ECON-E 202 - Chapter 17, 7
Which of the following statements is correct?
ALL OF THE ABOVE - In the long run, the Phillips curve is a vertical line at the natural rate of unemployment - In the long run, a higher or lower inflation rate has no effect on the unemployment rate - In the long run, a higher or lower price level has no effect on real GDP
According to many economists and policymakers, what other options does the Fed have to improve its credibility with workers, firms, and investors?
All of the above - Following a rules strategy - Following a discretion strategy - Following the Taylor rule
In the figure to the right, expected inflation is initially 1.5%. When expected inflation increases to 4.5%, which of the following will occur?
All of the above - To have 3.5% unemployment rate, inflation would be 7.5% - At the natural rate of unemployment, inflation is 4.5% - Unemployment reaches the natural rate of 5%
Why is agreeing on the size of the output gap difficult?
All of the above reasons that may explain why it is difficult for policymakers to agree on the size of the output gap. - Economic information, such as the size of GDP, is usually learned with a lag - The size of the output gap may be unknown due to data limitations, and once learned, may be later revised as new information becomes available - The output gap is the percentage difference between real GDP and potential GDP, and its is hard to estimate potential GDP
Why might an increase in mortgage interest rates reduce Toll Brothers' revenue and profit?
An increase in mortgage interest rates decreases the demand for durable goods
Indicate the two main objections to the idea that the short-run Phillips curve is vertical
C. Workers and firms might not have rational expectations D. Contracts with workers keep wages sticky
What economic framework did economists change as the result of Lucas's arguments?
Economists changed the theory of "adaptive expectations" where people assume that future rates of inflation will follow the past rates of inflation
Why might the Fed rapidly increasing its target for the federal funds rate push the economy into a recession?
Increasing the target for the federal funds rate decreases GDP by reducing consumption
Why do most economists believe that it is important for a country's central bank to be independent of the rest of the country's central government?
Independent central baks are more effective at fighting inflation
The Phillips curve was developed by A.W. Phillips in 1957 and shows the relationship between unemployment and inflation. The curve, shown at the right, indicates what type of relationship between the two variables?
Inverse relationship
Why might investors be more likely to buy risky securities if they feel confident that they know what interest rates will be in the future as a result of Fed announcements?
Investors may seek higher returns in more risky assets and borrow at low interest rates to speculate on risky assets
Why are there disagreements over the value of the NAIRU?
It is hard to estimate the NAIRU because the natural rate of unemployment changes over time
When SRAS1 shifts to SRAS2, the price level increases and the level of real GDP falls. What happens to the short-run Phillips curve when the short-run aggregate supply curve shifts (a supply shock)?
It shifts up such that a given level of unemployment occurs at a higher price level
During this period was Fed policy attempting to reach a point on the short-run Phillips curve representing higher unemployment and lower inflation, or a point representing higher inflation and lower unemployment? Briefly explain.
Lower inflation, which comes with higher unemployment
Which of the following statements concerning the Phillips curve is correct?
Many economists and policy makers in the 1960s viewed the Phillips curve as a structural relationship
What is the NAIRU?
NAIRU is the nonaccelerating inflation rate of unemployment
Are the low inflation rates of recent years entirely the result of Federal Reserve policy?
No, the low inflation rates are partially due to slow economic growth
In the figure to the right, at what point is the inflation rate stable? That is, at what point can we refer to the inflation rate as the nonaccelerating inflation rate of unemployment?
Point C
Why might interest rates that are too low lead to financial instability?
Rates that are too low could lead to speculative bubbles in stocks and other financial assets
What does the article mean by a "soft landing"?
Reducing inflation without causing a recession
Suppose that the expected inflation rate increases from 4 percent to 6 percent. What will happen to the short-run Phillips curve?
The short-run trade-off between unemployment and inflation will be worse than before as the economy moves to a higher short-run Phillips curve
Why do these disagreements pose a problem for the Fed?
Those disagreements make it difficult for the Fed to know what level of unemployment to target
What connection is there between Fed policy and Toll Brothers' concern about the effect of rising mortgage interest rates on its profit?
When the Fed raises interest rates, it decreases profits because consumers don't purchase as many new homes
When Taylor refers to a "rules-based policy," he means
a formulaic strategy for targeting the money supply and the federal funds rate
If General Motors and the United Auto Workers (UAW) union fail to accurately forecast the inflation rate, the real wage will be different than the company and the union had expected. The company and the union sign long-term contracts rather than negotiate a new contract each year because each party believes that the
actual inflation rate will be equal to their expected inflation rate in the long term
Higher interest rates would have
decreased investment spending by firms and home purchases
Burns's views in this speech are _____ the views at the Fed in the late 1960s
different than
A significant reduction in the inflation rate is called
disinflation
There is a different short-run Phillips curve for every level of the _____ inflation rate. The inflation rate at which the short-run Phillips curve intersects the long-run Phillips curve equals the _____ inflation rate.
expected expected
The Fed calls attempts to shape expectations of future policy decisions
forward guidance
If expected inflation is higher than actual inflation, actual wages in the economy will turn out to be ___ than expected real wages; consequently firms will hire ___ workers than they had planned
higher fewer
Slow growth in aggregate demand leads to
higher unemployment and lower inflation
Such views are rare today because
in the long run there is no tradeoff between inflation and unemployment
As expectations of inflation increase, firms and workers _____ wages and prices, therefore inflation _____
increase increases
If the unemployment rate is below the natural rate, the inflation rate tends to _____, and eventually, the short-run Phillips curve will shift _____.
increase up
The Fed appears to believe that the more "potent multiplier effect" is associated with
investment spending because it is more sensitive to lower interest rates
A central bank's ability to maintain credibility on a policy to keep inflation low
is important because maintaining credibility allows a central bank to keep inflation expectations lower
If inflation turns out to be higher than households and firms had previously expected, the actual real wage will end up being In this case,
lower than the expected real wage firms will hire more workers than they had planned to hire and employment will rise
After Fed Chairman Paul Volcker began fighting inflation in 1979, workers and firms eventually _____ their expectations of future inflation, and the short-run Phillips curve shifted _____.
lowered down
An article in the Economist observes that "a sudden unanticipated spurt of inflation could lead to rapid economic growth." This statement implies that there is a _____ relationship between inflation and economic growth. The effect is _____
positive more likely if inflation is unanticipated because workers would not seek higher nominal wages
When Gregory says that the "policy... is unlikely to have a stimulative effect because it will be easily anticipated," he indicates his belief that households and businesses have
rational expectations of inflation in which all available information is used in forming expectations
Economists during the early 1960s thought of the Phillips curve as a "policy menu" because they thought that the Phillips curve They _____ to think of the Phillips curve as a "policy menu"
represented a structural relationship in the economy that would not change as a result of policy change were not correct
According to Milton Friedman, differences between the actual and expected inflation rates could lead the actual unemployment rate to
rise above or fall below the natural rate
The unemployment rate
rose from 6% to 10% during the period of the Volcker disinflation
As the public starts expecting a higher inflation rate, the short-run Phillips curve will _____
shift up and to the right
Do all economists agree with Lucas's main conclusions about the effectiveness of monetary policy? Briefly explain. Many economists have remained skeptical of all the following, except
that there is a short-run trade-off between unemployment and inflation
If, in the long run, real GDP returns to its potential level, then in the long run,
the Phillips curve is vertical
If workers and firms have rational expectations and wages and prices adjust quickly, then if the Fed announces a credible expansionary monetary policy,
the inflation rate will increase, but the unemployment rate will be unchanged
Milton Friedman argued that the Phillips curve did not represent a permanent trade-off between unemployment and inflation, since
the long-run Phillips curve is vertical, there is no trade-off between unemployment and inflation in the long run
The board would change its estimate of the NAIRU over time when
the natural rate of unemployment changes as a result of demographic changes or changes in labor market institutions
Robert Lucas and Thomas Sargent argued that
there might not be a trade-off between unemployment and inflation in the short run, and the short-run Phillips curve would be vertical
Friedman defined the "natural rate of unemployment" as the
unemployment rate that exists when the economy produces potential GDP
If workers and firms have rational expectations, they will
use all available information when forming their expectations of future inflation; thus, the actual inflation rate will be equal to the expected inflation rate
If the Fed wants to move from a point on the short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation, then it should
use expansionary monetary policy
Therefore, during the 1970s, there _____ a trade-off between unemployment and inflation
was not
Who gains and who loses when a country imposes a tariff or a quota on imports of a good? A. Domestic sugar producers and their workers B. Consumers C. Industries that use sugar and their workers D. The U.S. economy
A. G B. L C. L D. L
Another restriction with a similar outcome would be to impose a limit on the amount of a specific good that can be imported. This restriction is called a _____
Ad valorem tax on imports
In the real world, specialization is not complete. Why do countries not completely specialize?
All of the above - Because production of most goods involves increasing opportunity costs - Because tastes for products differ - Because not all goods are traded internationally
If sugar protectionism has the bad effects as stated in the editorial, which of the following is a likely reason why Congress and the president so not eliminate it?
All of the above - Consumers are unaware of the existence of the quota - There is little political support for the elimination of the quota - Sugar growers have a very strong lobby in Washington
If the United States were to stop trading goods and services with other countries, which of the following U.S. industries would be likely to see their sales decline the most?
All of the above - Most manufacturing industries - Some service industries - Most of the agriculture industry
Why do some people oppose the World Trade Organization (WTO)?
All of the above - Some critics of the WTO support globalization in principle but believe that the WTO favors the interests of the high-income countries at the expense of the low-income countries - Some opponents are specifically against the globalization process that began in the 1980s and became widespread in the 1990s - Some opponents desire to erect trade barriers to protect domestic firms from foreign competition
Which of the following factors may explain why a country like the Netherlands is more likely to import and export larger fractions of its GDP than would a larger country, such as China or the United States?
All of the above - The Netherlands is a small country with a level of GDP that is only a small fraction of that of China or the U.S. - Given its small size, the Netherlands must specialize in producing and exporting only a few products; it cannot produce the wide range of products that China or the U.S. can produce - The Netherlands must rely on imports for a large range of products
Choose the correct answer that might refer to "economic nationalism"
All of the above - The use of non-tariff barriers to protect domestic industries - The use of quotas to protest domestic industries - The use of tariffs to protest domestic industries
You and your neighbor pick apples and cherries. If you can pick apples at a lower opportunity cost than your neighbor, which of the following statements is true?
All of the above - You can trade some of your apples for some of your neighbor's cherries, and both of you will end up with more of both fruit - You have a comparative advantage in picking apples - Your neighbor is better off specializing in picking cherries
Some people are opposed to globalization because they
All of the above - believe globalization destroys the distinctive cultures of many countries - want to erect trade barriers to protect domestic firms from foreign competition - believe globalization favors the interests of high-income countries at the expense of low-income countries
Which of the following events would cause the demand curve in the foreign exchange market to shift?
All of the above - increased demand for U.S. goods and services - Increase in U.S. interest rates - Changes in expectations of the future value of U.S. currencies
By trading, countries are able to consume more than they could without trade. This outcome is possible because
All of the above - inefficiencies in resource allocation are reduced - shifting production to the more efficient country - the one with the comparative advantage - increases total production - world production of both goods increases after trade
The World Trade Organization (WTO)
All of the above - replaced the General Agreement on Tariffs and Trade (GATT) in January 1995 - generally aids in negotiating trade agreements that include not only goods but also services and intellectual property - is an international organization that oversees international trade agreements
The saving and investment equation
All of the above - shows the a country with negative NFI must be saving less than it is investing domestically - can be written: S = I + NFI - tells us that a savings will be invested domestically or overseas
In addition to tariffs and quotas, governments sometimes erect other barriers to trade. Which of the following is an example of a barrier to trade that a government may impose?
All of the above are examples of barriers to trade that a government may impose - Imports must meet certain health requirements - Imports of certain products may be restricted on national security grounds - Imports must meet certain safety requirements
What is a voluntary export restraint?
An agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country
_____ is a situation in which a country does not trade with other countries. The _____ is the ratio at which a country can trade its exports for imports from other countries.
Autarky terms of trade
What does the article mean that China's emergence as a trade powerhouse rattled the U.S. economy?
China began exporting more goods than the United States had been producing
The article noted that "places in America more exposed to these Chinese imports [were] typically those with lots of labor-intensive manufacturing." Why would places with lots of labor-intensive manufacturing be more exposed to Chinese imports? Places with lots of labor-intensive manufacturing jobs have been affected more by Chinese imports because
China has a comparative advantage in producing labor-intensive products
What does the article mean by the "Chine-shock literature?" The "China-chock literature" is research that examines the effects of
Chinese access to world markets
What is the difference between absolute advantage and comparative advantage? _____ advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. While _____ advantage is the ability of an individual, a firm, or a country to produce more of a good or service than competitors when using the same amount of resources.
Comparative absolute
Briefly explain what economic concept the author is illustrating in this passage.
Comparative advantage, where people produce that for which they have a lower opportunity cost
Who benefits and who loses from dumping? What problems arise when implementing anti-dumping laws?
Consumers benefit while competing firms lose; The true production costs are not easy for foreign governments to calculate
Which of the following is not a reason why purchasing power parity fails to provide a complete explanation of exchange rates?
Countries have different wage rates
Why might disagreements over the size of the output gap make it difficult for the Fed to use a pre-announced rule in conducting monetary policy?
Differences in the estimate of the output gap can lead to different targets for the federal funds rate
Briefly explain whether you agree or disagree with the following statement: "International trade is more important to the U.S. economy than to most other economies."
Disagree. Exports and imports are a relatively small fraction of the United States GDP
Briefly explain whether you agree with the following statement: "Japan has always been much more heavily involved in international trade than are most other nations. In fact, today Japan exports a larger fraction of its GDP than do Germany, the United Kingdom, or the United States."
Disagree. Japan exports about 20% of its GDP, of the above, only the U.S. exports a smaller percentage
Do you agree that reducing barriers to trade reduces the number of jobs available to workers in the United States?
Disagree. While some jobs are saved by trade restrictions, many more jobs are lost in industries that use trade restricted goods as inputs.
Workers generally form their expectations of future inflation based on the current conditions in the economy. Which one of the following does not reflect how they form their expectations?
During periods of high inflation, people do not take any particular action until the Fed has controlled the inflation rate
Why didn't economists and policymakers expect the economic effect of imports from China to be as great as it turned out to be?
Economists and policymakers didn't expect the large number of job losses to occur so quickly
_____ are goods and services produced domestically but sold to other countries. _____ are goods and services bought domestically but produced in other countries. _____ are taxes imposed by a government on imports of a good into a country.
Exports Imports Tariffs
What advantages does being located in Boulder give to startup natural food firms?
External economies
As long as countries only produce goods in which they have a comparative advantage and trade those goods for ones in which they do not have a comparative advantage, everyone gains and no one loses as a result of international trade.
False
Countries gain from specializing in producing goods in which they have an absolute advantage and trading for goods in which other countries have an absolute advantage.
False
The U.S. economy would experience a gain in economic surplus from the elimination of tariffs and quotas only if other countries also reduced their tariffs and quotas.
False
The United States is the leading exporting country in the world.
False
When an industry receives tariff or quota protection, there is no effect on other domestic industries.
False
As of 1993, the Fed sets targets for which of the following in order to achieve price stability and high employment?
Federal funds rate
Is fiscal policy in Peru likely to be more or less effective than it would be in a less open economy? Briefly explain.
Fiscal policy will have a smaller impact on aggregate demand in an open economy than in a less open economy
Briefly explain whether you agree with the following argument: "Unfortunately, Bolivia does not have a comparative advantage with respect to the United States in the production of any good or service."
If the U.S. trades at all with Bolivia, then the argument above is false. There would be no trade unless both countries were made better off, and this would imply Bolivia has the comparative advantage in the production of at least one good or service.
Which of the following is a problem that can result from pegging a country's currency?
If the pegged value is above the market value, there may be a speculative run on the currency
Which of the following describes the importance of international trade around the world?
Imports and exports remain a smaller fraction of GDP in the U.S. than in most other countries
Why doesn't the Phillips curve represent a permanent trade-off between unemployment and inflation in the long run?
In the long run, aggregate supply is vertical
Which of the following is not a main source of comparative advantage?
Internal economies of scale
In the figure the the right, the exchange rate between the Japanese yen and the U.S. dollar increased because demand increased by more than supply. As a result, what happens to U.S. real GDP?
It decreases
Referring to your answer above, what makes it such a powerful insight?
It explains why if individuals, firms, and countries specialize and trade they will be better off
How does the additional policy channel available in an open economy affect monetary policy?
It increases the ability of an expansionary monetary policy to affect aggregate demand
What is meant by a country specializing in the production of a good? Is it typical for countries to be completely specialized?
It shifts resources toward producing only those goods where it has a comparative advantage; No
In the example in the text with Japan and America producing and trading cell phones and tablet computers, America has a comparative advantage in tablet computers while Japan has a comparative advantage in cell phones. Which of the following statements correctly describes the outcome when America imports cell phones from Japan?
Jobs in the American cell phone industry may suffer but jobs in the American computer industry manufacturing tablet computers increase and in the overall American economy, more jobs are created
Currency pegging refers to the decision by a country to
Keep the exchange rate fixed between its currency and another currency
Which of the following is an example of positive economic analysis?
Measuring the effect of the sugar quota on the U.S. economy
Why is it potentially a problem for the Fed to "wait too long" to raise its target for the federal funds rate? Can't the Fed just wait until inflation increases and begin to slowly increase the target at that time?
Monetary policy works with a lag that can be up to 18 months
Do you agree that a country only benefits from free trade if every other country also practices free trade?
No
Are they correct in asserting that free trade costs U.S. jobs?
No, since free trade creates more jobs for the U.S. economy than it costs the U.S.
Former President Barack Obama once described a trade agreement reached with the government of Columbia as a "win-win" for both our countries." Is everyone in both countries likely to win from the agreement?
No, workers employed at companies that are less efficient than foreign companies will lose jobs
How can the Fed fight a combination of rising unemployment and rising inflation?
Not easily; neither expansionary nor contractionary monetary policy can solve both problems simultaneously
Models that use factors, such as technology shocks, to explain fluctuations in real GDP instead of changes in the money supply are called
Real Business Cycle Models
Protectionism is the use of trade barriers to shield domestic firms from foreign competition. Protectionism is usually justified on the basis of several arguments which include:
Saving jobs, protecting infant industries, and protecting national security
Which of the two arguments is most convincing?
Since both of these arguments are based on normative statements, someone could find either argument more convincing
Which of the following statements is true about the Fed under the leadership of Chairman Alan Greenspan between 1987 and 2006?
The Fed attempted to enhance its credibility by announcing its monetary policy action at the conclusion of each FOMC meeting
Why did targeting inflation and communicating about future changes in interest rates become "central bank fashion"?
The Fed can affect long-term interest rates, which depend partly on the public's expectations of future monetary policy
Which of the following decisions does the textbook discuss as an action by the Fed during Chairman Alan Greenspan's term that possibly contributed to the financial crisis of 2007-2009?
The Fed's decision to keep the target for the federal funds rate at 1 percent for more than 18 months after the end of the 2001 recession
What events led to the General Agreement on Tariffs and Trade? Why did the World Trade Organization eventually replace GATT?
The Great Depression and the Smoot-Hawley Tariff; Trade in services and in products incorporating intellectual property grew in importance
How does he know that Romans got better pots and better defense by relying on this economic concept?
The Romans gave up less than if they had produced these goods themselves
In what sense has the U.S. workforce adapted more slowly than expected?
The United States was slow to retrain its workers with new skills
What is absolute advantage?
The ability of an individual, firm, or country to produce more of a good or service than competitors when using the same amount of resources
To encourage the domestic production of soybean oil, the Indian government imposed a 20% tariff on the import of soybean oil. The world price, when the tariff was imposed, was (in terms of the Indian currency, rupees) Rs. 1,000 per ton of oil. The figure to the right shows the domestic supply and the level of imports before and after the imposition of the tariff. Suppose the Indian government replaced the 20% tariff imposed on the import of soybean oil with an import quota of 6 million tons. Which of the following will hold true once the quota is imposed?
The benefit that accrued to the government from the import tariff will get transferred to the foreign producers of soybean oil
To encourage the domestic production of soybean oil, the Indian government imposed a 20% tariff on the import of soybean oil. The world price, when the tariff was imposed, was (in terms of the Indian currency, rupees) Rs. 1,000 per ton of oil. The figure to the right shows the domestic supply and the level of imports before and after the imposition of the tariff. Which of the following is most supported by the information given?
The deadweight loss because they are forced to buy from less efficient domestic producers is Rs. 300 million
Which of the following, if true, would weaken the claim of the people who lost their jobs?
The demand for the country's goods is higher outside the country than inside the country
Which of the following, if true, will support the claim that a budget surplus will lead to an improvement in Avalon's current account balance?
The domestic interest rate has declined to a ten-year low, causing people in Avalon to invest in assets abroad
An economist remarks, "In the 1960s, fiscal policy would have been a better way to stabilize the economy, but now I believe that monetary policy is better." What has changed about the U.S. economy that might have led the economist to this conclusion?
The economy is more open today than it was in the 1960s
Which of the following statements is not correct about the effects of the euro?
The euro increased the ability of participating countries to run independent monetary policies
How would your open-economy answer change if interest rates in countries that are major trading partners of the United States also rise?
The interest rate increase would not change the value of the dollar, so the decrease in aggregate demand would be less
Who is harmed when individual nations move from autarky to free trade?
The owners of the firms that went out of business
Which of the following, if true, would weaken the argument that protection is required?
The price of the local variety of the same good is lower than the imported variety
If repealing the program is "an easy call" as the editorial asserts, why was the program still in place in 2017, more than a year after the editorial was published?
The program's benefits are concentrated
Consider this statement: "It usually takes more than 120 yen to buy 1 U.S. dollar and more than 1.5 dollars to buy 1 British pound. These values show that the United States must be a much wealthier country than Japan and that the United Kingdom must be wealthier than the United States." Is this reasoning correct?
The statement is incorrect because wealth is measured by productive capacity and purchasing power, not by the exchange rate
According to the purchasing power parity theory, relative price levels play an important role in determining exchange rates in the long-run. Suppose prices have been rising faster in Mexico than in the United States, we then predict that:
The value of the peso must decline
Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange.
This statement is false; the U.S. economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas
Why is it difficult for the Fed to pull off a soft landing? What are the consequences for the economy if the Fed fails to pull off a soft landing?
To reduce inflation the Fed has to raise interest rates, which typically increases unemployment
As a result of the effect of the sugar quota, the U.S. price of sugar is higher than the world price of sugar.
True
There is little doubt who wins [from trade] in the long run: consumers.
True
Trade allows a country "to produce more with less"
True
Which of the following statements is most true?
When trade occurs, countries are better off, but some individuals may be worse off
Which of the following, if true, would support Amanda's point of view?
While Shillong produces bigger loaves of bread than Safi, chocolate bars produced in Safi are bigger than those in Shillong.
Which of the following statements is true about the importance of trade in the U.S. economy?
While exports and imports have been steadily rising as a fraction of GDP, not all sectors of the U.S. economy have been affected equally by international trade.
Almia and Adjikistan are two open economies producing goods A and B. Many people in Almia, including the leading economists, are lobbying for trade. They feel that the country has a comparative advantage in good A that could be traded with good B from Adjikistan. The government of Adjikistan is also under pressure from various groups to encourage trade with Almia. However, when both countries begin to trade, gains from exporting good A to Adjikistan turn out to be much lower than what Almia's economists had anticipated. Which of the following, if true, would explain this outcome?
With the introduction of trade, Adjikistan now has access to Almia's advanced production technology in A
Who benefits and who loses from protectionist policies? What are the main arguments people use to justify protectionism? Winners - _____ Losers - _____
Workers in trade protected industries Industries that use trade protected goods as inputs
Would it have been cheaper for the federal government to have raised taxes on U.S. consumers and given the money to tire workers rather than to have imposed a tariff?
Yes, because Hufbauer and Lowry concluded that the tariff cost U.S. consumers more than $900,000 per year for each job saved in the tire industry
In addition to tariffs and quotas, governments sometimes erect other barriers to trade. For example, all governments require that imports meet certain health and safety requirements. Many governments also restrict imports of certain products on national security grounds. Explain whether you agree or disagree with the following statement: Sometimes, however, governments use these requirements to shield domestic firms from foreign competition
Yes, sometimes governments impose stricter health and safety requirements on imported goods than on goods produced by domestic firms
A country will always be an exporter of a good where it has _____ advantage in production.
a comparative
Briefly explain how international trade increases a country's consumption. By specializing in the production of the goods and services in which they have _____ advantage, countries allocate resources more efficiently. In other words, goods and services are produced at their lowest _____ cost and world output increases. Since countries are producing goods and services at different opportunity costs, _____ can be negotiated that will allow all countries to consume more with trade than in autarky.
a comparative opportunity terms of trade
Expansionary monetary policy on the part of the central bank of Japan will cause:
a decrease in interest rates in Japan and a decrease in the value of the Yen relative to other currencies
Why would a federal government program to inspect catfish be considered an example of protectionism?
a federal program to inspect catfish creates a barrier to trade
When a central bank intervenes into the foreign exchange market to set a country's exchange rate over long periods of time, it is called
a fixed exchange rate
When countries agree to keep the value of their currencies constant, there is
a fixed exchange rate system
If China enters into an agreement with other countries to keep the exchange rate among their currencies fixed it is taking part in:
a fixed exchange-rate system
A country that allows demand and supply to determine the value of its currency has
a floating currency
The "twin deficits" refers to the idea that
a government budget deficit may lead to a current account deficit
Monetary policy has _____ impact on aggregate demand in an open economy than in a closed economy.
a greater
For the U.S. economy, imports and exports represent _____ fraction of GDP compared to what they were in 1970
a larger
For Germany to have a comparative advantage in a product relative to France or another country, it would have
a lower opportunity cost of producing the product than the other country
Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented
a permanent trade-off between unemployment and inflation
In a real business cycle model, which of the following best explains an increase in real GDP above the full-employment level?
a positive technology shock
The WTO allows countries to determine that dumping has occurred if
a product is exported for a lower price than it sells for on the home market
The "Volcker disinflation" was
a significant reduction in the inflation rate between 1979 and 1989, under the leadership of Fed Chairman Paul Volcker
Fiscal policy has _____ effect on aggregate demand in an open economy
a smaller
The short-run Phillips curve exhibits _____, whereas the long-run Phillips curve shows _____.
a trade-off between inflation and unemployment no trade-off between inflation and unemployment
If actual inflation is higher than expected inflation, the
actual real wage is less than the expected real wage: unemployment falls
Alan Greenspan
agreed with Paul Volcker about the importance of keeping inflation low
If Lucas and Sargent were right,
an expansionary monetary policy would not work if people had rational expectations, since they will use all available information including knowledge of the effects of the Fed's monetary policy
In an open economy, an expansionary fiscal policy on the part of the government of Mexico will cause:
an increase in interest rates in Mexico which may have a larger crowding out effect than in a closed economy
Under the Bretton Woods system, exchange rates were determined by
an international agreement to fix the value of the dollar in terms of gold and the value of all other currencies in terms of the dollar
In the figure to the right, the exchange rate equilibrium occurs at the point where the quantity demanded equals the quantity supplied, Y 120 = $1 (point A). If the equilibrium exchange rate changed from Y 120 = $1 to Y 150 = $1, we would say that the dollar
appreciated against the yen
Boulder's advantages _____ likely to persist over time.
are
As a central bank has greater independence from the government, the economy's inflation rate tends to _____
be reduced
Dumping is selling a product _____ its cost of production.
below
When Burns refers to "the current environment", he means the 1970s, a period in which
both inflation and unemployment worsened
During the 1980s and 1990s, the relationship between growth in M2 and inflation
broke down, and the Fed announced that it would no longer set targets for M2
The concept of a nonaccelerating inflation rate of unemployment (NAIRU) helps us to understand why in the long run, the Federal Reserve
can affect the inflation rate but not the unemployment rate
If the long-run aggregate supply curve is vertical, then the Phillips curve
cannot be downward sloping in the long run
The increase in interest rates as a result of the government of Canada running a budget deficit will:
cause an increase in the value of the Canadian dollar relative to other currencies and therefore increase imports and decrease exports
When Robert Shriller asked a sample of the general public what they though caused inflation, the most frequent answer he received was "greed" Most economists would argue that inflation is caused by
changes in both aggregate demand and aggregate supply
Among the main sources of comparative advantage are the following:
climate and natural resources, relative abundance of labor and capital, technology, external economies
The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors is known as _____
comparative advantage
If the Fed had raised interest rates earlier than it did, Schwab would have expected
consumer spending to have increased
If the U.S. firms succeed in having tariffs imposed on imports of steel,
consumers will lose as steel prices rise but domestic steel firms will gain
If the board had kept its estimate fixed at 5.5 percent during a period when the actual NAIRU was lower, monetary policy would have been too
contractionary in an effort to increase the unemployment rate
A country would want to grant its central bank more independence than it grants, say, its department of agriculture or department of education, because the central bank
controls the money supply, and the more independent the central bank, the lower is the likelihood of inflation
In 1968, Herbert Stein, who would later serve on President Nixon's Council of Economic Advisors, wrote, "Some who would opt for avoiding inflation would say that in the long run such a policy would cost little, if any, additional unemployment." Stein's statement was _____ Most economists in 1968 _____ have agreed with him because they _____
correct would not believed in the stable trade-off relation manifested in the Phillips curve
Could the low inflation rates have occurred without the Fed having a mandate to achieve price stability? Without the Fed's mandate to achieve price stability, the low inflation rates of recent years _____ have occurred
could still
Suppose that Federal Reserve policy leads to higher interest rates in the U.S. If the U.S. is a closed economy, in the short run, real GDP will _____. If the U.S. is an open economy, real GDP will _____ by _____.
decrease decrease more than in a closed economy
The theory of purchasing power parity _____ explain exchange rates well in the long run
does not
One reason some oppose free trade and the reduction of trade barriers is protectionism. What does old-fashioned protectionism seek to protect? Protectionism traditionally seeks to use trade barriers to protect
domestic wages
What is the name given to the sale of a product for a price below its cost of production?
dumping
Net exports ___ net foreign investment
equals
According to purchasing power parity
exchange rates move to equalize the purchasing power of different currencies
The general public believes that inflation is a bigger problem than economists do because the general public believes that real wages _____
fall until a full inflation correction takes place
From the end of the Bretton Woods system in 1973 through June 2017, the U.S. dollar
gained more than 30% in value against the Canadian dollar and lost more than 60% of its value against the Japanese yen
The opponents of globalization contend that
globalization destroys cultures
Briefly explain whether the value of U.S. exports is typically larger or smaller than the value of U.S. imports. The value of U.S. exports
has been smaller than the value of U.S. imports since about 1980
Restrictions on catfish imports into the United States result in _____ prices that _____ U.S. consumers of catfish. U.S. suppliers of catfish _____. Chinese consumers _____ because they can import _____ catfish from Vietnam.
higher harm gain hain more
Workers, firms, banks, and investors in financial markets care about the future rate of inflation because
if actual inflation turns out to be different from expected inflation, real wages, profits, and interest will be different from their expected values
The United States practices "sugar protectionism" by
imposing a quota on sugar imports
When the government runs a budget surplus, national saving _____
increases
Canadian professional sports teams are better off when the value of the Canadian dollar relative to the U.S. dollar
increases, because one Canadian dollar will buy more U.S. dollars, so paying the players will be less expensive
According to the real business cycle models,
inflation can change due to movements in the money supply, however, fluctuations in real GDP are mainly explained by changes in the level of technology
The balance of payments
is always zero
The outcome in Rochester shows that globalization
is good for some, like consumers of digital cameras, and bad for others, like the unemployed Kodak workers
Dumping
is selling a product for a price below its cost of production
Comparative advantage
is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
One effect of tariffs and quotas
is to cost jobs outside the industries immediately affected
"Sugar protectionism" is viewed as a "job killer" because
it leads to job losses in the candy industry and various food manufacturing industries that use sugar
In what way is sugar protectionism a burden on consumers? As far as the effect of "sugar protectionism" on U.S. consumers is concerned,
it raises the prices of sugar and candy that consumers have to pay and leads to a loss of consumer surplus
Many Fed officials have been opposed to adopting a rules-based policy because
it would reduce the ability of the Fed to respond rapidly to a financial crisis
When one currency is "pegged" against another currency,
its value is fixed in terms of that currency
A negative supply shock, such as the OPEC oil price increases of the early 1970s, can be illustrated by a shift to the _____ of the short-run aggregate supply curve and a shift _____ of the short-run Phillips curve.
left up
in 2010, Congress passed the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) which
made it much more difficult for the Fed to use a too-big-to-fail policy
The theory of purchasing power parity states that the long-run level of the exchange rate must
make it possible to buy equivalent bundles of goods in either country
Comparative advantage
may change as time passes and circumstances change
We do not see complete specialization in the real world because
not all goods and services are traded internationally, production of most goods involves increasing opportunity costs, and tastes for products differ
In claiming that an expansionary monetary policy will only increase inflation and have no impact on unemployment, the analysts are assuming that:
people accurately interpret all available information to form reliable forecasts
The use of trade barriers to shield domestic companies from foreign competition is called
protectionism
An economic analysis of a proposal to impose a quota on steel imports into the United States indicated that the quota would save 3,700 jobs in the steel industry but cost about 35,000 jobs in other U.S. industries. A quota on steel imports would cause employment to fall in other industries because what happens to the costs of producing goods that use steel? The quota _____ the costs of producing goods that use steel
raises
Suppose the federal government decreases spending without also decreasing taxes. In a closed economy setting, this policy will _____ real GDP and _____ the price level in the short run. In an open economy setting, the effect of government fiscal policies will _____. For example, in an open economy, expansionary fiscal policies affect interest rates and also exchange rates in the same direction and the changes in the latter create a _____ crowding out effect.
reduce, lower be dampened, larger
The four determinants of exchange rates in the long run are
relative price levels, relative productivity growth, tastes, and trade barriers
"Dumping" is
selling a product for a price below tis cost of production
When the Federal reserve uses contractionary monetary policy to reduce inflation, it
sells treasury securities increasing interest rates, leading to a stronger dollar that lowers net exports in an open economy
Such views of the trade-off between inflation and unemployment might have existed in the 1960s because the Phillips curve was widely viewed as
stable
If the government wants to protect import competing industries and its workers from foreign competition, it can impose a tax on imports called a _____
tariff
What has caused most of the decline in U.S. manufacturing employment since the 1940s? Most of the decline in U.S. manufacturing since the 1940s is due to
technological change
When Federal Reserve Chairman Ben Bernanke said that the public's expectations of inflation could "become embedded in wage and price decisions," he meant
that workers, firms, consumers, and the government will all take the inflation rate into account when making decisions
The federal government did not adopt this alternative policy because
the United Steelworkers Unions had sufficient political power to persuade Congress to pass this tariff
The part of the balance of payments that records migrants' transfers and sales of nonproduced, nonfinancial assets is called
the capital account
The part of the balance of payments that records a country's net exports, net investment income, and net transfers is called
the current account
The part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country is called
the financial account
Briefly explain why the data Brainard cites indicate that the Phillips curve is relatively flat
the flatter the Phillips curve, the less the inflation rate will rise, and the inflation rate has not risen much
Cross-country evidence supports that the more independent a country's central bank,
the lower its inflation rate
In the United States, the Fed is held accountable to the nation's elected leadership through
the nomination and confirmation process, and the requirement to submit semiannual reports on monetary policy and the economy to Congress
All of the following statements correctly describe the outcomes when the U.S. imports products in which it does not have a comparative advantage, except that
the number of jobs in the U.S. is reduced
The primary difference between a quota and a voluntary export restraint (VER) is that
the quota is unilaterally imposed by one nation on the other while the VER is the result of negotiations between nations
Suppose that the inflation rate is increasing each year for a number of years, then
the rational expectations hypothesis is likely to give more accurate forecasts because if workers or firms have adaptive expectations, then they will expect the future inflation to follow the pattern of past inflation rates
The term external economies refers to
the reduction of costs resulting from increases in the size of an industry in a given area
The Phillips curve exhibits
the relationship between the unemployment and the inflation rates
Which of the following is a source of comparative advantage?
the relative abundance of capital and labor
Under the gold standard, exchange rates were determined by
the relative amounts of gold in each country's currency
We can tell whether a monetary policy has worked by
the state of the economy
Holding other factors constant, if the average productivity of Mexican firms increases faster than the average productivity of U.S. firms, then
the value of the Mexican peso should rise against the dollar
Although international trade leads to substantial net benefits, not everyone gains from international trade. Which of the following groups is most likely to lose from trade?
the workers and companies in the industries that complete with the imports
If China pegs its exchange rate the the U.S. dollar at a rate (in terms of yuan per dollar) above the equilibrium exchange rate, the result is
the yuan is undervalued
If a country pegs its exchange rate with the dollar below the equilibrium value,
there will be an excess demand for that country's currency
Which of the following best describes the trend of the exchange rate systems in the world after the East Asian exchange rate crisis of the late 1990s?
toward managed floating exchange rates
Globalization is the process of countries becoming more open to foreign _____
trade and investment
Protectionism is the use of _____ to shield domestic firms from foreign competition.
trade barriers
The general public's opinion of foreign trade might be substantially different during an economic recession as opposed to during an economic expansion because during an economic recession,
unemployment is higher and workers will more likely resent foreign competition
When the New York Times columnist concluded that this was, "... precisely the way globalization is supposed to work" he meant that
when an industry changes, jobs will be created in other sectors
Assuming people have rational expectations,
when the Fed uses monetary policy, people quickly realize the impact that will be created by the policy, adjust wages and prices, and inflation will adjust to the new expectations which means the policy will not affect real GDP
A serious inconsistency exists between a vertical long-run aggregate supply curve and a downward-sloping long-run Phillips curve because
when the long-run aggregate supply curve is vertical at potential real GDP, the long-run Phillips curve is vertical at the natural rate of unemployment
It would be possible for middle- and lower-income Americans to be both the biggest losers and at the same time the biggest winners from free trade if they are the ones most likely to
work in industries that produce at higher opportunity cost than in other countries and purchase those goods that can be produced at lower opportunity cost in other countries
Consider the graph on the right, where both the short-run and long-run Phillips curves are vertical. An expansionary monetary policy will increase the inflation rate continuously but will have no effect on the unemployment rate because of all the following except
workers and firms who have adaptive expectations will not consider the Fed's policy before forming their expectations about inflation
Younger people might have a more favorable view of foreign trade than older people because
younger people have less career risk as a result of trade policy
Paul Volcker is credited largely with which of the following?
A and B only - The "Volcker disinflation." - Fighting inflation by reducing the growth of the money supply
What is the Fed doing to increase the credibility of its policies?
A and B only A. Whenever a change in policy is announced, the change actually takes place B. Announcing the federal funds target rate
A columnist for bloomberg.com offers the following observation about economic legislation: "history shows that concentrated opposition beats diffuse support every time." Briefly explain what he means. Does his observation apply to tariffs? Briefly explain.
A few passionate opponents are more influential than many tepid supporters Yes, his observation predicts that Congress will be hesitant to eliminate tariffs
If workers ignore inflation in forming their expectations of the real wage rate, what is the effect of an expansionary monetary policy?
A move up along the short-run Phillips curve
Even though Avalon's budget was in surplus the next year, the country's current account balance turned out to be negative. Which of the following, if true, can explain this outcome?
A neighboring country adopted Avalon's currency as legal tender during this year
What is a quota?
A numerical limit a government imposes on the quantity of a good that can be imported into a country
Which of the following examples describes a similar government policy?
A tariff introduced by the Mexican government on tobacco imports from Brazil in retaliation for unfair treatment of Mexican tobacco exports to Brazil
In the 2016 Summer Olympic Games, Ashton Eaton (from the United States) won a gold medal in the decathlon, which requires athletes to compete in 10 different track and field events. In one of these events, Eaton ran a 100-meter race in 10.46 seconds. In a separate event, Usain Bolt (from Jamaica) won a gold medal by running 100 meters in 9.81 seconds. The concept of comparative advantage better explains _____ Based on their performance at the 2016 Olympic Games, who was the better athlete? _____
Bolt's performance because he specialized in an event and had the fastest time This cannot be determined because this is a normative question
In what circumstances can natural food firms located elsewhere overcome these advantages?
By convincing consumers that the quality and variety of the goods and services it sells are worth paying higher prices
How does the U.S. government protect steelworkers in West Virginia at the expense of steelworkers in South Korea?
By imposing a tariff on steel imports, the government protects U.S. steelworkers by reducing imports; however, that means South Korea is exporting less steel, which hurts steelworkers there
The diagram on the right represents a tariff imposed on an individual market. The total deadweight loss (loss in economic surplus) from this tariff is illustrated by areas
C and D
