Chapter 8

70. A main disadvantage of the European Monetary Union is that a. each member country loses the use of monetary policy as to tool to combat recession. b. there is a high degree of labor mobility among the member countries. c. prices are highly flexible in response to changing economic conditions. d. wages are highly flexible in response to changing economic conditions.

a. each member country loses the use of monetary policy as to tool to combat recession.

54. When Mexico became a part of the North American Free Trade Agreement, along with Canada and the United States, it a. eliminated tariffs against Canada and the United States but maintained them against nonmembers. b. eliminated tariffs against Canada, the United States, and all nonmember countries. c. increased tariffs against Canada, the United States, and all nonmember countries. d. increased tariffs against Canada and the United States but did not change them against nonmember countries.

a. eliminated tariffs against Canada and the United States but maintained them against nonmembers

3. Which of the following represents the stage where economic integration is least complete? a. free trade area b. monetary union c. common market d. customs union

a. free trade area

45. Suppose that steel from Japan faces a 20 percent tariff in France and a 25 percent tariff in Italy, while France and Italy maintain free trade between each other. France and Italy are therefore part of a (an) a. free trade area. b. customs union. c. common market. d. economic union.

a. free trade area.

82. NAFTA is essentially a a. free trade area. b. customs union. c. economic union. d. monetary union.

a. free trade area.

92. Regarding stages of economic integration, a customs union a. goes beyond a free trade area by including a common external tariff. b. falls short of a free trade area by excluding a common external tariff. c. goes beyond a common market by including a common transportation policy. d. goes beyond a common market by including a common agricultural policy.

a. goes beyond a free trade area by including a common external tariff.

21. Members of the European Union find that "trade creation" is fostered when their economies are a. highly competitive. b. highly noncompetitive. c. small in economic importance. d. geographically distant.

a. highly competitive.

71. World welfare under a customs union a. increases because of a trade creation effect. b. increases because of a trade diversion effect. c. is not affected by the trade creation and the trade diversion effects. d. decreases because of a trade creation effect.

a. increases because of a trade creation effect.

58. As new regional trading arrangements are formed, the opportunity cost of remaining outside a. increases. b. decreases. c. either increases or decreases. d. neither increases nor decreases.

a. increases.

85. In terms of static economic analysis, if a customs union results in a large amount of trade creation relative to trade diversion, world welfare a. increases. b. decreases. c. either increases or decreases. d. neither increases nor decreases.

a. increases.

91. The formation of a regional trading bloc results in trade creation if a. inefficient domestic production is replaced by more efficient production from another member country. b. inefficient domestic production is replaced by more efficient production from a nonmember country. c. member countries import more but export less to nonmember countries. d. member countries export less but import more from nonmember countries.

a. inefficient domestic production is replaced by more efficient production from another member country.

79. American critics of the North American Free Trade Agreement thought that it could cause some U.S. companies to move to Mexico to benefit from a. lenient environment policies of the Mexican government. b. high wages of Mexican workers. c. low productivity of Mexican workers. d. high corporate tax rates of the Mexican government.

a. lenient environment policies of the Mexican government.

26. The implementation of the European Union has a. made it harder for Americans to compete against the Germans in the British market. b. made it easier for Americans to compete against the Germans in the British market. c. made it harder for Americans to compete against the Japanese in the British market. d. made it easier for Americans to compete against the Japanese in the British market.

a. made it harder for Americans to compete against the Germans in the British market.

59. Regarding the interests of a nonmember nation of a regional trading agreement a. the exporting interests of the nonmember nation outweigh its import competing interests. b. the import competing interests of the nonmember nation outweigh its exporting interests. c. the nonmember nation will have a better negotiating position. d. the nonmember nation has no interest in the regional trading arrangement.

a. the exporting interests of the nonmember nation outweigh its import competing interests.

83. A customs union that results in a sizable amount of __________ would be beneficial to global welfare. a. trade creation b. trade diversion c. trade restrictions d. trade diversification

a. trade creation

66. Suppose that Canada has domestic firms that could supply its entire market for radios at a price of $50, while U.S. firms could supply radios at $40 and Mexico at $30. Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with Mexico. As a result, Canada realizes a. trade creation, no trade diversion, and overall welfare gains. b. trade creation, no trade diversion, and overall welfare losses. c. trade diversion, no trade creation, and potential overall welfare losses. d. trade diversion, trade creation, and potential overall welfare gains.

a. trade creation, no trade diversion, and overall welfare gains.

4. Customs union theory reasons that the formation of a customs union will decrease members' real welfare when the a. trade diversion effect exceeds the trade creation effect. b. trade production effect exceeds the trade consumption effect. c. trade consumption effect exceeds the trade production effect. d. trade creation effect exceeds the trade diversion effect.

a. trade diversion effect exceeds the trade creation effect.

23. When the United States, Canada, and Mexico form a free trade area, and Mexico begins importing a product from Canada rather than from the lowest-cost world producer a. trade diversion occurs. b. trade creation occurs. c. world welfare rises. d. world welfare falls to zero.

a. trade diversion occurs.

46. Suppose that Mexico and Canada form a free trade area, and Canada begins importing steel from Mexico rather than from Germany. There occurs a. trade diversion. b. trade creation. c. trade destruction. d. trade exhaustion.

a. trade diversion.

52. In the United States, which group was most likely to be hurt by the North American Free Trade Agreement? a. unskilled labor b. skilled labor c. owners of capital equipment d. owners of financial capital

a. unskilled labor

7. Which device has the European Union used to equalize farm-product import prices with politically determined European Union prices, regardless of shifts in world prices? a. variable levies b. import quotas c. import subsidies d. domestic content regulations

a. variable levies

95. The common agricultural policy of the European Union supports its farmers through a system of a. variable levies and export subsidies. b. fixed import tariffs and export subsidies. c. export subsidies and import quotas. d. domestic content requirements.

a. variable levies and export subsidies.

11. Which of the following organizations is considered a regional trading arrangement? a. Organization of Petroleum Exporting Countries b. North Atlantic Treaty Organization c. Benelux Union d. International Tin Agreement

c. Benelux Union

16. Which organization was founded in 1957 whose objective was to create an economic union among its members? a. General Agreements on Tariffs and Trade b. Organization of Economic Cooperation and Development c. European Union d. Latin American Free Trade Association

c. European Union

62. Regarding a common market, which of the following is true? a. It permits the free movement of goods and service among nonmembers. b. It exercises common external trade restrictions against members. c. It represents a more complete integration of member nations than a customs union. d. It restricts the movement of factors of production across national borders.

c. It represents a more complete integration of member nations than a customs union.

57. Smaller nations may seek safe haven trading arrangements with larger nations when future access to that market seems uncertain. This was reason for the formation of a. WTO. b. GATT. c. NAFTA. d. Council for Mutual Economic Assistance.

c. NAFTA.

63. The United States serves as an example of a. a common market. b. a common union. c. a monetary union. d. a free trade area.

c. a monetary union.

13. Which form of economic integration occurs when participating countries abolish tariffs on trade among themselves, establish a common tariff on imports from nonmembers, and permit free movement of capital and labor within the organization? a. free trade area b. economic union c. common market d. monetary union

c. common market

49. Suppose that the United Kingdom and Italy abolish all tariffs on each other's goods and all restrictions on movements of factors of production between them. They also implement a common protectionist policy toward other countries. This is an example of a (an) a. free trade area. b. customs union. c. common market. d. economic union.

c. common market.

6. By 1992 the European Union had become a full-fledged a. economic union. b. monetary union. c. common market. d. fiscal union.

c. common market.

96. Concerning the stages of economic integration, by the early 1990s, the European Union had essentially reached the stage of a (an) a. free trade area. b. customs union. c. common market. d. economic union.

c. common market.

99. The theory of optimal currency areas concludes that for a currency area to have the best chance of success a. workers in the affected country must be able to work freely in their countries. b. prices and wages are fixed. c. countries should have similar business cycles. d. countries should have different economic structures.

c. countries should have similar business cycles.

40. In 1989, Canada and the United States agreed to implement a (an) ____ over a ten-year period. a. customs union b. common market c. free trade area d. economic union

c. free trade area

90. If the United States and Canada implement a regional trading agreement that results in the two countries eliminating trade barriers between themselves while maintaining separate trade barriers against nonmember countries, they have formed a a. common market. b. customs union. c. free trade area. d. economic union.

c. free trade area.

68. The formation of the European Monetary Union is expected to entail benefits for member countries which include all of the following EXCEPT a. greater certainty for investors within the EMU. b. lower costs of transactions within the EMU. c. independent monetary policies run by the central bank of each member country. d. enhanced competition among companies in member countries.

c. independent monetary policies run by the central bank of each member country.

73. The gains from having an optimum currency include a. price differentiation. b. lower competition. c. lower transaction costs. d. independent monetary policies run by the central bank of each member country.

c. lower transaction costs.

2. Which of the following represents the stage where economic integration is most complete? a. economic union b. customs union c. monetary union d. common market

c. monetary union

44. Suppose that government procurement liberalization results in the U.K. government importing automobiles from Germany, the low-cost EU manufacturer. Cost savings could result from all of the following EXCEPT a. competition effect. b. scale-economy effect. c. protective effect. d. trade effect.

c. protective effect.

97. Countries pursuing membership in the European Monetary Union (Eurozone) are supposed to meet "convergence criteria," which includes a. price instability. b. high long-term interest rates. c. sound governmental finances. d. unstable exchange rates.

c. sound governmental finances.

9. Assume that the formation of a customs union turns out to include the lowest-cost world producer of the product in question. Which effect could NOT occur for the participating countries? a. trade creation-production effect b. trade creation-consumption effect c. trade diversion d. scale economies and competition

c. trade diversion

87. An objective of all of the members of the European Union has been to a. abolish tariff and nontariff barriers to trade among member countries. b. adopt identical fiscal policies for all countries belonging to the EU. c. form a customs union agreement with members of NAFTA. d. establish a common currency and a common monetary policy.

a. abolish tariff and nontariff barriers to trade among member countries.

22. The European Union has achieved all of the following EXCEPT a. adopted a common fiscal policy for member nations. b. established a common system of agricultural price supports. c. disbanded all tariffs among its member countries. d. levied common tariffs on products imported from nonmembers.

a. adopted a common fiscal policy for member nations.

72. A common market a. allows the imposition of common external trade barriers against nonmembers. b. represents less economic integration than a free trade area. c. does not permit free movement of goods among member nations. d. does not allow free movement of factors of production among nations.

a. allows the imposition of common external trade barriers against nonmembers.

20. Under the European Union's common agricultural policy, a variable import levy equals the a. amount by which the EU's support price exceeds the world price. b. amount by which the world price exceeds the EU's support price. c. support price of the EU. d. world price.

a. amount by which the EU's support price exceeds the world price.

69. According to the theory of optimum currency areas, a currency area has the least chance for success when a. countries of the currency area have differing business cycles. b. workers have a high degree of mobility across borders of the currency area. c. prices and wages can be adjusted in response to economic disturbances. d. a single monetary policy affects all member countries in the same manner.

a. countries of the currency area have differing business cycles.

64. The task of creating an economic union is a. difficult. b. relatively easy. c. similar to creating a customs union. d. the simplest of all economic integrations.

a. difficult.

18. Which nation is NOT a member of the North American Free Trade Association? a. Canada b. Greenland c. Mexico d. United States

b. Greenland

50. The North American Free Trade Agreement was expected to benefit __________ the most. a. Canada b. Mexico c. Greenland d. United States

b. Mexico

89. When the North American Free Trade Agreement was being considered, American critics argued that it would likely result in a. a reduction in U.S. competitiveness against Canada. b. a loss of American jobs to Mexico. c. a gain in U.S. competitiveness against Mexico. d. additional jobs for unskilled workers in the United States.

b. a loss of American jobs to Mexico.

78. American critics of the North American Free Trade Agreement thought that it could a. cause American workers to migrate to Mexico to find jobs. b. cause U.S. companies to move to Mexico to benefit from lower labor costs. c. cause Mexican companies to move to the United States to benefit from higher labor productivity. d. cause Mexican companies to move to the United States to benefit from higher labor costs.

b. cause U.S. companies to move to Mexico to benefit from lower labor costs.

48. If the United States and Canada abolish all tariffs on each other's goods and implement a common tariff on goods imported from other countries, there occurs a (an) a. free trade area. b. customs union. c. common market. d. economic union.

b. customs union.

27. The common agricultural policy of the European Union has a. increased American farm exports to the EU. b. decreased American farm exports to the EU. c. lowered the price of American farm exports to the EU. d. not affected the price of American farm exports to the EU.

b. decreased American farm exports to the EU.

86. In terms of static economic analysis, if a customs union results in a small amount of trade creation relative to trade diversion, world welfare a. increases. b. decreases. c. either increases or decreases. d. neither increases nor decreases.

b. decreases.

94. If several countries form a regional trading pact that removes tariffs between the members, implements a common external tariff structure, permits free mobility of factors of production, and integrates fiscal policies, they have formed a a. customs union. b. economic union. c. free trade area. d. common market.

b. economic union.

41. In the United States, the proposed North American Free Trade Agreement was generally supported by a. labor unions. b. electronics firms. c. environmentalists. d. citrus producers.

b. electronics firms.

29. Under the common agricultural policy, exports of any surplus quantities of European Union produce are encouraged through the usage of a. variable levies. b. export subsidies. c. import quotas. d. countertrade.

b. export subsidies.

93. Regarding stages of economic integration, a free trade area a. goes beyond a customs union by including a common external tariff. b. falls short of a customs union by excluding a common external tariff. c. goes beyond a common market by including a common transportation policy. d. goes beyond a common market by including a common agricultural policy.

b. falls short of a customs union by excluding a common external tariff.

19. The North American Free Trade Association is a a. monetary union. b. free trade area. c. common market. d. customs union.

b. free trade area.

60. The World Trade Organization's efforts to promote trade liberalization globally a. have become easier. b. have become more difficult. c. have remained stable. d. cannot be achieved.

b. have become more difficult.

77. Advocates of the North American Free Trade Agreement hoped that a (an) __________ in Mexican exports would __________ the migration of labor from Mexico to the United States. a. increase, increase b. increase, decrease c. decrease, increase d. decrease, decrease

b. increase, decrease

51. The North American Free Trade Agreement was most strongly opposed by U.S. a. electronics manufacturers. b. labor unions. c. commercial banks. d. engineering companies.

b. labor unions.

84. Relative to a regional trade agreement, a multilateral trade agreement may be more beneficial to global welfare in that it entails a. less trade creation. b. less trade diversion. c. more trade diversion. d. more trade consumption.

b. less trade diversion.

47. Suppose that Mexico and Canada form a free trade area. Mexicans then decrease auto manufacturing and increase imports of autos from Canada, while the Canadians decrease computer production and import more computers from Mexico. This is an example of a. trade diversion. b. trade creation. c. trade destruction. d. trade exhaustion.

b. trade creation.

14. A static welfare effect resulting from the formation of the European Union would be a. economies of scale. b. trade diversion. c. investment incentives. d. increased competition.

b. trade diversion.

81. When the United States was considering joining NAFTA, many economists predicted that the U.S. factor of production that would be most harmed was a. skilled labor. b. unskilled labor. c. capital. d. entrepreneurship.

b. unskilled labor.

8. Which trade instrument has the European Union used to insulate its producers and consumers of agricultural goods from the impact of changing demand and supply conditions in the rest of the world? a. domestic content regulations b. variable import levies c. voluntary export quotas d. orderly marketing agreements

b. variable import levies

25. Which country is NOT a member of the European Union? a. Spain b. Germany c. France d. Iceland

d. Iceland

74. Luxembourg is NOT a member of a. the European Union. b. a monetary union. c. the Benelux Union. d. NAFTA.

d. NAFTA.

10. Which organization of nations permits free trade among its members in industrial goods, while each member maintains freedom in its trade policies toward nonmember countries? a. European Union b. Benelux Union c. North Atlantic Treaty Organization d. North American Free Trade Association

d. North American Free Trade Association

56. Regarding the benefits of regional trade agreements, which of the following is NOT a benefit? a. Regional trade agreements may help manage immigration flows. b. Regional trade agreements promote regional security. c. Regional trade agreements may help lock in policy shifts towards market-oriented reform. d. Regional trade agreements may promote democracy.

d. Regional trade agreements may promote democracy.

28. The implementation of a common market involves all of the following EXCEPT a. elimination of trade restrictions among member countries. b. a common tax system and monetary union. c. prohibition of restrictions on factor movements. d. a common tariff levied on imports from nonmembers.

d. a common tariff levied on imports from nonmembers.

55. Among the benefits that a regional trading arrangement can provide are all of these EXCEPT a. economies of large-scale production. b. specialization fostering. c. attracting foreign investment. d. a shorter production time.

d. a shorter production time.

43. By removing discriminatory government procurement laws within the European Union, member nations hoped to benefit from all of the following EXCEPT a. EU governments could purchase from the cheapest foreign suppliers. b. increased competition occurs as domestic firms compete with foreign firms previously shut out of the domestic market. c. industries are restructured which permits surviving firms to achieve economies of scale. d. agricultural prices fall as more farmers are allowed to produce their commodities.

d. agricultural prices fall as more farmers are allowed to produce their commodities.

5. Which economic integration scheme is solely intended to abolish trade restrictions among member countries, while setting up common tariffs against nonmembers? a. economic union b. common market c. free trade area d. customs union

d. customs union

15. A dynamic welfare gain resulting from the formation of the European Union would be a. trade diversion. b. trade creation. c. diseconomies of scale. d. economies of scale.

d. economies of scale.

98. According to the theory of optimal currency areas, there are gains to be achieved from sharing a currency across national boundaries. These gains include a. higher transactions costs. b. greater uncertainty for investors. c. monetary policies run by central banks of member nations. d. enhanced competition.

d. enhanced competition.

67. As of 2002, members of the European Monetary Union agreed to replace their currencies with the a. mark. b. dollar. c. franc. d. euro.

d. euro.

17. The common agriculture policy of the European Union has supported European farmers via a. export tariffs and domestic content regulations. b. variable levies and voluntary export agreements. c. content regulations and export subsidies. d. export subsidies and variable levies.

d. export subsidies and variable levies.

1. The European Union is primarily intended to permit a. countries to adopt scientific tariffs on imports. b. an agricultural commodity cartel within the group. c. the adoption of export tariffs for revenue purposes. d. free movement of resources and products among member nations.

d. free movement of resources and products among member nations.

88. As of 2016, 18 members of the European Union had adopted further economic integration than the other members by a. abolishing tariff and nontariff barriers to trade among each other. b. adopting uniform policies on the movement of factors of production. c. establishing common trade policies against countries that were not members of the EU. d. implementing a common currency and a common monetary policy.

d. implementing a common currency and a common monetary policy.

42. At the Maastricht Summit of 1991, European Union negotiators called for the pursuit of a a. free trade area. b. customs union. c. common market. d. monetary union.

d. monetary union.

80. For the United States, the political debate of joining NAFTA was very intense because of Mexico's a. relatively high wage levels. b. relatively high levels of environmental enforcement. c. relatively high standards for protecting workers. d. relatively low-skilled workers.

d. relatively low-skilled workers.

24. When the formation of a free trade area results in the reduction of trade with nonmember nations in favor of member countries, _____________ occurs. a. trade devaluation b. trade revaluation c. trade creation d. trade diversion

d. trade diversion

53. By joining the North American Free Trade Agreement, the United States, Canada, and Mexico would find their short run welfare decreasing because of the a. economies of scale effect. b. business investment effect. c. trade creation effect. d. trade diversion effect.

d. trade diversion effect.

65. Suppose that Canada has domestic firms that could supply its entire market for radios at a price of $50, while U.S. firms could supply radios at $40 and Mexico at $30. Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with the United States. As a result, Canada realizes a. trade creation, no trade diversion, and overall welfare gains. b. trade creation, no trade diversion, and overall welfare losses. c. trade diversion, no trade creation, and potential overall welfare losses. d. trade diversion, trade creation, and potential overall welfare gains.

d. trade diversion, trade creation, and potential overall welfare gains.

12. When products from high-cost suppliers within a customs union replace imports from a low-cost nation that is NOT a member of the customs union, there exist(s) a. dynamic welfare losses. b. dynamic welfare gains. c. trade creation. d. trade diversion.

d. trade diversion.

61. All of the following are factors mitigating against global trade liberalization EXCEPT a. regional trading arrangements may limit trade liberalization with outsiders. b. a small nation might do better entering into a pact with a larger nation rather than competing globally. c. trading bloc members may not realize economies of scale through global liberalization. d. trading bloc members prefer competing globally rather than locally.

d. trading bloc members prefer competing globally rather than locally.