econ 340 midterm 2 review

Which of the following would result when EUR/USD falls from 1.25 to 1.1?

American goods become more expensive for Europeans to buy. he dollar value of European corporate stock owned by Americans falls. Euros become cheaper for Americans to buy.

Compare free trade with autarky in a perfectly competitive market. How does the introduction of free trade affect each group in the situation where the country would export the good? consumer surplus: Government Spending: producer surplus:

Decrease does not change increase

What do we call a strategy that is the best response to the other country's strategy regardless of what the other country chooses to do.

Dominant

Forwards

Highly customized contracts that are traded over the counter, contract has a minimum size of $1 million. Can involve any two currencies over any time horizon.

most favored nation

If the United States levies a 25% tariff on Japanese trucks, it must also levy a 25% tariff on German trucks.

Suppose that the U.S. interest rate is 4%, the Japanese interest rate is 3%, and the yen is selling forward at a premium of 5%. Which of the following is true? Interest rates apply to risk-free government bonds.

It is possible to earn a riskless profit by borrowing dollars, converting them to yen, and lending the yen.

Which of the following are characteristics of a customs union?

Member countries share a common policy toward non-members.

Doha round.

Not yet concluded, widely considered a failure.

An import quota is enforced by the government issuance of import licenses. These licenses create profit opportunities for those who hold them. What term is used to describe the profit from quota licenses?

Quota rent

optimal tariff

The size of a tariff that raises the welfare of a tariff-imposing country by the greatest amount relative to free-trade welfare levels

how to find trade creation?

The value of trade creation can be shown to equal the area of a triangle, where the base equals the amount of increased trade and the height is the difference between the old price (with tariff) and the new price.

•Arbitrage

a riskless activity exploiting temporary price discrepancies where it is possible to simultaneously buy something for a low price while reselling it for a high price

•The way that a government manages the value of its currency is called an

exchange rate regime

Spot exchange rate

the exchange rate at which a foreign exchange dealer will convert one currency into another that particular day

The GATT might be viewed as an attempt to address which issue?

the prisoners dilema

Locational Arbitrage

the process of buying a currency at the location where it is priced cheap and immediately selling it at another location where it is priced higher

Trade balance

the value of a nation's exports minus the value of its imports; also called net exports

An import tariff increases social welfare for the importing country if the terms of ______(50 %) gain is bigger than the ______(50 %) loss. The import tariff reduces the country's welfare when the opposite is true.

trade, deadweight

Which treaty established the foundation of the European Union?

treaty of Rome

What does the World Trade Organization do?

work to reduce trade barriers establish fair rules of trade settle trade disputes

Home and Foreign are the only two countries in the world. Home levies a tariff on imports of Foreign skis. This creates a deadweight loss of $775 in Home and $800 in Foreign. In addition, there is a Home terms of trade gain of $1,000. From the perspective of the world as a whole, what is the dollar value of the change in social welfare resulting from this tariff?

-1,575

Suppose that on the spot market, €0.9 = $1 and £1 = $1.1. How many euros does one British pound equal in equilibrium? Round your answer to 2 decimal places and do not use any form of currency symbol.

.99 multiply the value of the base currency value to the dollar value of the counter currecny

Suppose that the United States, China, and Mexico are the only three countries in the world. Further suppose that the United States initially has a $7 non-discriminatory import tariff on shirts, then subsequently forms a free trade area with Mexico. The Chinese cost of producing shirts is $9 and the Mexican cost is $10. In the case of a non-discriminatory tariff, the United States imports 1,100 shirts.

1,100 all of those shirts would shift to mexican production

Suppose that the European interest rate is 3.4% and that the euro is selling forward at a 0.5% premium. What is the U.S. interest rate implied by covered interest parity?

3.9

Consider a country that exports 100 units of a particular good at the world price of $10. Economists estimate that the domestic price of the good would be $4 if all exports were eliminated. Compared with autarky, what is the dollar value of the net change in social welfare due to exports?

300

Consider a country that imports 150 units of a particular good at the world price of $5. Economists estimate that the domestic price of the good would be $9 if all imports were eliminated. Compared with autarky, what is the dollar value of the net change in social welfare due to imports?

300

Suppose that Home and Foreign are the only two countries in the world, and that Home imports fish from Foreign. The Home autarky price of fish is $24, while the Foreign autarky price is $10. The free trade equilibrium price is $12 and the equilibrium quantity traded is 600. What is the dollar value of the gain from trade for the world as a whole?

4,200

Suppose that Ecuador currently has a non-discriminatory import tariff on goods originating in the United States or China. Ecuador and the United States are contemplating a free trade agreement. Economists estimate that the resulting trade creation will be $500 and trade diversion will be $450. What is the estimated net welfare effect on these three countries combined?

50

There are 45 exchange rates if there are 10 currencies. How many exchange rates would there be if there are 11 currencies?

55

Which of the following represents the value of all income that a country earns from abroad minus all of its expenses with respect to the rest of the world?

Current account

how to determine the value of a payoff matrix when both countries import a tariff?

Each country benefits from its own tariff, but imposes a cost on the other. When both levy their optimal tariffs (the case represented in the lower right cell of the matrix), the net effect is the country's gain from levying its own tariff minus the loss imposed by the trading partner imposing its own tariff.

Tokyo Round

First to address a large number of non-tariff trade barriers.

Uruguay round

First to address trade in services and protection of intellectual property.

Kennedy round

First to negotiate a formula for tariff reductions and first to address unfair trade practices such as dumping.

There are two countries in the world (Home and Foreign). Home imports sugar from Foreign. Neither country is "small" in the technical sense. Thinking about producers and consumers of sugar in each country, who benefits from trade? Select all that apply.

Forign producers, Home consumers

What does the acronym GATT stand for?

General agreement on tariffs and trade.

covered interest parity

Relates interest rates across countries and the rate of change between forward exchange rates and the spot exchange rate

Which of the following are characteristics of a free trade area?

Require rules of origin to prevent trade deflection.

What aspect of free trade agreements is designed to eliminate trade deflection?

Rules of origin

Options

Standardized contract traded on an exchange, the strike price specifies the exchange rate and the premium is the fee paid for the instrument.

Futures

Standardized contracts traded on an exchange, traded on margin with gains or losses added to or deducted from margin on daily basis.

national treatment

The United States cannot have higher safety standards for trucks imported from Japan than it has for U.S. made trucks.

Forward exchange rate

The exchange rates governing forward exchange transactions

There are two countries in the world (Home and Foreign). Home is a small exporter of cotton. The home country's government subsidizes cotton exports. Which of the following occurs due to the home export subsidy? Select all that apply.

The export subsidy creates deadweight loss in Home. The export subsidy reduces Home social welfare.

An import tariff causes some consumers to reduce their quantity demanded of the product, resulting in lower consumer surplus. The loss of this surplus is known as the ________ distortion. In addition, the tariff induces firms to produce more. The wasteful use of resources used to increase output is known as the _____ distortion. The sum of these to losses is known as the ______ loss

consumption, production, deadweight

The formation of a preferential trade agreement can either increase or decrease social welfare. Social welfare increases if trade _______ is bigger than ____ and decreases if the reverse is true

creation, diversion

Triangular Arbitrage

currency transactions in the spot market to capitalize on discrepancies in the cross exchange rates between two currencies

Compare free trade with autarky in a perfectly competitive market. How does the introduction of free trade affect each group in the situation where the country would import the good? producer surplus consumer surplus gov revenue

decrease increase does not change

Trade deflection

•A non-member country exports to the member of the FTA with the lowest tariff to then re-export to other members duty free

•Uncovered Interest Parity:

•An equilibrium condition that specifies equality between expected rates of return when all rates are measured in a common currency

Nash equilibrium

•Each country (or player, more generally) chooses its best strategy given the strategy of the other. Neither can gain by unilateral change

foreign exchange market

•Foreign exchange is commonly abbreviated as FX. The FX market is not a physical location, but the global network of banks, governments, and others that trade currencies

•We use exchange rates to convert prices of goods priced in one currency into prices of another currency

•P_$=P_€∙E_($∕€)

equation for uncovered interest parity

•i_$=i_€+(E^e-E)/E

condition of covered interest parity

•i_$=i_€+(F-E)/E

•Locational arbitrage

•occurs if the same currency has two different prices in two different geographic locations at the same instant in time