Practice Midterm 2

20. Pakistan is facing a potential currency crisis and has gone to the IMF for rescue. The IMF asks the Pakistani government to raise taxes and lower its budget deficit. The IMF conditions are often referred to as: a. austerity b. trade adjustment assistance c. autarky d. concessional finance e. obsolescing bargaining

ANS: A

3. What do governments seek to control with their monetary policy? a. growth b. tariffs c. quotas d. noneconomic trade barriers

ANS: A

31. The Lost Decade refers to: a. the time period in Latin America during the 1980s b. the time period following the Asian financial crisis in the late 1990s c. the time period during the Great Depression between WWI and WWII d. the time period of economic stagnation that followed OPEC's raising oil prices

ANS: A

34. Concessional finance refers to loans that are granted: a. to very poor countries at below-market rates b. with specific conditions for repayment c. from one developed country to another developed country d. from a private bank to a sovereign country

ANS: A

35. Which of the following is NOT a goal that the Group of 77 shared? a. reduce dependence on imported oil b. regulate foreign investment c. renegotiate trade agreements d. enhance power of LDCs in international organizations

ANS: A

5. Why did the Bretton Woods monetary system collapse? a. The U.S. dollar's tie to gold lacked credibility. b. Europe created the euro zone. c. Countries wanted to exchange the gold standard for the silver standard. d. Détente led to loss of a common external threat.

ANS: A

2. The exchange rate between the U.S. dollar and the Chinese yuan was about $1: yuan 8.28 in 2005, and is about $1: yuan 6.8 in 2008. By looking at the two exchange rates, we say that the Chinese currency yuan ____________ or becomes ____________. a. appreciates; weaker b. appreciates; stronger c. depreciates; weaker d. depreciates; stronger

ANS: B

24. The key assumption distinguishing the Ricardo-Viner (RV) model from the Hecksher-Ohlin/Stolper-Samuelson (HOSS) model is: a. RV assumes that factor mobility is high; HOSS assumes that factor mobility is low b. RV assumes that factor mobility is low; HOSS assumes that factor mobility is high c. RV assumes that free trade benefits consumers; HOSS assumes that free trade hurts consumers d. RV assumes that free trade hurts consumers; HOSS assumes that free trade benefits consumers

ANS: B

26. Which of the following is true about floating exchange rates? a. They increase the purchasing power of domestic consumers. b. They allow states to use monetary policy to respond to domestic economic conditions. c. They make exports cheaper, benefiting producers who sell to the foreign market. d. They create stability that facilitates reliable contracts in international exchange and investment.

ANS: B

27. Major debt or financial crises occurred in all of the following EXCEPT: a. Latin America in 1982 b. Germany in 2002 c. Mexico in 1994 d. East Asia in 1997-1998

ANS: B

29. A major effect of trade barriers such as tariffs, quotas, and nontariff barriers is: a. aggregate social welfare is increased by keeping wealth within the country b. consumers lose from higher prices while import-competing producers benefit c. export-oriented producers are supported while the effect on consumers is minor d. states are no longer allowed to be members of the WTO

ANS: B

32. The Bretton Woods currency system can be best described as a: a. commodity standard b. commodity-backed paper standard c. paper currency standard d. none of the above

ANS: B

4. Which of the following is true of comparative advantage and absolute advantage? a. Every country has its own absolute advantage and comparative advantage. b. Every country has its own comparative advantage but may not have absolute advantage. c. Every country has its own absolute advantage but may not have comparative advantage. d. none of above

ANS: B

6. Which of the following statements is true about economic liberalism? a. If American consumers bought only goods "made in the USA," they would be better off. b. Specialization and trade helps ensure more efficient allocation of resources. c. Countries can improve their well-being by being self-sufficient. That way they can always get the highest quality products without paying others for them. d. If a country has an absolute advantage in some activity, it must also have a comparative advantage. e. Import-substituting industrialization is a viable economic strategy for the Global South.

ANS: B

8. A tax on imports levied at the border is called a: a. quota b. tariff c. nontariff barrier d. quantitative restriction

ANS: B

1. The Hecksher-Ohlin theorem states that: a. trade interests are determined by predominant industries in a country b. countries will protect infant industries from outside competition c. comparative advantage is determined by relative amounts of land, labor, capital, and human capital d. every capitalist economy experiences periodic boom-bust cycles

ANS: C

13. Hypothetically, if the Mexican government is considering raising its domestic interest rates, which of the following outcomes is NOT likely to occur? a. Foreign investors will want to move capital to Mexico. b. The demand for the Mexican peso will increase and lead to appreciation. c. Inflation is more likely to occur. d. Domestic spending will be reduced.

ANS: C

17. Using ____________ theory, Ronald Rogowski predicts that we will see ____________ cleavage in a country where capital and labor are scarce but land is abundant. a. Ricardo-Viner; urban-rural b. Stolper-Samuelson; class c. Stolper-Samuelson; urban-rural d. Ricardo-Viner; class e. Hecksher-Ohlin; class

ANS: C

19. From earlier experiences of adopting import substitution industrialization (ISI) in some developing countries, we know that: a. ISI has contributed to the economic success of the "Asian Tigers" b. ISI encouraged companies to produce for foreign consumers c. the agricultural sector often opposed ISI, leading to an urban-rural cleavage in domestic politics d. ISI was advocated by international institutions such as the IMF e. ISI could be regarded as a market-oriented strategy

ANS: C

23. The world has witnessed several currency crises in the past, such as the Asian financial crisis in 1997 and the Argentina crisis in 2002. In a currency crisis, we typically find: a. it often started in countries using a floating exchange rate system b. the currency value of the problematic country would plunge, relieving pressure on those who owed money to foreigners c. the fundamental problem was usually domestic recessions coupled with the government's inability to use monetary policy to respond d. that countries facing a currency crisis often went to the World Bank for rescue e. that fortunately, a currency crisis most of time was limited to the problematic country

ANS: C

28. The institutions that govern international finance are different from international institutions in other issue areas in that: a. they are particularly weak and rarely achieve international cooperation b. the formal structure has evaporated, but norm-based compliance is still observed c. they are unusually strong and feature a thick institutional structure d. they all locate their headquarters outside the United States

ANS: C

30. Interest rates are higher in developing countries because: a. the risk of investing is lower b. capital is abundant c. capital is scarce d. they are not higher; interest rates are lower in developing countries

ANS: C

33. OPEC is an example of a: a. regional trade agreement b. BIT c. commodity cartel d. regional development bank

ANS: C

9. Which of the following economic actors in Japan and South Korea would prefer the Japanese yen to be strong vis-à-vis the Korean won, rather than to be weak? a. Japanese manufacturers who export to Korea b. Korean consumers who buy imported Japanese cars c. Japanese tourists who travel to Korea d. Korean manufacturers who have to import machines and parts from Japan e. none of the above

ANS: C

10. Which of the following is true of the Ricardo-Viner model? a. A country will export goods that make intensive use of the resources that country has in abundance. b. Countries that invest heavily in one another's economies also tend to trade heavily with one another. c. Protection benefits the scarce factor of production. d. People's interests are tightly tied up with the interests of others in their sector of the economy.

ANS: D

11. Which of the following countries was least affected by the currency crisis in 1997-1998? a. Thailand b. Malaysia c. the Philippines d. China e. South Korea

ANS: D

12. Which of the following policies is LEAST likely to be pursued by a debtor country under IMF conditionality (structural adjustment programs)? a. increasing government transparency b. stabilizing the value of the national currency in the international financial market c. creating a stable investment climate for foreign investors d. increasing the government's social welfare spending to provide social safety nets e. raising interest rates to decrease the supply of money

ANS: D

14. Which of the following is true of the export-oriented industrialization strategy that Asia's "Four Tigers" pursued? a. Like ISI, it embraced economic self-sufficiency. b. Like ISI, it rejected the international division of labor between the Global North and South. c. Like the Washington consensus, it tried to minimize government intervention in the economy. d. Like the Washington consensus, it viewed international trade as good for economic growth. e. It was no more successful than the ISI strategy of Latin American countries throughout the 1980s.

ANS: D

15. Which of the following is NOT true of portfolio investment? a. Investor has a claim on income. b. Investor has no role in managing the investment. c. Portfolio investment is usually sovereign lending. d. Investor bears more cost with portfolio investment than with foreign direct investment.

ANS: D

21. Many factors will affect the bargaining power between multinational corporations (MNCs) and the host country. Which of the following is a correct illustration? a. When an MNC controls global production and marketing chains, its bargaining power decreases. b. All else equal, a mining company typically has higher bargaining power than a bank. c. A host country's regulations, such as quotas, often undermine its own bargaining power. d. When it is easy to get sovereign loans, host countries' bargaining power against MNCs increases. e. When an MNC owns advanced technology, the host country's bargaining power increases.

ANS: D

22. A key factor of development is whether an encompassing coalition is formed domestically to promote overall welfare. Which of the following makes such a coalition more likely? a. artificial state boundaries that do not overlap with ethnic boundaries b. wealth concentration c. oligarchical institutions in domestic politics d. the existence of common external threats e. none of the above

ANS: D

25. The vast majority of international investment goes to: a. the poorest twenty states in the world, mostly in Africa b. smaller states in Latin America and Asia c. emerging market states d. rich states in the developed world

ANS: D

7. What characterizes the resource curse? a. Resource wealth makes rapid development possible. b. Resource wealth can degrade the environment. c. Resource wealth benefits only wealthy countries. d. Resource wealth decreases incentives to invest in human capital.

ANS: D

16. Which of the following is an example of a fixed exchange rate system? a. the gold standard b. the Bretton Woods monetary system c. European currencies pegged to the Deutsche mark before 2002 d. A and B e. all of the above

ANS: E

18. According to the following table, which of the answers is correct? a. The United States has comparative advantage in producing submarines. b. Germany has comparative advantage in producing fighters. c. To maximize efficiency, the United States should specialize in producing fighters. d. To maximize efficiency, Germany will import submarines from the United States under complete free trade. e. A and B

ANS: E