MBA 680 - Final Exam
Concern about the ability of independent foreign firms to maintain product quality
makes FDI preferable to licensing firms in the foreign markets.
A country which has a higher ratio of capital to other factors of production than does the rest of the world is
relatively capital-abundant.
Which of the following can be concluded from the relationships given below? (U.K. capital stock) < (rest of the world's capital stock) (U.K. labor supply) > (rest of the world's labor supply)
The United Kingdom is relatively labor-abundant compared to the rest of the world.
Suppose under a gold standard the price of gold in the United States is $450 per ounce and the price of gold in the United Kingdom is 200£ per ounce. The exchange rate is thus
$2.25 per pound.
A small country is considering imposing a tariff on imported wine at the rate of $5 per bottle. Economists have estimated the following based on this tariff amount: World price of wine (free trade):$20 per bottleDomestic production (free trade):500,000 bottlesDomestic production (after tariff):600,000 bottlesDomestic consumption (free trade):750,000 bottlesDomestic consumption (after tariff):650,000 bottles Calculate the government revenue from the tariff.
$250,000 Graph 6
The figure below shows the market for computers in a small importing country. Dd and Sd are the domestic demand and supply curves of computers, respectively.Calculate the tariff revenue of the country's government.
$28 million Graph 5
Suppose Country A, a labor-abundant country, produces only wheat and cloth. The following equations illustrate the prices and costs of wheat and cloth in the country. The numbers indicate the amounts of labor and land needed to produce a unit of wheat and cloth. 'W' is the wage rate and 'r' is the rental rate of land. Price of wheat = 1w + 2r Price of cloth = 2w + 1r Suppose Country A engages in free trade and the price of cloth increases from $3 per unit to $4 per unit. The price of wheat remains unchanged at $3 per unit. The wage rate and the rental rate change to _____ and _____ , respectively.
$5/3; $2/3
Under free trade, a large country produces one million leather bags per year and imports another two million bags per year at the world price of $60 per bag. Assume the country imposes a specific tariff of $5 per bag. As a result, the per-unit price of leather bags decreases to $58 in the international market and the import of leather bags drops to 1.6 million. The domestic production, on the other hand, increases to 1.1 million. Following the imposition of the tariff, the domestic consumers pay a price of _____ for each bag.
$63
The figure below represents the effects in the labor markets due to migration. Here, the world has been divided into a high-income "North" (left panel) and a low-income "South" (right panel). Dn and Sn are the labor demand and the labor supply curves in North. Ds and (Sr + Smig) are the labor demand and pre-migration labor supply curves in South. Sr is the post-migration labor supply curve in South. The value c is the cost of migrating. When migration is not allowed, workers in North earn _____ per hour and workers in South earn _____ per hour.
$8.00; $3.00 Graph 10
The figure below represents the effects in the labor markets due to migration. Here, the world has been divided into a high-income "North" (left panel) and a low-income "South" (right panel). Dn and Sn are the labor demand and the labor supply curves in North. Ds and (Sr + Smig) are the labor demand and pre-migration labor supply curves in South. Sr is the post-migration labor supply curve in South. The value c is the cost of migrating. The world's net gain due to migration is represented by the area
(b + f). Graph 10
The table below shows the number of labor hours required to produce one gallon of wine and one pound of cheese in the United States and France. The opportunity cost of producing cheese in the United States is LH to Make -> USA -> France 1G of Wine -> 4.00 -> 1.00 1lb Cheese -> 1.00 -> 2.00
0.25 gallon of wine.
Suppose the amount of exports of textile machinery from Italy to the rest of the world equals 60 billion tons. The amount of imports of textile machinery into Italy from the rest of the world is 40 billion tons. Therefore, the intra-industry trade share for machinery is
0.8.
The interest rate is 4 percent in the U.K. and 3 percent in the U.S. for 90 days. The current spot rate is $2.00/£ and the forward rate is $1.96/£. If a U.S.-based investor expects the spot rate to remain at $2.00/£ in 90 days, the expected uncovered interest rate differential would be _____ in favor of the _____ investment.
1%; pound
The table below shows the number of umbrellas and bushels of corn produced in the United Kingdom and the rest of the world per labor hour. If the United Kingdom and the rest of the world begin to trade with each other, the international price of umbrellas will lie between _____ and _________. Productivity -> UK -> World Umbrellas/LH -> 0.25 -> 1.00 BushCorn/LH -> 0.50 -> 0.67
2/3 of a bushel of corn per umbrella; two bushels of corn per umbrella.
A small country is considering imposing a tariff on imported wine at the rate of $5 per bottle. Economists have estimated the following based on this tariff amount: World price of wine (free trade):$20 per bottleDomestic production (free trade):500,000 bottlesDomestic production (after tariff):600,000 bottlesDomestic consumption (free trade):750,000 bottlesDomestic consumption (after tariff):650,000 bottles Before the tariff is imposed, the country imports _____ bottles of wine, but following the imposition of the tariff, the country will import _____ bottles of wine.
250,000; 50,000 Graph 6
The figure below shows the foreign exchange market. D£ is the nonofficial demand curve for pounds. S£ (Spring-summer) and S£ (Autumn-winter) are the nonofficial supply curves of pounds during the spring-summer and autumn-winter seasons, respectively. In the Spring-summer period, what is the social gain if the British government maintains a fixed exchange rate at $1.90 per pound?
3 billion dollars Graph 12
Suppose the interest rate on six-month treasury bills is 7 percent per year in the United Kingdom and 4 percent per year in the United States. Also, today's spot exchange price of the pound is $2.00 while the six-month forward exchange price of the pound is $1.98. U.S. investors expect that the future spot rate of pounds will be $2.04. By investing in U.K. treasury bills rather than U.S. treasury bills, and NOT covering exchange-rate risk, the approximate extra return that U.S. investors expect to earn for six months is
3.5 percent.
Suppose the dollar per pound exchange rate is $2 per pound while the dollar per Swiss franc exchange rate is 50 cents per franc. From the given information we can conclude that the Swiss franc per pound exchange rate is
4 francs per pound.
Which of the following is an inherent disadvantage to being a multinational enterprise (MNE)?
An MNE does not initially have the native understanding of local laws, customs, procedures, practices, and relationships.
Which of the following would you expect to lead to worsening environmental quality?
An export or production subsidy from the Chinese government to Chinese steel manufacturers
The following figure shows the production-possibility curves for Canada (AB) and the rest of the world (CD). Suppose Canada begins to trade with the rest of the world. If, in the international market, one bushel of corn is exchanged for one liter of maple syrup, Canada will produce _____ bushels of corn and the rest of the world will produce _____ liters of maple syrup. A. 35; 32.5 B. 0; 0 C. 70; 50 D. 90; 100
B. 0; 0 *Graph 1*
The figure below illustrates the market for British pounds. D£ and S£ are the nonofficial demand and supply curves of the British pounds, respectively. If the British government wants to peg the dollar per pound exchange rate at $2.50 per pound, what action would British monetary authorities have to undertake?
Buy 1 million pounds and sell 2.5 million dollars Graph 11
How can one profit through arbitrage if the dollar per euro exchange rate in London is $2 per pound while in New York is $1.95 per pound?
Buy pounds in New York and sell them in London
For a country which has a relatively high rate of inflation and wants some form of pegged exchange rate, which of the following exchange-rate regimes is the best choice?
Crawling peg
Which of the following activities does the International Monetary Fund engage in?
Creation of special drawing rights
In a country's balance of payments, which of the following items will be recorded as a debit entry?
Domestic bank balances owned by foreigners are reduced
Let's assume that cloth-making (labor-intensive) and farming (land-intensive) are the only two sectors of production in a country. If this country is labor-abundant, and if trade corresponds to the Heckscher-Ohlin theory, which of the following groups will gain in the short run, but lose in the long run, from the opening of trade?
Domestic landowners in the domestic cloth-making sector
Given the combination of purchasing power parity (PPP) with quantity theory equations, which of the following statements is true?
Everything else remaining unchanged, the price of the foreign currency (e) would be raised by an increase in the relative size of foreign production.
A parallel or black market often arises as a result of which of the following?
Exchange controls
Which of the following items is recorded in the financial account?
Ford Motor Company of the United States provides part of the financing for a new automobile factory in China.
Which of the following is an example of foreign direct investment?
Ford buys a controlling interest in Peugeot Citroën, a French automobile company.
Which of the following statements about trade and domestic pollution is accurate?
If polluters are not forced to internalize the external costs associated with their production, free trade could result in the country exporting the wrong products.
Which of the following statements is true?
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 statements is true?
If young firms are struggling to retain their trained workers, then government should offer a subsidy to offset the costs of training workers.
Which of the following refers to a two-way trade in which a country both exports and imports the same or very similar products?
Intra-industry trade
Which of the following is true of intra-industry trade?
Intra-industry trade is said to occur when the United States exports Ford automobiles and imports Honda automobiles.
If a British businessman sells U.S. government securities to a U.S. buyer, how will this item be entered in the balance of payments?
It will appear in the financial account as a decrease in the U.S. assets held by foreigners.
Suppose the Japanese government pegs the yen to the U.S. dollar. What could the Japanese central bank do to prevent depreciation of the yen against the dollar in the foreign exchange market?
It would buy yen and sell dollars in the foreign exchange market.
Suppose Country A, a labor-abundant country, produces only drink and furniture. The following equations illustrate the prices and costs of drink and furniture in the country, where the numbers indicate the amounts of labor and land needed to produce a unit of drink and furniture. 'W' is the wage rate and 'r' is the rental rate of land. Price of drink = 1w + 2r Price of furniture = 2w + 1r According to this information, which of the following statements is true?
Labor is used relatively intensively in the production of furniture.
The table below shows the number of labor hours required to produce one gallon of wine and one pound of cheese in the United States and France. The United States has an absolute advantage in the production of LH to Make -> USA -> France 1G of Wine -> 4.00 -> 1.00 1lb Cheese -> 1.00 -> 2.00
Only cheese.
The table below shows the units of land and labor required to produce a unit of bread and cheese respectively in Country X. Identify the correct statement. UNITS: 1 Unit of Bread -> 1 Unit of Cheese Labor Input:5 units -> 20 units Land Input: 4 units -> 10 units
Production of bread is relatively land-intensive in the country.
Which of the following is NOT a function of the interbank part of the foreign exchange market?
Provides clearing services for organizations that prefer to use different currencies
The figure below depicts the relationship between the social benefits and social costs associated with different levels of pollution. The two curves are Social Marginal Cost (SMC) and Social Marginal Benefit (SMB). The other terms are P = Price of the commodity, MC = Marginal Cost (private), and MB = Marginal Benefit (private). For pollution level 'a', _____, therefore the country should _____ pollution.
SMB > SMC; increase Graph 9
For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example that includes hedging?
Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars
For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example that includes speculating?
Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate
Which of the following refers to transfer pricing by a multinational enterprise (MNE)?
Setting prices by the company for things that move between the units of the company
_____ means committing oneself to an uncertain future value of one's net worth in terms of home currency.
Speculating
The figure below illustrates the market for British pounds. D£ and S£ are the nonofficial demand and supply curves of the British pounds, respectively. If the U.S. Federal Reserve uses a contractionary monetary policy to raise U.S. interest rates, the _____ curve would shift right and the pound would tend to
S£; depreciate. Graph 11
Which of the following statements is true?
The WTO allows a country to impose an import restriction on a good for health reasons as long as the country also restricts the domestic production or consumption of the good.
Which of the following has overseen the global rules of government policy toward international trade since 1995?
The World Trade Organization
Which of the following is NOT linked together by uncovered interest parity?
The current forward exchange rate
Which of the following can help explain the rise of intra-industry trade?
The demand for product variety has increased substantially over time.
Which of the following arguments for protection is derived from the fact that funding of public goods in some countries is difficult given little or no means to collect income or sales taxes?
The developing government argument
Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. Which of the following interventions will stem the pressures for depreciation of the pound?
The government of Britain should buy pounds and sell dollars.
The figure below shows the national market for mopeds in a small country. Dd and Sd are the domestic demand and supply curves of mopeds, respectively. Initially, the country's government has a tariff on imports of mopeds. The figure below shows the marginal external benefit curve (MEB) of the country from the production of domestic mopeds. What will be the impact on the national well-being if, instead of imposing a tariff of $50 per unit, the government provides a subsidy of $50 per unit to the domestic manufacturers of mopeds?
The national welfare will increase by $5 million. Graph 8
Suppose Country A had been traditionally enjoying a comparative advantage in the production of Good X. As a result, most of the large firms manufacturing and exporting Good X were concentrated in Country A. However, recently it has been observed that the comparative advantage in the production of Good X has shifted to Country B owing to better factor availability and lower input prices. Some new firms are contemplating to start operating in Country B. Which of the following conditions probably must be fulfilled to ascertain that these new firms will enjoy a cost advantage over the established firms in Country A?
The output level of the new firms in Country B should be large enough to enable them to achieve scale economies.
Suppose that U.S. prices rise 4 percent over the next year while prices in Mexico rise 6 percent. According to the purchasing power parity theory of exchange rates, which of the following should happen?
The peso will depreciate.
Which of the following is true of capital controls?
They are socially inefficient methods of maintaining a fixed exchange rate
The table below shows the number of labor hours required to produce one gallon of wine and one pound of cheese in the United States and France. What is the relative price of cheese (the price of cheese in terms of wine) in France under a no-trade situation? LH to Make -> USA -> France 1G of Wine -> 4.00 -> 1.00 1lb Cheese -> 1.00 -> 2.00
Two gallons of wine per pound
Vineland and Moonited Republic produce wine and cheese. The opportunity cost for the production of a bottle of wine in Vineland is two pounds of cheese, and in the Moonited Republic is 2.5 pounds of cheese. Based on this information, it can be concluded that
Vineland has a comparative advantage in the production of wine.
The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy is at Point A, a triple intersection. Here, the FE curve is steeper than the LM curve. At Point B, the economy is experiencing
a deficit in the overall balance of payments. Graph 13
The figure below shows the national market for mopeds in a small country. Dd and Sd are the domestic demand and supply curves of mopeds, respectively. The figure below shows the marginal external benefit curve (MEB) of the country from the domestic production of mopeds. The overall impact of the tariff on the nation would be
a gain of $5.75 million. Graph 8
If Country X has higher labor productivity in the production of umbrellas than the rest of the world, we would say that Country X has a(n) _____ in the production of umbrellas.
absolute advantage
Everything else fundamentally remaining unchanged, the monetary approach predicts that a 5 percent cut in the money supply by the Fed will result in
an appreciation of the U.S. dollar vis-à-vis other currencies.
Scale economies are said to be present when
an increase in output leads to a decrease in average cost.
Multinationals typically operate in a market structure that would best be described as
an oligopoly.
The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy was at Point A, a triple intersection. Here, the FE curve is flatter than the LM curve. If monetary authority is unable to sterilize, the interest rate will end up
between i1 and i0. Graph 14
As a result of the Uruguay Round, production of _____ goods increased in industrialized countries and polluting emissions in these countries _____ as a result.
capital and skill-intensive; increased
The table below shows the export and import values of automobiles, pharmaceuticals, and clothing in Country A and Country B. Country A Exports ($Billions)Imports ($Billions)Automobiles2040Pharmaceuticals3030Clothing400 Country B Exports ($Billions)Imports ($Billions)Automobiles020Pharmaceuticals4040Clothing4535 The IIT share is zero for _____ in Country A and for _____ in Country B.
clothing; automobiles *Graph 4*
In international trade jargon, constant-cost production-possibility curves are associated with _____ specialization, while increasing-cost production-possibility curves are associated with _____ specialization.
complete; partial
The figure below shows the market for shoes in a small importing country. Dd and Sd are the domestic demand and supply curves of shoes, respectively. The consumption effect of the tariff on shoes is measured by the area
d. Graph 7
The figure below shows the market for shoes in a small importing country. Dd and Sd are the domestic demand and supply curves of shoes, respectively. Following the imposition of a tariff, the domestic consumer surplus _____ by the area
decreases; (a + b + c +d). Graph 7
Under the floating exchange-rate system, a fall in the market price of a currency is called
depreciation.
Under a fixed exchange-rate system, a large fall in the market price (the exchange rate value) of a currency is called a(n) _____ of that currency.
devaluation
In the case in which foreign affiliates undertake the same kind of production as the parent firm, the affiliate _____ some trade in that product. The affiliate also _____ trade through better local marketing of other products produced by the multinational in other countries.
displaces; expands
A(n) _____ of the money supply in a country _____ the domestic interest rates.
expansion; decreases
Country Y has fifteen thousand acres of land and forty-five thousand laborers, whereas the Rest of the World has one hundred thousand acres of land and two hundred thousand laborers. These countries produce a labor-intensive Good A, and a land-intensive Good B. When trade opens up between these countries, it can be inferred that Country Y will
export Good A, and import Good B.
Assume a two-country, two-commodity, and two-input model. Let the two countries in this model be the United States and the Rest of the World and the two goods being produced by each of the countries be steel and wheat. The two factors of production used in producing the goods in each country are capital and land. If the United States is capital-abundant and steel production is capital-intensive, the Heckscher-Ohlin model would predict that the United States would
export steel and import wheat.
Consumers of the exportable product in the exporting country are most likely to gain when trade is based on
external scale economies.
Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. If the countries engage in free trade, the price of food will
fall in Alpha and rise in Beta.
Suppose Country A collectively enjoys monopsony power in Good X. If Country A imposes a tariff on the imports of Good X, the world price of Good X will
fall.
The net value of flows of financial assets and similar claims (excluding official international reserve asset flows) is called the
financial account balance.
Under perfect capital mobility and fixed exchange rates, expansionary _____ is especially effective because the
fiscal policy; interest rate does not change
There are limits to the ability of monetary authorities to use sterilized intervention in the case of a surplus because
foreign countries will increase political pressures on the country to allow its currency to appreciate.
When the current $/£ forward rate is below the current spot rate, the pound is at a(n)
forward discount.
During the 20th century and into the 21st, the U.S. net international investment position has
gone from negative to positive and back to negative.
In the short-run, following the opening of trade
groups tied to declining sectors of the economy will suffer from lower returns.
A country that is saving more than it is investing domestically
has a current account surplus.
Internal shocks to an economy with a fixed exchange rate will
have the same types of impacts as monetary and fiscal policy changes.
Company X is a perfume manufacturer and one of its popular products involves rosewood. It is deeply concerned with the market price fluctuations of rosewood. To protect this, it enters into a contract which would allow the company to buy rosewood at a specific price at a given future date. This is an example of
hedging.
The Heckscher-Ohlin theory predicts that the opening of trade between a land-abundant country and a labor-abundant country should result in
higher wages in the labor-abundant country and higher rents in the land-abundant country.
When external scale economies exist in an industry, new trade opportunities will cause consumers
in both the exporting and importing countries to gain.
Rapid increases 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.
increase in the supply of; increase in the demand for
Assume that Country X produces two goods—sugar and shoes—and that the country's production possibility curve is "bowed-out." As the country produces more sugar the opportunity cost of sugar in terms of shoes foregone will
increase.
Consider a two-country, two-commodity model. The table below shows the units of Good X and Good Y produced in Country A and Country B per labor hour. If Country B transfers one labor hour from the production of Good X to the production of Good Y, total world production of Good Y will _____ by _____ unit(s). Productivity -> Country A -> Country B Good X -> 1.00 -> 0.50 Good Y -> 0.20 -> 0.70
increase; 0.7
If the expected future spot exchange rate value of the foreign currency decreases, with the interest rate differential unchanged, the current spot exchange-rate value of the domestic currency
increases.
The figure below shows the market for shoes in a small importing country. Dd and Sd are the domestic demand and supply curves of shoes, respectively. Following the imposition of a tariff, the domestic producer surplus _____ by the area
increases; a. Graph 7
As the world moves toward freer trade, the composition of production shifts so that more environmentally "dirty" products are produced in _____ and more environmentally "clean" products are produced in
industrialized countries; developing countries.
Official intervention in the foreign exchange market to defend a fixed-exchange rate when the value of the country's currency is under downward pressure causes
international reserve holdings to fall.
Following an expansion of the money supply, a government committed to maintaining a fixed exchange rate must
intervene in the foreign exchange market to sell foreign currency and buy domestic currency.
A country experiencing a current account surplus
is able to lend internationally.
When Adam Smith presented his theory of absolute advantage, he assumed that all "value" in an economy was determined by and measured in terms of the _____ used in the production of the various goods.
labor hours
If international capital flows are highly responsive to interest rates, expansionary fiscal policy will
lead to financial account surpluses.
The figure below represents the effects in the labor markets due to migration. Here, the world has been divided into a high-income "North" (left panel) and a low-income "South" (right panel). Dn and Sn are the labor demand and the labor supply curves in North. Ds and (Sr + Smig) are the labor demand and pre-migration labor supply curves in South. Sr is the post-migration labor supply curve in South. The value c is the cost of migrating. As an effect of the migration, the native employees in North
lose welfare given by area a. Graph 10
The financial account in the U.S. balance of payments includes
new U.S. investments in foreign countries.
If Social Marginal Benefit (SMB) > Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Cost (SMC), it implies that
not enough of a good is being demanded.
The table below shows the export and import values of automobiles, pharmaceuticals, and clothing in Country A and Country B. Country AExports ($Billions)Imports ($Billions)Automobiles2040Pharmaceuticals3030Clothing400 Country BExports ($Billions)Imports ($Billions)Automobiles020Pharmaceuticals4040Clothing4535 In Country B, the product with the highest intra-industry trade (IIT) share is _____ and the product with the lowest IIT share is
pharmaceuticals; automobiles. *Graph 4*
In the figure below, AB is the production-possibility curve of Canada. I1 and I2 are two of the community indifference curves of Canada. In the absence of trade Canada will:
produce and consume at point C0. *Graph 3*
In the figure below, AB is the production-possibility curve of Canada. The line PQ shows the price ratio of one bushel of wheat/bale of cotton. The international price ratio is 0.25 bushels of wheat/bale of cotton as shown by the line RS. I1 and I2 are two of the community indifference curves of Canada. After Canada engages in free trade, it will:
produce at point S1 and consume at point C1. *Graph 2*
According to the Stolper-Samuelson theorem, an increase in the price of a country's imports will
raise the returns to the factor of production used intensively in the import-competing industry.
Country A is relatively land-abundant, and wheat is relatively land-intensive. Given the assumptions of the Heckscher-Ohlin model, the opening of trade by this country will cause the domestic price of wheat to
rise.
Assume you are a Chinese exporter and expect to receive $250,000 at the end of 60 days. You can remove the risk of loss due to a devaluation of the dollar by
selling dollars in the 60-day forward exchange market.
If the spot price of the euro is $1.10 per euro and the 30-day forward rate is $1.00 per euro, and you believe that the spot rate in 30 days will be $1.05 per euro, then you can try to maximize speculative gains by
signing a forward foreign exchange contract to sell dollars in 30 days.
A(n)_____ is a tax on imports that is stipulated as a money amount per unit.
specific tariff
The phenomenon of overshooting is based on the existence of
sticky prices and the belief that purchasing power parity(PPP) and the monetary approach hold in the long run.
The United States produces some of the electronic components used as inputs in its fighter planes. But due to the limited number of companies that produce these items, it imports these parts from Japan as well. There is concern that in the case of a prolonged war, these important imports may not be available. Fearing that the Air Force may be unable to fulfill its tasks in the case of a prolonged war, the specificity rule suggests that the United States should
subsidize the domestic production of these electronics parts.
If the use of fossil fuels is harming our nation, according to the specificity rule the optimal policy to use to mitigate this harm is to
tax the consumption of fossil fuels.
Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. The British government can only intervene in the foreign exchange market for a limited period of time because
the British government will run out of official international reserves.
Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. If the British government uses unsterilized intervention in the foreign exchange market, then it is expected that
the British money supply will fall.
If investors begin to expect a decrease in the value of the Thai baht vis-à-vis other currencies, their actions will cause
the actual depreciation to occur much faster.
A deficit in the overall balance of payments of a nation generally is an indication that
the country's monetary authority is selling foreign currency.
Consider the interaction between U.S. dollars and U.K. pounds. When the forward premium on the dollar is zero, it means
the current forward price of dollars equals the current spot price of dollars.
The current account balance does NOT equal
the difference between government saving and government investment.
If a country starts with a surplus in its official settlements balance, intervention to defend a fixed exchange rate will cause
the money supply to expand and the economy to grow.
Labor productivity refers to:
the number of units of output a worker can produce in one hour.
In 1989 the United States passed a law against catching shrimp with nets that do not have turtle excluder devices. Four Asian countries filed a complaint with the Word Trade Organization (WTO), and it ruled that the U.S. policy violated WTO rules because
the policy did not apply equally to all exporting nations and did not recognize alternative ways to protect sea turtles.
The figure below illustrates the market for British pounds. D£ and S£ are the nonofficial demand and supply curves of the British pounds, respectively. If the exchange rate is pegged at $2.50 per pound
the pound will be overvalued. Graph 11
When domestic production causes pollution that imposes an external cost on the country, the country may export the wrong products because
the price of the product should be higher, which could lead to no exports of the product.
If Social Marginal Cost (SMC) > Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Benefit (SMB), it implies that
the product is oversupplied.
The United States is relatively capital-abundant because
the ratio of capital to other inputs is greater in the United States than that in the rest of the world.
The Stolper-Samuelson theorem indicates that, after a country shifts to free trade
the real return to the factor used intensively in the export industry will rise in the long run.
Suppose Country Y produces only corn and clothing using only two inputs-land and labor. Production of corn requires an intensive use of land whereas clothing is a labor-intensive good. If the price of corn increases by 15 percent and the price of clothing remains constant, the Stolper-Samuelson theorem predicts that in the long run
the rental rate of land will increase by more than 15 percent.
If movement of labor across countries is costless and painless, it can be expected that
the wage rates in the countries will equalize over time.
Suppose the average price of a Big Mac in the United States is $3.50 while in Japan the average price is 400 yen. If the market exchange rate is that 1 dollar is exchanged for 100 yen, the purchasing power parity model of exchange-rate determination suggests that
the yen is overvalued.
Suppose manufacturing of paper results in substantial ground-water pollution. One possible policy that can be used to reduce the inefficiency caused by this externality is
to impose a tax on the production of paper.
Suppose that the domestic production of computer games creates enjoyment for those who play the games. Domestic production of computer games also results in knowledge spillovers that positively impact many other industries. One possible policy that could be employed to encourage increased production of computer games by domestic firms is
to impose tariffs on computer game imports.
The French highly value domestic production of traditional French cheese made by high-cost, traditional production methods. According to the specificity rule, the most efficient policy tool to protect this traditional industry would be
to provide a production subsidy to the domestic firms.
Interbank trading is conducted directly between _____ or through the use of _____ that provide anonymity until the trade is complete.
traders; brokers
The law of one price works better if
transportation costs for the product are close to zero.
Free trade may lead to more pollution because
with free trade, the size of the economy increases resulting in higher production and consumption.