ECON 4300

Race to the bottom refers to which of the following? A) Firms have an incentive to relocate to countries with lower standards. B) Countries have an incentive to conform to the standards of the lowest income country. C) Countries will compete with each other to offer incentives to firms. D) Firms will underpay workers in low income countries.

A) Firms have an incentive to relocate to countries with lower standards.

What did China create to allow more international trade? A) Special economic zones B) Foreign exchange centers C) More open and transparent government meetings D) New educational efforts

A) Special economic zones

Monopoly powers given to domestic utility companies to create economies of scale might unintentionally... A) be an obstacle to increased international trade. B) be useful for the creation of a comparative advantage for the domestic country. C) not be used for rent-seeking behaviors. D) be a positive externality for the world as a whole.

A) be an obstacle to increased international trade

A country that runs out of official reserve assets A) cannot settle international debts. B) is bankrupt. C) will have a current account deficit. D) will have a current account surplus.

A) cannot settle international debts.

If the residents of a country receive income from their foreign investments, it is counted as a A) credit in the current account. B) debit in the current account. C) credit in the capital account. D) debit in the capital account.

A) credit in the current account.

India's economic reforms have focused on A) privatizing state-owned enterprises and increasing efficiency. B) reducing persistent inflation and current account deficits. C) transitioning from socialism and toward private ownership. D) reducing exchange rate instability.

A) privatizing state-owned enterprises and increasing efficiency.

Under a fixed exchange standard, if the domestic demand for foreign exchange increases, A) the central monetary authority must meet the demand out of its reserves. B) the central monetary authority must increase the supply of domestic money. C) the fixed exchange standard will breakdown. D) inflation will increase.

A) the central monetary authority must meet the demand out of its reserves.

Holding nominal exchange rates constant, if inflation in Europe exceeds inflation in the United States, A) the real exchange rate ($/€) will rise, and the euro will buy more in the U.S. B) the real exchange rate ($/€) will rise, and the euro will buy less in the U.S. C) the real exchange rate ($/€) will fall, and the euro will buy more in the U.S. D) the real exchange rate ($/€) will fall, and the euro will buy less in the U.S.

A) the real exchange rate ($/€) will rise, and the euro will buy more in the U.S.

If inflation is higher in the home market, what is expected to happen to the real value of the home currency as time passes?

Appreciates

Which of the following is an example of external debt for the United States? A) A purchase of Apple stock by a person in Canada B) A loan made in yen to a company in the United States C) A loan made by Citibank to the government of Mexico D) A purchase of U.S. Treasury bills by the Bank of Japan

B) A loan made in yen to a company in the United States

Which of the following transactions would be recorded in the current account? A) U.S. investors purchase bonds from Germany. B) A person living in the United States sends money home to her family in Cuba. C) The Fed increases its holdings of yen. D) The U.S. transfers a military base to another country.

B) A person living in the United States sends money home to her family in Cuba

Which of the following is NOT true about this national income equation: A) For the current account, CA, to improve, we may have to invest less than otherwise would be the case. B) For the current account, CA, to improve, we may have to save less to maintain the same amount of investment that includes foreign saving. C) For the current account, CA, to improve, the government may have to run budget surplus. D) A reduction in the trade deficit with one country will simply show up as an increase in a trade deficit with another country.

B) For the current account, CA, to improve, we may have to save less to maintain the same amount of investment that includes foreign saving.

Which of the following is NOT an obstacle to increased international economic integration? A) Monopoly powers given to domestic companies of individual nations. B) High tariff rates imposed by industrialized nations. C) Health and safety standard requirements. D) Labor and environmental standard requirements.

B) High tariff rates imposed by industrialized nations

Countries that compete by offering foreign firms a reduced set of environmental compliance requirements are known as A) transboundary members. B) pollution havens. C) pollutants. D) pollution exporters.

B) Pollution Havens

Harmonization of standards refers to A) the elimination of tariffs and quotas by trading partners. B) common product safety, environment, labor, and fair competition standards agreed upon by trading partners. C) the acceptance or keeping of a trading partner's standards as valid and sufficient by another trading partner. D) separate standards held by different trading partners which other partners refuse to recognize.

B) common product safety, environment, labor, and fair competition standards agreed upon by trading partners.

Suppose that the nominal exchange rate between the U.S. dollar and the Mexican peso is 0.10 dollars per peso. If Mexico's inflation is 10 percent and the United States' inflation is 0 percent, from the U.S. point of view, the real exchange rate A) appreciates to 0.11 dollars per peso. B) depreciates to 0.11 dollars per peso. C) appreciates to 0.09 dollars per peso. D) depreciates to 0.09 dollars per peso.

B) depreciates to 0.11 dollars per peso.

The gravity model predicts that China and India will trade with A) smaller economies that are close by. B) larger economies that are close by. C) larger economies that are distant. D) smaller economies that are distant.

B) larger economies that are close by.

All else equal, if Canada raises its interest rates, A) the dollar depreciates. B) the U.S. demand for Canadian dollars decreases. C) the Canadian supply of Canadian dollars increases. D) the Canadian dollar will depreciate.

B) the U.S. demand for Canadian dollars decreases.

Developing countries are usually unwilling to negotiate over labor standards because A) the WTO always tends to rule in favor of industrialized nations. B) they fear that industrialized nations are trying to undermine their comparative advantage—production of agriculture and textiles/apparel—and close the markets of high-income countries in these areas. C) they fear that they may be unable to compete without some protection of their industries. D) organized labor would not allow them to negotiate with other countries.

B) they fear that industrialized nations are trying to undermine their comparative advantage—production of agriculture and textiles/apparel—and close the markets of high-income countries in these areas.

Which of the following is FALSE? A) Current account deficits must be financed through inflows of capital. B) Loans from abroad add to a country's stock of external debt and generate debt service. C) Borrowed funds are always used in a manner that contributes to the expansion of the country's productive capability. D) Debt service can become an unsustainable burden that holds back development.

C) Borrowed funds are always used in a manner that contributes to the expansion of the country's productive capability.

Which primary trade partner of India suffered setbacks that ultimately helped lead India to embark on economic reform? A) The United Kingdom B) The United States C) The Soviet Union D) South Korea

C) The Soviet Union

When the evolution of new technologies is unknown, or it is unclear which country has the "best" rules for standards, the adoption of ________ is the superior option. A) a harmonization of standards B) separate standards C) mutual recognition standards D) larger country standards

C) mutual recognition standards

Mutual recognition of standards refers to A) the elimination of tariffs and quotas by trading partners. B) common product safety, environment, labor, and fair competition standards agreed upon by trading partners. C) the acceptance of a trading partner's standards as valid and sufficient by another trading partner. D) separate standards held by different trading partners which other partners refuse to recognize.

C) the acceptance of a trading partner's standards as valid and sufficient by another trading partner.

All else equal and given the current system of exchange rates, if the United States enters a period of exceptionally strong growth, A) the pressure on the dollar is to revalue. B) the pressure on the dollar is to devalue. C) the pressure on the dollar is to depreciate. D) the pressure on the dollar is to appreciate.

C) the pressure on the dollar is to depreciate.

China's economic reforms have focused on A) privatizing state-owned enterprises and increasing efficiency. B) reducing persistent inflation and current account deficits. C) transitioning from socialism and toward private ownership. D) reducing exchange rate instability.

C) transitioning from socialism and toward private ownership.

If the dollar/pound exchange rate is $2/£, a Big Mac costs $5 in New York City and costs £2 in London, the pound is ________, and U.S. tourists will be ________. A) overvalued; better off in London B) overvalued; better off in New York C) undervalued; better off in London D) undervalued; better off in New York

C) undervalued; better off in London

Unsustainable debt may occur for all of the following reasons EXCEPT A) when countries are dependent on one or two key export commodities, and there is a sudden drop in the price of those commodities. B) when natural disasters occur. C) when civil conflicts are resolved and a peace dividend occurs. D) when there are corrupt politicians and practices.

C) when civil conflicts are resolved and a peace dividend occurs.

Which of the following would NOT be a sign that China wants to become a high technology producer? A) More patents are being sought and granted in China. B) Large spending on infrastructure C) Rapid expansion of science, engineering and research D) Less emphasis on education spending

D) Less emphasis on education spending

Suppose that Mexico has external debt, and the value of the country's currency, the peso, falls. Which of the following is true? A) The peso value of the loans will decrease as well. B) Mexico will find it easier to pay off its external debt. C) Mexico will declare bankruptcy. D) The cost of debt service will be higher.

D) The cost of debt service will be higher.

When an individual or firm in the United States requests that a bank sell foreign exchange, the bank will probably A) call a foreign bank and arrange a purchase. B) call the central bank and arrange a purchase. C) call another bank customer with foreign exchange holdings. D) call a foreign exchange broker and arrange a purchase.

D) call a foreign exchange broker and arrange a purchase.

People sometimes worry that American trade with other countries will lead to large U.S. trade deficits and the movement of massive amounts of American capital out of the country. This worry is unfounded because countries cannot A) increase savings at the same time that a trade deficit grows. B) spend more than they earn. C) invest more than they save. D) have both current account and financial account deficits at the same time.

D) have both current account and financial account deficits at the same time.

Imposing the same standards on high- and low-income countries can be a problem because A) it widens the market and lowers prices. B) there are no economies of scale for low-income countries. C) high-income countries have few environmental problems. D) low-income countries may have less ability to enforce standards.

D) low-income countries may have less ability to enforce standards.

Separate standards refers to A) the elimination of tariffs and quotas by trading partners. B) common product safety, environment, labor, and fair competition standards agreed upon by trading partners. C) the acceptance of a trading partner's standards as valid and sufficient by another trading partner. D) standards held by different trading partners which other partners refuse to recognize.

D) standards held by different trading partners which other partners refuse to recognize.

Typically, the most important determinant of private investment in an economy is A) the inflow of foreign investment. B) the size of the capital account surplus. C) the size of the current account deficit. D) the amount of domestic savings.

D) the amount of domestic savings.

Empirical studies show that countries with low standards are very successful at attracting foreign investment.

FALSE

For countries such as the United States and the United Kingdom, it is important to have trade surpluses in order to service their external debts.

FALSE

Low standards reduce production costs and change a nation's comparative advantage.

FALSE

Speculation would involve using forward contracts and options to reduce the exchange rate risk on future foreign exchange transactions.

FALSE

The spot rate is the rate at which foreign currencies will be exchanged a specified number of days in the future.

FALSE

When Jeneva went to Costa Rica in July 2008, a U.S. dollar was worth 550 colones. If today a U.S. dollar is worth 650 colones, it means that the U.S. dollar has depreciated against the colone.

FALSE

China exports more services than India.

TRUE

China has a trade deficit in services, while India has a trade surplus in services.

TRUE

If Mexicans increasingly lose confidence in their domestic financial markets and move their assets to other countries, the peso will depreciate.

TRUE

If U.S. consumers increase their demand for foreign products and foreign travel, the U.S. dollar would tend to depreciate as more dollars are supplied to foreign exchange markets.

TRUE