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Suppose the world economy is composed of just two countries: A and B.Each can produce steel or chemicals but at different levels of economic efficiency.The domestic production possibilities curves are shown in the graphs below. Suppose the world economy is composed of just two countries: A and B.Each can produce steel or chemicals but at different levels of economic efficiency.The domestic production possibilities curves are shown in the graphs below. Refer to the above graphs and information.The assumption made about the domestic opportunity costs in countries A and B is that they are: A) constant. B) variable. C) increasing. D) decreasing. Refer to the above graphs and information.The assumption made about the domestic opportunity costs in countries A and B is that they are:


A) constant.
B) variable.
C) increasing.
D) decreasing.

E) All of the above
F) A) and B)

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In a two-country model,equilibrium world prices and equilibrium quantities of exports and imports occur where one nation's export supply curve intersects the other nation's import demand curve.

A) True
B) False

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Comparative advantage can result from different climates,natural resource endowments,and capital stocks in various countries.

A) True
B) False

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If the dollar price of the yen rises,then:


A) the yen price of dollars also rises.
B) the dollar depreciates relative to the yen.
C) the yen depreciates relative to the dollar.
D) the dollar will buy fewer U.S.goods.

E) B) and D)
F) All of the above

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The following diagram is a flexible exchange market for foreign currency: The following diagram is a flexible exchange market for foreign currency: At the price $.80 for one euro: A) the quantity of euros demanded equals the quantity supplied. B) the dollar-euro exchange rate is unstable. C) the dollar price of one euro equals the euro price of one dollar. D) there will be a surplus of euros in the foreign exchange market. At the price $.80 for one euro:


A) the quantity of euros demanded equals the quantity supplied.
B) the dollar-euro exchange rate is unstable.
C) the dollar price of one euro equals the euro price of one dollar.
D) there will be a surplus of euros in the foreign exchange market.

E) All of the above
F) None of the above

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One of the causes of the trade deficits of the late 1990s has been a declining saving rate in the United States.

A) True
B) False

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Which is a valid counterargument to the infant industry argument for protective tariffs?


A) It results in too many benefits for domestic firms that export goods and services.
B) It is difficult to determine which infant industries will become mature industries with a comparative advantage.
C) The objective would be better achieved through strategic trade policy.
D) The objective would be better achieved by import quotas and nontariff barriers.

E) None of the above
F) All of the above

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A major goal of the World Trade Organization is to:


A) increase the protection of producers against foreign trade competition.
B) encourage bilateral trade agreements between nations.
C) liberalize international trade among nations.
D) maximize tariff revenue for governments.

E) None of the above
F) A) and D)

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If there is no comparative advantage between two countries:


A) one country must be more productive in producing all goods than the other.
B) the benefits resulting from trade are increased.
C) there are no gains from specialization and trade.
D) each country should specialize in the production of a particular commodity.

E) All of the above
F) B) and D)

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If an American can purchase 40,000 British pounds for $90,000,the dollar rate of exchange for the pound is:


A) $1.40.
B) $2.00.
C) $2.25.
D) $6.00.
The dollar rate of exchange is the value of a pound in terms of dollars.Since 40,000 pounds = $90,000,1 pound = $90,000/40,000 = $2.25.

E) None of the above
F) A) and D)

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The organization created to oversee the provisions of multilateral trade agreements,resolve disputes under the international trade rules,and meet periodically to consider further trade liberalization is called the:


A) International Monetary Fund (IMF) .
B) World Trade Organization (WTO) .
C) Common Market Organization (CMO) .
D) International Trade Commission (ITC) .

E) A) and B)
F) None of the above

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The following are hypothetical exchange rates: 2 euros = 1 pound;$1 = 2 pounds.We can conclude that:


A) $1 = 4 euros.
B) $1 = .5 euro.
C) 1 euro = $.50.
D) 1 euro = $2.
Since $1 = 2 pounds,1 pound = $1/2 = $.50.Substituting into the first equation: 2 euros = $.50,so 4 euros = $1 (2 * 2 = $.50 * 2) .

E) B) and C)
F) A) and C)

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Nation Alpha has a comparative advantage in product X and nation Beta has a comparative advantage in product Y.Trade in the two products will only benefit the two nations if:


A) the exchange ratio of X for Y is fixed.
B) the terms of trade increase in both nations.
C) there is excess capacity in both economies.
D) the prices charged for X and Y reflect their domestic opportunity costs.

E) A) and B)
F) A) and C)

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Other things equal,economists would prefer:


A) free trade to tariffs and tariffs to import quotas.
B) free trade to import quotas and import quotas to tariffs.
C) import quotas to tariffs and tariffs to voluntary export restrictions.
D) import quotas to free trade and free trade to tariffs.

E) B) and C)
F) B) and D)

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Autos and chemicals are in units of one million Autos and chemicals are in units of one million Refer to the above tables.Assume that prior to specialization and trade Germany and the C.Now if each specializes according to its comparative advantage,the resulting total gains from specialization and trade will be: United States both choose production possibility A) 8 units of autos. B) 6 units of autos. C) 6 units of autos and 8 units of chemicals. D) 8 units of autos and 6 units of chemicals. Germany has the comparative advantage in autos because of the lower opportunity cost (3 vs.6) ,while the United States has the comparative advantage in chemicals because of the lower opportunity cost (<sup>1</sup>/<sub>6</sub> vs.<sup>1</sup>/<sub>3</sub>) .So,Germany should produce autos and the United States should produce chemicals.Initially,combined output is 14 autos and 60 chemicals.After specialization,output will be 20 autos (from Germany) and 60 chemicals (from the United States) .This is a net gain of 6 autos with no increase in chemicals. Refer to the above tables.Assume that prior to specialization and trade Germany and the C.Now if each specializes according to its comparative advantage,the resulting total gains from specialization and trade will be: United States both choose production possibility


A) 8 units of autos.
B) 6 units of autos.
C) 6 units of autos and 8 units of chemicals.
D) 8 units of autos and 6 units of chemicals.
Germany has the comparative advantage in autos because of the lower opportunity cost (3 vs.6) ,while the United States has the comparative advantage in chemicals because of the lower opportunity cost (1/6 vs.1/3) .So,Germany should produce autos and the United States should produce chemicals.Initially,combined output is 14 autos and 60 chemicals.After specialization,output will be 20 autos (from Germany) and 60 chemicals (from the United States) .This is a net gain of 6 autos with no increase in chemicals.

E) None of the above
F) A) and B)

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If a nation has a balance of payments deficit and exchange rates are flexible,the price of that nation's currency in the foreign exchange markets will rise.

A) True
B) False

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Answer the next question on the basis of the following production possibilities data for two countries,Alpha and Beta,which have populations of equal size. Answer the next question on the basis of the following production possibilities data for two countries,Alpha and Beta,which have populations of equal size. Suppose that before specialization and trade Alpha chose production alternative C and Beta chose production alternative B.After specialization and trade the gains will be: A) 20 tons of fish. B) 20 tons of chips. C) 20 tons of fish and 20 tons of chips. D) 240 tons of fish and 20 tons of chips. Before specialization,total output of fish was 220 (40 + 180) and total output of chips was 20 (10 + 10) .After specialization,Beta will produce only fish (240 tons) and Alpha will produce only chips (20 tons) .This is a net gain of 20 tons of fish and no change in the amount of chips. Suppose that before specialization and trade Alpha chose production alternative C and Beta chose production alternative B.After specialization and trade the gains will be:


A) 20 tons of fish.
B) 20 tons of chips.
C) 20 tons of fish and 20 tons of chips.
D) 240 tons of fish and 20 tons of chips.
Before specialization,total output of fish was 220 (40 + 180) and total output of chips was 20 (10 + 10) .After specialization,Beta will produce only fish (240 tons) and Alpha will produce only chips (20 tons) .This is a net gain of 20 tons of fish and no change in the amount of chips.

E) B) and D)
F) C) and D)

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The following diagram is a flexible exchange market for foreign currency: The following diagram is a flexible exchange market for foreign currency: Other things equal,a leftward shift of the demand curve would: A) depreciate the dollar. B) appreciate the euro. C) reduce the equilibrium quantity of euros. D) cause a shortage of euros. Other things equal,a leftward shift of the demand curve would:


A) depreciate the dollar.
B) appreciate the euro.
C) reduce the equilibrium quantity of euros.
D) cause a shortage of euros.

E) C) and D)
F) All of the above

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If a Japanese importer could buy $1000 U.S.for 122,000 yen,the rate of exchange for one dollar would be:


A) 112 yen.
B) 122 yen.
C) 1220 yen.
D) 12,200 yen.
Since $1000 = 122,000 yen,$1 = 122,000/1000 = 122 yen.

E) All of the above
F) A) and D)

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Dumping is the sale of a product in a foreign market:


A) at a price below its domestic price or cost of production.
B) that does not meet the quality standards in the domestic market.
C) and is the principal means used to enforce nontariff barriers.
D) and is encouraged by voluntary export restraints.

E) None of the above
F) C) and D)

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