EC 340 Exam 3

The below diagram represents the welfare effects of an import quota in a large economy. If quota licenses are given away to foreign governments, the net effect on welfare is represented by regions: GRAPH A. -(b+c+d) B. -(b+d) C. e-(b+d) D. e-(b+c+d) E. b+c+d

A. -(b+c+d)

The below diagram represents the welfare effects of an import quota. Note: this economy is a small open economy. The middle horizontal line (between regions c and e) represents the world price, both before and after the implementation of the quota. The top horizontal line (above region c) represents the domestic price after the quota is implemented. If quota licenses are auctioned by the government, the net effect on welfare is represented by regions: GRAPH A. -(b+d) B. b+d-e C. e-(b+d) D. e-(b+c+d) E. b+c+d

A. -(b+d)

[________] FDI leads to higher volumes of international trade?

A. Vertical

Intel owns high-tech wafer production facilities in Israel and Ireland and assembly plants in Malaysia. It owns all facilities. This is an example of?

A. Vertical FDI

When would a currency trader be likely to launch a successful speculative attack on a currency?

A. When a country's currency is overvalued B. When a county's foreign currency reserves are low

Which policy appears to have changed the long-run trajectory and avoided a crisis in the specific case of Turkey in 2018?

C. Raising interest rates

How can we tell the government of Turkey has been intervening in markets to prop up the value of the Lira?

C. The declining balance of Turkey's foreign reserves

In a working fixed exchange rate regime with free-flowing capital, what can be said about the exchange rate and the expected exchange rate?

C. The spot exchange rate must be equal to the expected future rate

The US imports 1.2 million pairs of shoes per month. It institutes a tariff of 10% on the import of shoes, and imports drop by 200,000 pairs per month. Congress is considers replacing the existing tariff with a quota of 1 million shoes per month. Quota licenses will be auctioned off by the government. When compared with the number of imports under the existing tariff, the proposed policy will?

C. have no effect on the number of shoes imported

True or False: A bilateral free trade agreement between two countries must necessarily be welfare improving for all signing countries?

False

Question 4: Two countries, Home and Foreign, are initially in autarky. There is only one industry with external economies of scale. They open up to trade with each other and production in the external economies of scale industry concentrates at Home and Home services 100% of the world demand in that industry. It must be the case that ______.

Prices of goods in the external economies of scale industry drop in both countries. (Home would capture the whole market - home prices declines

Question 3: The government imposes a tariff if $t on all steel coming from China this will _______.

Raise the price of steel facing US consumers and producers by less than $t.

Question 2: Country A is a sizable economy. Its economy grows over the course of the a decade. The government of Country A always follows a tariff schedule that is welfare-maximizing. Country A has signed no international trade agreements. We would expect the average tariff rate for imports to Country A will over the course of the decade _______.

Rise, starting from a positive level

Question 1: For the US, tariffs are ______.

Sometimes welfare improving, if they are small enough.

Question 1: Tariffs effects on domestic welfare are ________.

Sometimes welfare-improving for large economies if tariffs are small enough and always welfare-reducing for small open economies

An export subsidy raises the price domestic consumers pay? True or False

True

For any large economy, there is a tariff greater than zero that is welfare improving relative to free trade? True or False

True

Home's tariffs on Foreign products increase the value of Home's currency? True or False

True

The US left the gold standard because inflation made exports expensive? True or False

True

Question 2: A US multination owns, a foreign subsidiary in a low-wage country. The firm both ships intermediate goods to the=is plant and ends the plants products to other factors owned by the firm. The erm that describes this type of phenomenon is _______.

Vertical FDI

Question 2: In a small, open economy the optimal tariff is ______.

Zero

Question 2: South Korea's growth can be attributed to _______.

a and b (The success of infant industry protections, Changes in the composition of the South Korean labor force)

Question 3: depicting the effects of a tariff, the terms of trade gains are represented by the area

e

Question 3: The government of a large exporting country country can act as a _____ power by imposing a ______ and improve its terms of trade.

monopoly; export tax

The government of a large exporting country can act as a [ ] power by imposing an [ ] and improve its terms of trade?

monopoly; export tax

Question 5: Trade agreements have become more multilateral recently because _______.

1. Additional gains from trade with individual countries have become smaller as tariffs rates declined 2. Remaining tariffs are supported by more powerful, entrenched interests 3. Multilateral trade agreements reduce the possibility for diverted trade (all the above)

Question 3: Infant industries are _______. A bad idea, because they raise prices, at least temporarily on consumers and A good idea, but only if governments can successfully identify industries with external economies of scale

A bad idea, because they raise prices, at least temporarily on consumers and A good idea, but only if governments can successfully identify industries with external economies of scale

In the figure below, both Thailand and Switzerland have free open borders. It's the case that?

A. Barring any government intervention, Thailand cannot profitably enter the market if Switzerland is currently servicing all world demand B. For a given quantity, Thailand has lower average costs than Switzerland.

Governments can adjust currency prices by?

A. Buying and selling foreign reserves B. Setting the domestic interest rate C. Legal declarations that outlaw alternative prices

In a model with external economies of scale, when comparing one equilibrium where trade is free and production is concentrated in a single country to autarky, prices in the equilibrium with concentrated production and free trade [Hint: this is not the same as moving from autarky to trade]?

A. Can be lower for both countries B. Are always lower for the exporting country

Besides bravado and cheap talk, what policy levers did the Turkish government have available to them to boost the Lira's value?

A. Capital controls B. Raising interest rates C. Selling more of its foreign reserves

The figure below depicts an industry with external economies of scale in two countries. Both are in Autarky. Both countries have the exact same average cost curve - that is, for a given quantity, average costs are identical in China and the US. Yet autarky prices are higher in the US. It must be the case that [Hint: the axes on the graph are not to scale]?

A. China's domestic market is larger than the US's C. If these countries open to trade, the Chinese industry will expand

Starting from free trade, when a tariff is applied to imports in a small country, then which of the following increases?

A. Domestic output B. The domestic price

A firm is considering building a factory in a foreign country with similar factor prices. This factory will replicate the production process of the firm's plant in the firm's home country. A trade war between the two countries radically increases import tariffs in the firms' industry (both on final and intermediate goods). This will [ _______ ] the probability that the firm will undertake this investment?

A. Increase

The US leaves the WTO, raising tariffs on incoming products, including intermediate inputs and final goods. In retaliation, foreign countries increase tariffs on American goods. This will most likely [ _________ ] horizontal FDI?

A. Increase

What is one rationale for the government of Turkey to fight the market forces' downward pressure on the Lira?

A. Intervening to support the value of the Lira could be a way for the government to credibly commit to fighting inflation. C. Debt denominated in foreign currencies will make Turkish companies insolvent

The drop in the Lira likely spread to other emerging markets like Brazil and India because?

A. Investors believed the economies were fundamentally similar and the Turkish crisis gave new information on the status of other emerging markets. B. Investors in both economies rebalanced positions and/or were forced to scale back investments across the board.

Which of the following is a possible cause of external economies of scale in an industry?

A. Labor market pooling (and specialization) B. Knowledge spillovers

Double True or False: Assuming only that developed countries are skill-abundant, the H-O model will predict that as the world opens to trade, there will be increased inequality in which is true? i) developed countries ii) developing countries

A. Only (i) is true.

Using a fixed exchange rate for export promotion may?

A. Potentially increase inflation because of import price increases

During a speculative attack, a government running low on foreign reserves may?

A. Raise interest rates B. Restrict or end international capital flows C. Let its currency float (end the fixed regime)

Governments may fix exchange rates in order to?

A. Reduce currency risk for goods traders B. Fight inflation C. Increase the value of exports

Suppose Country A is high skill abundant and County B is low skill abundant. Industry X, which produces Good X uses skills intensively (relative to Industry and Good Y). According to the mechanisms of the H-O model, as the two countries open to trade with eachother, the [ ] of skilled workers in Industry X in Country A should [ ] (most directly) because of [ ]?

A. Relative level; Decrease; the change in relative factor prices.

Which policies did the government of South Korea use to foster infant South Korean industries?

A. Temporary tariffs B. Export subsidies through the tax code C. Credit subsidies

Which of the following is an assumption of the infant industry argument?

A. That the industry exhibits external economies of scale

True or False: According to the predictions of the H-O model, we should expect the college wage premium to have fallen in less developed economies as those countries open up to trade with the West? A. True B. False

A. True

True or False: Firms that export are more likely to innovate compared to firms that only service the domestic market? A. True B. False

A. True

True or False: More often, developing countries are "hosts" of multinational activity rather than the "source," when compared to developed countries? A. True B. False

A. True

What is an internally consistent argument against infant industry protections?

A. The government might not be able to correctly identify an industry that has potential to become more productive B. The long-run gains of capturing world demand may be outweighed by the short-run costs of imposing protectionist policies and government intervention. C. Sustained government interventions necessary to foster an infant industry foster corruption.

When quota rents are collected by domestic agents?

A. The welfare effect is the same as a tariff with the same price and quantity effects

When a large country levies a tariff on imports?

A. The world price falls B. Foreign firms are hurt C. The domestic price rises by less than the tariff

Which of the following characteristics are common to multinational firms?

A. They have high levels of research and development expenditures B. Relative to others in the industry, a higher fraction of employees are skilled, non-production workers C. Their products have a higher degree of product differentiation

On average, a higher percentage of firms' sourced intermediate goods will be from arms-length transactions (instead of Vertical FDI) when?

A. They produce goods that have more homogenous parts B. They produce in countries with better property rights

On average, firms undertake more vertical FDI if?

A. Transport costs are lower

Signing the WTO commits nations to which of the following?

A. reducing tariffs with all other countries to negotiated rates B. with some caveats, not raising tariff rates in the future on member nations C. eliminating non-tariff barriers

Although the discipline has yet to come to a conclusion on the subject, there is currently [ ] empirical evidence that part of the decline in American manufacturing employment was due to trade with China. [ ] remains an alternative hypothesis?

A. some; skill-biased technical change

A small open economy is considering a tariff on imports of electronics. There are no scale economies in the electronic industry. When making a decision about how to size this tariff, the government should consider that?

A. tariffs are always welfare-reducing for such an economy

If the dollar is backed by gold, there can be no inflation in the US True or False

False

A government successfully pegging the value of its currency

B. Cant use monetary policy to stimulate domestic economy, unless it also imposes international capital controls.

Two microprocessor manufactures, Company A and B, have similar technology, however Company A's chip is made using interchangeable, industry-standard parts, while Company B's chips are tailored to its product. This makes?

B. Company B more likely to internalize production

In small economies, an increase in the import tariff will always?

B. Decrease domestic consumption of the good

True or False: On average, employees of multinationals in developing countries earn less than workers employed at domestic firms in the same industry and location? A. True B. False

B. False

Home and Foreign both produce good X using the same technology, so that for a given quantity produced, producers in Foreign and at Home have the same average cost. Foreign has a much larger population than Home. There are economies of scale in this industry. At first both countries are in autarky. Then, they open to trade with each other. What can we predict about the location of production in the new equilibrium, assuming no government intervention?

B. Foreign will eventually be the only producer in the world market

County A and B both have similar factor prices. A firm from Country A opens a factory in Country B. This factor produces finished products and sells them in the host country. This is most likely an example of?

B. Horizontal FDI

The miraculous growth of South Korea in the second half of the 20th century can be attributed to the strategy of?

B. Infant industry protections C. Investments in workforce education

A central bank can put downward pressure on the value of its currency by?

B. Lowering interest rates C. Purchasing foreign currency

More concentrated industries are more likely to get trade protections because?

B. More concentrated industries are easier to organize for lobbying purposes

Under what circumstances is the (domestic) welfare effect of a tariff net positive?

B. Only if the deadweight loss from changes in consumer and producer behaviors is smaller than the tariff revenues attributable to terms of trade gains

What can explain the skill upgrading within industries we see in the data?

B. Skill-biased technical change

The diagram below represents the effects of a tariff on welfare. The region c+e represents? GRAPH A. deadweight loss B. tariff revenue C. consumer surplus loss D. producer surplus gain E. terms of trade gain

B. tariff revenue

In the US, when asked, skilled workers are more likely than unskilled workers to espouse protectionist positions? True or False

False

American manufacturing employment has [_____] since America has signed more trade deals and more economies have joined the WTO. At the same time, manufacturing productivity has [____]?

B. declined; increased

Suppose Home is skill abundant and Foreign is low skill abundant. According to the Stolper-Samuelson theorem, as these countries become more open to trade, inequality should [ ] at home and [ ] in Foreign?

B. increase; decrease

According to data on changes in prices of high-skill intensive goods relative to changes in prices of low-skill intensive goods, we should would expect to see?

C. A fall in the US college wage premium

When comparing a free trade equilibrium to Autarky, trade in an industry with external economies?

C. Can have either a positive or a negative effect on national welfare

For a given quantity of almonds produced, China has lower average costs. We don't know the history of production. If there are [_________] returns to scale in almond production, production [_______]. [Hint: Decreasing returns to scale means the supply curve is upward-sloping, as studied in Lecture 10]?

C. Decreasing returns to scale; must always be at least partially concentrated (more than half) in China

Double True or False i) Opening to trade increases profits of low-productivity firms ii) Opening to trade increases profits of high-productivity firms Which is true and which is false?

C. False; True

Turkish Lira is facing downward pressure on its price. This may be because of?

Current account deficits High inflation Speculation that asset prices have reached a peak

The Government imposes a tariff of $t on all steel coming from China this will?

D - raise the price of steel facing US consumers and producers by less than $t.

Double True or False: i) Firms that export generally employ fewer people relative to the average firm ii) Firms that export pay lower wages Which is true and which is false?

D. False; False

A Chinese firm imports parts to assemble iPads and exports them to the US. The Chinese government lowers the value of the Yuan by 10%. We can predict that this will?

D. Have an ambiguous effect on the price of the iPad, as the devaluation makes imported part more expensive and may increase inflation

Which of the following best describes divide between the interests of Labor and industry groups?

D. In a particular industry, when labor favors specific protection, industry groups generally do as well

Two countries, Home and Foreign, are initially in Autarky. There is only one industry with external economies of scale. They open up to trade with each other and production in the external economies of scale industry concentrates at Home and Home services 100% of world demand in that industry. It must be the case that?

D. Prices of goods in the external economies of scale industry drop in both countries

Question 4: If the US imposes tariffs on Chinese steel, Chinese steel producers will _______.

Face a lower world price of steel. This will reduce Chinese producer surplus.

The government of a large exporting country can use its [ ] power by imposing a [ ] and improve its terms of trade?

D. monopoly; export tax

Question 2: depicting the effects of a tariff, the quota with the equivalent welfare effect would be a quota of

D2-S2

The graph below shows the average cost curve for producers in China and Vietnam and the global demand for buttons. Based on the graph, which country must be servicing the world demand? Assume there is no government intervention?

E. It is impossible to tell who services world demand from this image alone

The below diagram represents the welfare effects of an export subsidy. The terms of trade loss can represented by the regions A. b+d B. b+c+d C. b+d+e+f+g D. b+c+d+e+f+g E. e+f+g

E. e+f+g

In a FIXED RATE regime, if traders BELIVE the regime will continue into the FUTURE, the interest rate at HOME will always be?

Equal to the foreign interest rate

A government can maintain an exchange rate with an overvalued currency and wont run out of foreign reserves if its willing to sell unlimited quantities of its currency in currency markets? True or False

False

Question 4: True or false: Trade agreements are always welfare improving for all signing countries.

False. (Trade agreements usually increase welfare of both countries - diverted trade can lead to not welfare improving for both countries - change who we are importing from because of the minimal cheaper costs because of no tariffs - this causes losses of tariff revenue for the government - this can make the equation negative)

Question 1: Honda, a Japanese firm, builds CRVs at plants in Ontario and Ohio. The entire production process takes place within the plant. The Ohio plant services the US market and the Ontario plant mostly services the Canadian market. The term which most precisely describes this type of phenomenon _______.

Horizontal FDI (replication of production process abroad to reduce trade costs) (vertical - don't produce final products produce intermediary goods takes advantage of factor prices) (outsourcing is when there is a contract - not ownership) (export platform - building a plant in Mexico to service the US or one plant serving another country on its own - build final, finished goods)

A firm is conversing building a factory in a foreign country with similar factor prices. This factory will replicate the production process of a local plant. A trade war between the two countries radically increases import tariffs in the firms industry. This will _____ the probability the firm will undertake this investment.

Increase (similar factor prices—> not vertical FDI, replication —> horizontal FDI, tariffs are increases to trade costs, motivation is to get around trade costs —> you won't have to pay import tariffs) (If it was vertical FDI a higher tariff (trade costs are in the con for vertical) this would decrease probability - if the tariffs were only on the final products and not the intermediate inputs then this would be no effect under vertical FDI)

Question 1: The graph shows the average cost curve for producers in China and Vietnam and the global demand for buttons. Based on the graph which country must be servicing world demand.

It is impossible to tell who services world demand from the graph alone (we would have had to been given the history)

Question 1: The graph shows the average cost curve for producers in China and Vietnam and the global demand for buttons. Based on the graph which country must be servicing world demand? GRAPH

It is impossible to tell who services world demand from the graph alone (we would have had to been given the history)

Question 1: depicting the effect of a tariff, the deadweight loss caused by the tariff is represented by

b+d