for its import commodity increases then Pimports/Pexports for the country _______________ and trade volume _________________. A) decreases; increases. B) decreases; decreases.


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C) increases; increases. *D) increases; decreases.

21. In the Heckscher-Ohlin model of trade, international trade is based mostly on a difference in A) economies of scale. *B) factor endowments. C) tastes. D) technology.

22. If a small nation increases the tariff on its import commodity then A) the p

rotection cost of the tariff decreases. B) the deadweight loss decreases. *C) the rent to domestic producers of the commodity increases. D) all of the above.

23. According to the Heckscher-Ohlin (factor proportions model), international trade will *A) reduce international differences in per capita incomes. B) increase international differences in per capita incomes. C) possibly increase or reduce international differences in per capita incomes. D) lead to complete specialization.

24. Intra-industry trade takes place A) because perfect competition is the prevalent form of market organization. B) because products are homogeneous. *C) in order to take advantage of economies of scale.


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D) all of the above.

25. The Leontief paradox refers to the empirical finding that U.S. A) exports are more K-intensive than import substitutes. *B) imports substitutes are more K-intensive than exports. C) exports are more L-intensive than imports. D) importsare more K-intensive than exports.

26. A proportionately greater increase in the nation's supply of labor than of capital is likely to result in a decrease in Pimports/Pexports if the nation exports *A) the L-intensive commodity. B) the K-intensive commodity. C) both commodities. D) either commodity.

27. The imposition of an import tariff by a small nation A) increases the relative price of the import commodity for domestic producers and consumers and leavesthe nation's welfare unchanged. *B) increases the relative price of the importcommodity for domestic producers and consumers and reduces the nation's welfare.C) reduces the relative price of the import commodity for the nation as a wholeand reduces the nation's welfare. D) reduces the relative price of the import commodity for domestic producers and consumers and increases the nation's welfare

.

28. According to the Stolper-Samuelson theorem, the imposition of a tariff by anation *A) increases the real return of the nation's scarce factor. B) increasesthe real return of the nation's abundant factor.


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C) reduces the real return of the nation's scarce factor. D) leaves the real return of the nation's abundant factor unchanged.

29. An increase in the demand of the imported commodity subject to a given import quota A) reduces the domestic quantity demanded of the commodity. *B) increases the domestic production of the commodity. C) reduces the domestic price of thecommodity. D) reduces the producer surplus.

30. The expression "gains from trade" refers to *A) the increase in a nation's standard of living derived from specialization and trade based on comparative advantage. B) the foreign currencies earned by exporting goods and services. C) a nation's surplus of exports over imports. D) a nation's balance of trade.

31. A country, previously producing two goods, wine and wheat, enters into a free-trade situation in which the country exports wine and imports wheat. The expected result of this exchange will be A) an increase in the country's consumptionof wheat but no possible increase in its consumption of wine. B) an increase inthe country's consumption of wine but no possible increase in its consumption ofwheat. *C) an increase in the country's consumption of both goods. D) increased

domestic production of both wheat and wine.

32. Trade, whether between individuals or nations, promotes


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*A) specialization. B) lower standards of living. C) higher product prices. D) self-sufficiency.

The production possibilities given below shows how many bushels of either wheator rice can be produced in India and Canada with one unit of resources. Assume we are in the Ricardian model with labor as the only factor of production. Wheat(bushels) 6 13 Rice (bushels) 13 5 Number of Laborers 100 10

India Canada

33. Referring to the chart above: India has an absolute advantage in the production of A) wheat. *B) rice. C) both rice and wheat. D) neither rice nor wheat.

34. Referring to the chart above, if the relative price (Price/Pwheat) under free trade is 2, India will produce A) neither rice nor wheat but import them fromCanada. B) 600 bushels of wheat. *C) 1300 bushels of rice. D) 600 bushels of rice and 1300 bushels of wheat.

35. Under a regime of managed floating exchange rates, the balance of the offici

al reserve transactions account is A) always negative.


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B) always positive. C) *zero. D) may be positive or negative.

35. An appreciation in the dollar vis-a-vis other currencies should lead to allbut which of the following? A) A decrease in exports. B) An increase in imports.C) * A shift of the Y - A curve to the right. D) A leftward shift of the X - Mcurve. curve.

36. Changes in the exchange rate A) reflect changes in the purchasing power of one currency relative to the rest of the world. B) indicate changes in the pricesof goods produced in one country relative to the rest of the world. C) are positive if domestic prices in one country are climbing relative to those in the rest of the world. D) can be caused by changes in either the domestic price index or the price index of goods produces and traded across the rest of the world. E)* all of the above.

37. The Brentton-Woods System was one of A) * relatively fixed exchange rates set across the world by international agreement. B) extremely flexible exchange rates monitored across the world by international agencies. C) actively managed, floating exchange rates dominated by the major currency markets around the world.


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D) laissez-faire exchange rate policy that allowed countries to focus entirely on domestic policy issues.

38. If the German mark appreciates relative to the British pound, then a mark will buy A) fewer pounds than before. B) *more pounds than before. C) the same number of pounds as before. D) zero pounds since only the mark has value.

39. The relative purchasing power-parity theory postulates that: A) the equilibrium exchange rate is equal to the ratio of the price level in the two nations. B) *the change in the exchange rate over a period of time should be proportionalto the relative change in the price level in the two nations over the same timeperiod. C) change in the exchange rate over a period of time should be be proportional to the absolute change in the price level in the two nations over the same time period. D) the exchange rate at a period of time should be proportional to the relative prices in the two nations.

40. An autonomous increase in saving from a condition of equilibrium in nationalincome and in the trade balance results in the nation's income: A) rising and its trade balance turning into surplus. B) *falling and its trade balance turning

into surplus. C) falling and its trade balance turning into deficit. D) risingand its trade balance turning into deficit.

41. To correct a balance of trade deficit and unemployment a nation requires a:


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A) devaluation and expansionary fiscal and monetary policies. B) devaluation andcontractionary fiscal and monetary policies. C) * devaluation and either expansionary or contractionary fiscal and monetary policies. D) revaluation and eitherexpansionary or contractionary fiscal and monetary policies.

42. An autonomous improvement in the nation's trade balance under fixed exchangerates will cause the nation's aggregate demand curve to A) *shift to the right.

B) shift to the left. C) remain unchanged. D) any of the above.

43. An excessive money growth in the nation over time under a flexible exchangerate system results in a: A) *depreciation of the nation's currency. B) appreciation of the nation's currency. C) leaves the nation's currency unchanged. D) anyof the above.

44. Everything else equal, the volume of trade is likely to be: A) larger undera flexible than under a fixed exchange rate system. B) *larger under a fixed than under a flexible exchange rate system. C) equal under a flexible and fixed exchange rate system. D) any of the above.

45. The European Monetary System is or most resembles a :


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A) *fixed exchange rate system. B) a managed exchange rate system. C) a crawlingpeg system. D) a freely flexible exchange rate system.

46. The present international monetary system is a : A) gold standard. B) flexible exchange rate system. C) *managed exchange rate system (a dirty float). D) atarget zone system.

47. The main reason why one nation trades with another is to A) save its naturalresources from rapid deterioration. B) *exploit the advantages of specialization. C) eliminate the danger of retaliation from other nations. D) improve political alliances.

48. A restriction of imports that is accomplished by a quota normally A) *can beaccomplished also by a tariff. B) cannot be replicated exactly by imposing a tariff. C) can be accomplished also by an export subsidy. D) can be accomplished also by negotiations within GATT.

49. The infant-industry argument is valid when A) a new industry is suffering financial losses.


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B) a new industry is less efficient than foreign competitors. C) *the industry'sprospective gains are sufficient to repay the social (deadweight) losses incurred while it is being protected. D) the industry is not likely to be profitable in the future.

50. The anti-dumping argument A) calls for protectionist measures when foreigners charge unconscionable high prices for products dumped on our markets. B) *call

s for protectionist measures against countries that subsidize exports and dump their goods at unconscionable low prices on our markets. C) is valid on strictlyeconomic criteria. D) is derived from the notion that high import prices are badfor a country.

51. Currency values will appreciate in those countries with A) *lower inflationrates than the rest of the world; slower growth in aggregate demand; or high interest rates. B) higher inflation rates than the rest of the world; rapid growthin aggregate demand; or low interest rates. C) lower inflation rates than the rest of the world; rapid growth in aggregate demand; or low interest rates. D) higher inflation rates than the rest of the world; slower growth in aggregate demand; or low interest rates.

52. Other things equal, a rise in the interest rates in the U.S. often will A) lead to a depreciation of the dollar. B) *lead to an appreciation of the dollar.C) lead to a decrease in the amount of foreign capital attracted to the U.S.


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D) shift the demand curve for dollars to the left. 53. An autonomous (exogenous)increase in exports or decrease in imports, A) *has a multiplier effect on theeconomy, just like an increase in consumption, investment, or government purchases. B) affects the price level but not the equilibrium level of GDP. C) affectsthe equilibrium level of GDP but not the price level. D) has no effect on the economy if the change is autonomous and not induced.

54. For John to have a comparative advantage in the production of pins means that, relative to Jack, with the same resources: A) *John is better at producing pins than at producing needles. B) John is better at producing both pins and needles. C) John can produce pins more efficiently than Jack. D) John can produce more pins than Jack.

55. The Heckscher-Ohlin theorem sates that a country will have a(n) ________________ advantage in the production of a good which uses its relatively ___________________________. A) absolute, scare input intensively. B) absolute, abundant input intensively. C) *comparative, abundant input intensively. D) comparative, scarce input intensively.

56. Arboc is growing at a rate of 3% while Arbez is growing at a rate of 7%. Itis likely that exports from Arboc will _______________ and that its imports will_________________. A) *increase, increase.


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B) increase, decrease. C) decrease, increase. D) decrease, decrease.

57. Arboc is growing at a rate of 3% while Arbez is growing at a rate of 7%. Allelse equal, we would expect to see the ________________ currency depreciating.The new exchange rate will __________________ the consumers of Arboc. A) Arboc,hurt. B) Arboc, benefit. C) Arbez, hurt. D) *Arbez, benefit.

58. The balance on current account: A) will be zero when merchandise exports equal merchandise imports. B) shows the direction and amount of gold flows betweenthe nation and its trading partners. C) includes capital inflows but not capitaloutflows. D) *shows the relationship between U.S. sales of goods and services abroad and U.S. purchases of goods and services from abroad.

59. Which of the following will decrease demand for British pounds? * A) Incomein the U.S. decreases B) The inflation rate increases in the U.S. relative to the inflation rate in England C) U.S. companies decide to increase their investment in England D) More U.S. citizens decide to travel to England

60. The gains of trade can be demonstrated by a consumption possibilities curve

that is:


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A) identical with the production possibilities curve B) outside of, but parallelto, the production possibilities curve * C) outside of, and with different slope than, the production possibilities curve D) inside of, but parallel to, the production possibilities curve.

70. The supply of dollars in the foreign exchange market is likely to be upwardssloping because as the price of a dollar (the exchange ratE) falls, A) American

s demand more foreign goods because these goods have become less expensive to American consumers. * B) Americans demand fewer goods because these goods have become more expensive to American consumers C) foreigners demand more American goods because these goods have become less expensive to foreign consumers. D) foreigners demand more foreign goods because these goods have become more expensive toforeign consumers

71. Suppose that the price of a television set is $100 in the U.S. and 8000 yenin Japan. If the current exchange rate is 100 yen to the dollar, then purchasing-power-parity theory would predict that in the long run A) Japan will begin to import television sets from the U.S. B) the exchange value of the yen will depreciate * C) the exchange value of the yen will appreciate D) the exchange value of

the dollar will appreciate

72 According to the theory of covered interest arbitrage, if there is a positiveinterest difference in favor of the foreign country, and it exceeds the forwarddiscount on the foreign currency there will be a: A) capital inflow under covered interest arbitrage. * B) capital outflow under covered interest arbitrage.


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C) no capital flow under a covered interest arbitrage. D) any of the above.

73. A U.S. importer scheduled to make a payment of 100,000 in three months can hedge his foreign exchange risk by: A) purchasing $100,000 in the spot market fordelivery in three months. B) selling 100,000 in the spot market for delivery in three months. * C) purchasing 100,000 in the forward market for delivery in threemonths. D) selling 100,000 in the forward market for delivery in three months.

74. If the three-month forward rate is $2/1 and a speculator anticipates that spot rate will be $2.03/1 in three months, he can earn a profit by: A) selling pounds forward. * B) purchasing pounds forward. C) selling dollars forward. D) purchasing dollars forward.

75. A capital outflow from New York to London under covered interest arbitrage can take place if the positive interest differential in favor of London is: A) smaller than the forward discount on the pound. B) equal to the forward discount on the pound. * C) larger than the forward discount on the pound. D) none of theabove.

76. The appreciation of the currency of country A will tend to: * A) stimulate imports to country A B) discourage imports to country A


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C) increase exports from country A D) discourage foreign travel by the citizensof country A

77. If the Federal Reserve pursues an expansionary domestic monetary policy A) capital outflows will be discouraged * B) the foreign exchange value of the U.S.dollar is likely to decrease C) capital inflows will be encouraged D) there should be no effect oneither foreign exchange rates or on foreign investment in the

U.S.

78. If the exchange rate maintains its Purchasing Power Parity, then inflation rates of 10% in France and 5% in the US will result in: A) 15% increase in the franc price of the dollar B) 5% increase in the dollar price of franc * C) 5% increase in the franc price of the dollar D) 15% decrease in the dollar price of franc

79. Which of the following would be a credit item in the U.S. balance of payments? A) a U.S. citizen travels to England for a two-week vacation B) a U.S. firm hires a non-U.S. citizen * C) a U.S. company sells computer software to a companyin Spain D) the U.S. government lends Russia money

80. When the U.S. acquires assets abroad, it is in essence A) borrowing money, and foreign debts to the U.S. decrease B) borrowing money, and foreign debts to the U.S. increase


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C) lending money, and foreign debts to the U.S. decrease * D) lending money, andforeign debts to the U.S. increase

81. The effect of a sustained increase in government spending (or investment) onincome A) is larger in an open economy than in a closed economy B) is the sameregardless of whether the economy is open or closed * C) is smaller in an open economy than in a closed economy D) could be larger or smaller in an open economy

than in a closed economy

82. Hedging refers to: A) the acceptance of a foreign exchange risk. B) *the covering of a foreign exchange risk. C) foreign exchange speculation. D) foreign exchange arbitrage.

83. To correct a balance of payments surplus and inflation a nation requires a:A) devaluation and expansionary fiscal and monetary policies. B) devaluation andcontractionary fiscal and monetary policies. * C) devaluation and either expansionary or contractionary fiscal and monetary policies. D) revaluation and eitherexpansionary or contractionary fiscal and monetary policies.

84. A fixed exchange rate maintained above the equilbirium would tend to: * A) reduce the country's reserves of gold and foreign exchange over time B) increasethe country's reserves of gold and foreign exchange over time C) shift the supply curve for that country's currency in the foreign exchange


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market to the left D) make the country's exports cheaper in foreign countries than at the equilibrium exchange rate

85. A country's balance of payments deficit can be elimated if: A) imports increase B) the deficit country's government adds to its liabilities to foreign governments C) the deficit country reduces its stocks of official reserves * D) exchange rates are allowed to fluctuate freely

86. If country A has a budget deficit that is being funded by the purchases of bonds by individuals in country B, it can be expected that: * A) the value of currency of country A should increase relative to that of country B B) there will be an increased demand for country B's currency by those in country A C) there should be no immediate change in the value of country A's currency, but country A's currency should increase in value in the future D) the central bank will intervene to halt the purchase of the country's domestic bonds

87. With fixed exchange rates and zero capital mobility, national income and trade surplus move: * A) in opposite directions B) in the same direction C) sometime in opposite directions and sometime in the same direction D) in the same direc

tion as imports


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88. Labor in developing countries generally: A) opposes an inflow of foreign direct investments from abroad. * B) favors an inflow of foreign direct investmentsfrom abroad. C) is indifferent to foreign direct investments from abroad. D) wecannot say without additional information.

89. Owners of capital in developing countries generally: * A) oppose an inflow of foreign direct investments from abroad. B) favor an inflow of foreign direct i

nvestments from abroad. C) are indifferent to foreign direct investments from abroad. D) we cannot say without additional information.

90. According to the infant industry argument for tariffs, a new small industry:A) must be protected even if it will never have a comparative advantage B) mustbe protected permanently to provide for a diversified economy C) will need protection once it develops economies of scale * D) must be protected temporarily until it can develop economies of scale

91. A fixed exchange rate system without a band of allowed fluctuation would require the nation's monetary authorities to intervene in the foreign exchange market: A) never. B) seldom. * C) constantly. D) we cannot say.

92. Under a flexible as compared to a fixed exchange rate system:


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* A) a nations can more easily achieve its desired inflation-unemployment tradeoff. B) it is more difficult for a nation to achieve its desired inflation-unemployment tradeoff. C) it is more difficult for a nation to achieve internal balance. D) it is more difficult for a nation to achieve external balance.


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MULTIPLE-CHOICE QUESTIONS, CHP. 181. The major difference between a closed economy and an open economy is that a(n) a. closed economy balances budget, while an open economy does not. b. open economy is a market economy, while a closed economy relies on planning. c. open economy interacts with the rest of the world, while a closed economy does not. d. closed economy keeps political affairs secret, while an open economy does not. Arise in net exports shifts the aggregate a. demand curve inward. b. demand curve

outward. c. supply curve outward. d. supply curve inward. A recession abroad would a. increase U.S. net exports and increase aggregate demand. b. increase U.S.net exports and increase aggregate supply. c. reduce U.S. net exports and reduce aggregate demand. d. reduce U.S. net exports and increase aggregate demand. Anincrease in the U.S. price level relative to the price level of other countrieswould a. increase U.S. net exports and increase aggregate demand. b. increase U.S. net exports and increase aggregate supply. c. reduce U.S. net exports and reduce aggregate demand. d. reduce U.S. net exports and increase aggregate demand.

+ 2. +

3.

+ 4.

+ .

Figure 18-1

5.

+ 6.

Which of the following is correct? a. IM + X = G T b. I + G + T = S + X M c. I +G + X = S + T + IM d. I + T + G = S X IM A closed economy is one that a. uses t

ariffs. b. uses quotas to restrict trade. c. uses exchange controls. d. does nottrade with other nations.

+


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7.

+ 8. +

An increase in the value of the U.S. dollar relative to the Japanese yen will a.increase aggregate demand in the United States. b. decrease aggregate supply inthe United States. c. increase aggregate demand in Japan. d. increase aggregate

supply in Japan. An appreciation of the Japanese yen relative to the U.S. dollar will a. increase aggregate demand in the United States. b. increase aggregatesupply in the United States. c. increase aggregate demand in Japan. d. decreaseaggregate supply in Japan. If a currency depreciates, a country net exports s a.fall and AD increases. b. rise and AD increases. c. fall and AD decreases. d. rise and AD decreases. An increase in the price level in the economies of U.S. trading partners will cause the aggregate expenditures function in the United States to a. shift up. b. shift down. c. get flatter. d. get steeper. An increase inthe U.S. price level relative to the price level of U.S. trading partners will cause the aggregate expenditures function in the United States to a. shift up. b.shift down. c. get flatter. d. get steeper.

9. +

10. +

11.

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Figure 18-2

12. +

Which of the following explains the movements in Figure 18-2? a. an increase inthe U.S. price level b. a decrease in the U.S. price level c. an appreciation ofthe U.S. dollar d. an expansionary monetary policy Which of the following expla

ins the movements in Figure 18-2? a. an increase in U.S. imports b. a decrease in U.S. exports c. an increase in U.S. exports d. a decrease in U.S. net exportsIf Mexico experiences a period of stable prices while the United States experiences rapid inflation, what will happen in Mexico? a. an increase in aggregate supply b. a decrease in aggregate supply c. a decrease in aggregate demand d. an increase in aggregate demand

13.

+ 14.

+

Figure 18-3


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15. +

Which of the situations illustrated in Figure 18-3 shows the effects of a currency appreciation leading to a recession? a. 1 b. 2 c. 3 d. 4 Which of the situations illustrated in Figure 18-3 shows the effects of a currency appreciation leading to real GDP growth? a. 1 b. 2 c. 3 d. 4 When the U.S. dollar appreciates, a.U.S. exports rise. b. U.S. imports decline. c. aggregate demand shifts inward.

d. aggregate demand shifts outward. d. Japanese net exports to increase. What effect did the increase in the value of the dollar have on the U.S. trade deficitin the period from 1997 to 2000? a. It decreased the trade deficit as Americansbought more U.S. capital goods. b. It decreased the trade deficit as foreignerswere attracted to the increased value of U.S. products. c. It increased the trade deficit as U.S. investors bought more domestic financial assets. d. It increased the trade deficit as Americans bought more imports and foreigners bought fewer U.S. products.

16.

+

17.

+

18.

+

AGGREGATE SUPPLY IN AN OPEN ECONOMY

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In an open economy, aggregate supply consists of domestic production a. plus imports. b. plus exports. c. minus imports. d. minus exports. If the dollar rises in value compared to other currencies, what will happen in the United States? a.an increase in aggregate demand b. an increase in aggregate supply c. a decreasein aggregate supply d. an increase in the U.S. price level When the dollar depreciates, the prices of imported inputs a. fall and aggregate supply shifts outward. b. fall and aggregate supply shifts inward. c. rise and aggregate supply shifts outward. d. rise and aggregate supply shifts inward.

20.

+

21.

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22. +

When the dollar appreciates, the prices of imported inputs a. fall and aggregatesupply shifts outward. b. fall and aggregate supply shifts inward. c. rise andaggregate supply shifts outward. d. rise and aggregate supply shifts inward. Themain input into the production of Starbuck coffee is imported coffee beans. If the s dollar depreciates, how will this affect the U.S. retail coffee market? a.

Input prices will fall and supply will decrease. b. Input prices will fall and supply will increase. c. Input prices will rise and supply will decrease. d. Input prices will rise and supply will increase.

23.

+

THE MACROECONOMIC EFFECTS OF EXCHANGE RATES

24.

+ 25.

A currency appreciation should a. reduce net exports and therefore increase aggregate demand. b. raise net exports and therefore decrease aggregate demand. c. reduce net exports and therefore decrease aggregate demand. d. raise net exportsand therefore increase aggregate demand. What are the economic effects of a currency depreciation? a. It will decrease aggregate demand and aggregate supply, sothat output will certainly fall, and prices may fall as well. b. It will increase aggregate demand and aggregate supply, so that output will certainly rise, and prices may rise as well. c. It will increase aggregate demand and decrease aggregate supply, so that prices will certainly rise and output may rise as well. d. It will decrease aggregate demand and increase aggregate supply, so that prices will certainly fall and output may fall as well. Following the economic crisis

in 1994-1995, the Mexican peso fell sharply in value. What will be the main economic effects in Mexico of such an exchange rate change? a. It will decrease aggregate demand and aggregate supply, so that output will certainly fall, and prices may fall as well. b. It will increase aggregate demand and aggregate supply,so that output will certainly rise, and prices may rise as well. c. It will increase aggregate demand and decrease aggregate supply, so that prices will certainly rise and output may rise as well. d. It will decrease aggregate demand and increase aggregate supply, so that prices will certainly fall and output may fallas well. The principal danger to Japan in 2001 when the yen was appreciating wasthat this would a. increase aggregate demand and make inflation worse. b. decrease aggregate demand and make the recession worse. c. decrease aggregate demandand make inflation worse. d. increase aggregate demand and make the recession worse.

+

26.

+

27. +


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28.

+

If U.S. interest rates rise while foreign interest rates remain unchanged, a. GDP will not change since the shift in aggregate supply cancels the positive effects on aggregate demand. b. the dollar will depreciate and thus reduce prices and

output. c. foreign capital will be attracted to the United States and the dollar will appreciate. d. net exports will increase and the economy will expand.

Figure 18-5

29.

+ 30.

Which of the graphs in Figure 18-5 are consistent with an appreciation of the U.S. dollar caused by an increase in U.S. interest rates? a. 1 b. 2 c. 3 d. 4 Which of the graphs in Figure 18-5 are consistent with a depreciation of the U.S. do

llar and an increase in net exports caused by a decrease in U.S. interest rates?a. 1 b. 2 c. 3 d. 4

+

FISCAL AND MONETARY POLICIES IN AN OPEN ECONOMY

31.

+ 32. +

A rise in the domestic interest rate leads to capital a. outflows and exchange rate appreciation. b. outflows and exchange rate depreciation. c. inflows and exc

hange rate depreciation. d. inflows and exchange rate appreciation. A currency appreciation a. reduces aggregate demand and increases aggregate supply. b. reduces aggregate demand and aggregate supply. c. increases aggregate demand and reduces aggregate supply. d. increases aggregate demand and aggregate supply.


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33.

+

Expansionary fiscal policy in an open economy a. leads to a balance of trade surplus. b. decreases America capital account surplus and the current account deficit by the s same amount. c. increases both America capital account surplus and cur

rent account deficit by equal s amounts. d. increases America capital account surplus more than it increases the current account s deficit. International trade tends to lower the value of the multiplier because a. imports fall as GDP increases. b. net exports fall as GDP increases. c. net exports tend to rise as GDP increases. d. exports fall as GDP increases. In an open economy, an increase in (G T) will a. decrease (X IM). b. increase (X IM). c. leave (X IM) unchanged. d. have an unpredictable effect on (X IM). An expansionary fiscal policy will lead toa. higher interest rates, an appreciated dollar, and reduced net exports. b. higher interest rates, an appreciated dollar, and increased net exports. c. reduced interest rates, an appreciated dollar, and reduced net exports. d. reduced interest rates, an appreciated dollar, and increased net exports. International capital flows in an open economy have the effect of a. increasing the power of fisc

al policy. b. reducing the power of fiscal policy. c. reducing the power of fiscal policy in an expansion, and increasing it in a contraction. d. increasing thepower of fiscal policy in an expansion, and reducing it in a contraction. If acountry tries to stimulate the economy with fiscal policy, the effects will be exchange rate a. depreciation, lower interest rates, and a small increase in aggregate demand. b. depreciation, higher interest rates, and a small decrease in aggregate demand. c. appreciation, lower interest rates, and a small increase in aggregate demand. d. appreciation, higher interest rates, and a small increase inaggregate demand. Why is fiscal policy less effective in an open economy than in a closed economy? a. Expansionary fiscal policy raises demand for imports, which reduces aggregate demand. b. Expansionary fiscal policy raises interest rates, which raises the value of the currency, and reduces aggregate demand. c. Expansionary fiscal policy raises the value of the currency, which reduces demand for

exports. d. Expansionary fiscal policy has all the above effects. Internationalcapital flows strengthen a. monetary policy and have no effect on fiscal policy. b. monetary policy but weaken fiscal policy. c. monetary and fiscal policy. d.fiscal policy but weaken monetary policy.

34. +

35. +

37. +

38. +

39.

+ 40.

+ 41. +


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42.

+ 43.

The sequence of events following a contractionary monetary policy would be higher interest rates followed by dollar a. depreciation, higher exports, and lower imports. b. depreciation, lower exports, and higher imports. c. appreciation, low

er exports, and higher imports. d. appreciation, higher exports, and lower imports. The dramatic rise in the dollar between 1981 and 1986 was the result of a(n)a. a tight monetary and a tight fiscal policy. b. an expansive monetary and anexpansive fiscal policy. c. an expansive monetary and a tight fiscal policy. d.a tight monetary and an expansive fiscal policy.

+


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Economics 101. Second Exam. Fall 2008 Section I: Multiple-Choice Questions (75 points) Each question has only one answer that is most appropriate. Choose the most appropriate answer and bubble it in in the scantron. Each question carries the same weight. There is no partial credit to an incorrect answer. 1. The incomeelasticity of demand for luxuries tends to be a. greater than 1. b. less than 1.c. equal to 1. d. equal to 0. Demand for a good would tend to be more inelasticthe a. fewer the available substitutes. b. longer the time period considered. c

. more the good is considered a luxury good. d. more narrowly defined the marketis.

A

2.

A

3.

Suppose the price of Twinkies is reduced from $1.50 to $1.25 and, as a result, t

he quantity of Twinkies demanded increases from 2,000 to 2,200. The price elasticity of demand for Twinkies in the given price range is approximately a. 2.00. b. 0.60. B c. 1.00. d. 1.64.


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The next four questions are based on the following diagram:

4.

According to the graph, the price elasticity of demand from point B to point A would be a. 1. b. 1.5. c. 1.33. C d. 2.5. According to the graph, the price elasticity of demand from point C to point B would be a. 0.5. b. 0.40. B c. 1.33. d.

1.45. According to the graph, if the price decreased from $18 to $12, what wouldhappen to total revenue? a. Total revenue would increase by $1200 and demand would be elastic. b. Total revenue would increase by $1800 and demand would be elastic. B c. Total revenue would decrease by $1200 and demand would be inelastic.d. Total revenue would decrease by $800 and demand would be inelastic. A producer is currently charging a price of $12. If he wants to raise the price a. his revenue will decrease, since he is operating in the low-elasticity zone. b. his revenue will increase, since he is operation in the low-elasticity zone. c. his revenue will decrease, since he is operating in the high-elasticity zone. d. his revenue will increase, since he is operating in the high-elasticity zone.

5.

6.

7.

C

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The next three questions are based on the following table: Income Quantity of Good X Purchased 2 5 Quantity of Good Y Purchased 20 10

$30,000 (old) $40,000 (new) 8.

According to the table, using the midpoint method, what is the income elasticityof good Y? a. 3.33 b. 2.33 B c. -1.50 d. 2.33 According to the table, Good X is a

. a luxury good. b. an inferior good. c. underpriced. d. a normal good. A

9.

10. According to the table, Good Y is a. not related to income. b. an inferior good. c. price inelastic. d. a normal good.

B

11. A minimum wage imposed above a markets equilibrium wage will result in the quantity a. supplied of labor being greater than the quantity demanded of labor and unemployment will occur. A b. demanded of labor being greater than the quantit

y supplied of labor and unemployment will occur. c. supplied of labor being greater than the quantity demanded of labor and a shortage of workers will occur. d.demanded of labor being greater than the quantity supplied of labor and a shortage of workers will occur.

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The next three questions are based on the diagram below:

12. According to the graph, the amount of the TOTAL tax imposed in this market is a. $50.00. b. $75.00. c. $125.00. d. $150.00.

D

13. According to the graph, the amount of the TOTAL tax that buyers and sellerswould pay would be, respectively, a. $100.00 and $100.00. b. $100.00 and $50.00.B c. $50.00 and $200.00. d. $100.00 and $300.00. 14. In the above diagram, before the tax is imposed, pick the most appropriate answer from below: a. A price ceiling of $7 is binding in this market and that price will create shortage. b. Aprice floor of $7 is binding in this market and that price will create excess in the market. B c. A price ceiling of $7 is binding in this market and that price will create excess. d. A price floor of $7 is binding in this market and thatprice will create shortage in the market. 15. Which of the following is NOT a result of government imposed rent controls? a. fewer new apartments offered for rent b. less maintenance provided by landlords c. bribery d. higher quality housing

D

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Following is Andys maximum valuation of burgers: First burger: $6.00 Second burger: Third burger: $2.00 Fourth burger: $4.00 $0.00

Following is Barbaras minimum cost of producing burgers: First burger: $1.00 Second burger: Third burger: $3.50 Fourth burger: $2.00 $5.00

Based on the above information, answer the following five questions: 16. If the

price of a burger is set at $3.00, the consumer surplus that Andy will have is a. $1.00 b. $2.00 c. $3.00 d. $4.00 D 17. If the price of the burger is set at $2.00, the producer surplus that Barbara will have is a. $1.00 A b. $2.00 c. $3.00d. $4.00

18. The market-clearing number of burgers and the market-clearing price per burger in this market are, respectively, a. Three burgers at the price of $4.00. b.Four burgers at the price of $2.00. C c. Two burgers at the price of $3.00. d. Three burgers at the price of $3.00. 19. At the market clearing price the TOTAL surplus would be a. $5.00 b. $6.00 c. $7.00 d. $8.00

C

20. Barbara has a strong lobby in the government circle and manages to get a price floor established at $4.00. Pick the most appropriate answers from the following: a. The price floor is not binding and the market clearing price and quantity still prevail. b. The price floor is binding but Andy will demand 3 burgers, while Barbara will produce 2 burgers, and so there will be shortage of burgers inthe market. c. The price floor is binding but Andy will demand 2 burgers, whileBarbara will produce 3 burgers, and so there will be excess burgers in the market. C d. The price floor is binding but Andy will demand 3 burgers, while Barbara will produce 3 burgers, and so there will be no shortage or excess of burgersin the market.

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21. When dealing with externalities, government a. can correct the market failure only in the case of positive externalities. b. can correct the market failureonly in the case of negative externalities. c. can correct the market failure inboth the positive and negative externalities by inducing market participants tointernalize the externality. C d. cannot correct for externalities due to consumer rights laws. 22. Private markets fail to reach a socially optimal level whennegative externalities are present because. a. private benefit equals social be

nefit at the private market solution. b. private costs exceed private benefits at the private market solution. c. social cost exceeds private cost at the private market solution. C d. private costs exceed social cost at the private market solution. 23. According to the Coase theorem, private parties can solve the problem of externalities if A a. the cost of bargaining is small. b. the initial distribution of rights favors the person being adversely affected by the externality. c. the number of parties involved is sufficiently large. d. All of the above are correct. 24. When goods are not excludable a. the good will be produced as aprivate good but not as a public good. b. the good will not be produced since noone values it. c. the free-rider problem prevents the private market from supplying them. d. everyone can have all they want and the good will have a zero price. 25. Basic research is a public good because it a. is difficult to exclude tho

se who might benefit from it. b. is used to develop public goods. c. always benefits developed countries at the expense of developing countries. d. is a rival good.

C

A

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Section II: Short Answer Type Questions (25 points)

1. Consider the market for gasoline. Suppose crude oil, which is an input to gasoline, suddenly becomes expensive. a. Draw a diagram showing the gasoline marketsupply and demand before crude oil price rise. b. Suppose crude oil price rises. Which curve will shift as a result of that? In the same diagram show the effect by shifting the appropriate curve after the crude oil price rise. c. Show the

appropriate triangle representing consumer surplus before tax by labeling the three corners of the triangle, for example the triangle ABC. d.Show the appropriate triangle representing consumer surplus after tax by labeling the three cornersof the triangle, for example the triangle ABC. e. Show the appropriate trianglerepresenting producer surplus before tax by labeling the three corners of the triangle, for example the triangle ABC. f. Show the appropriate triangle representing producer surplus after tax by labeling the three corners of the triangle, for example the triangle ABC.

ANSWER NEXT PAGE

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$

S-after S-before

A P- after P-before B C G D E F

D Q Q-after Q-before

CS (before) = A + B + D + E CS (after) = A PS (before) = C + F + G PS (after) =B + C

8


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U NIVERSITY OF E SSEX

D EPARTMENT OF E CONOMICS

EC372 Economics of Bond and Derivatives Markets Multiple Choice TestMay 2006

Time allowed: 40 minutes. There are TWENTY questions, ALL of which should be answered. DO NOT START UNTIL YOU ARE INSTRUCTED TO BEGIN. Enter your registration number on the answer sheet. For each question, mark the most appropriate option,A, B, C, or D, on the answer sheet. Calculators (hand held, containing no textual information) are permitted. Only the answer sheet is to be returned. You should keep the question paper (this document). The purpose of the test is solely formative for students to gauge their understanding of the course material. The mark will carry no weight in your overall result for the course.


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5. It is observed that the yield curve is positively sloped. A. The observationimplies that interest rates will increase over the next few years. B. The observation implies that interest rates will decrease over the next few years. C. Theobservation is compatible with the pure expectations hypothesis of the term structure. D. The observation is incompatible with the liquidity preference (risk premium) theory of the term structure. 6. A forward contract is made for the delivery of a commodity 10 months from today at a forward price of $200 per unit of t

he commodity. Futures contracts for the same commodity and delivery date are also available. A. The purchaser of the forward contract pays the forward price, $200, immediately but must wait for 10 months to receive the commodity. B. The holder of a forward contract always has the right to exchange it for an identical futures contract at any time before the delivery date. C. The seller of the forward contract has an obligation to deliver the commodity 10 months from today in return for the spot (cash) price on the delivery date (i.e., a price that may differ from $200). D. The seller of the forward contract has an obligation to deliver the commodity 10 months from today in return for $200 per unit, payable on delivery. 7. The main difference between forward and futures contracts is: A. Futures contracts are traded every day (i.e., frequently) in organised exchanges prior to the delivery date specied in the contract. B. For a futures contract there

is never any obligation to deliver, or to receive, the underlying asset. C. Forward contracts always have delivery dates further from the present than futures contracts. D. The underlying assets in forward contracts are always physical commodities (e.g., wheat, oil or silver), while for futures contracts the underlyingassets could be anything (e.g. weather indices or notional bank deposits).

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8. The process of marking to market in futures markets: A. Refers to the mechanismby which gains (or losses) resulting from changes in futures prices are credited (or debited) to the investors margin account B. Implies that the futures pricecan change (increase or decrease) at most once each trading day. C. Refers to the gain or loss that an investor makes on the day that a futures position is offset (i.e. closed-out), rather than being kept open to the next trading day (or longer). D. Refers to changes in the spot price of the underlying asset that occur

in response to changes in the futures contract price. 9. At the end of tradingon 9th February 2006 the open interest equalled 65889 contracts for Wheat futures with delivery in July 2006 (at the Chicago Board of Trade). A. The open interest refers to the volume of wheat stocks held in warehouses on 9th February intended for delivery in July. B. The open interest refers to markets expectation of the volume of wheat stocks that will be held in warehouses immediately before delivery in July. C. As of 9th February, there were 65889 contracts in existence (i.e., outstanding) promising to deliver wheat in July 2006. D. During trading on9th February 65889 contracts were exchanged (i.e., purchased and sold) promisingto deliver wheat in July 2006. 10. Investor XYZ takes a short position in 20 futures contracts at a price of $500 per contract. A. If the futures contract price rises from $500 to $510 per contract, marking-tomarket increases by $200 the f

unds in the XYZs margin account. B. If XYZ holds the contracts until the deliverydate, XYZ will be required to take delivery of (i.e., receive) the underlying commodity (asset) in return for the spot (cash) price of the commodity at the delivery date. C. If XYZ offsets the position when the contract price has increasedto $530, XYZ will make a prot of $600 (ignoring transaction costs). D. If XYZ offsets the position when the contract price has fallen to $480, the result will be a gain of $400 (ignoring transaction costs).

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11. Investor NPQ takes a long position in 5 futures contracts at a price of $300per contract. The initial margin is $100 per contract, the maintenance margin is $80 per contract, and, if a margin call is made, the margin must be restored to its initial level. Assume that no interest is paid on margin account balances.A. An increase $10 in the contract price of will reduce the margin account balance by $50. B. If NPQ offsets the position when the contract price equals $260 per contract, the margin account will reect a loss of $200 (ignoring transaction c

osts). C. If NPQ offsets the position when the contract price equals $320 per contract, the margin account will reect a loss of $100 (ignoring transaction costs). D. Suppose that the margin account balance equals $440. An increase of $20 inthe contract price will trigger a margin call for $60. 12. Suppose that: (i) thespot price of wheat today is $10.00 per bushel, (ii) markets are frictionless,(iii) the interest factor for borrowing and lending over the next six months is1.10, and (iv) the convenience yield for holding wheat is zero. Arbitrage opportunities are absent. A. The forward price for wheat will be equal to $11.00 if wheat is available for storage at zero cost. B. The forward price for wheat will be less than $10.00 if wheat is available for storage at zero cost. C. The forward price for wheat will equal $10.90 if wheat is available for storage at $0.90 per bushel (payable upon delivery, in six months). D. The forward price for wheat

will equal $9.10 if wheat is available for storage at $0.90 per bushel (payableupon delivery, in six months). 13. The Exchange Delivery Settlement Price (EDSP) in futures markets. A. The EDSP is the price of the underlying asset used to settle each Exchange of Futures for Physicals (EFP) prior to (i.e., before) the delivery date for the futures contract. B. The EDSP is an average of the futuresprices calculated each trading day during the life of the futures contract (so that the EDSP normally changes from day to day). C. For each day during the lifeof a futures contract the EDSP is the price that is used when contracts are marked-to-market. D. The EDSP is the price of the asset underlying the futures contract as at the delivery date specied in the contract.

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14. An investor chooses a short-hedging strategy using a futures contract. A. The purpose of the strategy to prot from an expected increase in the futures pricebetween today and the date when the contract is sold (i.e., offset). B. The purpose of the strategy to prot from an expected decrease in the futures price between today and the date when the contract is purchased (i.e., offset). C. The investor seeks to reduce the uncertainty about the price at which an asset (e.g. a commodity or a security) is to be purchased at a later date. D. The investor seeks

to reduce the uncertainty about the price at which an asset (e.g. a commodity or a security) is to be sold at a later date. 15. Normal backwardation in futuresmarkets. A. Normal backwardation refers to the prediction that the futures price, f (t, T ), tends to be lower than E[p(T ), t )] (todays expectation of the spot price that will be observed on the futures delivery date). B. Normal backwardation refers to the prediction that futures prices usually fall as the delivery date approaches, so that f (T, T ) f (t, T ) for t < T . C. A normal backwardation is said to occur when todays futures price exceeds todays spot price for the asset underlying the futures contract i.e., f (t, T ) > p(t). D. Normal backwardation is a type of market manipulation in which an investor (or small group of investors) conspire to purchase a large proportion of all the futures contracts corresponding to a particular delivery date. 16. A European call option on Intel ord

inary shares with exercise price $10.50 per share expires on 30 June: A. Permitsthe option writer to sell Intel shares for $10.50 on 30 June. B. Requires the option writer to buy Intel shares for $10.50 any time before or on 30 June, at the discretion of the option holder. C. Permits the option holder to buy Intel shares for $10.50 on 30 June. D. Permits the option holder to sell Intel shares for$10.50 on 30 June. 17. An American put option on Intel ordinary shares with exercise price $10.50 per share expires on 30 June: A. Permits the option holder holder to sell Intel shares for $10.50 any time before or on 30 June. B. Permits the option writer holder to sell Intel shares for $10.50 on 30 June. C. Requiresthe option writer to sell Intel shares for $10.50 on 30 June, at the discretionof the option holder. D. Requires the option holder to buy Intel shares for $10.50 any time before or on 30 June, at the discretion of the option writer. 5


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18. Both American and European style call options are traded in frictionless markets with the same expiry date for the same underlying asset. In the absence ofarbitrage opportunities: A. The option premium for the American options always exceeds the premium for the European options. B. The option premium for the American options will be greater than or equal to the premium for the European options. C. The option premium for the American options will be less than or equal tothe premium for the European options. D. The option premium for the American opt

ions will be lower than the premium for the European options. 19. Todays price for a share in XYZ Inc. equals $14.00. Todays premium is $3.00 for an American calloption on XYZ shares expiring three months from now, with exercise price $10.00. Assume that markets are frictionless. A. There is an arbitrage opportunity: buy one option and exercise it immediately. B. There is an arbitrage opportunity:buy one option and exercise it at the expiry date. C. There is an arbitrage opportunity: write one option and exercise it at the expiry date. D. Abitrage opportunities are absent, because the price of XYZ shares may fall below $10.00 between today and the expiry date. 20. At the expiry date for a European put option onABC shares with exercise price $16.00, the price of a share in ABC equals $12.00. Assume that markets are frictionless. A. An investor who had purchased the option when the premium was $6.00 would allow it to die, unexercised, because ther

e is a net loss of $2.00 per option. B. An investor who had purchased the optionwhen the premium was $3.00 would nd it worthwhile to exercise the option. C. Aninvestor who had written the option when the premium was $6.00 makes a gain of $10.00 per option. D. The option will be allowed to die, unexercised, no matter what premium had been before the expiry date. *****

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BUSINESS ECONOMICS CEC2 532-751 & 761PRACTICE MACROECONOMICS MULTIPLE CHOICE QUESTIONS

Warning: These questions have been posted to give you an opportunity to practicewith the multiple choice format of questioning and to help you review and understand more deeply the material taught. In no way should you assume that the level of difficulty of the multiple- choice questions shown here is the same as that

of the questions to be given in the exam.

1. Expansionary monetary policy (a) tends to lead to an appreciation of a nation

s currency. (b) usually has no effect on a currency

s exchange value. (c) tendsto lead to a depreciation of the currencies of other nations. (d) tends to leadto a depreciation of a nation

s currency. 2. If the number of people classifiedas unemployed is 20,000 and the number of people classified as employed is 230,000, what is the unemployment rate? (a) 8% (b) 8.7% (c) 9.2% (d) 11.5% 3. It isoften true that as the economy begins to recover from a recession the unemployment rate rises. Which of the following statements would be the best explanation for this? (a) The unemployment rate would rise because as the economy initially recovers from a recession the demand for goods and services falls, so the demand

for workers falls. (b) As the economy begins to recover from a recession, workers who were previously discouraged about their chances of finding a job begin tolook for work again. (c) The unemployment rate seems to rise as the economy begins to recover from a recession because of errors in the way the data are collected. (d) As the economy initially recovers from a recession, firms do not immediately increase the number of workers they hire. Firms wait to hire more individuals until they are convinced that the recovery is strong. 4. If an individual whocannot find a job because his or her job skills have become obsolete this


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is an example of (a) frictional unemployment. (b) structural unemployment. (c) cyclical unemployment. (d) seasonal unemployment. 5. The natural rate of unemployment is generally thought of as the (a) ratio of the frictional unemployment rate to the cyclical unemployment rate. (b) sum of structural unemployment and cyclical unemployment. (c) sum of frictional unemployment and cyclical unemployment.(d) sum of frictional unemployment and structural unemployment. 6. Firms reactto unplanned increases in inventories by (a) reducing output. (b) increasing out

put. (c) increasing planned investment. (d) increasing consumption. 7. The ratioof the change in the equilibrium level of income to a change in some autonomousincrease in spending is the (a) elasticity coefficient. (b) multiplier. (c) automatic stabilizer. (d) marginal propensity of the autonomous variable. 8. Bankscan create money (a) only by illegally printing additional dollar bills. (b) bypaying interest to their depositors. (c) by making loans that result in additional deposits. (d) by offering financial services, such as stick market brokerage.

9. A bank has excess reserves to lend but is unable to find anyone to borrow themoney. This


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will aid the Bank of Canada in fighting inflation because (a) as the money supply is decreased, the interest rate will increase, and the exchange rate will rise, causing Canadian exports to fall and Canadian imports to rise. (b) as the money supply is decreased, the interest rate will increase, and the exchange rate will rise, causing Canadian exports to rise and Canadian imports to fall. (c) as the money supply is decreased, the interest rate will increase, and the exchangerate will fall, causing Canadian exports to fall and Canadian imports to rise. (

d) as the money supply is decreased, the interest rate will increase, and the exchange rate will fall, causing Canadian exports to rise and Canadian imports tofall. 15. When economists refer to "tight" monetary policy, they mean that the Bank of Canada is taking actions that will (a) increase the demand for money. (b)decrease the demand for money (c) expand the supply of money (d) contract the supply of money 16. An increase in total production (real GDP) causes the demandfor money to ___________ and the interest rate to _________. (a) increase; increase (b) increase; decrease (c) decrease; decrease (d) decrease; increase 17. Which of the following actions is an example of expansionary fiscal policy? (a) a decrease in welfare payments (b) a purchase of government securities in the openmarket (c) a decrease in the Bank rate (d) a decrease in the corporate profits tax rates 18. The main cause of cyclical unemployment is that (a) firms engage in

race, gender and sex discrimination in their hiring practices. (b) some individuals do not have marketable job skills. (c) the level of overall economic activity fluctuates. (d) workers often voluntarily quit a job to look for a better job. 19. The aggregate demand (AE) curve would shift down if


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(a) government spending were increased. (b) taxes were increased. (c) the moneysupply were increased. (d) the interest rate decreased. 20. As the economy nearsfull capacity, the short-run aggregate supply curve (a) becomes flatter. (b) becomes steeper. (c) shifts to the right. (d) shifts to the left. 21. If the economy is operating at potential GDP, an increase in the money supply will lead to (a) stagflation. (b) structural inflation. (c) demand-side inflation. (d) supply-side inflation. 22. The sale of government securities by the Bank of Canada is p

redicted to a. decrease reserves of the chartered banks, and eventually lead toan expansion of the money supply. b. decrease reserves of the chartered banks, and eventually cause a contraction of the money supply. c. increase reserves of the chartered banks, and eventually cause a contraction of the money supply. d. increase reserves of the chartered banks, and eventually cause an expansion of the money supply. e. none of the above. 23. To lower interest rates, the Bank of Canada could a. buy securities. b. decrease the chartered banks

reserves. c. decrease the money supply. d. raise the treasury bill rate. e. raise the reserve requirement. 24. Suppose a Canadian firm imports $1,000 worth of bananas and sellsthem for $2,000. The


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effect on GDP would be a. to decrease the value of GDP by $3,000. b. to increasethe value of GDP by $3,000. c. to increase the value of GDP by $2,000. d. to increase the value of GDP by $1,000. e. no effect on GDP since the bananas were produced outside Canada. 25. An increase in the MPS will cause, other factors remaining constant: (a) (b) (c) (d) a parallel shift up in the AE-function and a parallel shift up in the L-function; a rotational shift up in the AE-function and arotational shift up in the L-function; a parallel shift down in the AE-function

and a rotational shift up in the L-function; a rotational shift down in the AE-function and a rotational shift up in the L-function; (e) a rotational shift down in the AS-function and a rotational shift up in the L-function.

ANSERS TO QUESTIONS:1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. d a b b d a b c a b b c d a d a d c b b c b a d d


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1Chapter 1. 1. A furniture maker currently produces 100 tables per week and sellsthem for a profit. She is considering expanding her operation in order to makemore tables. Should she expand? a. Yes, because making tables is profitable. b.No, because she may not be able to sell the additional tables. c. It depends onthe marginal cost of producing more tables and the marginal revenue she will earn from selling more tables. d. It depends on the average cost of producing more

tables and the average revenue she will earn from selling more tables. 2. The opportunity cost of an item is a. the number of hours needed to earn money to buythe item. b. what you give up to get that item. c. usually less than the dollarvalue of the item. d. the dollar value of the item. 3. Russell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is a.the improvement in his grades from studying for the hour. b. the improvement inhis grades from studying minus the enjoyment of playing tennis. c. the enjoymentand exercise he would have received had he played tennis. d. zero. Since Russell chose to study rather than to play tennis, the value of studying must have been greater than the value of playing tennis. 4. A rational decisionmaker a. ignores marginal changes and focuses instead on the big picture. b. ignores the likelyeffects of government policies when he or she makes choices. c. takes an action

only if the marginal benefit of that action exceeds the marginal cost of that action. d. takes an action only if the combined benefits of that action and previous actions exceed the combined costs of that action and previous actions. 5. Teresa eats three oranges during a particular day. The marginal benefit she enjoysfrom eating the third orange a. can be thought of as the total benefit Teresa enjoys by eating three oranges minus the total benefit she would have enjoyed by eating just the first two oranges. b. determines Teresas willingness to pay for the first, second, and third oranges. c. does not depend on how many oranges Teresa has already eaten. d. All of the above are correct.


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26. People are willing to pay more for a diamond than for a bottle of water because a. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water. b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water. c. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices. d. water prices are held artific

ially low by governments, since water is necessary for life. 7. The principle that "trade can make everyone better off" applies to interactions and trade between a. families. b. states within the United States. c. nations. d. All of the above are correct. 8. Which of the following statements does not apply to a marketeconomy? a. Firms decide whom to hire and what to produce. b. No one is lookingout for the economic well-being of society as a whole. c. Households decide which firms to work for and what to buy with their incomes. d. Government policies are the primary forces that guide the decisions of firms and households. 9. The "invisible hand" directs economic activity through a. advertising. b. prices. c.central planning. d. government regulations. 10. The basic principles of economics suggest that a. markets are seldom, if ever, a good way to organize economicactivity. b. government should become involved in markets when trade between cou

ntries is involved. c. government should become involved in markets when those markets fail to produce efficient or equitable outcomes. d. All of the above arecorrect.

ANSWERS: CBCCA BDDBC


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3Chapter 2. 1. An economic theory about international trade that is based on theassumption that there are only two countries and two goods a. can be useful in helping economists understand the complex world of international trade involvingmany countries and many goods. b. is useless, since the real world has many countries trading many goods. c. can be useful only in situations involving two countries and two goods. d. can be useful in the classroom, but is useless in the re

al world. 2. A model can be accurately described as a a. theoretical abstractionwith very little value. b. device that is useful only to the persons who created it. c. realistic and carefully constructed theory. d. simplification of reality. 3. The two loops in the circular-flow diagram represent a. (i) the flow of goods and (ii) the flow of services. b. (i) the flow of dollars and (ii) other financial flows. c. (i) inputs into production processes and (ii) outputs from production processes. d. (i) the flows of inputs and outputs and (ii) the flow of dollars. 4. In the circular-flow diagram, a. factors of production flow from government to firms. b. goods and services flow from households to firms. c. income paid to the factors of production flows from firms to households. d. spending ongoods and services flows from firms to households. 5. If an economy is producingefficiently, then a. there is no way to produce more of one good without produc

ing less of another good. b. it is possible to produce more of both goods without increasing the quantities of inputs that are being used. c. it is possible toproduce more of one good without producing less of the other. d. it is not possible to produce more of any good at any cost. 6. The bowed-out shape of the production possibilities frontier can be explained by the fact that a. scarcity is afact of life. b. economic growth is always occurring. c. the opportunity cost ofone good in terms of the other depends on how much of each good the economy isproducing. d. an assumption that is made in constructing a production possibilities frontier is that tradeoffs are unimportant.


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4

7.

1 ) If the economy moves from point A to point D, the opportunity cost is a. 10toasters. b. 20 toasters. c. 30 toasters. d. 30 toothbrushes. 2) The opportunitycost of obtaining 15 additional toasters by moving from point D to point C is a

. 10 toothbrushes. b. 20 toothbrushes. c. 30 toothbrushes. d. none of the above;the economy cannot move from point D to point C. 8. Which of the following would be considered a topic of study in macroeconomics? a. the effect of agricultural price support programs on the cotton industry b. the effect on U.S. steel producers of an import quota imposed on foreign steel c. the effect of an increasinginflation rate on national living standards d. the effect of an increase in theprice of imported coffee beans on the U.S. coffee industry 9. Which of the following is an example of a positive statement? a. Prices rise when the governmentprints too much money. b. If welfare payments increase, the world will be a better place. c. Inflation is more harmful to the economy than is unemployment. d. When public policies are evaluated, the benefits to the economy of improved equity should be considered more important than the costs of reduced efficiency.

ANSWERS: ADDCA C(BD)CA


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5Chapter 4. 1. The negative relationship between price and quantity demanded a. applies to most goods in the economy. b. is represented by a downward-sloping demand curve. c. is referred to as the law of demand. d. All of the above are correct. 2. Which of the following would not be a determinant of the demand for a particular good? a. prices of related goods b. income c. tastes d. the prices of the inputs used to produce the good 3. If a good is normal, then an increase in in

come will result in a. an increase in the demand for the good. b. a decrease inthe demand for the good. c. a movement down and to the right along the demand curve for the good. d. a movement up and to the left along the demand curve for the good. 4. Currently you purchase 6 packages of hot dogs a month. You will graduate from college in December and you will start a new job in January. You have no plans to purchase hot dogs in January. For you, hot dogs are a. a substitute good. b. a normal good. c. an inferior good. d. a law-of-demand good. 5. Supposeyou like to make, from scratch, pies filled with banana cream and vanilla pudding. You notice that the price of bananas has increased. How would this price increase affect your demand for vanilla pudding? a. It would decrease. b. It would increase. c. It would be unaffected. d. There is insufficient information given to answer the question. 6. What will happen in the rice market if buyers are expe

cting higher rice prices in the near future? a. The demand for rice will increase. b. The demand for rice will decrease. c. The demand for rice will be unaffected. d. The supply of rice will increase.


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67. Which of the following events would cause a movement upward and to the rightalong the supply curve for tomatoes? a. The number of sellers of tomatoes increases. b. There is an advance in technology that reduces the cost of producing tomatoes. c. The price of fertilizer decreases, and fertilizer is an input in the production of tomatoes. d. The price of tomatoes rises. 8. Suppose there is an increase in steel prices. We would expect the supply curve for steel barrels a. to

shift rightward. b. to shift leftward. c. to become flatter. d. to remain unchanged. 9. When the price of a good is higher than the equilibrium price, a. a shortage will exist. b. buyers desire to purchase more than is produced. c. sellersdesire to produce and sell more than buyers wish to purchase. d. quantity demanded exceeds quantity supplied. 10. Good X and good Y are substitutes. If the price of good Y increases, then the a. demand for good X will decrease. b. market price of good X will decrease. c. demand for good X will increase. d. quantity demanded of good X will increase. 11. Beef is a normal good. You observe that boththe equilibrium price and quantity of beef have fallen over time. Which of thefollowing explanations would be most consistent with this observation? a. Consumers have experienced an increase in income and beef-production technology has improved. b. The price of chicken has risen and the price of steak sauce has falle

n. c. New medical evidence has been released that indicates a negative correlation between a persons beef consumption and his or her longevity. d. The demand curve for beef must be positively sloped. 12. Which of the following events would cause the price of oranges to fall? a. There is a shortage of oranges. b. An article is published in which it is claimed that tangerines cause a serious disease,and oranges and tangerines are substitutes. c. The price of land throughout Florida decreases, and Florida produces a significant proportion of the nations oranges. d. All of the above are correct. ANSWERS: DDACA ADBCC CC


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7Chapter 5 1. For a good that is a necessity, a. quantity demanded tends to respond substantially to a change in price. b. demand tends to be inelastic. c. the law of demand often does not apply. d. All of the above are correct. 2. If the price elasticity of demand for a good is 1.65, then a 3 percent decrease in priceresults in a a. 0.55 percent increase in the quantity demanded. b. 1.82 percentincrease in the quantity demanded. c. 4.95 percent increase in the quantity dema

nded. d. 5.55 percent increase in the quantity demanded. 3. When the price of agood is $5, the quantity demanded is 100 units per month; when the price is $7,the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about a. 0.22. b. 0.67. c. 1.33. d. 1.50. 4. Demand isinelastic if elasticity is a. less than 1. b. equal to 1. c. greater than 1. d.equal to 0. 5. The flatter the demand curve through a given point, the a. greater the price elasticity of demand at that point. b. smaller the price elasticityof demand at that point. c. closer the price elasticity of demand will be to the slope of the curve. d. greater the absolute value of the change in total revenue when there is a movement from that point upward and to the left along the demand curve. 6. In the case of perfectly inelastic demand, a. the change in quantity demanded equals the change in price. b. the percentage change in quantity dem

anded equals the percentage change in price. c. infinitely-large changes in quantity demanded result from very small changes in the price. d. quantity demandedstays the same whenever price changes. 7. Suppose the point (Q = 2,000, P = $60)is the midpoint on a certain downward-sloping, linear demand curve. Then


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8a. an increase in price from $40 to $42 will increase total revenue. b. a decrease in price from $61 to $59 will leave total revenue unchanged. c. the maximum value of total revenue is $120,000. d. All of the above are correct. 8. If the price elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of tuna will decrease the quantity demanded of tuna by a. 1.05% and tuna sellers

total revenue will increase as a result. b. 1.05% and tuna sellers

total revenue

will decrease as a result. c. 2.14% and tuna sellers

total revenue will increase as a result. d. 2.14% and tuna sellers

total revenue will decrease as a result. 9. If a 6 percent increase in income results in a 10 percent increase in thequantity demanded of pizza, then the income elasticity of demand for pizza is a.negative and therefore pizza is an normal good. b. negative and therefore pizzais a inferior good. c. positive and therefore pizza is an inferior good. d. positive and therefore pizza is a normal good. 10. Which of the following expressions represents a cross-price elasticity of demand? a. percentage change in quantity demanded of apples divided by percentage change in quantity supplied of apples b. percentage change in quantity demanded of apples divided by percentage change in price of pears c. percentage change in price of apples divided by percentage change in quantity demanded of apples d. percentage change in quantity demand

ed of apples divided by percentage change in income

ANSWERS: BCBAA DDADB


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