6th

The money supply schedule is

vertical because MS is set by the central bank while P is taken as given.

If there is initially

excess supply of money, the interest rate falls, and if there is initially an excess demand, it rises.

An increase in a country's money supply causes

its currency to depreciate in the foreign exchange market while a reduction in the money supply causes its currency to appreciate.

A reduction in a country's money supply causes:

its currency to appreciate in the foreign exchange market.

Customs unions differ from free trade areas by the manner in which A. member countries apply tariffs to nonmembers. B. members share the gains from trade with each other. C. countries attain membership. D. the WTO adjudicates disputes between the members.

A

If people expect relative PPP to hold A) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, in the United States and Europe, respectively, over the relevant horizon. B) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected in Europe and the United States, respectively. C) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively, in the short run. D) the difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively. E) the difference between the interest rates offered by dollar and euro deposits will be below the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively.

A

In practice A) changes in national price levels often tell us relatively little about exchange rate movements. B) changes in national price levels raise the exchange rate. C) changes in national price levels lower the exchange rate. D) changes in national price levels often tell us about exchange rate movements. E) changes in national price levels match identical changes in the exchange rate.

A

In the short run A) the interest rate can rise when the domestic money supply falls. B) the interest rate can decrease when the domestic money supply falls. C) the interest rate stays constant when the domestic money supply falls. D) the interest rate rises in the same proportion as the domestic money supply falls. E) the interest rate never rises when the domestic money supply falls.

A

Our usual models of trade assume that jobs lost in one industry will be offset by jobs gained in other industries. The Autor et al. paper​ argued, however, that communities that lose manufacturing jobs to imports end up losing other jobs as well. Is this a​ contradiction? The Autor et al. paper A. does not contradict our usual models because the gains and losses from trade may B. contradicts our usual models because workers are predicted to acquire different skills to benefit from trade. C. contradicts our usual models because consumer demand is predicted to increase with lower prices. D. contradicts our usual models because workers are predicted to move geographically to benefit from trade. E. does not contradict our usual models because a​ country's industries are rarely so geographically concentrated.

A

Given PUS and YUS,

An increase in the European money supply causes the euro to depreciate against the dollar, but it does not disturb the U.S. money market equilibrium.

The monetary approach to interest rates assumes that the prices of goods are ________, which implies that a country's currency will ________, when nominal interest rates ________ because of ________ expected future inflation. A) perfectly flexible; depreciate; increase; higher B) perfectly flexible; appreciate; increase; higher C) immutable; depreciate; increase; higher D) immutable; appreciate; decrease; higher E) absolutely inflexible; depreciate; decrease; higher

A

Under Purchasing Power Parity A) E$/E = PUS/PE. B) E$/E = PE/PES. C) E$/E = PUS + PE. D) E$/E = PUS - PE. E) E$/P = PUS/PE.

A

Under sticky prices A) a fall in the money supply raises the interest rate to preserve money market equilibrium. B) a fall in the money supply reduces the interest rate to preserve money market equilibrium. C) a fall in the money supply keeps the interest rate intact to preserve money market equilibrium. D) a fall in the money supply does not affect the interest rate in the short run, only in the long run. E) a fall in the money supply raises the interest rate to preserve money market equilibrium in the long run.

A

When the nominal dollar interest rate ________, money demand will ________, and the general price level will ________. A) increases; decrease; increase B) increases; increase; increase C) increases; decrease; decrease D) increases; increase; decrease E) decreases; increase; increase

A

Which of the following statements is MOST accurate? A) A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. B) A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. C) A relative expansion of U.S. output causes a long-run appreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real depreciation of the dollar against the euro. D) A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro. E) A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.

A

Which of the following statements is MOST accurate? A) In the money market, an increase in U.S. money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. B) In the money market, an increase in European money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. C) In the money market, an increase in U.S. money supply growth rate leads to a decrease in the long-run nominal dollar/euro exchange rate. D) In the money market, an increase in European money supply growth leads to an increase in the long-run nominal dollar/euro exchange rate. E) In the money market, an increase in U.S. money supply level leads to a proportional decrease in the long-run nominal dollar/euro exchange rate.

A

Which of the following statements is the MOST accurate? In general A) the monetary approach to the exchange rate is a long run theory. B) the monetary approach to the exchange rate is a short run theory. C) the monetary approach to the exchange rate is both a short and long run theory. D) the monetary approach to the exchange rate neither long run nor short run theory. E) the monetary approach to the exchange rate is considered less practical than the law of one price.

A

Which of the following statements is the MOST accurate? The law of one price states A) in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. B) in competitive markets free of transportation costs and official barrier to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency. C) in competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price. D) identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. E) in competitive markets free of official barrier to trade, identical goods are sold at the same price regardless of transportation costs.

A

Why are international negotiations important in order to reduce tariff rates​ worldwide? A. They help avoid trade wars. B. ​Special-interest groups cannot affect international negotiations. C. Large countries can impose policy restrictions on smaller countries. D. The world as a whole gains from free trade.

A

For trade to take place, a country must face a world relative price that is A. different from the relative price that would prevail in the absence of trade. B. more than the relative price that would prevail in the absence of trade. C. the same as the relative price that would prevail in the absence of trade. D. less than the relative price that would prevail in the absence of trade.

A. different from the relative price that would prevail in the absence of trade.

Movement of labor from a Foreign country to the domestic (Home) economy A. increases the marginal product of labor in Foreign. B. increases the marginal product of labor at Home. C. leaves the marginal product of land unchanged in both countries. D. occurs only is the marginal product of labor is higher in Foreign than at Home.

A. increases the marginal product of labor in Foreign.

As more labor is used, holding capital constant, A. the marginal product of labor decreases. B. the shape of the production function gets steeper from left to right. C. the marginal product of labor increase.

A. the marginal product of labor decreases.

A pollution haven is said to exist when A. the industrial countries choose an​ area, usually in the less developed​ world, to dispose of industrial wastes. B. an economic activity becomes concentrated in countries or regions having less strict environmental controls than elsewhere. C. a country fails to prosecute violators of its environmental regulations. D. a poorer region or country agrees to store pollutants in exchange for aid.

B

An increase in the world relative demand for U.S. output causes A) a short-run real depreciation of the dollar against the euro. B) a long-run real appreciation of the dollar against the euro. C) a long-run real depreciation of the dollar against the euro. D) a short-run real appreciation of the euro against the dollar. E) a long-run real appreciation of the euro against the dollar.

B

Floating exchange rates A) systematically lead to much larger but less frequent short-run deviations from the absolute PPP. B) systematically lead to much larger and more frequent short-run deviations from the relative PPP. C) systematically lead to much smaller and less frequent short-run deviations from the relative PPP. D) systematically lead to much smaller but more frequent short-run deviations from the relative PPP. E) systematically lead to much smaller and less frequent short-run deviations from the absolute PPP.

B

GNP​ (Gross National​ Product) equals GDP plus A. indirect business taxes. B. net receipts of factor income from the rest of the world. C. a statistical discrepancy. D. the capital consumption allowance.

B

If governments make trade policies based on national economic​ welfare, is the problem of trade warfare still represented by a​ "Prisoner's dilemma"​ game? What is the equilibrium solution to the game if governments formulate policy in this​ way? Would they ever choose the strategy of​ protectionism? A. It is still a​ Prisoner's dilemma​ game; however, now each​ country's dominant strategy would be to engage in free trade and there would be no incentive to switch to protectionism. B. In this​ case, it would no longer be a​ Prisoner's dilemma​ game; each​ country's dominant strategy would be to engage in free trade and there would be no incentive to switch to protectionism. C. It is still a​ Prisoner's dilemma​ game; however, now each​ country's dominant strategy would be to engage in free trade. This equilibrium is unstable as there would be an incentive for large countries to switch to protectionism to reap additional gains. D. In this​ case, it would no longer be a​ Prisoner's dilemma​ game; each​ country's dominant strategy would be to engage in free trade. ​ However, this equilibrium is unstable as there would be an incentive for large countries to switch to protectionism to reap additional gains.

B

The difference between nominal and real interest rates is that A) nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms. B) nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output. C) nominal interest rates can fluctuate, while real interest rates always remain fixed. D) real interest rates can fluctuate, while nominal interest rates always remain fixed. E) real interest rates are the same in every country, while nominal interest rates are different for every country.

B

The​ "theory of the second​ best" states that A. free trade is only the​ "second best"​ policy, after the optimal tariff. B. in the presence of a market​ failure, government intervention may improve welfare. C. trade intervention is the best policy for dealing with domestic market imperfections. D. there is always an alternative solution if the first best is not feasible.

B

What is the main problem with imposing environmental​ standards? A. Consumers in developed countries are not willing to pay more for​ "clean" goods. B. They can cause potential export industries to shut down in poor countries. C. It is too costly to monitor. D. Countries cannot settle on a particular standard.

B

What is the main reason explaining why agriculture enjoys protective tariffs in the​ U.S.? A. Unfair competition from European agriculture. B. Producers​ (who gain) are well​ organized, while consumers​ (who lose) are not. C. Low wages in the agriculture sector would fall even further in the absence of protection. D. Environmental and health concerns force the government to restrict​ non-compliant imports.

B

Which of the following is NOT a valid argument against a strategic trade policy in an​ externality-generating sector? A. The externalities are hard to measure. B. The externalities can spill over across the border if free trade is allowed. C. Such policies can lead to trade wars. D. It might be better to address the appropriability problem directly.

B

Which of the following is not a key assumption that allows strategic trade policy to work effectively in the​ Brander-Spencer example of Airbus and​ Boeing? A. The economies of scale are large for each firm. B. A subsidy enables both firms to operate profitably. C. Firms can earn excess returns. D. Only one firm can profitably produce aircraft.

B

Which of the following statements is MOST accurate? A) In the output market, an increase in demand for U.S. output leads to an increase in the long-run nominal dollar/euro exchange rate. B) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate. C) In the output market, a decrease in demand for U.S. output leads to a decrease in the long-run nominal dollar/euro exchange rate. D) In the output market, an increase in the demand for European output leads to a decrease in the long-run nominal dollar/euro exchange rate. E) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal euro/dollar exchange rate.

B

Which of the following statements is the MOST accurate? A) Relative PPP is not a reasonable approximation to the data. B) Relative PPP is sometimes a reasonable approximation to the data but often performs poorly. C) Relative PPP is sometimes a reasonable approximation to the data. D) PPP is sometimes a reasonable approximation to the data. E) PPP is sometimes a reasonable approximation to the data but usually performs poorly.

B

Assume a specific factors economy produced two goods, cloth and food, and that when representing the output of this economy graphically, cloth is on the x-axis and food is on the y-axis. When the price of cloth increase by 5% and the price of food increases by 5%. A. the output of food falls. B. the output of cloths rises. C. the real incomes of landowners remain the same. D. labor shifts from the food sector to the clothes sector.

C. the real incomes of landowners remain the same.

Which of the following statements is the MOST accurate? A) The prices of identical commodity baskets, when converted to a single currency, are the same across countries. B) The prices of identical commodity baskets, when converted to a single currency, differ substantially across countries. C) The prices of identical commodity baskets, when converted to a single currency, do not differ substantially across countries. D) The prices of identical commodity baskets, when converted to a single currency, are often the same across countries. E) The prices of identical commodity baskets, when converted to a single currency, are the same across countries more than 50% of the time.

B

Who among the following list of people is an early 20th century economist from Yale University who wrote the book The Theory of Interest? A) Gustav Cassel B) Irving Fisher C) David Ricardo D) Paul Krugman E) Israel Kirzner

B

​France, in addition to its occasional stabs at strategic trade​ policy, pursues an active nationalist cultural ​policy, promoting French​ art, music,​ fashion, cuisine, and so on. This may be primarily a matter of attempting to preserve a national identity in an increasingly homogeneous​ world, but some French officials also defend this policy on economic grounds. In what sense could some features of such a policy be defended as a kind of strategic trade​ policy? A. There are no economic grounds for pursuing a nationalist cultural policy. B. Promoting French culture is a strategic trade policy in that it promotes tourism and industries related to French culture such as the textile and wine industries. C. Nationalist pride can encourage French workers and firms to produce high quality goods for export.

B

Some retailers in advanced countries sell products from developing countries with low wages but assure customers that these goods are produced under tolerable working conditions. Is demanding that kind of guarantee the same thing as putting a tariff on​ low-wage exports? Demanding the working conditions guarantee A. is the same thing as a tariff because both decrease import consumption. B. is different than a tariff because it increases consumer demand. C. is different than a tariff because it decreases market prices. D. is different than a tariff because it raises government revenue. E. is the same thing as a tariff because both increase production costs. Is there any way demanding a working conditions guarantee can benefit workers​ overseas? Demanding tolerable working conditions A. could benefit overseas workers if the demand for their labor decreases. B. could hurt overseas workers if their employers earn higher profits. C. will not affect overseas workers if retailers receive more revenue. D. could benefit overseas workers if they are paid higher wages.

B, D

in 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing country, this was widely regarded as good for the US economy. Yet in Texas and Louisiana, 1986 was a year of economic decline. Why? In Texas and Louisiana, 1986 was a year of economic decline because in these two states, A. a significant fraction of workers in the oil industry transferred to other sectors. B. Oil production was reduced. C. even though owners of capital in the oil industry benefitted, workers in the oil industry experienced high rates of unemployment.

B. Oil production was reduced.

Brander-Spencer analysis states that A. competition can be enhanced by international trade. B. monopoly profits can be eliminated by international trade. C. monopoly profits can be moved from one country to another by a government subsidy. D. monopoly profits can be eliminated by trade policies.

C

Do data on the U.S. official settlements balance give an accurate picture of the extent to which foreign central banks buy and sell dollars in currency​ markets? A. ​Yes, this account balance is equal to the total net sales of dollars by foreign central banks. B. ​Yes, this account balance is equal to the total net purchases of dollars by foreign central banks. C. ​No, this account provides only a partial picture because it shows a net value of all transactions. D. ​No, this account does not include sales or purchases of dollars by foreign central banks.

C

How does the WTO justify its position on trade disputes that involve environmental​ issues? A. Imposing uniform environmental standards on all countries prevents any one country from gaining an unfair advantage. B. It requires developed countries to meet the same standards. C. It forces member countries to apply the same standards to imported goods that it applies to domestically produced goods. D. The WTO argues that it is not its place to impose environmental regulations on sovereign nations.

C

If the United States had its​ way, it would demand that Japan spend more money on basic research in science and less on applied research into industrial applications. Explain why in terms of the analysis of appropriability. A. Research targeting specific problems in an industry does not produce an externality that can be appropriated by other firms. Only basic research generates a technology externality. B. Research targeting problems in specific industries will lead to a competitive advantages for Japan that the U.S. cannot appropriate. C. The benefits to the United States of Japanese basic research would exceed the benefits from Japanese research targeted to specific problems in Japanese industries. D. All of the above.

C

In an open economy holding GNP and consumption spending constant and where private savings equals domestic​ investment, a government budget deficit must be matched by A. a positive difference between domestic exports and imports. B. a current account balance. C. a current account deficit. D. a current account surplus.

C

In the long run A) exchange rates obey relative PPP when all disturbances occur in the output markets. B) exchange rates obey absolute PPP when all disturbances occur in the output markets. C) exchange rates are unlikely to obey relative PPP when all disturbances occur in the output markets. D) exchange rates are unlikely to obey relative PPP when all disturbances are monetary in nature. E) exchange rates obey absolute PPP when all disturbances are monetary in nature.

C

Many countries have​ value-added taxeslong dash—taxes that are paid by​ producers, but are intended to fall on consumers.​ (They're basically just an indirect way of imposing sales​ taxes.) Such​ value-added taxes are always accompanied by an equal tax on​ imports; such import taxes are considered legal​ because, like the​ value-added tax,​ they're really an indirect way of taxing all consumer purchases at the same rate. Compare this situation to the argument over carbon tariffs. Which of the following statements regarding carbon tariffs is​ true? A. A carbon tariff is put into place to encourage domestic firms to move their production to a pollution haven with lax environmental regulations. B. A carbon tariff would give an artificial advantage to domesticdomestic firms if it would be more costly for a domesticdomestic firm to reduce its carbon emissions than a foreignforeign firm. C. An objection over carbon tariffs is that they may be discriminating between domestic and foreign goods. D. By imposing a carbon tariff on​ imports, the overall level of pollution will be increased.

C

The expected rate of change in the nominal dollar/euro exchange rate is best described as A) the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe expected inflation difference. B) the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe real interest rate difference. C) the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe expected inflation difference. D) the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe real interest rate difference. E) the expected rate of change in the real dollar/euro exchange rate plus the European expected inflation.

C

Under PPP (and by the Fisher Effect), all else equal A) a rise in a country's expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation. B) a fall in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. C) a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. D) a rise in a country's expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation. E) a fall in a country's expected inflation rate will eventually cause an inversely proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.

C

Under Purchasing Power Parity A) E$/E = PiUS/PiE. B) E$/E = PiE/PiUS. C) E$/E = PUS/PE. D) E$/E = PE/PES. E) E$/E = PiE + PiUS/PiE.

C

Under the monetary approach to exchange rate theory, money supply growth at a constant rate A) eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. B) eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do affect the full-employment output level and the long-run relative prices of goods and services. C) eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. D) eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services. E) eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services.

C

What is the main critique against the WTO with respect to environmental​ protection? A. The​ WTO's stance on environmental protection supports protectionist trade policy. B. The WTO interferes with environmental policy of sovereign nations. C. It​ doesn't do enough to impose tougher environmental standards on developing countries. D. It imposes environmental standards on developing countries that they cannot afford.

C

What is the main problem with imposing labor standards to prevent child labor and poor working conditions in the exporting sector of a​ less-developed country? A. Countries cannot settle on a particular standard. B. It is too costly to monitor. C. ​Less-developed countries are opposed to them. D. Consumers in developed countries are not willing to pay more for goods produced in better conditions.

C

Which of the following is not part of the definition for Gross National​ Product? A. The market value... B. ...of all final goods and services... C. ...produced within a​ country's borders... D. ...within a given period of time.

C

Which of the following statements is MOST accurate? A) The United States price level will place a relatively light weight on commodities produced and consumed in America, while the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. B) The United States price level will place a relatively light weight on commodities produced and consumed in America, and the European price level will place a relatively light weight on commodities produced and consumed in Europe. C) The United States price level will place a relatively heavy weight on commodities produced and consumed in America, and the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. D) The United States price level will place a relatively heavy weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America. E) The United States price level will place a relatively light weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America.

C

Which of the following statements is the MOST accurate about the Law of One Price on Scandinavian ferry lines? A) Due to menu costs, the Law of One Price does not hold. B) To avoid arbitrage opportunities, the Law of One Price must hold. C) Transaction costs of exchanging currency causes the Law of One Price to fail. D) Transportation costs between ferry lines leads to a violation of the Law of One Price. E) The physical distance allowed the Law of One Price to hold.

C

Which of the following statements is the MOST accurate? A) If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same. B) If the law of one price holds true for every commodity, PPP must hold automatically. C) If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same. D) If the law of one price does not hold true for every commodity, PPP cannot be true as long as the reference baskets used to reckon different countries' price levels are the same. E) If PPP holds true, then the law of one price must hold true automatically.

C

Which of the following statements is the MOST accurate? A) Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over different commodities space. B) Absolute PPP may be valid even when relative PPP is not, provided the factors causing deviations from relative PPP are more or less stable over time. C) Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time. D) Relative PPP is not valid when absolute PPP is not. E) Relative PPP is only valid when absolute PPP is valid, providing the factors causing deviations from relative PPP are more or less stable over time.

C

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate A) while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. B) while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply do not affect the interest rate. C) while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. D) the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate. E) while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate.

C

Which one of the following statements is the MOST accurate? A) Relative price changes could not lead to PPP violations even if trade were free and costless. B) Relative price changes could lead to PPP violations only if trade were free and costless. C) Relative price changes could lead to PPP violations even if trade were free and costless. D) Price changes could lead to PPP violations even if trade were free and costless. E) Price changes could not lead to PPP violations even if trade were free and costless.

C

Which one of the following statements is the MOST accurate? A) The purchasing power of any given country's currency will increase in countries where the prices of non-tradable goods rise. B) The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods fall. C) The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods rise. D) The purchasing power of any given country's currency will remain constant in countries where the prices of non-tradable goods rise. E) The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods remain constant.

C

When opening up to trade, an economy A. exports and import the good whose relative price has decreased. B. A. exports and import the good whose relative price has increase. C. exports the good whose relative price has increased and imports the god whose relative price has decreased. D. exports the good whose relative price has decreased and imports the good whose relative price has increased.

C. exports the good whose relative price has increased and imports the god whose relative price has decreased.

According to the one-good model, international mobility labor A. does not fully equalize real wages across countries. B. makes everyone in the world better off. C. increase the world's output. D. does not affect the marginal output of land.

C. increase the world's output.

Trade benefits A. all factors in the economy. B. the factor that is specific to the import - competing sectors. C. the factor that is specific to the export sector of each economy. D. mobile factors.

C. the factor that is specific to the export sector of each economy.

GNP accounts avoid double counting by including only the value of final goods and services sold on the market. Should the measure of imports and exports used in the GNP accounts therefore be defined to include only imports and exports of final goods and services received from and sold to other​ countries? A. Total value of imports should be​ included, but only the value of exports of final goods. B. ​Yes, only the value of final goods that are exported or imported should be included. C. Total value of exports should be​ included, but only the value of imports of final goods. D. ​No, total values and imports and exports should be included in the calculation of the GNP.

D

Give an intuitive explanation for the optimal tariff argument. A. In a small​ country, a tariff can unfavorably shift the terms of trade such that the welfare loss exceeds the tariff revenue. B. In a small​ country, a tariff can favorably shift the terms of trade such that the tariff revenue exceeds the welfare loss. C. In a large​ country, a tariff can unfavorably shift the terms of trade such that the tariff revenue exceeds the welfare loss. D. In a large​ country, a tariff can favorably shift the terms of trade such that the tariff revenue exceeds the welfare loss.

D

In January 2013, the world's cheapest Big Macs were sold in A) the Philippines. B) Russia. C) China. D) Malysia. E) the Czech Republic.

D

It's widely believed that​ self-driving vehicles will become commonplace in the fairly near future and that their growth will be fast for years to come.​ Doesn't this mean that the United States should have policies designed to ensure that we are a leader in the​ self-driving car​ industry? Should the U.S. subsidize the domestic​ self-driving car​ industry? The U.S. should A. offer subsidies if the U.S. naturally has a comparative advantage in producing​ self-driving vehicles. B. offer subsidies if the subsidies would promote perfect competition. C. not offer subsidies if the subsidies would lead to technological spillovers. D. offeroffer subsidies if the subsidies wouldwould generate returns from market power in excess of subsidy costs. E. not offer subsidies if the subsidies would lead to excess returns above normal market levels.

D

The expected real interest rate (re) in terms of the nominal interest rate (R) and the expected inflation rate (πe) is given by A) re = πe + R. B) re = 2πe + R2. C) re = πe + R2. D) re = R - πe. E) re = R2 - πe.

D

The monetary approach makes the general prediction that A) the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies. B) the exchange rate, which is the relative price of American and European money, is fully determined in the short run by the relative supplies of those monies and the relative demands for them. C) the exchange rate, which is the relative price of American and European money, is fully determined in the short run and long run by the relative supplies of those monies and the relative demands for them. D) the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them. E) the money supply in the U.S. will adjust to European monetary equilibrium.

D

Which of the following are theories meant to explain "Why Price Levels are Lower in Poorer Countries"? A) only Bhagwati-Kravis-Lipsey B) only Balassa-Samuelson C) only Goldberg-Knetter D) Bhagwati-Kravis-Lipsey and Balassa-Samuelson E) Bhagwati-Kravis-Lipsey and Goldberg-Knetter

D

Which of the following statements is the MOST accurate? A) Absolute PPP does not imply relative PPP. B) Relative PPP implies absolute PPP. C) There is no causality relation between the two. D) Absolute PPP implies relative PPP. E) Absolute PPP is inversely related to relative PPP.

D

Which of the following statements is the MOST accurate? A) In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries' products are traded. B) In the long run, national price levels play a key role only in determining interest rates. C) In the long run, national price levels play a key role only in determining the relative prices at which countries' products are traded. D) In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded. E) In the long run, national price levels play no role in determining interest rates and the relative prices at which countries' products are traded.

D

Which of the following statements is the MOST accurate? A) The law of one price does fare well in all recent studies. B) The law of one price does fare well in many recent studies. C) The law of one price sometimes fares well in recent studies. D) The law of one price does not fare well in recent studies. E) The law of one price has not been studied recently.

D

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate A) the interest rate is not independent of the money supply growth rate in the short run. B) the interest rate is independent of the money supply growth rate in the long run. C) the interest rate is not independent of the money supply growth rate in the long run, but independent in the short run. D) the interest rate is not independent of the money supply growth rate in the long run. E) the interest rate is a factor of the money supply growth rate only in the short term.

D

Nowadays, some people recommend restrictions on imports from China​ (and other​ countries) to reduce the American current account deficit. How would higher U.S. barriers to imports affect private​ saving, domestic​ investment, and government​ deficit? A. It will reduce government budget deficit. B. It will certainly reduce private savings. C. It will increase investment. D. It is impossible to tell without a general equilibrium model. Do you agree that import restrictions would necessarily reduce a U.S. current account​ deficit? A. ​No, because we cannot tell what general equilibrium effects will be. B. ​Yes, because it will reduce imports.

D, A

The fundamental reason why trade potentially benefits a country is that it A. promotes restoration of natural resources. B. increases dependency on foreign countries. C. guarantees that everyone is better off. D. expends the economy's choices.

D. expends the economy's choices.

Within each country that opens to international trade, A. workers always lose while corporations always win. B. there is a clearcut gain for all factors owners. C. there will be losses to the country's abundant factor. D. some factor owners gain, but other factors owners lose.

D. some factor owners gain, but other factors owners lose.

Assume a specific factors economy produces two goods, cloth and food, and that when representing this economy graphically, cloth is on the x-axis and food is on the y-axis. For a trading economy, A. the slope of the budget constraint is (Pc/Pf) B. the slope of the budget constraint is -(Pf/Pc) C. the budget constraint intersects the PPF at the chosen production point. D. the budget constraint is tangent to the PPF at the chosen production point.

D. the budget constraint is tangent to the PPF at the chosen production point.

Under the monetary approach to the exchange rate A) a reduction in the money supply will cause immediate currency depreciation. B) a rise in the money supply will cause currency depreciation. C) a rise in the money supply will cause immediate currency appreciation. D) a rise in the money supply will cause depreciation. E) a rise in the money supply will cause immediate currency depreciation.

E

Suppose a specific factors economy produces two goods: x and y. Given that the economy is open to trade, and assuming that D in consumption, Q is production, and P is price, the budget constraint can be defined as...

Dx-Qx=(Py/Px)(Qy-Dy)

In order for the condition E$/HK$ = PUS/PHK to hold, what assumptions does the principle of purchasing power parity make? A) Only that there are no transportation costs and restrictions on trade. B) Only that the markets are perfectly competitive, i.e., P = MC. C) The factors of production are identical between countries. D) No arbitrage exists. E) HK and the US are perfectly competitive and there are no transportation costs or restrictions on trade.

E

Interest rate differences between countries depend on A) differences in expected inflation, but not on expected changes in the real exchange rate. B) differences in expected changes in the real exchange rate, but not on expected inflation. C) neither differences in expected inflation, nor on expected changes in the real exchange rate. D) differences in expected inflation and nothing else. E) differences in expected inflation, and on expected changes in the real exchange rate.

E

The PPP theory fails in reality for all of the following reasons EXCEPT A) transport costs. B) monopolistic or oligopolistic practices in goods markets. C) the inflation data reported in different countries are based on different commodity baskets. D) restrictions on trade. E) inflation rates are unrelated to money supply growth.

E

Under a flexible-price monetary approach to the exchange rate A) when the domestic money supply falls, the price level would eventually fall, increasing the interest rate. B) when the domestic money supply falls, the price level would fall right away, causing a reduction in the interest rate. C) when the domestic money supply falls, the price level would fall right away, causing an increase in the interest rate. D) when the domestic money supply falls, the price level would eventually fall, keeping the interest rate constant. E) when the domestic money supply falls, the price level would fall right away, keeping the interest rate constant.

E

Under sticky prices A) an interest rate rise is associated with lower expected deflation and a long-run currency appreciation, so the currency appreciates immediately. B) an interest rate rise is associated with higher expected inflation and a long-run currency appreciation, so the currency appreciates immediately. C) an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency appreciates immediately. D) an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency depreciates immediately. E) an interest rate rise is associated with lower expected inflation and a long-run currency appreciation, so the currency appreciates immediately.

E

Under the monetary approach to the exchange rate A) an interest rate decrease is associated with higher expected inflation and a currency that will be weaker on all future dates. B) an interest rate increase is associated with higher expected deflation and a currency that will be weaker on all future dates. C) an interest rate increase is associated with higher expected inflation and a currency that will be strengthened on all future dates. D) an interest rate increase is associated with higher expected deflation and a currency that will be strengthened on all future dates. E) an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all future dates.

E

When all variables start out at their long-run equilibrium levels, the most important determinant of long-run swings in nominal exchange rates is A) a shift in relative money supply levels. B) a shift in relative money supply growth rates. C) a change in relative output demand. D) a change in relative output supply. E) a change in relative inflation rates.

E

When the domestic money prices of goods are held constant A) a nominal dollar appreciation makes U.S. goods cheaper compared with foreign goods. B) a nominal dollar depreciation makes U.S. goods less appealing in foreign markets. C) a nominal dollar appreciation does not affect the prices of U.S. goods. D) a nominal dollar depreciation makes U.S. goods more expensive compared with foreign goods. E) a nominal dollar depreciation makes U.S. goods cheaper compared with foreign goods and a nominal dollar appreciation makes U.S. goods more expensive compared with foreign goods.

E

Which of the following statements is the MOST accurate? A) The law of one price applies only to the general price level. B) The law of one price applies to the general price level while PPP applies to individual commodities. C) The law of one price applies to individual commodities while PPP applies to both the general price level and to individual commodities. D) PPP applies only to individual commodities. E) The law of one price applies to individual commodities while PPP applies to the general price level.

E

Which one of the following statements is the MOST accurate? A) Departures from PPP are similar in both the short run and long run. B) Departures from PPP are even greater in the long run than in the long run. C) Departures from PPP are always greater in the short run than in the long run. D) It is hard to tell whether departures from PPP are greater in the short run than in the long run. E) Departures from PPP may often be greater in the short run than in the long run.

E

The aggregate demand for money can be expressed by:

Md = P × L(R,Y).

What are the main factors determining the aggregate money demand?

interest rate, the price level and real national income

The aggregate real money demand schedule L(R,Y)

slopes downward because a fall in the interest rate raises the desired real money holdings of each household and firm in the economy.

Individuals base their demand for an asset on

the expected return, how risky that expected return is, and the asset's liquidity.

If there is an excess supply of money:

the interest rate falls.

The exchange rate between currencies depends on

the interest rate that can be earned on deposits of those currencies and the expected future exchange rate.

The aggregate money demand depends on

the interest rate, price level, and real national income.

In each sector of a specific factors economy, profit-maximizing employers will demand labor up to the point where ...

the marginal product of labor times the price of the product equals the wage rate.