Final Exam Review

_____ is typically an important characteristic of a country with a low per capita income. a. More barriers to lending of money to the most productive uses for that money b. Fewer barriers to the shifting of capital into and out of the country c. More participation in functioning free-trade areas d. More opportunities for foreign direct investment to serve domestic buyers in the country

a. More barriers to lending of money to the most productive uses for that money

If the law of one price holds, then we would expect that if one dollar exchanges for four yen and if a computer costs $1,000 in the U.S., then in Japan, the computer should cost a. 4000 yen. b. 2000 yen. c. 3000 yen. d. 250 yen.

a. 4000 yen.

Which of the following was NOT one of the five convergence criteria established in the Maastricht Treaty? a. A country's current account deficit must be no more than 3 percent of its gross domestic product (GDP). b. A country's budget deficit can be no larger than 3 percent of its GDP. c. A country's exchange rate must be within the Exchange Rate Mechanism (ERM) bands and cannot be revalued or devalued within the two-year period leading up to monetary union. d. A country's gross government debt can be no larger than 60 percent of GDP.

a. A country's current account deficit must be no more than 3 percent of its gross domestic product (GDP).

_____ suggests that an assortment of tradable products will have the same cost in different countries if the cost is stated in the same currency. a. Absolute purchasing power parity b. International equilibrium c. The law of supply and demand d. Relative purchasing power parity

a. Absolute purchasing power parity

The fixed exchange rate system adopted by several European Union countries in 1979 was the a. Exchange Rate Mechanism. b. European Central Bank. c. Maastricht Treaty. d. European Monetary Union.

a. Exchange Rate Mechanism.

Identify the incorrect statement. a. If a country is likely to be buffeted mainly by internal monetary shocks, the country should choose a floating exchange rate. b. The effects of shocks under fixed exchange rates depend on whether interventions are sterilized. c. International capital-flow shocks are likely to be more disruptive under fixed exchange rates. d. International trade shocks can be countered by adopting a floating exchange rate that can shift the price competitiveness of the country's products.

a. If a country is likely to be buffeted mainly by internal monetary shocks, the country should choose a floating exchange rate.

The monetary approach would predict that a 23 percent increase in Country A's money supply should eventually lead to a(n) a. 23 percent decrease in the exchange rate value of that country's currency. b. 23 percent increase in the exchange rate value of that country's currency. c. 11.5 percent decrease in the exchange rate value of that country's currency. d. 11.5 percent increase in the exchange rate value of that country's currency.

a. 23 percent decrease in the exchange rate value of that country's currency.

Which of the following is the least accurate statement about purchasing power parity (PPP)? a. PPP predicts most accurately when looking at the largest measure of price levels such as all products in the gross domestic product (GDP).Correct b. Relative PPP predicts better over the long term rather than the short term. c. PPP predicts moderately well at the level of all traded goods. d. If absolute PPP is true at all times, then relative PPP is also true.

a. PPP predicts most accurately when looking at the largest measure of price levels such as all products in the gross domestic product (GDP).Correct

What was a primary cause of the Greek debt problem that arose in 2010? a. The amount of Greek government debt rose to a point where it was more than the gross domestic product (GDP) of Greece. b. Spending by the Greek government declined as government employees were fired or placed on unpaid leave. c. The value of the euro declined, making products made in Greece more costly. d. Greece lost the ability to borrow on the international market because interest rates in Greece declined dramatically.

a. The amount of Greek government debt rose to a point where it was more than the gross domestic product (GDP) of Greece.

Which of the following is NOT a standard used by the World Trade Organization (WTO) when it permits an environmental exception for national rules that limit imports of products produced using processes that harm the environment? a. The rules must connect directly to efforts to save a nearly extinct species. b. The country imposing the rules should be engaged in negotiations with other involved countries to establish a multilateral agreement to address the environmental issue. c. The rules must demonstrably assist in pursuing a legitimate environmental goal, and they must limit trade as little as possible. d. The rules must be applied equally to domestic producers and to all foreign exporting firms.

a. The rules must connect directly to efforts to save a nearly extinct species.

Why are capital markets in developing countries generally less efficient than capital markets in industrialized countries? a. There are more barriers to lending because property rights in those countries are not as well-defined as they are in industrialized countries. b. The currency valuation in developing countries is less stable than in industrialized countries. c. Interest rates in developing countries are subject to dramatic swings making the cost of borrowing uncertain. d. Foreign lenders are often subject to more regulation than domestic lenders, which leads to a lack of funds available for capital investment.

a. There are more barriers to lending because property rights in those countries are not as well-defined as they are in industrialized countries.

_____ is the act of exploiting pricing discrepancies among three different currencies in the foreign exchange market. a. Triangular arbitrage b. Foreign Exchange Swap c. Foreign exchange-rate "pegging" d. Risk arbitrage

a. Triangular arbitrage

The currency that is most often used to accomplish trading between two other currencies is the _____, which is often referred to as a vehicle currency. a. U.S. dollar b. Japanese yen c. British pound d. euro

a. U.S. dollar

The primary demand for money is a. as a medium of exchange. b. for a country's international reserves. c. in developing countries. d. for foreign direct investment.

a. as a medium of exchange.

The World Trade Organization (WTO) rules allow countries to restrict the importation of products that the country maintains cause harm to the environment or to the citizens of the country a. as long as the measures to limit environmental damage or damage to the country's citizens apply equally to both domestic and imported products. b. even if there are products produced within the country that cause similar damage to the environment or to citizens of the country. c. but only if a majority of people in the country want the import restrictions. d. but WTO rules allow the country whose imports are so restricted to impose anti-discriminatory sanctions against the country that imposes the import restrictions.

a. as long as the measures to limit environmental damage or damage to the country's citizens apply equally to both domestic and imported products.

The _____ exchange rates recognizes that, as demand for and supply of financial securities denominated in different currencies shift, the shifts place pressure on the exchange rates among the affected currencies. a. arbitrage approach to b. asset market approach to c. long term view of d. supply-side view of

a. asset market approach to

The expected overall return on an uncovered investment in a bond denominated in a foreign currency depends on the a. basic return on the bond and the expected gain or loss on currency exchanges. b. economic health of the company issuing the bond and the world economic situation. c. political stability of the nation where the bond is issued and the exchange rate. d. exchange rate and the world economic situation.

a. basic return on the bond and the expected gain or loss on currency exchanges.

Engel's law says that as per capita income rises a. demand for staples increases proportionately less than income is increasing. b. demand for staples increases at the same rate as income is increasing. c. exports increase. d. demand increases for all products.

a. demand for staples increases proportionately less than income is increasing.

Trade barriers related to agricultural products lead to a. excessive use of pesticides and fertilizers as protected farmers seek to increase production. b. a broader market for agricultural products and technological advances in agricultural practices. c. more efficient agricultural practices and reduced pollution effects. d. retaliation by other countries and a resulting increase in pollution from agricultural activities.

a. excessive use of pesticides and fertilizers as protected farmers seek to increase production.

If the exchange rate of a currency is determined by the foreign exchange market without the intervention of government, the exchange rate system is known as a(n) _____ exchange rate system. a. floating b. pegged c. fixed d. equilibrium

a. floating

Purchasing power parity predicts that when the U.S. inflation rate increases relative to the inflation rate of another country the a. foreign currency should appreciate. b. dollar should appreciate. c. exchange rate should not be affected. d. foreign currency should depreciate.

a. foreign currency should appreciate.

Since most exporters want to be paid in the currency of their home country, exports of goods generally cause a. foreign currency to be sold to buy the currency of the country that exports the goods. b. U.S. dollars to be used to pay for the exports. c. U.S. dollars to be bought to increase the supply of foreign currency in the importing country. d. foreign currency to be borrowed to use in paying for the exports.

a. foreign currency to be sold to buy the currency of the country that exports the goods.

In developing countries, the wage gap between expanding sectors within the countries and the declining sectors is a. greater than in industrialized countries. b. non-existent because wages are already low. c. reduced by foreign direct investment. d. small and getting smaller as use of the internet increases.

a. greater than in industrialized countries.

The law on one price works well for _____ but does not hold for a. heavily traded commodity products; manufactured products. b. industrial countries; developing countries. c. international transactions; domestic transactions. d. theoretical comparisons; actual results.

a. heavily traded commodity products; manufactured products.

An increase in the U.S. exports of goods and services will result in a(n) _____ foreign currency and a(n) _____ U.S. dollars in the foreign exchange market. a. increase in the supply of; increase in the demand for b. increase in the demand for; increase in the supply of c. decrease in the supply of; decrease in the demand for d. shortage of foreign currency; surplus of

a. increase in the supply of; increase in the demand for

Pollution is an externality because a. it imposes a cost on people who did not have input into the decision to conduct the activity that causes the pollution. b. it imposes more costs than benefits gained from the activity that produces the pollution. c. it usually is produced by a source outside of the country that suffers the effects of the pollution. d. the only effective way to control pollution is by imposing restrictions from outside of the country where the pollution is produced.

a. it imposes a cost on people who did not have input into the decision to conduct the activity that causes the pollution.

OPEC countries a. often face pressures to increase oil production above the levels established by the cartel. b. are all located in the Middle East where most oil in the world is located. c. are all politically opposed to most policies of Western and developed countries. d. have usually succeeded in stabilizing oil prices at high levels.

a. often face pressures to increase oil production above the levels established by the cartel.

Everything else remaining unchanged, a decrease in interest rates in the United States is most likely to result in a. outflows of capital from the United States toward foreign-currency assets. b. appreciation of the dollar. c. an increase in the demand for dollar-denominated financial assets. d. outflows of capital from foreign countries toward U.S.-currency assets.

a. outflows of capital from the United States toward foreign-currency assets.

The market exchange rate is a(n) _____ way to compare average income and production levels because the absolute purchasing power parity hypothesis a. poor; is not reliable when applied to the goods and services that make up national expenditures or domestic production. b. acceptable; equalizes international economic differences in expenditures and production. c. good; is better than any other approach that has been developed to compare incomes and production. d. excellent; is well-suited for comparing national expenditures and production.

a. poor; is not reliable when applied to the goods and services that make up national expenditures or domestic production.

International cartels in primary products other than oil are unlikely because a. production of most primary products is widely distributed, and a cartel in most primary products would be subject to competition from non-cartel countries. b. developing countries are not sophisticated enough to establish and maintain a cartel without the assistance and participation of developed countries. c. no developing country would be interested in establishing a cartel unless it was for oil. d. oil is the only product that developed countries are interested in importing from the developing world.

a. production of most primary products is widely distributed, and a cartel in most primary products would be subject to competition from non-cartel countries.

If two countries choose to fix the exchange rates among their currencies, then a. the country with the high rate of inflation will eventually suffer current account deficits. b. there usually is more pressure on the government whose country has an overall payments surplus than on the government whose country has an overall payments deficit. c. the nominal exchange rate will remain defendable independent of inflation rates. d. the country with a current account deficit can increase its money supply to delay the need for intervention.

a. the country with the high rate of inflation will eventually suffer current account deficits.

If investors expect a decrease in the value of the South African Rand vis-à-vis other currencies, their actions will cause a. the expected depreciation to occur much faster. b. a large inflow of foreign capital into South Africa. c. a decrease in South African interest rates. d. the South African Rand to appreciate immediately.

a. the expected depreciation to occur much faster.

Internationally and domestically, a currency is less valuable a. the more of it there is in circulation. b. if it is the currency of a developed country. c. if a country has a trade imbalance. d. the more demand there is for that currency.

a. the more of it there is in circulation.

The property rights approach to pollution often does not solve international pollution disputes because a. there is no international authority to enforce penalties for polluting. b. private property goes best with free trade. c. there is no real international concern about pollution. d. it is difficult to determine the sources of pollution.

a. there is no international authority to enforce penalties for polluting.

If the British government, through tighter monetary policy, reduced the supply of British pounds by 10 percent, then, other things equal, we expect that eventually a. there would be a 10 percent higher exchange rate value of the pound. b. the pound would have to be devalued. c. there would be a 10 percent lower exchange rate value of the pound. d. the British government would have to increase the supply of pounds.

a. there would be a 10 percent higher exchange rate value of the pound.

In Zimbabwe, Botswana, and Namibia, elephant herds are a. too large and need an approved sustainable development plan. b. unprotected by the domestic governments' poorly enforced conservation plans. c. almost completely depleted. d. threatened by development pressures from agriculture.

a. too large and need an approved sustainable development plan.

For a typical developing country, _____ are primary products such as agriculture, forestry, fuels, and mineral products. a. traditional exports b. infant industries c. natural resources d. substitute imports

a. traditional exports

The primary cause of the collapse in oil prices in 2009 was a. worldwide increase in oil consumption. b. military actions in Iraq. c. reduced oil extraction costs. d. the recession that accompanied the global crisis.

d. the recession that accompanied the global crisis.

If one U.S. dollar equals 5.76 Egyptian pounds and one U.S. dollar equals 0.56 British pounds, how many Egyptian pounds equals one British pound? a. 3.226 Egyptian pounds b. 10.29 Egyptian pounds c. 0.097 Egyptian pounds d.5.200 Egyptian pounds

b. 10.29 Egyptian pounds

_____ attempts to establish a fixed exchange-rate that is long-lived by focusing on maintaining the fixed exchange-rate and holds only foreign-currency assets. a. The International Monetary Fund (IMF) b. A currency board c. A central bank d. A monetary union

b. A currency board

_____ is the process by which an investor buys a currency in one market at a particular exchange rate and then almost immediately sells that currency in another market where the exchange rate for the currency is more advantageous, thereby ensuring an almost risk-free profit. a. Risk-free investing b. Arbitrage c. Appreciation d. Revaluation

b. Arbitrage

Which of the following would depress the price of primary products in the world market? a. Natural Limits b. Engel's Law c. Any of these would depress the price of primary products in the world market. d. Relatively slow productivity growth in the primary sector

b. Engel's Law

In the foreign exchange market, what could be a possible consequence of an increase in the purchase of stocks of Toyota, a Japanese automobile firm, by U.S. residents? a. Demand for the dollar will increase b. The dollar will depreciate c. Yen will depreciate d. The supply curve for the dollar will shift to the left

b. The dollar will depreciate

How does pollution result in inefficiencies in production in a country? a. Pollution increases the costs that governments must incur to deal with the pollution so that limited government funds are spent on pollution issues rather than being spent on other social issues. b. The social costs (such as pollution) of production are often not recognized by the forces that lead to decisions about how much to produce, so producers do not factor in those social costs when determining their cost of production and the prices that they will charge for their products. c. The social costs (such as pollution) are often overestimated so production is seen as being more costly than it really is and production takes place at a lower level than actual costs dictate. d. Pollution degrades the environment which eventually causes a decline in consumption so that more is produced than will be consumed.

b. The social costs (such as pollution) of production are often not recognized by the forces that lead to decisions about how much to produce, so producers do not factor in those social costs when determining their cost of production and the prices that they will charge for their products.

A domestic monetary shock is less disruptive to a country with a fixed exchange rate than to a country with a floating exchange rate because a. foreign economic forces will counteract any domestic effects of the monetary shock. b. a country with a fixed exchange rate will intervene to defend its fixed rate and reverse the effects of the shock. c. a country with a fixed exchange rate will devalue to maintain external balance. d. the fixed exchange rate will only fluctuate within a narrow band and the country will not have to act in response to the shock.

b. a country with a fixed exchange rate will intervene to defend its fixed rate and reverse the effects of the shock.

An appreciation of the U.S. dollar refers to a. an increase in the dollar price of a foreign currency. b. a decrease in the dollar price of a foreign currency. c. the high regard that foreigners have for the U.S. financial system. d. a decrease in the amount of financial assets held by U.S. interests.

b. a decrease in the dollar price of a foreign currency.

A criticism that developing countries have about developed countries is that developed countries urge the adoption of free-trade policies a. that are often adopted without understanding the long-term effects of the policies. b. but do not always enact or enforce free-trade policies themselves. c. that reinforce the long-run downward trend in the relative prices of primary products. d. that are designed to harm developing countries.

b. but do not always enact or enforce free-trade policies themselves.

A currency board would react to increased private selling of the country's currency by a. buying foreign currency without regard to the effect on the fixed rate. b. buying domestic currency to defend the fixed rate. c. selling domestic currency to defend the fixed rate. d. selling domestic currency without regard to the effect on the fixed rate.

b. buying domestic currency to defend the fixed rate.

U.S. capital outflows create a(n) a. equilibrium in the foreign exchange markets. b. demand for foreign currencies and a supply of U.S. dollars. c. supply of a foreign currency and a demand for U.S. dollars. d. opportunity for triangular arbitrage.

b. demand for foreign currencies and a supply of U.S. dollars.

While the causes of changes in short-term floating exchange rates are difficult to determine, long-term changes in floating exchange rates are related to a. pegged exchange rates. b. economic fundamentals. c. political risks. d. Eurocurrencies.

b. economic fundamentals.

Externalities lead to sub-par performance of a market, therefore a. only private initiatives can overcome the sub-par performance of the market. b. government policies to enhance the efficiency of the market can be justified. c. society is at the mercy of externalities. d. government policies intended to offset the effects of externalities are often ineffective.

b. government policies to enhance the efficiency of the market can be justified.

Pollution often has a trans-border effect in that a. no country can make economic progress without creating pollution. b. it affects not only the country responsible for the pollution but also other countries that are geographically close to the polluting country. c. pollution is produced everywhere in the world without regard to whether a nation is developed or developing. d. the only solution to pollution is a concerted international effort to address the causes and sources of pollution.

b. it affects not only the country responsible for the pollution but also other countries that are geographically close to the polluting country.

Many developing countries have comparative advantages based on a. technology resulting from their own research and development. b. land, natural resources, and unskilled labor. c. capital and the application of foreign technology. d. skilled service labor.

b. land, natural resources, and unskilled labor.

The _____ is based on the idea that a product that is freely traded should have the same price everywhere if the prices at different places are expressed in the same currency. a. law of supply and demand b. law of one price c. role of interest rates d. floating exchange rate

b. law of one price

A managed floating exchange rate is: a. a way for a country to gain some independence for its monetary policy and also have some ability to reduce the variability of the exchange-rate value of its currency. b. less flexible than a pegged exchange rate. c. one version of a currency board. d. a source of discipline on national inflation rates.

b. less flexible than a pegged exchange rate.

With floating exchange rates, domestic spending shocks are _____ disruptive and fiscal policy is more effective if capital flows are _____ responsive to interest rates. a. more; more b. more; less c. most; not d. less; less

b. more; less

The interbank part of the foreign exchange market involves banks trading with _____ in foreign exchange. a. customers b. other banks c. countries d. industrial firms

b. other banks

Fish stocks have been depleted worldwide because a. The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) does not apply to fish. b. property rights in fisheries are not well-defined, which has led to overfishing. c. pollution has killed them. d. fish are subject to numerous diseases.

b. property rights in fisheries are not well-defined, which has led to overfishing.

Those who advocate a return to a real gold standard believe that doing so would a. strengthen the power of fiscal policy in influencing aggregate demand and output. b. reduce national and average global rates of inflation by controlling countries' abilities to expand their money supplies. c. reduce unemployment rates by allowing the countries to adjust their money supply to the money demand. d. allow countries to pursue independent monetary policies.

b. reduce national and average global rates of inflation by controlling countries' abilities to expand their money supplies.

The _____ market is the foreign exchange trading that is done by banks with their customers. a. interbank foreign exchange b. retail part of the c. swap d. commercial exchange

b. retail part of the

The "size effect" tends to result in more pollution as production and consumption within a country increase because a. the benefits of rising income and consumption will divert the attention of the country's residents away from environmental damages. b. some of the increased output and product use will result in increased harmful discharges into the environment. c. as production in a country increases, the composition of output changes, leading to increased pollution. d. the increased income must be allocated to reduction of pollution or to increased consumption, and, since consumer spending is such an important part of any country's Gross Domestic Product (GDP), spending to reduce pollution loses out to increased consumption.

b. some of the increased output and product use will result in increased harmful discharges into the environment.

The monetary approach to exchange rates is generally a. of no value for explaining short- or long-term exchange rates. b. successful in explaining long-term exchange rates but not short-term exchange rates. c. successful in explaining short-term exchange rates but not long-term exchange rates. d. successful in explaining short- and long-term exchange rates.

b. successful in explaining long-term exchange rates but not short-term exchange rates.

If a country's government chooses to have a cleanly floating exchange rate for its currency, then a. the exchange rate will impose a strong discipline effect on the country's inflation rate. b. the country has the ability to use monetary policy to fight rising inflation in the country. c. the country's central bank probably must hold a substantial amount of international reserves to use for intervention. d. currency speculators often have one-way bets.

b. the country has the ability to use monetary policy to fight rising inflation in the country.

The fact that it is impossible for a country to maintain a fixed exchange rate, to permit free capital flows, and to have a monetary policy directed toward domestic objectives is referred to as the a. policy assignment rule. b. trilemma. c. unfortunate truth. d. invisible hand.

b. trilemma.

If a developing country's export of a product is large enough, the country can a. develop substitute products for that product and thus increase its overall benefits from exports. b. use an export tax to increase its benefits from the export of that product. c. discourage production of that product in other parts of the world. d. control the world price for that product through import controls.

b. use an export tax to increase its benefits from the export of that product.

How has technology affected developing countries' ability to export primary products? a. Technology has placed more emphasis on manufacture of more complex products and decreased the demand for primary products. b. Improved technology helps developed countries form more successful international cartels. c. Improved technology has led to the development of man-made alternatives to primary products and depressed prices of some primary products. d. Technology has increased the demand for primary products that are used to manufacture more sophisticated products.

c. Improved technology has led to the development of man-made alternatives to primary products and depressed prices of some primary products.

The center of global foreign exchange trading is a. New York. b. Abu Dhabi. c. London. d. Tokyo.

c. London.

If a British pound equals 1837 South Korean won (the currency of South Korea), what is the British pound equivalent of a South Korean won? a. 1.54 British pounds b. 0.54 British pounds c. 0.00054 British pounds d. 0.1837 British pounds

c. 0.00054 British pounds

In addition to moving toward competitive markets and market-determined prices, a centrally planned economy must do what else to transition to a market economy? a. Decrease exports and imports b. Join an economic union c. Establish property rights and a legal system to enforce those property rights d. Take advantage of its comparative advantages

c. Establish property rights and a legal system to enforce those property rights

Which of the following is NOT a function of the interbank part of the foreign exchange market? a. Provides a bank with a continuous stream of information on conditions in the foreign exchange market b. Provides a bank the means to readjust its own position quickly and at low cost when it separately conducts a large trade with a customer c. Provides clearing services for organizations that prefer to use different currencies d. Permits a bank to take on a position in a foreign currency quickly if the bank and its traders want to speculate on exchange-rate movements in the near future

c. Provides clearing services for organizations that prefer to use different currencies

Among the reasons that Sweden should adopt the euro is that a. labor moves easily from high-unemployment locations to low-unemployment locations within the euro area. b. the European Central Bank actively shifts government spending in the euro area to countries that are in recession. c. Swedish firms that export to or import from France and Germany will be less affected by exchange-rate risk. d. Sweden will get loans from the International Monetary fund (IMF) to smooth the transition.

c. Swedish firms that export to or import from France and Germany will be less affected by exchange-rate risk.

Which of the following countries decided not to be bound by the Kyoto Protocol? a. Japan b. Russia c. United States d. France

c. United States

A government can fix the exchange rate of its currency by a. raising its interest rates to make the currency more attractive to foreigners. b. refusing to engage in foreign trade. c. buying or selling its currency to keep the exchange rate in a pre-established range. d. joining a trade bloc.

c. buying or selling its currency to keep the exchange rate in a pre-established range.

When the U.S. imports goods, those imports create a(n) a. opportunity for triangular arbitrage. b. equilibrium in the foreign exchange markets. c. demand for foreign currencies and a supply of U.S. dollars. d. supply of a foreign currency and a demand for U.S. dollars.

c. demand for foreign currencies and a supply of U.S. dollars.

If a country's government acts to reduce the fixed value of its currency, the change is called a(n) a. revaluation. b. evaluation. c. devaluation. d. depreciation.

c. devaluation.

A country with low to moderate income per capita is considered to be a(n) a. untrustworthy trading partner. b. source of low-priced primary goods. c. developing country. d. prime market for untested products.

c. developing country.

A fixed exchange-rate system will encourage all of the following except a. a discipline effect on high-inflation countries. b. higher levels of international transactions. c. different macroeconomic goals across countries. d. monetary shocks that are relatively less disruptive.

c. different macroeconomic goals across countries.

Where there are market distortions, a competitive market, in the absence of government policy, results in a. an imbalance in which demand exceeds supply and creates shortages. b. an imbalance in which supply exceeds demand and creates surpluses. c. either too much or too little of an activity than is best for the economy. d. equilibrium in which social marginal benefit equals social marginal cost.

c. either too much or too little of an activity than is best for the economy.

The higher the income in a country, the more pressure there is on the government of that country to a. insist that other countries relax their environmental controls. b. relax environmental regulations so that production can increase. c. enact more stringent environmental protection regulations. d. limit imports from countries that have strict anti-pollution policies.

c. enact more stringent environmental protection regulations.

Arguments in favor of a developing country using import-substituting industrialization include all of the following except a. manufacturing industries can be nurtured as infant industries. b. data on imports can be used to guide domestic development policy. c. evidence indicates that countries with outward-oriented policies that emphasize increased exporting tend to grow faster. d. tariffs provide the government with revenue that can be used to increase spending on education and health.

c. evidence indicates that countries with outward-oriented policies that emphasize increased exporting tend to grow faster.

A(n) _____ exists when an activity brings direct losses to people who are not involved in the decision to conduct that activity. a. monopoly b. external benefit c. external cost d. internal cost

c. external cost

A _____ includes both a spot exchange of two currencies and an agreement to reverse the exchange at a specified future date. a. combination exchange transaction b. reverse forward swap c. foreign exchange swap d. forward exchange contract

c. foreign exchange swap

The effect of a domestic spending shock on a country with a floating exchange rate depends upon a. how effectively the country's monetary policy controls the domestic money supply. b. how quickly the country reacts to defend its exchange rate. c. how responsive international capital flows are to interest-rate changes in the country. d. the ratio of exports to imports immediately before the shock.

c. how responsive international capital flows are to interest-rate changes in the country.

When a resident of Germany buys a U.S. Treasury bond, there will be a(n) a. decrease in the demand for German marks. b. decrease in the demand for U.S. dollars. c. increase in the demand for U.S. dollars. d. increase in the demand for German marks.

c. increase in the demand for U.S. dollars.

International capital-flow shocks have domestic effects on countries with both fixed and floating exchange-rate systems, but they are a. easier to deal with in fixed exchange-rate systems. b. more likely to lead to crises in floating exchange-rate systems. c. less disruptive in floating exchange-rate systems. d. easier to anticipate in floating exchange-rate systems.

c. less disruptive in floating exchange-rate systems.

Developing nations would not agree at Kyoto in 1997 to a. stop the production of chlorofluorocarbon compounds (CFCs). b. lift all of their trade barriers. c. limit greenhouse gas emissions. d. switch all import quotas to tariffs.

c. limit greenhouse gas emissions.

With fixed exchange rates, domestic spending shocks are _____ disruptive and fiscal policy is more effective if capital flows are _____ responsive to interest rates. a. not at all; perfectly b. less; more c. more; more d. more; less

c. more; more

valid but only with respect to the movement of production from one industrialized country to another industrialized country. a. valid, so the World Trade Organization (WTO) enforces rules that prohibit the shifting of production to countries with low environmental standards. b. valid but only with respect to the movement of production from one industrialized country to another industrialized country. c. not well-founded because the cost of meeting environmental standards is usually low enough that moving production to avoid meeting those standards is not cost-effective. d. not well-founded because the variation in environmental standards from country-to-country are not significant enough to warrant the shifting of production.

c. not well-founded because the cost of meeting environmental standards is usually low enough that moving production to avoid meeting those standards is not cost-effective.

The comparative advantages that many developing countries have logically led them to exports of a. skilled-labor-intensive business services. b. high-tech components for assembly of products in other countries. c. primary products and products based on primary products. d. products manufactured specifically for other developing countries.

c. primary products and products based on primary products.

One of the important factors related to developing countries which discourages the investment in new assets is that a. developing countries lack strong sources of comparative advantage. b. developing countries only export primary products. c. property rights are less-clearly defined than in developed countries so that investors cannot be as confident in their title to assets as they would be in developed countries. d. import-substituting industrialization has become more successful over time.

c. property rights are less-clearly defined than in developed countries so that investors cannot be as confident in their title to assets as they would be in developed countries.

In a country with a floating exchange rate, a tendency toward overall balance of payments surplus causes the country's currency to appreciate a. increasing the attractiveness of the currency internationally and improving the country's current account balance. b. reducing imports and causing domestic production to increase. c. reducing the country's international price competitiveness and causing domestic production to decline. d. increasing domestic interest rates and attracting international investment.

c. reducing the country's international price competitiveness and causing domestic production to decline.

For a cartel that controls part of world production, the optimal price markup will be higher with a. a smaller cartel share of world production. b. relatively more elastic non-cartel supply. c. relatively more inelastic demand. d. a greater tendency for cartel members to cheat.

c. relatively more inelastic demand.

Among the reasons that Sweden should not adopt the euro is that a. Swedish exporting firms can avoid exchange-rate risk by setting prices (that are charged to buyers in euro-area countries) in euros. b. Sweden's government will have to impose capital controls on financial transactions with other euro-area countries if Sweden adopts the euro. c. the Swedish central bank is highly competent and effective. d. transactions cost will be lower if Sweden keeps its own currency.

c. the Swedish central bank is highly competent and effective.

Some environmental problems, like the emission of carbon dioxide, increase as income in a country increases because a. the continued increase in carbon dioxide emissions is necessary if income related to production is to continue to increase. b. there are no technologies that are effective in reducing the emission of carbon dioxide as the result of production. c. the cost of reducing these emissions is relatively high and the source of the problem is global rather than isolated to one or a few countries, so one country's efforts to reduce emissions will not be worth the expense. d. carbon dioxide is a usable product and World Trade Organization (WTO) rules will not allow efforts by an individual country to limit the production and exporting of carbon dioxide.

c. the cost of reducing these emissions is relatively high and the source of the problem is global rather than isolated to one or a few countries, so one country's efforts to reduce emissions will not be worth the expense.

The cost to firms of meeting environmental protection requirements in a country are usually relatively minor, even in countries with stringent environmental regulations, so a. most firms will do almost anything to avoid having to invest in pollution control measures to meet those requirements. b. countries with less stringent environmental regulations are able to entice firms away from countries with more stringent environmental regulations. c. the incentive to relocate to countries with less stringent environmental protection requirements is usually small. d. the World Trade Organization (WTO) is aggressive in requiring firms to meet national environmental regulations.

c. the incentive to relocate to countries with less stringent environmental protection requirements is usually small.

Relative purchasing power parity a. suggests that the exchange rate should be equal to the ratio of the domestic price level to the foreign price level. b. explains exchange rates as being part of the equilibrium for the markets for financial assets denominated in different currencies. c. theorizes that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time. d. says that a single currency will have the same price everywhere, once the prices at difference places are expressed in that currency.

c. theorizes that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time.

Completely replacing the local currency with a foreign currency is called a. a currency exchange. b. a fixed exchange rate. c. Exchange Rate Mechanism. d. dollarization.

d. dollarization.

Which of the following is often foregone in an effort to promote economic development in poorer countries? a. Clean air b. Clean water c. Enforcement of environmental laws d. All of these are foregone in poorer countries in pursuit of economic growth.

d. All of these are foregone in poorer countries in pursuit of economic growth.

The _____ rate is the price of one country's money in units of another country's money. a. foreign swap b. forward c. arbitrage d. exchange

d. exchange

Which of the following explains what led to the successful implementation of the Montreal Protocol? a. Scientific evidence strongly supported the connection between chlorofluorocarbon compounds (CFCs) and ozone problems. b. Scientific evidence strongly supported the connection between chlorofluorocarbon compounds (CFCs) and ozone problems. c. The world's largest users of CFCs were also the countries likely to suffer the most consequences caused by CFCs. d. All of these led to the successful implementation of the Montreal Protocol.

d. All of these led to the successful implementation of the Montreal Protocol.

Which of the following tasks is NOT part of the transition from central planning to a market economy? a. Establishing a legal system with legitimate contract laws and property rights b. Establishing private ownership of businesses and privatization of state businesses c. Shifting to competitive markets with a new process for resource allocation d. Establishing a currency union with another market economy

d. Establishing a currency union with another market economy

Which of the following statements is true? a. If the expected future spot dollar per euro exchange rate increases, there will be international financial repositioning toward the dollar-denominated assets thereby causing the euro to depreciate. b. If foreign interest rates increase, the domestic interest rate remaining unchanged, there will be international financial repositioning toward domestic-currency assets and the domestic currency will appreciate. c. If the expected future spot exchange rate value of the foreign currency decreases, there will be international financial repositioning toward foreign-currency assets, thereby causing the domestic currency to depreciate. d. If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.

d. If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.

Which of the following is not a plausible explanation of why the value of the Japanese yen generally rose during the period from 1970 to 1999? a. Japan experienced significant economic growth during that period. b. Japan's money supply did not grow much faster than the rate of economic growth. c. Price levels grew very slowly in Japan during that period. d. Inflation rose in Japan during that period.

d. Inflation rose in Japan during that period.

Why would an oil cartel be in favor of lower oil prices, at least for a short period of time? a. Lower oil prices will increase the demand for oil so the cartel will earn the same amount of revenue. b. Temporarily lower oil prices will bring more stability to oil prices in the long run. c. Lower oil prices will encourage more exploration for and production of oil. d. Lower oil prices will force marginal, non-cartel producers of oil out of the market.

d. Lower oil prices will force marginal, non-cartel producers of oil out of the market.

Which of the following is true of foreign exchange markets? a. Individuals' exchanges of currencies comprise the largest portion of overall foreign exchange trading. b. The laws of demand and supply are not applicable in a foreign exchange market. c. The foreign exchange market is a single gathering place where traders shout buy-and-sell orders at each other. d. Most foreign exchange trading involves the exchange of U.S. dollars for other currencies.

d. Most foreign exchange trading involves the exchange of U.S. dollars for other currencies.

Which of the following is NOT a reason why cartels often lack success over the long term? a. Decreased demand for the cartel's product. b. New supplies of the cartel's product outside of the cartel. c. Members of the cartel having a tendency to violate cartel rules. d. Non-members of the cartel seeking to become members of the cartel.

d. Non-members of the cartel seeking to become members of the cartel.

What implications for international financial repositioning and for the current spot exchange rate would flow from a decrease in the expected future spot rate value of a country's currency? a. Repositioning towards this country's currency assets results in the country's currency appreciating. b. Repositioning toward foreign currency assets results in this country's currency appreciating. c. Repositioning towards this country's currency assets results in the country's currency depreciating. d. Repositioning toward foreign currency assets results in this country's currency depreciating.

d. Repositioning toward foreign currency assets results in this country's currency depreciating.

What implications would a decrease in foreign interest rates have for the direction of international financial repositioning and for the current spot exchange rate? a. Repositioning toward foreign currency assets and the domestic currency appreciates. b. Repositioning towards domestic currency assets and the domestic currency depreciates. c. Repositioning toward foreign currency assets and the domestic currency depreciates. d. Repositioning towards domestic currency assets and the domestic currency appreciates.

d. Repositioning towards domestic currency assets and the domestic currency appreciates.

What implications for international financial repositioning and for the current spot exchange rate would flow from an increase in the current domestic interest rate? a. Repositioning toward foreign currency assets results in the domestic currency appreciating. b. Repositioning towards domestic currency assets results in the domestic currency depreciating. c. Repositioning toward foreign currency assets results in the domestic currency depreciating. d. Repositioning towards domestic currency assets results in the domestic currency appreciating.

d. Repositioning towards domestic currency assets results in the domestic currency appreciating.

The effects of foreign trade shocks are important to a country because a. net exports are affected by foreign trade shocks and net exports are a primary component of a county's fiscal balance. b. those effects determine whether a fixed exchange rate or a floating exchange rate is appropriate. c. changes in foreign trade affect a country's imports but not its exports. d. changes in foreign trade are a major way that business cycles are transmitted from country to country.

d. changes in foreign trade are a major way that business cycles are transmitted from country to country.

New human-made substitutes for primary products a. increase demand for primary products. b. increase imports into the country where the substitutes are produced. c. generally do not affect the demand for the primary products. d. depress the relative prices for the primary products.

d. depress the relative prices for the primary products.

If a country desires to use monetary policy to address domestic objectives, the country will favor a floating exchange rate because a a. fixed exchange rate does not allow domestic expansion without international capital inflow. b. floating exchange rate encourages domestic expansion and increased domestic production. c. floating exchange rate requires focus on international developments rather than domestic issues. d. floating exchange rate frees monetary policy from the need to defend a fixed exchange rate.

d. floating exchange rate frees monetary policy from the need to defend a fixed exchange rate.

The strongest argument against a country adopting a floating exchange rate is that a. floating exchange rates require constant monitoring and intervention to maintain them. b. most countries have fixed exchange rates and transactions between countries with different exchange rate systems are difficult. c. the International Monetary Fund encourages countries to adopt fixed exchange rates. d. floating exchange rates have been very variable which increases exchange-rate risk and discourages international transactions.

d. floating exchange rates have been very variable which increases exchange-rate risk and discourages international transactions.

If parties to a transaction agree on the rate at which two currencies will be exchanged at a specific time several months the future, they have agreed to a(n) a. reverse forward swap. b. spot exchange rate. c. arbitrage transaction. d. forward exchange rate.

d. forward exchange rate.

A significant aspect of global warming that has stalled international efforts to address the issue is a. most industrialized countries do not believe that global warming is a threat to the environment. b. global warming has advanced to the state that there is no solution to halt global warming. c. most industrialized countries believe it is up to developing countries to address the problem. d. harm from global warming is abstract, the costs of addressing global warming are substantial, and unilateral action will be ineffective.

d. harm from global warming is abstract, the costs of addressing global warming are substantial, and unilateral action will be ineffective.

In developing countries, per capita income a. has remained stagnant in the last two decades. b. will converge to the level of per capita income in the industrialized countries in the next decade or two, if current trends continue. c. has generally declined since 1990. d. has risen on average since 1990 at a rate faster than the growth in industrialized countries.

d. has risen on average since 1990 at a rate faster than the growth in industrialized countries.

Encouraging the development of industries that will allow a country to reduce its dependence on foreign production even if it means that export industries are de-emphasized is a. trade diversion. b. an illegal export subsidy under World Trade Organization (WTO) rules. c. the first step in creating a cartel. d. import-substituting industrialization.

d. import-substituting industrialization.

If the domestic interest rate increases, with the foreign interest rate and the expected future spot rate remaining unchanged, the value of the domestic currency vis-à-vis the foreign currency is expected to a. decrease. b. remain unchanged. c. converge to its purchasing power parity (PPP) value. d. increase

d. increase

As a result of the Uruguay Round, product standards to protect the health and safety of the population of a particular country a. can only be imposed in response to specific injuries that have occurred. b. are illegal. c. are not controlled by the World Trade Organization (WTO). d. must have a scientific basis.

d. must have a scientific basis.

The 2004-2013 rapid growth in global foreign exchange trading can be explained by a. the increase in the number of nations adopting a floating exchange rate. b. increases in volume of global trade in goods and services during those years. c. volatility in U.S. long-term government bond yields. d. none of the above.

d. none of the above.

As the world moves toward freer trade a. worldwide pollution becomes less of a problem because production becomes more efficient. b. international organizations such as the World Trade Organization (WTO) are better able to address the problems created by pollution. c. most environmental problems become worse. d. production of capital- and skill-intensive products expands in industrialized countries and shrinks in developing countries.

d. production of capital- and skill-intensive products expands in industrialized countries and shrinks in developing countries.

In a country with a fixed exchange rate, if a shock threatens to make the country's currency appreciate, the country's central bank will respond by a. buying domestic currency to reduce the money supply to protect it from the shock. b. buying several foreign currencies as a hedge against the economic turmoil that may affect several countries. c. selling foreign currencies to isolate itself from the economic turmoil created by the shock. d. selling domestic currency to defend the fixed rate, thereby increasing the country's money supply.

d. selling domestic currency to defend the fixed rate, thereby increasing the country's money supply.

The rate at which one country's currency is exchanged for another country's currency within two days after the exchange is agreed to is referred to as the a. future exchange rate. b. arbitrage exchange rate. c. forward exchange rate. d. spot exchange rate.

d. spot exchange rate.

Absolute purchasing power parity (PPP) holds for a product bundle if a. the law of diminishing returns holds for all the goods in the bundle. b. the goods are traded with minimum transportation costs. c. there exists free trade of all the products that comprise the bundle. d. the bundle costs the same number of U.S. dollars in different countries.

d. the bundle costs the same number of U.S. dollars in different countries.

If economic activities produce significant amounts of domestic pollution a. the industries in the country where the pollution is produced will bear the costs of that pollution. b. the costs will be shifted to foreign consumers of goods that are exported to foreign countries. c. free trade will offset the domestic costs of that pollution and the country producing the pollution will not suffer as a result of the pollution. d. the cost of the pollution falls almost entirely on the people within the country producing the pollution.

d. the cost of the pollution falls almost entirely on the people within the country producing the pollution.