International Economics 4th Edition Feenstra Test Bank 

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International Economics
Economics 4th Edition Feenstra Solutions Manual
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1. Which of the following is NOT a reason why countries trade goods with one another?
A) differences in technology used in different countries
B) differences in countries' total amount of resources
C) the proximity of countries to one another
D) differences in countries' languages and cultures

2. David Ricardo's model explains trade based on:

A) labor supply.
B) technology.
C) population.
D) government control.

3. Which of the following is the MOST likely explanation for a Detroit construction
company's imports of concrete blocks made in Windsor,
W indsor, Ontario?
A) the Ricardian model
B) offshoring
C) technology
D) proximity

4. What is the MOST likely reason why neighboring nations engage in trade?
trade?
A) labor availability
B) similar tastes and preferences
C) proximity
D) shared membership in a free-trade area

5. A country's factors of production includes:

A) its labor, capital, natural resources, and markets.
B) only its labor and capital.
C) only its capital and natural resources.
D) its labor, capital, and natural resources.

Page 1
6. Which of the following is NOT considered to be a factor
factor of production?
A) labor
B) capital
C) natural resources
D) government

Page 2
 7. When a firm in one nation purchases unfinished products internationally
internationally and adds
further processing to sell in the domestic market, this is known as:
A) barter.
B) offshoring.
C) factor movement.
D) marketing arrangements.

8. In some cases,
cases, a country can export a good without having any advantage in the natural
natural
resources needed to produce it. Which of the following is an example of this
this type of
export?
A) Austrian exports of snowboards
B) U. S. exports of “icewine”
C) Japanese exports of Toyotas
D) Canadian exports of lumber

9. In some cases,
cases, a country can export a good without having any advantage in the natural
natural
resources needed to produce it. Which of the following is an example of this
this type of
export?
A) United Arab Emirates's exports of high-quality snowboards
B) U. S. exports of Caterpillar bulldozers
C) French exports of wine
D) Canadian exports of lumber

10. In trade, if a nation has the technology to produce a good with fewest resources (such
(such as
Germany's production of snowboards), it is known as a(n):
A) absolute advantage.
B) technology advantage.
C) comparative advantage.
D) resource advantage.

11. The Ricardian model focuses on how:

A) countries' resource bases explain international trade.
B) countries' different technologies explain international trade.
C) transportation costs explain international trade.
D) different languages and cultures explain international trade.

Page 3
12. When a country requires fewer resources to produce a product than other countries, it is
said to have a(n):
A) absolute advantage in the production of the product.
B) comparative advantage in the production of the product.
C) higher opportunity cost of producing the product.
D) lower opportunity cost of producing the product.

13. When a country requires more resources to produce a product than other countries, it is
said to have a(n):
A) absolute disadvantage in the production of the product.
B) comparative disadvantage in the production of the product.
C) lower opportunity cost of producing the product.
D) higher opportunity cost of producing the product.

14. The primary explanation of trade

trade among nations is Ricardo's theory of:
A) offshoring.
B) resource abundance.
C) absolute advantage.
D) comparative advantage.

15. The Ricardian model focuses on how differences in influence international

trade patterns.
A) demand
B) comparative costs
C) absolute costs
D) transportation costs

16. Ricardo's theory of trade discredited the school of economic thought that believed
inflows of gold or silver as a result of exporting
ex porting helped a nation, while outflows of gold
or silver as a result of importing hurt a nation. This school of economic thought was
known as:
A) export preference.
B) mercantilism.
C) monetary economics.
D) price-specie-flow mechanism.

Page 4
17. Ricardo's theory made a number of assumptions, including which of the following?
A) Nations had balanced trade with their partners.
B) There were barriers to trade.
C) There was no transfer of gold or silver.
D) Nations' factors of production
production consisted of labor and capital.
capital.

18. According to Ricardo:

A) all countries can gain from trade if they export goods for
for which they have an
absolute advantage.
B) one country can gain from trade
trade only at the expense of another country.
C) all countries
countries can gain from
from trade if they export goods for which they have a
comparative advantage.
D) all countries lose from international trade.

19. According to the Ricardian principle of comparative advantage, international

international trade
increases a nation's total output because:
A) the nation's resources are used where they are most productive.
B) the output of the nation's trading partner declines.
C) the nation can produce outside of its production possibilities frontier.
D) the nation is able to increase its consumption.

20. David Ricardo

Ricardo believed
believed that:
A) trade is a zero-sum game; that is, a country benefits at the expense of other
countries.
B) trade will
will benefit countries when it generates
generates gold and silver for the national
treasury.
C) all nations can gain from free international trade.
D) trade cannot increase the world's output of goods.
goods.

21. Mercantilists believed that:

A) exporting goods will leave fewer goods
goods for the local economy.
B) importing goods is beneficial for the economy.
C) exports and imports are both bad for the economy.
D) exports are good
good and imports are bad for the economy.

Page 5
22. Ricardo's theory showed
showed that if nations are allowed
allowed to trade freely, the result will
will be
that:
A) all trading nations benefit by trade.
B) the manufacturing sector benefits
benefits but the consumers lose out.
C) workers benefit but the government loses tax revenue.
D) the gains from trade offset the losses
losses from trade exactly.

23. The Ricardian model can be simplified

simplified and made more explanatory by assuming that
there is only one resource used in producing
producin g goods. What did Ricardo
R icardo assume the
resource was?
A) capital
B) technology
C) labor
D) loanable funds

24. What is the marginal product of labor?

A) the average output of a unit of labor
B) the extra
extra output obtained by using one more unit of labor
labor
C) the average output obtained by using one more unit of labor
D) the total output obtained by using one more unit of labor

25. In the Ricardian model, the marginal

marginal product of labor:
A) first rises, then falls, as more labor is employed to produce a good.
B) first falls, then rises,
rises, as more labor is employed
employed to produce a good.
C) continuously falls as more labor is is employed
employed to produce a good.
D) does not change as more labor is employed
employed to produce a good.

26. The Ricardian model assumes that the marginal product of labor is:
A) increasing.
B) decreasing.
C) constant.
D) zero.

27. Production possibilities frontiers in the Ricardian model:

A) are linear
linear (i.e., straight lines), with end points showing a country's production when
it produces only one or the other good.
B) are bowed out from the origin, with end points showing a country's production
when it produces only one or the other good.
C) are linear and begin from the origin.
D) are curvilinear and increase at a decreasing rate.

Page 6
28. When the production possibilities frontier is a straight line, then
then production occurs
under conditions of:
A) increasing costs.
B) decreasing costs.
C) constant costs.
D) increasing, then decreasing, then constant costs.

29. The Ricardian model employs the concept of alternate uses of economic resources in
 production. We refer to this technique as:
A) the production possibilities frontier.
B) the labor theory of value technique.
C) the least-cost option.
D) the labor productivity model.

30. With the assumption that the marginal product of labor is constant and that labor is the
only variable resource, the slope of the PPF is:
A) positive and increasing.
B) negative and decreasing.
C) negative and constant.
D) unrelated to the issue at hand.

31. Assume the MPLt = 5 tennis rackets and MPLb = 4 baseball bats. If the economy
econom y has
100 workers, then the economy can produce:
A) a maximum of 500 tennis rackets.
B) a maximum of 350 baseball bats.
C) 500 tennis rackets and 400 baseball bats.
D) either 100 tennis rackets only or 100 baseball bats only.
only.

32. Assume the MPLc = 2 cars and the MPLb = 5 boats. There are 150 workers
wo rkers in this
hypothetical economy. What is the maximum number of boats that can be produced?
A) 30
B) 300
C) 750
D) 150

Page 7
33. The slope of the PPF can be expressed as:
A) the ratio of abundance of capital to labor.
B) the preferences of consumers in terms of marginal utility.
C) the ratio of the quantities of good 1 and good 2.
D) the negative
negative of the ratio of the marginal products
products of labor in producing each good.

34. If the maximum number of units of cloth produced is 300 and the maximum number of
units of corn produced is 600, then with an MPLcloth = 2, what is the number of workers
in the economy?
A) 100
B) 200
C) 150
D) 600

35. If the maximum number of units of cloth produced

produced is 300 and the maximum number of
units of corn produced is 600, then with an MPLcloth = 2, what is the MPLcorn?
A) 4
B) 5
C) 6
D) 7

36. To complete the model of international

international trade using the PPF, we must also use the idea of
indifference curves. One of these curves represent:
A) a set of alternate
alternate quantities of both goods (sloped
(sloped negatively), whereby consumers
are equally satisfied in their level of utility gained.
B) consumers who are indifferent to everything.
C) producers who do not care which production method is is chosen.
D) a fixed quantity of one good (such as wheat) and a varying amount of the other
good.

37. As a consumer moves down one of her indifference curves,

curves, her satisfaction:
A) falls.
B) rises.
C) remains unchanged.
D) first falls, then levels out.

Page 8
38. If a consumer moves to a higher indifference
indifference curve, her satisfaction:
satisfaction:
A) falls.
B) rises.
C) remains unchanged.
D) first falls, then levels out.

39. International trade allows countries to:

A) produce outside their PPF.
B) produce inside their PPF.
C) consume inside their PPF.
D) consume outside their PPF.

40. (Figure: Home

Home Production and Consumption) The figure gives Home's international
trading pattern. Point P is production with trade, and point C is consumption with trade.
Which product does Home export?

A) clothing
B) chemicals
C) It exports neither chemicals nor clothing.
D) It exports both chemicals and clothing.

Page 9
41. (Figure: Home
Home Production and Consumption) The figure gives Home's international
trading pattern. Point P is production with trade, and point C is consumption with trade.
Which product does Home import?

A) clothing
B) chemicals
C) It imports neither chemicals nor clothing.
D) It imports both chemicals and clothing.

42. (Figure: Home

Home Production and Consumption) The figure gives Home's international
trading pattern. Point P is production with trade and point C is consumption with trade.
How many units of which product does Home export and how many units of which
 product does it import?

A) Home exports 60 units of chemicals

chemicals and imports 20 units of clothing.
clothing.
B) Home exports 40 units of chemicals
chemicals and imports 60 units of clothing.
clothing.
C) Home exports 40 units of clothing
clothing and imports 20 units of chemicals.
D) Home exports 20 units of chemicals and imports 40 units of clothing.
clothing.

Page
43. (Figure: Home
Home Production and Consumption) The figure gives Home's international
trading pattern. Point P is production with trade, and point C is consumption with trade.
What is the international price of chemicals according to the figure?

A) 1/2 unit of clothing per unit of chemicals

B) one unit of clothing per unit of chemicals
C) two units of clothing per unit of chemicals
D) three units of clothing per unit of chemicals

44. Where will a nation that gains from trade

trade find its consumption point located?
located?
A) inside its production possibilities frontier
B) along its production possibilities frontier
C) outside its production possibilities frontier
D) at the center of its production possibilities frontier

45. When a nation is in autarky

autarky (a no-trade state) and maximizes its
its living standard,
standard, its
consumption and production points are:
A) along its production possibilities frontier.
B) above its production possibilities frontier.
C) beneath production possibilities frontier.
D) along, above, or beneath its production possibilities frontier.

46. Assume the MPLc = 2 cars and the MPLb = 5 boats. There are 150 workers
wo rkers in this
hypothetical economy. If cars are measured on the vertical axis and boats are measured
on the horizontal axis, the slope of the PPF for this economy is:
A)  – 5.
5.
B)  – 5/2.
5/2.
C)  – 2/5.
2/5.
D)  – 1/5.
1/5.

Page 10
47. The slope of the PPF can also be expressed as:
A) the ratio of abundance of labor to capital.
B) consumer utility.
C) the opportunity cost of the good
good measured on the vertical axis.
D) the ratio of the marginal products of labor to the marginal product
product of capital.

48. (Figure: Home Equilibrium with

with No Trade) Under the condition of no trade, which
attainable combination gives the nation the MOST utility?

A)  A
B)  B
C) C
D)  D

Page 11
49. (Figure: Home Equilibrium with
with No Trade) Under the condition of no trade, which
combinations are NOT attainable?

A)  A and D
B)  A and  B
C)  B and D
D)  B and C 

50. (Figure: Home Equilibrium with

with No Trade) Suppose that trade occurs and Home finds
its comparative advantage in the production of
o f wheat. How many bushels of wheat will
it produce?

A) 0 bushels
B) 50 bushels
C) 100 bushels
D) between 50 and 100 bushels

Page 12
51. Assume a hypothetical economy where
where cloth and wheat can be produced. What is the
opportunity cost of producing wheat in this econom y?
A) the amount of cloth that must be given up to produce one more unit of wheat
B) the amount of money received by selling wheat
C) the number of workers it takes to produce
produce all the wheat
D) More information is needed to answer the question.

52. Among the indifference curves for an economy, to achieve higher utility:
utility:
A) you must move to the indifference curve farthest
farthest away from the origin.
B) you must move to the the indifference
indifference curve
curve closest to the origin.
C) it is necessary to always close the borders.
D) it does not matter which indifference
indifference curve you
you select; your
your utility is the same
same
along every curve.

53. If the opportunity cost is constant (the PPF is a straight line), then a country will:
A) partially specialize in the production of its exported product.
B) completely specialize in the production of its exported product.
C) not benefit from importing goods from another country.
D) benefit by raising trade barriers.

54. Moving to a lower indifference

indifference curve means that a country is:
A) better off.
B) worse off.
C) indifferent.
D) lowering production.

55. In order for

for the production possibilities frontier
frontier to be a straight line, production must
exhibit:
A) increasing costs.
B) decreasing costs.
C) constant costs.
D) increasing, then decreasing, then constant costs.

56. In the absence of trade, a nation is in equilibrium where an indifference curve:

A) lies above its production possibilities frontier.
B) is tangent to its production possibilities frontier.
C) intersects its production possibilities frontier.
D) lies below its production possibilities frontier.

Page 13
57. A country's indifference curve describes combinations of goods that:
A) a country can purchase.
B) yield equal satisfaction to a country.
C) yield satisfaction to a country.
D) a country can produce.

58. (Figure: Indifference

Indifference Curves) If this economy produces no cloth, how many units of
wheat are possible?

A) 50
B) 200
C) 300
D) 400

Page 14
59. (Figure: Indifference
Indifference Curves) What is the opportunity cost of cloth in terms of wheat in
this example?

A) A unit of cloth may be obtained by foregoing a unit of wheat.

B) A unit of cloth “costs” 2 units of wheat.
C) A unit of cloth “costs” 1/2 unit of wheat.
D) Not enough information is given to answer.

Page 15
60. (Figure: Indifference
Indifference Curves) Of the following points of consumption, which is MOST
desirable for consumers?

A)  A
B)  B
C) C
D)  D

Page 16
61. (Figure: Indifference
Indifference Curves) Of the following points of consumption, which is LEAST
LEAST
desirable for consumers?

A)  A
B)  B
C) C
D)  D

Page 17
62. (Figure: Indifference
Indifference Curves) Which point on the diagram
diagram represents Home's
equilibrium in the absence of international trade?

A)  A
B)  B
C) C
D)  D

Page 18
63. (Figure: Indifference
Indifference Curves) Which combination of wheat and cloth is
is represented by
 point A in the diagram?

A) 200 units of cloth and 400 units of wheat

B) 100 units of cloth and 200 units of wheat
C) 200 units of cloth and 100 units of wheat
D) 300 units of cloth and 150 units of wheat

64. A nation will gain from trade

trade if it:
it:
A) produces and consumes along its PPF.
B) produces outside its PPF and consumes along its PPF.
C) consumes outside its PPF and produces along its PPF.
D) produces and consumes outside its PPF.

65. The pre-trade Home equilibrium will

will provide the highest
highest level of consumer satisfaction
satisfaction
from domestic resources whenever:
A) the marginal products of labor are equal.
B) capital and technology are not factors in the decision of what to produce.
C) perfect competition exists in product and labor markets.
D) Adam Smith's “invisible hand” is not an interfering factor.

Page 19
66. In competitive labor markets, the wage equals:
A) the marginal product of labor times the price of output.
B) the marginal product of labor plus the price of output.
C) the marginal product of labor.
D) the price of output.

67. Which of the following statements describes the way the pre-trade home equilibrium
reflects the concepts of competitive markets?
A) The opportunity cost of good
good 1 is the ratio of labor productivity of good 1 to good
2
B) Prices of each good
good reflect their opportunity cost.
C) Wages are not equal for each good
D) The value of the marginal product of labor ( MPL
 MPL × P) differs for each good.

68. In the home equilibrium situation, the relative price of wheat (when wheat is on the
horizontal axis) is the same as:
A) the relative price of cloth.
B) the slope of the PPF.
C) the marginal product of wheat.
D) the cost of labor to produce wheat.

69. The United States requires

requires 20 hours of labor to produce 1 ton of steel
steel and 30 hours of
labor to produce 1,000 board feet of lumber. In Canada, 20 hours
hou rs of labor are required
to produce 1 ton of steel and 25 hours of labor to produce 1,000 board feet of lumber.
Which country has an absolute advantage
adv antage in the production of steel?
A) the United States
B) Canada
C) Neither the United States nor Canada has an absolute advantage.
D) Both the United States and Canada have an absolute advantage.
advantage.

70. The United States requires

requires 20 hours of labor to produce 1 ton of steel
steel and 30 hours of
labor to produce 1,000 board feet of lumber. In Canada, 20 hours
hou rs of labor are required
to produce 1 ton of steel and 25 hours of labor to produce 1,000 board feet of lumber.
Which country has an absolute advantage in the production of lumber?
A) the United States
B) Canada
C) Neither the United States nor Canada has an absolute advantage.
D) Both the United States and Canada have an absolute advantage.
advantage.

Page 20
71. The United States requires
requires 20 hours of labor to produce 1 ton of steel
steel and 30 hours of
labor to produce 1,000 board feet of lumber. In Canada, 20 hours
hou rs of labor are required
to produce 1 ton of steel and 25 hours of labor to produce 1,000 board feet of lumber.
Which country has a comparative advantage in the production of steel?
A) the United States
B) Canada
C) Neither the United States nor Canada has a comparative advantage.
D) Both the United States and Canada have a comparative advantage.
advantage.

72. The United States requires

requires 20 hours of labor to produce 1 ton of steel
steel and 30 hours of
labor to produce 1,000 board feet of lumber. In Canada, 20 hours
hou rs of labor are required
to produce 1 ton of steel and 25 hours of labor to produce 1,000 board feet of lumber.
Which country has a comparative advantage
adv antage in the production of lumber?
A) the United States
B) Canada
C) Neither the United States nor Canada has a comparative advantage.
D) Both the United States and Canada have a comparative advantage.
advantage.

73. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to produce
a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1 ton of
coal and 1 hour of labor to produce a bushel of wheat. Which country has an absolute
advantage in the production of wheat?
A) Poland
B) the Czech Republic
C) Neither country has an absolute advantage.
D) Both countries have an absolute advantage.

74. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to produce
a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1 ton of
coal and 1 hour of labor to produce a bushel of wheat. Which country has an absolute
advantage in the production of coal?
A) Poland
B) the Czech Republic
C) Neither country has an absolute advantage.
D) Both countries have an absolute advantage.

Page 21
75. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to produce
a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1 ton of
coal and 1 hour of labor to produce a bushel of wheat. Which country has a comparative
advantage in the production of coal?
A) Poland
B) the Czech Republic
C) Neither country has a comparative advantage.
D) Both countries have a comparative advantage.

76. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to produce
a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1 ton of
coal and 1 hour of labor to produce a bushel of wheat. Which country has a comparative
advantage in the production of wheat?
A) Poland
B) the Czech Republic
C) Neither country has a comparative advantage.
D) Both countries have a comparative advantage.

77. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to produce
a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1 ton of
coal and 1 hour of
o f labor to produce a bushel
bu shel of wheat. What is the opportunity
oppo rtunity cost of
coal in Poland?
A) 0.25 hours of labor per ton of coal
B) 0.25 bushels of wheat per ton of coal
C) 4 hours of labor per ton of coal
D) 4 bushels of wheat per ton of coal

78. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to produce
a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1 ton of
coal and 1 hour of
o f labor to produce a bushel
bu shel of wheat. The international price of wheat
must fall between which of the following two prices?
A) between 1/6 ton and 1/4 ton of coal per bushel of wheat
B) between 1/4 ton and 1/3 ton of coal per bushel of wheat
C) between 1/3 ton and 1.5 tons of coal per bushel of wheat
D) between 4 tons and 6 tons of coal per bushel of wheat

Page 22
79. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to produce
a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1 ton of
coal and 1 hour of labor to produce a bushel of wheat. Suppose that the international
 price of coal is 4 1/4 bushels of wheat per ton of coal. Which country is likely to
to have
the larger gain from trade?
A) Poland
B) the Czech Republic
C) Neither country has the larger gain.
D) Both countries have the larger gain.

80. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to produce
a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1 ton of
coal and 1 hour of labor to produce a bushel of wheat. Suppose that Poland has 1,000
hours of labor and that it completely
completel y specializes according to its comparative advantage.
How many units of which product will it produce?
p roduce?
A) 250 tons of coal
B) 1,000 bushels of wheat
C) 100 bushels of wheat
D) 4,000 tons of coal

81. Poland requires 4 hours of labor to produce 1 ton of coal and 1 hour of labor to produce
a bushel of wheat. The Czech Republic requires 6 hours of labor to produce 1 ton of
coal and 1 hour of labor to produce a bushel of wheat. In Poland, what is the marginal
 product of labor in coal production?
A) 0.25 tons per hour
B) 0.4 tons per hour
C) 2.5 tons per hour
D) 4 tons per hour

82. To explain why some nations purchase products from abroad, even when they have an
absolute advantage in production, we have to use the theory of:
A) absolute advantage.
B) relative pricing.
C) comparative advantage.
D) industrial advantage.

Page 23
83. Whenever a nation has a lower opportunity cost of producing any good or service
service in
relative terms, that nation is said to have:
A) an absolute advantage.
B) a comparative advantage.
C) low labor costs.
D) better technology to produce that good or service.

84. Comparative advantage in production of a product is reflected in:

A) a lower relative price.
B) a lower opportunity cost.
C) higher labor productivity.
D) a lower relative price and a lower opportunity cost.

85. (Table: Output in the

the United States and China) Which of the following statements is
correct?

A) The United States has

has an absolute advantage in both apparel and wheat and a
comparative disadvantage in wheat.
B) China has an absolute advantage in both apparel and wheat and a comparative
advantage in apparel.
C) The United States has an absolute disadvantage in both apparel and wheat and a
comparative advantage in wheat.
D) China has an absolute disadvantage in both apparel and wheat and a comparative
advantage in apparel.

86. (Table: Output in the

the United States and China) Which of the following products will the
United States export to China?

A) wheat
B) apparel
C) The United States will export neither
neither wheat nor apparel.
D) The United States will export both wheat and apparel.

Page 24
87. (Table: United States and China Production
Production per Worker in Apparel, Textiles, and Wheat
in 2014) In the upper part of the table, the productivity of workers in the textile and
apparel sectors is given for the United States and China. The average worker in the
United States produces _ times more apparel sales than the average worker in
China.

A) 0.39
B) 2.55
C) 70
D) 27.5

88. (Table: United States and China Production

Production per Worker in Apparel, Textiles, and Wheat
in 2014) In the upper part
p art of the table, the productivity of workers in the textile
t extile and
apparel sectors is given for the United States and China. The table shows that the United
States has an absolute advantage in:

A) textile manufacturing.
B) apparel manufacturing.
C) neither textile nor apparel manufacturing.
D) both textile and apparel manufacturing.

89. (Table: United States and China Production

Production per Worker in Apparel, Textiles, and Wheat
in 2014) In the upper part
p art of the table, the productivity of workers in the textile
t extile and
apparel sectors is given for the United States and China. The table shows that China C hina has
a comparative advantage in:

A) textile manufacturing.
B) apparel manufacturing.
C) neither textile nor apparel manufacturing.
D) both textile and apparel manufacturing.

Page 25
90. (Table: United States and China Production
Production per Worker in Apparel, Textiles, and Wheat
in 2014) Consider the productivity of workers in all three sectors of the table. In the
United States, what is the dollar value of apparel foregone in order to produce an
additional bushel of wheat?

A) $0.04
B) $0.14
C) $7.00
D) $23.20

91. (Table: United States and China Production

Production per Worker in Apparel, Textiles, and Wheat
in 2014) Consider the productivity of workers in all three sectors
sectors of the table. In China,
how many dollars of textile production must be given up in order to produce additional
 bushel of wheat?

A) $66.67
B) $0.015
C) $300
D) $91.67

92. It can be shown that differences in before-trade

before-trade relative prices will
will determine:
A) which nation has the absolute advantage.
B) which good each nation will export or import.
C) the quantity traded by each nation.
D) the equilibrium trade price.

93. A nation will export the product in which it has a comparative advantage, which results
results
from the good being relatively than in the importing nation.
A) less expensive
B) more expensive
C) lower in quality
D) less available

Page 26
94. At some point, as the
the price of the exported product is bid up and the price of the
imported product falls, the price of the product in both nations:
A) becomes more unequal.
B) approaches zero.
C) approaches infinity.
D) equalizes.

95. When two nations have achieved identical relative prices of the two traded products, we
have:
A) a standoff.
B) a stalemate.
C) international trade equilibrium.
D) absolute advantage once again.

96. Compared with constant cost production, if production occurs under increasing
increasing cost
conditions, it is MORE likely that countries will:
A) completely specialize.
B) incompletely specialize.
C) not engage in international trade.
D) trade with one another.

97. Suppose a nation increases the quantity of a product it exports. To attract

attract the labor
resources needed to support the increased production,
produ ction, it must:
A) pay higher wages.
B) lay off workers.
C) borrow capital abroad.
D) find new sites for production near population centers.

98. The Ricardian model (with constant opportunity costs) predicts that a nation will
in the production of the good it exports.
A) have a comparative disadvantage
B) develop shortages
C) lower the cost of production
D) specialize completely

Page 27
 99. (Table: Output in the
the United States and China) Using the data in the table, what will
will
happen to the U.S. labor force after trade occurs with China?

A) U.S. labor will move from apparel to agriculture,

agriculture, where its marginal productivity is
higher.
B) U.S. jobs in apparel will be exported to China, wheat exports will create additional
 jobs in agriculture, and the value of output produced by U.S. labor will increase.
C) The value of output produced by U.S. labor will will increase.
D) U.S. labor will move from apparel to agriculture,
agriculture, where its marginal productivity is
higher. U.S. jobs in apparel will be exported
ex ported to China, wheat exports
ex ports will create
additional jobs in agriculture, and the value of
o f output produced by U.S. labor
lab or will
increase.

100. (Figure: Upperia's

Upperia's Production and Consumption) The graph shows shows Upperia's
international trading pattern. Point  P is production with trade, and point C is
consumption with trade. Which product does Home Ho me export?

A) shoes
B) shirts
C) Home exports neither shirts nor shoes.
D) Home exports both shirts and shoes.

Page 28
101. (Figure: Upperia's
Upperia's Production and Consumption) The graph shows shows Upperia's
international trading pattern. Point  P is production with trade, and point C is
consumption with trade. Which product does Home Ho me import?

A) shoes
B) shirts
C) Home imports neither shirts nor shoes.
D) Home imports both shirts and shoes.

Page 29
102. (Figure: Upperia's
Upperia's Production and Consumption) The graph shows Upperia's
international trading pattern. Point P is production with trade, and point C is
consumption with trade. What is the international price of shoes (shirts/pair of shoes)?

A) 125/80 shirts per unit of pair of shoes

B) 4/3 shirts per unit of pair of shoes
C) 5/4 shirts per unit of pair of shoes
D) 3/4 shirt per unit of pair of shoes

Page 30
103. (Figure: Upperia's
Upperia's Production and Consumption) The graph shows Upperia's
international trading pattern. Point P is production with trade, and point C is
consumption with trade. Assume that the marginal product of labor in producing shoes
is one pair per hour. How many hours of labor occur in Upperia?

A) 125
B) 100
C) 80
D) 65

Page 31
104. (Figure: Upperia's
Upperia's Production and Consumption) The graph shows Upperia's
international trading pattern. What is the autarkic relative price of shirts in Upperia?

A) 4/3 pairs of shoes per shirt

B) 3/4 pair of shoes per shirt
C) 5/4 pairs of shoes per shirt
D) 4/5 pair of shoes per shirt

105. With trade, a country will maximize its economic well-being

well-being when it:
A) moves to the highest possible indifference curve.
B) forces the marginal rate of substitution to its
its lowest possible value.
value.
C) consumes more of both goods than it does in autarky.
D) finds its marginal
marginal rate of substitution
substitution exceeding its marginal
marginal rate of transformation.

106. If the international terms of trade

trade settle at a level
level that is between each country's
opportunity cost:
A) there is no basis for gainful trade forfor either country.
B) both countries gain from trade.
C) only one country gains from trade.
D) one country gains and the other country loses from from trade.

107. Trade between two nations is NOT possible if they have:

A) identical indifference curves but different production possibilities frontiers.
B) identical production possibilities frontiers but different indifference curves.
C) different production possibilities frontiers and different indifference curves.
D) identical production possibilities frontiers and identical indifference curves.

Page 32
108. As nations trade, their
their total level of utility (satisfaction from consuming
consuming goods):
A) equalizes.
B) levels out.
C) decreases.
D) increases.

109. The increase in total utility

utility derived from
from trading products is called:
A) trade patterns.
B) gains from trade.
C) comparative advantage.
D) labor productivity.

110. Chile and Argentina each produce jellybeans

jellybeans and peanut butter, using labor as their only
resource. Each country has 1,000 hours of labor. In Chile, an hour produces a pound of
 jellybeans and 2 hours produce a pound of peanut butter. In Argentina, an hour produces
a pound of jellybeans and 3 hours produces a pound of peanut butter. When they do not
trade with each other, Chile consumes 600 pounds of jellybeans and 200 pounds of
 peanut butter, and Argentina consumes 400 pounds of jellybeans and 200 pounds of
 peanut butter. Which country has an absolute advantage in jellybean production?
A) Chile
B) Argentina
C) Neither Argentina nor Chile has an absolute advantage.
D) Both Argentina and Chile have an absolute advantage.

111. Chile and Argentina each produce jellybeans

jellybeans and peanut butter, using labor as their only
resource. Each country has 1,000 hours of labor. In Chile, an hour produces a pound of
 jellybeans and 2 hours produce a pound of peanut butter. In Argentina, an hour produces
a pound of jellybeans and 3 hours produces a pound of peanut butter. When they do not
trade with each other, Chile consumes 600 pounds of jellybeans and 200 pounds of
 peanut butter, and Argentina consumes 400 pounds of jellybeans and 200 pounds of
 peanut butter. Which country has a comparative advantage in jellybean production?
A) Chile
B) Argentina
C) Neither Argentina nor Chile has a comparative advantage.
D) Both Argentina and Chile have a comparative advantage.

Page 33
112. Chile and Argentina each produce jellybeans
jellybeans and peanut butter, using labor as their only
resource. Each country has 1,000 hours of labor. In Chile, an hour produces a pound of
 jellybeans and 2 hours produce a pound of peanut butter. In Argentina, an hour produces
a pound of jellybeans and 3 hours produces a pound of peanut butter. When they do not
trade with each other, Chile consumes 600 pounds of jellybeans and 200 pounds of
 peanut butter, and Argentina consumes 400 pounds of jellybeans and 200 pounds of
 peanut butter. What are the endpoints of Chile's production possibilities frontier?
frontier?
A) 1,000 pounds of jellybeans and 500 pounds of peanut butter
B) 1,000 pounds of jellybeans and 2,000 pounds of peanut butter
C) 600 pounds of jellybeans and 200 pounds of peanut butter
D) 1,000 pounds of jellybeans and 333 pounds of peanut butter

113. Chile and Argentina each produce jellybeans

jellybeans and peanut butter, using labor as their only
resource. Each country has 1,000 hours of labor. In Chile, an hour produces a pound of
 jellybeans and 2 hours produce a pound of peanut butter. In Argentina, an hour produces
a pound of jellybeans and 3 hours produces a pound of peanut butter. When they do not
trade with each other, Chile consumes 600 pounds of jellybeans and 200 pounds of
 peanut butter, and Argentina consumes 400 pounds of jellybeans and 200 pounds of
 peanut butter. What is the price of peanut butter in Argentina before the two countries
 begin to trade with each other?
A) 1/3 pound of jellybeans per pound of peanut butter
B) 1/2 pound of jellybeans per pound of peanut butter
C) 2 pounds of jellybeans per pound of peanut butter
D) 3 pounds of jellybeans per pound of peanut butter

114. Chile and Argentina each produce jellybeans

jellybeans and peanut butter, using labor as their only
resource. Each country has 1,000 hours of labor. In Chile, an hour produces a pound of
 jellybeans and 2 hours produce a pound of peanut butter. In Argentina, an hour produces
a pound of jellybeans and 3 hours produces a pound of peanut butter. When they do not
trade with each other, Chile consumes 600 pounds of jellybeans and 200 pounds of
 peanut butter, and Argentina consumes 400 pounds of jellybeans and 200 pounds of
 peanut butter. In order for Chile to gain from trade, the price of jellybeans must be less
than:
A) 2 pounds of peanut butter per pound of jellybeans.
B) 3 pounds of peanut butter per pound of jellybeans.
C) 1/3 pound of peanut butter per pound of jellybeans.
D) 1/2 pound of peanut butter per pound of jellybeans.

Page 34
115. Chile and Argentina each produce jellybeans
jellybeans and peanut butter, using labor as their only
resource. Each country has 1,000 hours of labor. In Chile, an hour produces a pound of
 jellybeans and 2 hours produce a pound of peanut butter. In Argentina, an hour produces
a pound of jellybeans and 3 hours produces a pound of peanut butter. When they do not
trade with each other, Chile consumes 600 pounds of jellybeans and 200 pounds of
 peanut butter, and Argentina consumes 400 pounds of jellybeans and 200 pounds of
 peanut butter. Argentina's gains from trade will be largest (and still feasible) when the
 price of jellybeans is:
A) 2 pounds of peanut butter per pound of jellybeans.
B) 3 pounds of peanut butter per pound of jellybeans.
C) 1/3 pound of peanut butter per pound of jellybeans.
D) 1/2 pound of peanut butter per pound of jellybeans.

116. Chile and Argentina each produce jellybeans

jellybeans and peanut butter, using labor as their only
resource. Each country has 1,000 hours of labor. In Chile, an hour produces a pound of
 jellybeans and 2 hours produce a pound of peanut butter. In Argentina, an hour produces
a pound of jellybeans and 3 hours produces a pound of peanut butter. When they do not
trade with each other, Chile consumes 600 pounds of jellybeans and 200 pounds of
 peanut butter, and Argentina consumes 400 pounds of jellybeans and 200 pounds of
 peanut butter. What is the opportunity cost of a pound of peanut butter in Chile?
A) 2 pounds of jellybeans
B) 3 pounds of jellybeans
C) 1/3 pound of jellybeans
D) 1/2 pound of jellybeans

117. Chile and Argentina each produce jellybeans

jellybeans and peanut butter, using labor as their only
resource. Each country has 1,000 hours of labor. In Chile, an hour produces a pound of
 jellybeans and 2 hours produce a pound of peanut butter. In Argentina, an hour produces
a pound of jellybeans and 3 hours produces a pound of peanut butter. When they do not
trade with each other, Chile consumes 600 pounds of jellybeans and 200 pounds of
 peanut butter, and Argentina consumes 400 pounds of jellybeans and 200 pounds of
 peanut butter. Suppose that Chile and Argentina begin to trade with each other. Each
completely specializes in the product in which it finds
find s its comparative advantage. How
many pounds of peanut butter and jellybeans do the two countries jointly produce?
A) 1,000 pounds of jellybeans and 400 pounds of peanut butter
B) 1,000 pounds of jellybeans and 500 pounds of peanut butter
C) 500 pounds of jellybeans and 1,000 pounds of peanut butter
D) 333.33 pounds of jellybeans and 500 pounds of peanut butter 

Page 35
118. Chile and Argentina each produce jellybeans
jellybeans and peanut butter, using labor as their only
resource. Each country has 1,000 hours of labor. In Chile, an hour produces a pound of
 jellybeans and 2 hours produce a pound of peanut butter. In Argentina, an hour produces
a pound of jellybeans and 3 hours produces a pound of peanut butter. When they do not
trade with each other, Chile consumes 600 pounds of jellybeans and 200 pounds of
 peanut butter, and Argentina consumes 400 pounds of jellybeans and 200 pounds of
 peanut butter. Suppose that Chile and Argentina begin to trade with each other. Each
completely specializes in the product in which it finds
find s its comparative advantage. How
many more pounds of peanut butter
bu tter and jellybeans do the two countries
cou ntries jointly produce
compared with production before they began to trade?
A) 1,000 pounds of jellybeans and 500 pounds of peanut butter
B) 0 pounds of jellybeans and 500 pounds of peanut butter
C) 1,000 pounds of jellybeans and 0 pounds of peanut butter
D) 0 pounds of jellybeans and 100 pounds of peanut butter

119. Chile and Argentina each produce jellybeans

jellybeans and peanut butter, using labor as their only
resource. Each country has 1,000 hours of labor. In Chile, an hour produces a pound of
 jellybeans and 2 hours produce a pound of peanut butter. In Argentina, an hour produces
a pound of jellybeans and 3 hours produces a pound of peanut butter. When they do not
trade with each other, Chile consumes 600 pounds of jellybeans and 200 pounds of
 peanut butter, and Argentina consumes 400 pounds of jellybeans and 200 pounds of
 peanut butter. Which of the following groups will benefit from trade between Chile and
Argentina?
A) Chilean consumers only
B) Argentinean consumers only
C) Both Argentinean consumers and Chilean consumers
D) Neither Chilean consumers nor Argentinean consumers

120. Suppose there are two countries (Home and Foreign) that produce two goods. Home's
wages are 100% greater than Foreign's
Forei gn's wages. Will trade be possible between Home and
Foreign?
A) No, because Foreign's wages are lower than Home's wages.
B) Yes, Foreign will be able to export
export both products to Home.
C) Yes, as long as Home's marginal productivity of labor in one product is at least
100% higher than Foreign's marginal productivity of labor in the same product.
D) No, because prices will be the same in each country.
country.

Page 36
121. According to the principle of comparative advantage, specialization and trade increase
increase a
nation's total output because:
A) resources are directed to their highest productivity.
B) the output of the nation's trading partner declines.
C) the nation can produce outside its
its production possibilities frontier.
D) the problem of unemployment is eliminated.

122. Assume that two countries

countries (Home and Foreign) each produce
produce two goods (corn and
wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat
with a day of labor. Without trade (in autarky),
autark y), Home's daily production is 20 tons of
wheat and 10 tons of corn. What is Home's price of corn in autarky?
A) 0.5 ton of wheat
B) 20 tons of wheat
C) 10 tons of wheat
D) 2 tons of wheat

123. Assume that two countries

countries (Home and Foreign) each produce
produce two goods (corn and
wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat
with a day of labor. Without trade (in autarky),
autark y), Home's daily production is 20 tons of
wheat and 10 tons of corn. How large is Home's labor force?
A) 50 workers
B) 40 workers
C) 30 workers
D) 20 workers

124. Assume that two countries

countries (Home and Foreign) each produce
produce two goods (corn and
wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat
with a day of labor. Without trade (in autarky),
autark y), Home's daily production is 20 tons of
wheat and 10 tons of corn. Now suppose that Home has the opportunity to trade with
Foreign at an international price of 1 ton of wheat per ton of corn. In which product will
Home find its comparative advantage?
A) wheat
B) corn
C) Home will find itsits competitive
competitive advantage
advantage in neither corn nor wheat.
wheat.
D) Home will find itsits competitive
competitive advantage
advantage inin both corn and wheat.

Page 37
125. Assume that two countries
countries (Home and Foreign) each produce
produce two goods (corn and
wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat
with a day of labor. Without trade (in autarky),
autark y), Home's daily production is 20 tons of
wheat and 10 tons of corn. Suppose that Home completely specializes, and it consumes
20 tons of wheat after it begins trading with Foreign. Home trades
t rades with Foreign at a
1-to-1 ratio of corn for wheat. How many
man y tons of corn does Home consume
consum e when it
trades with Foreign?
A) 10 tons of corn
B) 20 tons of corn
C) 30 tons of corn
D) 40 tons of corn

126. Assume that two countries

countries (Home and Foreign) each produce
produce two goods (corn and
wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat
with a day of labor. Foreign produces 1 ton of corn and 0.5 ton of wheat. Without trade
(in autarky), Home's daily production is 20 tons of
o f wheat and 10 tons of corn. At which
international price will Home's gains from trade be largest?
A) 1/2 ton of wheat per ton of corn
B) 1 ton of wheat per ton of corn
C) 1.5 tons of wheat per ton of corn
D) 2 tons of wheat per ton of corn

127. Assume that two countries

countries (Home and Foreign) each produce
produce two goods (corn and
wheat) under constant cost production. Home produces 1/2 ton of corn or 1 ton of wheat
with a day of labor. Foreign produces 1 ton of corn and 1/2 ton of wheat. Suppose that,
after trade occurs, the international price actually becomes 1.5 tons of wheat per ton of
of
corn. Which of the following statements is true?
A) Home will gain from trade but Foreign will not.
B) Foreign will gain from trade but Home will not.
C) Neither home nor Foreign will gain from trade.
D) Both Home and Foreign
Foreign will gain from trade.

128. Assume that Germany and China can produce beer and cloth. If
If the MPLc/ MPL
 MPLb for
Germany is 2/5 and MPLc/ MPL
 MPLb for China is 1, then Germany and China have a
comparative advantage in:
A) cloth and beer, respectively.
B) beer and cloth, respectively.
C) beer.
D) cloth.

Page 38
129. Assume that Germany and China can produce beer and cloth. IfIf the MPLc/ MPL
 MPLb for 
Germany is 2/5 and MPLc/ MPL
 MPLb for China is 1, then China should:
A) specialize in producing beer and export beer.
B) specialize in producing cloth and export cloth.
C) not specialize, because China will not benefit from it.
D) specialize in producing cloth and import cloth.

130. Assume that Germany and China can produce beer and cloth. If If the MPLc/ MPL
 MPLb for 
Germany is 2/5 and MPLc/ MPL
 MPLb for China is 1, then Germany should:
A) specialize in producing beer and export beer.
B) specialize in producing cloth and export cloth.
C) not specialize, because Germany will not benefit from it.
D) specialize in producing cloth and import cloth.

131. Using the marginal product theory of wages, a worker's “real” wage is:
A) twice the amount of the “money” wage.
B) what the “money” wage will purchase in terms of products.
C) what she earns after taxes.
D) what she would earn if her employer
employer paid her fairly.
fairly.

132. A worker's “r ea

eal” wage is related to:
A) her productivity in the workplace.
B) the value of her production to her employer.
C) the nation's absolute advantage in production of that product.
D) her productivity
productivity in
in the workplace, the value of her production to her employer, and
the nation's absolute advantage in production of that
t hat product.

133. Which of the following statements describes what the Ricardian model predicts as a
nation improves its technology and productivity?
A) Its standard of living will rise.
B) Wages of its workers will fall.
C) It will lose its absolute advantage.
D) It will lose its comparative advantage.

134. For China, the result of opening its economy was:

A) a decline in its wages.
B) an increase in wages.
C) a reduction in the amount exported.
D) a reduction in the amount imported.

Page 39
135. The case study of wages and productivity in the textbook demonstrates that:
that:
A) workers lose out when international trade occurs.
B) internationally, worker productivity varies directly with real wages.
C) workers who get educated get higher wages.
D) workers become more productive, but most of the value-added
value-added goes to the owners
of capital.

136. For China and India, the result

result of opening their economies was:
was:
A) very large decreases in per capita real incomes.
B) very large increases in per capita real incomes.
C) no change in per capita real incomes.
D) small increases in per capita real incomes.

137. A comparison of wages and value-added in manufacturing across countries suggests

suggests that
there:
A) is no relationship between value-added and wages.
B) is a negative relationship between value-added and wages.
C) wages tend to rise as productivity increases.
D) wages tend to rise as productivity falls.

138. In the United States, one worker can produce 10 tons of steel per day or 20 tons of
chemicals per day. In the United Kingdom, one worker can produce 5 tons of steel per
day or 15 tons of chemicals per
pe r day. The United States has the absolute advantage in the
 production of:
A) steel.
B) chemicals.
C) neither steel nor chemicals.
D) both steel and chemicals.

139. In the United States, one worker can produce 10 tons of steel per day or 20 tons of
chemicals per day. In the United Kingdom, one worker can produce 5 tons of steel per
day or 15 tons of chemicals per day. The United Kingdom has the absolute advantage in
the production of:
A) steel.
B) chemicals.
C) neither steel nor chemicals.
D) both steel and chemicals.

Page 40
140. In the United States, one worker can produce 10 tons of steel per day or 20 tons of
chemicals per day. In the United Kingdom, one worker can produce 5 tons of steel per
day or 15 tons of chemicals per day. The United Kingdom has a comparative advantage
in the production of:
A) steel.
B) chemicals.
C) neither steel nor chemicals.
D) both steel and chemicals.

141. In the United States, one worker can produce 10 tons of steel per day or 20 tons of
chemicals per day. In the United Kingdom, one worker can produce 5 tons of steel per
day or 15 tons of chemicals per day. If trade occurs between the United States and the
United Kingdom, American firms should specialize in producing:
A) steel.
B) chemicals.
C) neither steel nor chemicals.
D) both steel and chemicals.

142. In the United States, one worker can produce 10 tons of steel per day or 20 tons of
chemicals per day. In the United Kingdom, one worker can produce 5 tons of steel per
day or 15 tons of chemicals per
pe r day. International trade will occur between the United
States and the United Kingdom so long
lon g as 1 ton of steel trades for:
A) at least
least 1 ton of chemicals, but no more than 2 tons of chemicals.
B) at least
least 2 tons of chemicals, but no more than 3 tons of chemicals.
C) at least
least 0.33 ton of chemicals, but no more than 0.5 ton of chemicals.
D) at least
least 0.55 ton of chemicals but no more than 0.75 ton of chemicals.

143. In the United States, one worker can produce 10 tons of steel per day or 20 tons of
chemicals per day. In the United Kingdom, one worker can produce 5 tons of steel per
day or 15 tons of chemicals per
pe r day. The United Kingdom will gain the most from trade
(and trade will be feasible) if 1 ton of steel trades for:
A) 2 tons of chemicals.
B) 3 tons of chemicals.
C) 1.5 tons of chemicals.
D) 0.5 ton of chemicals.

Page 41
144. In the United States, one worker can produce 10 tons of steel per day or 20 tons of
chemicals per day. In the United Kingdom, one worker can produce 5 tons of steel per
day or 15 tons of chemicals per
pe r day. Which of the following statements is correct?
A) U.S. wages will be higher than U.K. wages.
B) U.K. wages will be higher than U.S. wages.
C) Wages in the United States and the United
United Kingdom will be equal.
D) There will be no relationship
relationship between
between U.S. and U.K. wages.

145. If export prices increase, what can we expect the wages in the export sector to do?
A) increase
B) decrease
C) stay the same
D) The answer cannot be determined from the information provided.

146. What does the term value-added per hour help us measure?
A) terms of trade
B) labor productivity
C) volume of exports
D) volume of imports

147. In the Ricardian model, wages are equal across industries

industries because:
A) employers care for their workers.
B) workers prefer to work in exporting industries.
C) workers are freely mobile between industries.
D) workers are freely mobile between countries.

148. Suppose that the introduction of computers

computers increases the productivity
productivity of workers in the
the
developed world. What you would expect wages to do?
A) Rise mainly in the developed countries.
B) Rise mainly in the developing countries.
C) Fall mainly in the developed countries.
D) Fall mainly in the developing countries.

149. If a home country is exporting corn and importing bikes and if the relative price P c /P 
 /P b is
increasing, then:
A) the home country will export less corn.
B) the home country will export more corn.
C) the home country will import the same number of bikes.
D) there isis no change in the trade pattern for the home country.

Page 42
150. It is possible to determine how much a nation will export over and above its domestic
consumption at various international prices, other things being equal, b y finding a set of
equilibria. This schedule is:
A) the import demand curve for a nation.
B) the export supply curve for a nation.
C) the production possibilities frontier for a nation.
D) the “no-trade” equilibrium.

151. The flat part of Home's export supply curve in the Ricardian model is due to the
the
assumption that:
A) Home has a comparative advantage in its export.
B) Home has an absolute advantage in its export.
C) the marginal product of labor is constant in the export good.
good.
D) Home has more labor than Foreign.

152. It is possible
possible to determine how much a nation will import at various international prices,
prices,
other things being equal, by
b y finding a set of equilibria. This schedule is the:
A) import demand curve for a nation.
B) export supply curve for a nation.
C) production possibilities frontier for a nation.
D) “no-trade” equilibrium.

153. Because the PPF is a straight

straight line in the Ricardian
Ricardian model, Foreign's import demand
curve is:
A) upward sloping in parts.
B) flat in parts.
C) downward sloping in parts.
D) flat everywhere.

154. International trade equilibrium occurs where:

A) there is no further
further way
way to increase production of any commodity.
B) the home excess supply curve intersects
intersects with
with the home excess demand curve.
curve.
C) the total world import
import demand curve intersects
intersects with the total world export supply
curve.
D) the amount produced in each nation is just equal to the amounts produced in every
other nation.

Page 43
155. The international relative price and total quantity of a traded good or service is
determined by:
A) labor shortages that occur worldwide.
B) the World Trade Organization.
C) the intersection
intersection of the total world import demand curve with the total world
world export
supply curve.
D) natural resource availability
availability compared with
with the industrial demand for those
 products.

156. If prices of a nation's exported products rise

rise in comparison with prices paid for imports,
that nation experiences a:
A) rise in its international terms of trade.
B) decline in its international terms of trade.
C) reduction in its imports.
D) reduction in its exports.

157. Suppose that the U.S. price index for its imports rose
rose from 100 to 120 from 2010 to
2011 and the price index for its exports remained unchanged. Which of the following
statements is correct?
A) The U.S. terms of trade worsened between 2010 and 2011.
B) The U.S. terms of trade improved
improved between 2010 and 2011.
C) The U.S.
U.S. terms of trade improved
improved in 2010 and worsened in in 2011.
D) There was no change in the U.S. terms of trade
trade between 2010 and 2011.

158. Suppose that there is an improvement in a country's terms of trade between 2010 and
2014. This improvement means that:
A) the country can purchase more imports
imports in 2014, with the same volume of exports
as in 2010.
B) the country can purchase moremore exports in 2014, with the same volume of exports as
in 2010.
C) the country needs to increase its exports in order to purchase the same volume of
imports as in 2010.
D) regarding its
its international trade, the country is worse off in 2014 than it was in
2010.

159. If the foreign import demand curve intersects

intersects the home country's export supply curve in
its horizontal portion, then:
A) the home country will suffer
suffer a loss from international trade.
trade.
B) the home country will not gain from trade.
C) the home country will gain from trade.
D) the foreign country will not gain from trade.

Page 44
160. Home has a comparative advantage in wheat, and Foreign has a comparative advantage
in cloth. Once trade occurs, Home produces 1,000 bushels of wheat, and Foreign
 produces 1,000 yards of cloth. The following table shows the amount of wheat that
Home is willing to supply and Foreign is willing to buy at various international prices.

What is the international price of wheat?

A) 1 yard/bushel
B) 3 yards/bushel
C) 5 yards/bushel
D) 7 yards/bushel

161. Home has a comparative advantage in wheat, and Foreign has a comparative advantage
in cloth. Once trade occurs, Home produces 1,000 bushels of wheat, and Foreign
 produces 1,000 yards of cloth. The following table shows the amount of wheat that
Home is willing to supply and Foreign is willing to buy at various international prices.

In equilibrium, how many bushels of wheat will Foreign import?

A) 900 bushels
B) 700 bushels
C) 500 bushels
D) 300 bushels

Page 45
162. Home has a comparative advantage in wheat, and Foreign has a comparative advantage
in cloth. Once trade occurs, Home produces 1,500 bushels of wheat, and Foreign
 produces 1,000 yards of cloth. The following table shows the amount of wheat that
Home is willing to trade to acquire more cloth.

If the international price of cloth is 1.5 bushels

bu shels of wheat per yard, how many
man y bushels of
wheat will Home export to Foreign?
A) 1,050 bushels
B) 800 bushels
C) 700 bushels
D) 550 bushels

163. Home has a comparative advantage in wheat, and Foreign has a comparative advantage
in cloth. Once trade occurs, Home produces 1,500 bushels of wheat, and Foreign
 produces 1,000 yards of cloth. The following table shows the amount of wheat that
Home is willing to trade to acquire more cloth.

If the international price of cloth is 1.5 bushels

bu shels of wheat per yard, how many
man y yards of
cloth will Foreign export to Home?
A) 500 yards
B) 600 yards
C) 700 yards
D) 1,150 yards

Page 46
164. Home has a comparative advantage in wheat, and Foreign has a comparative advantage
in cloth. Once trade occurs, Home produces 1,500 bushels of wheat, and Foreign
 produces 1,000 yards of cloth. The following table shows the amount of wheat that
Home is willing to trade to acquire more cloth.

Suppose that Home's trade price rose from 0.5 bushel of wheat per yard of cloth in 2009
to a bushel of wheat per yard of cloth in 2010. What
W hat does this movement represent in
terms of Home's terms of trade?
A) It is an improvement in Home's terms of trade.
B) It is a deterioration in Home's terms of trade.
C) There is no change in Home's terms of trade.
D) The answer cannot be determined based on the information provided.

165. Home has a comparative advantage in wheat, and Foreign has a comparative advantage
in cloth. Once trade occurs, Home produces 1,500 bushels of wheat, and Foreign
 produces 1,000 yards of cloth. The following table shows the amount of wheat that
Home is willing to trade to acquire more cloth.

Suppose that Home's trade price rose from 0.5 bushel of wheat per yard of cloth in 2009
to a bushel of wheat per yard of cloth in 2010. Which
W hich of the following statements is
true?
A) Home's situation had greatly
greatly improved in 2010.
B) Home's situation had deteriorated in 2010.
C) Home's situation was the same as it was in 2009.
D) Home's situation had slightly improved in 2010.

Page 47
166. Home has a comparative advantage in wheat, and Foreign has a comparative advantage
in cloth. Once trade occurs, Home produces 1,500 bushels of wheat, and Foreign
 produces 1,000 yards of cloth. The following table shows the amount of wheat that
Home is willing to trade to acquire more cloth.

Suppose that Home's trade price rose from 0.5 bushel of wheat per yard of cloth in 2009
to a bushel of wheat per yard of cloth in 2010. We conclude that the change in Home's
export price means that Home was worse off in 2010 than it was in 2009. Which of the
following statements best explains this conclusion?
A) Home had to export twicetwice as much wheat to obtain a yard
yard of cloth
cloth in 2010 as it did
in 2009.
B) Home had to export half as much wheat to obtain a yardyard of cloth
cloth in 2010 as it did
in 2009.
C) Home had to export the same amount of wheat to obtain a yard of cloth in both
2009 and 2010.
D) Home had to export threethree times the amount of wheat to obtain a yard of cloth in
2010 as it did in 2009.

167. In 2000, the U.S. terms of trade was one. In 2009 the U.S. export price index was 1.15
and the U.S. import price index was 1.18. Which of the following statements is the best
interpretation of the change in the U.S. terms of trade between 2000 and 2009?
A) In 2009, the United States had to export 2% more in order to obtain the same
amount of imports as in 2000.
B) In 2009, the United States could export 2% less to obtain the same of amount of
imports as in 2000.
C) Prices of U.S. exports rose
rose more rapidly than prices of U.S. imports.
D) The U.S. terms of trade improved between 2000 and 2009.

168. With other things unchanged, a rise in the average price of imports or a fall in the
average price of exports will:
A) improve the terms of trade.
B) worsen the terms of trade.
C) expand the production possibilities frontier.
D) contract the production possibilities frontier.

Page 48
169. (Table: The Prices of Ghana's Exports and Imports) Suppose that the table gives values
of price indices for Ghana's exports and imports in 2012 and in 2014. Did Ghana's terms
of trade improve, deteriorate, or remain unchanged between 2012 and 2014?

A) The terms of trade improved.

B) The terms of trade deteriorated.
C) The terms of trade remained unchanged.

170. An increase in
in the price of imported goods will:
A) increase the volume of imports.
B) decrease the volume of imports.
C) shift the production possibility frontier inward.
D) shift the production possibility frontier outward.

171. The Prebisch – Singer

Singer hypothesis concludes that:
A) because of unfair trading practices,
practices, labor in developing countries
countries is exploited.
B) developing countries experience a long-run decline in their terms of trade, as the
demand for primary products in higher-income countries declines relative to their
demand for manufactured goods.
C) OPEC has been responsible for a slowdown in the world's standard of living.
D) technology lowers the cost of manufactured products, so so developing
developing countries
should see an increase in their terms of trade.

172. The textbook authors

authors conclude that the Prebisch – Singer
Singer hypothesis:
A) is not true.
B) is true.
C) is valid in some instances but showed no consistent trend and cannot be considered
a general rule.
D) is valid only since 1995, when the World Trade Organization began its operations.

173. Several economists have hypothesized that the

the terms of trade for
for developing countries
will decline over time. Which of the following might be a cause of this decline?
A) Technological progress in manufactured goodsgoods has caused their prices to fall.
fall.
B) Some developing countries are able to keep the price of their exports high by
restricting supplies on the world market.
C) Increased demand for developing country exports has caused prices of developing
country exports to rise.
D) The demand for primary
primary product exports from
from developing countries has not risen as
fast as the demand for manufactured exports of industrialized countries.

Page 49
174. What are the shapes of production possibilities frontiers
frontiers in the Ricardian
Ricardian model?

175. In an autarkic situation,

situation, demonstrate that a country will be at its optimal production if it
 produces where an indifference curve is tangent to the production possibilities frontier.
frontier.

176. Why is a country able to consume outside its production possibilities frontier
frontier when it
engages in international trade?

177. If a country has a comparative advantage in producing rice and a comparative

disadvantage in producing pencils, does the Ricardian model predict that the real wage
in rice production will fall and the real wage
wa ge in pencil production will rise as a result of
international trade? Explain.

178. Assume that, in autarky, an economy has 150 workers and the MPLc is two cars and the
 MPLb is five boats. Demonstrate how one can derive the autarkic price of cars in this
economy.

179. Suppose that:

1. Malaysia requires 1 hour of labor to produce 1 pound of rice and 2 hours of labor to
 produce 1 pencil;
2. Indonesia requires 2 hours of labor to produce 1 pound of rice and 4 hours of labor to
 produce 1 pencil;
3. each country has 10,000 hours of labor to allocate between the production of rice and
 pencils; and
4. in autarky, Malaysia consumes 5,000 pounds of rice and 2,500 pencils.
Which country has an absolute advantage in rice production? In pencil production?
Which country has a comparative advantage in rice production? In pencil production?
Will trade between the two countries be mutually beneficial?

180. Why does the United States import textiles from Asian nations when it has an absolute
advantage in textile production?

Page 50
181. Use the following table to determine the absolute and comparative advantages of China
and the United States in producing wheat and textiles.

182. In the Ricardian model, what is expected to happen to real wages in each country as
trade occurs?

183. (Figure: International

International Trade Equilibrium) Which is the before-trade point of production
and consumption?

Page 51
184. (Figure: International
International Trade Equilibrium) Which line shows
shows the before-trade
before-trade relative
 price in this nation?

185. (Figure: International

International Trade Equilibrium) Which point shows
shows the after-trade point of
consumption?

Page 52
186. (Figure: International
International Trade Equilibrium) Which line shows
shows the new equilibrium
“wor ld”
ld” price determined by trade?

187. (Figure: International

International Trade Equilibrium) Before trade, how many units of wheat will
this nation produce?

Page 53
188. (Figure: International
International Trade Equilibrium) Before trade, how many units of wheat will
this nation consume?

189. (Figure: International

International Trade Equilibrium) Before trade, how many units of cloth will
this nation produce?

Page 54
190. (Figure: International
International Trade Equilibrium) Before trade, how many units of cloth will
this nation consume?

191. (Figure: International

International Trade Equilibrium) Assume that this country specializes in the
good in which it has comparative advantage.
adv antage. After trade, how many units of wheat will
this nation produce?

Page 55
192. (Figure: International
International Trade Equilibrium) After trade, how many units of wheat will this
nation consume?

193. (Figure: International

International Trade Equilibrium) Assume that the country specializes in the
good in which it has comparative advantage.
adv antage. After trade, how many units of cloth will
this nation produce?

Page 56
194. (Figure: International
International Trade Equilibrium) After trade, how many units of cloth will
will this
nation consume?

195. (Figure: International

International Trade Equilibrium) How many units of wheat will this nation
export or import?

Page 57
196. (Figure: International
International Trade Equilibrium) How many units of cloth will this nation
export or import?

197. Compare the absolute advantages in U.S. and Chinese wheat and textile production to
explain why the United States imports textile
tex tile products from China, even though the
typical U.S. textile worker is 7 to 16 times more productive than the typical
t ypical Chinese
textile worker.

198. Suppose that:

- Malaysia requires 1 hour of labor to produce 1 pound of rice and 2 hours of labor
to produce 1 pencil;
- Indonesia requires 2 hours of labor to produce 1 pound of rice and 3 hours of labor
to produce 1 pencil;
- each country has 10,000 hours of labor to allocate between the production of rice
and pencils; and
- in autarky, Malaysia consumes 5,000 pounds of rice and 2,500 pencils.
- when trade occurs, the international price of rice becomes 3/5 pencils per pound of
rice.

I. In Malaysia, what are the marginal productivities of labor in rice and pencil
 production?
II. In Indonesia, what are the marginal productivities of labor in rice and pencil
 production?
III. What are the autarkic prices of rice and pencils in each country?
IV. In which product will each specialize?
V. What happens to wages in each country when trade occurs?

Page 58
199. Suppose that the following table gives export and import price
price indexes for Zimbabwe
Zimbabwe in
1990, 2000, and 2014. (The base year is 1990, so all values are 100 in that year.)

Year 1990 2000 2014

Export price index 100 110 100
Import price index 100 90 110

I. How did Zimbabwe's terms of trade change between 1990 and 2000? Between 2000
and 2014? Between 1990 and 2014?
II. Do these changes represent deterioration or improvement in Zimbabwe's terms of
trade?
III. What are the implications of a terms-of-trade deterioration for the Zimbabwean
economy?

200. Suppose that China and the United States only trade wheat and textiles with
with each other.
The following graph gives the U.S. supply curve for its exports of wheat to China
Ch ina and
the Chinese demand curve for its imports of wheat from the United States.

I. How many tons of wheat did the United States produce prior to trade with China?
II. How many tons of wheat did China produce prior to trade with the United States?
III. What is the international price of wheat in U.S. – 
 – Chinese
Chinese trade?
IV. What will happen to the international price of wheat and Chinese imports from the
United States if there is a severe drought that reduces the size of the U.S. wheat harvest?
V. What will happen to the international price of wheat and Chinese imports if there is a
severe drought in China that reduces the size of its wheat harvest?

Page 59
201. Suppose that the following table shows autarkic production and consumption
consumption in Country
A and in Country B.

I. What are the autarkic prices of wheat and cloth in each country?
II. Suppose the indifference curves of the two countries are identical. Will trade occur?
III. Suppose the indifference curves of the two countries are NOT identical, with
Country A showing a marked preference for wheat and Country B a marked preference
for cloth. Under these conditions, will trade occur?

202. The authors provide evidence that wages

wages rose at roughly the same rates as labor
 productivity in seven countries between 1973 and 2011. In China, many observers
 believe that wages have been increasing faster than labor productivity in recent years.
If true, what are some implications for Chinese trade patterns?

203. Consider the following

following table.

I. Which country has an absolute advantage in wheat production?

II. Which country has an absolute advantage in cloth production?
III. Which country has a comparative advantage in wheat production?
IV. Which country has a comparative advantage in cloth production?
V. In what range must the international price of wheat fall?
VI. Which country is likely to gain more from trade if the international price of wheat is
7/5 bushel per yard of cloth?

Page 60
Answer Key

1. D
2. B
3. D
4. C
5. D
6. D
7. B
8. B
9. A
10. A
11. B
12. A
13. A
14. D
15. B
16. B
17. A
18. C
19. A
20. C
21. D
22. A
23. C
24. B
25. D
26. C
27. A
28. C
29. A
30. C
31. A
32. C
33. D
34. C
35. A
36. A
37. C
38. B
39. D
40. B
41. A
42. D
43. C
44. C

Page 61
45. A
46. C
47. C
48. A
49. D
50. C
51. A
52. A
53. B
54. B
55. C
56. B
57. B
58. D
59. B
60. C
61. D
62. A
63. B
64. C
65. C
66. A
67. B
68. B
69. C
70. B
71. A
72. B
73. C
74. A
75. A
76. B
77. D
78. A
79. B
80. A
81. A
82. C
83. B
84. D
85. D
86. A
87. B
88. D
89. B
90. C

Page 62
 91. A
92. B
93. A
94. D
95. C
96. B
97. A
98. D
99. D
100. A
101. B
102. B
103. A
104. C
105. A
106. B
107. D
108. D
109. B
110. C
111. B
112. A
113. D
114. D
115. D
116. A
117. B
118. D
119. C
120. C
121. A
122. D
123. B
124. A
125. B
126. A
127. D
128. B
129. B
130. A
131. B
132. D
133. A
134. B
135. B
136. B

Page 63
137. C
138. D
139. C
140. B
141. A
142. B
143. A
144. A
145. A
146. B
147. C
148. A
149. B
150. B
151. C
152. A
153. B
154. C
155. C
156. A
157. A
158. A
159. B
160. C
161. C
162. A
163. C
164. B
165. B
166. A
167. A
168. B
169. A
170. B
171. B
172. C
173. D
174.
175.
176.
177.
178.
179.
180.
181.
182.

Page 64
183.
184.
185.
186.
187.
188.
189.
190.
191.
192.
193.
194.
195.
196.
197.
198.
199.
200.
201.
202.
203.

Page 65
1. Exchange rates
rates affect:
I. international trade flows
II. international investment flows
III. corporate earnings
A) I
B) II and III
C) I and II
D) I, II, and III

2. The price of a foreign

foreign currency expressed in terms
terms of the home currency is called the:
A) exchange rate.
B) rate of depreciation.
C) dollar  – yen
yen ratio.
D) opportunity cost.

3. Normally, exchange rates are expressed as:

A) the number of units of the currency per one ounce of gold.
B) the GDP of one nation as a percentage of the GDP of the other.
C) the price of one unit of foreign currency
currency expressed in terms of the domestic
currency.
D) ratios of the value of one nation's wealth compared with the other.

4. When interpreting the meaning of an exchange rate, the first step is to always:
always:
A) know exactly what the exchange rate signifies in terms of which currency is the
denominator.
B) watch for ways the currency might lose value.
C) learn about recent behavior of the exchange rate.
D) know exactly what the rate is at any moment in time.

5. The notation used in the text for

for the euro – dollar
dollar exchange rate is:
A)  FX  €/$.
B)  FX $/  €.
$/ €
C)  E  €/$.
D)  E $/  €.
$/ €

Page 1
 6. Generally, exchange rates are quoted as a single price of a unit of foreign currency
rather than a ratio because:
A) the ratio of the units of home currency to units of foreign currency is always equal
to one.
B) the denominator is always equal to one.
C) the price is fixed by the government.
D) the rate is adjustable
adjustable in increments of 25 basis points.

7. The equation E $/£
$/£ = 2 means that:
A) 1 dollar buys 2 pounds.
B) 1 dollar buys a pound.
C) 2 pounds buy 1 dollar.
D) 1 dollar buys 1 pound.

8. If the dollar 
 – euro
euro exchange rate on June 30, 2015, is $1.115 per euro, then the
euro – dollar
dollar exchange rate would be:
A)  €2.45 per dollar.
B)  €0.897 per dollar.
C)  €1.225 per dollar.
D)  €1 per dollar.

9. The equation E ¥/£
¥/£ = 100 means that:
A) 1 yen buys 10 pounds.
B) 0.1 yen buys 1 pound.
C) 100 yen buy 1 pound.
D) 0.01 yen buys 1 pound.

10. When we look at exchange rates between two countries, what is the relationship
relationship
 between the exchange rate expressed in units of the domestic currency and the exchange
rate expressed in units of the foreign currency?
currenc y?
A) They are both equal to one.
B) They cancel each other out.
C) One is always the reciprocal of the other.
D) They can never coexist.

Page 2
11. If, in 2011, $1 = 1.5 euros, and in 2016, $1 = 0.9 euros, which of the following
statements would be TRUE?
A) More American
American tourists will find
find it cheaper to travel to Europe.
B) More Europeans will stay home as visits to the United States become more
expensive.
C) Europeans will import fewer products from from the United States.
States.
D) Americans will import fewer products from Europe.

12. A dining table costs $3,000 in New York and the same table
table costs 5,000 euros in Rome.
Thus, $1 is equal to:
A) 1 euro.
B) 2 euros.
C) 1.67 euros.
D) 0.6 euros.

13. (Table: Exchange Rates Across Currencies) If the exchange rate on January 1, 2016, is
$1 = 144 yen, then:

A) the dollar has appreciated 10% against the yen.

yen.
B) the dollar has depreciated 24% against the yen.
C) the yen has depreciated 12% against the dollar.
D) the yen has depreciated 20% against the dollar.

14. (Table: Exchange Rates Across Currencies) Based on the information

information provided, which
of the following statements is TRUE?

A) 1 peso = 10 yen
B) 1 rupee = 10 yen
C) 1 peso = 3 rupees
D) $1 Canadian = 35 rupees

Page 3
15. (Table: Exchange Rates Across Currencies) Based on the information
information provided, one
Canadian dollar is equal to Mexican pesos and Indian rupees.

A) 10; 73.5
B) 10; 37.5
C) 12; 37.5
D) 12; 45

16. If a nation's
nation's currency buys fewer units of a foreign currency today than yesterday, we
say the value of its currency has:
A) appreciated.
B) depreciated.
C) stagnated.
D) become inverted.

17. If today €1 exchanges for ¥135, and tomorrow €1 exchanges for ¥150, we say the euro
has:
A) appreciated.
B) depreciated.
C) stagnated.
D) become inverted.

18. When a nation's currency appreciates, it purchases units of a foreign currency and
its currency is said to .
A) fewer; strengthen
B) more; strengthen
C) fewer; weaken
D) more; weaken

19. If one nation's currency strengthens against a foreign

foreign currency, the other nation's
currency must against the domestic currency.
A) strengthen
B) equalize
C) weaken
D) appreciate

Page 4
20. When the dollar declines in
in value against a foreign
foreign currency, it is called
called a(n):
A) appreciation.
B) depreciation.
C) inflation.
D) deflation.

21. In European terms, when the exchange rate for the U.S. dollar increases:
A) the dollar has appreciated.
B) the dollar has depreciated.
C) the euro has appreciated.
D) the dollar has weakened.

22. Which of the following statements is equivalent to an

an appreciation of the dollar relative
relative
to the euro?
A) The dollar buys fewer euros now.
B) The euro buys fewer dollars now.
C) The dollar costs less.
D) The euro buys more dollars now.

23. When the dollar “cost” of a unit of foreign currency

currenc y falls, the dollar is against the
foreign currency.
A) depreciating
B) appreciating
C) equalizing
D) holding its own

24. If a euro costs

costs $1.25 today, and it costs $1.50 tomorrow, what has happened to the
dollar-euro exchange rate?
A) Both the dollar and euro have depreciated.
B) The dollar has appreciated and the euro has depreciated.
C) The dollar has depreciated and the euro has appreciated.
D) Both the dollar and euro have appreciated.

25. It is customary to express changes in the exchange rates of two currencies over time, as:
A) the loss of purchasing power of one currency divided by the loss of purchasing
 power of the other currency.
B) the percentage
percentage change expressed as an appreciation or depreciation
depreciation of one against
the other.
C) a ratio of the absolute values (without signs).
D) a ratio
ratio of the price of
of gold
gold in each nation.

Page 5
26. In general, the percentage of appreciation of one nation's currency is equal to:
A) its rate of growth of real GDP.
B) its purchasing power.
C) its population growth.
D) the percentage of depreciation of the foreign nation's currency.

27. Slight discrepancies in the rates of appreciation versus

versus depreciation of two currencies
currencies
are related to:
A) a mathematical
mathematical quirk that percentage increases are always larger than percentage
decreases because, in the first case, the denominator is smaller.
B) the imprecise nature of the calculations.
C) the lack of reliable information.
D) the volatile nature of exchange rates.

28. Changes in exchange rates are usually expressed in percentage terms. The percentage
rate of appreciation for one currency
currenc y will be close to the rate of depreciation for the
other nation whenever:
A) the change in the rate is very small.
B) the exchange rates
rates are
are very different in quantitative terms.
C) the change in the rate is very large.
D) one exchange rate is 50% more than the other one at the time of the change.

29. If E $/£
$/£ moves from 2 to 3, this is a percentage change
chan ge of:
A) 50%.
B) 33.3%.
C)  – 33.3%.
33.3%.
D)  – 50%.
50%.

30. If E $/£
$/£ increases by 20%, this is consistent with an increase from:
A) 4 to 5.
B) 4 to 6.
C) 5 to 6.
D) 4 to 7.

Page 6
31. (Table: Currency
Currency Values I) The U.S. dollar appreciated against
against the:

A) British pound and the Indian rupee.

B) euro and the Indian rupee.
C) euro and the Brazilian real.
D) euro and the Indian rupee.

32. (Table: Currency

Currency Values I) The U.S. dollar depreciated against
against the and the
.

A) euro; Brazilian real

B) Indian rupee; Brazilian real
C) British pound; euro
D) euro; Indian rupee

33. (Table: Currency Values I)

I) The U.S. dollar appreciated against the real by:

A) 2.4%.
B) 25%.
C) 75%.
D) 12.4%.

Page 7
34. (Table: Currency Values I)
I) The U.S. dollar depreciated against the euro by:

A) 0.6%.
B) 1%.
C) 33%.
D) 100%.

35. (Table: Currency Values I)

I) The dollar rose against the rupee
rupee by:

A) 111%.
B) 11%.
C) 1%.
D)  – 1%.
1%.

36. (Table: Currency Values I)

I) In 2015, how many euros would it take to buy one pound?

A) 0.75
B) 1.33
C) 1.5
D) 3

Page 8
37. (Table: Currency Values I)
I) Between 2015 and 2016, how did the euro do against the
British pound?

A) It appreciated.
B) It held steady.
C) It depreciated.
D) Not enough information
information is provided to know how well the euro did.

38. (Table: Currency

Currency Values I) If
If you want, ceteris paribus, to invest dollars in 2015 and
then convert them back into dollars in 2016, which is the best currency to invest in?

A) the euro
B) the real
C) the pound
D) the rupee

39. A bilateral exchange rate is an exchange rate:

A) that has two sides: maximal and minimal.
B) that has exhibited both appreciation and depreciation.
C) that is a hybrid between fixed and floating.
D) between two currencies.

40. What is a multilateral

multilateral exchange rate?
rate?
A) It is an exchange rate that is measured by using a number of different techniques.
B) It is an exchange rate that calculates the overall movement of the rate against more
than just one other currency.
C) It is an exchange rate that is measured
measured once every 10 years.
years.
D) It is a rate that is set by the IMF
IMF for many different nations.
nations.

Page 9
41. The average of the bilateral rate changes for a nation, weighted
weighted by the importance of the
trading partner, is known as the:
A) real exchange rate.
B) nominal exchange rate.
C) effective exchange rate.
D) direct exchange rate.

42. To calculate the multilateral effective exchange rate for a nation for each trading
 partner:
A) add the share of trade to the percent change in the exchange rate and add the sums.
B) divide the share of trade by the percent change in the exchange rate and add the
dividends.
C) subtract the share of trade from the percent change in the exchange rate and add the
differences.
D) multiply the share of trade by the change in the exchange rate and add the products.

43. Your textbook refers to a “ basket” of currencies. What is it?

A) a random selection of currencies
B) currencies that are low-valued and unstable
C) currencies that represent
represent the average increase
increase in value for all currencies
currencies
D) currencies most used by the nation in its trade
trade and other transactions,
transactions, weighted by
their importance

44. We use the effective exchange rate calculation

calculation to tell us:
A) the underlying rate of inflation.
B) how international finance affects a nation's exchange rate.
C) how the
the overall international purchasing power of a nation has changed.
D) the natural (real)
(real) exchange
exchange rate
rate taking out the effects of inflation.
inflation.

45. Suppose 80% of U.S. trade is with England and the rest is with Japan. If the dollar rises
rises
 by 10% against the pound and rises by 20% against the yen, what is the percentage
change in the effective exchange
ex change rate of the United States?
A)  – 16%
16%
B)  – 12%
12%
C)  – 8%
8%
D)  – 4%
4%

Page 10
46. Suppose 60% of U.S. trade is with England and the rest is with Japan. If the dollar rises
rises
 by 20% against the pound but falls by 20% against the yen, what is the percentage
change in the effective exchange
ex change rate of the United States?
A)  – 12%
12%
B)  – 4%
4%
C) ±0%
D)  – 8%
8%

47. If the dollar falls by 20% against the euro and rises by 10% against the yen, which of the
following values for European and Japanese trade with the United States are consistent
with a 10% increase in the effective exchange
ex change rate of the United States?
A) Europe: 33%; Japan: 66%
B) Europe: 66%; Japan: 33%
C) Europe: 50%; Japan: 50%
D) None of these values is consistent with this increase.

48. The U.S. dollar's effective exchange rate since 2002 steadily weakened up to 2012,
 before rebounding somewhat. However, it didn't weaken as much against ALL
currencies as it did against the currencies of the major developed countries (which
include the pound and the euro). This could be because:
A) the U.S. government has a strong dollar policy.
B) the large trading partners, China and Japan, did not allow their currencies
currencies to
appreciate greatly against the U.S. dollar.
C) the rate
rate of appreciation is always somewhat greater than the rate of depreciation.
D) the United States does not trade with some nations, so the effective rate is biased.

49. When exchange rates change and prices stay the same:
A) relative prices of traded goods in the two nations are unchanged.
B) the price of foreign
foreign goods expressed in the home currency will always rise.
C) imports get more expensive as the home currency depreciates.
D) the price of foreign
foreign goods expressed in the home currency will always fall.

50. The fall in the U.S.

U.S. dollar has not affected Chinese trade as much as that for
for other
countries because:
A) China has appreciated its currency.
B) China has reduced its exports.
C) China has depreciated its currency.
D) China has pegged its currency to the dollar.

Page 11
51. Using exchange rates, it is possible to price-compare
price-compare in different nations.
nations. If an iPod
costs $90 in the United States and €45 in France, in which nation would you get the
 better deal when the dollar 
 – euro
euro exchange rate is $2/ €
 €?
A) The iPod would be cheaper in France.
B) The iPod would be cheaper in the United States.
C) The iPod would cost the same in both countries.
D) From the the information
information provided, it is impossible to answer this question.

52. Using exchange rates, it is possible to price-compare

price-compare in different nations.
nations. If an iPod
costs $90 in the United States and €45 in France, in which nation would you get the
 better deal when the dollar 
 – euro
euro exchange rate is $2.50/ €
 €?
A) The iPod would be cheaper in France.
B) The iPod would be cheaper in the United States.
C) The iPod would cost the same in both countries.
D) From the the information
information provided, it is impossible to answer this question.

53. A term that categorizes

categorizes patterns of exchange rate behavior is known as:
A) exchange rate regimes.
B) exchange rate realms.
C) exchange rate principles.
D) exchange rate observations.

54. If a government
government wishes to limit or prohibit fluctuations in exchange rates,
rates, it will choose:
A) to fix, or peg, the value of its
its currency to some base currency over a sustained
 period.
B) to allow its currency to rise or fall in price, depending on a variety of supply and
demand factors.
C) to suspend purchases and salessales of its currency.
D) to allow
allow the rate to be set by international banks.

55. A flexible or floating

floating exchange rate system is is one in which the:
A) government closely monitors and controls the value due to trade trade flows.
flows.
B) government makes no attempt to fix fix it against any base currency.
C) government actively tries to achieve fluctuations in the rate.
D) government fixes
fixes the rate against
against the currency of its largest
largest trading partner.

Page 12
56. When exchange rates are limited
limited to small fluctuations,
fluctuations, but not totally fixed, economists
refer to the situation as:
A) essentially fixed.
B) essentially floating.
C) relatively floating.
D) intermediate regimes.

57. Which of the following exchange rate systems is in the right order, from MOST control
to LEAST control?
A) floating, fixed, managed float
B) fixed, floating, managed float
C) managed float, floating, fixed
D) fixed, managed float, floating

58. When exchange rates are very volatile, with a wide range
range of variation, the currency is
said to be:
A) in limbo.
B) in free float.
C) perfectly flexible.
D) in sluggish float.

59. What is a currency

currency band?
A) a limit
limit below which the currency
currency is
is not allowed to fall
B) a limit
limit above which the currency is not allowed to rise
rise
C) a fixed
fixed rate regime with some small
small variations
variations up or down allowed
D) a very rigid control of the currency — no
no variation allowed

60. A middle-ground exchange rate regime, between fixed and floating, is NOT called:
A) a managed float.
B) a dirty float.
C) limited flexibility.
D) a free float.

61. A large and sudden currency depreciation is widely known as:

A) a managed float.
B) a crawling peg.
C) an exchange rate or currency crisis.
D) a free float.

Page 13
62. A sudden and pronounced loss of value of one nation's currency against others is known
as a:
A) currency crisis.
B) forced devaluation.
C) thinning of value.
D) default.

63. An exchange rate

rate crisis is when:
A) the currency is stable.
B) the value of a currency declines dramatically.
C) the value of a currency increases dramatically.
D) a country fixes the price of its currency.

64. A crawling
crawling peg refers to:
to:
A) a large and sudden currency depreciation.
B) a fixed exchange rate regime in which the currency is adjusted very frequently to
reflect market conditions.
C) a managed or dirty
dirty float, depending on the
the business cycle.
D) a drag on exchange rate adjustment caused by imperfect markets.

65. Which nation took the bold step of abandoning its own currency and adopting the U.S.
dollar?
A) China
B) India
C) Mexico
D) Ecuador

66. Which European nation has kept its own currency and maintains a fixed
fixed value against
the euro?
A) the United Kingdom
B) Belgium
C) Denmark
D) Russia

67. Since the mid-1990s, the Argentine peso has NOT experienced:
A) a one-to-one peg with the U.S. dollar.
B) a large devaluation and crisis.
C) limited flexibility,
flexibility, after which it was kept in a narrow band with the dollar.
D) a currency union.

Page 14
68. A nation that allowed its currency to steadily depreciate (crawl) over a six-year
six-year period
is:
A) France.
B) Canada.
C) the United Kingdom.
D) Colombia.

69. Some nations such as Ecuador chose

chose dollarization because:
A) the currency was depreciating so
so rapidly it became nearly worthless.
B) Ecuadorians wanted
wanted to save dollars for eventual emigration
emigration to the
the United States.
C) the Ecuadorian currency was
was backed by gold, which was confiscated by
government officials.
D) All of these are reasons why such countries chose dollarization.

70. In 2010, Ilzetzki,

Ilzetzki, Reinhart, and Rogoff classified 182 economies, comparing the:
A) value of their currencies.
B) percentage of women in the workforce.
C) effectiveness of governance and institutions.
D) flexibility of their exchange rate regimes.

71. Across the globe,

globe, exchange rate regimes are:
A) mostly fixed.
B) a mix of fixed and floating.
C) mostly floating.
D) hard to pinpoint.

72. A currency board is set up to:

A) manage free-floating currencies.
B) gradually eliminate currency pegs.
C) give a peg added durability.
D) immediately eliminate currency pegs.

73. Some nations use a currency board to manage their currencies. How does this work?
A) It is all in the hands of international banks.
B) The International Monetary Fund manages the currency.
C) There is a fixed rate regime with a set of strict rules and policy guidelines to keep
the currency's value stable.
D) The currency is allowed to float, but its fluctuations are reviewed periodically by a
 board of economists.

Page 15
74. Eurozone countries:
A) have no separate legal tender.
B) are pegged to the euro.
C) are pegged to the dollar.
D) are fixed against a single currency.

75. If a nation abandons its own currency and decides to use

use another nation's currency as its
own circulating currency, this is known as:
A) euro-zoning.
B) dollarization.
C) a managed float.
D) a Western regime.

76. Dollarization refers to:

A) increased trade with the United
United States, resulting in a glut of dollars circulating in
the domestic economy.
B) the fall of the U.S. dollar.
C) the dominance of the U.S. dollar in international finance.
D) the adoption of any foreign currency
currency as an official currency by nations outside the
United States, such as El Salvador and Ecuador.

77. The foreign

foreign exchange market refers
refers to:
A) a physical place in the heart of New York City's financial district, where
where traders
come to trade other currencies.
B) a collection of all purchases and sales of one currency for another, where exchange
rates are determined.
C) the discount window of the Federal Reserve.
D) the commodity futures market.

78. From 1992 to 2013, the volume of currency traded worldwide:

A) slumped due to the world recession.
B) has steadily increased.
C) fluctuated wildly due to investor expectations.
D) was concentrated in trades in the developing world.

Page 16
79. Which of the following correctly ranks the size of the three largest foreign
foreign currency
trading centers in dollar volume?
A) 1. Paris; 2. Miami; 3. London
B) 1. New York; 2. Rome; 3. Chicago
C) 1. London; 2. New York; 3. Singapore
D) 1. Tokyo; 2. Los Angeles; 3. Paris

80. Which of the following is NOT a major foreign

foreign exchange center?
A) London
B) New York
C) Tokyo
D) Chicago

81. Foreign exchange is traded:

A) weekly on the Internet
Internet in special auctions arranged by the Federal Reserve.
B) continuously all over the world 24 hours a day and seven days a week.
C) only in officially
officially designated trading centers such as London
London or New York.
D) It is traded in none of these ways
ways or venues.

82. The spot market for foreign exchange:

A) is a market that exists only in one place at one time.
B) is when a person borrows to to speculate
speculate in the market.
C) are purchases and sales
sales of currencies
currencies for immediate delivery.
D) is the rate
rate of exchange quoted during the next business day.

83. A spot contract is a(n):

A) promise to purchase a foreign currency in 30 days.
B) promise to purchase a foreign currency in 90 days.
C) contract for the immediate exchange of currencies.
D) agreement to sell currencies at a fixed price indefinitely.

84. The overall volume of daily currency trade was in 2013.

A) $3.2 billion
B) $32 billion
C) $320 trillion
D) $5.3 trillion

Page 17
85. What percent of currency transactions involve a trade in
in the spot market?
A) 30%
B) 40%
C) 60%
D) 80%

86. A transaction cost associated

associated with spot trading
trading is:
A) travel to and from the market.
B) shipping costs.
C) brokerage commissions.
D) the spread, which isis earned mostly by large
large banks.

87. Spreads in quotations of exchange rates are:

are:
A) the geographical dispersion of nations that use the currency.
B) a measure of contagion involved in changes in exchange rates.
C) the difference
difference in the price the buyer pays versus the price the seller receives.
D) the percentage of interest one pays when borrowing
borrowing to purchase currencies.

88. Market spreads usually range from on large contracts to on small

contracts.
A) 3%; 0.5%
B) 10%; 2%
C) 1%; 2%
D) 0.01%; 5%

89. The difference between the buy at and the sell at price is
is caused by:
A) market friction.
B) transaction cost.
C) menu cost.
D) market friction and transaction cost.

90. A derivative
derivative is a:
A) contract derived from a spot market rate.
B) fixed exchange rate.
C) flexible exchange rate.
D) contract between firms for foreign currency.

Page 18
91. Forwards, swaps, futures, and options are examples of:
A) spot market transactions.
B) transaction costs.
C) market frictions.
D) derivatives.

92. The difference between the spot contract and a forward contract is that: that:
A) the former is a flexible price on the currency, and the latter is a fixed price.
B) the former is a contract to be settled immediately,
immediately, and the latter is a contract to be
settled at a future agreed-upon date.
C) the former is a derivative,
derivative, and the latter
latter is not a derivative.
D) the former has a fixed
fixed price but the contract can be settled
settled at a later date, and the
latter is a contract to be settled immediately.

93. In which of the

the following categories would an agreement to trade
trade currencies in pre-set
amounts at a certain date in the future be included?
A) an option
B) a futures contract
C) a forward contract
D) a swap

94. The forward contract differs from a futures contract in that:

A) the forward contract is to be settled immediately.
B) the futures
futures contract specifies
specifies a fixed
fixed amount and arranged
arranged date, whereas the
forward contract can be for any amount or date.
C) the futures
futures contract cannot be traded in a market, whereas the forward
forward contract can
 be bought in the market.
D) forward contracts areare standardized,
standardized, whereas futures contracts are not standardized.

95. Foreign exchange contracts, such as futures, swaps, and options, are collectively known
as:
A) derivatives.
B) deposits.
C) spot contracts.
D) spreads.

Page 19
 96. The forward
forward market is:
A) a market
market that
that exists only in one place at one time.
B) when a person borrows to speculate in the market.
C) the purchases and sales of currencies for delivery at a later time
time — up
up to a year.
D) the rate of exchange quoted during the next business day.

97. In which of the

the following categories would an agreement to buy or sell a certain
quantity of a specified currency at a fixed price at a date 30, 60, 90, 120, or 360 days
da ys in
the future be included?
A) an option
B) a futures contract
C) a forward contract
D) a swap

98. Foreign exchange swaps involve:

A) selling one currency on the spot market and at the same time purchasing it forward.
B) trading goods rather than money to improve efficiency.
C) delaying payment of a spot
spot contract until the currency is actually
actually delivered.
delivered.
D) a promissory note with repayment in 60 days.

99. A foreign
foreign exchange option is:
A) the right
right to engage in buying or selling on the spot market.
B) the right
right to purchase or sell foreign currency
currency at a specified price on a specified date
in the future.
C) when the price of foreign currency exceeds the spot rate.
rate.
D) when a speculator must decide whether to move into the market.market.

100. In international finance, hedging indicates:

A) not being able to make a commitment to buy or sell.
B) delaying a purchase of foreign exchange, hoping the price
price will fall.
C) simultaneously buying several currencies to ensure that at least
least one will rise
rise in
value.
D) avoiding risk of loss by offsetting an obligation to buy a foreign
foreign currency by
locking in a contract to sell it at the same time.

Page 20
101. When exchange rates are , agreeing to wait for one week from today to engage in
an international transaction carries .
A) flexible rather than fixed; less risk
B) flexible rather than fixed; the same amount of risk
C) flexible rather than fixed; more risk
D) fixed rather than flexible; the same amount of risk

102. In international finance, speculation involves:

A) not being able to make a commitment to buy or sell.
B) taking a risk by purchasing (or selling) a foreign currency asset,
asset, holding it in
anticipation of a rate increase (decrease).
C) simultaneously buying several currencies to ensure that at least
least one will rise
rise in
value.
D) avoiding risk of loss by offsetting an obligation to buy a foreign
foreign currency by
locking in a contract to sell it at the same time.

103. In which of the

the following categories would the sale of foreign currency with a forward
repurchase agreement be included?
A) an option
B) a futures contract
C) a forward contract
D) a swap

104. An agreement that gives one party the right to buy from or sell to another party a
specified quantity of currency at a specified price would be included in which of the
following transactions?
A) an option
B) a futures contract
C) a forward contract
D) a swap

105. Interbank trading is:

A) a monopoly business in the United States.
B) controlled by just 10 banks.
C) a state-mandated business.
D) a highly
highly competitive market, with hundreds of banks offering
offering services.
services.

Page 21
106. Why does a government impose controls or restrictions on converting
converting domestic
currency to foreign currency (capital controls)?
A) The government
government is trying to stop the rapid decline in value of the domestic
currency.
B) The government wants to speculate on its own currency.
C) The government is trying to suppress international trade.
D) The government is trying to to avoid imposing taxes on citizens.

107. When a government sets limits

limits or puts any restrictions on the international
international flow of
currency or payments, these measures are called:
A) forex regulation and restriction.
B) capital controls.
C) safeguard measures.
D) black-market measures.

108. Why may a “ black market” develop in nations in which government has imposed capital
controls?
A) All foreign currency purchases and sales are conducted and controlled by the
government, and it is illegal to trade privately.
B) Traders are trying to avoid the taxes they must pay on each transaction.
C) The government makes a huge profit on currency trades that the private sector
wants access to.
D) None of these explains why a “ black market” may develop in these nations.

109. To bypass capital controls, people who need foreign currency sometimes resort to:
A) forward foreign exchange markets.
B) stock markets.
C) black markets.
D) farmers' markets.

110. Foreign exchange market

market intervention refers to:
A) actions taken by speculators to to increase
increase profits from trading.
B) actions taken to lower currency trading risksrisks and
and make the markets
markets safer.
safer.
C) the forgiving of penalties and other punishments for illegal foreign exchange
activities.
D) government purchases or sales of a nation's own currency in international markets
to change or stabilize the value of
o f the currency.

Page 22
111. To avoid the imposition of capital controls, a government
government wishing to keep its exchange
rate at a certain level, may rely
rel y on:
A) forbidding all sales or purchases of foreign currency.
B) asking the large
large banks to keep the prices
prices at a certain
certain level.
C) asking for loans from the International
International Monetary Fund
Fund (IMF).
D) intervention in in the foreign exchange market to raise or lower the exchange rate.
rate.

112. To maintain a fixed exchange rate via intervention in the markets, a government should:
A) be ready to crack
crack down on illegal traders.
B) be ready to buy the home currency with foreign currency reserves when the home
currency's value declines.
C) be ready
ready to sell the home currency when
when the home currency's
currency's value declines.
D) be ready to borrow funds from international banks
banks when the home currency's value
declines.

113. Foreign exchange arbitrage refers to:

A) the simultaneous
simultaneous purchase and sale of a foreign currency asset
asset in different markets
to take advantage of a price
p rice differential.
B) actions taken to lower currency trading risks risks and
and make the markets
markets safer.
safer.
C) the forgiving of penalties and other punishments for illegal foreign exchange
activities.
D) government purchases or sales of a nation's own currency in international markets
to change or stabilize the value ofo f the currency.

114. Capital control is described

described by all of the following, EXCEPT:
A) restricting merchandise trade.
B) restricting the trade in foreign exchange.
C) channeling the currency trade through the government.
D) restricting cross-border financial transactions.

115.  Parallel markets is another term for:

A) government interventions.
B) interbank trades.
C) black markets.
D) trade in goods and in services.

Page 23
116. Arbitrage is:
A) capital controls.
B) interest rate management by the central bank.
C) exploiting profit
profit opportunities in the market resulting from price differences.
differences.
D) investing in junk bonds or businesses that are not ethical.

117. Whenever there is a difference

difference in the same exchange rate
rate offered in two markets,
markets, an
arbitrageur would:
A) wait for the markets to come to equilibrium.
B) buy in the market where the currency is offered at the cheaper rate, and
simultaneously sell the currency where the rates are higher.
C) sell the cheaper-rate currency in the home market.
D) not consider the trade, since prices
prices would undoubtedly change before it could be
executed.

118. Suppose $1 = 10.5 pesos in New York

York and $1 = 9.6 pesos in Mexico City.
City. If you had
$10,000 using arbitrage, your profits would be:
A) $937.50.
B) 937 pesos.
C) 9,600 pesos.
D) $790.

119. If the U.S. interest rate is 4% per year

year and the U.K. interest rate is 9% per year, then:
A) an investor will seesee no reason to invest in the United Kingdom.
B) an investor will borrow
borrow money in the United Kingdom
Kingdom and invest it in the United
States.
C) an investor can borrow money in the United States and invest it it in the United
Kingdom and profit.
D) an investor will find
find that the returns
returns are the same in both countries.

120. Arbitrage with

with two currencies is NOT possible
possible when:
A) there is an exchange rate difference in two markets.
B) traders are familiar with markets.
C) the exchange rates are in equilibrium, and the same is occurring in all markets.
D) the exchange rates are extremely volatile.

Page 24
121. Suppose $1 = 1.5 euros in London
London and $1 = 1.2 euros in New York.
York. Which of the
following would be the right trade for you to make money?
A) You sell
sell 1,000 euros in London and buy euros inin New York.
B) You sell dollars in NewNew York and buy dollars in London.
London.
C) You sell
sell dollars
dollars in
in London and buy dollars in New York.
York.
D) You sell
sell euros
euros in London and buy dollars in New York.

122. Suppose $1 = 120 yen in New York,

York, $1 = 2 euros in London, and one euro = 75 yen
yen in
Tokyo. A speculator with $1 million would get a profit of by engaging in a
3-point arbitrage.
A) $1.20
B) 150,000 yen
C) $250,000
D) $1.25 million

123. When it is possible to trade two separate

separate currencies for a common third currency,
economists refer to profit opportunities
oppo rtunities as:
A) backward arbitrage.
B) speculation.
C) triangular arbitrage.
D) forced equilibrium.

124. Approximately how many different

different national currencies exist in the world today?
today?
A) more than 100
B) more than 5,000
C) 12
D) 535

125. If 1 euro
euro is priced at $1.25 and if 1 euro will also buy 88 Japanese yen  €1
 (€1 = ¥88), in
equilibrium, with no arbitrage opportunities, how much is the cross rate bet ween the yen
and the dollar (yen – dollar
dollar rate)?
A) ¥150/$
B) ¥70.4/$
C) ¥20/$
D) ¥5/$

Page 25
126. A vehicle
vehicle currency
currency is:
A) contraband — it it is used to smuggle other assets into controlled economies.
B) a widely accepted, tradable currency that serves as a currency to use for buying or
selling one's own.
C) a currency whose value changes rapidly and erratically.
D) a currency used to purchase imports of autos, buses, and other transportation
transportation
equipment.

127. Suppose the average interest rate on euro bonds is 4%, and the average interest rate on
U.S. dollar bonds is 6%. Which should
shou ld the investor choose?
A) neither   —  bonds have high default rates
B) both — an an investor will choose some euro bonds
bo nds and some U.S. bonds to diversify
C) the euro bond because their economies are usually more stable
stable
D) It is not possible to answer without
without information
information on exchange rates.

128. The forward

forward exchange rate:
A) allows investors
investors to be sure of the price at which they can
can trade forex
forex in the future.
B) is the rate at which a trader can purchase currency for immediate
immediate delivery.
delivery.
C) is the rate
rate of discount that international banks get
get when they purchase.
D) is the rate that
that speculators consider if they are looking for bargain prices.

129. If investors
investors can cover themselves in the forward
forward market, they will
will take advantage of
interest rate differentials by:
A) buying assets (lending) denominated in the high-interest rate currency, and selling
assets (borrowing) in the low-interest rate currency.
B) removing funds from both investments.
C) turning over their investment portfolio
portfolio to an expert in one of the two nations.
nations.
D) selling assets denominated in high-interest rate currency and buying assets in the
low-interest rate currency.

130. There can be an opportunity for covered interest arbitrage if:

A) the interest rate is low and the exchange
exchange rate is high.
B) the forward/spot
forward/spot rate difference is either larger or smaller in percentage terms than
the difference in the interest rates on two currencies.
C) there is a time
time lag on the settlement of the transactions.
transactions.
D) the interest rate is high and the exchange rate is low.
low.

Page 26
131. Covered interest parity refers to the situation
situation in which:
A) interest rates are the same in both currencies.
B) spot and forward
forward rates are the same in both currencies.
currencies.
C) the forward rate between the the two currencies is equal to the ratio of their returns
returns
times the spot rate between the two currencies.
D) there is
is an opportunity for
for arbitrage
arbitrage whenever prices are sluggish
sluggish and sticky.

132. If the future rate equals the spot rate,

rate, then in equilibrium:
A) the exchange rate must depreciate.
B) interest rates should be different.
C) the exchange rate will appreciate.
D) None of these will occur.

133. Whenever nations remove

remove capital controls on their currencies:
currencies:
A) returns are equalized and arbitrage opportunities disappear.
B) there is
is no opportunity for
for trade or arbitrage,
arbitrage, and differences
differences in returns disappear.
disappear.
C) the government
government sets the returns on its currency, soso traders cannot make profits.
D) in those nations, because government has ensured its safety, capital is free to move.

134. Uncovered interest parity refers to:

A) borrowing in thethe low-interest
low-interest currency and lending in the high-interest
high-interest currency
without covering against a change in the exchange rates.
B) foolish actions that usually are not successful.
C) activities that are designed to raise or lower interest rates but are risky.
D) the practice
practice of depositing all of one's funds in one currency without regarding the
 pros and cons of such a transaction.

135. Liquidity of an asset

asset refers to:
A) its level of risk.
B) whether it is held domestically or overseas.
C) the ease with which it can be sold.
D) its volatility.

136. The situation in which the difference in interest rates between two currencies is equal to
the expected change in the spot rate over the same period is known as:
A) covered interest arbitrage.
B) covered interest parity.
C) uncovered interest parity.
D) the forward-spot reversal.

Page 27
137. As the expected future spot
spot rate moves closer to the spot rate, uncovered interest parity
indicates that:
A) interest rates should remain constant.
B) interest rates should converge.
C) interest rates should diverge.
D) The answer depends on whether the expected future spot rate is higher or lower
than the spot rate.

138. In equilibrium, the expected future spot rate is equal to the:

A) current spot rate.
B) current interest rate.
C) interest rate spread.
D) current forward rate.

139. If the U.S. interest rate is 4% per year

year and the U.K. interest rate is 9% per year, which of
the following statements is TRUE?
A) The dollar will depreciate 4% in one year. year.
B) The pound will depreciate 9% in one year. year.
C) The pound will depreciate 5% in one year. year.
D) The dollar will appreciate 4% in one year.year.

140. In equilibrium, if both uncovered and covered interest parity hold, what condition
should exist?
A) World interest rates will be equal.
B) Rates of inflation will equalize.
C) The forward rate will equal the expected future
future spot rate.
rate.
D) The forward
forward rate will
will decrease as the spot
spot rate rises.

141. Whenever a nation's currency isis expected to depreciate because of various market
conditions, the following situation ex ists regarding its forward rate for another currency:
currenc y:
A) there is
is a forward discount
discount from the spot rate by the rate of depreciation.
B) there is
is a forward premium from the spot rate by the rate of depreciation.
C) there is no difference between thethe spot
spot and forward
forward rates.
rates.
D) there is no predictable relationship between
between the spot and forward rates.

Page 28
142. The expected rate of currency depreciation is
is equal to the proportional difference
 between the forward rate and the spot rate. This is known as the:
A) forward depreciation.
B) backward depreciation.
C) forward premium.
D) backward premium.

143. The total rate of return

return on an international asset
asset is the:
A) spot rate plus the forward rate.
B) rate of return on the asset plus or minus the expected capital
capital gain or loss on
currency changes.
C) rate of return on the asset minus commissions.
D) rate of return plus inflation minus taxes.

144. In equilibrium, the interest parity condition requires that:

A) all rates of returns will equalize.
B) all spot and forward rates will equalize.
C) the home interest rate minus its expected rate of currency
currency depreciation (against the
foreign country) will equal the foreign interest rate on similar assets.
D) all rates of returns and forward
forward rates will equalize.

145. From uncovered interest parity,

parity, we know that when the domestic currency is expected to
depreciate, the domestic interest rate should be:
A) greater than the foreign interest rate.
B) greater than the foreign exchange rate.
C) less than the foreign interest rate.
D) less than the foreign exchange rate.

146. From uncovered interest parity,

parity, we know that when the domestic interest
interest rate is greater
greater
than the foreign one:
A) the domestic currency is expected to appreciate.
B) the domestic currency is expected to depreciate.
C) the foreign currency is expected to appreciate.
D) the foreign currency is expected to depreciate.

147. Explain in your own words the effective exchange rate and why policy makers pay more
attention to it than the bilateral exchange rate.

Page 29
148. Suppose a country trades with three countries: Brazil (20% of trade), China (45%), and
France (35%). Over the last year, the currenc y of this country has depreciated by 4%
against the Brazilian real, appreciated by 3% against the Chinese yuan, and depreciated
 by 7% against the euro. What has happened to the effective exchange rate of the
country?

149. If a pair of shoes in the United States costs $45, and a pair of the exact same shoes is
sold in Mexico for 430 pesos while the exchange rate is E = $0.1100/pesos, what
arbitrage opportunities exist (if any)? Ignoring transactions costs, explain how you
would take advantage of this.

150. You have studied how nations have adopted a wide variety
variety of exchange rate regimes
from freely floating with almost no intervention to rigid and fixed with co mplete control
 by the government. Other nations have chosen different paths, relinquishing some or all
control over their currencies. Discuss two such systems and comment on their
differences.

151. What are the similarities

similarities and differences
differences between a currency union and dollarization?
dollarization?

152. Assume your company has a contract to purchase 100,000 computers from a Korean
company. The payment is due on receipt of the shipment and must be delivered in Korea
on December 31, 2015. In July 2015, when you are arranging the contract, the
computers are priced at 500,000 won each. The spot rate in July 2015 is $1 in exchange
for 1,250 won.
I. Calculate the U.S. dollar price (in July
J uly 2015) of one unit of
o f Korean currency.
II. What is the total price of the computers in dollars?
III. What is the total price of the computers in won?
IV. What would you advise your firm to do to avoid a loss on the deal if the Korean won
costs 10% more compared with the U.S. dollar when payment is due in December?
Dec ember?

153. Explain two of the four main types of derivatives used in the foreign
foreign exchange market,
and why they are used.

154. In July 2015, the spot rate is $1 exchanging for 1,250 won. You are convinced that the
won will appreciate by the end of the year. How might you profit if your hunch is
correct?

155. What role(s) might

might the government play in the foreign exchange markets? Explain.

Page 30
156. Is it
it possible to engage in arbitrage
arbitrage under the following scenario?
scenario? The exchange rate in
 New York is E = $1.25/euro, and it is E = $1.35/euro in London. Explain how you
would do it.

157. Explain how a trader can exploit an arbitrage opportunity using the spot market and the
forward market, after discovering a difference in interest rate returns on two currencies.

158. Explain the difference

difference between risky
risky and riskless arbitrage.

159. Suppose the U.S. dollar interest rate

rate is 5% and the euro interest
interest rate is 6%. Assume no
transaction costs, fees, or commissions. In all markets, the spot rate for euros is $1.25.
You believe in one year's time the spot rate for euros will be $1.30. An investor would
like to invest $100,000 for one year and is willing to take on risk for a higher
hi gher return.

I. How would you advise him?h im?

II. What if you are incorrect and the euro rate is lower?
lo wer? Calculate the “ break-even”
exchange rate; that is, an investment that returns the same as investing $100,000 at 5%.

160. Suppose the U.S. dollar interest rate is 3%, while

while the interest rate
rate in the United
Kingdom is 6%. Your friend thinks he can convert his dollars, invest in the United
Kingdom and convert his pounds back into dollars at the end of a year, allowing him to
make a lot higher return. Assuming uncovered interest
inte rest parity (UIP), explain why he is
incorrect.

161. Suppose interest rates in the United States are 5.5%, while they are 3% in the euro area.
Currently the dollar 
 – euro
euro exchange rate is at $2.50 per euro. If UIP holds, what do you
expect the exchange rate to be in the future? Round to three decimals.

Page 31
Answer Key

1. D
2. A
3. C
4. A
5. C
6. B
7. B
8. B
9. C
10. C
11. D
12. C
13. D
14. A
15. B
16. B
17. A
18. B
19. C
20. B
21. A
22. B
23. B
24. C
25. B
26. D
27. A
28. A
29. A
30. C
31. A
32. A
33. B
34. C
35. B
36. A
37. A
38. A
39. D
40. B
41. C
42. D
43. D
44. C

Page 32
45. B
46. B
47. D
48. B
49. C
50. D
51. C
52. B
53. A
54. A
55. B
56. D
57. D
58. B
59. C
60. D
61. C
62. A
63. B
64. B
65. D
66. C
67. D
68. D
69. A
70. D
71. B
72. C
73. C
74. A
75. B
76. D
77. B
78. B
79. C
80. D
81. B
82. C
83. C
84. D
85. D
86. D
87. C
88. D
89. D
90. A

Page 33
 91. D
92. B
93. B
94. B
95. A
96. C
97. C
98. A
99. B
100. D
101. C
102. B
103. D
104. A
105. B
106. D
107. B
108. A
109. C
110. D
111. D
112. B
113. A
114. A
115. C
116. C
117. B
118. A
119. C
120. C
121. C
122. C
123. C
124. A
125. B
126. B
127. D
128. A
129. A
130. B
131. C
132. D
133. B
134. A
135. C
136. C

Page 34
137. B
138. D
139. C
140. C
141. B
142. C
143. B
144. C
145. A
146. B
147.
148.
149.
150.
151.
152.
153.
154.
155.
156.
157.
158.
159.
160.
161.

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