EC340 Final Exam

Study 20 from exam 2

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Study Qs 7-10, 12, 15, 16, 27-31, 37,46 from exam 1

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Consider a country that imports aluminum, and that the elasticity of export supply from the rest of the world is 4. What is the size of the importing country's optimal tariff?

1/4

Suppose that the South Korean company Samsung has a monopoly on foldable cell phones. The Korean demand for foldable phones is 𝑃 = 800 −𝑄/2 where 𝑃 and 𝑄 are the price and quantity. Marginal cost is 400 + 𝑄. How many foldable phones will Samsung sell in South Korea if there is no trade?

200

Based on uncovered interest parity, what would we expect to happen to the value of the dollar relative to the euro if the U.S. interest rate is 9% and the Eurozone interest rate is 5%? We would expect the dollar to depreciate by

4%

What is described by the monetary approach to exchange rates?

A long-run relationship between money, prices, and exchange rates

Which of the following would cause a country's aggregate demand curve to shift upward?

A real depreciation of its currency.

What is the "zero lower bound?"

A reference to the fact that the interest rate cannot be negative.

Which of the following is NOT one of the convergence criteria that countries needed to satisfy to join the eurozone?

Four consecutive years of positive GDP growth.

Which three markets are represented in the IS-LM-FX model?

Goods, money, Foreign Exchange

Which of the following examples cited in the text was the most successful case of infant industry protection?

Harley davidson motor cycles

Suppose that Home has 20% of the world's capital, 10% of the world's skilled labor, and 50% of the world's unskilled labor and produces 40% of the world's GDP. What does this information suggest?

Home is ONLY abundant in unskilled labor

Under which set of conditions are the benefits of sharing a common currency likely to outweigh the costs?

When business cycles between the countries are positively correlated (symmetric) with each other.

To make a correct decision about limiting imports on behalf of an infant industry, a government should look at

a cost-benefit analysis measuring the present value of the likely benefits from lower production costs compared with the cost to society of higher prices in the present.

Which of the following is NOT possible in the Ricardian model of trade with two goods?

a country has a comparative advantage in both goods

The decision to form a currency union is similar to the decision to peg; however, the currency union requires

a higher level of commitment, and therefore requires a higher net benefit

The costs identified with opening trade are called

adjustment costs.

Holding all other things constant, which of the following changes would most likely worsen a country's current account deficit?

an increase in investment spending

What is a vehicle currency?

currency used to make it easier to trade other currencies

Under what conditions does an import tariff increase social welfare (relative to free trade) for a large country? A tariff increases social welfare if

deadweight loss is smaller than the terms of trade gain.

In the context of the Ricardian model, suppose that an economy has a comparative advantage in the production of milk and a comparative disadvantage in the production of cookies. What would happen to the maximum amounts of milk and cookies that the economy could produce if its labor force were to double?

e maximum amounts of both milk and cookies that could be produced each double.

In general, what are the two broad types of exchange rate systems?

fixed and floating

Since NAFTA was signed, Mexico saw the productivity of its firms

increase at a faster pace in its plants near the U.S. border compared with those farther from the border.

What does the term "twin deficits" mean in the context of international finance? This means the tendency for a country's current account balance to

increase when government saving increases.

When was the euro first introduced as a unit of account?

january 1, 1999

In the IS-LM-FX model, what causes investment spending on new plant and equipment to increase?

lower interest rate

What is the term used to describe banks' unwillingness to lend to a firm because they do not know with certainty that the firm will achieve lower costs and be profitable enough in the future to repay the loan?

market failure

The "most favored nation principle" means that member countries

must apply the same tariffs to all WTO member countries.

Which of the following will cause the IS curve to shift to the right?

reduction in taxes

Who was awarded the Nobel Prize based upon his research into conditions under which different countries should share a common currency?

robert mundell

According to the United States Constitution, who has the authority to regulate commerce with foreign nations?

the congress

Suppose that the U.S. and European money supplies both increase by 3%, U.S. real income increases by 2%, and there is no change in European real income. Based on our long run model of exchange rate determination, what happens to the value of the dollar relative to the euro?

the dollar appreciated by 2%

Which of the following is NOT an assumption of the long run model of exchange rate determination?

the forward exchange rate adjusts to satisfy the covered interest parity condition

Suppose that there are 50 firms in a monopolistically competitive industry in country A and 50 firms in the same monopolistically competitive industry in country B. If country A and country B engage in international trade, we expect that the total number of firms in this industry

will be more than 50, but less than 100.

Which of the following does not increase a country's foreign wealth?

Domestic borrowing from foreign banks.

Suppose that the foreign exchange market is currently in a long-run equilibrium with an exchange rate of $1 per euro and that the expected future exchange rate is also $1 per euro. Suppose that the U.S. interest rate is 3%. Which of the following would NOT happen if the U.S. were to permanently increase its money supply by 10%?

The expected return on euro-denominated assets will be higher than 3%

Which of the following would be true if the exchange rate between the home currency and foreign currency is fixed, and if capital can freely move between the two countries?

The home interest rate will equal the foreign interest rate.

What is covered interest parity?

It is the condition that prevents profitable arbitrage when exchange rate risk has been eliminated by use of the forward exchange market

What is purchasing power parity based upon?

Law of one price

France and Italy only trade with each other. Each produces wine and bread. The production of bread is relatively capital intensive, and the production of wine is relatively labor intensive. France is relatively abundant in capital, while Italy is relatively abundant in labor. According to the Stolper-Samuelson theorem, free trade between France and Italy should result in:

decreased real wages in France and increased real wages in Italy.

Which member of the European Union was given the right to "opt out" of the use of the euro?

denmark

Which round of the following is NOT a pillar of the World Trade Organization?

promotion of monetary stability

If the prices of goods in the U.S. increase, while prices in Japan and the nominal exchange rate between the yen and the U.S. dollar both remain the same, we say that the U.S. dollar has experienced a:

real appreciation

What treaty or agreement created the euro?

the maastricht treaty

Which country is currently negotiating its withdrawal from the European Union?

united kingdom

Which round of WTO negotiations resulted in the creation of the WTO?

uruguay

Suppose that labor is the only factor of production and that each worker can produce either 2 pounds of cheese or 4 loaves of bread. All workers are alike, and each can easily move between sectors. Moreover, suppose that the price of one pound of cheese is $2. What does the price of one loaf of bread have to be if both cheese and bread are produced in equilibrium?

$1

Suppose that Australia is an exporter of wool. In the absence of trade, the price of wool would be $20 per bushel and the quantity demanded (and supplied) would be 200 bushels. With trade, the price is $30 per bushel, the quantity supplied is 300 bushels, and the quantity demanded is 100 bushels. What is Australia's net welfare gain from trade?

$1,000

Which of the following is NOT an assumption of the monopolistic competition model of international trade?

The average cost of production falls as the number of firms in the industry increases.

What should a country consider when deciding to join a currency union?

The costs of abandoning its national currency versus the benefit of a using common currency.

What can be inferred about a country's net exports and current account if investment spending is larger than national saving?

The current account must be negative; net exports can be positive or negative.

Suppose that dollars purchase more goods and services in the United States than in France, once we convert the dollars into euros at the spot exchange rate. What would we say in this situation?

The dollar is overvalued relative to what would be expected from absolute purchasing power parity.

Suppose that all American liabilities to Europeans are measured in dollars, while all American holdings of European assets are measured in euros. What happens when the dollar depreciates relative to the euro?

The dollar value of U.S. liabilities to Europeans does not change, while the dollar value of American holding of European assets increases.

What are the effects of expansionary fiscal policy when a country's exchange rate is fixed?

The money supply increases, the interest rate does not change, and exports do not change.

In the model of increasing returns to scale and monopolistic competition, which of the following is NOT a likely outcome when two countries begin to trade?

The opening of export markets allows firms to earn higher long-run profits compared with autarky.

What happened to the quantity and quality of Japanese exports of cars to the United States as the result of a policy adopted by the Japanese government in the 1980s?

The quantity decreased while the quality increased.

The Heckscher-Ohlin model assumes that there are two countries, each of which produces two goods (say manufactures and agriculture) using two factors of production (say labor and capital). Which of the following is an additional assumption of the Heckscher-Ohlin model?

The ratio of the quantity of labor to the quantity of capital is different for each nation, resulting in different "endowments" of capital and labor.

Suppose that the U.S. and European interest rates are both 5% and that the euro is selling forward at a 2% discount. Which of the following is true?

The return on dollar-denominated assets is higher than the return on euro-denominated assets.

what is GDP Consumption Spending 60 Investment Spending 30 Government Spending 20 Taxes 10 Exports of Goods and Services 40 Imports of Goods and Services 50 Net Primary Income 25 Net Secondary Income 10

100

A country's GDP is $10 trillion; its exports are $1 trillion; and its imports are $3 trillion. What is its trade-to-GDP ratio (also known as its trade inex)?

20%

What is the balance of the current account? Consumption Spending 60 Investment Spending 30 Government Spending 20 Taxes 10 Exports of Goods and Services 40 Imports of Goods and Services 50 Net Primary Income 25 Net Secondary Income 10

25

Which assumption of the monopolistic competition model with increasing returns to scale implies that firms cannot collude to raise prices?

There are many firms in the industry.

Suppose that the South Korean company Samsung has a monopoly on foldable cell phones. The Korean demand for foldable phones is 𝑃 = 800 −𝑄/2 where 𝑃𝑃 and 𝑄 are the price and quantity. Marginal cost is 400 + 𝑄. Suppose that the market for foldable phones is perfectly competitive in the rest of the world and that South Koreans can purchase as many as they wish at the world price of $700. How many phones will Samsung sell in the South Korean market?

300

How much is national saving Consumption Spending 60 Investment Spending 30 Government Spending 20 Taxes 10 Exports of Goods and Services 40 Imports of Goods and Services 50 Net Primary Income 25 Net Secondary Income 10

55

How does a forward contract differ from a futures contract?

A futures contract specifies a standardized amount of currency, but a forward contract can be for any amount of currency

What does uncovered interest parity imply? a. The spot exchange rate equates the expected return on foreign deposits with the return on domestic deposits. b. It is not possible to arbitrage differences in interest rates to profitably borrow in one country while lending in the other. c. Uncovered interest parity implies both of the above are true. d. Uncovered interest parity does not imply any of the above.

C. Uncovered interest parity implies both of the above are true

Use CA to represent current account, KA to represent capital account, and FA to represent financial account. How are the three accounts related to each other?

CA + KA = FA

Assume that the exchange rate is allowed to float. What happens to different components of aggregate demand as an economy moves from point 1 (Top) to point 2 (Bottom) along the IS curve pictured to the right?

Consumption, investment, and exports all increase.

What is the main difference between a customs union and a free trade area?

Customs union member countries adopt common tariffs against nonmembers, whereas free-trade area member countries maintain their separate tariff structures against nonmembers.

Suppose that one U.S. dollar exchanges for 100 Japanese yen; and one U.S. dollar also exchanges for 2 European euros. Further assume that each euro exchanges for 50 Japanese yen. Which of the following is possible? a. An American starting with dollars could make a riskless profit by purchasing euros, then selling the euros for yen, then selling the yen for dollars. b. A German starting with euros could make a riskless profit by purchasing yen, then selling the yen for dollars, then selling the dollars for euros. c. Both of the above are possible. d. None of the above are possible.

D. None of the Above

Suppose that the U.S. money supply increases by 10% and stays at the higher level forever. Which of the following is true? a. The value of the dollar will appreciate by 10% in the long run. b. The U.S. interest rate will permanently fall. c. Both of the above are true. d. None of the above are true.

D. None of the above

In the model of monopolistic competition and international trade, how does the introduction of trade affect the market demand for any single firm's product?

Demand becomes more elastic, creating incentives for the firm to reduce its price.

If a country's currency buys fewer units of a foreign currency today compared with yesterday, we say that the value of its currency has:

Depreciated

Suppose that the index of intraindustry trade has a value of 100. Then it must be the case that

Exports and imports in that industry are both positive and are equal to each other.

What are the conditions under which a customs union increases social welfare among its member countries?

Trade creation is greater than trade diversion.

Assume that prices are fully flexible. What can we infer about the price level in an economy where real income and the money supply both grow by 5% per year?

Price level does not change

There are several conditions that justify limiting imports to ensure the survival of the "infant industry" and to justify government protection. Which of the following is a justification?

Protection allows a firm to reduce future costs and cause its average cost curve to shift downwards.

In the case of a floating exchange rate, what are the two ways that an increase in the money supply might stimulate the economy?

Reducing the interest rate and causing the currency to depreciate

Suppose that the dollar and the euro are the two currencies. What can we infer about the European money supply if we observe that the dollar appreciates in the short run, then returns to its original value in the long run? We can infer that the European money supply has

Temporarily increased

The Danish krone is pegged to the euro, whereas the British pound floats. What can be predicted about experiences in the two countries?

The U.K has the benefit of being able to pursue its own monetary policy regardless of interest rates on Eurozone deposits.

What is the Leontief Paradox?

The United States appears to export relatively labor-intensive goods, contradicting the HeckscherOhlin theorem and the presumption that the United States is labor scarce.

At the end of 2015, a country had $100 of external assets and $150 of external liabilities. During 2016, the country's capital account balance was zero, and it had a current account surplus of $20. Assuming no valuation changes during the year, what was the value of the country's net external wealth at the end of 2016?

-$30

Suppose that Boeing sells a fleet of airplanes to the German airline Lufthansa. The contract specifies payment in dollars, but payment is not due for 90 days. Both Lufthansa and Boeing expect that in 90 days the spot exchange rate will be $1.25 per euro. What will happen if the spot exchange rate in 90 days is actually $1.00 per euro?

Lufthansa will pay more euros than expected

What school of thought argued that exports enriched a country while imports made the country poorer?

Mercantilism

The Ricardian model focuses on how differences between countries in __________ influence international trade patterns.

Opportunity costs

Call the two factors of production skilled labor and unskilled labor. Call the two goods computers and pharmaceuticals. The number of units of each type of labor used to produce each of the two goods is given in the following table. Which good is intensive in the use of unskilled labor? Computers: Skilled labor per unit of output- 2 Unskilled labor per unit of output- 4 Pharmeceuticals: Skilled labor per unit of output- 1 Unskilled labor per unit of output- 3

Pharmaceuticals