Chapter 18-19

Consumers... Automobile firms... Domestic parts manufacturers....

favor it because it lowers car prices. favor it because they can produce less expensive cars. oppose it because they face global competition.

The production possibilities curve shows

the combination of two goods that can be produced with a​ nation's resources.

If a country bans the importation of a particular​ good, the market equilibrium is shown by the intersection of the ....domestic supply... curve and the ...domestic demand... curve. In the case of the market for​ shirts, the ...decrease... in supply resulting from an import ban ...increases... the price consumers have to pay for shirts and ...decreases... the quantity available for them to buy.

.domestic supply;domestic demand decrease;increases;decreases

If the exchange rate is 1.25 euro per​ dollar, a watch that sells for 240 euros will cost you ​$192

192

The average tariff rate in the United States is roughly 5 percent.

5

a. Suppose the two countries split the difference between the willingness to pay for computers and the willingness to accept computers. The terms of​ trade, that​ is, the rate at which the two countries will exchange computers and​ shoes, will be...75... pairs of shoes per computer. ​(Enter your response rounded to one decimal​ place.) b. Suppose the two countries exchange one computer for the number of shoes dictated by the terms of trade you computed above. The net benefit from trade for each country will be ...65... pairs of shoes per computer. ​(Enter your response rounded to one decimal​ place.)

75;65

Expectations of Depreciation and Investing. Individuals wishing to invest in Turkey in 2006 had two choices. They could invest in bonds that would pay returns in 2007 in Turkish lira and earn 14.7 percent.​ Or, they could invest in Turkish bonds that would pay returns in U.S. dollars but earn only 5.2 percent. Which of the following most closely approximates the​ market's expected rate of depreciation of the Turkish lira against the U.S.​ dollar?

9.5% or more

The Effects of Policy Changes in Japan. Until the early​ 1980s, Japan required its large insurance companies to invest all of their vast holdings in Japanese securities. At the prompting of the United​ States, Japan relaxed the restrictions and allowed the companies to invest anywhere in the world. What effect do you think this had on the​ yen/dollar exchange rate and the trade balance between the two​ countries?

Dollar appreciation and larger U.S. trade deficit with Japan.

The law of one price provides accurate predictions of current exchange rates. False

False

What other types of firms in that economy might object to this​ policy?

Firms that use steel in production

Graph

Free trade

Given the opportunity costs reflected in these​ curves, it can be deduced that the comparative advantages are held by Tableland in tables and Chairland in chairs. If the two countries split the difference between the​ buyer's willingness to pay for tables and the​ seller's willingness to​ accept, in terms of the number of chairs for 1​ table, the terms of trade will be ...1.5...

Tableland in tables and Chairland in chairs;1.5 change y/change x

Uncovering U.S. Exchange Rate Policy. Suppose the United States reported that the U.S. Treasury had increased its holdings of foreign currencies from last year. What does this tell you about the foreign exchange policies of the United States during the last​ year?

The U.S. government had intervened to decrease the price of the dollar.

Dollarization. Some countries have simply decided to let the U.S. dollar or another foreign currency serve as their local currency. This is called​ "dollarization." Why would a country decide to abandon its own currency and use a foreign​ currency?

To provide a stable and secure economic and investment climate.

NAFTA is a free trade agreement between Mexico​, Canada​, and the United States .

United States

The WTO was formed in 1995 to oversee GATT.

WTO

Expansion in the European Union. When the EU​ originated, member countries generally had similar standards of living.​ However, with the most recent expansion of the​ EU, countries that were less developed joined the developed countries. Which of the following implications for wage inequality within the more established European countries is most likely to result from the entry of the new​ countries?

Wages for skilled workers rise relative to the wages for unskilled workers.

When a country imposes an import ban on a​ product, there will be

a decrease in​ supply, an increase in the price consumers have to pay for the​ product, and a decrease in the quantity available for them to buy.

The rate at which units of one product can be exchanged for units of another product

are the terms of trade.

The equilibrium price under an import quota is below the price that occurs with an import ban and above the price that occurs with free trade.

below; above

Based on the comparative opportunity cost data in your​ table, the comparative advantage in TVs lies with Country...c​...,while the comparative advantage in computers is held by Country...b...

c and b

What two factors shift the demand and supply curves for​ dollars?

changes in interest rates and prices

When two countries switch from​ self-sufficiency to specialization and trade​ increases,

consumption increases in both nations.

A curve showing the combinations of two goods that can be consumed when a nation specializes in a particular good and trades with another nation is the

consumption possibilities curve.

The...current...account is equal to net exports plus net income from existing investments abroad and net transfers from abroad. The...financial...account is the value of a​ country's net sales of assets. The...capital...account is the net value of a​ country's capital transfers and the purchase or sale of​ nonproduced, nonfinancial assets. The sum of these accounts is...zero.

current; financial; capital; zero

When the U.S. and foreign price levels remain the same but the dollar depreciates​, the real exchange rate will decrease.

decrease

This will ...decrease the demand for... British pounds. As a​ result, the British pound will ...depreciate... with respect to the yen.

decrease the demand for; depreciate

When prices rose in Mexico faster than in the United States and the nominal exchange rate remained​ constant, the real exchange rate ...decreased... .

decreased

The United States has a large ...deficit... on the current​ account, but a large ...surplus... on the financial account.

deficit; surplus

f the exchange rate is 1.25 euro per​ dollar, a watch that sells for 250 euros will cost you ​$200. ​(Enter your response rounded to the nearest​ dollar.) If the exchange rate becomes 1.10 euro per​ dollar, the dollar has depreciated and the watch will now cost ​$227. ​(Enter your response rounded to the nearest​ dollar.)

depreciated

The dollar ...depreciates... against the euro when the European central bank raises interest rates.

depreciates

The dollar ...depreciates... against the euro when the inflation rate in Europe decreases.

depreciates.

Pricing below production cost or selling at prices in foreign markets less than domestic markets is known as dumping .

dumping

A...flexible...exchange rate system is a currency system in which exchange rates are determined by free markets. A....fixed...exchange rate system is a system in which governments peg exchange rates to prevent their currencies from fluctuating. A balance of payments...deficit...can occur under a...fixed...exchange rate​ system, which is a situation in which the supply of a​ country's currency exceeds the demand for the currency at the current exchange rate. Revaluation...is an increase in the exchange rate to which a currency is pegged under a fixed exchange rate system.

flexible; fixed; fixed; Revaluation

Economists call efforts to influence the exchange rate

foreign exchange market intervention.

It can be extremely difficult to maintain a fixed exchange rate when

funds can move quickly from country to country in capital markets.

A restriction on imports is likely to lead to

further restrictions on trade and a retaliatory response.

A tariff—a tax on ...imports... —generates revenue for ...the government... ​,whereas an import ...quota.. generates revenue for ...importers...

imports; the government; quota; importers

If a country borrows in​ dollars, a depreciation of its own currency against the dollar will ...increase... the burden of its debt.

increase

Using Demand and Supply Analysis. Consider the effects of an increase in Japanese interest rates on the exchange rate between the British pound and the Japanese yen. This will ...increase... the supply of British pounds. As a​ result, the British pound will ...depreciate... with respect to the yen.

increase; depreciate

Advantages of outsourcing include

increases in exports, requiring more U.S. skilled labor, and higher wages for these workers.

The ...infant... ​-industry argument is often given to provide a rationale for tariffs for new firms.

infant

Tariffs and other protectionist policies are often defended on the grounds that they protect ...infant... industries that are in the ...early... stages of development and can benefit from learning by doing.

infant; early

The result of protectionism will be

less-efficient production, higher​ prices, and lower consumption for the country adopting protectionism.

When European countries joined together to create the​ euro, they no longer were able to conduct independent ...monetary... policy.

monetary

Labor Mobility and the Euro. Unlike the United States which has high levels of interstate​ mobility, labor is less mobile from one part of Europe to the​ other, because workers would have to move from one country to another. This poses challenges for the viability of the euro system because with less labor​ mobility, there will be

more adjustments in wages and prices in each country as economic conditions change.

A country has a comparative advantage if it has a lower opportunity cost of producing a good.

opportunity

In relation to the​ dollar, the Swiss franc is over-valued

over-valued

Under a scheme of predatory ​pricing, a firm cuts its price to drive out rivals and then raises its price later.

predatory

The theory of ...purchasing power parity... states that the exchange rate between two countries should be determined by the price levels in those two countries.

purchasing power parity

The Dollar and the Financial Crisis. It is generally recognized that the​ world-wide financial crisis in 2008 originated in the United​ States, as its financial institutions were most active in fueling the housing boom.​ However, investors throughout the world had bought U.S.​ mortgage-related securities and this spread the global crisis. When the crisis​ hit, however, the value of the U.S. dollar rose sharply against many other currencies. This appreciation could have occurred because

the demand for dollars rose since the dollar was considered a safe currency.

Threatening to impose a tariff on a​ country's exports if it​ doesn't open up its markets to trade is an example of a retaliatory policy.

retaliatory

If there is an excess demand of a​ country's currency at the fixed exchange​ rate, there is a balance of payments surplus .

surplus

An import quota shifts the supply curve Equilibrium in the market under an import quota moves ...upward... along the demand curve and the equilibrium price is ...below... the price that occurs with an import ban and ...above... the price that occurs with free trade.

to the​ left, but not as far as under an import ban. upward; below; above

Suppose the United States has a comparative advantage in goods that use skilled labor. If we trade with a country that has a comparative advantage in goods using unskilled​ labor, the wage differences between skilled and unskilled labor in the United States will widen

widen

International trade has contributed to ...widening... the gap between the wages of​ low-skilled and​ high-skilled labor. It has also ...reduced... prices of goods purchased by the​ poor, ...offsetting... the effects on inequality.

widening; reduced; offsetting

Suppose a country has a comparative advantage in computer chips but not shirts. Workers in the shirt industry will be worse off with trade.

worse off

The current​, financial​, and capital accounts must sum to zero .

zero