Quiz 8

Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.10 = 1 peso. Furthermore, suppose the price level in Mexico rises 15 percent while the U.S. price level remains constant. According to the purchasing power parity theory, which of the following exchange rates comes closest to being the equilibrium

$0.087 = 1 peso

Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.12 = 1 peso. Furthermore, suppose the price level in the United States rises 25 percent at a time when the Mexican price level is stable. According to the purchasing power parity theory, what will be the new equilibrium exchange rate?

$0.15 = 1 peso

Refer to Exhibit 33-8. Assume that the current price of sugar in the United States is $300 per ton (which includes a $100 per ton tariff on sugar imports). The government collects tariff revenues on sugar imports in the amount of __________ million.

$500

Refer to Exhibit 33-4. The opportunity cost of one unit of good A is __________ for country 1 and __________ for country 2.

0.2B; 1B

Refer to Exhibit 33-6. The opportunity cost of 1 unit of cheese in terms of units of wine is __________ for country B.

1

Refer to Exhibit 33-6. The opportunity cost of 1 unit of wine in terms of units of cheese is __________ for country B.

1

Refer to Exhibit 33-3. The world price is PW. If a tariff is imposed the price rises to PW + T. Because of the tariff, consumers' surplus is reduced by an amount equal to the area of

1 + 2 + 3 + 4.

Refer to Exhibit 33-6. Which of the following terms of trade would both countries agree on?

1 unit of wine = 1.5 units of cheese

Suppose that an American-made pair of pants has a price of $80. If the exchange rate is $0.065 = 1 peso, then a Mexican consumer would have to pay approximately __________ pesos to purchase the pants, but if the exchange rate is $0.055 = 1 peso, then a Mexican consumer would have to pay _________ pesos to purchase the pants.

1,231; more

Refer to Exhibit 33-1. The opportunity cost of one unit of X in country A is

1.5 unit of Y.

Refer to Exhibit 33-6. The opportunity cost of 1 unit of cheese in terms of units of wine is __________ for country A.

1/2

Refer to Exhibit 33-8. Assume that the current price of sugar in the United States is $300 per ton (which includes a $100 per ton tariff on sugar imports). Americans purchase __________ million tons of sugar from U.S. producers and import __________ million tons of sugar from abroad.

10; 5

An American computer is priced at $1,350. If the exchange rate between the U.S. dollar and the Japanese yen is $0.009 per yen, the equivalent price of the computer in yen is approximately __________ yen.

149,600

Refer to Exhibit 33-6. The opportunity cost of 1 unit of wine in terms of units of cheese is __________ for country A.

2

Refer to Exhibit 33-1. The opportunity cost of one unit of X in country B is

2 units of Y.

Refer to Exhibit 33-3. The world price is PW. If a tariff is imposed, the price rises to PW + T. Because of the tariff, government collects tariff revenues equal to the area of

3.

Refer to Exhibit 33-4. The opportunity cost of one unit of good B is __________ for country 1 and __________ for country 2.

5A; 1A

Suppose a Mexican consumer wants to buy an American television for $700 and an American wants to buy a Mexican raincoat for 800 pesos. If the exchange rate is $0.10 = 1 peso, then the price of the television in pesos will be __________ pesos and the price of the raincoat in dollars will be __________.

7,000; $80

Refer to Exhibit 33-8. Assume that the current price of sugar in the United States is $300 per ton (which includes a $100 per ton tariff on sugar imports). Consumers' surplus is equal to the area __________ while producers' surplus is equal to the area __________.

A + B; C + G

Refer to Exhibit 33-12. PW is the price that exists in a free world market. A quota is imposed and imports are Q4 - Q3. Importers gain revenues equal to the area __________.

GHJK

Which of the following points would not be used as an argument in support of the current international monetary system?

It results in stable exchange rates.

International trade policies are largely advocated, argued, and lobbied for based more on their distributional effects than on their aggregate or overall effects. What does this imply?

Producers will lobby for protectionism even though they may know that their gains from protectionism will be outweighed by the losses to consumers.

Refer to Exhibit 33-2. The U.S. demand and supply for a good are shown. Under a policy of free trade, the world price is PW. At this price, consumers' surplus equals the area of

Pw AC.

Refer to Exhibit 33-2. The U.S. demand and supply for a good are shown. Under a policy of free trade, the world price is PW. At this price, what quantity of this good do U.S. consumers buy from U.S. producers and what quantity do they import from foreign producers?

Q1 from U.S. producers and (Q3 - Q1) from foreign producers

Refer to Exhibit 33-3. The world price is PW. At this price, Americans purchase Q1 from U.S. producers and import the quantity __________ from foreign producers.

Q2 - Q1

Refer to Exhibit 33-11. If the world price (PW) is operational in the market, then U.S. imports equal

Q2 - Q1.

Which of the following conditions makes it most likely for a quota to be imposed?

The benefits of the quota are spread over few and the costs are spread over many.

How do countries know when they have a comparative advantage in the production of a good?

They know as the result of individuals trying to earn profits and buying low and selling high in the process.

Which of the following statements about a tariff and a quota is true?

With a tariff the government collects revenues, but not with a quota.

The national defense argument for trade restriction holds that

a country should produce those goods necessary for national defense purposes even if it doesn't have a comparative advantage in them.

The effect of a tariff is

an increase in tariff revenues for government.

The effects of a quota include:

b and c

Consumers' surplus is the difference between the price

buyers pay for a good and the maximum price they would have paid for the good.

The situation where a country can produce a good at a lower opportunity cost than another country is called a(n) __________ advantage.

comparative

the situation where a country can produce a good at a lower opportunity cost than another country is called a(n)___________ advantage.

comparative

The difference between the highest amount a buyer would be willing to pay for a good and the amount she actually pays for it is

consumers' surplus.

The foreign exchange market is the market in which

currencies of different countries are bought and sold.

If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.007 = 1 yen, but currently the exchange rate is $0.009 = 1 yen, then with flexible exchange rates the dollar price of a yen will __________, and the yen will __________.

decrease; depreciate

Suppose that prices in the United States rise relative to prices in France. We expect that (on the foreign exchange market) the demand for U.S. dollars will __________ and the supply of dollars will __________.

decrease; increase

The effects of tariffs and quotas are: a(n) __________ in consumers' surplus, and a(n) __________ in producers' surplus.

decrease; increase

If, as a result of market forces, the exchange rate changes from $1 equals 11 pesos to $1 equals 9 pesos, then the dollar has

depreciated.

Suppose that the exchange rate between the U.S. dollar and the Mexican peso is 1 peso = $0.11. If the U.S. dollar price per Mexican peso changes to 1 peso =$0.10, the peso is said to have __________ and the dollar to have __________.

depreciated; appreciated

If, under a fixed exchange rate system, the dollar price of a Mexican peso is below its equilibrium level, then the

dollar is overvalued.

In a foreign exchange market diagram with pesos per dollar on the vertical axis, the quantity of __________ would be on the horizontal axis, and the U.S. demand for Mexican goods would help to determine the __________ curve.

dollars; supply

The sale of goods abroad at a price below their cost and below the price charged in the domestic market is called

dumping

The act of selling goods abroad at a price below their cost and below the price charged in the domestic market is called

dumping.

In contrast to a tariff, a quota does not

generate revenues for government.

Refer to Exhibit 33-4. Country 1 has a comparative advantage in the production of __________, and country 2 has a comparative advantage in the production of __________.

good A; good B

Refer to Exhibit 33-1. Country A is the lower opportunity cost producer of

good X.

Refer to Exhibit 33-1. Country B is the lower opportunity cost producer of

good Y.

When the equilibrium dollar price of a foreign currency decreases due to changes in demand for or supply of the foreign currency, the domestic currency

has appreciated.

When the equilibrium dollar price of a foreign currency decreases due to changes in demand for or supply of the foreign currency, the foreign currency

has depreciated.

Refer to Exhibit 33-8. Assume that the current price of sugar in the United States is $300 per ton (which includes a $100 per ton tariff on sugar imports). The removal of the $100 per ton tariff would cause a(n) __________ in imports of __________ million tons.

increase; 10

Suppose that prices in France increase by 8 percent while prices in the United States remain relatively stable. We would expect that (on the foreign exchange market) the demand for U.S. dollars will __________ and the supply of U.S. dollars will __________.

increase; decrease

The effects of tariffs and quotas are: a(n) __________ in the prices of imported goods to domestic consumers, and a(n) __________ in imports.

increase; decrease

If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.008 = 1 yen, but currently the exchange rate is $0.007 = 1 yen, then with flexible exchange rates the dollar price of a yen will __________, and the dollar will __________.

increase; depreciate

When exports of American goods increase, this __________ the demand for U.S. dollars and at the same time __________ foreign currencies.

increases; increases the supply of

"New industries need to be protected or they won't have the opportunity to grow up." This is a statement of the __________ argument for trade restrictions.

infant-industry

"New industries should be protected from older established foreign competitors until they are mature enough to compete on an equal basis." This argument for trade restrictions is called the __________ argument.

infant-industry

One country has a comparative advantage over another country in the production of a good if it

is a lower opportunity cost producer of the good.

When the official dollar price of a foreign currency is set below its equilibrium level, the dollar

is overvalued.

When the official dollar price of a foreign currency is set below its equilibrium level, the foreign currency

is undervalued.

With a quota, the __________ is greater than the __________.

loss in consumers' surplus; loss in producers' surplus plus higher total revenues on the imported goods

The current international monetary system is best described as a

managed flexible exchange rate system.

Suppose that the exchange rate between the U.S. dollar and the Mexican peso starts out at $0.12 per peso, and then changes to $0.09 per peso. The result will be that Americans will buy __________ pesos because Mexican goods become relatively __________ expensive.

more; less

It is argued that certain industries should be protected from foreign competition because they are needed to secure the United States from foreign aggression. This argument is called the __________ argument.

national defense

If countries 1 and 2 produce only two goods, A and B, and they have the same opportunity cost to produce good A (and thus good B), then

neither country will specialize in the production of a good, and there will be no incentive for trade.

there is demand for and supply of dollars and a demand for and supply of pesos. under a flexible exchange rate system, if income growth in the US is greater than income growth in Mexico then

none of the above

Refer to Exhibit 33-8. Assume that the current price of sugar in the United States is $300 per ton (which includes a $100 per ton tariff on sugar imports). The removal of the $100 per ton tariff would increase consumers' surplus by an amount equal to area

none of these

Under a fixed exchange rate system, at the exchange rate of E1, the peso is __________ and there is a __________.

overvalued; shortage of dollars

Refer to Exhibit 34-4. Under a fixed exchange rate system, at the exchange rate of E3, the dollar is __________ and there is a __________.

overvalued; surplus of dollars

Countries tend to specialize in the production of goods in which they have a comparative advantage because

people want to make a profit.

If, under a fixed exchange rate system, the dollar price of a Mexican peso is above its equilibrium level, then the

peso is overvalued.

In a foreign exchange market diagram with dollars per peso on the vertical axis, the quantity of __________ would be on the horizontal axis, and the U.S. demand for Mexican goods would help to determine the __________ curve.

pesos; demand

Tariffs and quotas are often imposed when a government is more responsive to __________ interests, and the benefits of those trade restrictions are often __________.

producer; concentrated

A tariff is imposed on strawberries. The tariff will ___________ the price of strawberries in the domestic market, _____________ the quantity of strawberries imported in the domestic market, and ____________ consumers' surplus.

raise; lower; lower

If the U.S. dollar depreciates in the foreign exchange market, U.S. exports will be __________ and U.S. imports will be __________.

relatively less expensive; relatively more expensive

If the U.S. dollar appreciates in the foreign exchange market, U.S. exports will be __________ and U.S. imports will be __________.

relatively more expensive; relatively less expensive

If an international currency speculator expects that country A will soon be forced to devalue its currency, the speculator will

sell all his holdings of that currency.

Producers' surplus is the difference between the price __________ receive for a good and the __________ price for which they would have __________ the good.

sellers; minimum; sold

Two major exports for the United States are

soybeans and scientific instruments.

Americans buying Japanese cars create a

supply of U.S. dollars and demand for Japanese yen.

Suppose there are only two countries in the world, Mexico and the United States. In the foreign exchange market, it follows that the

supply of pesos is linked to the demand for dollars

A tariff is a

tax imposed on imported goods.

Suppose that an increase in a nation's income causes the nation's residents to buy more domestic and foreign goods. Given this, if U.S. residents experience an increase in income, but Mexican residents do not, it is likely that, ceteris paribus,

the U.S. dollar will depreciate, and the Mexican peso will appreciate.

Which of the following is not an argument for trade restrictions?

the comparative advantage argument

The Mexican demand for American goods leads to

the demand for U.S. dollars and the supply of Mexican pesos on the foreign exchange market.

There is a flexible exchange rate system and only two countries in the world, the United States and Mexico. If the inflation rate in the United States rises relative to the inflation rate in Mexico, it follows that

the dollar will depreciate, and the peso will appreciate.

Suppose that prices in the United States rise relative to prices in Japan. We expect that

the dollar will depreciate, and the yen will appreciate.

There is a flexible exchange rate system and only two countries in the world, the United States and Mexico. The real interest rate in the United States rises relative to the real interest rate in Mexico. It follows that

the peso will depreciate, and the dollar will appreciate.

"Dumping" refers to

the sale of goods abroad at a price below their cost and below the price charged in the domestic market.

The U.S. real interest rate rises relative to Japan's. As a result,

the yen will depreciate, and the dollar will appreciate.

We start with a 3 percent real interest rate in the United States and in Japan. Next, the real interest rate in Japan falls to 2 percent, and the U.S. real interest remains constant. As a result,

the yen will depreciate, and the dollar will appreciate.

If there is no comparative advantage in the production of either of the two goods produced by countries 1 and 2, then

there are no gains from specialization and trade between the two countries.

If, at the world price, domestic producers are producing and selling 100 units of a good, then at the world price plus tariff it follows that

they will be producing and selling more than 100 units of the good.

Under a fixed exchange rate system, if the dollar price of a Mexican peso is below its equilibrium level, the peso is said to be

undervalued.

Refer to Exhibit 34-4. Under a fixed exchange rate system, at the exchange rate of E3, the peso is __________ and there is a __________.

undervalued; shortage of pesos

You go on vacation to Mexico and take $1,000 with you. During your time in Mexico, the peso appreciates in value relative to the dollar. It follows that

you will be able to buy fewer goods and services in Mexico after the peso appreciates.