POLS 2170 inQuizitive Questions Ch 7-9

Monetary policy is used by national governments to influence macroeconomic conditions such as unemployment and economic growth. It involves changes to the interest rate and money supply of an economy.

True

The eurozone crisis in the early 2010s originated in countries such as Greece, Ireland, Portugal, and Spain.

True

The interests of creditor and debtor nations are most at odds with each other during recessions and depressions.

True

There is no major international institution specifically related to foreign direct investment (FDI).

True

State A decides it wants to support its domestic manufacturers. To do so, it acquires large amounts of the currency of State B so that its own currency remains artificially weakened relative to State B's. This encourages people living in State B to buy goods manufactured in State A. State B could accuse State A of which of the following?

currency manipulation

BMW, a German car manufacturer, opens a factory in the United States, in South Carolina. This is an example of BMW operating as a multinational corporation.

True

Currency crises that start in one country often spread to others.

True

Suppose that during a World Trade Organization round of negotiations, China agrees to reduce trade barriers to its domestic agricultural market for Brazil, and this access is worth $1,000,000,000 (a billion dollars). Based on WTO norms, we would expect Brazil to offer trade concessions to China equal to approximately what value, in dollars?

$1,000,000,000

Place the following important events in international financial history in chronological order, from the earliest to the most recent.

1. The great depression 2. the founding of Bretton Woods institutions such as the IMF and the World Bank 3. the Latin American debt crisis 4. the global financial crisis

Place the following eras of exchange rates in order, from oldest to most recent.

1. fixed exchange rate using the gold standard 2. Bretton Woods system using an adjustable peg 3. floating exchange rate used for major currencies like the dollar, euro and yen

Suppose you were the chief finance minister of your country. You are responsible for facilitating trade with your regional partners by picking an exchange rate system. Order the following systems from the system which will offer you the greatest flexibility in altering exchange rates to the one that offers the least flexibility.

1. floating exchange rate 2. adjustable peg 3. gold standard

Put the steps of a typical currency crisis in order from first to last.

1. the government commits itself to a fixed exchange rate 2. the government faces difficulty in sticking to its promised exchange rate 3. People, especially investors, lose faith in the government's ability to keep its exchange rate 4. Investors sell off the nation's currency, exchanging it for more reliable foreign currencies 5. the government devalues its currency

What does it most commonly mean for a country to manipulate its currency?

A country keeps the value of its currency artificially low

Which of the following best captures the relationship between interest rates and exchange rates?

A country with higher interest rates will tend to have a stronger currency

Which of the following statements about the International Monetary Fund (IMF) are accurate?

Accurate about the IMF: - The IMF offers loans to countries facing debt difficulties. - The IMF was established to manage the international monetary system. - Loans from the IMF are often contingent on debtor countries adopting economic policies that will reform their economies. Not Accurate about the IMF: - The IMF does little to address conflicts between debtor nations and their private creditors. - As the twenty-first century progresses, the United States and Europe only provide a miniscule amount of the IMF's total resources.

Choose all of the following that are criticisms of the International Monetary Fund (IMF).

Correct Answer(s): - The IMF is a tool of international financiers. - The IMF violates the sovereignty of nations. - The conditions the IMF attaches to loans harm the poorest citizens of a country. Incorrect Answer(s): - The IMF only assists developing countries.

Match each term with its corresponding example(s).

Aramco, a Saudi Arabian petroleum and natural gas company, owns and operates an oil refinery in China. Correct label:foreign direct investment Toyota, a Japanese-based car maker, builds a new factory in Mexico. Correct label:foreign direct investment Goldman Sachs, an American-based investment bank, lends money to the government of Indonesia for an infrastructure project. Correct label:sovereign lending Chase Bank, based in the United States, purchases stock in a Japanese telecommunications company. Correct label:portfolio investment

In the late 1800s and early 1900s, many in the United States advocated for a silver standard to replace the prevailing gold standard. Which of the following were arguments made by supporters of the silver standard?

Arguments Made by Backers of the Silver Standard: - It would make American exports more competitive by devaluing the dollar. - It would have helped debtors. Arguments NOT Made by Backers of the Silver Standard: - It would have lowered domestic prices for goods. - It would have helped creditors.

Suppose Argentina is not going to be able to make its payments to its creditors and has to turn to the International Monetary Fund (IMF) for a loan. The IMF requires Argentina to reduce government spending by cutting salaries to government workers and reducing pension payments. This is an example of which of the following?

Austerity

Which of the following are examples of austerity policy, and which are not?

Austerity Policy: - reducing government spending - increasing taxes Incorrect: - increasing consumption - raising wages

How are labor and capital similar when it comes to analyzing their movement across international borders?

Both respond to differential rates of return

Which of the following were features of the gold standard international monetary regime? Choose all that are correct.

Correct Answer(s): - The system relied on major financial powers being willing to stabilize each other through emergency loans. - It proved contentious in places like the United States. - It limited the independence of a country's monetary policy. Incorrect Answer(s): - Currency was backed by national government commitments rather than being tied to the value of a precious metal.

What commonalities do debtor nations share with their creditors, and where do the interests of debtor nations and creditors diverge?

Common Interests: - Debtors want to be seen as trustworthy nations to lend money to and do business in. - Debtors want to maintain access to international credit markets. Diverging Interests: - Debtors want to avoid austerity measures if possible. - Debtors want to pay back as little of their debts as they can negotiate.

Suppose the World Bank provides Bangladesh with a zero-interest loan so that Bangladesh can build new hydroelectric dams. What is this loan an example of?

Concessional finance

Choose all of the following that are examples of the factors that the Heckscher-Ohlin trade theory uses to explain national comparative advantage and trading patterns.

Correct Answer(s) - China and India exporting their labor-intensive manufactures to North America and Western Europe and importing capital-intensive industrial goods—including the complex machinery needed to operate domestic factories - the United States exporting agricultural products during the nineteenth century - the United States exporting capital-intensive machinery to Mexico, while labor-rich Mexico sends labor-intensive manufactured products to the United States Incorrect: trading between branches of a company, such as when a Ford engine factory in the United States sends an engine to a Ford assembly plant in Mexico

Choose all of the following that are reasons a corporation might want to become multinational corporation (MNC).

Correct Answer(s) - MNCs have access to resources that they otherwise could not get. - MNCs send different parts of the production chain to the places where they are cheapest. - MNCs avoid trade barriers by producing in a local market. Incorrect Answer(s): - MNCs are less complex because they work with multiple governments.

Programs such as Trade Adjustment Assistance in the United States offer compensation and other social services to those harmed by globalization. Why?

Correct Answer(s) - Such programs can weaken both calls for protectionism and opposition to free trade. - In rich countries, trade liberalization may reduce the wages of low-skilled workers. Incorrect: - Citizens overwhelmingly support free trade. - Globalization harms a majority of the population; hence, compensation is an easy political win for politicians.

Choose all of the following that are nontariff barriers to trade that act to restrict imports.

Correct Answer(s): - "Buy American" laws that govern what federal, state, or local governments can buy - quantitative restrictions (quotas) on goods imported Incorrect: - regional trade agreements (RTAs) that allow members to bid for government procurement contracts in other member states - a tax on imports levied at the border and paid by the importer

Choose all of the following that are reasons a country might want a weak currency relative to other currencies.

Correct Answer(s): - A weaker currency encourages foreigners to buy its goods. - A weaker currency allows groups such as domestic farmers to be more competitive on the international market. Incorrect Answer(s): - A weaker currency allows a country's citizens to purchase more with their currency when abroad. - A weaker currency increases the purchasing power of domestic consumers and importers.

How can incomplete information complicate bargaining between debtor and creditor nations?

Correct Answer(s): - Debtors may not know how willing creditors really are to retaliate on defaults. - The creditor may not know whether the debtor state can really repay its debts. Incorrect Answer(s): - Creditors may not know how much debtors owe them. - Debtors may not know whether they can afford to pay back their debts.

Choose all of the following that are ways the Heckscher-Ohlin theory helps explain trends in foreign investment in emerging markets.

Correct Answer(s): - Developed countries pay little interest on loans because of the abundance of capital. - Investors can get larger returns in developing countries because of the scarcity of capital. Incorrect Answer(s): - In the search for profit, the relatively low interest rates seen in developing countries lead to capital flows from poorer countries to richer countries. - The abundance of land in developed countries leads to higher interest rates for capital there.

Why might a government want a fixed exchange rate? Choose all that apply.

Correct Answer(s): - Fixed exchange rates facilitate international trade. - Fixed exchange rates keep prices stable. Incorrect Answer(s): - Governments have more flexibility in monetary policy with fixed exchange rates. - Currency manipulation is easier with a fixed exchange rate.

Many people in developed countries where multinational corporations (MNCs) are headquartered have criticized MNCs for their practices. Choose all of the following that are reasons why people in developed countries have criticized MNCs.

Correct Answer(s): - MNCs use the threat of moving jobs overseas to extract concessions from workers. - MNCs outsource some jobs to other countries, thereby hurting labor in their home country. - MNCs avoid environmental regulations by moving production to states with less intense environmental standards. Incorrect Answer(s): - MNCs pay taxes in both their home countries and host countries.

Choose all of the following that are principal features of an international monetary regime.

Correct Answer(s): - an understanding of whether currencies are fixed, floating, or a combination thereof - agreement on what benchmark or standard currency value will be based on Incorrect Answer(s): - rules about allowable trade barriers between states - funding for international organizations to help set exchange rates

Choose all of the following that are reasons that a country might want a strong currency relative to other currencies.

Correct Answer(s): - A stronger currency benefits domestic consumers when purchasing imported goods. - A stronger currency allows a country's citizens to purchase more with their currency when they are abroad. Incorrect Answer(s): - A stronger currency encourages foreigners to buy its goods. - A stronger currency makes it easier for groups such as domestic farmers to be competitive overseas.

Choose all of the following that are reasons a government might want a floating exchange rate.

Correct Answer(s): - Floating exchange rates allow economic policies to have greater flexibility. - Central banks have more authority with floating exchange rates. Incorrect Answer(s): - Trade is simplified with a floating exchange rate. - A floating exchange rate ties a currency's value to the value of gold or other precious metals.

Choose all of the following that are ways immigration benefits citizens in receiving countries.

Correct Answer(s): - Migrant labor pays taxes in host countries. - The economy benefits from a larger labor pool. Incorrect Answer(s): - Migrant labor may use local social services. - Migrant labor keeps wages low for all workers.

Why did many European countries face difficult currency decisions in 1991 and 1992?

Correct Answer(s): - They had pegged their currency to the German Deutschmark, and Germany was engaging in rapid interest rate increases. Incorrect Answer(s): - They were suffering from internal political violence that made investors hesitant to invest in their currencies. - They wanted to remove their currency from its ties to the gold standard, but the United States would not allow them to. - They had large government debts they could no longer afford to pay off.

Choose all of the following that are historical examples of trade liberalization.

Correct: - large developing countries such as Brazil and India after the 1980s - the Western world after 1945 Incorrect: - the 30 years following the outbreak of World War I in 1914 - the 300 years after 1492

How does the Heckscher-Ohlin theory help us explain labor migration?

Countries with large numbers of unskilled labour will export that labour to the rest of the world

In Country A, a political party representing labor interests was elected. It promptly instituted protectionist measures. In Country B, a political party representing labor interests was similarly elected, but it promptly decreased tariffs and other barriers to trade. Which explanation of the different policy decisions in Country A and Country B are consistent with the Stolper-Samuelson model?

Country A is labour-scarce and Country B is labour abundant

Country A exports computers and banking services. Country B exports dairy products and wheat. Country C exports clothing and shoes. According to the Heckscher-Ohlin trade theory, what factors would we expect each country to be abundant in, given only this information?

Country A: capital Country B: land Country C: low-skilled labor

One way that institutions can make cooperation easier is by setting standards that allow all countries to know if another country is abiding by its agreements. Which of the following in an example of how the World Trade Organization (WTO) sets standards?

Creating rules about when and how countries can use safeguards to protect domestic industries

Which of the following was the predecessor to the World Trade Organization (WTO)?

General Agreement on Tariffs and Trade (GATT)

Most individuals and corporations in developed countries invest in developing countries because they believe these investments are less risky than investing in developed countries.

False

The 2008 global financial crisis started in Greece.

False

The Heckscher-Ohlin trade theory primarily explains why countries frequently trade more with allies than with hostile nations.

False

The United States is currently on a fixed exchange rate with the dollar pegged to the value of gold.

False

Trade protectionism finds more support among economists than among the public.

False

Under an international monetary regime that uses a national paper currency standard, national governments issue paper currency with a fixed value in terms of gold or a similar commodity.

False

Which groups or individuals would benefit more from a floating currency, and which would benefit more from a fixed currency?

Floating Currency: - central banks - businesses that are entirely domestic in nature Fixed Currency: - businesses that conduct international trade

Which of the following is an example of a bilateral investment treaty?

France and Germany agree on terms for how companies and businesses can invest across their borders

Among developed countries, the United States has the largest percentage of international migrants.

False

Having a strong currency is always better for a country.

False

This major international organization, created as part of the Bretton Woods System, was originally responsible for monitoring interstate exchange rates and overseeing currency relations.

IMF

Match each term with the state behavior that best describes it.

If the United States confers this status on Brazil, then a tariff reduction given by the United States to any other country with this status will automatically be given to Brazil Correct label:most favored nation When Japan grants a trade-policy concession desired by South Korea, South Korea will also grant a trade-policy concession to Japan. Correct label:reciprocity The United States places a limit on the amount of a good that is allowed to be imported. Correct label:quota The United States imposes a tax on imports from China. Correct label:tariff

Ukraine can produce a ton of wheat using man-hours, land resources, and other inputs equal to about 90 euros, whereas in Austria the inputs to produce the same ton of wheat cost approximately 180 euros. Ukraine can produce an automobile component part using man-hours, resources, and other inputs equal to about 90 euros, while in Austria the inputs to produce the same automobile component costs approximately 60 euros to produce. Using only what you can learn from the information above, label the following statements as either true or false.

In the absence of already existing trade barriers, Austrian wheat farmers have an incentive to ask their government for protection against cheaper imports Correct label:true Relative to Ukraine, Austria has a comparative advantage in the production of automobile parts. Correct label:true Because Ukraine is poorer than Austria, it would be advantageous to Ukraine to produce both wheat and automobile components for its own domestic market. Correct label:false Austria has absolute advantage in both wheat production and automobile components. Correct label:false

Match each theory of how different sets of actors will support or oppose trade protectionism with the corresponding example(s).

Industry-specific factors of production such as capital equipment for steel-making in the United States lead this industrial sector to be protectionist when faced with stiff import competition, unlike other capital-intensive industries. Correct label:Ricardo-Viner (specific factors) model In the unskilled-labor-scarce and capital-abundant United States, unskilled workers will support trade barriers, while investors and skilled workers oppose them. Correct label:Stolper-Samuelson theorem Farmers in land-poor Japan are protectionist, but farmers in land-rich Argentina will be free traders. Correct label:Stolper-Samuelson theorem Large firms with significant exports, like General Motors or Microsoft in the United States, will support further trade liberalization. Correct label:firm-based trade theory

Which of the following statements about the history of labor migration is most accurate?

Labour migration was a proportionally larger percentage of the population in the 1800s than today

Trade policy in the United States is largely influenced by the organization and representation of different interests. In the following pairs of competing interests, click on the one that is better organized or better represented in Congress.

RURAL INTERESTS & FARMERS

Which of the following conditions are most likely to lead to higher trade flows between Country A and Country B, all else being equal?

Likely to increase trade: - Country A borders Country B. - Country B recently lowered its tariffs for imports from Country A. - Multinational corporations (MNCs) headquartered in Country A operate subsidiaries in Country Unlikely to increase trade: Country A has health and safety regulations for food products that producers in Country B have trouble meeting. Country A uses a different currency than Country B. Country A and Country B have strained diplomatic relations.

Which of the following best explains the creation of the euro?

Many EU countries wanted a stable exchange rate between their countries

A business enterprise that operates in a number of countries, with production or service facilities outside its country of origin, is known as which of the following?

Multinational corperation

Why do some people criticize global attempts to contain currency crises?

Some people believe that bailing out such currencies only rewards undeserving banks and governments

In the following paragraph, click on all actions or policies by the government of Country A that have the effect of sheltering domestic producers from foreign competition.

Tariff on textiles Requires state and local governments to purchase paper products made domestically

Prior to the Trump administration, the United States has generally obeyed rulings of the World Trade Organization, even when countries that complain about the United States are smaller and less powerful than the United States. Why?

The US would like other countries to also abide by the WTO rulings

Match the type of exchange rate with its corresponding example.

The United States allowed individuals to trade their currency for a set amount of gold per dollar. Correct label:gold standard Panama pegs its currency to the value of the U.S. dollar. Correct label:fixed The United States allows the value of its currency to change based on supply and demand. Correct label:floating

Why are predictable exchange rates necessary for transnational trade?

Traders would be reluctant to do business across borders if currencies fluctuated wildly

The U.S. Congress has traditionally been more protectionist than the president. Which of the following best explains this pattern?

The president represents thw whole country, whereas members of congress are electorally responsive only to the interests of their district.

Which of the following is true about comparative advantage?

Trade barriers make domestic production less efficient because they hinder a country's ability to pursue its comparative advantage

A stable international monetary regime has many features of a public good that require collective action.

True

Which of the following is true about World Trade Organization (WTO) rules?

WTO rules allow countries to apply safeguards that temporarily protect domestic industries from trade pressures

Sort the following into reasons a host country might want, or not want, a multinational corporation (MNC) to set up within its borders.

Want to Host an MNC: - MNCs sometimes generate significant tax revenue. - MNCs bring talent and knowledge to a local economy. Do Not Want to Host an MNC: - MNCs may leave a hole in the economy if they depart. - MNCs spur protests by local competitors.

Choose all of the following that are examples of ways in which the negotiation of regional trade agreements (RTAs) can overcome problems of strategic interaction.

Ways RTAs Overcome Problems of Strategic Interaction: - RTAs involve smaller numbers of countries, which may make it easier for members to monitor each other's behavior. - RTAs can allow concessions in trade policies to be made by linking such concessions to other national interests. Not Ways RTAs Overcome Problems of Strategic Interaction: - RTAs allow for more countries to participate than the WTO does. - RTAs avoid skepticism that international trade institutions don't satisfy individual country's interests.

This major international institution lends money at low interest rates to developing countries for the purposes of building infrastructure and other such projects.

World Bank

If Canada decides to tie its currency to the value of the U.S. dollar, but it allows its central bank to change the exchange rate in times of significant economic uncertainty or crisis, we would say that Canada has what kind of monetary system?

adjustable peg

Match each currency crisis with the events or circumstances that helped cause it.

caused in part by political unrest and uncertainty tied to an assassination Correct label:Mexico 1994 caused in part by states borrowing heavily after the creation of the euro Correct label:Europe 2011-2015 caused by Germany raising interest rates while other European nations had tied their currencies to the Deutschmark Correct label:Europe 1992 spread rapidly from country to country, caused in part by lagging exports and rising inflation Correct label:East Asia 1997

Match the currency standard with the era in which it was commonly used.

classical gold standard era Correct label:commodity standard Bretton Woods era Correct label:commodity-backed paper standard modern era Correct label:national paper currency standard

This kind of finance entails wealthy countries or organizations either giving money or lending it at a very low interest rate to poorer nations.

concessional

Identify the following as either groups who want their government to devalue during a currency crisis or groups who want their government to stay on a fixed exchange rate.

consumers Correct label:stay fixed farmers and manufacturers Correct label:devalue companies and individuals who have borrowed in a foreign currency Correct label:stay fixed

The price at which one can trade dollars for euros is known as which of the following?

exchange rate

Which of the following was one of the most important lessons of the late 1990s currency crisis in East Asia?

how quickly currency crises can spread from country to country

You decide to buy some stock in a foreign company in the hopes that you will earn a higher rate of return than you would by keeping your money under your mattress. What is this is an example of?

portfolio investment

Which of the following institutions of world finance is the oldest?

the Bank for International Settlements

In the modern international monetary order, currencies are backed by which of the following?

the commitment of issuing governments to maintain their values

The fictional state of Atlantis contains many groups within it. Some of these groups would prefer that Atlantis has a strong currency while others would prefer a weak currency. Indicate which type of currency the following groups would prefer.

tourists who travel overseas Correct label:strong currency domestic manufacturers who sell overseas Correct label:weak currency farmers Correct label:weak currency domestic consumers Correct label:strong currency