dInternational Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 1 Introduction

1.1 What Is International Economics About?

1) Historians of economic thought often describe ________ written by ________ and
published in ________ as the first real exposition of an economic model.
A) "Of the Balance of Trade," David Hume, 1776
B) "Wealth of Nations," David Hume, 1758
C) "Wealth of Nations," Adam Smith, 1758
D) "Wealth of Nations," Adam Smith, 1776
E) "Of the Balance of Trade," David Hume, 1758
Answer: E
Page Ref: 1
Difficulty: Easy

2) From 1960 to 2012

A) the U.S. economy roughly tripled in size.
B) U.S. imports roughly tripled in size.
C) the share of US Trade in the global economy roughly tripled in size.
D) U.S. Imports roughly tripled as compared to U.S. exports.
E) U.S. exports roughly tripled in size.
Answer: C
Page Ref: 1
Difficulty: Easy

3) The United States is less dependent on trade than most other countries because
A) the United States is a relatively large country with diverse(tương đối) resources.
B) the United States is a "Superpower."
C) the military power of the United States makes it less dependent on anything.
D) the United States invests in many other countries.
E) many countries invest in the United States.
Answer: A
Page Ref: 2
Difficulty: Easy

4) Theories of international economics from the 18th and 19th Centuries are
A) not relevant to current policy analysis.
B) only of moderate relevance in today's modern international economy.
C) highly relevant(phù hợp) in today's modern international economy.
D) the only theories that actually relevant to modern international economy.
E) not well understood by modern mathematically oriented theorists.
Answer: C
Page Ref: 2
Difficulty: Easy

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5) An important insight of international trade theory is that when two countries engage in
voluntary trade
A) one country always benefits at the expense of the other.
B) it is almost always beneficial to both countries.
C) it only benefits the low wage country.
D) it only benefits the high wage country.
E) it is almost never beneficial to both countries.
Answer: B
Page Ref: 4
Difficulty: Easy

6) If there are large disparities( chênh lệch lớn) in wage levels between countries, then
A) trade is likely to be harmful to both countries.
B) trade is likely to be harmful to the country with the high wages.
C) trade is likely to be harmful to the country with the low wages.
D) trade is likely to be harmful to neither country.
E) trade is likely to have no effect on either country.
Answer: D
Page Ref: 4
Difficulty: Easy

7) The benefits of international trade are derived from trade in

A) tangible goods only.
B) intangible goods only.
C) goods but not services.
D) services but not goods.
E) anything of value.
Answer: E
Page Ref: 4
Difficulty: Easy

8) Which of the following does NOT belong?

A) NAFTA
B) Uruguay Round
C) World Trade Organization
D) non-tariff barriers
E) major free trade agreements of the 1990s
Answer: D
Page Ref: 5-6
Difficulty: Easy

9) International economics ________ use the same fundamental methods of analysis as other
branches of economics, because ________.
A) does not, the level of complexity of international issues is unique
B) does not, the interactions associated with international economic relations is highly
mathematical
C) does not, international economics takes a different perspective on economic issues
D) does not, international economic policy requires cooperation with other countries
E) does, the motives and behavior of individuals are the same in international
trade as they are in domestic transactions

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Answer: E
Page Ref: 3
Difficulty: Easy

10) Because the Constitution forbids restraints on interstate trade (cấm các hạn chế về thương
mại giữa các tiểu bang)
A) the U.S. may not impose tariffs on imports from NAFTA countries.
B) the U.S. may not affect the international value of the $ U.S.
C) the U.S. may not put restraints on foreign investments in California if it involves a
financial intermediary in New York State.
D) the U.S. may not impose export duties.
E) the U.S. may not disrupt commerce
không làm gián đoạn thương mại between Florida and Hawaii.
Answer: E
Page Ref: 3
Difficulty: Easy

11) Which of the following is NOT a major concern of international economic theory?
A) protectionism
B) the balance of payments
C) exchange rate determination
D) bilateral trade relations with China
quan hệ thương mại song phương với Trung Quốc
E) the international capital market
Answer: D
Page Ref: 3
Difficulty: Easy

12) "Trade is generally harmful if there are large disparities(chenh lech lớn) between
countries in wages."
chênh lệch lớn giữa các quốc gia về tiền lương
A) This is generally true.
B) This is generally false.
C) Trade theory has nothing to say about this issue.
D) This is true if the trade partner ignores child labor laws.
E) This is true if the trade partner uses prison labor.
Answer: B
Page Ref: 4
Difficulty: Easy

13) Who sells what to whom

A) has been a major preoccupation of international economics. đã là một mối bận tâm lớn của
kinh tế quốc tế.
B) is not a valid concern of international economics.
C) is not considered important for government foreign trade policy since such decisions are
made in the private competitive market.
D) is determined by political rather than economic factors.
E) is less important than international economic theory.
Answer: A
Page Ref: 5

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Difficulty: Easy

14) The insight that patterns of trade are primarily determined by international differences in
labor productivity was first proposed by
A) Adam Smith.
B) David Hume.
C) David Ricardo.
D) Eli Heckscher.
E) Lerner and Samuelson.
Answer: A
Page Ref: 5
Difficulty: Easy

15) After World War II, the United States has pursued a broad policy of Các tiểu bang đã
theo đuổi một chính sách rộng lớn
A) strengthening "Fortress America" protectionism.
B) removing barriers to international trade.
C) isolating Iran and other members of the "axis of evil."
D) protecting the U.S. from the economic impact of oil producers.
E) restricting trade of manufactured goods.
Answer: B
Page Ref: 5
Difficulty: Easy

16) The balance of payments has become a central issue for the United States because
A) when the balance of payments is not balanced, society is unbalanced.
B) the U.S. economy cannot grow when the balance of payments is in deficit.
C) the U.S. has run huge trade deficits in every year since 1982. Hoa Kỳ đã thâm hụt thương
mại rất lớn mỗi năm kể từ năm 1982.
D) the U.S. never experienced a surplus in its balance of payments.
E) the U.S. once ran a large trade surplus of about $40 billion.
Answer: C
Page Ref: 6
Difficulty: Easy

17) The euro, a common currency for most of the nations of Western Europe, was introduced
A) before 1900.
B) before 1990.
C) before 2000.
D) in order to snub the pride of the U.S.
E) in order to fix currencies in terms of the U.S dollar.
Answer: C
Page Ref: 6
Difficulty: Easy

18) During the first three years of its existence, the euro
A) depreciated against the $U.S. mất giá so với $ U.S.
B) maintained a strict parity with the $U.S.
C) strengthened against the $U.S.
D) proved to be an impossible dream.

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E) exported exclusively to the U.S.
Answer: A
Page Ref: 6
Difficulty: Easy

19) The study of exchange rate determination is a relatively new part of international
economics, since
A) for much of the past century, exchange rates were fixed by government action.
B) the calculations required for this were not possible before modern computers became
available.
C) economic theory developed by David Hume demonstrated that real exchange rates remain
fixed over time.
D) dynamic overshooting asset pricing models are a recent theoretical development.
E) the exchange rate never fluctuates.
Answer: A
Page Ref: 7
Difficulty: Easy

20) A fundamental problem in international economics is how to produce

A) a perfect degree of monetary harmony.
B) an acceptable degree of harmony among the international trade
policies of different countries.
C) a world government that can harmonize trade and monetary policies
D) a counter-cyclical monetary policy so that all countries will not be adversely affected by a
financial crisis in one country.
E) a worldwide form of currency.
Answer: B
Page Ref: 7
Difficulty: Easy

21) For almost 70 years international trade policies have been governed
A) by the World Trade Organization.
B) by the International Monetary Fund.
C) by the World.
D) by an international treaty known as the General Agreement on Tariffs and Trade (GATT).
bởi một hiệp ước quốc tế được gọi là Hiệp định chung về Thuế quan và Thương mại (GATT).
E) by the North American Free Trade Agreement (NAFTA).
Answer: D
Page Ref: 7
Difficulty: Easy

22) The international capital market is

A) the place where you can rent earth moving equipment anywhere in the world.
B) a set of arrangements by which individuals and firms exchange money now for promises
to pay in the future.
C) the arrangement where banks build up their capital by borrowing from the Central Bank.
D) the place where emerging economies accept capital invested by banks.
E) exclusively concerned with the debt crisis that ended in the 1990s.
Answer: B
Page Ref: 8

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Difficulty: Easy

23) International capital markets experience a kind of risk not faced in domestic capital
markets, namely
A) "economic meltdown" risk.
B) Flood and hurricane crisis risk.
C) the risk of unexpected downgrading of assets by Standard and Poor.
D) the risk of exchange rate fluctuations.
E) the risk of political upheaval.
Answer: D
Page Ref: 6-7
Difficulty: Easy

24) Since 1994, trade rules have been enforced by

A) the WTO.
B) the G10.
C) the GATT.
D) The U.S. Congress.
E) the European Union.
Answer: A
Page Ref: 5-6
Difficulty: Easy

25) In 1998 an economic and financial crisis in South Korea caused it to experience
A) a surplus in their balance of payments.
B) a deficit in their balance of payments.
C) a balanced balance of payments.
D) an unbalanced balance of payments.
E) a lull in international trade.
Answer: A
Page Ref: 6
Difficulty: Easy

26) In 1999, demonstrators representing a mix of traditional and new ideologies disrupted a
major international trade meeting in Seattle of
A) the OECD.
B) NAFTA.
C) the WTO.
D) GATT.
E) the G8.
Answer: C
Page Ref: 6
Difficulty: Easy

27) International Economists cannot discuss the effects of international trade or recommend
changes in government policies toward trade with any confidence unless they know
A) their theory is the best available.
B) their theory is internally consistent.
C) their theory passes the "reasonable person" legal criteria.
D) their theory is good enough to explain the international trade that is actually observed.

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E) their theory accounts for China's unique position in international trade.
Answer: D
Page Ref: 5
Difficulty: Easy

28) Trade theorists have proven that the gains from international trade
A) must raise the economic welfare of every country engaged in trade.
B) must raise the economic welfare of everyone in every country engaged in trade.
C) must harm owners of "specific" factors of production.
D) will always help "winners" by an amount exceeding the losses of "losers."
E) usually outweigh the benefits of protectionist policies.
thường vượt trội hơn lợi ích của các chính sách bảo hộ.
Answer: E
Page Ref: 4
Difficulty: Easy

29) The international financial crisis of 2007 was the result of

A) failure of the Euro currency.
B) runaway inflation in the U.S.
C) a deep global recession.
D) the collapse of global currency markets.
E) defaults on U.S. mortgage-backed securities.
mặc định đối với chứng khoán được thế chấp bởi Hoa Kỳ.
Answer: E
Page Ref: 8
Difficulty: Easy

30) In September 2010, the finance minister of ________ declared that the world was "in the
midst of an international currency war" because of rapid appreciation in the value of the
country's currency, the ________.
Vào tháng 9 năm 2010, bộ trưởng tài chính của ________ tuyên bố rằng thế giới đang "ở giữa
một cuộc chiến tiền tệ quốc tế" vì sự đánh giá nhanh chóng về giá trị của đồng tiền của đất
nước, đó là ____.
A) England; pound sterling
B) Germany; euro
C) Japan; yen
D) China; renminbi
E) Brazil; Real
Answer: E
Page Ref: 8
Difficulty: Easy

1.2 International Economics: Trade and

Money
1) Cost-benefit analysis of international trade
A) is basically useless.

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B) is empirically intractable.
C) focuses attention primarily on conflicts of interest within countries.
D) focuses attention on conflicts of interest between countries.
E) never leads to government intervention in international trade.
Answer: C
Page Ref: 8-9
Difficulty: Easy

2) An improvement in a country's balance of payments means a decrease in its balance of

payments deficit, or an increase in its surplus. In fact we know that a surplus in a balance of
payments
Sự cải thiện trong cán cân thanh toán của một quốc gia có nghĩa là giảm thâm hụt cán cân
thanh toán hoặc tăng thặng dư. Trên thực tế, chúng tôi biết rằng thặng dư trong cán cân thanh
toán
A) is always beneficial.
B) is usually beneficial.
C) is never harmful.
D) is sometimes harmful.
E) is always harmful.
Answer: D
Page Ref: 8-9
Difficulty: Easy

3) The GATT is
A) an international treaty.
B) an international U.N. agency.
C) an international IMF agency.
D) a U.S. government agency.
E) a collection of tariffs.
Answer: A
Page Ref: 8-9
Difficulty: Easy

4) The international debt crisis of early 1982 was precipitated when ________ could not pay
its international debts.
A) Russia
B) Mexico
C) Brazil
D) Malaysia
E) China
Answer: B
Page Ref: 8-9
Difficulty: Easy

5) International economics can be divided into two broad sub-fields

A) macro and micro.
B) developed and less developed.
C) monetary and barter.
D) international trade and international money.
E) static and dynamic.

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Answer: D
Page Ref: 8-9
Difficulty: Easy

6) International monetary analysis focuses on

A) the real side of the international economy.
B) the international trade side of the international economy.
C) the international investment side of the international economy.
D) the issues of international cooperation between Central Banks.
E) the monetary side of the international economy, such as currency exchange.
Answer: E
Page Ref: 8-9
Difficulty: Easy

7) The distinction between international trade and international money is not entirely clear
because
A) real developments in the trade accounts do not have monetary implications.
B) the balance of payments includes only real measures.
C) developments caused by purely monetary changes have no real effects.
D) trade models focus on real, or barter relationships.
E) most international trade involves monetary transactions.
Answer: E
Page Ref: 8-9
Difficulty: Easy

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 2 World Trade: An Overview

2.1 Who Trades with Whom?

1) Approximately what percent of all world production of goods and services is exported to
other countries?
A) 10%
B) 30%
C) 50%
D) 100%
E) 90%
Answer: B
Page Ref: 10
Difficulty: Easy

2) The gravity model offers a logical explanation for the fact that Mô hình trọng lực đưa ra
một lời giải thích hợp lý cho thực tế rằng
A) trade between Asia and the U.S. has grown faster than NAFTA trade.
B) trade in services has grown faster than trade in goods.
C) trade in manufactures has grown faster than in agricultural products.
D) Intra-European Union trade exceeds international trade by the European UnionThương

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mại nội bộ Liên minh châu Âu vượt quá thương mại quốc tế của Liên minh châu Âu..
E) the U.S. trades more with Western Europe than it does with Canada.
Answer: D
Page Ref: 13
Difficulty: Moderate

3) The gravity model suggests that over time

A) trade between neighboring countries will increase.
B) trade between all countries will increase.
C) world trade will eventually be swallowed by a black hole.
D) trade between Earth and other planets will become important.
E) the value of trade between two countries will be proportional to the product of the two
countries' GDP.
Answer: E
Page Ref: 16
Difficulty: Moderate

4) The gravity model explains why

A) trade between Sweden and Germany exceeds that between Sweden and Spain.
B) countries with oil reserves tend to export oil.
C) capital rich countries export capital intensive products.
D) intra-industry trade is relatively more important than other forms of trade between
neighboring countries.
E) European countries rely most often on natural resources.
Answer: A
Page Ref: 11
Difficulty: Moderate

5) According to the gravity model, a characteristic that tends to affect the probability of trade
existing between any two countries is
A) their cultural affinity.
B) the average weight/value of their traded goods.
C) their colonial-historical ties.
D) the distance between them.
E) the number of different product varieties produced by their industries.
Answer: D
Page Ref: 12
Difficulty: Easy

6) In general, which of the following do NOT tend to increase trade between two countries?
A) linguistic and/or cultural affinity
B) historical ties
C) larger economies
D) mutual membership in preferential trade agreements
E) the existence of well controlled borders between countriessự tồn tại của biên giới được
kiểm soát tốt giữa các quốc gia
Answer: E
Page Ref: 13
Difficulty: Easy

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7) Why does the gravity model work?
A) Large economies became large because they were engaged in international trade.
B) Large economies have relatively large incomes, and hence spend more on government
promotion of trade and investment.
C) Large economies have relatively larger areas which raises the probability that a productive
activity will take place within the borders of that country.
D) Large economies tend to have large incomes and tend to spend more on imports.
E) Large economies tend to avoid trading with small economies.
Answer: D
Page Ref: 13
Difficulty: Easy

8) We see that the Netherlands, Belgium, and Ireland trade considerably more with the
United States than with many other countries.
A) This is explained by the gravity model, since these are all large countries.
B) This is explained by the gravity model, since these are all small countries.
C) This fails to be consistent with the gravity model, since these are small countries.
D) This fails to be consistent with the gravity model, since these are large countries.
E) This is explained by the gravity model, since they do not share borders.
Answer: C
Page Ref: 13
Difficulty: Easy

9) The two neighbors of the United States do a lot more trade with the United States than
European economies of equal size.
A) This contradicts predictions from gravity models.
B) This is consistent with predictions from gravity models.
C) This is irrelevant to any inferences that may be drawn from gravity models.
D) This is because these neighboring countries have exceptionally large GDPs.
E) This relates to Belgium's trade record with the U.S.
Answer: B
Page Ref: 13
Difficulty: Moderate

2.2 The Changing Pattern of World Trade

1) Since the period following World War II (the early 1950s), the proportion of most
countries' production being used in some other country
A) remained constant.
B) increased.
C) decreased.
D) fluctuated widely with no clear trend.
E) increased slightly before dropping off.
Answer: B
Page Ref: 17
Difficulty: Easy

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2) Since World War II, the likelihood that foreign markets would gain importance to average
exporters as a source of profits has
A) remained constant.
B) increased.
C) decreased.
D) fluctuated widely with no clear trend.
E) increased slightly before dropping off.
Answer: B
Page Ref: 17
Difficulty: Easy

3) Since World War II, the likelihood that any single item in the typical consumption basket
of a consumer in the U.S. originated outside of the U.S.
A) remained constant.
B) increased.
C) decreased.
D) fluctuated widely with no clear trend.
E) increased slightly before dropping off.
Answer: B
Page Ref: 18
Difficulty: Easy

4) Since World War II, the likelihood that the job of a new college graduate will be directly
or indirectly affected by world trade
A) remained constant.
B) increased.
C) decreased.
D) fluctuated widely with no clear trend.
E) increased slightly before dropping off.
Answer: B
Page Ref: 17
Difficulty: Easy

5) Since World War II, the relative importance of raw materials, including oil, in total world
trade
A) remained constant.
B) increased.
C) decreased.
D) fluctuated widely with no clear trend
E) increased slightly before dropping off.
Answer: C
Page Ref: 18-19
Difficulty: Easy

6) In the current Post-Industrial economy, international trade in services (including banking

and financial services)
A) dominates world trade.
B) does not exist.
C) is an increasingly important component of global trade. là một thành phần ngày càng quan
trọng của thương mại toàn cầu.

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D) is relatively stagnant.
E) far surpasses the predictions of economist Alan Blinder.
Answer: C
Page Ref: 20
Difficulty: Easy

7) In the pre-World War I period, the U.S. exported mainly

A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) weapons.
Answer: C
Page Ref: 19
Difficulty: Easy

8) In the pre-World War I period, the United Kingdom exported mainly

A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) livestock.
Answer: A
Page Ref: 18
Difficulty: Easy

9) In the pre-World War I period, the United Kingdom imported mainly

A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) from the United States.
Answer: C
Page Ref: 18
Difficulty: Easy

10) In the present, most of the exports from China are

A) manufactured goods.
B) services.
C) primary products including agricultural.
D) technology intensive products.
E) overpriced by world market standards.
Answer: A
Page Ref: 19
Difficulty: Easy

11) Which of the following does NOT explain the extent of trade between Ireland and the
U.S.?
A) historical ties
B) cultural Linguistic ties

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C) Gravity Model
D) multinational corporations
E) large numbers of Irish-Americans
Answer: C
Page Ref: 13
Difficulty: Moderate
International Economics, 10e
(Krugman/Obstfeld/Melitz)
Chapter 3 Labor Productivity and Comparative
Advantage: The Ricardian Model

3.1 The Concept of Comparative Advantage

1) Trade between two countries can benefit both countries if
A) each country exports that good in which it has a comparative advantage.
B) each country enjoys superior terms of trade.
C) each country has a more elastic demand for the imported goods.
D) each country has a more elastic supply for the exported goods.
E) each country produces a wide range of goods for export.
Answer: A
Page Ref: 24
Difficulty: Easy

2) In order to know whether a country has a comparative advantage in the production of one
particular product we need information on at least ________ unit labor requirements
A) one
B) two
C) three
D) four
E) five
Answer: D
Page Ref: 29
Difficulty: Easy

3) A country engaging in trade according to the principles of comparative advantage gains

from trade because it
A) is producing exports indirectly more efficiently than it could alternatively.
B) is producing imports indirectly more efficiently than it could domestically.
C) is producing exports using fewer labor units.
D) is producing imports indirectly using fewer labor units.
E) is producing exports while outsourcing services.
Answer: B
Page Ref: 26
Difficulty: Easy

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4) Given the information in the table above, if it is ( chắc chắn) that Foreign uses prison-slave
labor to produce its exports, then home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.
Answer: A
Page Ref: 29
Difficulty: Moderate

5) Given the information in the table above, if the Home economy suffered a meltdown, and
the Unit Labor Requirements doubled to 20 for cloth and 40 for widgets then home should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.
Answer: A
Page Ref: 29
Difficulty: Moderate

6) The earliest statement of the principle of comparative advantage is associated with

A) David Hume.
B) David Ricardo.
C) Adam Smith.
D) Eli Heckscher.
E) Bertil Ohlin.
Answer: B
Page Ref: 26
Difficulty: Easy

7) The Ricardian model attributes the gains from trade associated with the principle of
comparative advantage result to
A) differences in technology.
B) differences in preferences.
C) differences in labor productivity.
D) differences in resources.
E) gravity relationships among countries.
Answer: C
Page Ref: 25
Difficulty: Easy

8) The Ricardian model demonstrates that

A) trade between two countries will benefit both countries.
B) trade between two countries may benefit both regardless of which good each exports.
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C) trade between two countries may benefit both if each exports the product in which it has
a comparative advantage.
D) trade between two countries may benefit one but harm the other.
E) trade between two countries always benefits the country with a larger labor force.
Answer: C
Page Ref: 26
Difficulty: Easy

3.2 A One-Factor Economy

3) Use the information in the table below to answer the following questions.

(a) Does either country have an absolute advantage in the production of wheat or beef?
Explain.
(b) What is the opportunity cost of wheat in each country?
(c) What is the opportunity cost of beef in each country?
(d) Analyze comparative advantage and opportunities for trade between the U.S. and
Argentina.
Answer:
(a) Argentina has an absolute advantage in the production of both wheat and beef because
labor productivity in Argentina exceeds labor productivity in the U.S. for both products.
(b) In the U.S., the opportunity cost of wheat is 200/100 or 2.0 units of beef. In Argentina,
the opportunity cost of wheat is 400/200 or 2.0 units of beef.
(c) In the U.S., the opportunity cost of beef is 100/200 or 0.5 units of wheat. In Argentina,
the opportunity cost of beef is 400/200 or 0.5 units of wheat.
(d) Neither country has a comparative advantage and there is, therefore, no opportunity for
beneficial trade.
Page Ref: 26-29
Difficulty: Moderate

3.3 Trade in a One-Factor World

1) Given the information in the table above

A) neither country has a comparative advantage in cloth.
B) Home has a comparative advantage in cloth.
C) Foreign has a comparative advantage in cloth.
D) Home has a comparative advantage in both cloth and widgets.

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E) neither country has a comparative advantage in widgets.
Answer: B
Page Ref: 29
Difficulty: Moderate

2) Given the information in the table above, if wages were to double in Home, then Home
should
A) export cloth.
B) export widgets.
C) export both and import nothing.
D) export and import nothing.
E) export widgets and import cloth.
Answer: A
Page Ref: 29
Difficulty: Moderate

3) Given the information in the table above

A) neither country has a comparative advantage in cloth.
B) Home has a comparative advantage in widgets.
C) Foreign has a comparative advantage in widgets.
D) Home has a comparative advantage in both cloth and widgets.
E) neither country has a comparative advantage in widgets.
Answer: C
Page Ref: 29
Difficulty: Moderate

4) Given the information in the table above, Home's opportunity cost of cloth is
A) 0.5. (10/20)
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: A
Page Ref: 29
Difficulty: Moderate

5) Given the information in the table above, Home's opportunity cost of widgets is (20:10)
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: B
Page Ref: 29
Difficulty: Moderate

6) Given the information in the table above, Foreign ’s opportunity cost of cloth is
A) 0.5.
B) 2.0.
C) 6.0.

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D) 1.5.
E) 3.0.
Answer: B
Page Ref: 29
Difficulty: Moderate

7) Given the information in the table above, Foreign's opportunity cost of widgets is
A) 0.5.
B) 2.0.
C) 6.0.
D) 1.5.
E) 3.0.
Answer: A
Page Ref: 29
Difficulty: Moderate

8) Given the information in the table above, if the world equilibrium price of widgets were 4
clothes, then
A) both countries could benefit from trade with each other.
B) neither country could benefit from trade with each other.
C) each country will want to export the good in which it enjoys comparative advantage.
D) neither country will want to export the good in which it enjoys comparative advantage.
E) both countries will want to specialize in cloth.
Answer: A
Page Ref: 30
Difficulty: Moderate

9) Given the information in the table above, if the world equilibrium price of widgets were 40
cloths, then
A) both countries could benefit from trade with each other.
B) neither country could benefit from trade with each other.
C) each country will want to export the good in which it enjoys comparative advantage.
D) neither country will want to export the good in which it enjoys comparative advantage.
E) both countries will want to specialize in cloth.
Answer: A
Page Ref: 30
Difficulty: Moderate

10) In a two product two country world, international trade can lead to increases in
A) consumer welfare only if output of both products is increased.
B) output of both products and consumer welfare in both countries.
C) total production of both products but not consumer welfare in both countries.
D) consumer welfare in both countries but not total production of both products.
E) prices of both goods in both countries.
Answer: B
Page Ref: 31
Difficulty: Moderate

11) As a result of trade, specialization in the Ricardian model tends to be

A) complete with constant costs and with increasing costs.

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B) complete with constant costs and incomplete with increasing costs.
C) incomplete with constant costs and complete with increasing costs.
D) incomplete with constant costs and incomplete with increasing costs.
E) dependent on the specific opportunity costs involved in production.
Answer: B
Page Ref: 34
Difficulty: Easy

12) As a result of trade between two countries which are of completely different economic
sizes, specialization in the Ricardian 2X2 model tends to
A) be incomplete in both countries.
B) be complete in both countries.
C) be complete in the small country but incomplete in the large country.
D) be complete in the large country but incomplete in the small country.
E) sustain one countries economy in in direct proportion to the other.
Answer: C
Page Ref: 35
Difficulty: Easy

13) A nation engaging in trade according to the Ricardian model will find its consumption
bundle
A) inside its production possibilities frontier.
B) on its production possibilities frontier.
C) outside its production possibilities frontier.
D) inside its trade-partner's production possibilities frontier.
E) on its trade-partner's production possibilities frontier.
Answer: C
Page Ref: 34
Difficulty: Easy

14) In the Ricardian model, if a country's trade is restricted, this will cause all EXCEPT
which?
A) limited specialization and the division of labor
B) reduced volume of trade and reduced gains from trade
C) nations to produce inside their production possibilities curves
D) a country to produce some of the product of its comparative disadvantage
E) raised costs as more diverse product is produced internally
Answer: C
Page Ref: 36
Difficulty: Easy

15) If a very small country trades with a very large country according to the Ricardian model,
then
A) the small country will suffer a decrease in economic welfare.
B) the large country will suffer a decrease in economic welfare.
C) the small country only will enjoy gains from trade.
D) the large country will enjoy gains from trade.
E) both countries will enjoy equal gains from trade.
Answer: C
Page Ref: 37

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Difficulty: Easy

16) If the world terms of trade for a country are somewhere between the domestic cost ratio
of H and that of F, then
A) country H but not country F will gain from trade.
B) country H and country F will both gain from trade.
C) neither country H nor F will gain from trade.
D) only the country whose government subsidizes its exports will gain.
E) country F but not country H will gain from trade.
Answer: B
Page Ref: 37
Difficulty: Moderate

17) If the world terms of trade equal those of country F, then

A) country H but not country F will gain from trade.
B) country H and country F will both gain from trade.
C) neither country H nor F will gain from trade.
D) only the country whose government subsidizes its exports will gain.
E) country F but not country H will gain from trade.
Answer: A
Page Ref: 37
Difficulty: Easy

18) If the world terms of trade equal those of country H, then

A) country H but not country F will gain from trade.
B) country H and country F will both gain from trade.
C) neither country H nor F will gain from trade.
D) only the country whose government subsidizes its exports will gain.
E) country F but not country H will gain from trade.
Answer: E
Page Ref: 32
Difficulty: Easy

19) According to Ricardo, a country will have a comparative advantage in the product in
which its
A) labor productivity is relatively low.
B) labor productivity is relatively high.
C) labor mobility is relatively low.
D) labor mobility is relatively high.
E) labor is outsourced to neighboring countries.
Answer: B
Page Ref: 29
Difficulty: Easy

20) Assume that labor is the only factor of production and that wages in the United States
equal $20 per hour while wages in Japan are $10 per hour. Production costs would be lower
in the United States as compared to Japan if
A) U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour.
B) U.S. labor productivity equaled 30 units per hour and Japan's 20 units per hour.
C) U.S. labor productivity equaled 20 units per hour and Japan's 30 units per hour.

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D) U.S. labor productivity equaled 15 units per hour and Japan's 25 units per hour.
E) U.S. labor productivity equaled 15 units per hour and Japan's 40 units per hour.
Answer: A
Page Ref: 27
Difficulty: Moderate

21) If two countries engage in Free Trade following the principles of comparative
advantage, then
A) neither relative prices nor relative marginal costs (marginal rates of transformation-MRTs)
in one country will equal those in the other country.
B) both relative prices and MRTs will become equal in both countries.
C) relative prices but not MRTs will become equal in both countries.
D) MRTs but not relative prices will become equal in both countries.
E) trade will be unrestricted, regardless of relative costs and MRTs.
Answer: C
Page Ref: 31
Difficulty: Moderate

22) Let us define the real wage as the purchasing power of one hour of labor. In the Ricardian
2X2 model, if two countries under autarky engage in trade then
A) the real wage will not be affected since this is a financial variable.
B) the real wage will increase only if a country attains full specialization.
C) the real wage will increase in one country only if it decreases in the other.
D) the real wage will rise in both countries.
E) the real wage will fall under pressure of international competition.
Answer: D
Page Ref: 36
Difficulty: Moderate

23) In a two country and two product Ricardian model, a small country is likely to benefit
more than the large country because
A) the large country will wield greater political power, and hence will not yield to market
signals.
B) the small country is less likely to trade at price equal or close to its autarkic (domestic)
relative prices.
C) the small country is more likely to fully specialize.
D) the small country is less likely to fully specialize.
E) the small country can raise wages.
Answer: B
Page Ref: 37
Difficulty: Moderate

24) In the Ricardian model, comparative advantage is likely to be due to

A) scale economies.
B) home product taste bias.
C) greater capital availability per worker.
D) labor productivity differences.
E) political pressure.
Answer: D
Page Ref: 45

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Difficulty: Easy3.4 Misconceptions About Comparative Advantage

1) If a production possibilities frontier is bowed out (concave to the origin), then production
occurs under conditions of
A) constant opportunity costs.
B) increasing opportunity costs.
C) decreasing opportunity costs.
D) infinite opportunity costs.
E) uncertain opportunity costs.
Answer: B
Page Ref: 34
Difficulty: Easy

2) If the production possibilities frontier of one trade partner ("Country A") is bowed out
(concave to the origin), then increased specialization in production by that country will
A) increase the economic welfare of both countries.
B) increase the economic welfare of only Country A.
C) decrease the economic welfare of Country A.
D) decrease the economic welfare of Country B.
E) not affect the economic welfare of either country.
Answer: A
Page Ref: 35
Difficulty: Easy

3) If two countries have identical production possibility frontiers, then trade between them is
likely to be beneficial if
A) their supply curves are identical.
B) their cost functions are identical.
C) their demand conditions are identical.
D) their incomes are identical.
E) their demand functions differ.
Answer: E
Page Ref: 37
Difficulty: Moderate

4) If one country's wage level is very high relative to the other's (the relative wage exceeding
the relative productivity ratios), then if they both use the same currency
A) neither country has a comparative advantage.
B) only the low wage country has a comparative advantage.
C) only the high wage country has a comparative advantage.
D) consumers will still find trade worth while from their perspective.
E) it is possible that both will enjoy the conventional gains from trade.
Answer: E
Page Ref: 37-39
Difficulty: Moderate

5) If one country's wage level is very high relative to the other's (the relative wage
exceeding the relative productivity ratios) then it is probable that
A) free trade will not improve either both countries welfare.
B) free trade will result in no trade taking place.

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C) free trade will result in each country exporting the good in which it enjoys
comparative advantage.
D) free trade will result in each country exporting the good in which it suffers the
greatest comparative disadvantage.
E) free trade will not affect the economic welfare of either country.
Answer: C
Page Ref: 37-39
Difficulty: Moderate

6) In a two-country, two-product world, the statement "Germany enjoys a comparative

advantage over France in autos relative to ships" is equivalent to
A) France having a comparative advantage over Germany in ships.
B) France having a comparative disadvantage compared to Germany in autos and ships.
C) Germany having a comparative advantage over France in autos and ships.
D) France having no comparative advantage over Germany.
E) France should produce autos.
Answer: A
Page Ref: 37
Difficulty: Easy

7) If the United States' production possibility frontier was flatter to the widget axis, whereas
Germany's was flatter to the butter axis, we know that
A) the United States has no comparative advantage
B) Germany has a comparative advantage in butter.
C) the U.S. has a comparative advantage in butter.
D) Germany has comparative advantages in both products.
E) the U.S. has a comparative disadvantage in widgets.
Answer: B
Page Ref: 37
Difficulty: Moderate

8) Suppose the United States' production possibility frontier was flatter to the widget axis,
whereas Germany's was flatter to the butter axis. We now learn that the German mark sharply
depreciates against the U.S. dollar. We now know that
A) the United States has no comparative advantage
B) Germany has a comparative advantage in butter.
C) the United States has a comparative advantage in butter.
D) Germany has a comparative advantage in widgets.
E) Germany has lost its comparative advantage.
Answer: B
Page Ref: 37
Difficulty: Moderate

9) Suppose the United states production possibility frontier was flatter to the widget axis,
whereas Germany's was flatter to the butter axis. We now learn that the German wage
doubles, but U.S. wages do not change at all. We now know that
A) the United States has no comparative advantage.
B) Germany has a comparative advantage in butter.
C) the United States has a comparative advantage in butter.
D) Not enough information is given.

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E) Germany gains a comparative advantage in widgets.
Answer: B
Page Ref: 37
Difficulty: Moderate

10) Which of the following statements is TRUE?

A) Free trade is beneficial only if your country is strong enough to stand up to foreign
competition.
B) Free trade is beneficial only if your competitor does not pay unreasonably low wages.
C) Free trade is beneficial only if both countries have access to the same technology.
D) Free trade is never beneficial for developing countries.
E) Free trade can be beneficial to economic welfare of all countries involved.
Answer: E
Page Ref: 37-39
Difficulty: Moderate

11) Mahatma Gandhi exhorted his followers in India to promote economic welfare by
decreasing imports. This approach
A) makes no sense.
B) makes no economic sense.
C) is consistent with the the Ricardian model of comparative advantage.
D) is not consistent with the Ricardian model of comparative advantage.
E) guarantees benefits for Indian workers.
Answer: D
Page Ref: 37-39
Difficulty: Moderate

12) The Country of Rhozundia is blessed with rich copper deposits. The cost of copper
produced (relative to the cost of widgets produced) is therefore very low. From this
information we know that
A) Rhozundia has a comparative advantage in copper.
B) Rhozundia should import copper and export widgets.
C) Rhozundia should export both widgets and copper.
D) Rhozundia should invest in more in widget production.
E) Rhozundia may or may not have a comparative advantage in copper.
Answer: E
Page Ref: 37-39
Difficulty: Moderate

13) We know that in antiquity, China exported silk because no one in any other country knew
how to produce this product. From this information we know that
A) China had a comparative advantage in silk.
B) China had an absolute advantage, but not a comparative advantage in silk.
C) no comparative advantage could exist because the technology was not diffused.
D) China exported silk for political reasons even though it had no comparative advantage.
E) China was unable to profit by exporting silk because it was unknown in the rest of the
world.
Answer: A
Page Ref: 37-41
Difficulty: Moderate

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14) The pauper labor theory, and the exploitation argument
A) are theoretical weaknesses that limit the applicability of the Ricardian concept of
comparative advantage.
B) are theoretically irrelevant to the Ricardian model, and do not limit its logical relevance.
C) are not relevant because the Ricardian model is based on the labor theory of value.
D) are not relevant because the Ricardian model allows for different technologies in different
countries.
E) invalidate the Ricardian model.
Answer: B
Page Ref: 39
Difficulty: Easy

15) If labor productivities were exactly proportional to wage levels internationally, this would
A) not negate the logical basis for trade in the Ricardian model.
B) render the Ricardian model theoretically correct but practically useless.
C) negate the logical basis for trade in the Ricardian model.
D) negate the applicability of the Ricardian model if the number of products were greater
than the number of trading partners.
E) demonstrate the validity of the Ricardian model.
Answer: A
Page Ref: 35
Difficulty: Moderate

3.5 Comparative Advantage with Many Goods

1) The two-country, multi-product model differs from the two-country, two-product model in
that, in the former
A) the relative wage ratio will determine the pattern of trade ( which good is exported by
which country.
B) which country will export which product is determined entirely by labor productivity data.
C) full specialization is likely to hold in equilibrium.
D) none of the goods are potentially nontraded.
E) domestic relative prices are not relevant.
Answer: A
Page Ref: 42-48
Difficulty: Moderate

3.6 Adding Transport Costs and Nontraded Goods

1) Assume that transportation costs are especially high for Widgets in the two-country, two-
product Ricardian model, and Country A enjoys a comparative advantage in Widgets, then
A) country B must also enjoy a comparative advantage in Widgets.
B) country B may end up exporting Widgets.
C) country A may switch to having a comparative advantage in the other good.
D) country A will still export Widgets.
E) Trade may be impossible between the two countries.
Answer: E
Page Ref: 47

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Difficulty: Moderate

2) Which of the following is most likely to be an untraded good in a Ricardian two-country,

multi-good model?
A) steel
B) textiles
C) haircuts
D) petroleum
E) telemarketer services
Answer: C
Page Ref: 47-48
Difficulty: Easy

3.7 Empirical Evidence on the Ricardian Model

1) Which of the following has been confirmed by empirical tests of the Ricardian model?
A) All predictions of the model for a multi-product, multi-country world are highly
unrealistic.
B) The existence of nontraded goods results in a high degree of specialization among
countries.
C) International trade has no impact on income distribution.
D) The unimportance of economies of scale as a cause of trade.
E) Companies tend to export goods in which they have a relatively high level of productivity.
Answer: E
Page Ref: 45
Difficulty: Moderate

4) When compared with China, the growth of clothing exports originating in Bangladesh is
the result of
A) the comparative advantage that Bangladesh has in the production of clothing for export.
B) the absolute advantage that China has in the production of clothing for export.
C) the absolute advantage that Bangladesh has in the production of clothing for export.
D) the comparative and absolute advantage that China has in the production of clothing for
export.
E) the comparative and absolute advantage that Bangladesh has in the production of clothing
for export.
Answer: A
Page Ref: 47
Difficulty: Easy

5) The growth of clothing exports originating in Bangladesh is the result of the

A) high productivity of workers in Bangladesh.
B) low wages in Bangladesh.
C) low productivity of workers in other countries.
D) low productivity of workers in Bangladesh in industries other than those that produce
clothing for export.
E) high wages in other countries.
Answer: D
Page Ref: 47
Difficulty: Easy

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International Economics, 10e (Krugman/Obstfeld/Melitz)
Chapter 4 Specific Factors and Income Distribution

4.1 The Specific Factors Model

1) The Ricardian model of international trade demonstrates that trade can be mutually
beneficial. Why, then, do governments restrict imports of some goods?
A) Trade can have substantial effects on a country's distribution of income.
B) The Ricardian model is often incorrect in its prediction that trade can be mutually
beneficial.
C) Import restrictions are the result of trade wars between hostile countries.
D) Imports are only restricted when foreign-made goods do not meet domestic standards of
quality.
E) Restrictions on imports are intended to benefit domestic consumers.
Answer: A
Page Ref: 50
Difficulty: Easy

2) The Ricardian two-country two-good model predicts that there are potential benefits from
trade, but NOT
A) the effect of trade on income distribution.
B) the mechanism that determines which country will specialize in which good.
C) when one country has an absolute advantage in the production of both goods.
D) when one country has significantly lower wages than the other country.
E) when both countries have the same types of technology available.
Answer: A
Page Ref: 50
Difficulty: Easy

3) International trade can have important effects on the distribution of income because
A) some resources are immobile in the short run.
B) of government corruption.
C) the more powerful country dictates the terms of trade.
D) rich countries take advantage of poor countries.
E) different countries use different currencies.
Answer: A
Page Ref: 50
Difficulty: Easy

4) The Ricardian model of international trade demonstrates that trade can be mutually
beneficial. Why, then, do governments restrict imports of some goods?
A) Trade can have significant harmful effects on some segments of a country's economy.
B) The Ricardian model is often incorrect in its prediction that trade can be mutually
beneficial.
C) Import restrictions are the result of trade wars between hostile countries.
D) Imports are only restricted when foreign-made goods do not meet domestic standards of
quality.
E) Restrictions on imports can have significant beneficial effects on domestic consumers.
Answer: A
Page Ref: 50

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Difficulty: Easy

5) International trade can have important effects on the distribution of income because
A) different industries employ different factors of production.
B) of government corruption.
C) the more powerful country dictates the terms of trade.
D) rich countries take advantage of poor countries.
E) different countries use different currencies.
Answer: A
Page Ref: 50
Difficulty: Easy

6) Japan's trade policies with regard to rice reflect the fact that
A) japanese rice farmers have significant political power.
B) Japan has a comparative advantage in rice production and therefore exports most of its
rice crop.
C) there would be no gains from trade available to Japan if it engaged in free trade in rice.
D) there are gains from trade that Japan captures by engaging in free trade in rice.
E) Japan imports most of the rice consumed in the country.
Answer: A
Page Ref: 51
Difficulty: Easy

7) The specific factors model was developed by

A) Paul Samuelson and Ronald Jones.
B) Adam Smith and David Ricardo.
C) Richard Nixon and Robert Kennedy.
D) C.B. deMille and Gordon Willis.
E) Bill Clinton and Monica Lewinsky.
Answer: A
Page Ref: 51
Difficulty: Easy

8) In the specific factors model, labor is defined as a(an)

A) mobile factor.
B) specific factor.
C) fixed factor.
D) variable factor.
E) intensive factor.
Answer: A
Page Ref: 52
Difficulty: Easy

9) In the specific factors model, which of the following is treated as a specific factor?
A) land
B) labor
C) cloth
D) food
E) technology
Answer: A

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Page Ref: 52
Difficulty: Easy

10) In the specific factors model, which of the following is treated as a specific factor?
A) capital
B) labor
C) cloth
D) food
E) technology
Answer: A
Page Ref: 52
Difficulty: Easy

11) A factor of production that cannot be used outside of a particular sector of an economy is
a(an)
A) specific factor.
B) mobile factor.
C) variable factor.
D) import-competing factor.
E) export-competing factor.
Answer: A
Page Ref: 52
Difficulty: Easy

12) A factor of production that can be used in any sector of an economy is a(an)
A) mobile factor.
B) specific factor.
C) variable factor.
D) import-competing factor.
E) export-competing factor.
Answer: A
Page Ref: 52
Difficulty: Easy

13) The specific factors model assumes that there are ________ goods and ________
factor(s) of production.
A) two; three
B) two; two
C) two; one
D) three; two
E) four; three
Answer: A
Page Ref: 52
Difficulty: Easy

14) The degree of a factor's specificity is directly related to

A) the amount of time required to redeploy the factor to a different industry.
B) the cost of the factor as a proportion of the long-run total cost of production.
C) the mobility of the factor, with more mobile factors having more specificity.
D) technology differences between two countries, with a more advanced technology resulting

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in more factor specificity.
E) factor quality, with higher quality factors having a higher level of specificity.
Answer: A
Page Ref: 52
Difficulty: Easy

15) The degree of a factor's specificity is inversely related to

A) the mobility of the factor, with more mobile factors having less specificity.
B) the amount of time required to redeploy the factor to a different industry.
C) the cost of the factor as a proportion of the long-run total cost of production.
D) technology differences between two countries, with a less advanced technology resulting
in less factor specificity.
E) factor quality, with lower quality factors having a lower level of specificity.
Answer: A
Page Ref: 52
Difficulty: Easy

16) A worker who has invested in ________ skills will be ________ mobile than would
otherwise be the case.
A) occupation-specific; less
B) occupation-specific; more
C) ethical; less
D) ethical; more
E) occupation-nominal; less
Answer: A
Page Ref: 52
Difficulty: Easy

17) In the specific factors model, a country's production possibility frontier is ________
because of ________.
A) a straight line; diminishing marginal returns
B) a curved line; diminishing marginal returns
C) a straight line; constant marginal returns
D) a curved line; constant marginal returns
E) a curved line; a limited supply of labor
Answer: B
Page Ref: 56
Difficulty: Easy

18) In the specific factors model, a country's production function is ________ because of
________.
A) a straight line; diminishing marginal returns
B) a curved line; diminishing marginal returns
C) a straight line; constant marginal returns
D) a curved line; constant marginal returns
E) a curved line; a limited supply of labor
Answer: B
Page Ref: 56
Difficulty: Easy

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19) In the four-quadrant diagram of the specific factors model, the graph in the upper right
quadrant is a country's
A) production possibility frontier.
B) labor allocation constraint.
C) production function for food.
D) production function for cloth.
E) labor supply curve.
Answer: A
Page Ref: 56
Difficulty: Easy

20) In the four-quadrant diagram of the specific factors model, the graph in the lower right
quadrant is a country's
A) production function for cloth.
B) production possibility frontier.
C) labor allocation constraint.
D) production function for food.
E) labor supply curve.
Answer: A
Page Ref: 56
Difficulty: Easy

21) In the four-quadrant diagram of the specific factors model, the graph in the upper left
quadrant is a country's
A) production function for food.
B) production possibility frontier.
C) labor allocation constraint.
D) production function for cloth.
E) labor supply curve.
Answer: A
Page Ref: 56
Difficulty: Easy

22) In the four-quadrant diagram of the specific factors model, the graph in the upper right
quadrant is a country's
A) labor allocation constraint.
B) production possibility frontier.
C) production function for food.
D) production function for cloth.
E) labor supply curve.
Answer: B
Page Ref: 56
Difficulty: Easy

23) The slope of a country's production possibility frontier with cloth measured on the
horizontal and food measured on the vertical axis in the specific factors model is equal to
________ and it ________ as more cloth is produced.
A) -MPLF/MPLC; becomes steeper
B) -MPLF/MPLC; becomes flatter
C) -MPLF/MPLC; is constant

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D) -MPLC/MPLF; becomes steeper
E) -MPLC/MPLF; is constant
Answer: A
Page Ref: 56
Difficulty: Easy

24) The slope of a country's production possibility frontier with cloth measured on the
horizontal and food measured on the vertical axis in the Ricardian model is equal to
________ and it ________ as more cloth is produced.
A) -MPLF/MPLC; is constant
B) -MPLF/MPLC; becomes steeper
C) -MPLF/MPLC; becomes flatter
D) -MPLC/MPLF; becomes steeper
E) -MPLC/MPLF; is constant
Answer: A
Page Ref: 56
Difficulty: Easy

25) Under perfect competition, the equilibrium price of labor used to produce cloth will be
equal to
A) the marginal product of labor in the production of cloth times the price of cloth.
B) the average product of labor in the production of cloth times the price of cloth.
C) the ratio of the marginal product of labor in the production of cloth to the marginal
product of labor in the production of food times the ratio of the price of cloth. to the price of
food.
D) the slope of the production possibility frontier.
E) the price of cloth divided by the marginal product of labor in the production of cloth.
Answer: A
Page Ref: 56
Difficulty: Easy

26) When a country's labor market is in equilibrium in the specific factors model, the wage
rate
A) will be the same in both sectors.
B) will be higher in the export-competing sector.
C) will be higher in the import-competing sector.
D) will be higher in the sector where product price is higher.
E) will be higher in the sector where product price is lower.
Answer: A
Page Ref: 57
Difficulty: Easy

27) In the specific factors model, which of the following will increase the quantity of labor
used in food production?
A) an increase in the price of food relative to that of cloth
B) an increase in the price of cloth relative to that of food
C) a decrease in the price of labor
D) an equal percentage decrease in the price of food and cloth
E) an equal percentage increase in the price of food and cloth
Answer: A

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Page Ref: 57
Difficulty: Easy

28) In the specific factors model, which of the following will increase the quantity of labor
used in cloth production?
A) an increase in the price of cloth relative to that of food
B) an increase in the price of food relative to that of cloth
C) a decrease in the price of labor
D) an equal percentage decrease in the price of food and cloth
E) an equal percentage increase in the price of food and cloth
Answer: A
Page Ref: 57
Difficulty: Easy

29) In the specific factor model, the effect of an increase in the productivity of labor in the
production of cloth will cause a(an) ________ in the quantity of labor used to produce cloth,
a(an) ________ in the quantity of labor used to produce food and a(an) ________ in the wage
rate.
A) increase; decrease; increase
B) decrease; increase; increase
C) increase; decrease; decrease
D) decrease; increase; no change
E) increase; increase; no change
Answer: A
Page Ref: 57
Difficulty: Easy

30) In the specific factor model, the effect of an increase in the productivity of labor in the
production of food will cause a(an) ________ in the quantity of labor used to produce cloth,
a(an) ________ in the quantity of labor used to produce food and a(an) ________ in the wage
rate.
A) decrease; increase; increase
B) increase; decrease; increase
C) increase; decrease; decrease
D) decrease; increase; no change
E) increase; increase; no change
Answer: A
Page Ref: 57
Difficulty: Easy

31) The slope of a country's production possibility frontier is equal to ________ and the
optimal production point is located where the slope is equal to ________. Assume that output
of good Y is measured on the vertical axis, output of good X is measured on the horizontal
axis, MPL is the marginal product of labor with a subscript indicating which good, P is the
price of a good, and w is the wage rate.
A) -MPLY/MPLX; -PX/PY
B) -PX/PY; -MPLY/MPLX;
C) -PX/w; -PY/w
D) -MPLY/w; -MPLF/w
E) -MPLX/MPLY; -PX/PY

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Answer: A
Page Ref: 58
Difficulty: Moderate

32) In the specific factors model, a 5% increase in the price of food accompanied by a 5%
increase in the price of cloth will cause wages to ________, the production of cloth to
________, and the production of food to ________.
A) increase by 5%; remain unchanged; remain unchanged
B) increase by less then 5%; decrease; increase
C) increase by more then 5%; increase; remain unchanged
D) remain constant; increase; increase
E) remain constant; decrease; decrease
Answer: A
Page Ref: 58-60
Difficulty: Moderate

33) In the specific factors model, a 5% increase in the price of food accompanied by a 0%
increase in the price of cloth will cause wages to ________, the production of cloth to
________, and the production of food to ________.
A) increase by less then 5%; decrease; increase
B) increase by 5%; remain unchanged; remain unchanged
C) increase by more then 5%; increase; remain unchanged
D) remain constant; increase; increase
E) remain constant; decrease; decrease
Answer: A
Page Ref: 58-60
Difficulty: Moderate

34) In the specific factors model, a 0% increase in the price of food accompanied by a 5%
increase in the price of cloth will cause wages to ________, the production of cloth to
________, and the production of food to ________.
A) increase by less then 5%; increase; decrease
B) increase by 5%; remain unchanged; remain unchanged
C) increase by more then 5%; increase; remain unchanged
D) remain constant; increase; increase
E) remain constant; decrease; decrease
Answer: A
Page Ref: 58-60
Difficulty: Moderate

35) In the specific factors model, a 5% increase in the price of food accompanied by a 5%
increase in the price of cloth will cause ________ in the welfare of labor, ________ in the
welfare of the fixed factor in the production of food, and ________ in the welfare of the fixed
factor in the production of cloth.
A) no change; no change; no change
B) an increase; an increase; an increase
C) a decrease; an increase; an increase
D) an increase; a decrease; a decrease
E) a decrease; a decrease; a decrease
Answer: A

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Page Ref: 60-62
Difficulty: Moderate

36) In the specific factors model, a 5% decrease in the price of food accompanied by a 5%
decrease in the price of cloth will cause ________ in the welfare of labor, ________ in the
welfare of the fixed factor in the production of food, and ________ in the welfare of the fixed
factor in the production of cloth.
A) no change; no change; no change
B) an increase; an increase; an increase
C) a decrease; an increase; an increase
D) an increase; a decrease; a decrease
E) a decrease; a decrease; a decrease
Answer: A
Page Ref: 60-62
Difficulty: Moderate

37) In the specific factors model, a 5% increase in the price of food accompanied by a 10%
increase in the price of cloth will cause ________ in the welfare of labor, ________ in the
welfare of the fixed factor in the production of food, and ________ in the welfare of the fixed
factor in the production of cloth.
A) an ambiguous change; a decrease; an increase
B) an ambiguous change; an ambiguous change; an ambiguous change
C) a decrease; an ambiguous change; an ambiguous change
D) an increase; a decrease; an increase
E) an ambiguous change; an increase; a decrease
Answer: A
Page Ref: 60-62
Difficulty: Moderate

38) In the specific factors model, a 5% increase in the price of food accompanied by a 1%
increase in the price of cloth will cause ________ in the welfare of labor, ________ in the
welfare of the fixed factor in the production of food, and ________ in the welfare of the fixed
factor in the production of cloth.
A) an ambiguous change; an increase; a decrease
B) an ambiguous change; a decrease; an increase
C) an ambiguous change; an ambiguous change; an ambiguous change
D) a decrease; an ambiguous change; an ambiguous change
E) an increase; a decrease; an increase
Answer: A
Page Ref: 60-62

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Difficulty: Moderate

39) Refer to the production possibility graph above. Assume that the economy is in
equilibrium at point e. If there is an increase in the wage rate, the new equilibrium is most
likely to be
A) point e.
B) point d.
C) point f.
D) point h.
E) point b.
Answer: A
Page Ref: 60-62
Difficulty: Easy

40) Refer to the production possibility graph above. Assume that the economy is in
equilibrium at point e. If the price of good A increases, the new equilibrium is most likely to
be
A) point d.
B) point e.
C) point f.
D) point h.
E) point b.
Answer: A
Page Ref: 60-62
Difficulty: Easy

41) Refer to the production possibility graph above. Assume that the economy is in
equilibrium at point e. If the price of good B increases, the new equilibrium is most likely to
be
A) point f.
B) point d.
C) point e.
D) point h.
E) point b.
Answer: A
Page Ref: 60-62
Difficulty: Easy

42) Refer to the production possibility graph above. Assume that the economy is in
equilibrium at point e. If the labor supply increases due to immigration, the new equilibrium

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is most likely to be
A) point h.
B) point f.
C) point d.
D) point e.
E) point b.
Answer: A
Page Ref: 60-62
Difficulty: Easy

43) Refer to the production possibility graph above. Assume that the economy is in
equilibrium at point e. If a war reduces the country's capital stock by 40%, the new
equilibrium is most likely to be
A) point b.
B) point h.
C) point f.
D) point d.
E) point e.
Answer: A
Page Ref: 60-62
Difficulty: Easy

4.2 International Trade in the Specific Factors Model

1) A country that does NOT engage in trade can benefit from trade only if
A) pre-trade and free-trade relative prices are not identical.
B) it employs a unique technology.
C) it has an absolute advantage in at least one good.
D) its wage rate is below the world average.
E) pre-trade and free-trade relative prices are identical.
Answer: A
Page Ref: 63-64
Difficulty: Moderate

2) The relative price of a unit of cloth in the small isolated country of Moribundia is 5 units
of food. When then central city, Mudhole, puts in an airstrip, the country is able to engage in
trade. If the relative price of cloth in the outside world is 3 units of food, then Moribundia
will export ________ and ________ factors used in the production of ________ will benefit.
A) food; immobile; food
B) food; mobile; food
C) cloth; immobile; cloth
D) cloth; mobile; cloth
E) food; immobile; cloth
Answer: A
Page Ref: 63-64
Difficulty: Moderate

3) The relative price of a unit of cloth in the small isolated country of Moribundia is 5 units
of food. When then central city, Mudhole, puts in an airstrip, the country is able to engage in
trade. If the relative price of cloth in the outside world is 8 units of food, then Moribundia

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will export ________ and ________ factors used in the production of ________ will benefit.
A) cloth; immobile; cloth
B) food; immobile; food
C) food; mobile; food
D) cloth; mobile; cloth
E) cloth; immobile; food
Answer: A
Page Ref: 63-64
Difficulty: Moderate

4.3 Income Distribution and the Gains from Trade

1) In the specific factors model, the effects of trade on welfare are ________ for mobile
factors, ________ for fixed factors used to produce the exported good, and ________ for
fixed factors used to produce the imported good.
A) ambiguous; positive; negative
B) ambiguous; negative; positive
C) positive; ambiguous; ambiguous
D) negative; ambiguous; ambiguous
E) positive; positive; positive
Answer: A
Page Ref: 64-66
Difficulty: Easy

2) In the specific factors model, the effects of trade on welfare overall are ________ and for
fixed factors used to produce the exported good they are ________.
A) positive; positive
B) negative; positive
C) positive; negative
D) ambiguous; positive
E) positive; ambiguous
Answer: A
Page Ref: 64-66
Difficulty: Easy

3) In the specific factors model, the effects of trade on welfare overall are ________ and for
fixed factors used to produce the imported good they are ________.
A) positive; negative
B) positive; positive
C) negative; positive
D) ambiguous; positive
E) positive; ambiguous
Answer: A
Page Ref: 64-66
Difficulty: Easy

4) The overall welfare effects of trade are ________ if ________.

A) positive; those who gain can compensate those who lose and still be better off
B) positive; more people gain from trade than lose from it
C) negative; some people are made worse off by trade

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D) negative; those who lose can compel those who gain to compensate them for their losses
E) positive; the domestic economy grows faster than do foreign economies
Answer: A
Page Ref: 64-66
Difficulty: Easy

5) The effect of trade on income distribution

A) can be significant in the short run.
B) is positive for all segments of an economy.
C) is insignificant in the short run.
D) implies that there are no real gains from trade.
E) refutes the model of comparative advantage.
Answer: A
Page Ref: 64-66
Difficulty: Easy

6) A country's budget constraint states that

A) the value of exports must be equal to the value of imports.
B) real income in the exporting country must be equal to real income in the importing
country.
C) unless a country engages in trade, the value of exports cannot exceed the value of goods
produced.
D) a country will engage in trade only if the value of imports exceed the value of exports.
E) a country will engage in trade only if the value of exports exceeds the value of imports.
Answer: A
Page Ref: 64-66
Difficulty: Easy

7) A country's budget constraint states that

A) whether or not a country engages in trade, the value of goods consumed must be equal to
the value of goods produced.
B) real income in the exporting country must be equal to real income in the importing
country.
C) unless a country engages in trade, the value of goods consumed cannot exceed the value of
goods produced.
D) a country will engage in trade only if the value of goods consumed exceeds the value of
goods produced.
E) a country will engage in trade only if the value of goods produced exceeds the value of
goods consumed.
Answer: A
Page Ref: 64-66
Difficulty: Easy

8) A country will realize no gains from trade if

A) pre-trade and free-trade relative prices are identical.
B) all countries employ the same technology.
C) it does not have an absolute advantage in at least one good.
D) its wage exceeds the world average.
E) pre-trade and free-trade relative prices are not identical.
Answer: A

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Page Ref: 64-66
Difficulty: Moderate

4.4 The Political Economy of Trade: A Preliminary View

1) Those who will lose from free trade are ________ factors in sectors that produce goods
that are ________.
A) immobile; also imported
B) mobile; also imported
C) immobile; exported
D) mobile; exported
E) mobile; untraded
Answer: A
Page Ref: 67-70
Difficulty: Easy

2) Those who will unambiguously gain from free trade are ________ factors in sectors that
produce goods that are ________.
A) immobile; exported
B) immobile; also imported
C) mobile; also imported
D) mobile; exported
E) mobile; untraded
Answer: A
Page Ref: 67-70
Difficulty: Easy

3) The effect of trade on specialized employees of import-competing industries will be

________ jobs and ________ pay because they are relatively ________.
A) fewer; lower; immobile
B) fewer; lower; mobile
C) more; lower; immobile
D) more; higher; mobile
E) more; higher; immobile
Answer: A
Page Ref: 67-70
Difficulty: Moderate

4) The effect of trade on specialized employees of exporting industries will be ________ jobs
and ________ pay because they are relatively ________.
A) more; higher; immobile
B) fewer; lower; immobile
C) fewer; lower; mobile
D) more; lower; immobile
E) more; higher; mobile
Answer: A
Page Ref: 67-70
Difficulty: Moderate

5) Economists consider the effects of free trade on income distribution to be ________

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important than the effects on overall welfare because ________.
A) less; those who are harmed can be compensated by those who gain
B) more; those who are harmed are not compensated by those who gain
C) less; the effects on income distribution are minor and inconsequential
D) more; the effects on income distribution are major and consequential
E) less; the wealthy benefit and only the poor lose
Answer: A
Page Ref: 67-70
Difficulty: Easy

6) Economists consider the effects of free trade on income distribution to be ________

important than the effects on overall welfare because ________.
A) less; many factors besides trade affect income distribution
B) more; those who are harmed are not compensated by those who gain
C) less; the effects on income distribution are minor and inconsequential
D) more; the effects on income distribution are major and consequential
E) less; the wealthy benefit and only the poor lose
Answer: A
Page Ref: 67-70
Difficulty: Easy

7) There is a bias in the political process against free trade because

A) those who lose from free trade are better organized than those who gain.
B) the gains from free trade cannot be measured.
C) those who gain from free trade can't compensate those who lose.
D) foreign governments make large donations to U.S. political campaigns.
E) there is a high correlation between the volume of imports and the unemployment rate.
Answer: A
Page Ref: 67-70
Difficulty: Moderate

8) U.S. imports of sugar are limited by an import quota that, according to a study updated in
2013, imposed annual costs on American consumers of
A) $2,000,000.
B) $1,500,000.
C) $1,000,000,000.
D) $200,000.
E) $370,000.
Answer: A
Page Ref: 70
Difficulty: Easy

9) U.S. imports of sugar are limited by an import quota that, according to a study updated in
2013, imposed a total cost on American consumers close to $________, or an average cost of
________ per year for every man, woman, and child in the country.
A) $3 billion; $10
B) $105 million; $3
C) $2 billion; $110
D) $3 billion; $2,000
E) $370 million; $2,000

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Answer: A
Page Ref: 70
Difficulty: Easy

10) U.S. imports of sugar are limited by an import quota that, according to a study updated in
2013, imposed a total cost on American consumers close to $________, or an average cost of
________ per year for every job saved in the U.S sugar industry.
A) $3 billion; $10
B) $105 million; $3
C) $2 billion; $110
D) $3 billion; $1,000,000
E) $370 million; $20
Answer: D
Page Ref: 70
Difficulty: Easy

4.5 International Labor Mobility

1) In modern economies,
A) restrictions on international labor mobility are common.
B) labor is far more mobile internationally than capital.
C) restrictions on international labor mobility are rare.
D) labor is far more mobile internationally than it is intra-nationally.
E) outsourcing increases international labor mobility.
Answer: A
Page Ref: 70-76
Difficulty: Easy

2) Refer to the graph above. Points A, B, and C represent ________, ________, and
________, respectively.
A) equilibrium wage rate after migration from home to foreign has occurred; the wage rate in
foreign before migration; the wage rate in home before migration
B) equilibrium wage rate after migration from foreign to home has occurred; the wage rate in
home before migration; the wage rate in foreign before migration
C) the wage rate in home before migration; the wage rate in home after migration; the wage
rate in foreign after migration

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D) the global wage rate before migration; the wage rate in foreign after migration; the wage
rate in home after migration
E) the global wage rate before migration; the wage rate in home after migration; the wage
rate in foreign after migration
Answer: A
Page Ref: 70-76
Difficulty: Easy

3) In the two-country model of international labor mobility

A) the effect of migration is to cause real wages in the two countries to converge.
B) the effect of migration is to cause real wages in the two countries to diverge.
C) labor has only limited international mobility.
D) the long-run equilibrium global real wage is equal to the lesser of the pre-migration wages
in the two countries.
E) the long-run equilibrium global real wage is equal to the greater of the pre-migration
wages in the two countries.
Answer: A
Page Ref: 70-76
Difficulty: Easy

4) In the two-country model of international labor mobility

A) the long-run equilibrium assumes that desired and actual migration are equal.
B) the long-run equilibrium assumes that desired migration exceeds actual migration.
C) the long-run equilibrium assumes that actual migration exceeds desired migration.
D) the long-run equilibrium assumes countries' policies place significant restrictions on
migration.
E) the long-run equilibrium is the result of a divergence of the real wages in the two
countries.
Answer: A
Page Ref: 70-76
Difficulty: Easy

5) In the two-country model of international labor mobility

A) migration results in increased global output, although some groups are made worse off.
B) migration results in increased global output, and all groups are made better off.
C) migration has no effect on global output, although some groups are made worse off.
D) migration has no effect on global output, although some groups are made better off.
E) migration may reduce global output, although some groups are made better off.
Answer: A
Page Ref: 70-76
Difficulty: Easy

6) Immigration into the U.S. over the past century has caused the percentage of immigrants in
the U.S. population to
A) fall steadily until the 1970s and increase thereafter.
B) remain relatively constant over the time period.
C) fall steadily over the entire century.
D) rise steadily over the entire century.
E) rise steadily until the 1970s and fall thereafter.
Answer: A

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Page Ref: 70-76
Difficulty: Easy

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 5 Resources and Trade: The Heckscher-Ohlin Model

5.1 Model of a Two-Factor Economy

1) In the 2-factor, 2 good Heckscher-Ohlin model, an influx of workers from across the
border would
A) move the point of production along the production possibility curve.
B) shift the production possibility curve outward, and increase the production of both goods.
C) shift the production possibility curve outward and decrease the production of the labor-
intensive product.
D) shift the production possibility curve outward and decrease the production of the capital-
intensive product.
E) shift the possibility curve outward and displace preexisting labor.
Answer: D
Page Ref: 93-94
Difficulty: Moderate

2) In the 2-factor, 2 good Heckscher-Ohlin model, the two countries differ in

A) tastes and preferences.
B) military capabilities.
C) the size of their economies.
D) relative abundance of factors of production.
E) labor productivities.
Answer: D
Page Ref: 84
Difficulty: Easy

3) One way in which the Heckscher-Ohlin model differs from the Ricardo model of
comparative advantage is by assuming that ________ is (are) identical in all countries.
A) factor endowments
B) scale of production
C) factor intensities
D) technology
E) opportunity costs
Answer: D
Page Ref: 94
Difficulty: Easy

4) If a country produces good Y (measured on the vertical axis) and good X (measured on the
horizontal axis), then the absolute value of the slope of its production possibility frontier is
equal to
A) the opportunity cost of good X.
B) the price of good X divided by the price of good Y.
C) the price of good Y divided by the price of good X.
D) the opportunity cost of good Y.
E) the cost of capital (assuming that good Y is capital intensive) divided by the cost of labor.

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Answer: A
Page Ref: 87
Difficulty: Easy

5) The Heckscher-Ohlin model differs from the Ricardian model of Comparative Advantage
in that the former
A) has only two countries.
B) has only two products.
C) has two factors of production.
D) has two production possibility frontiers (one for each country).
E) has varying wage rates.
Answer: C
Page Ref: 84
Difficulty: Easy
8) In the 2-factor, 2 good Heckscher-Ohlin model, the country with a relative abundance of
________ will have a production possibility frontier that is biased toward production of the
________ good.
A) labor; labor intensive
B) labor; capital intensive
C) land; labor intensive
D) land; capital intensive
E) capital; land intensive
Answer: A
Page Ref: 92-94
Difficulty: Easy

9) In the 2-factor, 2 good Heckscher-Ohlin model, the country with a relative abundance of
________ will have a production possibility frontier that is biased toward production of the
________ good.
A) capital; capital intensive
B) labor; capital intensive
C) land; labor intensive
D) land; capital intensive
E) labor; land intensive
Answer: A
Page Ref: 92-94
Difficulty: Easy

10) In the 2-factor, 2 good Heckscher-Ohlin model, the production possibility frontier is
kinked when
A) there is no factor substitution in production.
B) the opportunity cost of production is constant.
C) there are unemployed factor resources.
D) a country does not engage in trade.
E) transportation costs are very high.
Answer: A
Page Ref: 86-87
Difficulty: Moderate

11) The assumption of diminishing returns in the Heckscher-Ohlin model means that, unlike

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in the Ricardian model, it is likely that
A) countries will not be fully specialized in one product.
B) countries will benefit from free international trade.
C) countries will consume outside their production possibility frontier.
D) comparative advantage will not determine the direction of trade.
E) global production will decrease under trade.
Answer: A
Page Ref: 87
Difficulty: Moderate

12) In the Heckscher-Ohlin model, countries are assumed to differ only in terms of their
A) factor endowments.
B) tastes and preferences.
C) available technologies.
D) factor productivities.
E) physical size.
Answer: A
Page Ref: 90
Difficulty: Easy

5.2 Effects of International Trade Between Two-Factor Economies

1) In the 2-factor, 2 good Heckscher-Ohlin model, trade will ________ the owners of a
country's ________ factor and will ________ the good that uses that factor intensively.
A) benefit; abundant; export
B) harm; abundant; import
C) benefit; scarce; export
D) benefit; scarce; import
E) harm; scarce; export
Answer: A
Page Ref: 91
Difficulty: Easy

2) According to the Heckscher-Ohlin model, the source of comparative advantage is a

country's
A) factor endowments.
B) technology.
C) advertising.
D) human capital.
E) political system.
Answer: A
Page Ref: 94-95
Difficulty: Easy

3) In the 2-factor, 2 good Heckscher-Ohlin model, trade will ________ the owners of a
country's ________ factor and will ________ the good that uses that factor intensively.
A) harm; scarce; import
B) harm; abundant; import
C) benefit; scarce; export
D) benefit; scarce; import

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E) harm; scarce; export
Answer: A
Page Ref: 96
Difficulty: Easy

4) According to the Heckscher-Ohlin model

A) the gainers from trade could compensate the losers and still retain gains.
B) everyone gains from trade.
C) the scarce factor gains from trade and the abundant factor loses.
D) a country gains from trade if its exports have a high value added.
E) only the country with the more advanced technology gains from trade.
Answer: A
Page Ref: 96
Difficulty: Easy

5) In the Heckscher-Ohlin model, when two countries begin to trade with each other
A) the relative prices of traded goods in the two countries converge.
B) relative factor prices in the two countries diverge.
C) benefits from trade are evenly distributed between the two countries.
D) all factors in both countries will gain from trade.
E) all factors in one country will gain, but there may be no gains in the other country.
Answer: A
Page Ref: 95
Difficulty: Easy

Assume that only two countries, A and B, exist.

6) Refer to the table above. If good S is capital intensive, then following the Heckscher-Ohlin
Theory
A) country B will export good S.
B) country A will export good S.
C) both countries will export good S.
D) trade will not occur between these two countries.
E) both countries will import good S.
Answer: A
Page Ref: 94-95
Difficulty: Moderate

7) Refer to the table above. If you are told that Country B is very much richer than Country
A, then the correct answer is
A) country B will export good S.
B) country A will export good S.
C) both countries will export good S.
D) trade will not occur between these two countries.
E) both countries will import good S.
Answer: A
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Page Ref: 94-95
Difficulty: Moderate

8) Refer to the table above. You are told that Country B is very much larger than country A.
The correct answer is
A) country B will export good S.
B) country A will export good S.
C) both countries will export good S.
D) trade will not occur between these two countries.
E) both countries will import good S.
Answer: A
Page Ref: 94-95
Difficulty: Moderate

9) Refer to the table above. You are told that Country B has no minimum wage or child labor
laws. Now the correct answer is
A) country B will export good S.
B) country A will export good S.
C) both countries will export good S.
D) trade will not occur between these two countries.
E) both countries will import good S.
Answer: A
Page Ref: 94-95
Difficulty: Moderate

10) If a good is labor intensive it means that the good is produced

A) using relatively more labor than goods that are not labor intensive.
B) using labor as the only input.
C) using more labor per unit of output than goods that are not labor intensive.
D) using labor such that the total cost of labor is greater than the total cost of capital.
E) using labor such that the cost of labor is more than 50% of total cost.
Answer: A
Page Ref: 94-95
Difficulty: Easy

11) In the Heckscher-Ohlin model, when there is international-trade equilibrium

A) the relative price of the capital intensive good in the capital rich country will be the same
as that in the capital poor country.
B) the capital rich country will charge less for the capital intensive good than the price paid
by the capital poor country for the capital-intensive good.
C) the capital rich country will charge more for the capital intensive good than the price paid
by the capital poor country for the capital-intensive good.
D) workers in the capital rich country will earn more than those in the poor country.
E) the workers in the capital rich country will earn less than those in the poor country.
Answer: A
Page Ref: 96
Difficulty: Moderate

12) If a good is capital intensive it means that the good is produced

A) using relatively more capital than goods that are not labor intensive.

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B) using capital as the only input.
C) using more capital per unit of output than goods that are not capital intensive.
D) using capital such that the total cost of capital is greater than the total cost of labor.
E) using capital such that the cost of capital is more than 50% of total cost.
Answer: A
Page Ref: 90
Difficulty: Easy

13) The Heckscher-Ohlin model predicts all of the following EXCEPT

A) the volume of trade.
B) which country will export which product.
C) which factor of production within each country will gain from trade.
D) that relative wages will tend to become equal in both trading countries.
E) that trade increases a country's overall welfare.
Answer: A
Page Ref: 89-97
Difficulty: Moderate

14) If Australia has relatively more land per worker, and Belgium has relatively more capital
per worker, then if trade began between these two countries
A) the relative price of the land-intensive product would increase in Australia.
B) the relative price of the capital-intensive product would increase in Australia.
C) the relative price of the land-intensive product would increase in Belgium.
D) the relative price of the capital-intensive product would decrease in Belgium.
E) relative product prices would diverge between Australia and Belgium.
Answer: A
Page Ref: 95-96
Difficulty: Moderate

15) If Australia has more land per worker, and Belgium has more capital per worker,then if
trade began between these two countries
A) the real income of landowners in Belgium would decline.
B) the real income of capital owners in Australia would increase.
C) the real income of labor in Australia would decline.
D) the real income of labor in Belgium would decline.
E) the real income of labor in both countries would decline.
Answer: A
Page Ref: 95-96
Difficulty: Moderate

16) If Japan is relatively capital rich and the United States is relatively land rich, and if food
is relatively land intensive then trade between these two, formerly autarkic countries will
result in
A) an increase in the relative price of food in the U.S.
B) an increase in the relative price of food in Japan.
C) a global increase in the relative price of food.
D) a decrease in the relative price of food in both countries.
E) an increase in the relative price of food in both countries.
Answer: A
Page Ref: 95-96

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Difficulty: Moderate

17) Trade benefits a country by

A) increasing available consumption choices.
B) reducing the need for specialization in production.
C) reducing the relative price of the exported good.
D) increasing the real income of all resource owners.
E) increasing the wage rate.
Answer: A
Page Ref: 95-96
Difficulty: Easy

18) If Gambinia has many workers but very little land and even less productive capital, then,
following the Heckscher-Ohlin model, we predict that Gambinia will export
A) labor-intensive goods.
B) capital-intensive goods.
C) both capital- and land-intensive goods.
D) land-intensive goods.
E) both labor- and land-intensive goods.
Answer: A
Page Ref: 95-96
Difficulty: Moderate

19) If Gambinia has many workers but very little land and even less productive capital, then,
following the Heckscher-Ohlin model, in order to improve the country's economic welfare,
the Gambinian government should
A) engage in free trade.
B) protect the capital-intensive product.
C) protect the land-intensive product.
D) protect the labor-intensive product.
E) discontinue all international trade.
Answer: A
Page Ref: 95-96
Difficulty: Easy

30) Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H
is relatively labor abundant, then once trade begins
A) wages should rise and rents should fall in H.
B) wages and rents should rise in H.
C) wages and rents should fall in H.
D) wages should fall and rents should rise in H.
E) rent will be unchanged but wages will rise in H.
Answer: A
Page Ref: 95-96
Difficulty: Moderate

31) Suppose that there are two factors, capital and land, and that the United States is
relatively land endowed while the European Union is relatively capital-endowed. According
to the Heckscher-Ohlin model
A) European capitalists should support U.S.-European free trade.

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B) European landowners should support U.S.-European free trade.
C) all capitalists in both countries should support free trade.
D) all landowners should support free trade.
E) the U.S. should compensate European countries once trade commences.
Answer: A
Page Ref: 95-96
Difficulty: Easy

32) International trade has strong effects on income distributions. Therefore, international
trade
A) will tend to hurt some groups in each trading country.
B) is beneficial to everyone in both trading countries.
C) will tend to hurt one trading country.
D) will tend to hurt everyone in both countries.
E) will be beneficial to all those engaged in international trade.
Answer: A
Page Ref: 95-96
Difficulty: Easy

33) Factors tend to be specific to certain uses and products

A) in the short run.
B) in countries lacking comparative advantage.
C) in capital-intensive industries.
D) in labor-intensive industries.
E) in countries lacking fair labor laws.
Answer: A
Page Ref: 96
Difficulty: Easy

34) If the price of the capital intensive product rises more than does the price of the land
intensive product, then
A) the relative price of the capital intensive product will fall to some point between the
pretrade relative prices.
B) demand will shift away from the capital-intensive product, and its production will
decrease.
C) demand will shift away from the capital-intensive product, and its production will
decrease relative to that of the land intensive product.
D) the production of the capital-intensive product will decrease, but by less than production
of the land-intensive product.
E) the country that exports the capital-intensive good will lose its comparative advantage.
Answer: A
Page Ref: 96
Difficulty: Easy

35) If trade opens up between the two formerly autarkic countries, Australia and Belgium,
then
A) the real income of both countries may increase.
B) the real income of Australia and of Belgium will increase.
C) the real income of Australia but not of Belgium will increase.
D) the real income of neither country will increase.

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E) the real income of both countries will increase.
Answer: A
Page Ref: 96
Difficulty: Easy

5.3 Empirical Evidence on the Heckscher-Ohlin Model

1) The Leontief Paradox

A) failed to support the validity of the Heckscher-Ohlin model.
B) supported the validity of the Ricardian theory of comparative advantage.
C) supported the validity of the Heckscher-Ohlin model.
D) failed to support the validity of the Ricardian theory.
E) proved that the U.S. economy is different from all others.
Answer: A
Page Ref: 104
Difficulty: Easy

2) The Leontief Paradox

A) refers to the finding that U.S. exports were more labor intensive than its imports.
B) refers to the finding that U.S. Exports were more capital intensive than its exports.
C) refers to the finding that the U.S. produces outside its Edgeworth Box.
D) still accurately applies to today's pattern of U.S. international trade.
E) refers to the fact that Leontief—an American economist—had a Russian name.
Answer: A
Page Ref: 104
Difficulty: Easy

3) The 1987 study by Bowen, Leamer and Sveikauskas

A) supported the validity of the Leontief Paradox.
B) supported the validity of the Heckscher-Ohlin model.
C) used a two-country and two-product framework.
D) demonstrated that in fact countries tend to use different technologies.
E) proved that the U.S.'s comparative advantage relied on skilled labor.
Answer: A
Page Ref: 105
Difficulty: Easy

4) Empirical observations on actual North-South trade patterns tend to

A) support the validity of the Heckscher-Ohlin model.
B) support the validity of the Leontief Paradox.
C) support the validity of the Rybczynski Theorem.
D) support the validity of the wage equalization theorem.
E) support the validity of the neo-imperialism exploitation theory.
Answer: A
Page Ref: 110
Difficulty: Moderate

5) The Case of the Missing Trade refers to

A) the fact that factor trade is less than predicted by the Heckscher-Ohlin theory.
B) the 9th volume of the Hardy Boys' Mystery series.

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C) the fact that world exports does not equal world imports.
D) the fact that the Heckscher Ohlin theory predicts much less volume of trade than actually
exists.
E) the fact that the Heckscher Ohlin theory never applies to China-U.S. trade practices.
Answer: A
Page Ref: 105
Difficulty: Moderate

13) If two countries are very different in relative factor abundance, then empirical support for
which of the following would less likely?
A) the Factor Price Equalization Theorem
B) the Heckscher-Ohlin Theorem
C) the Law of One Price
D) the Law of Demand
E) the Gravity Theorem
Answer: A
Page Ref: 102
Difficulty: Easy

14) Which of the following empirical studies cast the most doubt on the Heckscher-Ohlin
model?
A) the study by Wassily Leontief
B) the study by Bowen, Leamer, and Sveikauskas
C) the study by David Ricardo
D) the study by Adam Smith
E) the study by Davis and Weinstein
Answer: A
Page Ref: 106-107
Difficulty: Easy

15) Which of the following empirical studies provided the most support for the heckscher-
Ohlin model?
A) the study by Wassily Leontief
B) the study by Bowen, Leamer, and Sveikauskas
C) the study by David Ricardo
D) the study by Adam Smith
E) the study by Davis and Weinstein
Answer: E
Page Ref: 106-107
Difficulty: Easy

16) Empirical support for the Heckscher-Ohlin model was weakest when the study applied
A) all of the assumptions of the model.
B) all of the assumptions of the model except that regarding technology.
C) all of the assumptions of the model except those regarding technology, goods and shipping
costs.
D) all of the assumptions of the model except those regarding technology, shipping costs and
gravity.
E) all of the assumptions of the model except those regarding shipping costs.

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Answer: C
Page Ref: 106-107
Difficulty: Easy

5.4 Appendix to Chapter 5: Factor Prices, Goods Prices, and Production Decisions

1) Which of the following is an assertion of the Heckscher-Ohlin model?

A) The wage-rental ratio is determined by relative product prices.
B) An increase in a country's labor supply will increase production of both the capital-
intensive and the labor-intensive good.
C) In the long-run, labor is mobile and capital is not.
D) Factor price equalization will occur only if there is costless mobility of all factors across
borders.
E) Factor endowments determine the technology that is available to a country, which
determines the good in which the country will have a comparative advantage.
Answer: A
Page Ref: 114-117
Difficulty: Moderate

2) Which of the following is an assertion of the Heckscher-Ohlin model?

A) The wage-rental ratio determines the capital-labor ratio in a country's industries.
B) An increase in a country's labor supply will increase production of both the capital-
intensive and the labor-intensive good.
C) In the long-run, labor is mobile and capital is not.
D) Factor price equalization will occur only if there is costless mobility of all factors across
borders.
E) Factor endowments determine the technology that is available to a country, which
determines the good in which the country will have a comparative advantage.
Answer: A
Page Ref: 114-117
Difficulty: Moderate

3) Which of the following is an assertion of the Heckscher-Ohlin model?

A) An increase in a country's labor supply will increase production of the labor-intensive
good and decrease production of the capital-intensive good.
B) An increase in a country's labor supply will increase production of both the capital-
intensive and the labor-intensive good.
C) In the long-run, labor is mobile and capital is not.
D) Factor price equalization will occur only if there is costless mobility of all factors across
borders.
E) Factor endowments determine the technology that is available to a country, which
determines the good in which the country will have a comparative advantage.
Answer: A
Page Ref: 114-117
Difficulty: Moderate

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 6 The Standard Trade Model
6.1 A Standard Model of a Trading Economy
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1) The meaning of "terms of trade" is
A) the price of a country's exports divided by the price of its imports.
B) the amount of exports sold by a country.
C) the price conditions bargained for in international markets.
D) the quantities of imports received in free trade.
E) the tariffs in place between two trading countries.
Answer: A
Page Ref: 119
Difficulty: Easy

2) A country cannot produce a mix of products with a higher value than where
A) the isovalue line is tangent to the production possibility frontier.
B) the isovalue line intersects the production possibility frontier.
C) the isovalue line is above the production possibility frontier.
D) the isovalue line is below the production possibility frontier.
E) the isovalue line is tangent with the indifference curve.
Answer: A
Page Ref: 120
Difficulty: Easy

3) Tastes of individuals are represented by

A) indifference curves.
B) production possibility frontiers.
C) isovalue lines.
D) production functions.
E) the terms of trade.
Answer: A
Page Ref: 121
Difficulty: Easy

4) If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the
international marketplace, then
A) the terms of trade of cloth exporters will improve.
B) all countries would be better off.
C) the terms of trade of food exporters will improve.
D) the terms of trade of all countries will improve.
E) the terms of trade of cloth exporters will worsen.

Answer: A
Page Ref: 120
Difficulty: Easy

5) If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the
international marketplace, then
A) the cloth exporter will increase the quantity of cloth produced.
B) the cloth exporter will increase the quantity of cloth exported.
C) the food exporter will increase the quantity of food exported.
D) the cloth exporter will decrease the quantity of cloth exported.
E) the country would import more cloth.
Answer: A
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Page Ref: 123
Difficulty: Easy

6) If the ratio of price of cloth (PC) divided by the price of food (PF) increases in the
international marketplace, then
A) world relative quantity of cloth supplied will increase.
B) world relative quantity of cloth supplied and demanded will increase.
C) world relative quantity of cloth supplied and demanded will decrease.
D) world relative quantity of cloth demanded will decrease.
E) world relative quantity of food will increase.
Answer: A
Page Ref: 123
Difficulty: Easy

7) A country will be able to consume a combination of goods that is not attainable solely
from domestic production if
A) the world terms of trade differ from its domestic relative costs.
B) the country specializes in one product.
C) the country avoids international trade.
D) the world terms of trade equal the domestic relative costs.
E) the country's domestic production value equals world relative value.
Answer: A
Page Ref: 125
Difficulty: Moderate

8) Terms of trade refers to

A) the relative price at which trade occurs.
B) what goods are imported.
C) what goods are exported.
D) the volume of trade.
E) the tariffs applied to trade.
Answer: A
Page Ref: 119
Difficulty: Easy

9) If points A and B are two locations on a country's production possibility frontier, then
A) the country could produce either of the two bundles.
B) consumers are indifferent between the two bundles.
C) producers are indifferent between the two bundles.
D) at any point in time, the country could produce both.
E) both bundles must have the same relative cost.
Answer: A
Page Ref: 119
Difficulty: Easy

10) If the economy is producing at point a on its production possibility frontier, then
A) all of the country's workers are employed.
B) all of the country's workers are specialized in one product.
C) all of the country's capital is used for one product.
D) all of its capital is used, but not efficiently.

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E) all of the country's exports are produced in equal amounts.
Answer: A
Page Ref: 119-120
Difficulty: Easy

11) Refer to the figure above, which shows a country's possible production possibility
frontiers and indifference curves. If the country is producing at ________, then moving to
________ will cause utility to ________.
A) point b; point c; remain unchanged
B) point a; point b; increase
C) point c; point b; increase
D) point c; point b; decrease
E) point a; point c; remain unchanged
Answer: A
Page Ref: 121-122
Difficulty: Easy

12) If two countries with diminishing returns and different marginal rates of substitution
between two products were to engage in trade, then
A) the marginal rates of substitution of both would become equal.
B) the shapes of their respective production possibility frontiers would change.
C) the larger of the two countries would dominate their trade.
D) the country with relatively elastic supplies would export more.
E) the opportunity costs for the smaller country would increase.
Answer: A
Page Ref: 125
Difficulty: Easy

13) If a country began exporting product A and importing product B, then, as compared to the
autarky (no-trade) situation, the marginal cost of product A will
A) increase.
B) decrease.
C) shift outward.
D) shift inward.
E) remain the same.
Answer: A
Page Ref: 123
Difficulty: Easy

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14) When the production possibility frontier shifts out relatively more in one direction, we
have
A) biased growth.
B) unbiased growth.
C) immiserizing growth.
D) balanced growth.
E) imbalanced growth.
Answer: A
Page Ref: 126
Difficulty: Easy

15) Suppose that a country experiences growth strongly biased toward its export, cloth
A) this will tend to worsen the country's terms of trade.
B) this will tend to improve the country's terms of trade.
C) this will tend to leave the country's terms of trade unchanged.
D) this will tend to worsen the terms of trade for the country's trading partner.
E) this will increase the price of cloth relative to the imported good.
Answer: A
Page Ref: 126
Difficulty: Moderate

16) Suppose that a "small country" experiences growth strongly biased toward its export,
cloth
A) this will have no effect on terms of trade for the country's trading partner.
B) this will tend to worsen the country's terms of trade.
C) this will tend to improve the country's terms of trade.
D) this will tend to worsen terms of trade for the country's trading partner.
E) this will tend to improve terms of trade for the country's trading partner.
Answer: A
Page Ref: 129
Difficulty: Moderate

20) Refer to the figure above, which shows a country's possible production possibility
frontiers and indifference curves. If the country is producing at ________, then moving to
________ will cause utility to ________.
A) point c; point b; remain unchanged
B) point a; point b; increase
C) point c; point b; increase
D) point c; point b; decrease
E) point a; point c; remain unchanged
Answer: A
Page Ref: 121-123
Difficulty: Easy

21) Refer to the figure above, which shows a country's possible production possibility
frontiers and indifference curves. If the country is producing at ________, then moving to
________ will cause utility to ________.
A) point b; point a; increase
B) point a; point b; increase

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C) point c; point b; increase
D) point c; point b; decrease
E) point a; point c; remain unchanged
Answer: A
Page Ref: 121-123
Difficulty: Easy

6.2 Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD

1) If the U.S. (a large country) imposes a tariff on its imported good, this will tend to
A) improve the terms of trade of the United States.
B) have no effect on terms of trade.
C) improve the terms of trade of all countries.
D) cause a deterioration of U.S. terms of trade.
E) raise the world price of the good imported by the United States.
Answer: A
Page Ref: 132-133
Difficulty: Easy

2) If Slovenia is a small country in world trade terms, then if it imposes a large series of
tariffs on many of its imports, this would
A) have no effect on its terms of trade.
B) improve its terms of trade.
C) deteriorate its terms of trade.
D) decrease its marginal propensity to consume.
E) increase its exports.
Answer: A
Page Ref: 132-133
Difficulty: Easy

3) If Slovenia is a large country in world trade, then if it imposes a large set of tariffs on
many of its imports, this would
A) improve its terms of trade.
B) have no effect on its terms of trade.
C) harm its terms of trade.
D) decrease its marginal propensity to consume.
E) increase its exports.
Answer: A
Page Ref: 132-135
Difficulty: Easy

4) If Slovenia were a large country in world trade, then if it imposes a large set of tariffs on
its imports, this must
A) decrease the internal price of imports below the world market rate.
B) cause retaliation on the part of its trade partners.
C) harm Slovenia's real income.
D) improve Slovenia's real income.
E) improve the real income of its trade partners.
Answer: A
Page Ref: 132-135

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Difficulty: Easy

5) If Slovenia were a large country in world trade, then if it instituted a large set of subsidies
for its exports, this must
A) harm its terms of trade.
B) have no effect on its terms of trade.
C) improve its terms of trade.
D) decrease its marginal propensity to consume.
E) harm world terms of trade.
Answer: A
Page Ref: 132-135
Difficulty: Easy

6) If Slovenia were a large country in world trade, then if it instituted a large set of subsidies
for its exports, this must
A) improve the real income of its trade partners.
B) cause retaliation on the part of its trade partners.
C) harm Slovenia's real income.
D) improve Slovenia's real income.
E) increase internal prices above the world market rate.
Answer: A
Page Ref: 132-135
Difficulty: Easy

11) If a small country were to levy a tariff on its imports then this would
A) decrease the country's economic welfare.
B) have no effect on that country's economic welfare.
C) increase the country's economic welfare.
D) change the terms of trade.
E) raise prices on its exports in other countries.
Answer: A
Page Ref: 132-135
Difficulty: Easy

12) An increase in a country's net commodity terms of trade will

A) not always guarantee positive changes in the country's economy.
B) always increase the country's economic welfare.
C) always increase the country's real income.
D) never increase the country's quantity of exports.
E) always increase the country's production of its import competing good.
Answer: A
Page Ref: 132-135
Difficulty: Easy

13) An import tariff will cause the relative demand for ________ to ________ and the
relative supply for ________ to ________.
A) imports; decrease; imports; increase
B) imports; increase; imports; decrease
C) exports; increase; exports; decrease
D) exports; decrease; exports; increase

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E) exports; increase; imports; decrease
Answer: A
Page Ref: 132-135
Difficulty: Moderate

14) An export subsidy will cause the relative demand for ________ to ________ and the
relative supply for ________ to ________.
A) exports; decrease; exports; increase
B) imports; decrease; imports; increase
C) imports; increase; imports; decrease
D) exports; increase; exports; decrease
E) exports; increase; imports; decrease
Answer: A
Page Ref: 132-135
Difficulty: Moderate

15) An import tariff will cause the terms of trade of the ________ country to ________ and
will ________ the country.
A) importing; improve; benefit
B) exporting; improve; benefit
C) importing; suffer; harm
D) exporting; improve; harm
E) importing; improve; harm
Answer: A
Page Ref: 132-135
Difficulty: Moderate

16) An export subsidy will cause the terms of trade of the ________ country to ________ and
will ________ the country.
A) exporting; suffer; harm
B) exporting; improve; benefit
C) importing; suffer; harm
D) importing; suffer; benefit
E) importing; improve; harm
Answer: A
Page Ref: 132-135
Difficulty: Moderate

6.3 International Borrowing and Lending

1) International borrowing and lending may be interpreted as one form of

A) intertemporal trade.
B) intermediate trade.
C) trade in services.
D) unrequited international transfers.
E) aid to offset trade advantages.
Answer: A
Page Ref: 135-136
Difficulty: Easy

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2) If one observes that Japan was traditionally a net foreign lender, one could conclude that
relative to its international trade and financial partners
A) Japan's intertemporal production possibilities are biased toward present consumption.
B) Japan's intertemporal production possibilities are biased toward future consumption.
C) Japan's intertemporal production possibilities are larger than that of the other countries.
D) Japan's intertemporal production possibilities are not biased.
E) Japan preferred to consume beyond its production in the present.
Answer: A
Page Ref: 135-136
Difficulty: Easy

3) Rapidly growing developing countries tend to be borrowers on the international capital

markets. From this information we may surmise that they have a comparative advantage in
A) future income.
B) capital goods.
C) disposable income.
D) consumer goods.
E) present income.
Answer: A
Page Ref: 135-136
Difficulty: Easy

4) It may be argued that theoretically, international capital movements

A) tend to hurt labor in donor countries.
B) tend to hurt the donor countries.
C) tend to hurt the recipient countries.
D) tend to hurt labor in recipient countries.
E) increase future production in donor countries.
Answer: A
Page Ref: 135-136
Difficulty: Moderate

5) The intertemporal tradeoff between present and future consumption is measured by the
A) real interest rate.
B) inflation rate.
C) nominal interest rate.
D) terms of trade.
E) rate of economic growth.
Answer: A
Page Ref: 136-37
Difficulty: Easy

6) A fall in the real interest rate, all other things held constant, will cause a country's
________ to ________.
A) current consumption: increase
B) current consumption: decrease
C) terms of trade; improve
D) terms of trade; worsen
E) welfare level; improve
Answer: A

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Page Ref: 136-37
Difficulty: Easy

7) An increase in the real interest rate, all other things held constant, will cause a country's
________ to ________.
A) current consumption: increase
B) current consumption: decrease
C) terms of trade; improve
D) terms of trade; worsen
E) welfare level; improve
Answer: B
Page Ref: 136-37
Difficulty: Easy

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 7 External Economies of Scale and the International Location of Production

7.1 Economies of Scale and International Trade: An Overview

1) If a firm's output more than doubles when all inputs are doubled, production is said to
occur under conditions of
A) increasing returns to scale.
B) imperfect competition.
C) intra-industry equilibrium.
D) constant returns to scale
E) decreasing returns to scale.
Answer: A
Page Ref: 146-147
Difficulty: Easy

2) One advantage of the specialization that results from international trade is that countries
can take advantage of
A) scale economies.
B) production diversification
C) smaller countries.
D) taste reversals.
E) lower transport costs.
Answer: A
Page Ref: 146-147
Difficulty: Moderate

4) If a firm's output doubles when all inputs are doubled, production is said to occur under
conditions of
A) increasing returns to scale.
B) imperfect competition.
C) intra-industry equilibrium.
D) constant returns to scale
E) decreasing returns to scale.
Answer: D
Page Ref: 146-147

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Difficulty: Easy

5) If a firm's output less than doubles when all inputs are doubled, production is said to occur
under conditions of
A) increasing returns to scale.
B) imperfect competition.
C) intra-industry equilibrium.
D) constant returns to scale
E) decreasing returns to scale.
Answer: E
Page Ref: 146-147
Difficulty: Easy

7.2 Economies of Scale and Market Structure

1) The existence of external economies of scale

A) may be associated with a perfectly competitive industry.
B) cannot be associated with a perfectly competitive industry.
C) tends to result in one huge monopoly.
D) tends to result in large profits for each firm.
E) focuses more on individual firms than the industry as a whole.
Answer: A
Page Ref: 147-148
Difficulty: Moderate

2) The existence of internal economies of scale

A) cannot be associated with a perfectly competitive industry.
B) may be associated with a perfectly competitive industry.
C) is associated only with sophisticated products such as aircraft.
D) cannot form the basis for international trade.
E) focuses more on the industry than individual firms.
Answer: A
Page Ref: 147-148
Difficulty: Moderate

3) When there are external economies of scale, an increase in the size of the market will
A) increase the number of firms and lower the price per unit.
B) increase the number of firms and raise the price per unit.
C) decrease the number of firms and raise the price per unit.
D) decrease the number of firms and lower the price per unit.
E) not affect the number of firms, but will lower the price per unit.
Answer: A
Page Ref: 147-148
Difficulty: Easy

4) If some industries exhibit internal increasing returns to scale in each country, we should
not expect to see
A) perfect competition in these industries.
B) intra-industry trade between countries.
C) inter-industry trade between countries.

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D) high levels of specialization in both countries.
E) increased productivity in both countries.
Answer: A
Page Ref: 147-148
Difficulty: Moderate
6) External economies of scale arise when the cost per unit
A) falls as the industry grows larger and rises as the average firm grows larger.
B) rises as the industry grows larger and falls as the average firm grows larger.
C) falls as the industry and the average firm grows larger.
D) remains constant over a broad range of output.
E) rises as the industry and the average firm grows larger.
Answer: A
Page Ref: 147-148
Difficulty: Easy

7) Internal economies of scale arise when the cost per unit

A) falls as the average firm grows larger.
B) rises as the industry grows larger.
C) falls as the industry grows larger.
D) rises as the average firm grows larger.
E) remains constant over a broad range of output.
Answer: A
Page Ref: 147-148
Difficulty: Easy

8) Where there are internal economies of scale, the scale of production possible in a country
is constrained by
A) the size of the domestic plus the foreign market.
B) the size of the country.
C) the size of the trading partner's country.
D) the size of the domestic market.
E) the size of the foreign market.
Answer: A
Page Ref: 147-148
Difficulty: Easy

12) External economies of scale will ________ average cost when output is ________ by
________.
A) reduce; increased; the industry
B) reduce; increased; a firm
C) increase; increased; a firm
D) increase; increased; the industry
E) reduce; reduce; the industry
Answer: A
Page Ref: 147-148
Difficulty: Moderate

7.3 The Theory of External Economies

1) What is meant by an "industrial district" and what are the three main sources of the

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economic advantages derived from locating in such a district?
Answer: An industrial community is a geographical concentration of firms in the same
industry. Silicon Valley and Bollywood are modern examples. The advantages are (1)
specialized suppliers, (2) labor market pooling, and (3) knowledge spillovers.
Page Ref: 148-151
Difficulty: Moderate

2) External economies of scale often arise because similar firms

A) locate in the same geographic region.
B) collude to fix prices and increase profits.
C) have excellent internal logistics.
D) agree to cooperate to expand global trade.
E) have economies of scale in production.
Answer: A
Page Ref: 148-151
Difficulty: Easy

3) The Internet has made transactions between businesses (B2B trading) fast and easy. Any
business in any location can access specialized knowledge, labor, and materials. It is likely
that these virtual economic communities will result in
A) external economies of scale.
B) internal economies of scale.
C) consolidation of industries into a small number of powerful firms.
D) suppression of innovations and collusive behavior, driving up prices.
E) government intervention and regulation.
Answer: A
Page Ref: 148-151
Difficulty: Moderate

4) The long-run market supply curve in the presence of internal economies of scale is
________, and in the presence of external economies of scale, it is ________.
A) downward sloping; downward sloping
B) upward sloping; horizontal
C) horizontal; upward sloping
D) downward sloping; horizontal
E) upward sloping; downward sloping
Answer: A
Page Ref: 148-151
Difficulty: Easy

5) If output is increased in the long-run, average production costs in the presence of internal
economies of scale will ________, and in the presence of external economies of scale, will
________.
A) decrease; decrease
B) increase; remain constant
C) remain constant; increase
D) decrease; remain constant
E) increase; decrease
Answer: A
Page Ref: 148-151

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Difficulty: Easy

6) If the firms in a market have constant returns to scale internally while there are external
economies of scale for the industry, a firm's long-run supply curve will be ________ and the
long-run market supply curve will be ________.
A) downward sloping; downward sloping
B) upward sloping; horizontal
C) horizontal; downward sloping
D) downward sloping; horizontal
E) upward sloping; downward sloping
Answer: C
Page Ref: 148-151
Difficulty: Easy

7) If output is increased in the long-run, then in the presence of internal economies of scale
the number of firms will ________, and in the presence of constant external returns to scale
the number of firms will __________.
A) decrease; decrease
B) increase; remain constant
C) remain constant; increase
D) decrease; remain constant
E) increase; decrease
Answer: C
Page Ref: 148-151
Difficulty: Easy

8) If output is increased in the long-run, average production costs in the presence of internal
diseconomies of scale will ________, and in the presence of external diseconomies of scale,
will ________.
A) decrease; decrease
B) increase; remain constant
C) remain constant; increase
D) decrease; remain constant
E) increase; decrease
Answer: C
Page Ref: 148-151
Difficulty: Easy

7.4 External Economies and International Trade

1) If two countries begin trade and both produce a product subject to external economies of
scale, then the country with the ________ rate of production will ________ production until
it controls ________ of the market.
A) higher; increase; 100%
B) higher; increase; 50%
C) lower; increase; 100%
D) lower; increase; 50%
E) higher; decrease; 0%
Answer: A
Page Ref: 152-158

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Difficulty: Easy

3) In the presence of external economies of scale, trade

A) may or may not improve welfare in both countries.
B) will unambiguously improves welfare in both countries.
C) will unambiguously worsens welfare in both countries.
D) will unambiguously worsen welfare in the exporting country and improve welfare in the
importing country.
E) will unambiguously improve welfare in the exporting country and worsen welfare in the
importing country.
Answer: A
Page Ref: 152-158
Difficulty: Moderate

4) A learning curve relates ________ to ________ and is a case of ________ returns.

đơn giá; sản
A) unit cost; cumulative production; dynamic increasing returns

xuất tích lũy; lợi nhuận tăng động

B) output per time period; long-run marginal cost; dynamic increasing returns
C) unit cost; cumulative production; dynamic decreasing returns
D) output per time period; long-run marginal cost; dynamic decreasing returns
E) labor productivity; education; increasing marginal returns
Answer: A
Page Ref: 152-158
Difficulty: Easy

5) The learning curve describes the ________ relationship between ________ and ________.
A) inverse; unit cost; cumulative output
B) direct; unit cost; cumulative output
C) inverse; education; annual income
D) direct; education; annual income
E) direct; education; labor productivity
Answer: A
Page Ref: 152-158
Difficulty: Easy

6) If two countries begin trade and both produce a product subject to internal economies of
scale, then the country with the ________ rate of production will ________ production until
it controls ________ of the market.
A) higher; increase; 100%
B) higher; increase; 50%
C) lower; increase; 100%
D) lower; increase; 50%
E) higher; decrease; 0%
Answer: A
Page Ref: 152-158
Difficulty: Easy

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7.5 Interregional Trade and Economic Geography

1) Restaurant meals are an example of a ________ good and clothing is an example of a

________ good. The pattern of interregional trade is determined primarily by ________.
A) nontraded; traded; external economies.
B) traded; nontraded; internal economies
C) nondurable; durable; natural resource
D) durable; nondurable; natural resources
E) consumer; style; population
Answer: A
Page Ref: 158-161
Difficulty: Easy

2) The share of ________ goods in employment is ________ across the country. The share of
________ goods in employment is ________ across the country.
A) nontraded; uniform; traded; variable
B) traded; uniform; nontraded; variable
C) durable; uniform; nondurable; variable
D) nondurable; uniform; durable; variable
E) nontraded; variable; traded; uniform
Answer: A
Page Ref: 158-161
Difficulty: Moderate

3) Patterns of interregional trade are primarily determined by ________ rather than ________
because factors of production are generally ________.
A) external economies; natural resources; mobile
B) internal economies; external economies; mobile
C) external economies; population; immobile
D) internal economies; population; immobile
E) population; external economies; immobile
Answer: A
Page Ref: 158-161
Difficulty: Easy

4) The primary determinant of patterns of interregional trade is

A) accidents of history.
B) resource allocations.
C) factor abundance.
D) weather.
E) centralized optimization.
Answer: A
Page Ref: 158-161
Difficulty: Easy

5) The study of factors that influence both international and interregional trade is referred to
as
A) accidents of history.
B) economic geography.
C) factor abundance theory.

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D) weather analysis.
E) centralized optimization.
Answer: B
Page Ref: 158-161
Difficulty: Easy

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 8 Firms in the Global Economy: Export Decisions, Outsourcing, and
Multinational Enterprises

8.1 The Theory of Imperfect Competition

1) A monopolistic firm
A) will never sell a product whose demand is inelastic at the quantity sold.
B) can sell as much as it wants for any price it determines in the market.
C) cannot determine the price, which is determined by consumer demand.
D) cannot sell additional quantity unless it raises the price on each unit.
E) will always earn a profit in the long run.
Answer: A
Page Ref: 166-168
Difficulty: Easy

2) Monopolistic competition is associated with

A) product differentiation.
B) price-taking behavior.
C) explicit consideration at the firm level of the strategic impact of other firms' pricing
decisions.
D) high profit margins in the long run.
E) increasing returns to scale.
Answer: A
Page Ref: 169-173
Difficulty: Easy

3) Modeling trade in imperfectly competitive industries is problematic because

A) there is no single generally accepted model of behavior by imperfectly competitive firms.
B) there are no models of imperfectly competitive behavior.
C) it is difficult to find an imperfectly competitive firm in the real world.
D) collusion among imperfectly competitive firms makes usable data rare.
E) there is only a single model of imperfect competition (monopoly) but imperfect
competition can take many forms in the real world.
Answer: A
Page Ref: 165-166
Difficulty: Easy

4) The simultaneous export and import of widgets by the United States is an example of
A) intra-industry trade.
B) increasing returns to scale.
C) imperfect competition.
D) inter-industry trade.
E) the effect of a monopoly on international trade.

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Answer: A
Page Ref: 177-178
Difficulty: Easy

5) When a country both exports and imports a type of commodity, the country is engaged in
A) intra-industry trade.
B) increasing returns to scale.
C) imperfect competition.
D) inter-industry trade.
E) an attempt to monopolize the relevant industry.
Answer: A
Page Ref: 177-178
Difficulty: Easy

6) If there are a large number of firms in a monopolistically competitive industry

A) long-run profit will be equal to zero.
B) the country in which the firms are located can be expected to export the goods they
produce.
C) there will be barriers to entry that prevent addition firms from entering the industry.
D) the firms will converge production on a standardized product.
E) there will be a small number of firms that are very large and the rest will be very small.
Answer: A
Page Ref: 170-172
Difficulty: Easy

8) If a firm increases its output in the ________ and unit costs ________, then the firm is
experiencing ________ of scale.
A) long-run; decrease; economies
B) short-run; decrease; economies
C) long-run; decrease; diseconomies
D) short-run; decrease; diseconomies
E) long-run; increase; economies
Answer: A
Page Ref: 177-178
Difficulty: Easy

9) If a firm increases its output in the ________ and unit costs ________, then the firm is
experiencing ________ of scale.
A) long-run; increase; diseconomies
B) short-run; decrease; economies
C) long-run; decrease; diseconomies
D) short-run; decrease; diseconomies
E) long-run; increase; economies
Answer: A
Page Ref: 177-178
Difficulty: Easy

10) If a firm that uses a production process that yields economies of scale charges a price
equal to ________, then profit will be ________.
A) marginal cost; negative

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B) marginal revenue; maximized
C) marginal cost; maximized
D) marginal revenue; positive
E) marginal cost; positive
Answer: A
Page Ref: 177-178
Difficulty: Moderate

11) Firms that produce ________ products must be ________ competitive.

A) differentiated; imperfectly
B) differentiated; perfectly
C) standardized; imperfectly
D) standardized; perfectly
E) exported; imperfectly
Answer: A
Page Ref: 177-178
Difficulty: Moderate

12) Imperfectly competitive firms have a demand curve that ________ and a marginal
revenue curve that ________ and is ________ the demand curve.
A) slopes downward; slopes downward; below
B) is horizontal; is horizontal; the same as
C) slopes downward; is horizontal; above
D) is horizontal; slopes downward; below
E) slopes downward; slopes downward; the same as
Answer: A
Page Ref: 177-178
Difficulty: Easy

19) Under oligopoly, firms' pricing policies are ________ and, under monopolistic
competition, they are ________.
A) interdependent; independent
B) independent; interdependent
C) cooperative; uncooperative
D) uncooperative; cooperative
E) profit maximizing; revenue maximizing
Answer: A
Page Ref: 168-172
Difficulty: Moderate

20) Under the model of monopolistic competition, a(an) ________ in the number of firms in
the industry will cause ________ to ________.
A) increase; average price; decrease
B) increase; average price; increase
C) increase; average cost; decrease
D) decrease; markup; decrease
E) increase; marginal cost; decrease
Answer: A
Page Ref: 168-172

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Difficulty: Moderate

21) Under the model of monopolistic competition, a(an) ________ in the number of firms in
the industry will cause ________ to ________.
A) increase; markup; decrease
B) increase; average price; increase
C) increase; average cost; decrease
D) decrease; markup; decrease
E) increase; marginal cost; decrease
Answer: A
Page Ref: 168-172
Difficulty: Moderate

8.2 Monopolistic Competition and Trade

1) Intra-industry trade is most common in the trade patterns of

A) the industrial countries of Western Europe.
B) the developing countries of Asia and Africa.
C) raw material producers.
D) China with the rest of the world.
E) labor-intensive products.
Answer: A
Page Ref: 179
Difficulty: Easy

2) If the market for products produced by firms in a monopolistically competitive industry

becomes ________, then there will be ________ firms and each firm will produce ________
output and charge a ________ price.
A) larger; more; more; lower
B) larger; fewer; more; lower
C) larger; fewer; more; higher
D) larger; more; more; higher
E) larger; more; less; higher
Answer: A
Page Ref: 173-175
Difficulty: Easy

3) International trade based on external scale economies in both countries is likely to be

carried out by
A) a relatively large number of price competing firms.
B) a relatively small number of price competing firms.
C) a relatively small number of imperfect competitors.
D) monopolists in each country.
E) a large number of oligopolists in each country.
Answer: A
Page Ref: 173-178
Difficulty: Easy

4) International trade based solely on internal scale economies in both countries is likely to be
carried out by

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A) monopolists in each country.
B) a relatively large number of price competing firms.
C) a relatively small number of price competing firms.
D) a relatively small number of imperfect competitors.
E) a large number of oligopolists in each country.
Answer: A
Page Ref: 173-178
Difficulty: Easy

5) A monopoly firm engaged in international trade will

A) equate marginal costs with marginal revenues in both domestic and foreign markets.
B) equate average to local costs.
C) equate marginal costs with foreign marginal revenues.
D) equate marginal costs with the highest price the market will bear.
E) equate marginal costs with the relative world prices.
Answer: A
Page Ref: 173-178
Difficulty: Easy

6) A monopoly firm will maximize profits by producing where

A) marginal revenue is the same in domestic and foreign markets.
B) prices are the same in domestic and foreign markets.
C) marginal revenue is higher in foreign markets.
D) marginal revenue is higher in the domestic market.
E) total revenue from domestic and foreign sales is maximized.
Answer: A
Page Ref: 173-178
Difficulty: Moderate

7) A firm in long-run equilibrium under monopolistic competition will earn

A) zero economic profits because of free entry.
B) positive monopoly profits because each sells a differentiated product.
C) positive oligopoly profits because each firm sells a differentiated product.
D) negative economic profits because it has economies of scale.
E) positive economic profit if it engages in international trade.
Answer: A
Page Ref: 173-178
Difficulty: Easy

8) An industry is characterized by scale economies, and exists in two countries. Should these
two countries engage in trade such that the combined market is supplied by one country's
industry, then
A) consumers in both countries would have more varieties and lower prices.
B) consumers in both countries would have higher prices and fewer varieties.
C) consumers in the importing country only would have higher prices and fewer varieties.
D) consumers in the exporting country only would have higher prices and fewer varieties.
E) consumers in both countries would have fewer varieties at lower prices.
Answer: A
Page Ref: 173-178
Difficulty: Easy

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9) An industry is characterized by scale economies and exists in two countries. In order for
consumers of its products to enjoy both lower prices and more variety of choice
A) the two countries must engage in international trade with each other.
B) each country's marginal cost must equal that of the other country.
C) the marginal cost of this industry must equal marginal revenue in the other.
D) the monopoly must lower prices in order to sell more.
E) they must combine to become a multinational corporation.
Answer: A
Page Ref: 173-178
Difficulty: Moderate

10) A product is produced in a monopolistically competitive industry with scale economies.

If this industry exists in two countries, and these two countries engage in trade with each
other, then we would expect
A) each country will export different varieties of the product to the other.
B) the country in which the price of the product is lower will export the product.
C) the country with a relative abundance of the factor of production in which production of
the product is intensive will export this product.
D) neither country will export this product since there is no comparative advantage.
E) the countries will trade only with other nations they are not in competition with.
Answer: A
Page Ref: 173-178
Difficulty: Easy

11) Two countries engaged in trade in products with no scale economies, produced under
conditions of perfect competition, are likely to be engaged in
A) inter-industry trade.
B) monopolistic competition.
C) intra-industry trade.
D) Heckscher-Ohlin trade.
E) oligopolistic competition
Answer: A
Page Ref: 173-178
Difficulty: Easy

12) Two countries engaged in trade in products with scale economies, produced under
conditions of monopolistic competition, are likely to be engaged in
A) intra-industry trade.
B) price competition.
C) inter-industry trade.
D) Heckscher-Ohlinean trade.
E) immiserizing trade.
Answer: A
Page Ref: 173-178
Difficulty: Easy

13) We often observe "pseudo-intra-industry trade" between the United States and Mexico.
Actually, such trade is consistent with
A) comparative advantage associated with Heckscher-Ohlin model.

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B) oligopolistic markets.
C) optimal tariff issues.
D) the Ricardian model of trade.
E) the specific factors model of trade.
Answer: A
Page Ref: 173-178
Difficulty: Easy

14) Intra-industry trade will tend to dominate trade flows when which of the following exists?
A) small differences between relative country factor availabilities
B) large differences between relative country factor availabilities
C) homogeneous products that cannot be differentiated
D) constant cost industries
E) uneven distribution of abundant resources between two countries
Answer: A
Page Ref: 173-178
Difficulty: Easy

15) Trade without serious income distribution effects is most likely to happen
A) in sophisticated manufactures trade between rich countries.
B) in simple manufactures trade between developing countries.
C) in sophisticated manufactures trade between rich and poor countries.
D) in agricultural trade between rich countries.
E) in labor-intensive industries like clothing.
Answer: A
Page Ref: 173-178
Difficulty: Moderate

20) If the market for products produced by firms in a monopolistically competitive industry
becomes ________, then there will be ________ firms and each firm will produce ________
output and charge a ________ price.
A) smaller; fewer; less; higher
B) smaller; more; less; higher
C) smaller; more; less; lower
D) smaller; fewer; less; lower
E) smaller; fewer; more; higher
Answer: A
Page Ref: 173-178
Difficulty: Easy

21) In an industry where firms experience internal scale economies, the long-run cost of
production will depend on
A) the size of the market.
B) the size of the labor force.
C) whether the country engages in intra-industry trade.
D) individual firms' fixed costs.
E) whether the country engages in inter-industry trade.
Answer: A
Page Ref: 177-178
Difficulty: Easy

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8.3 Firm Responses to Trade: Winners, Losers, and Industry Performance

1) In the model of monopolistic competition, if firms have ________ average cost curves,
then opening trade will ________ the total number of firms and ________ the average price.
A) downward sloping; decrease; decrease
B) downward sloping; decrease; increase
C) downward sloping; increase; decrease
D) upward sloping; decrease; increase
E) upward sloping; increase; decrease
Answer: A
Page Ref: 181-185
Difficulty: Moderate

2) In the model of monopolistic competition, if firms have ________ average cost curves,
then opening trade will cause ________ firms to ________ the industry.
A) different; less efficient; exit
B) different; more efficient; enter
C) symmetric; less efficient; exit
D) symmetric; more efficient; enter
E) symmetric; less efficient; enter
Answer: A
Page Ref: 181-185
Difficulty: Easy

3) In the model of monopolistic competition, compared to a firm with a higher marginal cost,
a firm with a lower marginal cost will set a ________ price, produce ________ output, and
earn ________ profits.
A) lower; more; more
B) higher; more; more
C) lower; less; less
D) higher; less; less
E) higher; less; more
Answer: A
Page Ref: 181-185
Difficulty: Easy

4) In the model of monopolistic competition, compared to a firm with a lower marginal cost,
a firm with a higher marginal cost will set a ________ price, produce ________ output, and
earn ________ profits.
A) higher; less; less
B) lower; more; more
C) higher; more; more
D) lower; less; less
E) higher; less; more
Answer: A
Page Ref: 181-185
Difficulty: Easy

5) In the model of monopolistic competition, an increase in industry output will cause

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individual firms' demand curves to become ________, which will ________ demand for
higher-priced goods and ________ demand for lower-priced goods.
A) flatter; reduce; increase
B) steeper; reduce; increase
C) flatter; increase; reduce
D) steeper; increase; reduce
E) horizontal; reduce; reduce
Answer: A
Page Ref: 181-185
Difficulty: Easy

6) In the model of monopolistic competition, an increase in industry output will ________

producers of ________ higher-priced goods and ________ producers of lower-priced goods.
A) harm; benefit
B) benefit; harm
C) harm; harm
D) benefit; benefit
E) benefit; have no effect on
Answer: A
Page Ref: 181-185
Difficulty: Easy

7) In the model of monopolistic competition, an increase in industry output will ________

market shares and ________ profits of producers of higher-priced goods and will ________
market shares and ________ profits of producers of lower-priced goods.
A) reduce; reduce; increase; increase
B) increase; increase; reduce; reduce
C) increase; reduce; increase; reduce
D) reduce; increase; reduce; increase
E) reduce; increase; increase; reduce
Answer: A
Page Ref: 181-185
Difficulty: Easy

8.4 Trade Costs and Export Decisions

1) In the model of monopolistic competition, trade costs between countries will cause
domestic and foreign markets to have ________ prices, ________ quantities sold, and
________ profit levels.
A) different; different; different
B) identical; different; different
C) different; different; identical
D) identical; different; identical
E) identical; identical; different
Answer: A
Page Ref: 185-187
Difficulty: Easy

2) In the model of monopolistic competition, trade costs between countries cause

A) marginal costs of exported goods to exceed the marginal costs of goods sold domestically.

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B) marginal costs of goods sold domestically to exceed the marginal costs of exported goods.
C) all firms that can earn a profit on domestic sales to export their goods at lower prices.
D) all firms that can earn a profit on domestic sales to export their goods at higher prices.
E) countries to negotiate the elimination of trade costs by mutual subsidization of trade.
Answer: A
Page Ref: 185-187
Difficulty: Easy

3) In the model of monopolistic competition, trade costs between countries cause

A) some firms that can earn a profit on domestic sales to refrain from exporting their goods.
B) prices of goods sold domestically to exceed the prices of exported goods.
C) marginal costs of goods sold domestically to exceed the marginal costs of exported goods.
D) all firms that can earn a profit on domestic sales to export their goods at higher prices.
E) countries to negotiate the elimination of trade costs by mutual subsidization of trade.
Answer: A
Page Ref: 185-187
Difficulty: Easy

8.5 Dumping

1) The most common form of price discrimination in international trade is

A) dumping.
B) non-tariff barriers.
C) Voluntary Export Restraints.
D) preferential trade arrangements.
E) product boycotts.
Answer: A
Page Ref: 188-190
Difficulty: Easy

2) If an industry is imperfectly competitive, and markets are segmented then

A) a firm may find that it is profitable to engage in dumping.
B) a firm may find that international trade is unprofitable.
C) a firm may find that it should promote scale economies.
D) a firm may find that it has lost its comparative advantage.
E) a firm may find that it should become more specialized.
Answer: A
Page Ref: 188-190
Difficulty: Easy

3) Complaints are often made to the International Trade Commission concerning foreign
"dumping" practices. These complaints typically claim that
A) U.S. firms are harmed by the unfair pricing of foreign exporters.
B) foreign companies are charging exorbitant prices that are higher than the true value of the
products.
C) foreign companies are charging prices that are lower than prices they charge countries
other than the U.S.
D) U.S. consumers are harmed by the lack of quality control or health concerns in foreign
countries.
E) U.S. consumers cannot differentiate between the foreign and domestic goods.

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Answer: A
Page Ref: 188-190
Difficulty: Easy

8.6 Multinationals and Outsourcing

1) A corporation is considered a multinational ________ if ________.

A) parent; it owns more than 10% of a foreign firm
B) parent; more than 10% of its stock is held by a foreign company
C) child; more than 10% of its stock is held by a foreign company
D) child; more than 50% of its stock is held by a foreign company
E) monopolist; it owns more than 50% of a foreign firm
Answer: A
Page Ref: 190-194
Difficulty: Easy

2) A corporation is considered a multinational ________ if ________.

A) affiliate; more than 10% of its stock is held by a foreign company
B) parent; more than 10% of its stock is held by a foreign company
C) child; more than 10% of its stock is held by a foreign company
D) child; more than 50% of its stock is held by a foreign company
E) monopolist; it owns more than 50% of a foreign firm
Answer: A
Page Ref: 190-194
Difficulty: Easy

3) Consider the following two cases. In the first, a U.S. firm purchases 18% of a foreign
firm. In the second, a U.S. firm builds a new production facility in a foreign country. Both are
________, with the first referred to as ________ and the second as ________.
A) foreign direct investment (FDI) outflows; greenfield; brownfield
B) foreign direct investment (FDI) inflows; greenfield; brownfield
C) foreign direct investment (FDI) outflows; brownfield; greenfield
D) foreign direct investment (FDI) inflows; brownfield; greenfield
E) foreign direct investment (FDI); inflows; outflows
Answer: A
Page Ref: 190-194
Difficulty: Moderate

4) When a multinational affiliate replicates production in a foreign country it is called

________ foreign direct investment.
A) horizontal
B) vertical
C) transitional
D) bisectional
E) direct
Answer: A
Page Ref: 190-194
Difficulty: Easy

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5) When a multinational affiliate replicates elements of a production process in a foreign
country it is called ________ foreign direct investment.
A) vertical
B) horizontal
C) transitional
D) bisectional
E) direct
Answer: A
Page Ref: 190-194
Difficulty: Easy

7) Foreign outsourcing is
A) the transfer of operations to foreign contractors.
B) an example of internalization.
C) an example of foreign direct investment.
D) currently illegal in the U.S.
E) the substitution of immigration for foreign direct investment.
Answer: A
Page Ref: 190-194
Difficulty: Moderate

8.7 The Firm's Decision Regarding Foreign Direct Investment

1) A firm is more likely to engage in horizontal foreign direct investment if

A) trade costs are high and there are internal economies of scale.
B) trade costs are low and there are internal economies of scale.
C) trade costs are high and there are external economies of scale.
D) trade costs are low and there are external economies of scale.
E) trade costs are low and firms experience constant returns to scale in production.
Answer: A
Page Ref: 194-197
Difficulty: Easy

2) A firm's foreign direct investment. decisions are, in the case of horizontal FDI, strongly
influenced by ________ and, in the case of vertical FDI, strongly influenced by ________.
A) trade costs; production costs
B) materials costs; labor costs
C) production costs; materials costs
D) production costs; trade costs
E) labor costs; trade costs
Answer: A
Page Ref: 194-197
Difficulty: Easy

3) During the past decade, U.S. imports of business services have ________, U.S. exports of
business services have ________, and U.S. net exports of business services have ________.
A) increased; increased; increased
B) increased; decreased; decreased
C) decreased; increased; increased
D) increased; increased; not changed

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E) decreased; decreased; increased
Answer: A
Page Ref: 197-199
Difficulty: Moderate

5) Product differentiation and internal economies of scale yield gains from trade in the form
of
A) lower production costs and a greater variety of goods.
B) higher profits and lower trade costs.
C) the proximity-concentration effect.
D) a proliferation of competitive firms.
E) the substitution of immigration for foreign direct investment.
Answer: A
Page Ref: 199-200
Difficulty: Moderate

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 9 The Instruments of Trade Policy
9.1 Basic Tariff Analysis

1) Specific tariffs are

A) import taxes stated in specific legal statutes.
B) import taxes calculated as a fixed charge for each unit of imported goods.
C) import taxes calculated as a fraction of the value of the imported goods.
D) the same as import quotas.
E) import taxes calculated based solely on the origin country.
Answer: B
Page Ref: 206-207
Difficulty: Easy

2) Ad valorem tariffs are

A) import taxes stated in ads in industry publications.
B) import taxes calculated as a fixed charge for each unit of imported goods.
C) import taxes calculated as a fraction of the value of the imported goods.
D) the same as import quotas.
E) import taxes calculated solely on the origin country.
Answer: C
Page Ref: 206-207
Difficulty: Easy

3) The excess supply curve of a product we (H) import from foreign countries (F) increases
as
A) excess demand of country H increases.
B) excess demand of country F increases.
C) excess supply of country H increases.
D) excess supply of country F increases.
E) excess supply of country F decreases.
Answer: D
Page Ref: 207-209
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Difficulty: Easy

4) Suppose the United States eliminates its tariff on ball bearings used in producing exports.
Ball bearing prices in the United States would be expected to
A) increase, and the foreign demand for U.S. exports would increase.
B) decrease, and the foreign demand for U.S. exports would increase.
C) increase, and the foreign demand for U.S. exports would decrease.
D) decrease, and the foreign demand for U.S. exports would decrease.
E) decrease, and the foreign demand would be unchanged.
Answer: B
Page Ref: 209-210
Difficulty: Easy

5) A specific tariff provides home producers more protection when

A) the home market buys cheaper products rather than expensive products.
B) it is applied to a commodity with many grade variations.
C) the home demand for a good is elastic with respect to price changes.
D) it is levied on manufactured goods rather than primary products.
E) the home supply outnumbers the foreign imports.
Answer: A
Page Ref: 210-212
Difficulty: Easy

6) A lower tariff on imported steel(thép) would most likely benefit

A) foreign producers at the expense of domestic consumers.
B) domestic manufacturers of steel.
C) domestic consumers of steel.
D) workers in the steel industry.
E) foreign consumers of steel.
Answer: C
Page Ref: 209-210
Difficulty: Easy

7) A problem encountered when implementing an "infant industry" tariff is that

A) domestic consumers will purchase the foreign good regardless of the tariff.
B) the industry may never "mature."
C) most industries require tariff protection when they are mature.
D) the tariff may hurt the industry's domestic sales.
E) the tariffs fail to protect the domestic producers.
Answer: B
Page Ref: 211-212
Difficulty: Easy

8) Which of the following is a fixed percentage of the value of an imported product?

A) specific tariff
B) ad valorem tariff
C) nominal tariff
D) effective protection tariff
E) infant industry tariff
Answer: B

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Page Ref: 206-207
Difficulty: Easy

9) A tax of 20 cents per unit of imported garlic is an example of a(n)

A) specific tariff.
B) ad valorem tariff.
C) nominal tariff.
D) effective protection tariff.
E) a disadvantageous tariff.
Answer: A
Page Ref: 206-207
Difficulty: Easy

10) A tax of 20 percent per unit of imported garlic is an example of a(n)

A) specific tariff.
B) ad valorem tariff.
C) nominal tariff.
D) effective protection tariff.
E) a disadvantageous tariff
Answer: B
Page Ref: 206-207
Difficulty: Easy

11) Which type of tariff is forbidden in the United States on Constitutional grounds?
A) import tariff
B) export tariff
C) specific tariff
D) prohibitive tariff
E) import quota
Answer: B
Page Ref: 206-207
Difficulty: Moderate

12) Tariffs are NOT defended on the grounds that they

A) improve the terms of trade of foreign nations.
B) protect jobs and reduce unemployment.
C) promote growth and development of young industries.
D) prevent over-dependence of a country on only a few industries.
E) protect domestic producers from foreign low prices.
Answer: A
Page Ref: 209-212
Difficulty: Easy

13) The most vocal political pressure for tariffs is generally made by
A) consumers lobbying for export tariffs.
B) consumers lobbying for import tariffs.
C) consumers lobbying for lower import tariffs.
D) producers lobbying( van dong hanh lang) for export tariffs.
E) producers lobbying for import tariffs.
Answer: E

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Page Ref: 209-212
Difficulty: Easy

14) Tariff rates on products imported into the U.S.

A) have dropped substantially over the past 50 years.
B) were prohibited by the Constitution.
C) reached an all time high in 2002.
D) have risen steadily since 1920.
E) were the government's main source of income in 2006.
Answer: A
Page Ref: 209-212
Difficulty: Easy

15) What is a TRUE statement concerning the imposition in the U.S. of a tariff on cheese?
A) It lowers the price of cheese domestically.
B) It raises the price of cheese internationally.
C) It raises revenue for the government.
D) It will always result in retaliation from abroad.
E) it leads to higher domestic demand for cheese.
Answer: C
Page Ref: 209-212
Difficulty: Easy

16) The tariff levied (thuế) in a "large country" (Home), lowers the world price of the
imported good. This causes
A) foreign consumers to demand less of the good on which was levied a tariff.
B) domestic demand for imports to decrease.
C) domestic demand for imports to increase.
D) foreign suppliers to produce less of the good on which was levied a tariff.
E) no change in the foreign price of the good it imports.
Answer: D
Page Ref: 209-212
Difficulty: Easy

27) The effective rate of protection measures

A) the "true" ad valorem value of a tariff.
B) the quota equivalent value of a tariff.
C) the efficiency with which the tariff is collected at the customhouse.
D) the protection given by the tariff to domestic value added.
E) the difference between domestic and foreign prices of the import.
Answer: D
Page Ref: 210-213
Difficulty: Easy

28) If the tariff on computers is not changed, but domestic computer producers shift from
domestically produced semiconductors to imported components, then the effective rate of
protection in the computer industry will
A) increase.
B) decrease
C) remain the same.

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D) depend on whether computers are PCs or "Supercomputers."
E) no longer apply.
Answer: A
Page Ref: 210-213
Difficulty: Easy

29) If the tariff on computers is not changed, but the government then adds hitherto
nonexistent tariffs on imported semi-conductor components, then the effective rate of
protection in the computer industry will
A) increase.
B) decrease.
C) remain the same.
D) depend on whether computers are PCs or "Supercomputers."
E) no longer apply.
Answer: B
Page Ref: 210-213
Difficulty: Easy

30) When a government allows raw materials and other intermediate products to enter a
country duty free, this generally results in a(an)
A) effective tariff rate less than the nominal tariff rate.
B) nominal tariff rate less than the effective tariff rate.
C) rise in both nominal and effective tariff rates.
D) fall in both nominal and effective tariff rates.
E) rise in only the effective tariff rate.
Answer: B
Page Ref: 210-213
Difficulty: Easy

31) Of the many arguments in favor of tariffs, the one that has enjoyed significant economic
justification has been the
A) cheap foreign labor argument.
B) infant industry argument.
C) even playing field argument.
D) balance of payments argument.
E) domestic living standard argument.
Answer: B
Page Ref: 211-212
Difficulty: Easy

32) As globalization tends to increase the proportion of imported inputs relative to

domestically supplied components
A) the nominal tariff automatically increases.
B) the rate of (effective) protection automatically decreases.
C) the nominal tariff automatically decreases.
D) the rate of (effective) protection automatically increases.
E) the amount of tariffs levied increases.
Answer: D
Page Ref: 210-212
Difficulty: Easy

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33) In an inflationary environment, then over time
A) a specific tariff will tend to raise more revenue than an ad valorem tariff.
B) an ad valorem tariff will tend to raise more revenue than a specific tariff.
C) an optimum tariff will tend to raise more revenue than an escalating tariff.
D) a tariff quota will tend to raise more revenue than a specific tariff.
E) an import quota would raise more revenue than a specific tariff.
Answer: B
Page Ref: 206-207
Difficulty: Easy9.2 Costs and Benefits of a Tariff

1) If a good is imported into (large) country H from country F, then the imposition of a tariff
in country H
A) raises the price of the good in both countries (the "Law of One Price").
B) raises the price in country H and cannot affect its price in country F.
C) lowers the price of the good in both countries.
D) lowers the price of the good in H and could raise it in F.
E) raises the price of the good in H and lowers it in F.
Answer: E
Page Ref: 212-217
Difficulty: Easy

2) If a good is imported into (small) country H from country F, then the imposition of a tariff
In country H
A) raises the price of the good in both countries (the "Law of One Price").
B) raises the price in country H and does not affect its price in country F.
C) lowers the price of the good in both countries.
D) lowers the price of the good in H and could raise it in F.
E) raises the price of the good in H and lowers it in F.
Answer: B
Page Ref: 212-217
Difficulty: Easy

3) If a small country imposes a tariff, then

A) the producers must suffer a loss.
B) the consumers must suffer a loss.
C) the government revenue must suffer a loss.
D) the demand curve must shift to the left.
E) the world price on that item will shift.
Answer: B
Page Ref: 212-217
Difficulty: Easy

4) The imposition of tariffs on imports results in deadweight (triangle) losses. These are
A) production and consumption distortion effects.
B) redistribution effects.
C) revenue effects
D) efficiency effects.
E) distortion of incentives.
Answer: E

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Page Ref: 212-217
Difficulty: Easy

5) The main redistribution effect of a tariff is the transfer of income from

A) domestic producers to domestic buyers.
B) domestic buyers to domestic producers.
C) domestic producers to domestic government.
D) domestic government to domestic consumers.
E) foreign producers to domestic consumers.
Answer: B
Page Ref: 212-217
Difficulty: Easy

6) The principle benefit of tariff protection goes to

A) domestic consumers of the good produced.
B) foreign consumers of the good produced.
C) domestic producers of the good produced.
D) foreign producers of the good produced.
E) the domestic government.
Answer: C
Page Ref: 212-217
Difficulty: Easy

7) Should the home country be "large" relative to its trade partners, its imposition of a tariff
on imports would lead to an increase in domestic welfare if the terms of the trade rectangle
exceed the sum of the
A) revenue effect plus redistribution effect.
B) protective effect plus revenue effect.
C) consumption effect plus redistribution effect.
D) production distortion effect plus consumption distortion effect.
E) terms of trade gain.
Answer: D
Page Ref: 212-217
Difficulty: Easy

8) The deadweight loss of a tariff

A) is a social loss because it promotes inefficient use of national resources.
B) is a social loss because it reduces the revenue of the government.
C) is not a social loss because it merely redistributes revenue from one sector to another.
D) is not a social loss because it is paid for by rich corporations.
E) is not a social loss because it aids domestic consumers.
Answer: A
Page Ref: 212-217
Difficulty: Easy

9) A policy of tariff reduction in the computer industry is

A) in the interest of the United States as a whole and in the interest of computer producing
regions of the country.
B) in the interest of United States as a whole but not in the interest of computer producing
regions of the country.

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C) not in the interest of the United States as a whole but in the interests of computer
producing regions of the country.
D) not in the interest of the United States as a whole and not in the interests of computer
consumers.
E) not in the interest of the United States as a whole but in the interests of foreign computer
producers.
Answer: B
Page Ref: 212-217
Difficulty: Easy

10) The fact that industrialized countries levy very low or no tariff on raw materials and semi
processed goods
A) helps developing countries export manufactured products.
B) has no effect on developing country exports.
C) hurts developing country efforts to export manufactured goods.
D) hurts developing country efforts to export raw materials.
E) does not affect industrialized countries' exports.
Answer: C
Page Ref: 212-217
Difficulty: Easy

11) The imposition of tariffs will help a nation attain which of the following goals?
A) decreased domestic consumer prices
B) increased domestic employment
C) increased amount and variety of goods available for consumers
D) increased competition between domestic and foreign producers
E) gains for domestic producers
Answer: E
Page Ref: 212-217
Difficulty: Easy

12) The change in the economic welfare of a country associated with an increase in a tariff
equals
A) efficiency loss - terms of trade gain.
B) efficiency gain - terms of trade loss.
C) efficiency loss + tax revenue gain.
D) efficiency loss + tax revenue gain + terms of trade gain.
E) efficiency loss - tax revenue gain.
Answer: A
Page Ref: 212-217
Difficulty: Easy

14) In the country levying the tariff, the tariff will

A) increase both consumer and producer surplus.
B) decrease both the consumer and producer surplus.
C) decrease consumer surplus and increase producer surplus.
D) increase consumer surplus and decrease producer surplus.
E) decrease consumer surplus but leave producers surplus unchanged.
Answer: C
Page Ref: 212-217

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Difficulty: Easy

9.3 Other Instruments of Trade Policy

1) An important difference between tariffs and quotas is that tariffs

A) raise the price of the good.
B) generate tax revenue for the government.
C) stimulate international trade.
D) help domestic producers.
E) are paid by foreign producers.
Answer: B
Page Ref: 217-223
Difficulty: Easy

2) Throughout the post-World War II era, the importance of tariffs as a trade barrier has
A) increased.
B) decreased.
C) remained the same.
D) fluctuated wildly.
E) demonstrated a classic random walk with a mean-reversion tendency.
Answer: B
Page Ref: 217-223
Difficulty: Easy

3) In the exporting country, an export subsidy will

A) help consumers and raise the overall economic welfare of the exporting country.
B) hurt consumers but raise the overall economic welfare of the exporting country.
C) hurt consumers and lower the overall economic welfare of the exporting country.
D) help consumers but lower economic welfare of the exporting country.
E) help consumers and have no effect on the economic welfare of the exporting country.
Answer: C
Page Ref: 217-223
Difficulty: Easy

5) An export subsidy is
A) a payment to a firm or individual that ships a good abroad.
B) a fee that is charged to a country that ships goods to the U.S.
C) a payment made to a foreign government in return for preferential trade treatment.
D) illegal in the U.S. but is fairly common in the rest of the world.
E) a limit on the quantity of a good or service that can be sold abroad.
Answer: A
Page Ref: 217-223
Difficulty: Easy

6) An export subsidy differs from a tariff in each of the following ways EXCEPT
A) a tariff generates revenue.
B) a tariff is applied to imports.
C) a tariff results in an efficiency loss.
D) a tariff is a tax.
E) a tariff discourages imports.

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Answer: C
Page Ref: 217-223
Difficulty: Easy

7) The European Union's Common Agricultural Policy (CAP) is, in effect

A) a tariff imposed on agricultural exports.
B) a tariff imposed on agricultural imports.
C) a subsidy that reduces the cost of agricultural exports.
D) a subsidy that increases the cost of agricultural exports.
E) a quota that limits production of agricultural goods by EU nations.
Answer: C
Page Ref: 217-223
Difficulty: Easy

8) An import quota is similar to a ________ in its effect on imports, except that an import
quota ________.
A) tariff; does not generate revenue
B) tariff; generates revenue
C) subsidy; does not generate revenue
D) subsidy; generates revenue
E) tariff; does not result in an efficiency loss.
Answer: A
Page Ref: 217-223
Difficulty: Easy

9) The U.S. sugar quota

A) generates government revenue.
B) results in net welfare benefits to the U.S. economy.
C) results in benefits to sugar producers that exceed the cost to consumers.
D) results in costs to consumers that exceed the benefits to sugar producers.
E) does not result in an efficiency loss.
Answer: D
Page Ref: 221-223
Difficulty: Easy

10) Which of the following are examples of goods that have been subject to voluntary export
restraints?
A) Japanese cars and Chinese solar panels
B) Belgian chocolates and French wines
C) French wines and cheeses
D) Japanese sushi and German cars
E) Taiwanese electronics and Canadian barley
Answer: A
Page Ref: 224-225
Difficulty: Easy

9.4 The Effects of Trade Policy: A Summary

1) An export tariff will ________ producer surplus, ________ consumer surplus, ________
government revenue, and ________ overall domestic national welfare.

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A) increase; decrease; increase; have an ambiguous(moho) effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on
Answer: A
Page Ref: 227-228
Difficulty: Easy

2) An export subsidy will ________ producer surplus, ________ consumer surplus,

________ government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on
Answer: B
Page Ref: 227-228
Difficulty: Easy

3) An import quota will ________ producer surplus, ________ consumer surplus, ________
government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on
Answer: C
Page Ref: 227-228
Difficulty: Easy

4) A voluntary export restraint will ________ producer surplus, ________ consumer surplus,
________ government revenue, and ________ overall domestic national welfare.
A) increase; decrease; increase; have an ambiguous effect on
B) increase; decrease; decrease; decrease
C) increase; decrease; have no effect on; have an ambiguous effect on
D) increase; decrease; have no effect on; decrease
E) increase; increase; decrease; have an ambiguous effect on
Answer: D
Page Ref: 227-228
Difficulty: Easy

9.5 Appendix to Chapter 9: Tariffs and Import Quotas in the Presence of Monopoly

1) If an import-competing firm is imperfectly competitive( độc quyền nên đẩy gía lên cao),
then under free trade an export tariff will ________ domestic market price, ________
producer surplus, ________ consumer surplus, ________ government revenue, and ________
overall domestic national welfare.
A) increase; have no effect on; decrease; increase; decrease
B) decrease; decrease; increase; decrease; have no effect on

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C) increase; have no effect on; increase; decrease; increase
D) decrease; increase; decrease; increase; decrease
E) have no effect on; have no effect on; decrease; increase; decrease
Answer: A
Page Ref: 232-235
Difficulty: Easy

2) If an import-competing firm is imperfectly competitive, than under free trade an import

quota will ________ domestic market price, ________ producer surplus, ________ consumer
surplus, ________ government revenue, and ________ overall domestic national welfare.
A) increase; increase; decrease; have no effect on; decrease
B) decrease; decrease; increase; decrease; have no effect on
C) increase; have no effect on; decrease; increase; decrease
D) decrease; increase; decrease; increase; decrease
E) have no effect on; have no effect on; decrease; increase; decrease
Answer: A
Page Ref: 232-235
Difficulty: Easy

3) Suppose an import-competing firm is imperfectly competitive. Replacement of an export

tariff with an import quota that yields the same level of imports will ________ market price,
________ producer surplus, ________ consumer surplus, ________ government revenue, and
________ overall domestic national welfare.
A) increase; increase; decrease; decrease; decrease
B) have no effect on; have no effect on; have no effect on; decrease; decrease
C) increase; have no effect on; decrease; decrease; increase
D) increase; increase; increase; decrease; have an ambiguous effect on
E) decrease; decrease; increase; decrease; increase
Answer: A
Page Ref: 232-235
Difficulty: Easy

4) If an import-competing firm is the only domestic producer of a good, then a transition

from autarky to free trade will ________ domestic price, ________ producer surplus,
________ consumer surplus, and ________ overall domestic national welfare.
A) decrease; decrease; increase; increase
B) increase; increase; increase; increase
C) decrease; decrease; decrease; decrease
D) increase; increase; decrease; decrease
E) increase; increase; decrease; increase
Answer: A
Page Ref: 232-235
Difficulty: Easy

International Economics, 10e

(Krugman/Obstfeld/Melitz)
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Chapter 10 The Political
Economy of Trade Policy
10.1 The Case for Free Trade

1) The efficiency case made for free trade is that as trade distortions such as tariffs are
dismantled and removed
A) government tariff revenue will decrease, and therefore national economic welfare will
decrease.
B) government tariff revenue will decrease, and therefore national economic welfare will
increase.
C) deadweight losses for producers and consumers will decrease, hence increasing national
economic welfare.
D) deadweight losses for producers and consumers will decrease, hence decreasing national
economic welfare.
E) government tariff revenue will increase, hence increasing national economic welfare.
Answer: C
Page Ref: 236-241
Difficulty: Easy
Bỏ tariff => free trade => dùng benefit đi subsidy => để tăng mức cạnh tranh., giảm giá rẻ
hơn , xe hơi trong nước cạnh tranh với xe hơi nhập khẩu.
2) The opportunity to exploit economies of scale is one of the gains to be derived by
removing tariffs and other trade distortions. These gains will be the result of a decrease in
A) world prices of imports.
B) the consumption distortion loss triangle.
C) the production distortion loss triangle.
D) international labor mobility.
E) excessive entry and inefficient business practices.
Answer: E
Page Ref: 236-241
Difficulty: Easy

3) Judging by the ongoing changes in tariff rates in major trading countries, the world has
been experiencing a great
A) trade liberalization.
B) surge of protectionism.
C) lack of progress in the trade-policy area.
D) move towards regional integration.
E) shift from export subsidies to specific tariffs.
Answer: A
Page Ref: 236-241
Difficulty: Easy

4) A trade policy designed to alleviate some domestic economic problem by exporting it to

foreign countries is know as a(n)
A) international dumping policy.

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B) countervailing tariff policy.
C) beggar thy neighbor policy.
D) trade adjustment assistance policy.
E) redistribution quota policy.
Answer: C
Page Ref: 236-241
Difficulty: Easy

5) Trade theory suggests that Japan would gain from a subsidy the United States provides its
grain farmers if the gains to Japanese consumers of wheat products more than offsets the
losses to Japanese wheat farmers. This would occur as long as Japan
A) is a net importer in bilateral trade flows with the United States.
B) is a net importer of wheat.
C) has a comparative advantage in wheat.
D) has an absolute advantage in producing wheat.
E) is involved in intra-industry trade with the United States.
Answer: B
Page Ref: 236-241
Difficulty: Easy

10.2 National Welfare Arguments Against Free Trade

1) The optimum tariff is

A) the best tariff a country can obtain via a WTO negotiated round of compromises.
B) the tariff, which maximizes the terms of trade gains.
C) the tariff, which maximizes the difference between terms of trade gains and terms of trade
loses.
D) not practical for a small country due to the likelihood of retaliation.
E) not practical for a large country due to the likelihood of retaliation.
Answer: E
Page Ref: 242
Difficulty: Easy

2) The optimum tariff is most likely to apply to

A) a small tariff imposed by a small country.
B) a small tariff imposed by a large country.
C) a large tariff imposed by a small country.
D) a large tariff imposed by a large country.
E) an ad valorem tariff on a small country.
Answer: B
Page Ref: 242
Difficulty: Easy

3) The prohibitive tariff is a tariff that

A) is so high that it eliminates imports.
B) is so high that it causes undue harm to trade-partner economies.
C) is so high that it causes undue harm to import competing sectors.
D) is so low that the government prohibits its use since it would lose an important revenue
source.
E) is so low that it causes domestic producers to leave the industry.

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Answer: A
Page Ref: 242
Difficulty: Easy

4) The existence of marginal social benefits which are not marginal benefits for the industry
producing the import substitutes
A) is an argument supporting free trade and non-governmental involvement.
B) is an argument supporting the use of an optimum tariff.
C) is an argument supporting the use of market failures as a trade-policy strategy.
D) is an argument rejecting free trade and supporting governmental involvement.
E) is an argument rejecting the domestic market failure concept.
Answer: D
Page Ref: 242-246
Difficulty: Easy

5) The domestic market failure argument is a particular case of the theory of

A) the optimum, or first-best.
B) the second best.
C) the third best.
D) the sufficing principle.
E) the efficiency case for free trade.
Answer: B
Page Ref: 242-246
Difficulty: Easy

6) The difficulty of ascertaining the right second-best trade policy to follow

A) reinforces support for the third-best policy approach.
B) reinforces support for increasing research capabilities of government agencies.
C) reinforces support for abandoning trade policy as an option.
D) reinforces support for free-trade options.
E) reinforced support for the domestic market failure argument.
Answer: D
Page Ref: 242-246
Difficulty: Easy

7) The reason protectionism remains strong in the United States is that

A) economists can produce any result they are hired to produce.
B) economists cannot persuade the general public that free trade is beneficial.
C) economists do not really understand how the real world works.
D) the losses associated with protectionism are diffuse, making lobbying by the public
impractical.
E) economists cannot agree on trade policy recommendations.
Answer: D
Page Ref: 242-246
Difficulty: Easy

10.3 Income Distribution and Trade Policy

1) It is argued that special interest groups are likely to take over and promote protectionist

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policies, which may lead to a decrease in national economic welfare. This argument leads to
A) a presumption that in practice a free trade policy is likely to be better than alternatives.
B) a presumption that trade policy should be shifted to Non-Governmental Organizations, so
as to limit taxpayer burden.
C) a presumption that free trade is generally a second-best policy, to be avoided if feasible
alternatives are available.
D) a presumption that free trade is the likely equilibrium solution if the government allows
special interest groups to dictate its trade policy.
E) a presumption that protectionist policies will better serve a country as a whole than free
trade policies.
Answer: A
Page Ref: 246-251
Difficulty: Easy

2) The authors of the text believe that

A) second-best policy is worse than optimal policy.
B) special interest groups generally enhance national welfare.
C) national welfare is likely to be enhanced by the imposition of an optimal tariff.
D) market failure arguments tend to support free-trade policy.
E) there is no such thing as national welfare.
Answer: D
Page Ref: 246-251
Difficulty: Easy

3) The median voter model

A) works well in the area of trade policy.
B) is not intuitively reasonable.
C) tends to result in biased tariff rates.
D) does not work well in the area of trade policy.
E) is not widely practiced in the United States.
Answer: D
Page Ref: 246-251
Difficulty: Easy

4) The fact that trade policy often imposes harm on large numbers of people, and benefits
only a few may be explained by
A) the lack of political involvement of the public.
B) the power of advertisement.
C) the problem of collective action.
D) the basic impossibility of the democratic system to reach a fair solution.
E) a cycle of political corruption.
Answer: C
Page Ref: 246-251
Difficulty: Easy

5) Protectionism tends to be concentrated in two sectors

A) agriculture and clothing.
B) high-tech and national security sensitive industries.
C) capital and skill intensive industries.
D) industries concentrated in the South and in the Midwest of the country.

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E) financial services and manufacturing based in the Midwest.
Answer: A
Page Ref: 246-251
Difficulty: Easy

6) Export embargoes cause greater losses to consumer surplus in the target country
A) the lesser its initial dependence on foreign produced goods.
B) the more elastic is the target country's demand schedule.
C) the more elastic is the target country's domestic supply.
D) the more inelastic the target country's supply.
E) the larger the target country's labor force is.
Answer: D
Page Ref: 246-251
Difficulty: Easy

7) The strongest political pressure for a trade policy that results in higher protectionism
comes from
A) domestic workers lobbying for import restrictions.
B) domestic workers lobbying for export restrictions.
C) domestic workers lobbying for free trade.
D) domestic consumers lobbying for export restrictions.
E) domestic consumers lobbying for import restrictions.
Answer: A
Page Ref: 246-251
Difficulty: Easy

8) The average tariff rate dutiable imports in the United States is approximately
A) less than 10 % of the value of imports.
B) 15% of the value of imports.
C) 20 % of the value of imports.
D) 25% of the value of imports.
E) more than 30% of the value of imports.
Answer: A
Page Ref: 246-251
Difficulty: Easy

9) In 1990 the United States imposed trade embargoes on Iraq's international trade. The
negative effect on Iraq's consumer surplus would be greater the
A) less elastic Iraq's demand schedule.
B) more elastic Iraq's demand schedule.
C) greater Iraq's dependence on foreign products.
D) more inelastic Iraq's supply schedule.
E) less elastic Iraq's labor force is.
Answer: B
Page Ref: 246-251
Difficulty: Easy

10) Today U.S. protectionism is concentrated in

A) high-tech industries.
B) labor-intensive industries.

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C) industries in which Japan has a comparative advantage.
D) computer intensive industries.
E) capital-intensive industries.
Answer: B
Page Ref: 246-251
Difficulty: Easy

11) The quantitative importance of U.S. protection of the domestic clothing industry is best
explained by the fact that
A) this industry is an important employer of highly skilled labor.
B) this industry is an important employer of low skilled labor.
C) most of the exporters of clothing into the U.S. are poor countries.
D) this industry is a politically well organized sector in the U.S.
E) the technology involved is very advanced.
Answer: D
Page Ref: 246-251
Difficulty: Easy

10.4 International Negotiations and Trade Policy

1) The simple model of competition among political parties long used by political scientists
tends to lead to the practical solution of selecting the
A) optimal tariff.
B) prohibitive tariff.
C) zero (free-trade) tariff.
D) the tariff rate favored by the median voter.
E) the tariff rate supported by exporters.
Answer: D
Page Ref: 252-261
Difficulty: Easy

2) The General Agreement on Tariffs and Trade and the World Trade Organization have
resulted in
A) termination of export subsidies applied to manufactured goods.
B) termination of import tariffs applied to manufactures.
C) termination of import tariffs applied to agricultural commodities.
D) termination of international theft of copyrights.
E) a number of rounds of multilateral trade agreements.
Answer: E
Page Ref: 252-261
Difficulty: Easy

3) The General Agreement on Tariffs and Trade and the World Trade Organization have
resulted in
A) the establishment of universal trade adjustment assistance policies.
B) the establishment of the European Union.
C) the reciprocal trade clause.
D) reductions in trade barriers via multilateral negotiations.
E) the total protection of all intellectual property rights.
Answer: D

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Page Ref: 252-261
Difficulty: Easy

4) Countervailing duties are intended to neutralize any unfair advantage that foreign exporters
might gain because of foreign
A) tariffs.
B) subsidies.
C) quotas.
D) Local-Content legislation.
E) comparative advantage.
Answer: B
Page Ref: 252-261
Difficulty: Easy

5) In 1980 the United States announced an embargo on grain exports to the Soviet Union in
response to the Soviet invasion of Afghanistan. This embargo was mainly resisted by
A) U.S. grain consumers of bread.
B) U.S. grain producers.
C) foreign grain producers.
D) U.S. communists.
E) economists concerned with U.S. terms of trade.
Answer: B
Page Ref: 252-261
Difficulty: Easy

6) Under U.S. commercial policy, the escape clause results in

A) temporary quotas granted to firms injured by import competition.
B) tariffs that offset export subsidies granted to foreign producers.
C) a refusal of the U.S. to extradite anyone who escaped political oppression.
D) tax advantages extended to minority-owned exporting firms.
E) tariff advantages extended to certain Caribbean countries in the U.S. market.
Answer: A
Page Ref: 252-261
Difficulty: Easy

7) Under U.S. commercial policy, which clause permits the modification of a trade
liberalization agreement on a temporary basis if serious injury occurs to domestic producers
as a result of the agreement?
A) adjustment assistance clause
B) escape clause
C) most favored nation clause
D) prohibitive tariff clause
E) anti-dumping legislation
Answer: B
Page Ref: 252-261
Difficulty: Easy

8) An issue never confronted effectively by GATT, but considered an important issue for
WTO is that of
A) the promotion of freer World trade.

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B) the promotion of freer World commodity trade.
C) the promotion of freer World services trade.
D) the lowering of tariff rates.
E) the liberalization of trade.
Answer: C
Page Ref: 252-261
Difficulty: Easy

9) The political wisdom of choosing a tariff acceptable to the median U.S. voter is
A) a good example of the principle of the second best.
B) a good example of the way in which actual tariff policies are determined.
C) a good example of the principle of political negotiation.
D) not evident in actual tariff determination.
E) usually evident in actual tariff determination.
Answer: D
Page Ref: 252-261
Difficulty: Easy

10) A game-theory explanation of the paradox that even though all countries would benefit if
each chose free trade, in fact each tends to follow protectionist policies is
A) trade war.
B) collective action.
C) prisoner's dilemma.
D) benefit-cost analysis.
E) rent seeking.
Answer: C
Page Ref: 252-261
Difficulty: Easy

11) When the U.S. placed tariffs on French wine, France placed high tariffs on U.S. chickens.
This is an example of
A) deadweight losses.
B) multilateral negotiations.
C) bilateral trade negotiations.
D) international market failures.
E) a trade war.
Answer: E
Page Ref: 252-261
Difficulty: Easy

16) The World Trade Organization (WTO) was organized as a successor to the
A) IMF.
B) UN.
C) UNCTAD.
D) GATT.
E) the World Bank.
Answer: D
Page Ref: 252-261
Difficulty: Easy

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17) The WTO was established by the ________ of multilateral trade negotiations.
A) Kennedy Round
B) Tokyo Round
C) Uruguay Round
D) Dillon Round
E) NAFTA Round
Answer: C
Page Ref: 252-261
Difficulty: Easy

18) The Smoot-Hawley Tariff Act of 1930 has generally been associated with
A) falling tariffs.
B) free trade.
C) intensifying the worldwide depression.
D) recovery from the worldwide depression.
E) non-tariff barriers.
Answer: C
Page Ref: 252-261
Difficulty: Easy

19) The World Trade Organization provides for all of the following EXCEPT
A) the usage of the most favored nation clause.
B) assistance in the settlement of trade disagreements.
C) bilateral tariff reductions.
D) multilateral tariff reductions.
E) the prevention of nontariff interventions in trade.
Answer: C
Page Ref: 252-261
Difficulty: Easy

20) Which organization determines procedures for the settlement of international trade
disputes?
A) World Bank
B) World Trade Organization
C) International Monetary Organization
D) International Bank for Reconstruction and Development
E) The League of Nations
Answer: B
Page Ref: 252-261
Difficulty: Easy

21) The WTO's intervention against clean air standards

A) has earned it universal approval.
B) was done in order to limit national sovereignty.
C) has resulted in much criticism.
D) has resulted in much criticism among professional economists.
E) was championed in developing countries.
Answer: C
Page Ref: 252-261

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Difficulty: Easy

10.5 The Doha Disappointment

1) For most developing countries

A) productivity is high among domestic workers.
B) population growth and illiteracy rates are low.
C) saving and investment levels are high.
D) agricultural goods and raw materials constitute a high proportion of domestic output.
E) pollution emissions are relatively low.
Answer: D
Page Ref: 261-267
Difficulty: Moderate

4) The world trading system combines negotiated agreements that promote trade
liberalization called ________ with binding agreements called ________ that block tariff
increases.
A) fiscal policies; monetary policies
B) truces; aggressions
C) free trade; enforcement contracts
D) levers; ratchets
E) wheels; walls
Answer: D
Page Ref: 261-267
Difficulty: Moderate

5) One of the major issues that arose during the Doha round of negotiations involved
complaints by ________ about ________.
A) developing countries; agricultural subsidies.
B) manufacturers; intellectual property
C) industrialized countries; enforcement of contracts
D) Eastern European countries; European Union tariffs
E) South and Central American countries; domestic content requirements
Answer: A
Page Ref: 261-267
Difficulty: Moderate

10.6 Appendix to Chapter 10: Proving That the Optimum Tariff Is Positive

1) The effect of an export tariff on a large country is to ________ the terms of trade.
A) always improve
B) sometimes improve
C) leave unchanged
D) sometimes worsen
E) always worsen
Answer: A
Page Ref: 272-274
Difficulty: Easy

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International Economics, 10e
(Krugman/Obstfeld/Melitz)
Chapter 11 Trade Policy in Developing
Countries
11.1 Import-Substituting Industrialization

1) The infant industry argument was an important theoretical basis for

A) neo-colonialist theory of international exploitation.
B) import-substituting industrialization.
C) historiography of the industrial revolution in Western Europe.
D) the East-Asian miracle.
E) the reduction of tariffs on Western Europe.
Answer: B
Page Ref: 275-281
Difficulty: Easy

2) Sophisticated theoretical arguments supporting import-substitution policies include

A) terms of trade effects.
B) scale economy arguments.
C) learning curve considerations.
D) the problem of appropriability.
E) domestic market failure arguments.
Answer: D
Page Ref: 275-281
Difficulty: Easy

3) Which of the following could explain why the terms of trade of developing countries
might deteriorate over time?
A) Developing country exports consist mainly of manufactured goods.
B) Developing country exports consist mainly of primary products.
C) Commodity export prices are determined in highly competitive markets.
D) Commodity export prices are solely determined by developing countries.
E) Developing country exports are too diverse.
Answer: C
Page Ref: 275-281
Difficulty: Easy
First best: trực tiếp giải quyết vấn đề bằng việc viện trợ thuế subsidy
Second best: gián tiếp giải quyết vấn đề bằng việc lấy tiền của dân đi viện trợ
Hạn chế sử dụng đồ nước ngoài, vì vậy nên bảo vệ ngành công nghiệp non trẻ > sinh ra lãng
phí, vì nó chỉ benefit trong tương lai, tại sao k đầu tư vào nền công nghiệp đem lại hiệu quả
trong chốc lát.
Tập trung làm vào những thứ mình giỏi nhất trước để có nguồn vốn tích luỹ , sau đó phát
triển nữngg ngành sau này.
Những thứ phát minh ra không thể enjoy những thứ mình phát triển được vì những nước đang
phát triển không dc lấy bằng sáng chế và thụ hưởng do mình làm ra.
Vì first best k thể làm dc thi phải dùng tới second best.

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Những quốc gia hạn chế giao thương càng tụt hậu => trade librazation tự do hoá thương mại
Từ cái việc trade? Dẫn tới growth economy rate ? chắc chắn có sự liên quan ở đây.
4) Which trade strategy have developing countries used to restrict imports of manufactured
goods so that the domestic market is preserved for home producers?
A) international commodity agreement
B) export promotion
C) multilateral contract
D) import substitution
E) export subsidies
Answer: D
Page Ref: 275-281
Difficulty: Easy

5) The infant industry argument is that

A) comparative advantage is irrelevant to economic growth.
B) developing countries have a comparative advantage in agricultural goods.
C) developing countries have a comparative advantage in manufacturing.
D) developing countries have a potential comparative advantage in manufacturing.
E) developing countries have no chance to compete with industrialized countries.
Answer: D
Page Ref: 275-281
Difficulty: Easy

6) The infant industry argument calls for active government involvement

A) only if the government forecasts are accurate.
B) only if some market failure can be identified.
C) only if the industry is not one already dominated by industrial countries.
D) only if the industry has a high value added.
E) only if the industry is independently able to earn high returns.
Answer: B
Page Ref: 275-281
Difficulty: Easy

7) The imperfect capital market justification for infant industry promotion

A) assumes that new industries will tend to have low profits.
B) assumes that infant industries will soon mature.
C) assumes that infant industries will be in products of comparative advantage.
D) assumes that banks can allocate resources efficiently.
E) assumes that developing country will reward the donor country.
Answer: A
Page Ref: 275-281
Difficulty: Easy

11.2 Results of Favoring Manufacturing: Problems of Import-Substituting Industrialization

1) General equilibrium considerations lead to the realization that import-substituting policies

have the effect of
A) discouraging exports.
B) encouraging exports.
C) encouraging an efficient use of a country's resources.

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D) generating large tariff revenues for the government.
E) creating competitive manufacturing sectors.
Answer: A
Page Ref: 281-282
Difficulty: Easy

2) A reason why it is difficult for developing countries to maintain a cartel is that

A) the elasticity of demand for a cartel's output decreases over time.
B) producers in the cartel(quy ước) have an economic incentive to cheat.
C) economic profits discourage other producers from entering the industry.
D) producers in the cartel have the motivation to lower prices but not to raise prices.
E) tariffs allow producers in the cartel to produce items that make no profit.
Answer: B
Page Ref: 281-282
Difficulty: Easy

3) Import substitution policies make use of

A) tariffs that discourage goods from entering a country.
B) quotas applied to goods that are shipped abroad.
C) production subsidies granted to industries with comparative advantage.
D) tax breaks granted to industries with comparative advantage.
E) production facilities provided by industrialized countries.
Answer: A
Page Ref: 281-282
Difficulty: Easy

4) Brazil's export record in 1999 illustrated the principle that

A) a large country will tend to have few exports.
B) a small country will tend to have a high export ratio.
C) protectionist policies tend to discourage exports.
D) export-promoting policies do not tend to work.
E) import substitution policies helped the Brazilian economy.
Answer: C
Page Ref: 281-282
Difficulty: Easy

5) The disappointment with import-substitution policies is in part because

A) of the rapid and continuous growth record of South American countries.
B) many countries pursuing this strategy experienced stagnation (trì trệ) in their growth.
C) this policy is inconsistent with sophisticated economic growth models.
D) this policy tended to create world-class industrial competitors.
E) of the financial investment lost by the U.S.
Answer: B
Page Ref: 281-282
Difficulty: Easy

11.3 Trade Liberalization Since 1985

1) The high correlation between rapid growth in exports and rapid economic growth observed

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in several East Asia countries in recent decades
A) proves that export promoting trade policy leads to relatively rapid economic growth.
B) proves that a free-trade orientation of trade policy results in rapid economic growth.
C) proves that exports help growth, whereas imports impede growth.
D) proves that trade policy is the most important policy area for promotion of economic
development.
E) does not prove that trade liberalization always leads to rapid economic growth.
Answer: E
Page Ref: 282-284
Difficulty: Easy

2) The relatively rapid economic growth experienced by Chile in the late 1980s
A) supported the conventional Latin American reliance on import substitution.
B) relied on the Harris-Todaro model to explain this growth.
C) rejected the conventional Latin American reliance on import substitution.
D) demonstrated the importance of market failure as a reason for import substitution.
E) relied on high tariffs and import substitution.
Answer: C
Page Ref: 282-284
Difficulty: Easy

3) To help developing countries expand their industrial base, some industrial countries have
reduced tariffs on designated manufactured imports from developing countries below the
levels applied to imports from industrial countries. This policy is called
A) export-led growth.
B) generalized system of preferences.
C) Most Favored Nation.
D) reciprocal trade agreement.
E) outsourcing.
Answer: B
Page Ref: 282-284
Difficulty: Easy

4) To help developing nations strengthen their international competitiveness, many industrial

nations have granted tariff reductions to developing nations under the
A) international commodity agreements program.
B) multilateral contract program.
C) generalized system of preferences program.
D) export led growth program.
E) import substitution policy.
Answer: C
Page Ref: 282-284
Difficulty: Easy

5) Export-led growth tends to

A) discourage competition in the global economy.
B) exploit domestic comparative advantages.
C) lead to unemployment among domestic workers.
D) help firms benefit from diseconomies of large-scale production.
E) lower the overall volume of imports.

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Answer: B
Page Ref: 282-284
Difficulty: Easy

6) An efficient economy would set the marginal product in the traditional sector
A) lower than that in the modern non-traditional sector.
B) higher than that in the modern sophisticated sector.
C) equal to that in the modern sophisticated sector.
D) lower in the relatively capital intensive sector.
E) higher in the relatively capital intensive sector.
Answer: C
Page Ref: 282-284
Difficulty: Easy

7) The experience of sub-Saharan Africa, as compared to that of "Other Asia" (not including
the HPAEs) supports the argument that
A) high rates of protection tend to harm economic growth.
B) the poorer is the country the easier it is for it to "catch up" economically.
C) low rates of protection tend to promote economic growth.
D) free trade always best stimulates a developing country's economy.
E) neither trade liberalization nor import substitution is a foolproof strategy for economic
development.
Answer: E
Page Ref: 282-284
Difficulty: Easy

8) The experience of Chile's foreign sector in the last two decades of the 20th century
supports the proposition that economic growth is supported by
A) import substitution.
B) industrialization policies.
C) trade liberalization policies.
D) intra-industry trading.
E) trade embargoes.
Answer: C
Page Ref: 282-284
Difficulty: Easy

9) China's recent experience supports the proposition that

A) "economic miracles" are solely to be expected in small countries.
B) central planning and socialism can promote sustained economic growth.
C) a lessening of income disparities is a prerequisite for economic growth.
D) growth in a large country cannot be affected by its foreign sector.
E) policy changed can dramatically prompt export oriented growth
Answer: E
Page Ref: 282-284
Difficulty: Easy

11.4 Trade and Growth: Takeoff in Asia

1) Historically those few developing countries which have succeeded in significantly raising

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their per-capita income levels
A) did not accomplish this with import-substituting industrialization.
B) did accomplish this with import-substituting industrialization.
C) tended to provide heavy protection to domestic industrial sectors.
D) favored industrial to agricultural or service sectors.
E) did so to the detriment of their nearest neighbors.
Answer: A
Page Ref: 284-287
Difficulty: Easy

2) Statistical evidence suggests that

A) free trade policies promote economic growth more effectively than do import substitution
policies.
B) import substituting policies tend to promote effective exploitation of scale economies.
C) import substitution tends to lead to relatively low effective rates of protection.
D) import substitution is to this day the preferred growth strategy promoted by the World
Bank.
E) import substitution proved to be the most effective aid for developing countries before
1970.
Answer: A
Page Ref: 284-287
Difficulty: Easy

3) The growth successes of the high performance Asian economies

A) supports the belief that economic development requires import substitution policies.
B) rejects the belief that export-oriented industrialization is likely to promote economic
development.
C) rejects the belief that economic development requires import substitution policies.
D) suggests that free trade policies are required for successful economic development.
E) enforces United States' hesitation to trade with developing countries.
Answer: C
Page Ref: 284-287
Difficulty: Easy

4) Which industrialization policy used by developing countries places emphasis on the

comparative advantage principle as a guide to resource allocation?
A) export promotion
B) import substitution
C) international commodity agreements
D) Infant Industry promotion
E) intra-industry trade practice
Answer: A
Page Ref: 284-287
Difficulty: Easy

5) Taiwan and South Korea are examples of developing nations that have recently pursued
these industrialization policies
A) import substitution.
B) export promotion.
C) commercial dumping.

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D) multilateral contract.
E) trade embargoes.
Answer: B
Page Ref: 284-287
Difficulty: Easy

6) All the following nations except ________ have recently utilized export-led growth
policies.
A) Hong Kong
B) South Korea
C) Argentina
D) Singapore
E) Taiwan
Answer: C
Page Ref: 284-287
Difficulty: Easy

7) The development of countries like South Korea has been supported by all of the following
EXCEPT
A) high domestic interest rates.
B) high domestic saving rates.
C) large endowments of human capital.
D) high levels of labor productivity.
E) reduced government regulation.
Answer: A
Page Ref: 284-287
Difficulty: Easy

8) In 2003, the per-capita income in China was roughly ________ of that in the U.S.
A) one hundredth
B) one eighth
C) one half
D) the same as
E) one twentieth
Answer: B
Page Ref: 284-287
Difficulty: Easy

9) The "East Asian Miracle" is

A) the ability of so many people to live in such small areas.
B) the fact that so many Influenza varieties originate from this region.
C) the fact that poor dualistic economies managed to escape the vicious circle of poverty.
D) the ability to maintain large positive trade balances with the U.S.
E) the advent of completely free labor mobility between east Asian countries.
Answer: C
Page Ref: 284-287
Difficulty: Easy

10) The HPAE (High Performance Asian Economies) countries

A) have all consistently supported free trade policies.

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B) have all consistently maintained import-substitution policies.
C) have all consistently maintained non-biased efficient free capital markets.
D) have all maintained openness to international trade.
E) have all outperformed the U.S.
Answer: D
Page Ref: 284-287
Difficulty: Easy

11) The remarkable success of the HPAEs proves that

A) trade policy is the key to successful economic growth.
B) trade policy is irrelevant to successful economic growth.
C) high educational standards is the key to successful economic growth.
D) dual economies must suffer economic stagnation.
E) trade policy can lead to a higher standard of living for developing countries.
Answer: E
Page Ref: 284-287
Difficulty: Easy

12) The HPAE "economic miracle" illustrates a clear case in which

A) exports and growth were positively related.
B) exports were promoted by successful economic growth.
C) economic growth was determined by successful export promotion.
D) trade policy dominated other considerations in promoting economic growth.
E) import substitution enhanced economic development.
Answer: A
Page Ref: 284-287
Difficulty: Easy

13) The "East Asian Miracle" of the "Four Tigers" in the 1960s was replicated by
A) developing countries around the world.
B) other East Asian countries.
C) Sub Sahara African countries.
D) Industrialized countries.
E) Eastern European countries.
Answer: B
Page Ref: 284-287
Difficulty: Easy

14) Classical and Neoclassical trade theory makes the case that free trade can bring a country
to an optimum and economically efficient use of its resources; and hence is an optimal trade-
policy, if the objective is maximizing long term economic growth. There are those who argue
that the experience of the Asian Miracle countries, such as Taiwan, South Korea and
Singapore verify this argument in the real world. Explain. There are others who argue that the
experience of these countries cannot be used to verify or support the argument above.
Explain.
Answer: Both arguments may indeed be made. These countries did in fact tend to promote
exports in a consistent set of policies. However, they tended to do this via conscious National
industrial-policy (e.g., South Korea using "the Japanese system"), and hence (with the
possible exception of Hong Kong) do not provide a good test-tube for the long run effects of
a free-trade stance.

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Page Ref: 284-287
Difficulty: Moderate

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 12 Controversies in Trade Policy

12.1 Sophisticated Arguments for Activist Trade Policy

1) The existence of positive externalities due to the impossibility of full appropriability

A) supports the conclusions of the Heckscher-Ohlin model.
B) rejects the usefulness of government protectionism.
C) supports the concept that the government should support only high-tech industries.
D) provides support for government protectionism.
E) supports arguments for free trade.
Answer: D
Page Ref: 290-299
Difficulty: Easy

2) The United States

A) does not provide more support for R&D as compared to other forms of investment.
B) provides support for R&D by imposing high tariffs on R&D intensive products.
C) provides support for R&D by providing direct subsidies for such activities.
D) provides support for R&D through tax legislation.
E) provides support for R&D through grant incentives.
Answer: D
Page Ref: 290-299
Difficulty: Easy

3) The Brander-Spencer model identified market failure in certain industries due to

A) unfair competition.
B) wildcat destructive competition.
C) environmental negative externalities associated with pollution.
D) limited competition.
E) lack of excess returns.
Answer: D
Page Ref: 290-299
Difficulty: Easy

4) In the Brander-Spencer model the subsidy raises profits by more than the subsidy because
of
A) the "multiplier" effect of government expenditures.
B) the military-industrial complex.
C) the forward and backward linkage effects of certain industries.
D) the deterrent effect of the subsidy on foreign competition.
E) the economies of scale once the company enters the market.
Answer: D
Page Ref: 290-299
Difficulty: Easy

5) Criticisms of the Brander-Spencer model include all EXCEPT which of the following?

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A) the problem of insufficient information
B) the problem of likely foreign retaliation
C) the problem of harm to interests of consumers
D) the problem of adverse effects of trade policy politics
E) the problem of simultaneously causing harm to other industries
Answer: C
Page Ref: 290-299
Difficulty: Easy

6) Japan's protection of its semiconductor (RAM) producers is today seen as an object lesson
in
A) how strategic planning may backfire and cause a large waste of resources.
B) how externalities may be successfully exploited by protectionist policies.
C) how excess returns may be successfully exploited by protectionist policies.
D) how government intervention may create a meaningful comparative advantage.
E) how monopolies can outlast government intervention.
Answer: A
Page Ref: 290-299
Difficulty: Easy

7) The Heckscher-Ohlin, factor-proportions model lends support to the argument that

A) trade tends to worsen the conditions of unskilled labor in rich countries.
B) trade tends to worsen the conditions of owners of capital in rich countries.
C) trade tends to worsen the conditions of workers in poor countries.
D) trade tends to worsen the conditions of workers in rich countries.
E) trade tends to worsen the conditions of highly skilled workers in rich countries.
Answer: A
Page Ref: 290-299
Difficulty: Easy

8) If firms in an industry are generating knowledge that other firms can use without paying
for it, this industry is characterized by
A) social costs that exceed private costs.
B) social benefits that exceed private benefits.
C) social costs that exceed social benefits.
D) private benefits that exceed social benefits.
E) social benefits that undermine private benefits.
Answer: B
Page Ref: 290-299
Difficulty: Easy

9) It is argued that high-tech industries typically generate new technologies but cannot fully
appropriate the commercial benefits associated with their inventions or discoveries. If this is
true then in order to maximize a country's real income, the government should
A) tax the high-tech firms.
B) subsidize the high-tech firms.
C) protect the high-tech firms.
D) outsource high-tech production.
E) discourage high-tech investments.
Answer: B

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Page Ref: 290-299
Difficulty: Easy

10) In effect, the U.S. does subsidize high-tech firms by subsidizing R&D. This is done
through
A) the budget of the Department of Education.
B) systematic protection through the levying of tariffs.
C) systematic protection through the establishment of NTBs.
D) relatively accelerated "depreciation" of R&D investment in the Federal tax codes.
E) subsidies for high-tech firms.
Answer: D
Page Ref: 290-299
Difficulty: Easy

11) The best economic case one can make for an active industrial policy involves
A) the national security argument.
B) the technological spillover argument.
C) the environment preservation argument.
D) the high value added argument.
E) raising the national income.
Answer: E
Page Ref: 290-299
Difficulty: Easy

12) Spencer and Brander's model highlights the existence of

A) aircraft industries.
B) excess returns present in highly competitive markets.
C) excess returns, or rents, available in non-competitive markets.
D) the futility of government bureaucrats' attempts to build an airplane.
E) natural advantages in foreign technology firms.
Answer: C
Page Ref: 290-299
Difficulty: Easy

13) Spencer and Brander's model highlights the conventional assumption that
A) government involvement in business or in the economy tends to fail.
B) government subsidies tend to waste taxpayer's money.
C) government subsidies cannot create a successfully competing export.
D) government tends to distort when it displaces Adam Smith's Invisible Hand.
E) government subsidies can produce profits that exceed the subsidy's value.
Answer: E
Page Ref: 290-299
Difficulty: Easy

14) The reason Airbus succeeded in the Brander Spencer example is that
A) Boeing made the first move in this strategic game.
B) Europeans tend to be better strategists than corn-fed Americans.
C) the Airbus actually was a better plane than the Boeing 747.
D) U.S. laws actually prohibit U.S. exporters from bribing foreign officials.
E) the subsidy removed the advantage that Boeing gained with their head start in production.

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Answer: E
Page Ref: 290-299
Difficulty: Easy

15) The reason Airbus succeeded in the Brander Spencer example is that
A) the European government made an explicit subsidy offer, but the U.S. government did not.
B) Airbus' prices were better when adjusted for quality and warranty services.
C) Boeing traditionally refused to undertake any exchange rate risk in its transactions.
D) the U.S. acted in accordance with its ideological reliance on market solutions, whereas the
Europeans ignored market and technological factors.
E) the Airbus plane benefited from more advanced technology.
Answer: A
Page Ref: 290-299
Difficulty: Easy

16) The argument that strategic planning is not likely to be practical due to insufficient
information means that
A) because of trade secrets, the government does not know true cost relationships in any
given industry.
B) if the government had all the relevant information in a given industry then it could decide
whether a subsidy would enhance the public's welfare.
C) even if the government had all the relevant information in a given industry, it still could
not decide whether a subsidy would enhance the public's welfare.
D) due to recent cuts in the Department of the Census' sampling budgets, industry surveys are
no longer reliable, so that there is no way to determine if a subsidy is in the public's interest.
E) the government would need to employ its intelligence agencies in order to gain a complete
understanding of the market.
Answer: C
Page Ref: 290-299
Difficulty: Easy

17) The invocation of beggar-thy-neighbor arguments with respect to industrial policies

A) strengthens the argument for subsidies.
B) makes sense if the international Keynesian multipliers exceed unity.
C) applies only to rich countries most of whose trade partners are very poor countries.
D) weakens the argument for subsidies.
E) does not apply to rich countries who can influence relative world prices.
Answer: D
Page Ref: 290-299
Difficulty: Easy

18) When the WTO met in Seattle to initiate a further move towards free international trade,
thousands of activists met
A) in order to promote the WTO's goals of "Trade-not Aid."
B) in order to laud the WTO policy orientation which would bust local monopolies and
therefore help ordinary relatively poor consumers everywhere.
C) in order to laud the WTO policy of disallowing government sweetheart deals, which
typically meant that corrupt governments subsidized their in-laws' conglomerates on the
backs of poor taxpayers.
D) in order to support the WTO efforts of bringing about a universal shift of resources in

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poor countries to higher efficiency and productivity uses, which would raise the real incomes
of everyone.
E) in order to protest WTO free trade policies that they believed hurt workers.
Answer: E
Page Ref: 290-299
Difficulty: Easy

19) When one applies the Heckscher-Ohlin model of trade to the issue of trade-related
income redistributions, one must conclude that North South trade, such as U.S.-Mexico trade
A) must help low skill workers on both sides of the border.
B) is likely to hurt high-skilled workers in the U.S.
C) is likely to hurt low-skilled workers in the U.S.
D) is likely to hurt low-skilled workers in Mexico.
E) is likely to help highly skilled workers in Mexico.
Answer: C
Page Ref: 290-299
Difficulty: Easy

20) The evidence usually cited to prove that globalization hurts workers in developing
countries
A) is inconclusive due to poor statistical design of the underlying samples.
B) is inconclusive due to the poorly funded Central Statistical Office of Mexico.
C) is inconclusive due to the ambiguous theoretical implications of the findings.
D) is conclusive.
E) does not take into account the Heckscher-Ohlin model.
Answer: C
Page Ref: 290-299
Difficulty: Easy

21) The proposal that trade agreements should include a system which monitors worker
conditions and make the results available to consumers in the rich importing country
A) is consistent with the Invisible Hand paradigm.
B) is consistent with the market failure approach.
C) is consistent with the Ricardian theory of comparative advantage.
D) is consistent with the scale economies approach to trade theory.
E) is consistent with the principles laid out by the WTO.
Answer: B
Page Ref: 290-299
Difficulty: Easy

22) Labor standards in trade are typically opposed by most developing countries who believe
that they will be used
A) to further neo-imperialist colonial exploitation.
B) to charge these countries with crimes against child-labor standards at the Hague.
C) as a protectionist tool by import-competing producers in industrial countries.
D) as a means of spreading U.S. Corporate Values and destroying local cultures.
E) to hinder investment in foreign-based multinational corporations.
Answer: C
Page Ref: 290-299
Difficulty: Easy

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23) The WTO seems at times to be interfering in domestic policy since
A) the line between domestic policies and de factor protectionism is often fuzzy.
B) it is a supra-national organization with the power to overturn governments.
C) it determines which nations may trade what with whom.
D) it punishes naughty nations.
E) it exempts the U.S. and other powerful member nations from many of its edicts.
Answer: A
Page Ref: 290-299
Difficulty: Easy
12.2 Globalization and Low-Wage Labor

1) In today's world markets, poor developing countries tend to rely primarily on exports of
A) agricultural products.
B) primary products.
C) mineral products.
D) manufactured products.
E) high-tech products.
Answer: D
Page Ref: 299-305
Difficulty: Easy

2) In the second half of the 1990s a rapidly growing movement focused on the harm caused
by international trade to
A) land owners in poor countries.
B) capital owners in rich industrialized countries.
C) land owners in rich industrialized countries.
D) production workers in both rich and poor countries.
E) terms of trade in developing countries.
Answer: D
Page Ref: 299-305
Difficulty: Easy

3) The Ricardian model of comparative advantage lends support to the argument that
A) trade tends to worsen the conditions of unskilled labor in rich countries.
B) trade tends to worsen the conditions of owners of capital in rich countries.
C) trade tends to worsen the conditions of workers in poor countries.
D) trade tends to worsen the conditions of workers in rich countries.
E) trade is mutually beneficial to the countries that engage in it.
Answer: E
Page Ref: 299-305
Difficulty: Easy

4) Most developing countries oppose including labor standards in trade agreements because
A) they believe this would involve a loss of their national sovereignty.
B) they believe this would limit their ability to export to rich markets.
C) they believe this would create an uneven playing field.
D) multinational corporations control them.
E) they do not want to improve wages for their workers.
Answer: B

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Page Ref: 299-305
Difficulty: Easy

5) When Japan's MITI (Ministry of International Trade and Industry) focused resources on
the semiconductor industry, and in particular on Random Access Memory (RAM), it was
viewed as a typically successful Japanese foray into a new dynamic strategic sector. The
results, as viewed by the late 1990s
A) justified this view.
B) led to similar structuring of industrial policy in the U.S.
C) lent support to the Brander-Spencer model.
D) helped shift the focus of economists away from Japanese-style industrial policy.
E) propelled Japan into the leading country in high-tech manufacturing.
Answer: D
Page Ref: 299-305
Difficulty: Easy

6) Low wages and poor working conditions in many U.S. trade partners
A) prove that the gains-from-trade arguments of the Ricardian model are false.
B) may be a fact of life, but economists don't care.
C) are facts emphasized by U.S. labor in its contract negotiations.
D) prove that the gains-from-trade arguments of the Ricardian model are true.
E) prove that international trade is exploitative.
Answer: C
Page Ref: 299-305
Difficulty: Easy

7) The fact that articles of clothing sold in Walmart are produced by very poorly paid workers
in Honduras, is a fact that if taken into account
A) would prove to economists that the Ricardian model of comparative advantage is false.
B) would prove to economists that the equal-value in trade concept summed up in the trade
triangles is incorrect.
C) proves to economists that trade is a negative sum game.
D) proves to the Anti-Globalization Movement that trade is a negative sum game.
E) proves that corporations are exempt from labor standards.
Answer: D
Page Ref: 299-305
Difficulty: Easy

8) Faced with the evidence of poor working conditions and low wages in the border
maquiladoras, economists
A) shrug their shoulders and ignore the issue.
B) agree that trade theory is thus proven hollow and internally inconsistent.
C) argue that U.S. consumers should not consume lettuce.
D) argue that the poor conditions and low wages are actually improvements for the Mexican
workers, and may be cited as gains-from-trade.
E) argue that Mexico's generally high overall productivity offsets these conditions.
Answer: D
Page Ref: 299-305
Difficulty: Easy

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9) The shipbreakers of Alang are
A) a metaphysical representation of the WTO, deriving from Edgar Rice Burroughs' Princess
of Mars.
B) an early version of the Russian Ice-breaker of the Dnieper-Alang class.
C) a capital-intensive industry.
D) competing with pollution-producing industries in countries outside of India.
E) doing environmentally conscious work.
Answer: D
Page Ref: 299-305
Difficulty: Easy

10) The Shipbreakers of Alang utilize much labor and little capital, thereby supporting the
applicability of the
A) factor proportions explanation of the sources of comparative advantage.
B) specific factor theory of comparative advantage.
C) monopolistic competition theory of comparative advantage.
D) scale economies theory of comparative advantage.
E) basis of the non-dumping legislation.
Answer: A
Page Ref: 299-305
Difficulty: Easy

11) The Shipbreakers of Alang arouse the ire of Greenpeace because of

A) India's non-repentant nuclear stance.
B) India's import-competing industrialization policies.
C) the difficulty of avoiding ship accidents between Greenpeace's sailboat and the
reconstructed Container ships of Alang.
D) the large amount of pollution associated with the operations at Alang.
E) their competition with capital-intensive industries.
Answer: D
Page Ref: 299-305
Difficulty: Easy

12) The Shipbreakers of Alang represent a perfect example of how a developing country can
apply the principles of the Heckscher-Ohlin model, since
A) shipbreaking is generally considered to be a capital-intensive operation and India, being a
large country has much capital.
B) shipbreaking is a labor-intensive operation in India, and India has many workers since it is
such a large country.
C) shipbreaking is a labor-intensive operation in India, and India's availability of capital per
worker is less than that of its trade partners.
D) shipbreaking is a capital-intensive operation elsewhere in the world, and therefore
represents a case of a factor intensity reversal.
E) India's climate lends itself to the work involved in shipbreaking.
Answer: C
Page Ref: 299-305
Difficulty: Easy

13) When one applies the Heckscher-Ohlin model of trade to the issue of trade-related
income redistributions, one must conclude that North South trade, such as U.S.-Mexico trade,

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A) must help low skill workers on both sides of the border.
B) is likely to hurt high-skilled workers in the U.S.
C) is likely to involve higher overall national economic gains that will be greater than any
harm done to low-skilled workers in the U.S.
D) is likely to hurt low-skilled workers in Mexico.
E) gives no advantage to the workers in either country.
Answer: C
Page Ref: 299-305
Difficulty: Easy

14) Working conditions for clothing workers in Bangladesh are very poor. If countries refuse
to buy clothing from Bangladesh in order to encourage change, the effect is likely to be that
A) firms will be forced to comply and workers will be better off.
B) firms will refuse to comply, but workers will be better off.
C) firms will try to comply and workers will be worse off.
D) firms will try to comply and workers will be better off.
E) regardless of how firms respond, workers will be better off.
Answer: C
Page Ref: 299-305
Difficulty: Easy

12.3 Globalization and the Environment

1) Free trade and globalization is generally believed

A) to cause a degradation in the world's environment.
B) to improve the environment by correcting for distortions caused by import competing
policies.
C) to help spread the best of each country's culture, so as to uplift global cultural standards.
D) to help each country safeguard the best of its own culture.
E) to make no difference in the economic welfare of the world.
Answer: A
Page Ref: 305-310
Difficulty: Easy

International Economics, 10e

(Krugman/Obstfeld/Melitz)
Chapter 13 (Finance Ch 2) National Income
Accounting and the Balance of Payments
13.1 The National Income Accounts

1) A country's gross national product (GNP) is

A) the value of all final goods and services produced by its factors of production and sold on
the market in a given time period.
B) the value of all intermediate goods and services produced by its factors of production and
sold on the market in a given time period.

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C) the value of all final goods produced by its factors of production and sold on the market in
a given time period.
D) the value of all final goods and services produced by its factors of production and sold on
the market.
E) the value of all final goods and services produced by its factors of production, excluding
land, and sold on the market in a given time period.
Answer: A
Page Ref: 313-318
Difficulty: Easy

2) For most macroeconomists

A) national income accounts and national output accounts are equal to each other.
B) national income accounts exceed national output accounts.
C) national output accounts exceed national income accounts.
D) it is impossible to tell whether national income accounts equal to national output accounts.
E) national income accounts is much more important than national output accounts.
Answer: A
Page Ref: 313-318
Difficulty: Easy

3) For most macroeconomists

A) gross national income and gross national product are the same.
B) gross national income exceeds gross national product.
C) gross national product exceeds gross national product.
D) it is hard to tell whether gross national income equal gross national product.
E) gross national product is much more important than gross national income.
Answer: A
Page Ref: 313-318
Difficulty: Easy

4) The highest component of GNP is

A) the current account.
B) investment.
C) government purchases.
D) consumption.
E) trade.
Answer: D
Page Ref: 313-318
Difficulty: Easy

5) An example of how GNP accounts for services provided by foreign-owned capital (and
GDP does not) is
A) earnings of a Spanish factory with British owners counts only in Spain's GDP.
B) earnings of a Spanish factory with British owners counts only in Britain's GNP.
C) earnings of a Spanish factory counts in Spain's GNP but are part of Britain's GDP.
D) earnings of a Spanish factory counts in Spain's GDP but are part of Britain's GNP.
E) earnings of a Spanish factory counts in Spain's GNP but not in Britain's GDP or GNP.
Answer: D
Page Ref: 313-318
Difficulty: Easy

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6) The sale of
A) a used textbook does enter GNP.
B) a used textbook does not enter GNP, but the sale of a used house does.
C) both a used textbook and a used house do not enter GNP.
D) a used house does not enter GNP, but the sale of a used book does.
E) the GNP does not include sale of used items priced below $1000.
Answer: C
Page Ref: 313-318
Difficulty: Easy

7) Which one of the following statements is the MOST accurate?

A) The sale of a used textbook does generate income for factors of production.
B) The sale of a used textbook does not generate income for any factor of production.
C) The sale of a used textbook sometimes does and sometimes does not generate income for
factors of production.
D) It is hard to tell whether a sale of a used textbook does or does not generate income for
factors of production.
E) The sale of a used textbook is a part of the GNP.
Answer: B
Page Ref: 313-318
Difficulty: Easy

8) Which one of the following statements is the MOST accurate?

A) GNP plus depreciation is called net national product (NNP).
B) GNP less depreciation is called net national product (NNP).
C) GNP less depreciation is called net factor product (NFP).
D) GDP plus depreciation is called net national product (NNP).
E) GDP less depreciation is called net national product (NNP).
Answer: B
Page Ref: 313-318
Difficulty: Easy

9) National income equals GNP

A) less depreciation, less net unilateral transfers, less indirect business taxes.
B) less depreciation, plus net unilateral transfers, plus indirect business taxes.
C) less depreciation, less net unilateral transfers, plus indirect business taxes.
D) plus depreciation, plus net unilateral transfers, less indirect business taxes.
E) less depreciation, plus net unilateral transfers, less indirect business taxes.
Answer: E
Page Ref: 313-318
Difficulty: Easy

10) The United States began to report its gross domestic product (GDP) only since
A) 1900.
B) 1921.
C) 1931.
D) 1941.
E) 1991.
Answer: E

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Page Ref: 313-318
Difficulty: Easy

11) GDP is supposed to measure

A) the volume of production within a country's borders.
B) the volume of services generated within a country's borders.
C) the volume of production of a country's output.
D) GNP plus depreciation.
E) net unilateral transfers from foreigners.
Answer: A
Page Ref: 313-318
Difficulty: Easy

12) GNP equals GDP

A) minus net receipts of factor income from the rest of the world.
B) plus receipts of factor income from the rest of the world.
C) minus receipts of factor income from the rest of the world.
D) plus net receipts of factor income from the rest of the world.
E) minus depreciation.
Answer: D
Page Ref: 313-318
Difficulty: Easy

13) Movements in GDP

A) and GNP usually do not differ greatly.
B) and GNP usually do not differ greatly, as a practical matter.
C) and GNP usually do differ greatly.
D) are usually smaller than those of GNP movements, in practice.
E) are inversely proportional to movements in GNP.
Answer: B
Page Ref: 313-318
Difficulty: Easy

14) In 2006, the United States had

A) a surplus in the current account.
B) a balance in the current account.
C) a deficit in the current account.
D) From 2006 data, it is too difficult to determine whether a surplus or a deficit existed in the
current account.
E) a positive balance of net financial flows.
Answer: C
Page Ref: 313-318
Difficulty: Easy

15) Net unilateral transfers

A) are part of a national income.
B) are part of a country's product.
C) must be added to NNP in calculations of national income.
D) are part of a country's GNP.
E) Only A and C.

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Answer: E
Page Ref: 313-318
Difficulty: Easy

16) GDP is different than GNP in that

A) it accounts for net unilateral transfers.
B) it does not account for indirect business taxes.
C) it does not account for a country's production using services with foreign-owned capital.
D) it accounts for depreciation.
E) it is unhelpful when tracking national income.
Answer: C
Page Ref: 313-318
Difficulty: Easy
13.2 National Income Accounting for an Open Economy

1) Movements in GDP
A) differ greatly from movements in GNP.
B) do not differ greatly from movements in GNP.
C) are not allowed to differ at all from movements in GNP by definition.
D) need to be inflation adjusted in order to match movements in GNP.
E) are not relevant to an examination of national income.
Answer: B
Page Ref: 318-326
Difficulty: Easy

2) Purchases of inventories by
A) firms are not counted in investment spending.
B) firms are also counted in investment spending.
C) households are also counted in investment spending.
D) households and Firms are also counted in investment spending.
E) foreign consumers are counter in investment spending.
Answer: B
Page Ref: 318-326
Difficulty: Easy

3) In open economies
A) saving and investment are necessarily equal.
B) as in a closed economy, saving and investment are not necessarily equal.
C) saving and investment are not necessarily equal as they are in a closed economy.
D) saving and investment are necessarily equal contrary to the case of a closed economy.
E) investment always refers to the domestic stock market.
Answer: C
Page Ref: 318-326
Difficulty: Easy

4) Investment is usually
A) more variable than consumption.
B) less variable than consumption.
C) as variable as consumption.
D) It is hard to tell from the data whether investment is more or less variable than

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consumption.
E) a larger component of the GNP than consumption.
Answer: A
Page Ref: 318-326
Difficulty: Easy

5) Government purchases are defined as

A) only goods purchased by federal, state, or local governments.
B) all goods and services purchased by the federal government.
C) all goods and services purchased by the federal or state government.
D) all goods and services purchased by the federal, state, or local government.
E) goods and services purchased from the government.
Answer: D
Page Ref: 318-326
Difficulty: Easy

6) Government transfer payments like social security and unemployment benefits are
A) included in government purchases.
B) not included in government purchases.
C) not included in government purchases, but they are included in the consumption
component of GNP.
D) not included in government purchases, but they are part of the investment component of
GNP.
E) included in government purchases but not in the GNP.
Answer: B
Page Ref: 318-326
Difficulty: Easy

7) In 1929, government purchases accounted for

A) only 18.5 percent of U.S. GNP.
B) only 8.5 percent of U.S. GNP.
C) 28.5 percent of U.S. GNP.
D) 38.5 percent of U.S. GNP.
E) 48.5 percent of U.S. GNP.
Answer: B
Page Ref: 318-326
Difficulty: Easy

8) Which one of the following expressions is the MOST accurate?

A) CA = EX - IM
B) CA = IM - EX
C) CA = EX = IM
D) CA = EX + IM
E) CA - IM = EX
Answer: A
Page Ref: 318-326
Difficulty: Easy

9) A country's current account

A) balance equals the change in its net foreign wealth.

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B) balance equals the change in its foreign wealth.
C) surplus equals the change in its foreign wealth.
D) deficit equals the change in its foreign wealth.
E) balance equals its GNP.
Answer: A
Page Ref: 318-326
Difficulty: Easy

10) The CA is equal to

A) Y - (C - I + G).
B) Y + (C + I + G).
C) Y - (C + I + G).
D) Y - (C + I - G).
E) Y + (C - I - G).
Answer: C
Page Ref: 318-326
Difficulty: Easy

11) Which of the following is TRUE?

A) A country with a current account surplus is earning more from its exports than it spends
on imports.
B) A country could finance a current account deficit by using previously accumulated foreign
wealth to pay for its imports.
C) A country with a current account deficit must be increasing its net foreign debts by the
amount of the deficit.
D) We can describe the current account surplus as the difference between income and
absorption.
E) All of the above are true of current account balances.
Answer: E
Page Ref: 318-326
Difficulty: Easy

12) Over the 1980s

A) there is no question that a large increase in U.S. foreign assets did occur.
B) there is a question whether a large decrease in U.S. foreign assets did occur.
C) there is no question that a large decrease in U.S. foreign assets did occur.
D) there is no question that there was almost no change in U.S. foreign assets.
E) there is no question that rising exports exceeded U.S. foreign debt.
Answer: C
Page Ref: 318-326
Difficulty: Easy

13) In a closed economy, national saving

A) sometimes equals investment.
B) always equals investment.
C) is always less than investment.
D) is always more than investment.
E) is never equal to investment.
Answer: B
Page Ref: 318-326

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Difficulty: Easy

14) For open economies,

A) S = I.
B) S = I + CA.
C) S = I - CA.
D) S > I + CA.
E) S < I + CA.
Answer: B
Page Ref: 318-326
Difficulty: Easy

15) An open economy

A) can save only by building up its capital stock.
B) can save only by acquiring foreign wealth.
C) cannot save either by building up its capital stock or by acquiring foreign wealth.
D) can save either by building up its capital stock or by acquiring foreign wealth.
E) can save by avoiding excessive imports.
Answer: D
Page Ref: 318-326
Difficulty: Easy

16) A closed economy

A) can save either by building up its capital stock or by acquiring foreign wealth.
B) can save only by building up its capital stock.
C) can save only by acquiring foreign wealth.
D) cannot save either by building up its capital stock or by acquiring foreign wealth.
E) can save by avoiding excessive imports.
Answer: B
Page Ref: 318-326
Difficulty: Easy

17) Disposable income is National income

A) less taxes collected from households and firms by the government.
B) plus net taxes collected from households and firms by the government.
C) less net taxes collected from firms by the government.
D) less net taxes collected from households by the government.
E) less net taxes collected from households and firms by the government.
Answer: E
Page Ref: 318-326
Difficulty: Easy

18) Government savings, , is equal to

A) T - G.
B) T + G.
C) T = G.
D) T + G - I.
E) T - G = I.
Answer: A
Page Ref: 318-326

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Difficulty: Easy

19) Which of the following is FALSE about private savings and government savings?
A) SP = Y - T - C
B) Unlike private saving decisions, government saving decisions are often made with an eye
toward their effect on output and employment.
C) Total savings (S) = SP + .
D) The national income identity can help us to analyze the channels through which
government saving decisions influence macroeconomic conditions.
E) None of the above; all statements are true.
Answer: E
Page Ref: 318-326
Difficulty: Easy

20) In a closed economy, private saving, , is equal to

A) I - (G - T).
B) I + (G - T).
C) I + (G + T).
D) I - (G + T).
E) I + (G - T) + C.
Answer: B
Page Ref: 318-326
Difficulty: Easy

21) In an open economy, private saving, , is equal to

A) I - CA + (G - T).
B) I + CA - (G - T).
C) I + CA + (G - T).
D) I - CA - (G - T).
E) I + CA + (G + T).
Answer: C
Page Ref: 318-326
Difficulty: Easy

22) Ricardian equivalence argues that when the government cuts taxes and raises its deficit,
A) consumers anticipate that they will face lower taxes later to pay for the resulting
government debt.
B) consumers anticipate that they will higher services from the government.
C) consumers anticipate that they will face higher taxes later to pay for the resulting
government debt.
D) consumers anticipate it will affect their future taxes, in general in the direction of lowering
future taxes.
E) consumers anticipate that the low tax rates will continue.
Answer: C
Page Ref: 318-326
Difficulty: Easy

23) Ricardian equivalence argues that when the government

A) increases taxes and raises its deficit, consumers anticipate that they will face higher taxes

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later to pay for the resulting government debt, thus people will raise their own private saving
to offset the fall in government saving.
B) cuts taxes and decreases its deficit, consumers anticipate that they will face higher taxes
later to pay for the resulting government debt, thus people will raise their own private saving
to offset the fall in government saving.
C) cuts taxes and raises its surplus, consumers anticipate that they will face higher taxes later
to pay for the resulting government debt, thus people will raise their own private saving to
offset the fall in government saving.
D) cuts taxes and raises its deficit, consumers anticipate that they will face lower taxes later
to pay for the resulting government debt, thus people will raise their own private saving to
offset the fall in government saving.
E) cuts taxes and raises its deficit, consumers anticipate that they will face higher taxes later
to pay for the resulting government debt, thus people will raise their own private saving to
offset the fall in government saving.
Answer: E
Page Ref: 318-326
Difficulty: Easy

24) In the United States over the past fifty years, the fraction of GNP devoted to consumption
has fluctuated in a range of about
A) 42 to 49 percent.
B) 32 to 39 percent.
C) 22 to 29 percent.
D) 82 to 89 percent.
E) 62 to 70 percent.
Answer: E
Page Ref: 318-326
Difficulty: Easy

25) In the United States, (gross) investment has fluctuated between ________ of GNP in
recent years.
A) 2 and 12 percent
B) 11 and 22 percent
C) 22 and 32 percent
D) 32 and 42 percent
E) 42 and 52 percent
Answer: B
Page Ref: 318-326
Difficulty: Easy

26) Government purchases currently take up about

A) 20 percent of U.S. GNP, and this share has not changed much since the late 1950s.
B) 38 percent of U.S. GNP, and this share has not changed much since the late 1950s.
C) 18 percent of U.S. GNP, and this share has been increasing since the late 1950s.
D) 18 percent of U.S. GNP, and this share has been decreasing since the late 1950s.
E) 25 percent of U.S. GNP, and this share has been decreasing since the late 1950s.
Answer: A
Page Ref: 318-326
Difficulty: Easy

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27) The position of the United States current account balance in 2009 was
A) lent over 6 percent of its GNP, resulting in a large current account surplus.
B) borrowed over 9 percent of its GNP, leading to a large current account deficit.
C) achieved a currant account balance of zero.
D) borrowed over 10 percent of its GNP, leading to a large current account deficit.
E) borrowed less then 5 percent of its GNP, leading to a large current account surplus.
Answer: B
Page Ref: 318-326
Difficulty: Easy

28) Which one of the following statements is FALSE?

A) The United States had accumulated substantial foreign wealth by the early 1980s.
B) The 1980s witnessed a sustained current account deficit of proportions unprecedented in
the twentieth century opened up.
C) In 1987, the country became a net debtor to foreigners for the first time since World War
I.
D) U.S. foreign debt has continued to grow and now stands at 25 percent of GNP.
E) The U.S. foreign debt was paid off in the 1990s, allowing the U.S. to attain a current
account surplus. However, the deficit has returned in recent years.
Answer: E
Page Ref: 318-326
Difficulty: Easy

13.3 The Balance of Payments Accounts

1) Every international transaction automatically enters the balance of payments

A) once either as a credit or as a debit.
B) twice, once as a credit and once as a debit.
C) once as a credit.
D) twice, both times as debit.
E) the times, once as a credit, onces as a debit, and once as an exchange.
Answer: B
Page Ref: 326-337
Difficulty: Easy

2) The official settlements balance or balance of payments is the sum of

A) the current account balance, the capital account balance, the non reserve portion of the
financial account balance, the statistical discrepancy.
B) the current account balance and the capital account balance.
C) the current account balance, the capital account balance, the non reserve portion of the
financial account balance.
D) the current account balance and the non reserve portion of the financial account balance.
E) the current account balance and the interest in all investments.
Answer: A
Page Ref: 326-337
Difficulty: Easy

3) An American buys a Japanese car, paying by writing a check on an account with a bank in
New York. How would this be accounted for in the balance of payments?
A) current account, a Japanese good import

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B) current account, a U.S. good import
C) financial account, a U.S. asset import
D) financial account, a U.S. asset export
E) a current account as a U.S. good import and a financial account, a U.S. asset export
Answer: E
Page Ref: 326-337
Difficulty: Easy

4) The United States issues a $10,000 debt forgiveness to Argentina. How is this accounted
for in the balance of payments?
A) financial account, U.S. asset import
B) current account, Argentina transfer payment
C) current account, U.S. service export
D) financial account, U.S. asset export
E) current account, Argentina good import
Answer: D
Page Ref: 326-337
Difficulty: Easy

5) A U.S. citizen buys a newly issued share of stock in England, paying for his order with a
check, which the British company deposits in its own U.S. bank account in New York. How
is this transaction accounted for in the balance of payments?
A) financial account, U.S. asset export
B) current account, U.S. service import
C) current account, British good export
D) financial account, British asset import
E) financial account, U.S. asset import
Answer: A
Page Ref: 326-337
Difficulty: Easy

6) You travel to Paris and pay for a $100 dinner with your credit card. How is this accounted
for in the balance of payments?
A) current account, French service import
B) current account, U.S. good export
C) financial account, U.S. asset export
D) financial account, U.S. asset import
E) financial account, French asset export
Answer: C
Page Ref: 326-337
Difficulty: Easy

7) The German government carries out an official foreign exchange intervention in which it
uses dollars held in an American bank to buy French currency from its citizens. How is this
accounted for in the balance of payments?
A) current account, French good export
B) current account, German good import
C) financial account, French asset export
D) financial account, German asset export
E) financial account, German asset import

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Answer: C
Page Ref: 326-337
Difficulty: Easy

8) The earnings of a Spanish factory with British owners are

A) counted in Spain's GDP.
B) part of Britain's GNP.
C) only counted in Britain's GDP.
D) only part of Spain's GNP.
E) counted in Britain's GDP and are a part of Spain's GNP.
Answer: E
Page Ref: 326-337
Difficulty: Easy

9) The services British capital provides in Spain are a service export from Britain
A) therefore they are subtracted from British GDP in calculating British GNP.
B) therefore they are added to Spanish GDP in calculating Spanish GDP.
C) therefore they are added to British GDP in calculating British GNP.
D) therefore they are added to Spanish GNP in calculating Spanish GDP.
E) therefore they are subtracted from Spanish GNP.
Answer: C
Page Ref: 326-337
Difficulty: Easy

10) Unilateral transfers between countries are

A) long-term loans.
B) only international gifts, never payments that do not correspond to the purchase of any
good, service, or asset.
C) part of the current account but not a part of national income.
D) known for reducing the income of capital owners.
E) the difference between Y and GNP if the identity Y = C + I + G + CA holds exactly.
Answer: E
Page Ref: 326-337
Difficulty: Easy

11) Which of the following statements about the central bank is TRUE?
A) Only the central bank may hold foreign reserves and intervene officially in exchange
markets.
B) Central banks have little power to alter macroeconomic conditions.
C) Today, central banks' reserves consist largely of gold.
D) The Federal Reserve holds only a small level of official reserve assets other than gold.
E) Central banks never inject money into the economy.
Answer: D
Page Ref: 326-337
Difficulty: Easy

12) How do we allocate statistical discrepancy among the current, capital, and financial
accounts?
A) We have no way of knowing exactly how to allocate this discrepancy.
B) Depend on the degree of certainty by which we attribute to these accounts.

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C) Divide it evenly amongst the three accounts.
D) Depend on the convention adopted by the specific financial institution.
E) Statistical discrepancy signals human errors made when dealing with financial accounts.
Answer: A
Page Ref: 326-337
Difficulty: Easy

13) Which of the following is TRUE about current cost method and market value method?
A) They are used by the BEA to place current values on foreign indirect investments.
B) These methods lead to the same valuations.
C) Based on the current cost method, the BEA's 2009 estimate of U.S. net foreign wealth was
$2,737.86 billion.
D) The current cost method is preferred by the BEA.
E) Foreign direct investments of the U.S. are valued at their original purchase price.
Answer: C
Page Ref: 326-337
Difficulty: Moderate

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 14 (3) Exchange Rates and the Foreign Exchange
Market: An Asset Approach

14.1 Exchange Rates and International Transactions

1) How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50
British pounds if the exchange rate is 1.25 dollars per one British pound?
A) 50 dollars
B) 60 dollars
C) 70 dollars
D) 62.5 dollars
E) 40 British pounds
Answer: D
Page Ref: 342-346
Difficulty: Easy

2) How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50
British pounds if the exchange rate is 1.50 dollars per one British pound?
A) 50 dollars
B) 60 dollars
C) 70 dollars
D) 80 dollars
E) 75 dollars
Answer: E
Page Ref: 342-346
Difficulty: Easy

3) How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50
British pounds if the exchange rate is 1.80 dollars per one British pound?
A) 40 dollars

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B) 90 dollars
C) 50 dollars
D) 100 dollars
E) 95 dollars
Answer: B
Page Ref: 342-346
Difficulty: Easy

4) The Japanese currency is called the

A) DM.
B) Yen.
C) Euro.
D) Dollar.
E) Pound.
Answer: B
Page Ref: 342-346
Difficulty: Easy

5) How many British pounds would it cost to buy a pair of American designer jeans costing
$45 if the exchange rate is 1.50 dollars per British pound?
A) 10 British pounds
B) 20 British pounds
C) 30 British pounds
D) 35 British pounds
E) 25 British pounds
Answer: C
Page Ref: 342-346
Difficulty: Easy

6) How many British pounds would it cost to buy a pair of American designer jeans costing
$45 if the exchange rate is 1.80 dollars per British pound?
A) 10 British pounds
B) 25 British pounds
C) 20 British pounds
D) 30 British pounds
E) 40 British pounds
Answer: B
Page Ref: 342-346
Difficulty: Easy

7) How many British pounds would it cost to buy a pair of American designer jeans costing
$45 if the exchange rate is 2.00 dollars per British pound?
A) 22.5 British pounds
B) 32.5 British pounds
C) 12.5 British pounds
D) 40 British pounds
E) 30 British pounds
Answer: A
Page Ref: 342-346
Difficulty: Easy

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8) How many British pounds would it cost to buy a pair of American designer jeans costing
$45 if the exchange rate is 1.60 dollars per British pound?
A) 38.125 British pounds
B) 28.125 British pounds
C) 48.125 British pounds
D) 58.125 British pounds
E) 18.125 British pounds
Answer: B
Page Ref: 342-346
Difficulty: Easy

9) What is the exchange rate between the dollar and the British pound if a pair of American
jeans costs 50 dollars in New York and 100 Pounds in London?
A) 1.5 dollars per British pound
B) 0.5 dollars per British pound
C) 2.5 dollars per British pound
D) 3.5 dollars per British pound
E) 2 dollars per British pound
Answer: B
Page Ref: 342-346
Difficulty: Easy

10) What is the exchange rate between the dollar and the British pound if a pair of American
jeans costs 60 dollars in New York and 30 Pounds in London?
A) 1.5 dollars per British pound
B) 0.5 dollars per British pound
C) 2.5 dollars per British pound
D) 3.5 dollars per British pound
E) 2 dollars per British pound
Answer: E
Page Ref: 342-346
Difficulty: Easy

11) When a country's currency depreciates

A) foreigners find that its exports are more expensive, and domestic residents find that
imports from abroad are more expensive.
B) foreigners find that its exports are more expensive, and domestic residents find that
imports from abroad are cheaper.
C) foreigners find that its exports are cheaper; however, domestic residents are not affected.
D) foreigners are not affected, but domestic residents find that imports from abroad are more
expensive.
E) foreigners find that its exports are cheaper and domestic residents find that imports from
abroad are more expensive.
Answer: E
Page Ref: 342-346
Difficulty: Easy

12) An appreciation of a country's currency

A) decreases the relative price of its exports and lowers the relative price of its imports.

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B) raises the relative price of its exports and raises the relative price of its imports.
C) lowers the relative price of its exports and raises the relative price of its imports.
D) raises the relative price of its exports and lowers the relative price of its imports.
E) raises the relative price of its exports and does not affect the relative price of its imports.
Answer: D
Page Ref: 342-346
Difficulty: Easy

13) Which one of the following statements is the MOST accurate?

A) A depreciation of a country's currency makes its goods cheaper for foreigners.
B) A depreciation of a country's currency makes its goods more expensive for foreigners.
C) A depreciation of a country's currency makes its goods cheaper for its own residents.
D) A depreciation of a country's currency makes its goods cheaper.
E) An appreciation of a country's currency makes its goods more expensive.
Answer: A
Page Ref: 342-346
Difficulty: Easy

14) A(n) ________ of a nation's currency will cause imports to ________ and exports to
________, all other things held constant.
A) depreciation; increase; decrease
B) appreciation; decrease; increase
C) depreciation; decrease; increase
D) appreciation; increase; increase
E) depreciation; decrease; decrease
Answer: C
Page Ref: 342-346
Difficulty: Easy

15) If the goods' money prices do not change, an appreciation of the dollar against the pound
A) makes British sweaters cheaper in terms of American jeans.
B) makes British sweaters more expensive in terms of American jeans.
C) doesn't change the relative price of sweaters and jeans.
D) makes American jeans cheaper in terms of British sweaters.
E) makes British jeans more expensive in Britain.
Answer: A
Page Ref: 342-346
Difficulty: Easy

16) If the goods' money prices do not change, a depreciation of the dollar against the pound
A) makes British sweaters cheaper in terms of American jeans.
B) makes British sweaters more expensive in terms of American jeans.
C) makes American jeans more expensive in terms of British sweaters.
D) doesn't change the relative price of sweaters and jeans.
E) makes British jeans more expensive in Britain.
Answer: B
Page Ref: 342-346
Difficulty: Easy
14.2 The Foreign Exchange Market

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1) The largest trading of foreign exchange occurs in
A) New York.
B) London.
C) Tokyo.
D) Frankfurt.
E) Singapore.
Answer: B
Page Ref: 346-352
Difficulty: Easy

2) Which of the following type of funds cater to wealthy individuals, are not bound by
government regulations, and are actively traded in foreign exchange markets?
A) pension funds
B) mutual funds
C) hedge funds
D) exchange funds
Answer: C
Page Ref: 346-352
Difficulty: Easy

3) The future date on which the currencies are actually exchanged is called what?
A) the value date
B) the spot exchange date
C) the two-day window
D) the commitment date
E) the forward exchange rate
Answer: A
Page Ref: 346-352
Difficulty: Easy

4) In 2010, about
A) 20 percent of foreign exchange transactions involved exchanges of foreign currencies for
U.S. dollars.
B) 10 percent of foreign exchange transactions involved exchanges of foreign currencies for
U.S. dollars.
C) 30 percent of foreign exchange transactions involved exchanges of foreign currencies for
U.S. dollars.
D) 40 percent of foreign exchange transactions involved exchanges of foreign currencies for
U.S. dollars.
E) 85 percent of foreign exchange transactions involved exchanges of foreign currencies for
U.S. dollars.
Answer: E
Page Ref: 346-352
Difficulty: Easy

5) Which one of the following statements is the MOST accurate?

A) Spot exchange rates are always higher than forward exchange rates.
B) Spot exchange rates are always lower than forward exchange rates.
C) Spot exchange rates and forward exchanges rates are always equal.
D) Spot exchange rates and forward exchanges rates are equal when the value date and the

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date of the spot transaction are the same.
E) Spot exchange rates and forward exchange rates never move closely together.
Answer: D
Page Ref: 346-352
Difficulty: Easy

6) Forward and spot exchange rates

A) are necessarily equal.
B) do not move closely together.
C) are always such that the forward exchange rate is higher.
D) move closely together and are equal on the value date.
E) are unrelated to the value date.
Answer: D
Page Ref: 346-352
Difficulty: Easy

7) A foreign exchange swap

A) is a spot sale of a currency.
B) is a forward repurchase of the currency.
C) is a spot sale of a currency combined with a forward repurchase of the currency.
D) is a spot sale of a currency combined with a forward sale of the currency.
E) make up a negligible proportion of all foreign exchange trading.
Answer: C
Page Ref: 346-352
Difficulty: Easy

8) Non deliverable forward exchange markets in centers such as Hong Kong and Singapore
help to circumvent which problem?
A) loss of goods shipped from Hong Kong and Singapore
B) inconvertible currencies cannot be traded in foreign markets
C) lag between the spot exchange date and the value date
D) high travel costs from Asia to "traditional" foreign exchange markets
E) unstable currencies that hold no purchasing power
Answer: B
Page Ref: 346-352
Difficulty: Easy

9) The following is an example of Radio Shack hedging its foreign currency risk
A) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a
forward-exchange deal to buy yen.
B) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a
forward-exchange deal to sell yen.
C) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack buys yen at a
spot-exchange 1 month from now.
D) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen at a
spot-exchange 1 month from now.
E) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen in a
forward-exchange deal.
Answer: A
Page Ref: 346-352

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Difficulty: Easy

10) Which of the following is NOT an example of a financial derivative?

A) forwards
B) bonds
C) swaps
D) futures
E) options
Answer: B
Page Ref: 346-352
Difficulty: Easy

11) Which major actor is at the center of the foreign exchange market?
A) corporations
B) central banks
C) commercial banks
D) non-bank financial institutions
E) individual firms
Answer: C
Page Ref: 346-352
Difficulty: Easy

12) Which of the following is NOT a major actor in the foreign exchange market?
A) corporations
B) central banks
C) commercial banks
D) non-bank financial institutions
E) tourists
Answer: E
Page Ref: 346-352
Difficulty: Easy

13) By April 2010

A) only about 10 percent of foreign exchange trades were against euros.
B) only about 24 percent of foreign exchange trades were against euros.
C) only about 39 percent of foreign exchange trades were against euros.
D) only about 42 percent of foreign exchange trades were against euros.
E) only about 60 percent of foreign exchange trades were against euros.
Answer: C
Page Ref: 346-352
Difficulty: Easy

14) Which of the following statements is TRUE about a vehicle currency?

A) It is widely used to denominate contracts made by parties who reside in the country that
issues the vehicle currency.
B) The dollar is sometimes called a vehicle currency because of its pivotal role in many
foreign exchange deals.
C) There is much skepticism that the euro will ever evolve into a vehicle currency on par
with the dollar.
D) The pound sterling, once second only to the dollar as a key international currency, is

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beginning to rise in importance.
E) Vehicle currencies include nondeliverable currencies like the renminbi.
Answer: B
Page Ref: 346-352
Difficulty: Easy

15) The action of arbitrage is

A) the process of buying a currency cheap and selling it dear.
B) the process of buying a currency dear and selling it cheap.
C) the process of buying and selling currency at the same price.
D) the process of selling currency at different prices in different markets.
E) the process of buying a currency and holding onto it to take it off the market.
Answer: A
Page Ref: 346-352
Difficulty: Easy

16) Futures contracts differ from forward contracts in that

A) future contracts ensures you will receive a certain amount of foreign currency at a
specified future date.
B) future contracts bind you into your end of the deal.
C) future contracts allow you to sell your contract on an organized futures exchange.
D) future contracts are a disadvantage if your views about the future spot exchange rate are to
change.
E) futures contracts don't allow you to realize a profit of a loss right away.
Answer: C
Page Ref: 346-352
Difficulty: Easy

17) Exxon Mobil wants to pay 160,000 to a German supplier. They get an exchange rate
quotation from its own commercial bank and instructs it to debit their dollar account and pay
160,000 to the supplier's German account. If the exchange rate quoted is $1.2 per euro, how
much is debited to Exxon Mobil's account?
A) $160,000
B) $172,000
C) $180,000
D) $192,000
E) $150,000
Answer: D
Page Ref: 346-352
Difficulty: Easy

14.3 The Demand for Foreign Currency Assets

1) What is the expected dollar rate of return on euro deposits if today's exchange rate is $1.10
per euro, next year's expected exchange rate is $1.166 per euro, the dollar interest rate is 10%,
and the euro interest rate is 5%?
A) 10%
B) 11%
C) -1%
D) 0%

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E) 15%
Answer: B
Page Ref: 352-361
Difficulty: Easy

2) What is the expected dollar rate of return on dollar deposits if today's exchange rate is
$1.10 per euro, next year's expected exchange rate is $1.165 per euro, the dollar interest rate
is 10%, and the euro interest rate is 5%?
A) 10%
B) 11%
C) -1%
D) 0%
E) 15%
Answer: A
Page Ref: 352-361
Difficulty: Easy

3) What is the expected dollar rate of return on euro deposits if today's exchange rate is
$1.167 per euro, next year's expected exchange rate is $1.10 per euro, the dollar interest rate
is 10%, and the euro interest rate is 5%?
A) 10%
B) 11%
C) -1%
D) 0%
Answer: C
Page Ref: 352-361
Difficulty: Easy

4) The dollar rate of return on euro deposits is

A) approximately the euro interest rate plus the rate of depreciation of the dollar against the
euro.
B) approximately the euro interest rate minus the rate of depreciation of the dollar against the
euro.
C) the euro interest rate minus the rate of inflation against the euro.
D) the rate of appreciation of the dollar against the euro.
E) the euro interest rate plus the rate of inflation against the euro.
Answer: A
Page Ref: 352-361
Difficulty: Easy

5) If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then an
investor should
A) invest only in dollars.
B) invest only in euros.
C) be indifferent between dollars and euros.
D) invest only in dollars if the exchange rate is expected to remain constant.
E) invest only in euros if the exchange rate is expected to remain constant.
Answer: D
Page Ref: 352-361
Difficulty: Easy

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6) If the dollar interest rate is 4 percent, the euro interest rate is 6 percent, then
A) an investor should invest only in dollars.
B) an investor should invest only in euros.
C) an investor should be indifferent between dollars and euros.
D) invest only in dollars if the exchange rate is expected to remain constant.
E) invest only in euros if the exchange rate is expected to remain constant.
Answer: E
Page Ref: 352-361
Difficulty: Easy

7) If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, then
A) an investor should invest only in dollars if the expected dollar depreciation against the
euro is 4 percent.
B) an investor should invest only in euros if the expected dollar depreciation against the euro
is 4 percent.
C) an investor should be indifferent between dollars and euros if the expected dollar
depreciation against the euro is 4 percent.
D) an investor should invest only in dollars.
E) an investor should invest only in euros.
Answer: C
Page Ref: 352-361
Difficulty: Easy

8) If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then
A) an investor should invest only in dollars if the expected dollar depreciation against the
euro is 8 percent.
B) an investor should invest only in euros if the expected dollar depreciation against the euro
is 8 percent.
C) an investor should be indifferent between dollars and euros if the expected dollar
depreciation against the euro is 8 percent.
D) an investor should invest only in dollars.
E) an investor should invest only in euros.
Answer: B
Page Ref: 352-361
Difficulty: Easy

9) If the dollar interest rate is 10 percent, the euro interest rate is 12 percent, then
A) an investor should invest only in dollars if the expected dollar appreciation against the
euro is 4 percent.
B) an investor should invest only in euros an investor should invest only in dollars if the
expected dollar appreciation against the euro is 4 percent.
C) an investor should be indifferent between dollars and euros an investor should invest only
in dollars if the expected dollar appreciation against the euro is 4 percent.
D) an investor should invest only in dollars.
E) an investor should invest only in euros.
Answer: A
Page Ref: 352-361
Difficulty: Easy

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10) A the beginning of 2012, you pay $100 for a share of stock that then pays you a dividend
of $1 at the beginning of 2013. If the stock price rises from $100 to $109 per share over the
year, then you have earned an annual rate of return of
A) 5 percent.
B) 1 percent.
C) 9 percent.
D) 4 percent.
E) 10 percent.
Answer: E
Page Ref: 352-361
Difficulty: Easy

14.4 Equilibrium in the Foreign Exchange Market

1) Which one of the following statements is the MOST accurate?

A) Since dollar and yen interest rates are measured in comparable terms, they can move quite
differently over time.
B) Since dollar and yen interest rates are not measured in comparable terms, they can move
quite differently over time.
C) Since dollar and yen interest rates are measured in comparable terms, they move quite the
same over time.
D) Since dollar and yen interest rates are measured in comparable terms, they still move quite
differently over time.
E) Since dollar and yen interest rates are so similar, they move quite the same way over time.
Answer: B
Page Ref: 361-365
Difficulty: Easy

2) Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per
euro. Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on
dollar deposits is 10 percent and on euro it is 4 percent. Under these assumptions
A) interest parity does not hold.
B) interest parity does hold.
C) it is hard to tell whether interest parity does or does not hold.
D) Not enough information is given to answer the question.
E) interest parity fluctuates.
Answer: B
Page Ref: 361-365
Difficulty: Easy

14.5 Interest Rates, Expectations, and Equilibrium

1) Which one of the following statements is the MOST accurate?

A) A rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
B) A rise in the interest rate offered by dollar deposits causes the dollar to depreciate.
C) A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar.
D) For a given euro interest rate and constant expected exchange rate, a rise in the interest
rate offered by dollar deposits causes the dollar to appreciate.

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E) A rise in the interest rate offered by the dollar causes the euro to appreciate.
Answer: D
Page Ref: 366-370
Difficulty: Easy

2) Which one of the following statements is the MOST accurate?

A) For a fixed interest rate, a rise in the expected future exchange rate causes a rise in the
current exchange rate.
B) For a fixed interest rate, a rise in the expected future exchange rate causes a fall in the
current exchange rate.
C) For a fixed interest rate, a rise in the expected future exchange rate does not cause a
change in the current exchange rate.
D) For a given dollar interest rate and a constant expected exchange rate, a rise in the interest
rate of the euro causes the dollar to depreciate.
E) For a fixed interest rate, a fall in the expected future exchange rate causes a rise in the
current exchange rate.
Answer: A
Page Ref: 366-370
Difficulty: Easy

14.6 Appendix to Chapter 14: Forward Exchange Rates and Covered Interest Parity

1) The covered interest rate parity condition can be stated as follows: The interest rate on
dollar deposits equals the interest rate on euro deposits ________ the forward ________ on
euros against dollars.
A) plus; premium
B) minus; premium
C) plus; discount
D) minus; discount
E) times; premium
Answer: A
Page Ref: 376-378
Difficulty: Easy

2) The covered interest rate parity condition can be stated as follows: The interest rate on
dollar deposits equals the interest rate on euro deposits ________ the forward ________ on
dollars against euros.
A) plus; discount
B) minus; premium
C) plus; premium
D) minus; discount
E) times; premium
Answer: A
Page Ref: 376-378
Difficulty: Easy

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 20 (9) Financial Globalization: Opportunity and Crisis

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20.1 The International Capital Market and the Gains from Trade

1) If you are offered a gamble in which you win 500 dollars 3/8 of the time and you lose 500
dollars 5/8 of the time, what is your expected payoff and your behavior given that you are a
risk-lover?
A) $500, take the gamble
B) -$125, take the gamble
C) -$125, it is unclear what you would do without further information
D) $500, decline the gamble
E) -$125, decline the gamble
Answer: C
Page Ref: 597-602
Difficulty: Easy

2) The two types of trade, intertemporal and pure asset swap ________ perfect substitutes,
because ________.
A) are; they both offer considerable payoff and are equal in the long run
B) are; they both involve the smoothing out of now and future consumption
C) are not; asset swapping is immediate and involves only assets, while intertemporal trade
takes two time periods and involves both assets and goods/services
D) could possibly be; different economic states occur at different points in time
E) are not; asset swapping never relates to intertemporal trade
Answer: D
Page Ref: 597-602
Difficulty: Easy

3) For the following question assume the following facts:

(1) Balance of Payments = 0 prior to the transactions.
(2) Person A (who lives in the United States) purchases an airplane from British Airways for
$150,000.
(3) Person A pays with a check from his account at First Union Bank in the United States.
(4) British airways, since it will need dollars in 1 month, deposits the check at the Bank of
England.
(5) Bank of England deposits the $150,000 at Commonwealth bank, which is located in the
United States.
Due to the transactions above, what are the effects on the balance of payments?
A) -$150,000 due to import of good (current account debit)
B) +$150,000 due to import of good (current account credit)
C) -$150,000 due to deposit of Bank of England (capital account debit)
D) +$150,000 due to deposit of Bank of England (capital account credit)
E) No effect (150,000 current account debit and 150,000 capital account credit)
Answer: E
Page Ref: 597-602
Difficulty: Easy

4) For the following questions assume the following facts:

(1) Balance of Payments = 0 prior to the transactions.
(2) Person A (who lives in the United States) purchases an airplane from British Airways for
$150,000.
(3) Person A pays with a check from his account at First Union Bank in the United States.

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(4) British airways, since it will need dollars in 1 month, deposits the check at the Bank of
England.
(5) Bank of England deposits the $150,000 at Commonwealth bank, which is located in the
United States.
Due to the transactions above, what are the effects on the reserve at the Fed?
A) Fact 2 is a decrease of $150,000, fact 5 is a decrease of $150,000, a net effect of -
$300,000.
B) Fact 3 is a decrease of $150,000, fact 5 is an increase of $150,000, a net effect of 0.
C) Fact 3 is an increase of $150,000, fact 5 is a decrease of $150,000, a net effect of 0.
D) Both fact 3 and fact 5 result in increases of $150,000, a net effect of +$300,000.
E) Both fact 3 and fact 5 result in decrease of $150,000, a net effect of -$300,000.
Answer: B
Page Ref: 597-602
Difficulty: Easy

5) Suppose one is offered a gamble in which you win $1,000 half the time but lose $1,000
half the time. Since in this case one is as likely to win as to lose the $1,000, the average
payoff on this gamble—its expected value—is:
0.5 ∗ $1,000 + 0.5 ∗ (-$1,000) = 0.
Under such circumstances:
A) no one will take the gamble.
B) risk averse individuals will take the gamble.
C) risk lovers individuals will not take the gamble.
D) risk neutral individuals will not take the gamble.
E) risk lovers and risk neutral individuals may take the gamble.
Answer: E
Page Ref: 597-602
Difficulty: Easy

6) For most practical matters, economists assume that

A) individuals are risk neutral.
B) individuals are risk lovers.
C) individuals are risk averse.
D) most individuals are risk lovers.
E) most individuals are risk neutral.
Answer: C
Page Ref: 597-602
Difficulty: Easy

7) People who are risk averse

A) value a collection of assets only on the basis of its expected returns.
B) value a collection of assets only on the basis of the risk of that return.
C) value a collection of assets not only on the basis of its expected returns but also on the
basis of the risk of that return.
D) are less likely to invest in life insurance.
E) are less likely to have a diverse portfolio.
Answer: C
Page Ref: 597-602
Difficulty: Easy

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8) The idea of risk aversion
A) is at odds with the idea of insurance.
B) help explain the profitability of insurance companies.
C) has nothing to do with insurance companies.
D) help explain the losses suffers by the insurance industry.
E) help explain why insurance companies in the long run are zero profit companies.
Answer: B
Page Ref: 597-602
Difficulty: Easy

9) Risk averse people

A) will never hold bonds denominated in several different currencies because of transaction
costs.
B) will always hold bonds denominated in several different currencies because of transaction
costs.
C) may hold bonds denominated in several different currencies.
D) may hold bonds denominated in several different currencies only if satisfying the well
known interest party condition.
E) will hold only domestic bonds because of the home bias effect.
Answer: C
Page Ref: 597-602
Difficulty: Easy

10) Imagine that there are two countries, Home and Far Far Away, and that residents of each
own only one asset, domestic land yielding an annual harvest of mangoes. Assume that the
yield on the land is uncertain. Half the time, Home's land yields a harvest of 5,000 tons of
mangoes at the same time as Far Far Away's land yields a harvest of 2,500 tons. The other
half of the time the outcomes are reversed. The average for each country mango harvest is
A) 2500.
B) 2750.
C) 3500.
D) 3750.
E) 3000.
Answer: D
Page Ref: 597-602
Difficulty: Easy

11) Equity Instruments include

A) stocks.
B) bonds.
C) banks deposits.
D) receipts.
E) bank statements.
Answer: A
Page Ref: 597-602
Difficulty: Easy

12) What would best describe the international capital markets?

A) the market of exchange of bonds
B) the market of exchange of stocks

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C) the market of exchange of real-estate
D) the market in which residents of different countries trade assets
E) the currency market
Answer: D
Page Ref: 597-602
Difficulty: Easy

13) Describe three types of gains from trades?

A) trades of exchange rates for goods or services, trades of goods or services for property,
and trades of gold for textiles
B) trades of goods or services for goods or services, trades of goods or services for assets,
and trades of assets for assets
C) trades of imports for exports, trades of exports for imports, and trades of natural resources
for financial assets
D) trades of services for goods, trades of currency for services, and trades of one type of
currency for another
E) trades of current goods for future services, trades of currency for gold, and trades of one
type of currency for another
Answer: B
Page Ref: 597-602
Difficulty: Easy

14) Asset trades that deal with debt instruments are best described as
A) share of stock.
B) exchange rate.
C) receipts.
D) factors.
E) bonds or bank deposits.
Answer: E
Page Ref: 597-602
Difficulty: Easy

15) Asset trades that deal with equity instruments are best described as
A) share of stock.
B) exchange rate.
C) bonds.
D) bank deposits.
E) factors.
Answer: A
Page Ref: 597-602
Difficulty: Easy

16) The international capital market is:

A) the international currency exchange.
B) a market in which capital assets are exchanged for services.
C) the market that is subject to intense regulation and must file a report to the Basel
committee on a biannual basis.
D) not really a single market, but a group of closely interconnected markets in which asset
exchanges with some international dimension take place.
E) an organization of fiscal policies that dictate international trade.

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Answer: D
Page Ref: 597-602
Difficulty: Easy

17) Intertemporal trade is

A) the exchange of goods but not services for claims to future goods.
B) the exchange of services but not goods for claims to future services.
C) the exchange of good and services for claims to future goods and services.
D) the exchange of domestic goods and services for foreign goods and services.
E) the type of trade that the U.S. government focuses most upon.
Answer: C
Page Ref: 597-602
Difficulty: Easy

18) What is the basic motive for asset trade?

A) the belief that large risks will lead to large returns
B) restoration of the balance of payments
C) portfolio unification
D) economic stability
E) increase expected returns and reduced risk
Answer: E
Page Ref: 597-602
Difficulty: Easy

19) Using international asset trade, countries can

A) never really eliminate all risk.
B) eliminate all risk.
C) actually increase their risk in some cases.
D) eliminate all their risk except for emerging markets.
E) never really diversify their holdings.
Answer: A
Page Ref: 597-602
Difficulty: Easy

20.2 International Banking and the International Capital Market

1) As a country begins to liberalize its capital account, what would you expect to happen to
the difference between the interest rates for similar assets in this country and another country
with open capital markets?
A) get larger
B) get smaller
C) stay the same
D) it depends on the existing exchange rate.
E) exponential divergence
Answer: B
Page Ref: 602-605
Difficulty: Easy

2) Investment banks in the U.S. are

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A) regular banks specializing in investment projects.
B) not banks at all but institutions which specialize in underwriting sales of stocks and bonds.
C) special arm of the U.S. government for U.S. banks operating outside the U.S.
D) regular banks specializing in investment projects, but allowed to offer limited domestic
transactions.
E) international banks that are heavily invest in the U.S.
Answer: B
Page Ref: 602-605
Difficulty: Easy

3) Credit Suisse, Goldman Sachs, and Lazard Freres are examples of

A) commercial banks.
B) corporations.
C) non-bank financial institutions, such as insurance companies, pension funds, and mutual
funds. This includes investment banks, which specialize in underwriting sales of stocks and
bonds by corporations and in some cases governments.
D) central banks and other government agencies.
E) non-profit organizations.
Answer: C
Page Ref: 602-605
Difficulty: Easy

4) A country can control

A) its flexible exchange rate.
B) monetary policy oriented toward domestic goals.
C) international capital movements.
D) foreign inflationary policies.
E) and avoid risks in international trade.
Answer: B
Page Ref: 602-605
Difficulty: Easy

5) Under a gold standard, countries control

A) its flexible exchange rate.
B) monetary policy oriented toward domestic goals.
C) international capital movements.
D) foreign inflationary policies.
E) and avoid risks in international trade.
Answer: B
Page Ref: 602-605
Difficulty: Easy

6) After Bretton Woods period, countries chose to control

A) fixed exchange rate only.
B) monetary policy oriented toward domestic goals only.
C) freedom of international capital movements only.
D) fixed exchange rate and freedom of international capital movements.
E) fixed exchange rate and monetary policy oriented toward domestic goals.
Answer: D
Page Ref: 602-605

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Difficulty: Easy

7) Under the unified Euro regime, the European countries control

A) fixed exchange rate only.
B) monetary policy oriented toward domestic goals only.
C) freedom of international capital movements only.
D) monetary policy oriented toward domestic goals and freedom of international capital
movements.
E) fixed exchange rate and freedom of international capital movements.
Answer: E
Page Ref: 602-605
Difficulty: Easy

8) Which one of the following possibilities is TRUE?

A) Much of eurocurrency trading occurs in Europe.
B) Much of eurocurrency trading occurs in the United States.
C) Eurocurrencies trading occurs everywhere except the United States.
D) Eurocurrencies trading occurs everywhere except Europe.
E) Eurocurrencies trading occurs everywhere except China.
Answer: C
Page Ref: 602-605
Difficulty: Easy

9) Eurodollars are
A) dollar deposits located in the United States.
B) dollar deposits located in Europe.
C) dollar deposits located outside Europe.
D) dollar deposits located outside the United States.
E) dollar deposits located outside both Europe and the United States.
Answer: D
Page Ref: 602-605
Difficulty: Easy

10) Eurobanks are

A) all European Banks.
B) all non American banks.
C) banks that accept deposits denominated in Eurocurrencies excluding Eurodollars.
D) banks that accept deposits denominated in Eurocurrencies including Eurodollars.
E) banks that do not take U.S. dollars.
Answer: D
Page Ref: 602-605
Difficulty: Easy

11) The leading center of Eurocurrency trading is

A) New York City.
B) Chicago.
C) London.
D) Paris.
E) Frankfurt.
Answer: C

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Page Ref: 602-605
Difficulty: Easy

12) The Fed's Regulation Q

A) placed a ceiling on the interest rates U.S. banks could pay on time deposits to foreigners.
B) placed a ceiling on the interest rates U.S. banks could pay on time deposits.
C) placed a ceiling on the amount U.S. residents can deposits in Euro banks.
D) placed a ceiling on the amount foreign residents can deposits in domestic American banks.
E) placed a ceiling on the amount foreign banks can pay on time deposits.
Answer: B
Page Ref: 602-605
Difficulty: Easy

13) Which type of main institution in the international capital market most often is involved
in foreign exchange intervention?
A) central banks
B) non-bank financial institutions
C) insurance companies
D) corporations
E) commercial banks
Answer: A
Page Ref: 602-605
Difficulty: Easy

14) The difference between an agency office located abroad and a subsidiary bank located
abroad is
A) an agency office is just a home bank in another country while a subsidiary bank is
controlled by a foreign bank and subject to the same regulations as local banks.
B) an agency office is just a home bank in another country while a subsidiary bank arranges
loans and transfers funds but does not accept deposits.
C) an agency office arranges loans and transfers funds but does not accept deposits while a
subsidiary bank is controlled by a foreign bank and subject to the same regulations as local
banks.
D) an agency office arranges loans and transfers funds but does not accept deposits while a
subsidiary bank is just a home bank in a foreign country.
E) an agency office is controlled by a foreign bank and subject to the same regulations as
local banks while a subsidiary bank arranges loans and transfers funds but does not accept
deposits.
Answer: C
Page Ref: 602-605
Difficulty: Easy

15) Besides world trade growth, what can explain the growth of international banking since
the 1960s?
A) war in the Middle East
B) government focus on banking regulation.
C) an increase in world travel.
D) the emergence of developing countries like China.
E) desire of depositors to hold currencies outside the jurisdiction of the countries that issue
them

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Answer: E
Page Ref: 602-605
Difficulty: Easy

16) The Eurodollar market's early growth was stimulated by the Cold War between the
United States and U.S.S.R. Why?
A) Soviets feared the U.S. might confiscate dollars place in American banks if conditions of
Cold War were to worsen.
B) The United States didn't feel safe holding as many dollars in American banks.
C) The Cold War did not stimulate the Eurodollar market's early growth.
D) Developing technologies required larger money transfers than central banks could handle.
E) Soviets developed a new banking system with new allies developed during the tension.
Answer: A
Page Ref: 602-605
Difficulty: Easy

17) Rising inflationary pressure caused the U.S. to tighten its monetary policy at the end of
the 1960s. As a result, market interest rates rose above the Regulation Q ceiling and
American banks found it impossible to attract time deposits for re-lending. How did the
banks get around this problem?
A) by setting their own interest rates and then using better business as compensation for
government regulations
B) by borrowing funds from European branches, which faced no restriction on the interest
they could pay on Eurodollar deposits
C) by pushing through new legislation that nullified Regulation Q
D) by creating subsidiary branches in foreign countries
E) by waiting to trade time deposits until Regulation Q no longer applied
Answer: B
Page Ref: 602-605
Difficulty: Easy

18) What structures make up the international capital markets?

A) stock market, IFM, and the World bank
B) bond market, foreign exchange rates, IFM, and the World bank
C) commercial banks, corporations, non-bank financial institutions, the central banks, and
other government agencies
D) commercial banks and corporations
E) the central banks and non-bank financial institutions
Answer: C
Page Ref: 602-605
Difficulty: Easy

19) What are the types of institution banks used to conduct foreign business?
A) corporations
B) central banks
C) commercial banks
D) agency offices, subsidiary banks, and foreign branches
E) state-owned enterprises
Answer: D
Page Ref: 602-605

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Difficulty: Easy

20) A business's use of a bank located outside of the home country is called
A) Swiss banking.
B) offshore banking.
C) international banking.
D) domestic banking.
E) international swapping.
Answer: B
Page Ref: 602-605
Difficulty: Easy

21) The scale of transactions in the international capital market has

A) grown more quickly than world GDP since the early 1970s.
B) grown less quickly than world GDP since the early 1970s.
C) grown about the same rate as the world GDP since the early 1970s.
D) been fixed by international regulations.
E) decreased more quickly than world GDP since the early 1970s.
Answer: A
Page Ref: 602-605
Difficulty: Easy

22) If a country chooses to have a monetary policy oriented toward domestic goals and a
fixed exchange rate, then
A) it can have the freedom of international capital movements.
B) it cannot have the freedom of international capital movements.
C) it cannot balance its current account.
D) it cannot have fiscal policy oriented toward domestic goals.
E) it cannot control money supply growth.
Answer: B
Page Ref: 602-605
Difficulty: Easy

23) If a country chooses to have a monetary policy oriented toward domestic goals and the
freedom of international capital movements, then
A) it can have a fixed exchange rate.
B) it cannot have a fixed exchange rate.
C) it cannot balance its current account.
D) it cannot have a fiscal policy oriented toward domestic goals.
E) it cannot control money supply growth.
Answer: B
Page Ref: 602-605
Difficulty: Easy

24) Offshore banking can take place at which institution?

A) agency office only
B) subsidiary bank only
C) foreign bank only
D) subsidiary bank and foreign bank
E) agency office, subsidiary bank, and foreign bank

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Answer: E
Page Ref: 602-605
Difficulty: Easy

25) The fact that assets of the political opponents of the U.S. were frozen in U.S. banks
A) was challenged as unconstitutional.
B) lead to an increased amount of funds being placed in Eurobanks.
C) lead to a violation of the Law of One Price.
D) lead to the Cold War.
E) lead to a violation of Regulation Q.
Answer: B
Page Ref: 602-605
Difficulty: Easy

26) Regulatory asymmetries can explain why the following places have become main
Eurocurrency centers
A) the United States.
B) Germany.
C) Zurich, Somalia, and Mozambique.
D) London, Luxembourg, and The United States.
E) London, Luxembourg, and Hong Kong.
Answer: E
Page Ref: 602-605
Difficulty: Easy
20.3 Banking and Financial Fragility

1) For the following question, assume the following facts:

(1) Chase (which is located in the United States) has a 20% reserve requirement imposed by
the government.
(2) Bank of Germany has no reserve requirements.
(3) Both banks may invest at an 8% interest rate.
(4) Both banks have fixed costs of $3 per deposit made.
What is the difference between the minimum interest rates each bank can offer and still make
a profit if the deposit is $500 for 1 year?
A) 0 - Both banks can offer the same rate.
B) 1%
C) 1.6%
D) 0.4%
E) 20%
Answer: C
Page Ref: 605-612
Difficulty: Moderate

2) Which of the following statements is TRUE?

A) Bank failure is limited to banks that have mismanaged their assets.
B) Bank failure is limited to banks that have invested in real estate.
C) Bank failure is limited to banks that have invested in government bonds.
D) Bank failure is limited to a few banks.
E) Bank failure is NOT limited to banks that have mismanaged their assets.
Answer: E

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Page Ref: 605-612
Difficulty: Easy

3) Which of the following statements is TRUE?

A) Bank failures inflict serious financial harm on individual depositors.
B) Bank failures do not inflict serious financial harm on individual depositors.
C) Bank failures inflict not only serious financial harm on individual depositors, but also
harm the macroeconomic stability of the economy.
D) Bank failures inflict serious financial harm on individual depositors, but fortunately do not
harm the macroeconomic stability of the economy.
E) Bank failures only inflict serious financial harm on the macroeconomic stability of the
economy.
Answer: C
Page Ref: 605-612
Difficulty: Easy

4) Which of the following statements is TRUE for the U.S.?

A) The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against losses
up to $250,000.
B) The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against losses up
to $100,000.
C) The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against losses up
to $10,000.
D) The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against natural
disaster up to $100,000.
E) The Federal Deposit Insurance Corporation (FDIC) insures bank deposits against floods
up to $100,000.
Answer: A
Page Ref: 605-612
Difficulty: Easy

5) Which of the following statements is TRUE for the U.S.?

A) Federally chartered banks are required to make contributions to the FDIC to cover the cost
of bank
deposits insurance.
B) Federally chartered banks are not required to make contributions to the FDIC to cover the
cost of bank deposits insurance.
C) The States are not required to make contributions to the FDIC to cover the cost of bank
deposits insurance for banks with their main branch in that State.
D) The States are required to make contributions to the FDIC to cover the cost of bank
deposits insurance for banks with their main branch in that State.
E) The specific municipality where the main branch of the bank is located is required to make
contributions to the FDIC to cover the cost of bank deposits insurance.
Answer: A
Page Ref: 605-612
Difficulty: Easy

6) Which of the following statements is TRUE for the U.S.?

A) The FDIC does not provide insurance for deposits for Savings and Loans (S&L)
associations.

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B) The FDIC does provide insurance for deposits for Savings and Loans (S&L) associations,
but only up to $50,000.
C) The FDIC does provide insurance for deposits for Savings and Loans (S&L) associations
up to $250,000.
D) The FDIC does provide insurance for deposits for Savings and Loans (S&L) associations
up to $150,000.
E) The FDIC does provide insurance for deposits for Savings and Loans (S&L) associations
up to $100,000.
Answer: C
Page Ref: 605-612
Difficulty: Easy

7) Banks in the U.S.

A) face rules against lending too large a fraction of their assets to a single private customer
only.
B) face rules against lending too large a fraction of their assets to a single private customer or
to a single foreign government borrower.
C) face rules against lending too large a fraction of their assets to a single foreign government
borrower only.
D) face rules against lending to too many foreign organizations and corporations.
E) face rules against lending to other banks.
Answer: B
Page Ref: 605-612
Difficulty: Easy

8) Banks in the U.S.

A) cannot hold common stocks.
B) can hold common stocks.
C) cannot hold common stocks of companies they do business with.
D) cannot hold common stocks of companies that have their headquarters in the same state.
E) can hold risky assets.
Answer: A
Page Ref: 605-612
Difficulty: Easy

9) Banks in the U.S.

A) are prevented from holding assets that are "too risky."
B) are not prevented from holding assets that are "too risky."
C) are encouraged not to hold assets that are "too risky."
D) are not encouraged not to hold assets that are "too risky."
E) are encouraged to lend to a single private customer.
Answer: A
Page Ref: 605-612
Difficulty: Easy

10) In the U.S., the following agencies have the right to examine the bank's books
A) Fed and the FDIC.
B) FDIC and the Office of the Comptroller of the Currency.
C) Fed and the Department of Commerce
D) FDIC, Fed and the Office of the Comptroller of the Currency.

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E) Only the Fed.
Answer: D
Page Ref: 605-612
Difficulty: Easy

11) In the U.S., banks

A) cannot be forced to sell assets that the bank examiner deems too risky.
B) can be forced to sell assets that the bank examiner deems too risky.
C) can be forced to sell assets that the bank examiner deems too risky only after a court order.
D) can be forced to sell assets that the bank examiner deems too risky only after both
examiners from the Fed and from the FDIC agree.
E) can be forced to trade assets that the bank examiner deems too risky.
Answer: B
Page Ref: 605-612
Difficulty: Easy

12) In the U.S., banks

A) may not be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid.
B) may be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid.
C) may be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid only if the Fed and the FDIC examiners agree.
D) may be forced by bank examiner to adjust their balance sheets by writing off loans the
examiner thinks will not be repaid only if the Fed and the Office of the Comptroller of the
Currency examiners agree.
E) may be forced by bank examiner to adjust their balance sheets by paying off loans the
examiner thinks will not be repaid.
Answer: B
Page Ref: 605-612
Difficulty: Easy

13) A bank faced with the wholesale loss of deposits is likely to shut down despite
fundamentally sound balance sheet. Why could this be?
A) Banks have accountants that are too optimistic.
B) Banks purposely lie about their balance sheets in order to attract more clients.
C) Many bank assets are illiquid and cannot be sold quickly to meet deposit obligations
without substantial loss to the bank.
D) Many banks operate on a budget that exceeds their actual reserves.
E) Many banks will shut down to preserve their interest profits.
Answer: C
Page Ref: 605-612
Difficulty: Easy

14) Which statement is NOT true regarding emerging markets?

A) Emerging market financial institutions have generally proven to be weaker than those in
industrialized countries.
B) Emerging markets are the capital markets of poorer, developing countries that have
liberalized their financial system to allow private asset trade with foreigners.
C) Countries with emerging markets include Brazil, Mexico, and Thailand.

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D) Countries with emerging markets have been unable to liberalize their financial systems to
allow private trade with foreigners.
E) Emerging market financial institutions contributed to the financial crisis of 1997-1999.
Answer: D
Page Ref: 605-612
Difficulty: Easy

15) The main problem with securitization is that

A) governments are no longer able to repackage bank assets.
B) securitized banks grow too large and create oligopolies.
C) There is no problem. Governments can still get an accurate picture of global financial
flows by simply examining bank balance sheets.
D) governments are not able to monitor bank assets or to asses a bank's risk to the soundness
of the international banking system.
E) the bank assets are not marketable.
Answer: D
Page Ref: 605-612
Difficulty: Easy

16) In the United States, which of the following safety precautions has the government NOT
taken to reduce Bank failures?
A) implemented deposits insurance
B) bank reserve requirements
C) capital requirements and asset restrictions
D) required bank examination
E) forcibly closing poorly run banks
Answer: E
Page Ref: 605-612
Difficulty: Easy

17) The purpose of the Basel Committee was to

A) achieve a better coordination of the surveillance exercised by national authorities over the
international banking system.
B) achieve a better coordination of domestic banking systems.
C) achieve a better coordination between brokers and investment bankers.
D) achieve a better coordination between bond holder and bon issuers.
E) manipulate bank rates for more leverage profits.
Answer: A
Page Ref: 605-612
Difficulty: Easy

18) The case where people purposely act in a careless way, for example, driving recklessly
because they are insured, is called
A) asymmetric information.
B) risk aversion.
C) moral hazard.
D) bounded rationality.
E) thrill-seeking.
Answer: C
Page Ref: 605-612

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Difficulty: Easy

19) Capital markets of poor developing countries that liberalized their financial systems to
allow private asset trade with foreigners are called
A) direct foreign markets.
B) foreign exchange markets.
C) stock & bond markets.
D) emerging markets.
E) fledgling financial markets.
Answer: D
Page Ref: 605-612
Difficulty: Easy

20) U.S. reserve requirements

A) are rejected by half the banks operating in the United States.
B) show how regulatory asymmetries can operate to enhance the profitability of
Eurocurrency trading.
C) tend to harm the bank's business and decrease monetary aggregates.
D) force banks to hold a portion of its assets in a liquid form easily mobilized to meet sudden
deposit outflows.
E) remain in place, but capital requirements have begin defaulting.
Answer: D
Page Ref: 605-612
Difficulty: Easy

21) What is a difficulty encountered in regulating international banking?

A) excessive deposit insurance rates on international banks
B) absence of reserve requirements
C) oppressive regulatory controls that reduce competitiveness
D) lack of funds and incentive to secure payments
E) variability in exchange rates
Answer: B
Page Ref: 605-612
Difficulty: Easy

22) The Basel committee

A) takes advantages of loopholes in multinational banks
B) does not support regulatory agencies that monitor the assets of banks' foreign subsidiaries.
C) submitted its Concordat in 1975 and was then disbanded.
D) continues to be the major forum for cooperation in the regulation of international banking.
E) met for the first time in 1975.
Answer: D
Page Ref: 605-612
Difficulty: Easy

23) What is an appropriate definition for "securitization"?

A) the repackaging of bank assets into readily marketable forms
B) the promise of a secure return on deposits in FDIC-banks
C) the simplification of interest-bearing assets into their simplest derivative form
D) the unloading of derivative securities in response to a bank run

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E) the reinforcement of an asset's worth through official certification
Answer: A
Page Ref: 605-612
Difficulty: Easy

24) What caused a major economic shock in August 2007?

A) U.S. mortgage market
B) war in Iraq
C) U.S. bond market
D) technology stocks
E) misreporting from Asian markets
Answer: A
Page Ref: 605-612
Difficulty: Easy

25) The first run on a British bank since 1866 occurred in August 2007 at which bank?
A) Liberty Mutual
B) Liberty Rock
C) Northern Rock
D) Bank of England
E) First Savings and Loan
Answer: C
Page Ref: 605-612
Difficulty: Easy

26) Did the Bank of England intervene and perform its Lender of Last Resort responsibility
to end the panic in August 2007?
A) yes
B) no
C) yes, only after a bank run and under pressure from the British financial industry
D) no, since such support would present a moral hazard problem
E) no, despite intense pressure from the chancellor of the exchequer
Answer: C
Page Ref: 605-612
Difficulty: Easy

20.4 How Well Have International Financial Markets Allocated Capital and Risk?

1) What are three things to measure for in evaluating the performance of the capital markets?
A) level of intertemporal trade, international trade, portfolio diversification
B) level of portfolio diversification, balanced capital accounts, global inflation
C) level of portfolio diversification, intertemporal trade, efficiency of foreign exchange
D) onshore-offshore interest rate parity, level of portfolio diversification, stability of
eurocurrency market
E) onshore-offshore interest rate parity, interest parity and foreign exchange, balanced capital
accounts
Answer: C
Page Ref: 608-615
Difficulty: Easy

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2) In the Interest Parity Condition, Rt - R t = ( - Et)/Et + xt, where Rt - R t is the interest

rate differential and ( - Et)/Et is the expected change in the exchange rate, what does xt
stand for if it potentially is a market efficient difference between the two?
A) market inefficiency
B) risk premium
C) forecast error
D) tracking error
E) excessive volatility
Answer: B
Page Ref: 608-615
Difficulty: Easy

3) Why might a country's savings rate have a high positive correlation to its investment rate?
A) A country's gains from intertemporal trade may have been large.
B) governments' regulation to avoid inflation
C) A country's savings rate and investment rate are generally not positively correlated but
rather have negative correlation.
D) governments' regulation to avoid large current account balances
E) A government has not practiced sufficient fiscal regulation.
Answer: D
Page Ref: 608-615
Difficulty: Easy

4) Large differences in interest rates between countries would indicate that

A) the global market is thriving.
B) there is good communication between countries about potential global investment
opportunities.
C) there are unrealized gains from trade.
D) the market is in danger of collapse.
E) the supply growth exceeds the aggregate demand.
Answer: C
Page Ref: 608-615
Difficulty: Easy

5) Statistical studies of the relationship between interest rates and later depreciation rates
show that
A) the interest difference has been a very bad predictor in the large swings of exchange rates.
B) the interest difference has been an accurate predictor in the large swings of exchange rates.
C) the interest difference has correctly predicted the direction in which exchange rates would
change.
D) the interest difference has not yet been studied as a predictor in the large swings of
exchange rates.
E) the interest difference is unrelated to the large swings of exchange rates.
Answer: A
Page Ref: 608-615
Difficulty: Easy

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6) Which of the following is TRUE about exchange rates?
A) They should not be volatile because they will determine the economic climate.
B) They are generally more volatile than stock prices.
C) They are more volatile than several underlying factors that move them such as money
supplies and fiscal variables.
D) They should be volatile because to correct price signals they adjust quickly in response to
economic news, but they are generally less volatile than stock prices.
E) They never overreact to economic news.
Answer: D
Page Ref: 608-615
Difficulty: Easy

7) Departures from interest parity

A) can be explained using theories of risk premium.
B) cannot be explained using theories of risk premium.
C) may or may not be able to be explained using theories of risk premium, more research is
needed.
D) are completely unrelated to risk premium.
E) occur when risk premium is over calculated.
Answer: C
Page Ref: 608-615
Difficulty: Easy

8) A random walk model can more accurately predict exchange rates as compared to a
sophisticated forecast
A) always.
B) for forecasts up to a year away.
C) for forecasts longer than a year away.
D) never.
E) because of the predictability of exchange rates.
Answer: B
Page Ref: 608-615
Difficulty: Easy

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 21 (10) Optimum Currency Areas and the Euro

21.1 How the European Single Currency Evolved

1) The European Economic and Monetary Union

A) set up a single currency and sole bank for European economic monetary policy.
B) eliminated all barriers to trade such as tax differentials between borders.
C) produced a single government for handling European affairs.
D) created the Common Agricultural Pact.
E) eliminated all local currencies in Western Europe.
Answer: A
Page Ref: 634-641
Difficulty: Easy

2) The birth of the Euro

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A) resulted in fixed exchange rates between all EMU member countries.
B) resulted in flexible exchange rates between all EMU member countries.
C) resulted in crawling-peg exchange rates between all EMU member countries.
D) resulted in non currency board exchange rates between all EMU member countries.
E) resulted in floating exchange rates between all EMU member countries.
Answer: A
Page Ref: 634-641
Difficulty: Easy

3) Which of the following is TRUE?

A) All European countries are part of the EMU.
B) All Western European countries are part of the EMU.
C) Originally, 20 countries joined the EMU on January 1999.
D) No Western European countries are part of the EMU.
E) Not all Western European countries are part of the EMU.
Answer: E
Page Ref: 634-641
Difficulty: Easy

4) The EMU created a currency area with more than

A) 200 million consumers.
B) 250 million consumers.
C) about a billion.
D) 500 million consumers.
E) 300 million consumers.
Answer: E
Page Ref: 634-641
Difficulty: Easy

5) The EU countries were prompted to seek closer coordination of monetary policies and
greater exchange rate stability in order
A) to enhance Europe's role in the world monetary system.
B) to turn the European Union into a truly unified market.
C) both to enhance Europe's role in the world monetary system and to turn the European
Union into a truly unified market.
D) both to turn the European Union into a truly unified market and to counter the rise of
Japan in international financial markets.
E) to homogenize all European cultures.
Answer: C
Page Ref: 634-641
Difficulty: Easy

6) Which of the following statements is TRUE?

A) The 1957 Treaty of Rome founded the EU and created a custom union.
B) The 1957 Treaty of Rome founded the EU.
C) The 1957 Treaty of Rome founded the euro.
D) The 1957 Treaty of Rome founded the European Central Bank.
E) The 1957 Treaty of Rome founded the Stability and Growth Pact. known as SGP.
Answer: A
Page Ref: 634-641

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Difficulty: Easy

7) The credibility theory of the EMS implies in effect that the political costs of violating
international exchange rate agreements
A) cannot restrain governments from depreciating their currency.
B) can restrain governments from depreciating their currency.
C) cannot restrain governments from depreciating their currency in the short run.
D) cannot restrain governments from depreciating their currency in the long run.
E) can control the political policies of member nations.
Answer: B
Page Ref: 634-641
Difficulty: Easy

8) The credibility theory of the EMS implies in effect that the political costs of violating
international exchange rate agreements
A) cannot restrain governments from depreciating their currency to gain the short-term
advantage of an economic boom at the long-term cost of higher inflation.
B) can restrain governments from depreciating their currency to gain the short-term
advantage of an economic boom at the long-term cost of higher inflation.
C) cannot restrain governments from depreciating their currency in the short run.
D) cannot restrain governments from depreciating their currency in the long run.
E) cannot restrain governments from depreciating their currency to gain the long-term
advantage of an economic boom.
Answer: B
Page Ref: 634-641
Difficulty: Easy

9) Under the EMS, Germany set the system's

A) monetary policy while the other European countries pegged their currencies to the DM.
B) fiscal policy while the other European countries pegged their currencies to the DM.
C) monetary policy while the other European countries kept their currencies fluctuating
relative to the DM.
D) fiscal policy while the other European countries kept their currencies fluctuating relative
to the DM.
E) monetary policy, while other European countries maintained their traditional policies.
Answer: A
Page Ref: 634-641
Difficulty: Easy

10) An inflation-prone country

A) gains from vesting its monetary policy decisions with a "conservative" central bank.
B) loses from vesting its monetary policy decisions with a "conservative" central bank.
C) gains from vesting its fiscal policy decisions with a "conservative" central bank.
D) loses from vesting its fiscal policy decisions with a "conservative" central bank.
E) remains constant when vesting its fiscal policy decisions with a "conservative" central
bank.
Answer: A
Page Ref: 634-641
Difficulty: Easy

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11) The most important feature of the Single European Act of 1986, which amended the
founding Treaty of Rome, was dropping the requirement of
A) unanimous consent for measures related to market completion and making it a decision
that only Germany and France agreed about.
B) unanimous consent for measures related to market completion.
C) majority consent for measures related to market completion and making it a decision that
only Germany and France agreed about.
D) unanimous consent for measures related to agricultural policies only.
E) unanimous consent for measures related only to fiscal policies.
Answer: B
Page Ref: 634-641
Difficulty: Easy

12) The 1991 Maastricht Treaty can be best described as

A) a peace treaty between Europe and the United States.
B) an agreement for the accession of the Netherlands into the EU.
C) an agreement for the creation of a free trade area.
D) a provision for the introduction of a single European currency and European central bank.
E) the beginning of a floating exchange rate European monetary system.
Answer: D
Page Ref: 634-641
Difficulty: Easy

13) During the period from 1978-2012, the difference between annual inflation rates of EU
countries and the German inflation rate
A) grew at an accelerating rate.
B) remained fairly constant.
C) largely disappeared.
D) went through periods of hyperinflation.
E) trended upward at a declining rate.
Answer: C
Page Ref: 634-641
Difficulty: Easy

14) How many countries are in the EU as of January 1, 2014?

A) 9
B) 15
C) 17
D) 18
E) 25
Answer: D
Page Ref: 634-641
Difficulty: Easy

15) Did the 1957 Treaty of Rome turn the EU into a truly unified market?
A) Yes, it paved the way for the current EMU.
B) No, although it established a customs union, it failed to remove barriers to the movement
of goods and factors within Europe.
C) No, it was only after the German unification and locating the ECB in Frankfurt that unity
was achieved.

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D) No, since the Northern members of the EU had larger endowments of capital and skilled
labor.
E) No, the Treaty of Rome created more trade barriers between European countries.
Answer: B
Page Ref: 634-641
Difficulty: Easy

16) The German central bank in the European Monetary System, 1979-1998
A) was very inflation-averse.
B) was moderately inflation-averse.
C) was willing to accept inflation.
D) lacked control over inflation since it had fixed its exchange rate.
E) lacked sufficient reserves.
Answer: A
Page Ref: 634-641
Difficulty: Easy

17) The result of the reunification of eastern and western Germany in 1990
A) was a boom in Germany and higher inflation, with no effect on nearby countries.
B) was a recession in Germany and lower inflation, with no effect on nearby countries.
C) was a boom in Germany and higher inflation, and, with other EMS countries' commitment
to fixed exchange rates, a deep recession in nearby countries.
D) was a recession in Germany and lower inflation, and, with other EMS countries'
commitment to fixed exchange rates, a deep recession in nearby countries.
E) was a recession in Germany and lower inflation, causing a boom in nearby countries.
Answer: C
Page Ref: 634-641
Difficulty: Easy

18) The credibility theory of EMS had as an effect

A) the inflation rates of member countries converging to the low German levels, a result that
was not matched by similar countries who did not fix their exchange rates.
B) the inflation rates of member countries failing to converge to the low German levels.
C) the inflation rates of member countries converging to the low German levels, but other
countries including U.S. and Britain also reduced inflation in this time period without fixing
exchange rates.
D) the inflation rate in Germany rose to match the inflation rates of other member countries.
E) the inflation rate in the U.S. dropped to the low German levels.
Answer: C
Page Ref: 634-641
Difficulty: Easy

21.2 The Euro and Economic Policy in the Euro Zone

1) To join the EMU, a country should have no more than

A) 1.5 percent inflation rate above the average of the three EU member states with the
highest inflation.
B) 3 percent inflation rate above the average of the three EU member states with the lowest
inflation.
C) 4 percent inflation rate above the average of the three EU member states with the lowest

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inflation.
D) 1.5 percent inflation rate above the average of the three EU member states with the lowest
inflation.
E) 2 percent inflation rate above the average of the three EU member states with the lowest
inflation.
Answer: D
Page Ref: 641-643
Difficulty: Easy

2) To join the EMU, a country must have

A) a public-sector deficit no higher than 3 percent of its GDP in general.
B) a public-sector deficit no higher than 2 percent of its GDP in general.
C) a public-sector deficit no higher than 1 percent of its GDP in general.
D) a zero public-sector deficit.
E) a public-sector deficit no higher than 4 percent of its GDP in general.
Answer: A
Page Ref: 641-643
Difficulty: Easy

3) To join the EMU, a country must have a public debt below or approaching a reference
level of
A) 50 percent of its GDP.
B) 10 percent of its GDP.
C) 60 percent of its GDP.
D) 100 percent of its GDP.
E) 5 percent of its GDP.
Answer: C
Page Ref: 641-643
Difficulty: Easy

4) The European Central Bank has its headquarter in

A) London.
B) Berlin.
C) Frankfurt.
D) Paris.
E) Brussels.
Answer: C
Page Ref: 641-643
Difficulty: Easy

5) Under ERM 2 rules, the national central bank of an EU member with its own currency can
suspend euro intervention operations
A) if there is a civil war.
B) if they result in money supply changes that threaten to destabilize the domestic price level.
C) if there is a current account deficit.
D) if there is a current account surplus.
E) if they result in a weakened current account.
Answer: B
Page Ref: 641-643
Difficulty: Easy

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6) The main function of the 1997 Stability and Growth Pact (SGP) was to
A) exclude a highly indebted EMU country
B) enhance cooperation between France and Germany.
C) make the Euro a weak currency.
D) distribute the Euro banknote among European central banks and to create a timetable for
the imposition of financial penalties on countries that fail to correct situations of "excessive"
deficits and debt promptly enough.
E) determine specialized penalties for each member nation.
Answer: C
Page Ref: 641-643
Difficulty: Easy

21.3 The Theory of Optimum Currency Areas

1) What are the biggest advantages the U.S. has over the EU in terms of being an Optimum
Currency Area?
A) low mobility of labor, higher labor productivity, lower level of intra-regional trade
B) high unionization of U.S. Labor force
C) high mobility of labor force, more transfer payments between regions
D) higher uniformity of population's taste in consumption
E) more specialized labor force and natural resource advantages
Answer: C
Page Ref: 643-654
Difficulty: Easy

2) A major economic
A) benefit of fixed exchange rates is that they simplify economic calculations and provide a
more predictable basis for decisions that involve international transactions than do floating
rates.
B) benefit of floating exchange rates it that they simplify economic calculations and provide a
more predictable basis for decisions that involve international transactions than do fixed
rates.
C) cost of fixed exchange rates it that they simplify economic calculations and provide a
more predictable basis for decisions that involve international transactions than do currency
board rates.
D) benefit of flexible exchange rates it that they simplify economic calculations and provide a
more predictable basis for decisions that involve international transactions than do crawling
peg rates.
E) benefit of fixed exchange rates is that the value of goods will remain constant across a
large region of consumers.
Answer: A
Page Ref: 643-654
Difficulty: Easy

3) The efficiency
A) gain from a fixed exchange rate with the euro is smaller when trade between say, Norway
and the euro zone, is extensive than when it is small.
B) gain from a fixed exchange rate with euro is greater when trade between say, Norway and
the euro zone, is extensive than when it is small.

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C) loss from a fixed exchange rate with the euro is smaller when trade between say, Norway
and the euro zone, is extensive than when it is small.
D) gain from a fixed exchange rate with euro is the same as when trade between say, Norway
and the euro zone, is extensive than when it is small.
E) gain from a fixed exchange rate with euro is the same as when trade between say, Norway
and the euro zone, is small than when it is small.
Answer: B
Page Ref: 643-654
Difficulty: Easy

4) The monetary efficiency

A) loss from pegging the Norwegian krone to the euro (for example) will be higher if factors
of production can migrate freely between Norway and the euro area.
B) gain from pegging the Norwegian krone to the euro (for example) will be lower if factors
of production can migrate freely between Norway and the euro area.
C) gain from pegging the Norwegian krone to the euro (for example) will be higher if factors
of production can not migrate freely between Norway and the euro area.
D) gain from pegging say the Norwegian krone to the euro (for example) will be higher if
factors of production can migrate freely between Norway and the euro area.
E) gain or loss from pegging the Norwegian krone to the Euro cannot be predicted using the
available information.
Answer: D
Page Ref: 643-654
Difficulty: Easy

5) Which one of the following statements is TRUE?

A) The less extensive are cross-border trade and factor movements, the greater is the gain
from a fixed cross-border exchange rate.
B) The more extensive are cross-border trade and factor movements, the greater is the loss
from a fixed cross-border exchange rate.
C) The more extensive are cross-border trade and factor movements, the greater is the gain
from a fixed cross-border exchange rate.
D) The more extensive are cross-border trade, the greater is the loss from a fixed cross-border
exchange rate.
E) The more extensive are factor movements, the greater is the loss from a fixed cross-border
exchange rate.
Answer: C
Page Ref: 643-654
Difficulty: Easy

6) A country that joins an exchange rate area

A) gives up its ability to use the exchange rate for the purpose of stabilizing output and
employment.
B) does not give up its ability to use the exchange rate and monetary policy for the purpose of
stabilizing output and employment.
C) gives up its ability to use the exchange rate and monetary policy for the purpose of
stabilizing output and employment.
D) gives up its ability to use only monetary policy for the purpose of stabilizing output and
employment.
E) does not gives up its ability to use only monetary policy for the purpose of stabilizing

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output and employment.
Answer: C
Page Ref: 643-654
Difficulty: Easy

7) When the economy is disturbed by a change in the output market

A) a fixed exchange rate has an advantage over a flexible rate.
B) a floating exchange rate has an advantage over a fixed rate.
C) a crawling peg exchange rate has an advantage over a flexible rate.
D) a floating exchange rate has the same effect as fixed rate.
E) a flexible exchange rate is not as effective as a fixed exchange rate.
Answer: B
Page Ref: 643-654
Difficulty: Easy

8) Which one of the following statements is TRUE?

A) A fixed exchange rate automatically cushions the economy's output and employment by
allowing an immediate change in the relative price of domestic and foreign goods.
B) A flexible exchange rate does not automatically cushions the economy's output and
employment by allowing an immediate change in the relative price of domestic and foreign
goods.
C) A flexible exchange rate automatically cushions the economy's output and employment by
allowing an immediate change in the relative price of domestic and foreign goods.
D) A flexible exchange rate automatically cushions the economy's output and employment by
allowing an immediate change in the absolute price of domestic and foreign goods.
E) A fixed exchange rate automatically cushions the economy's output and employment by
allowing an immediate change in the absolute price of domestic and foreign goods.
Answer: C
Page Ref: 643-654
Difficulty: Easy

9) When the exchange rate is

A) flexible, purposeful stabilization is more difficult because monetary policy has no power
at all to affect domestic output and employment.
B) fixed, purposeful stabilization is less difficult because monetary policy has no power at all
to affect domestic output and employment.
C) fixed, purposeful stabilization is more difficult because monetary policy has no power at
all to affect domestic output and employment.
D) a crawling peg, rather than fixed, purposeful stabilization is more difficult because
monetary policy has no power at all to affect domestic output and employment.
E) fixed rather than crawling peg purposeful stabilization is more difficult because fiscal
policy has no power at all to affect domestic output and employment.
Answer: C
Page Ref: 643-654
Difficulty: Easy

10) When Norway unilaterally fixes its exchange rate against the euro and leaves the krone
A) free to float against the non-euro currencies, it is able to keep at least some monetary
independence.
B) free to float against the non-euro currencies, it is unable to keep at least some monetary

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independence.
C) free to float against the non-euro currencies, it is able to keep its monetary independence.
D) run by crawling peg against the non-euro currencies, it is able to keep at least some
monetary independence.
E) fixed against the non-euro currencies, it is unable to keep its monetary independence.
Answer: B
Page Ref: 643-654
Difficulty: Easy

11) After Norway unilaterally pegs the krone to the euro, domestic money market
disturbances will
A) no longer affect domestic output despite the continuation of float-rate regime against non-
euro currencies.
B) now have major effect on domestic output despite the continuation of float-rate regime
against non-euro currencies.
C) have some effect on domestic output despite the continuation of float-rate regime against
non-euro currencies.
D) have major effect on domestic employment despite the continuation of float-rate regime
against non-euro currencies.
E) no longer affect foreign imports despite the continuation of float-rate regime against non-
euro currencies.
Answer: A
Page Ref: 643-654
Difficulty: Easy

12) A krone/euro peg alone is

A) not enough to provide automatic stability in the face of any monetary shocks that shift the
AA schedule.
B) enough to provide automatic stability in the face of any monetary shocks that shift the AA
schedule.
C) not enough to provide automatic stability in the face of any monetary shocks that shift the
AA schedule, provided fiscal policy will be used as well.
D) enough to provide automatic stability in the face of any monetary shocks that shift the AA
schedule, provided the government runs a budget deficit.
E) enough to provide partial stability in the face of smaller monetary shocks that shift the AA
schedule.
Answer: B
Page Ref: 643-654
Difficulty: Easy

13) Since Norway has close trading links with the euro zone
A) a small reduction in its price will lead to an increase in euro zone demand for Norwegian
goods that is large relative to Norway's output. Thus, full employment can be restored fairly
quickly.
B) a small reduction in its price will lead to a decrease in euro zone demand for Norwegian
goods that is large relative to Norway's output. Thus, full employment can be restored fairly
quickly.
C) a small reduction in its price will lead to an increase in euro zone demand for Norwegian
goods that is small relative to Norway's output. Thus, full employment can be restored fairly
quickly.

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D) a big reduction in its price will lead to an increase in euro zone demand for Norwegian
goods that is large relative to Norway's output. Thus, full employment can be restored fairly
quickly.
E) a big reduction in its price will lead to a decrease in euro zone demand for Norwegian
goods that is small relative to Norway's output. Thus, full employment can be restored fairly
quickly.
Answer: A
Page Ref: 643-654
Difficulty: Easy

14) If Norway's labor and capital markets are highly correlated with those of its euro zone
neighbors
A) unemployed workers can easily move abroad to find work and domestic capital can be
shifted to more profitable uses in other countries.
B) unemployed workers cannot easily move abroad to find work and domestic capital cannot
be shifted to more profitable uses in other countries.
C) while unemployed workers can easily move abroad to find work, domestic capital cannot
be shifted to more profitable uses in other countries.
D) while capital can easily move abroad to be put to a more profitable use, unemployed
workers cannot easily move abroad to find work.
E) unemployment will rise, thanks to competition from foreign labor.
Answer: A
Page Ref: 643-654
Difficulty: Easy

15) The ability of factors to migrate abroad

A) reduces the severity of unemployment and the fall in the rate of return available to
investors.
B) increases the severity of unemployment and the fall in the rate of return available to
investors.
C) reduces the severity of unemployment but increases the fall in the rate of return available
to investors.
D) cannot change the severity of unemployment and the constant rate of return available to
investors.
E) reduces the migration of highly-skilled workers.
Answer: A
Page Ref: 643-654
Difficulty: Easy

16) Which one of the following statements is TRUE for Norway, a non-euro country?
A) Of course, owners of capital that cannot be moved cannot avoid more of the economic
stability loss due to fixed exchange rates when Norway's economy is open to capital flows.
B) Even owners of capital that cannot be moved can avoid more of the economic stability
loss due to fixed exchange rates when Norway's economy is open to capital flows.
C) Owners of capital that cannot be moved can avoid more of the economic stability loss due
to fixed exchange rates when Norway's economy is closed to capital flows.
D) Even owners of capital that can be moved can avoid more of the economic stability loss
due to fixed exchange rates when Norway's economy is closed to capital flows.
E) Only owners of capital that can be moved can avoid more of the economic stability loss
due to fixed exchange rates when Norway's economy is open to capital flows.

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Answer: B
Page Ref: 643-654
Difficulty: Easy

17) The intersection of GG and LL determines

A) the optimal level of integration desired by Norway.
B) the maximum integration level desired by Norway.
C) the minimum level of integration that will cause Norway to join the fixed exchange rate
regime.
D) the maximum level of integration that will cause Norway to join the fixed exchange rate
regime.
E) the maximum level of integration that can aid Norway if it joins the fixed exchange rate
regime.
Answer: C
Page Ref: 643-654
Difficulty: Easy

18) The level of fiscal federalism in the European Union is

A) too big to cushion member countries from adverse economic events.
B) too small to cushion member countries from adverse economic events.
C) appropriate to cushion member countries from adverse economic events.
D) too big relative to the one in the U.S.
E) similar in its level to that of the U.S.
Answer: B
Page Ref: 643-654
Difficulty: Easy

19) A good measure of a country's level of economic integration with a currency area is
A) the intersection of DD and GG.
B) the country's price level.
C) the compatibility of economic policies.
D) the intersection of AA and GG.
E) the extent of trade between the joining country and the currency area and the ease with
which labor and capital can migrate between the joining country and the currency area.
Answer: E
Page Ref: 643-654
Difficulty: Easy

20) A key barrier to labor mobility within Europe is

A) the laziness of Germans.
B) full employment in most European countries.
C) differences in language and culture.
D) lack of transportation.
E) the physical barriers in the landscape.
Answer: C
Page Ref: 643-654
Difficulty: Easy

21) Which of the following statements is MOST accurate?

A) The countries of southern Europe are better endowed with capital and skilled labor than

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the countries of northern Europe.
B) The countries of northern Europe are better endowed with capital and skilled labor than
the countries of southern Europe.
C) EU products that make intensive use of high-skill labor are most likely to come from
Portugal.
D) EU products that make intensive use of low-skill labor are most likely to come from Great
Britain.
E) The countries of eastern Europe are better endowed with capital and skilled labor than the
countries of western Europe.
Answer: B
Page Ref: 643-654
Difficulty: Easy

22) A recent study by Andrew Rose of the University of California showed that, on average,
two countries that are members of the same currency union
A) trade three times as much with each other as countries that do not share a currency.
B) trade twenty times as much with each other as countries that do not share a currency.
C) trade ten times as much with each other as countries that do not share a currency.
D) trade six times as much with each other as countries that do not share a currency.
E) trade twice as much with each other as countries that do not share a currency.
Answer: A
Page Ref: 643-654
Difficulty: Easy

23) Fiscal federalism in the EU refers to

A) one nation's control of the monetary policy of all the other nations.
B) freedom of member countries to leave the EU at any time.
C) the transfer of economic resources from members with healthy economies to those
suffering economic setbacks.
D) one nation's freedom to abandon the Euro and use its own currency.
E) the transfer of economic resources between members with healthy economies.
Answer: C
Page Ref: 643-654
Difficulty: Easy

24) Shortly after their admission into the EMU, Ireland and the Netherlands
A) both seceded from the EMU.
B) were expelled due to high levels of debt.
C) breached the inflation convergence criterion that had qualified them for admission to the
EMU in the first place.
D) achieved inflation rates of zero percent.
E) abandoned the Euro as their national currency.
Answer: C
Page Ref: 643-654
Difficulty: Easy

25) Which of the following best defines an optimum currency area?

A) a group of nations sharing the same currency
B) a group of regions in close proximity to each other.
C) a group of regions who operate under similar economic policies.

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D) a group of regions with economies closely linked by factor mobility and by trade in goods
and services
E) a group of nations that engage in free trade with each other
Answer: D
Page Ref: 643-654
Difficulty: Easy

26) Which of the following statements is MOST accurate?

A) A rise in the size and frequency of country-specific disturbances to the joining country's
product markets raises the critical level of economic integration at which the exchange rate
area is joined.
B) A rise in the size and frequency of country-specific disturbances to the joining country's
product markets lowers the critical level of economic integration at which the exchange rate
area is joined.
C) A decline in the size and frequency of country-specific disturbances to the joining
country's product markets raises the critical level of economic integration at which the
exchange rate area is joined.
D) A rise in the size and frequency of country-specific disturbances to the joining country's
product markets has no effect on the critical level of economic integration at which the
exchange rate area is joined.
E) A decline in the size and frequency of country-specific disturbances to the joining
country's product markets does not affect the level of economic integration at which the
exchange rate area is joined.
Answer: A
Page Ref: 643-654
Difficulty: Easy

27) Which of the following statements is MOST accurate?

A) A low degree of economic integration between a country and the fixed exchange rate area
that it joins reduces the resulting economic stability loss due to output market disturbances.
B) A high degree of economic integration between a country and the fixed exchange rate area
that it joins reduces the resulting economic stability loss due to output market disturbances.
C) A high degree of economic integration between a country and the fixed exchange rate area
that it joins increases the resulting economic stability loss due to output market disturbances.
D) A complete lack of economic integration between a country and the fixed exchange rate
area that it joins reduces the resulting economic stability loss due to output market
disturbances.
E) A low degree of economic integration between a country and the fixed exchange rate area
that it joins increases the resulting economic stability loss due to output market disturbances.
Answer: B
Page Ref: 643-654
Difficulty: Easy

28) The theory of optimum currency areas predicts that

A) floating exchange rates are most appropriate for areas closely integrated through
international trade and factor movements.
B) fixed exchange rates are most appropriate for areas that are loosely integrated through
international trade and factor movements.
C) fixed exchange rates are most appropriate for areas closely integrated through
international trade and factor movements.

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D) floating exchange rates are most appropriate for all countries in Europe.
E) fixed exchange rates are most appropriate for all countries in Europe.
Answer: C
Page Ref: 643-654
Difficulty: Easy

29) Why does the GG schedule have a positive slope?

A) The monetary efficiency gain a country gets by joining a fixed exchange rate area falls as
its economic integration with the area increases.
B) The monetary efficiency gain a country gets by joining a fixed exchange rate area rises as
its economic integration with the area decreases.
C) The monetary efficiency gain a country gets by joining a fixed exchange rate area rises as
its economic integration with the area increases.
D) The monetary efficiency gain a country gets by joining a floating exchange rate area rises
as its economic integration with the area increases.
E) The monetary efficiency gain a country gets by joining a fixed exchange rate area is
constant after their integration into the area.
Answer: C
Page Ref: 643-654
Difficulty: Easy

30) Why does the LL schedule have a negative slope?

A) The economic stability loss from pegging to the area's currencies rises as the degree of
economic interdependence rises.
B) The economic stability loss from pegging to the area's currencies falls as the degree of
economic interdependence rises.
C) The economic stability loss from pegging to the area's currencies falls as the degree of
economic interdependence falls.
D) The economic stability loss from pegging to the area's currencies rises as the degree of
economic activity increases.
E) The economic stability loss from pegging to the area's currencies is constant, even as the
degree of economic activity increases.
Answer: B
Page Ref: 643-654
Difficulty: Easy

31) Compared with inter-regional trade in the he United States, intra-EU trade
A) is far greater.
B) is greater.
C) is about the same.
D) is less.
E) is far less.
Answer: D
Page Ref: 643-654
Difficulty: Easy

32) When did the UK decide to adopt the Euro?

A) 1999
B) 2001
C) 2008

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D) The UK has not adopted the Euro.
E) 2010
Answer: D
Page Ref: 643-654
Difficulty: Easy

33) Which of the following statements is the MOST accurate?

A) Trade of EU countries with other EU countries has increased since the euro was
introduced.
B) Trade of EU countries with other EU countries has decreased since the euro was
introduced.
C) Trade of EU countries with other EU countries has increased in some years and decreased
in other years since the euro was introduced.
D) Trade of EU countries with other EU countries can no longer be measured since both
trading parties have the same currency.
E) Trade of EU countries with North American countries has decreased since the euro was
introduced.
Answer: A
Page Ref: 643-654
Difficulty: Easy

34) Richard Baldwin's estimate was that the euro increased the trade level of its users by
A) only 5 percent.
B) only 9 percent.
C) over 30 percent.
D) over 50 percent.
E) only 12 percent.
Answer: B
Page Ref: 643-654
Difficulty: Easy

21.4 The Euro Crisis and the Future of EMU

2) Which one of the following countries was the "spark" that ignited the 2009 euro crisis?
A) China
B) Greece
C) England
D) Spain
E) Germany
Answer: B
Page Ref: 655-665
Difficulty: Easy

3) Which one of the following unexpected events ignited the 2009 euro crisis?
A) Accelerating hyperinflation and political upheaval.
B) The prospect of a sovereign default by one or more euro zone countries.
C) Rising oil prices.
D) Revolutions in Switzerland and Belgium.
E) A Chinese boycott of European products.
Answer: B

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Page Ref: 655-665
Difficulty: Easy

International Economics, 10e (Krugman/Obstfeld/Melitz)

Chapter 22 (11) Developing Countries: Growth, Crisis, and Reform

22.1 Income, Wealth, and Growth in the World Economy

1) The world's economies can be divided into four main categories according to their annual
per-capita income levels. Which one of the following is NOT one of the categories?
A) low-income
B) upper middle-income
C) high-income
D) lower middle-income
E) middle-income
Answer: E
Page Ref: 670-674
Difficulty: Easy

2) Average per-capita GDP in the richest, most prosperous economies is ________ times that
of the average in the ________ economies.
A) 95, low (poorest) income
B) 95, lower-middle income
C) 73, lower-middle income
D) 44, low (poorest) income
E) 69, low (poorest) income
Answer: E
Page Ref: 670-674
Difficulty: Easy

3) Compared with industrialized economies, most developing countries are poor in the factors
of production essential to modern industry: These factors are
A) capital and skilled labor.
B) capital and unskilled labor.
C) fertile land and unskilled labor.
D) fertile land and skilled labor.
E) water and capital.
Answer: A
Page Ref: 670-674
Difficulty: Easy

4) The main factors that discourage investment in capital and skills in developing countries
are
A) political instability, insecure property rights.
B) political instability, insecure property rights, misguided economic policies.
C) political instability, misguided economic policies.
D) political instability.
E) insecure property rights, misguided economic policies.
Answer: B
Page Ref: 670-674

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Difficulty: Easy

5) The per-capita GNP of the industrial group is about ________ times that of the upper
middle-income countries.
A) 6
B) 10
C) 15
D) 19
E) 2
Answer: A
Page Ref: 670-674
Difficulty: Easy

6) When one compares per-capital output growth rates among countries

A) one needs to correct the data to account for departures from purchasing power parity.
B) such corrections are often not necessary.
C) such corrections are sometimes necessary.
D) the evidence whether such corrections are necessary are vague.
E) such corrections are not necessary.
Answer: A
Page Ref: 670-674
Difficulty: Easy

7) Over the period 1960-2010, the United States economy grew at roughly
A) 2.1 percent.
B) 3 percent.
C) 4 percent.
D) one percent.
E) 3.5 percent.
Answer: A
Page Ref: 670-674
Difficulty: Easy

8) Over the period 1960-2000, France grew ________ than the United States economy
A) 2 % slower.
B) 2% faster.
C) more than 2% slower.
D) less than 2% faster.
E) more than 2% faster.
Answer: D
Page Ref: 670-674
Difficulty: Easy

9) Over the post-war era, the gaps between industrial countries' living standards
A) disappeared.
B) stayed the same.
C) increased.
D) decreased.
E) fluctuated.
Answer: D

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Page Ref: 670-674
Difficulty: Easy

10) Over the post-war era, the gaps between countries' living standards
A) disappeared.
B) stayed the same.
C) increased.
D) decreased.
E) changed inconsistently.
Answer: E
Page Ref: 670-674
Difficulty: Easy

11) Over the post-war era, poorer countries grew

A) faster.
B) slower.
C) stayed the same.
D) grew faster, then grew slower.
E) No general tendency can be found.
Answer: E
Page Ref: 670-674
Difficulty: Easy

12) Since 1960, countries in Africa have grown at rates ________ those of the main industrial
countries.
A) far below
B) far above
C) about the same
D) slightly below
E) slightly above
Answer: A
Page Ref: 670-674
Difficulty: Easy

13) Since 1960, South Korea and Singapore enjoyed an average per-capita growth rates
________ the average industrialized world.
A) far below
B) far above
C) about the same
D) slightly below
E) slightly above
Answer: B
Page Ref: 670-674
Difficulty: Easy

14) Until recently, per-capita income increased in East Asian countries such as Hong Kong,
Singapore, South Korea, and Taiwan by ________-fold every generation
A) 2
B) 3
C) 4

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D) 5
E) 1
Answer: D
Page Ref: 670-674
Difficulty: Easy

15) Between 1960 and 2010, the annual growth rate in percent per year was the highest in
A) China.
B) United States.
C) Brazil.
D) Singapore.
E) South Korea.
Answer: A
Page Ref: 670-674
Difficulty: Easy

16) What is the basic problem of developing countries?

A) corruption
B) murder
C) poverty
D) stock market
E) natural resources
Answer: C
Page Ref: 670-674
Difficulty: Easy

17) How would you describe the world distribution of income?

A) persistently unequal
B) temporarily unequal
C) converging
D) fairly equal
E) completely unpredictable
Answer: A
Page Ref: 670-674
Difficulty: Easy

18) How would you define convergence?

A) tendency for gaps between industrial countries' per-capital incomes to narrow
B) tendency for gaps between all countries' per-capital incomes to narrow
C) the theory that a crisis in a low-income country will spread to all countries, regardless of
debt structure
D) the theory that a crisis in a low-income country will spread to only those countries which
had lent money to the original country
E) tendency for the world distribution of income to be persistently unequal
Answer: A
Page Ref: 670-674
Difficulty: Easy

19) Which of the following countries had a larger growth rate since 1960?
A) U.S.

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B) Senegal
C) South Korea
D) Kamul
E) Colombia
Answer: C
Page Ref: 670-674
Difficulty: Easy22.2 Structural Features of Developing Countries

1) While many developing countries have reformed their economies in order to imitate the
success of the successful industrial economies, the process remains incomplete and most
developing countries tend to be characterized by all of the following EXCEPT
A) seigniorage.
B) control of capital movements by limiting foreign exchange transactions connected with
trade in assets.
C) use of natural resources or agricultural commodities as an important share of exports.
D) a worse job of directing savings toward their most efficient investment uses.
E) reduced corruption and poverty due to limited underground markets.
Answer: E
Page Ref: 674-677
Difficulty: Easy

2) In general, one would expect that life expectancies reflect international differences in
income levels. Do the data support such a claim?
A) Average life span falls as relative poverty falls.
B) Average life span increases as relative poverty falls.
C) There is no statistically significant relationship between the two.
D) The relation is not very strong.
E) The relationship looks more like a U-shape.
Answer: B
Page Ref: 674-677
Difficulty: Easy

3) Seigniorage refers to
A) real resources a government earns when it prints money to use for spending on goods and
services.
B) nominal resources a government earns when it prints money to use for spending on goods
and services.
C) real resources a government earns when it prints money.
D) nominal resources a government earns when it prints money.
E) real resources a government earns when it issues bonds to use for spending on goods and
services.
Answer: A
Page Ref: 674-677
Difficulty: Easy

4) In developing countries, exchange rates tend to be

A) floating with some government intervention.
B) pegged.
C) hard to tell from the data.

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D) run by currency boards.
E) flexible.
Answer: B
Page Ref: 674-677
Difficulty: Easy

5) Most developing countries have tried to

A) liberalize capital movement.
B) control capital movements.
C) Hard to tell from the data.
D) in the 1960s and 1970s control, now to liberalize.
E) in the 1960s and 1970s liberalize, now to control.
Answer: B
Page Ref: 674-677
Difficulty: Easy

6) For many developing countries, natural resources or agricultural commodities make up

________ share of exports
A) close to no
B) an unimportant
C) an important
D) close a to 5 percent
E) close to a 10 percent
Answer: C
Page Ref: 674-677
Difficulty: Easy

7) In general, the development of underground economic activity ________ economic

efficiency
A) hinders
B) has no effect
C) aides
D) hard to tell, sometime hinders, sometimes aides
E) spikes
Answer: A
Page Ref: 674-677
Difficulty: Easy

8) One should expect ________ relationship between annual per-capita GDP and an inverse
index of corruption
A) a weak and negative
B) a weak and positive
C) a strong and negative
D) a strong and positive
E) an unpredictable
Answer: D
Page Ref: 674-677
Difficulty: Easy

9) Which of the following is NOT a common characteristic of a developing country?

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A) extensive direct government control of the economy
B) history of low inflation
C) many weak credit institutions
D) "pegged" exchange rates
E) Agricultural commodities make up a large share of its exports.
Answer: B
Page Ref: 674-677
Difficulty: Easy

10) The relationship between annual real per-capita GDP and corruption across countries has
been found to be
A) negative.
B) positive.
C) The relationship was negative in the late 1960s but is now positive.
D) The relationship was in the late 1960s but is now negative.
E) There is no relationship between these two variables.
Answer: A
Page Ref: 674-677
Difficulty: Easy

11) Which of the following does NOT explain why developing countries encouraged new
manufacturing industries of their own in the mid 20th century?
A) They were cut off from traditional suppliers of manufactures during WWII.
B) Former colonial areas had something to prove; they wanted to attain the same income
levels as their former rulers.
C) Leaders of these countries feared that their efforts to escape poverty would be doomed if
they continues to specialize in primary commodity exports.
D) There was political pressure to protect these industries.
E) Developing countries ran out of the natural resources that traditionally made up the
majority of their trade.
Answer: E
Page Ref: 674-677
Difficulty: Easy

12) Which of the following are characteristic of a developing country?

A) extensive embrace of free trade policies
B) low inflation
C) high national savings
D) a current account deficit and low national savings
E) strong credit institutions
Answer: D
Page Ref: 674-677
Difficulty: Easy

13) The real resource a government earns when it prints money and spends it on goods and
services is called
A) seigniorage.
B) control of capital movements by limiting foreign exchange transactions.
C) pure profits.
D) inflation profits.

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E) greenback.
Answer: A
Page Ref: 674-677
Difficulty: Easy

14) For many developing countries, natural resources or agricultural commodities make up a
________ share of exports.
A) large
B) moderate
C) nonexistent
D) small
E) insubstantial
Answer: A
Page Ref: 674-677
Difficulty: Easy

15) Which of the following countries is the most corrupt?

A) U.S.
B) Iceland
C) Finland
D) New Zealand
E) Greenland
Answer: A
Page Ref: 674-677
Difficulty: Easy

22.3 Developing-Country Borrowing and Debt

1) In developing economies, national saving is often ________ relative to developed

economies.
A) high
B) the same
C) hard to tell
D) low
E) low for the very poor countries and high for the more developed
Answer: D
Page Ref: 677-688
Difficulty: Easy

2) The Convertibility Law of April 1991 in Argentina

A) pegged the Argentinean currency to the US dollar at a ratio of one to one.
B) pegged the Argentinean currency to the US dollar at a ratio of one to two.
C) pegged the Argentinean currency to the US dollar at a ratio of one to 0.5.
D) represents an era of floating exchange rate in Argentina.
E) pegged the Argentinean currency to the British pound at a ratio of one to one.
Answer: A
Page Ref: 677-688
Difficulty: Easy

3) The $50 billion emergency loan orchestrated by the U.S. Treasury and the IMF to Mexico

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in 1994
A) was a disastrous policy for Mexico.
B) avoided a disaster to the Mexican economy.
C) did not affect Mexico in the short run.
D) did not affect Mexico in the long run.
E) was ineffective both in the short and long runs.
Answer: B
Page Ref: 677-688
Difficulty: Easy

4) Brazil's 1999 crisis was relatively short lived because

A) Brazil's financial institutions had avoided borrowing all together.
B) Brazil's financial institutions had avoided heavy borrowing in local currency.
C) Brazil's financial institutions had avoided heavy borrowing in dollars.
D) Brazil's financial institutions had extended low-interest loans.
E) Brazil's financial institutions had extended high-interest loans.
Answer: C
Page Ref: 677-688
Difficulty: Easy

5) What does it mean for a loan to be in default?

A) when the borrower of the a loan fails to repay on schedule according to a loan contract,
without the agreement of the lender
B) when the borrower of a loan fails to repay on schedule according to a loan contract, with
the agreement of the lender
C) when the lender of a loan fails to supplies the full amount of a loan to the borrower
D) when the lender of a loan supplies the full amount of a loan to a borrower without any
promise of being repaid
E) when the lender of a loan fails to offer the promised sum
Answer: A
Page Ref: 677-688
Difficulty: Easy

6) A trend that has been reinforced by many developing countries is privatization.

Privatization refers to
A) purchasing large companies and turning them into state-owned enterprises.
B) investing government money in large, privately-owned companies.
C) exchanging bonds for shares in state-owned enterprises.
D) selling large state-owned enterprises to private owners in the financial sector.
E) selling large state-owned enterprises to private owners in key areas such as electricity,
telecommunications, or petroleum.
Answer: E
Page Ref: 677-688
Difficulty: Easy

7) A considerable advantage that richer countries have over poorer ones is exemplified by the
fact that
A) richer countries do not have to denominate their foreign debts in their own currencies.
B) richer countries have the ability to denominate their foreign debts in foreign currencies.
C) when demand falls for a poorer country's goods, this leads to a significant wealth transfer

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from foreigners to the poorer country, a kind of international insurance payment.
D) richer countries have the ability to denominate their foreign debts in their own currencies.
E) richer countries can extract trade advantages by using military power.
Answer: D
Page Ref: 677-688
Difficulty: Easy

8) In 1981-1983, the world economy suffered a steep recession. Naturally, the fall in
industrial countries' aggregate demand had a direct negative impact on the developing
countries. What other mechanism was an even more important contributor to this event?
A) the immediate steep inflation that followed the recession
B) the dollar's sharp depreciation in the foreign exchange market
C) the increase in primary commodity prices, increasing terms of trade in many poor
countries
D) the collapse in primary commodity prices and the immediate, large rise in the interest
burden that debtors had to pay
E) the influx of defaulting credit
Answer: D
Page Ref: 677-688
Difficulty: Easy

9) With which country did the Debt Crisis of the early 1980s begin?
A) France
B) Mexico
C) Argentina
D) Japan
E) Germany
Answer: B
Page Ref: 677-688
Difficulty: Easy

10) In 1991, Argentina established a radical institutional reform after experiencing a decade
marked by financial instability. This program was called the new Convertibility Law. What
did this law do?
A) made Argentina's currency fully convertible into Eurocurrency at a fixed rate
B) required that the monetary base be backed completely by U.S. dollars
C) placed limits on exports of commodities
D) made Argentina's currency fully convertible into U.S. dollars at a fixed rate and required
that the monetary base be backed completely by gold or foreign currency
E) restricted risky international trade activity
Answer: D
Page Ref: 677-688
Difficulty: Easy

11) In the instances where a loan has been issued under certain terms and has to be repaid,
what happens when the borrower does not uphold these stipulations?
A) call
B) option
C) payment
D) default

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E) fraud
Answer: D
Page Ref: 677-688
Difficulty: Easy

12) There are many ways developing countries finance their external deficits EXCEPT
A) bank finance.
B) portfolio investment in ownership of firms.
C) bond finance.
D) official lending.
E) foreign exchange rates.
Answer: E
Page Ref: 677-688
Difficulty: Easy

13) During the time period of 1981-1983 what dramatic world issue happened?
A) political instability, insecure property rights
B) stock market crashed
C) world wide hyperinflation
D) the collapse of the U.S. mortgages market
E) A world economic recession caused developing countries to not be able to make payments
on foreign loans, in turn causing a universal default.
Answer: E
Page Ref: 677-688
Difficulty: Easy

14) The term Original Sin by two economists Barry Eichengreen and Ricardo Hausmann is
used to describe what?
A) low-income economy
B) developing countries' inability to borrow in their own currencies
C) a sin that is part of the Ten Commandments
D) borrows not able to receive loans
E) not diversifying economies portfolios
Answer: B
Page Ref: 677-688
Difficulty: Easy

15) How would you define exchange control?

A) The government allocates foreign exchange through decree rather than through the
market.
B) a country NOT pegging its exchange rate
C) a country pegging its exchange rate
D) a country buying up excess current account so that CA=0
E) a country restricting all foreign exchange
Answer: A
Page Ref: 677-688
Difficulty: Easy

16) As of 2013, how large is the debt of developing countries to the rest of the world?
A) $350 million

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B) $350 billion
C) $7 trillion
D) $35 trillion
E) $3.5 trillion
Answer: C
Page Ref: 677-688
Difficulty: Easy

17) Which of the following is a reason that developing countries are running large surpluses?
A) They are required to do so by IMF.
B) They have defaulted on international loans.
C) They have pegged exchange rates and thus the growth of exports must drive surplus up.
D) They have a strong desire to accumulate international reserves to protect against a sudden
stop of capital inflows.
E) They don't know how to manage their surpluses.
Answer: D
Page Ref: 677-688
Difficulty: Easy

18) Which Latin American country defaulted on loans in 2005 and paid off their creditors at
only 1/3 value?
A) Argentina
B) Brazil
C) Chile
D) Colombia
E) Mexico
Answer: A
Page Ref: 677-688
Difficulty: Easy

19) When a government defaults on its obligations, the event is called a

A) sovereign default.
B) magisterial default.
C) private default.
D) sudden stop default.
E) national default.
Answer: A
Page Ref: 677-688
Difficulty: Easy

20) The following are all the forms of debt finance.

A) bond, bank, and official finance
B) bond and bank finance
C) bond, bank, and portfolio finance
D) foreign direct and portfolio investment
E) direct investment, stock, and dividends
Answer: A
Page Ref: 677-688
Difficulty: Easy

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21) Why may equity finance be preferred to debt finance for developing countries?
A) A fall in domestic income automatically reduces the earnings of foreign shareholders
without violating any loan agreement.
B) There are laws insuring against any default with equity finance.
C) The risk is shared between debtor and creditor with debt finance.
D) The tax structure leaves equity finance unconstrained.
E) Repayments are unaffected by falls in real income.
Answer: A
Page Ref: 677-688
Difficulty: Easy

22) Since foreign credit dries up in crises when it is most needed, developing countries can
protect themselves from default by
A) cutting off imports of goods.
B) allowing the exchange rate to float.
C) using equity finance only.
D) accumulating high levels of international reserves.
E) avoiding the international capital market.
Answer: D
Page Ref: 677-688
Difficulty: Easy

22.4 East Asia: Success and Crisis

1) East Asia's crisis was relatively long lived because

A) East Asia's financial institutions had encouraged borrowing all together.
B) East Asia's financial institutions had encouraged heavy borrowing in local currency.
C) East Asia's financial institutions had extended low-interest loans.
D) East Asia's financial institutions had extended high-interest loans.
E) East Asia's financial institutions had encouraged heavy borrowing in dollars.
Answer: E
Page Ref: 688-694
Difficulty: Easy

2) In the early 1960s South Korea was an extremely poor country. However, in 1963, the
country began a remarkable economic ascent. What was a direct cause of this?
A) a shift in strategy that emphasized exports rather than imports
B) an increase in wages
C) an increase in the labor force
D) an increase in the money supply
E) an emphasis on education, leading to a highly productive labor force
Answer: A
Page Ref: 688-694
Difficulty: Easy

3) What weakness in the economic structures of Asian countries contributed to the severe
financial crisis that Asian economies experienced in 1997?
A) Productivity: It increased rapidly and the countries were victims of their own success
B) Banking regulation: Banks were excessively regulated, which reduced profits.
C) Legal Framework: The system dealt unsuccessfully with companies in financial trouble

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D) Natural Resources: Countries' lack of natural resources and failure to explore developing
industries accumulated and led to the crisis.
E) High Taxes: High rates of taxation resulted in a reliance on imports.
Answer: C
Page Ref: 688-694
Difficulty: Easy

4) What event started the Asian financial crisis in 1997?

A) Indonesia's inability to pay its debts
B) devaluation of Indonesia's currency
C) Thailand's inability to pay its debts
D) devaluation of Thailand's currency
E) devaluation of Malaysia's currency
Answer: D
Page Ref: 688-694
Difficulty: Easy

5) The problem of moral hazard has led

A) the governments of many developing countries to guarantee repayment of all loans.
B) to higher growth rates in Latin America.
C) to excessively speculative investment.
D) to both privilege and responsibility of creditors.
E) to stable investments with small and steady expected gains.
Answer: C
Page Ref: 688-694
Difficulty: Easy

6) How would you define a currency board?

A) the process by which non-pegged interest rates are allowed to fluctuate
B) the stockpiling of international reserves by developing countries
C) using the dollar to carry out all domestic transactions, making the domestic currency a
currency in name alone
D) a constraint placed on monetary policy
E) The monetary bases is backed entirely by foreign currency and the central bank holds no
domestic assets.
Answer: E
Page Ref: 688-694
Difficulty: Easy

7) If a developing country institutes a currency board, it relinquishes control over having

A) monetary policy autonomy.
B) exchange rate stability.
C) freedom of capital movement.
D) freedom of labor movement.
E) all of its funds.
Answer: A
Page Ref: 688-694
Difficulty: Easy

8) A currency board can ________ a country's ability to act as a lender of last resort.

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A) aggrandize
B) limit
C) enhance
D) offset
E) not affect
Answer: B
Page Ref: 688-694
Difficulty: Easy

22.5 Lessons of Developing-Country Crises

1) Which of the following economic lessons should we take from developing country crises
in Latin America (and elsewhere)?
A) Only that it is important to choose the right exchange rate regime.
B) Only that banking is of central importance in any government.
C) The order in which reform measures are implemented are irrelevant.
D) It is important to choose the right exchange rate regime and banking is of central
importance in any government.
E) The order in which reform measures are implemented are irrelevant and banking is of
central importance in any government.
Answer: D
Page Ref: 694-696
Difficulty: Easy

2) The term contagion refers to

A) a government's complete control over it's banking system.
B) a drop in interest rates across industrialized countries.
C) the vulnerability of healthy economies to crises generated by events elsewhere.
D) a directed attack on one market by a foreign market.
E) a side effect of international trade.
Answer: C
Page Ref: 694-696
Difficulty: Easy

3) What are the three main lessons on crisis learned from early developing countries in Latin
America?
A) choosing the right exchange rate regime, the importance of contagion and the importance
of the banking system
B) choosing the right real rate, the importance of following exchange rates, and keeping
prices high to make the most profit
C) pegging exchange rates with Euros, keeping labor cost and wages low
D) maintaining money supply, avoiding tariffs, and increasing output
E) maintaining money supply, avoiding inflation, and increasing production
Answer: A
Page Ref: 694-696
Difficulty: Easy

22.6 Reforming the World's Financial "Architecture"

1) Why is China's currency undervalued?

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A) The Asian miracle is over.
B) They do not trade with the U.S.
C) They do not allow their currency to appreciate despite large external surpluses.
D) They are stockpiling international reserves to protect against the next East Asian crisis.
E) They are not aware of the real value of their currency.
Answer: C
Page Ref: 696-702
Difficulty: Easy

22.7 Understanding Global Capital Flows and the Global Distribution of Income: Is
Geography Destiny?

1) Which theory best explains the wealth inequalities amongst nations?

A) weather
B) government institutions
C) natural selection
D) factors outside of any human control
E) levels of corruption
Answer: B
Page Ref: 703-708
Difficulty: Easy

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