Macroeconomics – Unit 6 Part 2

The College Board put out a sample test in 2008. These are all the questions from the sample test that deal with international econ issues.

Number your paper from 1 – 11You have 1 min 10 sec to answer each question.

1. If a certain combination of goods or services lies combination of goods or services lies outside the production possibilities curveoutside the production possibilities curve of an economy, which of the following is truetrue. (a) Effective trade barriers have reduced foreign imports into the economy. (b) New technology is being used in production. (c) Resources are not available to achieve that combination of goods/services. (d) resources are not being used efficiently to achieve that combination of goods or services. (e) Resources are being used at a more rapid rate then they were in the past. sugar_research_trade_barriers_2.doc

5 sec

2. An appreciation of the U.S. dollarappreciation of the U.S. dollar on the foreign exchange market could be caused by a decrease in which of the following? (a) U.S. interest rates (b) The U.S. consumer price index (c) Demand for the dollar by U.S. residents (d) Exports from the U.S. (e) The tariff on goods imported into the U.S.

Lower prices increase demand for U.S.Lower prices increase demand for U.S.exports and appreciate the dollar.exports and appreciate the dollar.

3. Before specialization & trade, the domestic opportunity cost of producing 1 ton of grain in Alpha and in Beta is 1 ton of grain in Alpha and in Beta is which of the followingwhich of the following?

AlphaAlpha BetaBeta

a. 1 ton of steel 1 ton of steel

b. 1 ton of steel 2 tons of steel

c. 2 tons of steel 1 ton of steel

d. 1 ton of steel 0.5 tons of steel

e. 0.33 tons of steel 1.5 tons of steel

Gra

in in

ton

s

Beta

20

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30 Alpha

Steel in tons

For questions 3-5For questions 3-5

4. The theory of comparative advantagecomparative advantage implies that AlphaAlpha would find it advantageous to a. export grain and import steel b. export steel and import grain c. export both grain and steel and import nothing d. import both grain and steel and export nothing e. trade 1 ton of grain for 0.5 ton of steel

Gra

in in

ton

s

Beta

20

10

30

30 Alpha

Steel in tons

For questions 3-5For questions 3-5

Gra

in in

ton

s

Beta

20

10

30

30 Alpha

Steel in tons

For questions 3-5For questions 3-5

5. At what real exchange ratio, also referred to as the terms terms of tradeof trade, between grain (G) and steel (S) would both Alpha and Beta find it mutually advantageous to specialize and trade. a. 1 G = 3.0 S b. 1 G = 1.5 S c. 1 G = 1.0 S d. 1 G = 0.5 S e. There is no real exchange ratio that would enable both countries to benefit, since Alpha has an absolute advantage in both goods.

6. If the real interest rate in the U.S. increasesreal interest rate in the U.S. increases relative to that of the rest of the world, capital should flow (a) into the U.S. and the dollar will depreciate (b) into the U.S. and the dollar will appreciate (c) out of the U.S. and the dollar will depreciate (d) out of the U.S. and the dollar will appreciate (e) out of the U.S. and the value of the dollar will not change

Higher U.S. interest rates attract moreHigher U.S. interest rates attract moredemand for our financial capital [CDsdemand for our financial capital [CDsand bonds] & financial flows of and bonds] & financial flows of foreign money will flow in to the U.S.foreign money will flow in to the U.S.to purchase these.to purchase these.

7. Assuming fixed exchange rates, if Mexico’s rate of inflation increasesinflation increases relative to its trading partners, Mexico’s imports and exportsimports and exports will most likely change in which of the following ways?

ImportsImports ExportsExportsa. Decrease Decreaseb. Decrease Increasec. Increase Decreased. Increase Increasee. No change No change

A higher price level in Mexico will decrease demand for their A higher price level in Mexico will decrease demand for their products, depreciating the peso. However, theincrease in the pesoproducts, depreciating the peso. However, theincrease in the peso currency price relative to other countries makes their goods currency price relative to other countries makes their goods cheaper so their importsincrease while their exports decrease cheaper so their importsincrease while their exports decrease as they have to pay more pesos .as they have to pay more pesos .

8. Assume that the world operates under a flexible exchange rate system. If the central bank of Mexico Mexico increases its MSincreases its MS but other countries do not change theirs, Mexico’s inflation rateMexico’s inflation rate and the international value of the Mexican pesovalue of the Mexican peso will most likely change in which of the following ways?

InternationalInternationalInflation RateInflation Rate Value of the PesoValue of the Pesoa. Increase Appreciateb. Increase Depreciatec. Increase No changed. Decrease Appreciatee. Decrease Depreciate

An increase in Mexico’s MS means “more pesosAn increase in Mexico’s MS means “more pesoschasing the same goods” as before, bringing onchasing the same goods” as before, bringing onhigher prices. This would decrease demand forhigher prices. This would decrease demand forMexico’s exports, depreciating the peso.Mexico’s exports, depreciating the peso.

9. Which of the following will cause the U.S. dollar to cause the U.S. dollar to depreciatedepreciate relative to the Euro? (a) An increase in household income in the U.S. (b) An increase in interest rates in the U.S. (c) An increase in household income in Europe (d) A decrease in interest rates in Europe (e) A decrease in price level in the U.S.

Increasing HH income in the U.S. results Increasing HH income in the U.S. results in more demand for foreign goods which in more demand for foreign goods which appreciates that currency and depreciatesappreciates that currency and depreciatesthe dollar.the dollar.

10. In an open economy, an increase in government increase in government budget deficitbudget deficit tends to cause the international value of a country’s currency and its trade deficit to change in which of the following ways?

Value of CurrencyValue of Currency Trade DeficitTrade Deficita. Appreciate Become smallerb. Appreciate Become largerc. Depreciate Become smallerd. Depreciate Become largere. Not change Not change

The budget deficit means the government is borrowing more, The budget deficit means the government is borrowing more, which pushes up the interest rate. The higher interest rate which pushes up the interest rate. The higher interest rate attracts more foreign investors, increasing demand for theattracts more foreign investors, increasing demand for thedollar and appreciating the dollar. The stronger dollar makes dollar and appreciating the dollar. The stronger dollar makes our exports more expensive and imports cheaper, therefore our exports more expensive and imports cheaper, therefore increasing the trade deficit.increasing the trade deficit.

11. If the exchange rate between the U.S. dollar and the British pound changed from $2 per one pound to $3 $2 per one pound to $3 per one poundper one pound, and domestic prices in both countries stayed the same, then the U.S. dollar would (a) depreciate, making U.S. imports from Britain more expensive (b) depreciate, making U.S. imports from Britain cheaper (c) appreciate, making U.S. imports from Britain more expensive (d) appreciate, making U.S. imports from Britain cheaper (e) purchase 3 times more British goods than before the change occurred