TEST BANK For International Economics 18th Edition by Robert Carbaugh All Chapters 1-15 by ACADEMIAMILL

Test Bank For International Economics, 18th Edition Robert Carbaugh Chapter 1-15 Chapter 01: The International Economy and Globalization 1. Which of the following is a dimension of integration into the world economy? a. Fair labor standards. b. Flexible exchange rates. c. Decreased foreign competition. d. Dependence on imported materials. ANSWER: d FEEDBACK: a. b. c. d. Integration involves several dimensions, including the dependence on imported materials.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Understand 2. Which of the following is a disadvantage of globalization? a. Living standards can increase more rapidly. b. Global competition and cheap imports keep a constraint on prices. c. Easier access to foreign investment and low interest rates. d. Companies building state-of-the-art factories in low-wage countries. ANSWER: d FEEDBACK: a. b. c. d. American employees can lose their competitiveness when companies build state-of-the-art factories in low-wage countries, making them as productive as those in the United States.

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TOPICS: KEYWORDS:

Has Globalization Gone Too Far? BLOOM'S: Remember

3. Which statement about globalization is true? a. It has led to more quotas on trade around the world. b. It is a purely economic term used to describe interrelated global markets. c. It has been fueled by trade, immigration, and foreign investment. d. It is the process by which more countries are becoming economically self-sufficient around the globe. ANSWER: c FEEDBACK: a. b. c. Globalization consists of the increased interaction of product and resource markets across nations via trade, immigration, and foreign investment.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Globalization of Economic Activity KEYWORDS: BLOOM'S: Understand 4. Which statement is true about import restrictions? a. They decrease the volume of exports. b. They lead to more jobs for domestic workers. c. They decrease imports and increase exports. d. They are more conducive to prosperity than free trade. ANSWER: a FEEDBACK: a. Trade restrictions that decrease the volume of imports will also decrease exports.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Common Fallacies of International Trade KEYWORDS: BLOOM'S: Understand 5. Most of the world's population now lives in nations that are a. integrated or becoming integrated into world markets. b. trying to overcome economic isolation. Copyright Cengage Learning. Powered by Cognero.

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c. cutting back on foreign investment. d. economically independent. ANSWER: a FEEDBACK: a. In today‘s world, no nation exists in economic isolation. b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Introduction KEYWORDS: BLOOM'S: Understand 6. International trade generally a. decreases jobs. b. generates income. c. decreases productivity. d. reduces competition. ANSWER: b FEEDBACK:

a. b. Producing goods for export generates jobs and income for domestic workers. c. d.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Is International Trade an Opportunity or Threat to Workers? KEYWORDS: BLOOM'S: Understand 7. The largest amount of trade with the United States in recent years has been conducted with a. China. b. Germany. c. Canada. d. the United Kingdom. ANSWER: a FEEDBACK: a. China heads the list of United States‘ trading partners. b. c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Remember 8. What led to the sharp loss of market share in the example of the Eastman Kodak Company? a. increased desire for higher-quality product substitutes b. consumer concern over Eastman Kodak’s near monopoly in the U.S. markets c. lack of innovation in emerging digital technologies d. increased profits of domestic import-competing industries ANSWER: c FEEDBACK: a. b. c. Kodak provides a striking example of an industrial giant that faltered in the face of global competition and advancing technology. It was slow in launching the production of digital cameras and failed to understand that smartphones replaced cameras.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Understand 9. Which statement is true about international trade? a. It is zero-sum game. b. Imports always result in domestic unemployment. c. Tariffs on imports always protect domestic jobs. d. Imports and exports are connected; as one falls, the other generally rises. ANSWER: d FEEDBACK: a. b. c. d. The drag on an economy caused by rising imports tends to be offset by the stimulus on the economy caused by rising exports.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Common Fallacies of International Trade KEYWORDS: BLOOM'S: Understand 10. North Carolina produces sweet potatoes in its rich soil, but does not have the climate to grow oranges well. It is correct to say that, relative to Florida, North Carolina has which of the following? a. An absolute advantage in sweet potato production. b. A monopoly on sweet potato production. c. A comparative advantage in sweet potato production. d. A trade imbalance in sweet potato production. ANSWER: c FEEDBACK: a. b. c. According to the principle of comparative advantage, if countries specialize in what they are relatively best at producing, they will import products that their trading partners are most efficient at producing, yielding benefits for both countries.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Common Fallacies of International Trade KEYWORDS: BLOOM'S: Apply 11. According to human rights activists, which organization supports governments that permit sweatshops? a. The International Organization for Standardization b. The International Monetary Fund c. The World Health Organization d. The World Trade Organization ANSWER: b FEEDBACK: a. b. Human rights activists contend that the International Monetary Fund supports governments that allow sweatshops and pursues policies that bail out governmental officials at the expense of local economies.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Has Globalization Gone Too Far? BLOOM'S: Understand

12. With globalization and import competition, U.S. prices generally a. increase. b. decrease. c. remain stable. d. fluctuate wildly. ANSWER: b FEEDBACK: a. b. Global competition and cheap imports keep a constraint on prices, so inflation is less likely to disrupt economic growth.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Has Globalization Gone Too Far? KEYWORDS: BLOOM'S: Remember 13. The United States was less open to international trade between a. 1870 and 1914. b. 1944 and 1980. c. 1890 and 1950. d. 1980 and the present. ANSWER: c FEEDBACK: a. b. c. Two world wars and the Great Depression of the 1930s caused the United States to reduce its dependence on trade, partly for national security reasons and partly to protect its home industries from import competition.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Remember 14. A sudden shift from import tariffs to free trade may induce short-term unemployment in Copyright Cengage Learning. Powered by Cognero.

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a. import-competing industries. b. industries that are only exporters. c. industries that sell domestically as well as export. d. industries that neither import nor export. ANSWER: a FEEDBACK: a. Cheap exports produced by lower-cost foreign workers threaten to eliminate jobs for some workers in industrial countries.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Is International Trade an Opportunity or Threat to Workers? KEYWORDS: BLOOM'S: Apply 15. Economic interdependence occurs through a. trade. b. protectionism. c. war. d. tariffs. ANSWER: a FEEDBACK: a. Economic interdependence occurs through trade. b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Introduction KEYWORDS: BLOOM'S: Apply 16. Small countries tend to have higher measures of openness than larger countries because a. their productivity is higher. b. they are more reliant on international trade. c. they are less reliant on international trade. d. they are more economically diverse. ANSWER: b FEEDBACK: a. Copyright Cengage Learning. Powered by Cognero.

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b. Large countries tend to be less reliant on international trade because many of their companies can attain an optimal production size without having to export to foreign nations. Therefore, small countries tend to have higher measures of openness than do large ones.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Understand 17. Following World War II, the U.S. a. became less open. b. helped construct a global economic order. c. negotiated increases in trade barriers. d. went through a period of economic isolationism. ANSWER: b FEEDBACK: a. b. During the late 1940s, the United States helped construct a global economic order that was governed by mutually accepted rules and overseen by multilateral institutions.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Waves of Globalization KEYWORDS: BLOOM'S: Remember 18. Which of the following is a fallacy of international trade? a. Trade is a zero-sum activity. b. Exports increase employment in exporting industries. c. Import restrictions increase employment in import-competing industries. d. Tariffs and quotas reduce trade. ANSWER: a FEEDBACK: a. One misconception is that trade results in a zero-sum game: If one trading partner benefits, the other must suffer. It turns out that both partners can benefit from trade.

b. c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Common Fallacies of International Trade KEYWORDS: BLOOM'S: Understand 19. The first wave of globalization was brought to an end by a. the Great Depression. b. the Second World War. c. the First World War. d. the Smoot-Hawley Act. ANSWER: c FEEDBACK: a. b. c. The first wave of globalization was brought to an end by World War I. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Waves of Globalization KEYWORDS: BLOOM'S: Remember 20. Multilateral trade negotiations have led to a. continued liberalization of trade and investment. b. increased protectionism. c. higher tariffs. d. more expensive financing. ANSWER: a FEEDBACK: a. Continuing liberalization of trade and investment has resulted from multilateral trade negotiations.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Globalization of Economic Activity BLOOM'S: Remember

21. The phrase ―When the United States sneezes, the economies of other nations catch a cold‖ was first used to describe the impact of the economy of the United States on the rest of the world at the end of World War II. This phrase is now a. more true, due to the impact of growing economic interdependence. b. less true, due to the impact of growing economic interdependence. c. only true when followed by impacts in the European Union. d. all of these are only true in the case of an economic recession. ANSWER: b FEEDBACK: a. b. It is less true because the U.S. economy has become increasingly integrated into the activities of foreign countries.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC2: - The study of economics, and definitions in economics TOPICS: Introduction KEYWORDS: BLOOM'S: Evaluate 22. Why has the economy of the United States realized waves of globalization? a. The United States consistently increases tariffs. b. The United States economy has been consistently opening up since the 1920s. c. Technology, supported by American investors, drives productivity. d. The trade policy of the United States has been uneven, resulting in periods of more or less openness to international trade. ANSWER: d FEEDBACK: a. b. c. d. In recent history, there have been three major waves of globalization—first from 1870 to 1914, then from 1944 to 1980, and finally from 1980 to the present. During these waves, the trade policy of the United States has been uneven.

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KEYWORDS:

BLOOM'S: Evaluate

23. The decline of Kodak Inc. in the camera and film business is NOT explained by a. the rise of Japanese rivals such as Fuji Photo Film Co. b. the development of digital cameras and smartphones that operate as cameras. c. antimonopoly laws that broke Kodak up into small, competing companies. d. constant innovation and attention to changing trends in recreational photography. ANSWER: c FEEDBACK: a. b. c. Kodak faltered in the face of global competition and advancing technology, not antimonopoly laws.

d. POINTS: 1 DIFFICULTY: Difficult QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Apply 24. Today, most Schwinn bicycles are manufactured in a. China. b. Canada. c. Mexico. d. Germany. ANSWER: a FEEDBACK: a. Most Schwinn bicycles today are built in Chinese factories. b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Remember 25. The natural gas turbine is considered a driver of globalization because the turbine a. increases efficiency, moving goods from place to place. b. was developed in the United States. c. is associated with increased transportation costs. Copyright Cengage Learning. Powered by Cognero.

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d. increases the labor input and decreases unemployment. ANSWER: a FEEDBACK: a. Diesels and turbines have become important movers of goods and people throughout the world. They have reduced transportation costs to such an extent that distance to the market is a much smaller factor affecting the location of manufacturers or the selection of the origin of imported raw materials

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Introduction KEYWORDS: BLOOM'S: Remember 26. Economists who suggest that the United States is losing its competitive edge cite that a. more American firms are choosing to manufacture overseas. b. the quality of education in Western countries is declining. c. the United States is ambivalent about technology. d. the Asian continent contains more raw materials than the United States. ANSWER: a FEEDBACK: a. American employees can lose their competitiveness when companies build state-of-the-art factories in low-wage countries, making them as productive as those in the United States.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Has Globalization Gone Too Far? KEYWORDS: BLOOM'S: Remember 27. Exporting firms in the United States typically a. have less overall productivity. b. offer higher wages to workers. c. rely on an unskilled labor force. d. do not rely on capital. ANSWER: b FEEDBACK: a. Copyright Cengage Learning. Powered by Cognero.

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b. For Americans working for exporting firms, average wages are about 18 percent higher than average wages in nonexporting firms.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Is International Trade an Opportunity or a Threat to Workers? KEYWORDS: BLOOM'S: Understand 28. The slogans "Buy American" and "American goods create American jobs" reflect a. concern over the number of exports leaving the country. b. concern about the threat of foreign competition. c. a desire for fewer import restrictions. d. a lack of job security within exporting firms. ANSWER: b FEEDBACK: a. b. Trade with low-wage developing countries is particularly threatening to unskilled workers in the import-competing sectors of industrial countries.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Is International Trade an Opportunity or a Threat to Workers? KEYWORDS: BLOOM'S: Understand 29. As an economy opens up to international trade, domestic prices a. decrease. b. increase. c. become stable over time. d. align more with international prices. ANSWER: d FEEDBACK: a. b. c. d. Global competition and cheap imports keep a constraint on prices, so inflation is less likely to disrupt economic growth.

POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Has Globalization Gone Too Far? KEYWORDS: BLOOM'S: Remember 30. The openness ratio is measured by a country's a. exports as a percent of gross domestic product. b. imports as a percent of gross domestic product. c. exports minus imports as a percent of gross domestic product. d. exports plus imports as a percent of gross domestic products. ANSWER: d FEEDBACK: a. b. c. d. As a rough measure of the importance of international trade in a nation‘s

economy, we can look at that nation‘s exports and imports as a percentage of its gross domestic product.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Remember 31. How has technology impacted the globalization of economic activity? a. Technological innovation has led to decreased mechanization of economic activities. b. Increased information flows have influenced production location decisions. c. The rise of the internet has increased communication costs in the service industry. d. Technology has led to a greater separation between people and enterprises. ANSWER: b FEEDBACK: a. b. On the technology side, increased information flows and the greater tradability of goods and services have influenced production location decisions. Businesses are able to locate different components of their production processes in various countries and regions and still maintain a single corporate identity.

c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Globalization of Economic Activity KEYWORDS: BLOOM'S: Understand 32. In recent decades, the United States has become tied to other nations through a rise in a. capital flows. b. labor mobility. c. domestic ownership of financial assets. d. production as compared to consumption. ANSWER: a FEEDBACK: a. Besides the trade of goods and services, movements in factors of production are a measure of economic interdependence. Labor and capital move more freely across nations.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Remember 33. All of the following have been criticisms of globalization and trade policies EXCEPT a. environmental concerns. b. disadvantages for corporations. c. unfair competition from countries that lack labor standards. d. support of countries with human rights violations such as sweatshops. ANSWER: b FEEDBACK: a. b. Critics maintain that U.S. trade policies primarily benefit large corporations. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Has Globalization Gone Too Far? KEYWORDS: BLOOM'S: Understand 34. Which factor contributed to the bankruptcy of the Schwinn bicycle company? Copyright Cengage Learning. Powered by Cognero.

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a. Schwinn was unable to successfully promote their brand or appeal to consumers in the United States. b. Schwinn was not innovative and did not add new features to their bicycles over time. c. Tariffs were rising on imported bicycles. d. Foreign competitors were able to manufacture competitive bicycles at a lower cost. ANSWER: d FEEDBACK: a. b. c. d. Foreign companies hired low-wage workers to manufacture competitive bicycles at a fraction of Schwinn‘s cost.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Understand 35. The most profound influence driving globalization is an increased awareness of global human rights. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The most profound influence is technological change.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Globalization of Economic Activity KEYWORDS: BLOOM'S: Remember 36. The benefits of international trade accrue in the forms of lower domestic prices. a. True b. False ANSWER: True FEEDBACK: Correct Global competition and cheap imports keep a constraint on prices, so inflation is less likely to disrupt economic growth. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Has Globalization Gone Too Far? KEYWORDS: BLOOM'S: Understand 37. In an open trading system, a country will import those commodities that it produces at relatively low cost while exporting commodities that can be produced at relatively high cost. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect According to the principle of comparative advantage, if countries specialize in what they are relatively best at producing, they will import products that their trading partners are most efficient at producing, yielding benefits for both countries.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Common Fallacies of International Trade KEYWORDS: BLOOM'S: Understand 38. Although free trade provides benefits for consumers, it is often argued that import protection should be provided to domestic producers of strategic goods and materials vital to the nation's security. a. True b. False ANSWER: True FEEDBACK: Correct In the post-pandemic world, more economic activity will be deemed essential for national security and thus require self-sufficiency. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Understand 39. In the long run, competitiveness depends on an industry's natural resources, its stock of machinery and equipment, and the skill of its workers in creating goods that people want to buy. a. True b. False ANSWER: True FEEDBACK: Correct International competitiveness can be analyzed in terms of a firm, an industry, and Copyright Cengage Learning. Powered by Cognero.

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a nation. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Understand 40. The term economic interdependence implies that the wealth and success of one country impacts the wealth and success of another country. a. True b. False ANSWER: True FEEDBACK: Correct Economic interdependence implies that all aspects of a nation‘s economy are linked to the economies of its trading partners. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Introduction KEYWORDS: BLOOM'S: Remember 41. As measured by the value of trade, China, Canada, and Mexico are the three top trading partners of the United States. a. True b. False ANSWER: True FEEDBACK: Correct Table 1.5, Top Eight U.S. Trading Partners, 2018. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Remember 42. The "openness ratio" of the U.S. economy in 2018 was approximately 15 percent, the same as in 1890. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

False Correct Incorrect In 2018, the United States exported 12 percent of its GDP, while imports were 15 percent of GDP; the openness of the U.S. economy to trade equaled 27 percent.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Remember 43. The development of diesel engines and gas turbines helped reduce transportation costs and thus increase international trade among nations. a. True b. False ANSWER: True FEEDBACK: Correct Diesels and turbines have become important movers of goods and people throughout the world. They have reduced transportation costs and thus increased international trade. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Introduction KEYWORDS: BLOOM'S: Remember 44. In the late 1990s, Schwinn Inc. closed its bicycle manufacturing plants in China and moved them to the United States. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Schwinn was purchased by the Pacific Cycle Company, which farmed the production of Schwinn bicycles out to low-wage workers in China.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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45. The advent of foreign competition forced Kodak Inc. to go into bankruptcy and to cease operating as a producer of cameras and film. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Kodak is an example of an industrial giant that faltered in the face of global competition and advancing technology.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC5: - Monopolistic competition TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Understand 46. In the United States, tariffs and quotas are commonly used as tools designed to restrict trade among the 50 states. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect There is free trade throughout America.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Common Fallacies of International Trade KEYWORDS: BLOOM'S: Understand 47. Critics maintain that U.S. trade policies have mainly benefitted large corporations rather than the average American citizen. a. True b. False ANSWER: True FEEDBACK: Correct Critics maintain that U.S. trade policies primarily benefit large corporations rather than average citizens, of the United States or any other country. Incorrect

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TOPICS: KEYWORDS:

Has Globalization Gone Too Far? BLOOM'S: Remember

48. Workers sometimes face demands for wage reductions from employers threatening to export jobs if wage reductions are not accepted. a. True b. False ANSWER: True FEEDBACK: Correct Workers worry that firms are relocating abroad in search of low wages. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC6: - Labor markets TOPICS: Is International Trade an Opportunity or a Threat to Workers? KEYWORDS: BLOOM'S: Remember 49. How has international trade forced domestic firms to become more competitive? International trade has forced domestic firms to become more competitive in terms of the ANSWER: introduction of new products, product design and quality, and product price. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Understand 50. What are the challenges of the international trading system? The international trading system faces dealing with fair labor standards and concerns about ANSWER: the environment, among other challenges. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Has Globalization Gone Too Far? KEYWORDS: BLOOM'S: Understand 51. How does competition impact product quality? Copyright Cengage Learning. Powered by Cognero.

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ANSWER:

International competition provides domestic producers with a strong incentive to improve the quality of their products. Also, international trade usually weakens monopolies. As countries open their markets, their monopoly producers face competition from foreign firms, which generally increases product quality. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Understand 52. What are the essential arguments in favor of free trade? Proponents of an open trading system contend that international trade results in higher ANSWER: levels of consumption and investment, lower prices of commodities, and a wider range of product choices for consumers. Trade also enables workers to become more productive, and wages of workers whose skills are scarcer internationally tend to rise. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The United States as an Open Economy KEYWORDS: BLOOM'S: Understand 53. What is the most important factor that contributes to competitiveness? International competitiveness can be analyzed in terms of a firm, an industry, and a nation. ANSWER: Key to the concept of competitiveness is productivity, or output per worker hour. Productivity increases faster when countries produce goods and services in which they have a comparative advantage. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Has Globalization Gone Too Far? KEYWORDS: BLOOM'S: Understand

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Chapter 02: Foundations of Modern Trade Theory: Comparative Advantage 1. The mercantilists would have objected to a. export promotion policies initiated by the government. b. the use of tariffs or quotas to restrict imports. c. trade policies designed to accumulate gold and other precious metals. d. international trade based on open markets. ANSWER: d FEEDBACK: a. b. c. d. The mercantilists advocated government regulation of trade. Tariffs, quotas, and other commercial policies were proposed by the mercantilists to minimize imports to protect a nation‘s trade position.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 2. Unlike the mercantilists, Adam Smith maintained that a. trade benefits one nation only at the expense of another nation. b. government control of trade leads to maximum economic welfare. c. all nations can gain from free international trade. d. the world's output of goods must remain constant over time. ANSWER: c FEEDBACK: a. b. c. Smith‘s view of international trade suggested that trading partners could simultaneously enjoy higher levels of production and consumption with trade.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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3. The trading principle formulated by Adam Smith maintained that a. international prices are determined from the demand side of the market. b. differences in resource endowments determine comparative advantage. c. differences in income levels govern world trade patterns. d. absolute cost differences determine the immediate basis for trade. ANSWER: d FEEDBACK: a. b. c. d. Adam Smith‘s trading principle was the principle of absolute advantage. A nation will import goods in which it has an absolute cost disadvantage and export those goods in which it has an absolute cost advantage.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 5. If Spain’s weather is better for growing wine grapes than Denmark’s, it can be said that Spain has a(n) a. absolute advantage in the production of wine. b. comparative advantage in the production of wine. Copyright Cengage Learning. Powered by Cognero.

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c. lower marginal rate of transformation for wine. d. lower opportunity cost of producing wine. ANSWER: a FEEDBACK: a. Spain has a natural advantage (absolute advantage) in wine production. b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Apply 6. According to the principle of comparative advantage, specialization and trade increase a nation's total output because a. resources are directed to their highest productivity. b. the output of the nation's trading partner declines. c. the nation can produce outside of its production possibilities frontier. d. the problem of unemployment is eliminated. ANSWER: a FEEDBACK: a. Because the world uses its resources more efficiently as the result of specializing, an increase in world output occurs that is distributed to the two nations through trade.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Understand 7. The United States has an absolute disadvantage to Spain on wine production. According to David Ricardo, specialization can be more efficient only in the following circumstances: a. Spain intentionally slows its production. b. The United States grows its own grapes, thereby reducing transport costs. c. In this case, specialization will not have an impact on either country. d. Specialization can lead to more efficient allocation of resources with free trade. ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. d. Ricardo maintained that, with specialization and trade, the world economy can attain a more efficient allocation of resources with free trade.

Country United States United Kingdom

Output per Worker per Labor Hour Wine Cloth 5 bottles 20 yards 15 bottles 10 yards

9. Referring to Table 2.1, the United States has the absolute advantage in the production of a. cloth. b. wine. Copyright Cengage Learning. Powered by Cognero.

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c. both cloth and wine. d. neither cloth nor wine. ANSWER: a FEEDBACK:

a. The United States is two times as efficient in cloth production (20/10 = 2). The United States has an absolute advantage in cloth.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 2.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Apply

10. Referring to Table 2.1, the United Kingdom has a comparative advantage in the production of a. cloth. b. wine. c. both cloth and wine d. neither cloth nor wine. ANSWER: b FEEDBACK: a. b. The principle of comparative advantage recognizes that the United Kingdom is three times as efficient in wine production (15/5 = 3). The United Kingdom has a comparative advantage in the production of wine.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 2.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Apply

11. Refer to Table 2.1. If trade opens up between the United States and the United Kingdom, American firms should specialize in producing a. cloth. Copyright Cengage Learning. Powered by Cognero.

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b. wine. c. both cloth and wine. d. neither cloth nor wine. ANSWER: a FEEDBACK:

a. Each nation specializes in and exports that good in which it has a comparative advantage. American firms should specialize in producing cloth.

12. Referring to Table 2.1, the opportunity cost of producing one bottle of wine in the United States is a. 3 yards of cloth. b. 4 yards of cloth. c. 5 yards of cloth. d. 10 yards of cloth. ANSWER: b FEEDBACK: a. b. The opportunity cost means that the relative cost of producing one bottle of wine is 4 yards of cloth sacrificed (20/5 = 4).

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 2.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Apply 13. If a production possibilities frontier is bowed out (i.e., concave) in appearance, production occurs under conditions of a. constant opportunity costs. b. increasing opportunity costs. c. decreasing opportunity costs. Copyright Cengage Learning. Powered by Cognero.

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d. zero opportunity costs. ANSWER: b FEEDBACK:

a. b. Nations tend to experience increasing-cost conditions. Thus, production possibilities frontiers are drawn bowed outward.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Increasing-Cost Conditions KEYWORDS: BLOOM'S: Understand 14. Assuming increasing-cost conditions, trade between two countries would NOT be likely if they have a. identical demand conditions but different supply conditions. b. identical supply conditions but different demand conditions. c. different supply conditions and different demand conditions. d. identical demand conditions and identical supply conditions. ANSWER: d FEEDBACK: a. b. c. d. Given increasing cost conditions, unit costs rise as both nations produce more of their export commodities. Eventually, the cost differentials are eliminated, at which point the basis for further specialization ceases to exist.

Output per worker per day Tons of steel Cars 80 40 20 20

15. Referring to Table 2.2, the opportunity cost of 1 car in Japan is a. 1 ton of steel. Copyright Cengage Learning. Powered by Cognero.

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b. 2 tons of steel. c. 3 tons of steel. d. 4 tons of steel. ANSWER: FEEDBACK:

a a. The opportunity cost means that the relative cost of producing 1 car in Japan is 1 ton of steel sacrificed (20/20 = 1).

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 2.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Apply

16. Referring to Table 2.2, the opportunity cost of one car in South Korea is a. 1/2 ton of steel. b. 1 ton of steel. c. 1 1/2 tons of steel. d. 2 tons of steel. ANSWER: d FEEDBACK: a. b. c. d. The opportunity cost means that the relative cost of producing 1 car in South Korea is 2 tons of steel sacrificed (80/40 = 2).

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 2.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Apply

17. Refer to Table 2.2. According to the principle of absolute advantage, Japan should Copyright Cengage Learning. Powered by Cognero.

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a. export steel. b. export cars. c. export steel and cars. d. not trade in anything, as there is no basis for gainful trade. ANSWER: d FEEDBACK: a. b. c. d. According to the principle of absolute advantage, because the opportunity cost of producing 1 car in Japan is 1 ton of steel sacrificed, Japan should not trade in anything, as there is no basis for gainful trade.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 2.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Apply

18. Refer to Table 2.2. According to the principle of comparative advantage, a. South Korea should export steel. b. South Korea should export steel and cars. c. Japan should export steel. d. Japan should export steel and cars. ANSWER: a FEEDBACK: a. According to the principle of comparative advantage, South Korea should export steel.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 2.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Apply

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19. Refer to Table 2.2. With international trade, what would be the maximum amount of steel that South Korea would be willing to export to Japan in exchange for each car? a. 1/2 ton of steel b. 1 ton of steel c. 1-1/2 tons of steel d. 2 tons of steel ANSWER: d FEEDBACK: a. b. c. d. The opportunity cost of producing 1 car in South Korea is 2 tons of steel (80/40 = 2). The maximum amount of steel that South Korea would be willing to export to Japan in exchange for each car is 2 tons of steel.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 2.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Apply

20. Refer to Table 2.2. With international trade, what would be the maximum number of cars that Japan would be willing to export to South Korea in exchange for each ton of steel? a. 1car b. 2 cars c. 3 cars d. 4 cars ANSWER: a FEEDBACK: a. The opportunity cost of producing 1 car in Japan is 1 ton of steel (20/20 = 1). Thus, the maximum number of cars that Japan would be willing to export to South Korea in exchange for each ton of steel is 1 car.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 2.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

Production Possibilities Frontiers BLOOM'S: Apply

21. The earliest theorist to discuss the principle of comparative advantage was a. Adam Smith. b. David Ricardo. c. Eli Heckscher. d. Bertil Ohlin. ANSWER: b FEEDBACK: a. b. David Ricardo was the earliest theorist to discuss the principle of comparative advantage, in the 1800s.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 22. If Hong Kong and Taiwan had identical labor costs but were subject to increasing costs of production, a. trade would depend on differences in demand conditions. b. trade would depend on economies of large-scale production. c. trade would depend on the use of different currencies. d. there would be no basis for gainful trade. ANSWER: a FEEDBACK: a. With increasing costs of production, trade would depend on differences in demand conditions.

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a. there is no basis for gainful trade for either country. b. both countries gain from trade. c. only one country gains from trade. d. one country gains and the other country loses from trade. ANSWER: b FEEDBACK: a. b. With increasing opportunity costs, comparative product prices in each country are determined by both supply and demand factors. A country tends to partially specialize in the product of its comparative advantage under increasing-cost conditions.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading under Increasing-Cost Conditions KEYWORDS: BLOOM'S: Understand 24. International trade is based on the notion that a. different currencies are an obstacle to international trade. b. goods are more mobile internationally than are resources. c. resources are more mobile internationally than are goods. d. a country's exports should always exceed its imports. ANSWER: b FEEDBACK: a. b. Taking labor as an example of a resource, labor can move freely among industries within a nation but is incapable of moving between nations. Thus, goods are more mobile internationally than are resources.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Understand Figure 2.1. Production Possibilities Frontier

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25. Referring to Figure 2.1, the relative cost of steel in terms of aluminum is a. 4.0 tons. b. 2.0 tons. c. 0.5 tons. d. 0.25 tons. ANSWER: c FEEDBACK: a. b. c. The relative cost of steel in terms of aluminum is 0.5 tons (1000/2000 = 0.5). d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 2.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Apply

26. Referring to Figure 2.1, the relative cost of aluminum in terms of steel is a. 4.0 tons. b. 2.0 tons. c. 0.5 tons. d. 0.25 tons. ANSWER: b FEEDBACK: a. Copyright Cengage Learning. Powered by Cognero.

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b. The relative cost of aluminum in terms of steel is 2.0 tons (2000/1000 = 2.0). c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 2.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Apply

27. Refer to Figure 2.1. If the relative cost of steel were to rise, then the production possibilities frontier would a. become steeper. b. become flatter. c. shift inward in a parallel manner. d. shift outward in a parallel manner. ANSWER: a FEEDBACK: a. The slope of the production possibilities frontier measures the marginal rate of transformation that indicates the amount of one product that must be sacrificed per unit increase of another product. Thus, if the relative cost of steel were to rise, then the production possibilities frontier would become steeper.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 2.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Analyze

28. Refer to Figure 2.1. If the relative cost of aluminum were to rise, then the production possibilities frontier would a. become steeper. b. become flatter. c. shift inward in a parallel manner. d. shift outward in a parallel manner. ANSWER: b FEEDBACK: a. Copyright Cengage Learning. Powered by Cognero.

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b. The slope of the production possibilities frontier measures the marginal rate of transformation that indicates the amount of one product that must be sacrificed per unit increase of another product. Thus, if the relative cost of aluminum were to rise, then the production possibilities frontier would become flatter.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 2.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Analyze 29. When a nation achieves autarky equilibrium, a. input price equals final product price. b. labor productivity equals the wage rate. c. imports equal exports. d. production equals consumption. ANSWER: d FEEDBACK: a. b. c. d. In autarky equilibrium (the absence of trade), a nation prefers to produce and consume at a point on its production possibilities frontier where production equals consumption.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Remember 30. When a nation is in autarky and maximizes its living standard, its consumption and production points are a. along the production possibilities frontier. b. above the production possibilities frontier. c. beneath the production possibilities frontier. d. beside the production possibilities frontier. ANSWER: a FEEDBACK: a. When a nation is in autarky equilibrium (the absence of trade) and maximizes its living standard, its consumption and production points are along the production possibilities frontier. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 31. Constant-cost conditions reflect that a. quality differs between products. b. products are perfect substitutes for each other. c. product quality is related to who produces it. d. one product is more desirable than the other. ANSWER: b FEEDBACK: a. b. Constant-cost conditions reflect that products are perfect substitutes for each other.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 32. If Canada experiences constant opportunity costs, its supply schedule of steel will be a. downward-sloping. b. upward-sloping. c. horizontal. d. vertical. ANSWER: c FEEDBACK: a. b. c. If Canada experiences constant opportunity costs, its supply schedule of steel will be horizontal.

d. POINTS:

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DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply 33. In a two-country, two-product world, the statement "Japan enjoys a comparative advantage over France in steel relative to bicycles" is equivalent to a. France having a comparative advantage over Japan in bicycles relative to steel. b. France having a comparative disadvantage against Japan in bicycles and steel. c. Japan having a comparative advantage over France in steel and bicycles. d. Japan having a comparative disadvantage against Japan in bicycles and steel. ANSWER: a FEEDBACK: a. In a two-country, two-product world, the statement "Japan enjoys a comparative advantage over France in steel relative to bicycles" is equivalent to France having a comparative advantage over Japan in bicycles relative to steel.

b. c. d. POINTS: DIFFICULTY:

1 Easy

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 35. Autarky is defined as a. the relative cost to produce and consume. b. the absence of trade. c. the amount of labor required to produce 1 unit of a product. d. the slope of the production possibilities frontier. ANSWER: b FEEDBACK: a. b. Autarky is defined as the absence of trade. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Remember 36. 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. ANSWER: b FEEDBACK: a. b. Ricardian trade theory relied solely on supply analysis, where labor is the only input (the labor theory of value). A country will have a comparative advantage in the product in which its labor productivity is relatively high.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Historical Development of Modern Trade Theory BLOOM'S: Understand

37. The Ricardian model of comparative advantage includes all of the following assumptions EXCEPT a. it is only based on two nations and two products. b. product quality varies among nations. c. labor is the only factor of production. d. labor can move freely within a nation. ANSWER: b FEEDBACK: a. b. One assumption of the Ricardian model of comparative advantage is that product quality does not vary among nations, implying that all units of each product are identical.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Understand 38. MacDougall’s 1951 writings argued that ______ explains a country's competitive position. a. national income levels b. relative endowments of natural resources c. domestic tastes and preferences d. labor productivity ANSWER: d FEEDBACK: a. b. c. d. MacDougall tested the Ricardian prediction that nations tend to export goods in which their labor productivity is relatively high. MacDougall found that wage rates and labor productivity were important determinants of international trade patterns.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Empirical Evidence on Comparative Advantage Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Remember

39. John Stuart Mill's theory of reciprocal demand best applies when trading partners a. are of equal size and importance in the market. b. produce under increasing cost conditions. c. partially specialize in the production of commodities. d. have similar taste and preference levels. ANSWER: a FEEDBACK: a. John Stuart Mill's theory of reciprocal demand asserts that within the limits to the terms of trade, the actual terms of trade are determined by the intensity of each country‘s demand for the other country‘s product. It best applies when trading partners are of equal size and importance in the market.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 40. The equilibrium prices and quantities established after trade are fully determinate if we know a. the location of all countries' indifference curves. b. the shape of each country's production possibilities frontier. c. the comparative costs of each trading partner. d. the strength of world supply and demand for each good. ANSWER: d FEEDBACK: a. b. c. d. Under constant-cost conditions, domestic relative prices are determined

exclusively by a nation‘s supply conditions. The equilibrium relative commodity price at which trade takes place is determined by the conditions of demand and supply for each commodity in both nations.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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41. "The equilibrium relative commodity price at which trade takes place is determined by the conditions of demand and supply for each commodity in both nations. Other things being equal, the nation with the more intense demand for the other nation's exported good will gain less from trade than the nation with the less intense demand." This statement was first proposed by a. Alfred Marshall, with offer curve analysis. b. John Stuart Mill, with the theory of reciprocal demand. c. Adam Smith, with the theory of absolute advantage. d. David Ricardo, with the theory of comparative advantage. ANSWER: b FEEDBACK: a. b. This statement was first proposed by John Stuart Mill with the theory of reciprocal demand.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Trading Under Constant-Cost Conditions BLOOM'S: Remember

43. The best explanation of the gains from trade that David Ricardo could provide was to describe only the outer limits within which the equilibrium terms of trade would fall. This is because Ricardo's theory did NOT recognize how market prices are influenced by a. demand conditions. b. supply conditions. c. business expectations. d. profit patterns. ANSWER: a FEEDBACK: a. Because Ricardian trade theory relied solely on supply analysis, it was not able to determine actual terms of trade.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 44. Under free trade, Sweden enjoys all of the gains from trade with Holland if Sweden a. trades at Holland's rate of transformation. b. trades at Sweden's rate of transformation. c. specializes completely in the production of its export good. d. specializes partially in the production of its export good. ANSWER: a FEEDBACK: a. The slope of the production possibilities frontier measures the marginal rate of transformation that indicates the amount of one product that must be sacrificed per unit increase of another product. For a country to consume at some point outside its production possibilities frontier, it must be able to exchange its export good internationally at terms of trade more favorable than the domestic terms of trade. Thus, under free trade, Sweden enjoys all of the gains from trade with Holland if Sweden trades at Holland's rate of transformation.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply 45. Because the Ricardian trade theory recognized only how supply conditions influence international prices, it could determine a. the equilibrium terms of trade. b. the outer limits for the terms of trade. c. where a country chooses to locate along its production possibilities frontier. d. where a country chooses to locate along its trade triangle. ANSWER: b FEEDBACK: a. b. Because Ricardian trade theory relied solely on supply analysis, it was not able to determine actual terms of trade, but it could determine the outer limits for the terms of trade.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 46. Terms of trade is determined by the prices a. paid for all goods imported by the home country. b. received for all goods exported by the home country. c. received for exports and paid for imports. d. of primary products as opposed to manufactured products. ANSWER: c FEEDBACK: a. b. c. Terms of trade measures the relation between the prices a nation gets for its exports and the prices it pays for its imports.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Trading Under Constant-Cost Conditions BLOOM'S: Remember

Example 2. Terms of Trade

Country Mexico Sweden Spain France Denmark

2000 100 100 100 100 100

Export Price Index 2018 220 160 155 170 120

Import Price Index 2018 200 150 155 230 125

47. Referring to Example 2, which countries' terms of trade improved between 2000 and 2018? a. Mexico and Denmark b. Sweden and Denmark c. Sweden and Spain d. Mexico and Sweden ANSWER: d Terms of trade is calculated by dividing a nation’s export price index by its import price RATIONALE: index and multiplying by 100 to express the terms of trade in percentages. Using the terms of trade formula, we find that the terms of trade improved for Mexico (10 percent increase) and Sweden (7 percent increase).

Country Mexico Sweden Spain France Denmark

2000 100 100 100 100 100

Terms of Trade 2018 110 107 100 74 96

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Example 2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply

48. Referring to Table 2.3, which countries' terms of trade worsened between 2000 and 2018? a. Spain and Mexico Copyright Cengage Learning. Powered by Cognero.

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b. Mexico and France c. France and Denmark d. Denmark and Sweden ANSWER: c Terms of trade is calculated by dividing a nation’s export price index by its import price RATIONALE: index and multiplying by 100 to express the terms of trade in percentages. Using the terms of trade formula, we find that the terms of trade worsened for France (26 percent decrease) and Denmark (4 percent decrease).

Country Mexico Sweden Spain France Denmark

2000 100 100 100 100 100

Terms of Trade 2018 110 107 100 74 96

49. Referring to Table 2.3, which country's terms of trade did NOT change between 2000 and 2018? a. Spain b. Sweden c. France d. Denmark ANSWER: a Terms of trade is calculated by dividing a nation’s export price index by its import price RATIONALE: index and multiplying by 100 to express the terms of trade in percentages. Using the terms of trade formula, we find that the terms of trade did not change for Spain (difference 0 percent).

Country Mexico Sweden Spain France Denmark POINTS:

2000 100 100 100 100 100

Terms of Trade 2018 110 107 100 74 96

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Example 2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply 50. Given free trade, small nations tend to benefit the most from trade because they a. are more productive than their large trading partners. b. are less productive than their large trading partners. c. have demand preferences and income levels lower than their large trading partners. d. enjoy terms of trade lying near the opportunity costs of their large trading partners. ANSWER: d FEEDBACK: a. b. c. d. If one nation is significantly larger than the other, the larger nation attains fewer gains from trade while the smaller nation attains most of the gains from trade.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 51. A terms-of-trade index that equals 150 indicates that, compared to the base year, a. it requires a greater output of domestic goods to obtain the same amount of foreign goods. b. it requires a lesser amount of domestic goods to obtain the same amount of foreign goods. c. the price of exports has risen from $100 to $150. d. the price of imports has risen from $100 to $150. ANSWER: b FEEDBACK: a. b. Terms of trade is calculated by dividing a nation‘s export price index by its import price index and multiplying by 100 to express the terms of trade in percentages. A terms-of-trade index that equals 150 indicates that to purchase a given quantity of imports, the nation had to sacrifice about 50 percent fewer exports.

c. d. POINTS: DIFFICULTY:

1 Challenging

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply 52. A term-of-trade index that equals 90 indicates that, compared to the base year, a. it requires a greater output of domestic goods to obtain the same amount of foreign goods. b. it requires a lesser amount of domestic goods to obtain the same amount of foreign goods. c. the price of exports has fallen from $100 to $90. d. the price of imports has fallen from $100 to $90. ANSWER: a FEEDBACK: a. Terms of trade is calculated by dividing a nation‘s export price index by its import price index and multiplying by 100 to express the terms of trade in percentages. A terms-of-trade index that equals 90 indicates that to purchase a given quantity of imports, the nation had to sacrifice about 10 percent more exports.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply 53. Terms of trade is given by a. price of exports/price of imports − 100. b. price of exports/price of imports + 100. c. price of exports/price of imports ÷ 100. d. price of exports/price of imports × 100. ANSWER: d FEEDBACK: a. b. c. d. Terms of trade is calculated by dividing a nation‘s export price index by its import price index and multiplying by 100 to express the terms of trade in percentages: price of exports/price of imports × 100.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Remember 54. A rise in the price of imports or a fall in the price of exports will a. improve the terms of trade. b. worsen the terms of trade. c. expand the production possibilities frontier. d. contract the production possibilities frontier. ANSWER: b FEEDBACK: a. b. Terms of trade is calculated by dividing a nation‘s export price index by its import price index and multiplying by 100 to express the terms of trade in percentages: price of exports/price of imports × 100. A rise in the price of imports or a fall in the price of exports will worsen the terms of trade.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 55. A fall in the price of imports or a rise in the price of exports will a. improve the terms of trade. b. worsen the terms of trade. c. expand the production possibilities frontier. d. contract the production possibilities frontier. ANSWER: a FEEDBACK: a. Terms of trade is calculated by dividing a nation‘s export price index by its import price index and multiplying by 100 to express the terms of trade in percentages: price of exports/price of imports × 100. A fall in the price of imports or a rise in the price of exports will improve the terms of trade.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 56. Under free trade, Canada would not enjoy any gains from trade with Sweden if Canada a. trades at the Canadian rate of transformation. b. trades at Sweden's rate of transformation. c. specializes completely in the production of its export good. d. specializes partially in the production of its export good. ANSWER: a FEEDBACK: a. The slope of the production possibilities frontier measures the marginal rate of transformation that indicates the amount of one product that must be sacrificed per unit increase of another product. Under free trade, Canada would not enjoy any gains from trade with Sweden if Canada trades at the Canadian rate of transformation.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply 57. The dynamic gains from trade include all of the following EXCEPT a. economies of large-scale production resulting in decreasing unit cost. b. increased saving and investment resulting in economic growth. c. increased competition resulting in lower prices and wider range of output. d. increasing comparative advantage leading to specialization. ANSWER: d FEEDBACK: a. b. c. d. Dynamic gains from trade can arise from increased investment in equipment and manufacturing plants, economies of large-scale production, and increased competition that occurs over time. It does not include increasing comparative advantage leading to specialization.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 58. All of the following may be exit barriers EXCEPT a. employee health benefit costs. b. treatment, storage, and disposal costs. c. penalties for terminating contracts with raw material suppliers. d. increasing opportunity cost of production. ANSWER: d FEEDBACK: a. b. c. d. Exit barriers imply a high cost of leaving an unprofitable market or discontinuing a low-profit product. Increasing opportunity cost of production is not an exit barrier.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Mobility, Exit Barriers, and Trade KEYWORDS: BLOOM'S: Understand 59. Improvements in productivity may lead to decreasing comparative costs if a. the assumption of fixed technologies under constant costs is relaxed. b. technologies available to each nation are maintained the same. c. resource endowments do not vary. d. comparative advantage does not change. ANSWER: a FEEDBACK: a. Improvements in productivity may lead to decreasing comparative costs if the assumption of fixed technologies under constant costs is relaxed.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Changing Comparative Advantage KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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60. Modern trade theory contends that the pattern of world trade is governed by a. mercantilism. b. supply conditions only. c. demand conditions only. d. the ability to separate the production process into tasks that can be done in different locations. ANSWER: d FEEDBACK: a. b. c. d. Modern trade theory contends that the pattern of world trade is governed by the ability to separate the production process into tasks that can be done in different locations.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Comparative Advantage and Global Supply Chains: Outsourcing KEYWORDS: BLOOM'S: Understand 61. When nations are of similar size and have similar taste patterns, the gains from trade a. are shared equally between them. b. are impossible to determine. c. are so small that trading is not beneficial. d. are determined by the nation that has comparative advantage in the more essential product. ANSWER: a FEEDBACK: a. If two nations of approximately the same size and with similar taste patterns participate in international trade, the gains from trade will be shared about equally between them.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply 62. Commodity terms of trade measures a. the rate at which exports exchange for imports. Copyright Cengage Learning. Powered by Cognero.

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b. the influence trade has on productivity levels. c. the effect on income of the trading nation. d. the improvement in a nation's welfare. ANSWER: a FEEDBACK: a. Commodity terms of trade is a frequently used measure of the international exchange ratio. It measures the relation between the prices a nation gets for its exports and the prices it pays for its imports.

63. In Figure 2.2, the marginal rate of transformation of wheat into autos is a. one and two-thirds. Copyright Cengage Learning. Powered by Cognero.

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b. two and one-third. c. three-fifths. d. three-sevenths. ANSWER: FEEDBACK:

a a. The marginal rate of transformation of wheat into autos is one and two-thirds (50/30 = 1.67).

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 2.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Apply

64. In Figure 2.2, the marginal rate of transformation of autos into wheat is a. one and two-thirds. b. two and one-third. c. three-fifths. d. three-sevenths. ANSWER: c FEEDBACK: a. b. c. The marginal rate of transformation of autos into wheat is three-fifths (30/50 = 3/5).

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 2.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Apply

65. In Figure 2.2, 1 car can be produced at a cost of a. one and two-thirds tons of wheat. b. two and one-third tons of wheat. Copyright Cengage Learning. Powered by Cognero.

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c. three-fifths tons of wheat. d. three-sevenths tons of wheat. ANSWER: a FEEDBACK: a. One car can be produced at a cost of one and two-thirds tons of wheat (50/30 = 1.67).

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 2.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply

66. In Figure 2.2, 1 ton of wheat can be produced at a cost of a. one and two-thirds cars. b. two and one-third cars. c. three-fifths of a car. d. three-sevenths of a car. ANSWER: c FEEDBACK: a. b. c. One ton of wheat can be produced at a cost of three-fifths of a car (30/50 = 3/5). d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 2.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply 67. Suppose Japan produces Widget A at the lowest cost. Then, Sweden discovers and uses new technology to produce Widget A at a slightly lower cost. What could Japan do to increase its comparative advantage in Widget A? a. specialize on aspects of Widget A for which it is more productive relative to Sweden. b. produce less of Widget A. c. use its manufacturing sector to produce a different kind of widget. d. continue to produce Widget A with no changes in production. Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

a a. Japan could specialize on aspects of Widget A for which it is more productive relative to Sweden.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Changing Comparative Advantage KEYWORDS: BLOOM'S: Analyze 68. According to your text, international trade has little impact on jobs because a. people prefer to buy domestically. b. governments control trade through tariffs. c. trade and unemployment typically move in unison. d. international trade tends to follow the principle of comparative advantage. ANSWER: d FEEDBACK: a. b. c. d. Because international trade tends to follow the principle of comparative advantage, it has little impact on jobs.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The Impact of Trade on Jobs KEYWORDS: BLOOM'S: Understand 69. The example of Rubbermaid in Wooster, Ohio, shows us that a. international trade is always favorable for the U.S. economy. b. tariffs can reduce firm mobility, thus keeping jobs in the U.S. c. although international trade generally benefits all, the movement of firms can have a temporary negative impact on workers in a region. d. prices always rise to account for price increases in raw materials. ANSWER: d FEEDBACK: a. b. c. Copyright Cengage Learning. Powered by Cognero.

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d. The example of Rubbermaid in Wooster, Ohio, shows us that prices always rise to account for price increases in raw materials.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The Impact of Trade on Jobs KEYWORDS: BLOOM'S: Understand 70. Which question is a concern of modern trade theory? a. What constitutes the basis for trade? b. What is the basis for direction of trade? c. What are the gains from trade regarding products exchanged in the world market? d. What are the potential gains from trade for the world as a whole? ANSWER: a FEEDBACK: a. The question that is a concern of modern trade theory is: What constitutes the basis for trade?

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Introduction KEYWORDS: BLOOM'S: Remember 71. Which theory attempted to explain why a favorable balance of trade could only exist in the short run, because it would automatically be eliminated in the long run? a. price-specie-flow doctrine b. theory of absolute advantage c. theory of comparative advantage d. theory of fluctuating incomes ANSWER: a FEEDBACK: a. According to David Hume‘s price-specie-flow doctrine, a favorable trade balance is possible only in the short run because it would automatically be eliminated over time.

b. c. d. POINTS: DIFFICULTY:

1 Easy

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 72. Both Adam Smith and David Ricardo a. were advocates of free trade and opponents of protectionism. b. were advocates of protectionism and opponents of free trade. c. developed trade theories based on the demand side of an economy. d. maintained that precious metals represented the wealth of a nation. ANSWER: a FEEDBACK: a. Both Adam Smith and David Ricardo were advocates of free trade and opponents of protectionism.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 73. In Adam Smith's trade theory, ______ is the only factor of production and is of one quality (homogeneous). a. land b. labor c. capital d. entrepreneurship ANSWER: b FEEDBACK: a. b. In Adam Smith's trade theory, labor is the only factor of production and is of one quality (homogeneous).

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KEYWORDS:

BLOOM'S: Remember

74. David Ricardo's simplified trade model is based on all of these assumptions EXCEPT a. costs do not vary with the level of production. b. the level of technology is fixed for all nations. c. capital is the only factor of production. d. perfect competition prevails in all markets. ANSWER: c FEEDBACK: a. b. c. In David Ricardo's simplified trade model labor, not capital, is the only input (the labor theory of value).

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 75. David Ricardo's simplified trade model assumes all of the following EXCEPT a. trade is balanced, thus ruling out money flows between nations. b. firms make production decisions in an attempt to maximize profit. c. transportation costs are zero. d. tariffs and quotas are used to protect a nation's producers from foreign competition. ANSWER: d FEEDBACK: a. b. c. d. David Ricardo's simplified trade model labor assumes that free trade occurs between nations; that is, no government barriers to trade exist.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 76. Which trade theory asserts that, within the outer limits of the terms of trade, the actual terms of trade is determined by the relative strength of each country's demand for the other country's product? a. theory of reciprocal demand b. overlapping demand theory Copyright Cengage Learning. Powered by Cognero.

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c. theory of income determination d. theory of negative externalities ANSWER: a FEEDBACK: a. According to the theory of reciprocal demand, the actual exchange ratio at which trade occurs depends on the trading partners‘ interacting demands.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Remember 77. Referring to the textbook's example of Babe Ruth, Ruth switched from being a pitcher to being an outfielder and batter because of the a. principle of absolute advantage. b. principle of comparative advantage. c. desire to be a mercantilist. d. concept of economies of scale. ANSWER: b FEEDBACK: a. b. Ruth switched from being a pitcher to being an outfielder and batter because of the principle of comparative advantage.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC13: - Perfect competition TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Remember 78. All of the following are sources of dynamic gains from trade EXCEPT a. specialization and the reallocation of existing resources. b. additional savings and investment that occur over time. c. economies of large-scale production. d. economic stimulus provided by increasing levels of competition. ANSWER: a FEEDBACK: a. Dynamic gains from trade can arise from increased investment in equipment and manufacturing plants, economies of large-scale production, and increased Copyright Cengage Learning. Powered by Cognero.

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competition that occurs over time. Specialization and the reallocation of existing resources are not sources of dynamic gains from trade.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 79. According to Apple, why does the company no longer assemble the majority of its products in the United States? a. Labor costs are higher in the United States. b. The United States has more skilled workers. c. Income taxes are highest in the United States. d. Foreign workers are more skilled and flexible. ANSWER: d FEEDBACK: a. b. c. d. Apple maintains that the vast scale of overseas factories, as well as the flexibility, perseverance, and skills of foreign workers, have become so superior to their American counterparts that manufacturing in the United States is no longer a realistic option for most Apple products.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Comparative Advantage and Global Supply Chains: Outsourcing KEYWORDS: BLOOM'S: Understand 80. The presence of increasing opportunity costs gives rises to production possibilities frontiers that are a. downward-sloping straight lines. b. upward-sloping straight lines. c. bowed outward from the diagram's origin. d. bowed inward toward the diagram's origin. ANSWER: c FEEDBACK: a. b. c. Nations tend to experience increasing-cost conditions. Thus, production possibilities frontiers are drawn bowed outward. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Trading Under Increasing-Cost Conditions KEYWORDS: BLOOM'S: Understand 81. Suppose that a country's post-trade consumption point lies outside of its production possibilities frontier. As a result, the country a. gains from trade. b. loses from trade. c. is not affected by trade. d. reaches the autarky point. ANSWER: a FEEDBACK: a. If a country's post-trade consumption point lies outside of its production possibilities frontier, the country gains from trade.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply 82. If a production possibilities frontier appears as a downward-sloping straight line, which of the following occurs? a. increasing opportunity cost b. decreasing opportunity cost c. constant opportunity cost d. negative opportunity cost ANSWER: c FEEDBACK: a. b. c. Under constant-cost conditions, the production possibilities frontier is a straight line.

d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC14: - Costs of production TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Understand 83. The so-called ______ shows the amount of one product that a nation must sacrifice in order to obtain one more unit of the second product. a. autarkic cost b. marginal rate of transformation c. technology cost d. accounting cost ANSWER: b FEEDBACK: a. b. The marginal rate of transformation indicates the amount of one product that must be sacrificed per unit increase of another product.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Remember 84. International economists use the production possibilities frontier to help explain a. a favorable trade balance. b. a trade surplus. c. levels of consumption. d. a nation’s gain from trade. ANSWER: c FEEDBACK: a. b. c. In the absence of trade, the consumption alternatives of a nation are limited to points along their domestic production possibilities frontiers.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trading Under Increasing-Cost Conditions KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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85. The British economist G. MacDougall compared the labor productivity ratios and export ratios for the United Kingdom and the United States in order to test a. Adam Smith's principle of absolute advantage. b. David Hume's price specie flow mechanism. c. David Ricardo's principle of comparative advantage. d. William Benoit's theory of mercantilism. ANSWER: c FEEDBACK: a. b. c. The first empirical test of Ricardo‘s theory of comparative advantage was made by MacDougall.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Empirical Evidence on Comparative Advantage KEYWORDS: BLOOM'S: Remember 86. Suppose that international trade results in an outward shift in a country's production possibilities frontier. This would be described as a. dynamic gains from trade. b. static gains from trade. c. protectionist gains from trade. d. allocative gains from trade. ANSWER: a FEEDBACK: a. The effect of trade on the country‘s long-run growth rate, which is demonstrated by an outward shift of the production possibilities frontier, is known as the dynamic gains from international trade as opposed to the static effects of reallocating a fixed quantity of resources.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Changing Comparative Advantage KEYWORDS: BLOOM'S: Apply 87. Outsourcing (offshoring) a. harms the economy’s domestic sectors. Copyright Cengage Learning. Powered by Cognero.

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b. applies only to manufacturing industries instead of service industries. c. is the transfer of work previously done by domestic workers to workers located in foreign countries. d. refers to the transfer of money capital from domestic banks to foreign banks. ANSWER: c FEEDBACK: a. b. c. Outsourcing (offshoring) refers to the subcontracting of work to another firm or the purchase of components for a product rather than manufacturing them in order to save on production costs.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Comparative Advantage and Global Supply Chains: Outsourcing KEYWORDS: BLOOM'S: Remember 88. For the United States, outsourcing tends to result from a. a change in the pattern of comparative advantage. b. the desire of domestic firms to keep domestic labor unions happy. c. poor educational systems that result in domestic workers becoming less productive. d. highly restrictive import tariffs and import quotas. ANSWER: a FEEDBACK: a. Outsourcing (offshoring) refers to the subcontracting of work to another firm or the purchase of components for a product rather than manufacturing them in order to save on production costs. For the United States, outsourcing tends to result from a change in the pattern of comparative advantage.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Comparative Advantage and Global Supply Chains: Outsourcing KEYWORDS: BLOOM'S: Understand 89. Although Apple Inc. employs some 40,000 workers in the United States, it licenses most of the production of its iPads and iPhones to Foxconn Technology Group, a company located in a. Mexico. b. China. c. Vietnam. Copyright Cengage Learning. Powered by Cognero.

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d. Cambodia. ANSWER: FEEDBACK:

b a. b. Foxconn Technology Group is a company located in China. c. d.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Comparative Advantage and Global Supply Chains: Outsourcing KEYWORDS: BLOOM'S: Remember 90. A worker quits a steel company and joins an automobile firm. What factor of mobility does this come under? a. movement of factors of production between firms within an industry b. movement of factors of production across industries c. movement of factors of production between countries within an industry d. movement of factors of production between countries across industries ANSWER: b FEEDBACK: a. b. The factor of mobility is a movement of factors of production across industries. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Mobility, Exit Barriers, and Trade KEYWORDS: BLOOM'S: Apply 91. Which is an example of movement of factors of production between countries within an industry? a. an employee quitting work in an automobile firm in the U.S. and joining another b. an employee moving from a steel firm to an automobile firm in the U.S. c. an employee moving from one steel firm to another in a different country. d. an employee moving from a steel firm to an automobile firm in a different country. ANSWER: c FEEDBACK: a. b. c. An employee moving from one steel firm to another in a different country is an example of movement of factors of production between countries within an industry. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Mobility, Exit Barriers, and Trade KEYWORDS: BLOOM'S: Apply 92. Digital trade involves exchange of all EXCEPT a. goods. b. services. c. information. d. equipment. ANSWER: d FEEDBACK: a. b. c. d. Commerce in products and services delivered via the internet is known as digital trade.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Remember 93. The efficiency gains that _______ provide(s) for economies are not a one-time occurrence but an ongoing process that fosters long-run economic growth. a. consumers b. computers c. information exchange d. digital trade ANSWER: d FEEDBACK: a. b. c. d. The efficiency gains that digital trade provide for economies are not a onetime occurrence but an ongoing process that fosters long-run economic growth.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Remember 94. Which is an efficiency gain provided by the internet? a. eliminates competition b. increases cost c. increases market d. minimizes collaboration ANSWER: c FEEDBACK: a. b. c. Continuing increases in productivity arise from decreasing costs, promoting competition, and increasing markets.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 95. Which country is a global leader in developing digital products? a. China b. Japan c. United States d. Russia ANSWER: c FEEDBACK: a. b. c. The United States remains the global leader in developing digital products and online platforms, and in exporting digital services.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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96. Which American companies are participating in international trade as never before? a. Fortune 500 companies b. smaller companies c. medium-sized companies d. smaller and medium-sized companies ANSWER: d FEEDBACK: a. b. c. d. Many of the gains from digital trade have accrued to small and medium-sized

American companies, and America‘s smaller and medium-sized companies are participating in international trade as never before.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Remember 97. Incomplete specialization may be caused by a. increasing opportunity cost. b. unrestricted trade. c. constant opportunity cost. d. decreasing opportunity cost. ANSWER: a FEEDBACK: a. Incomplete specialization may be caused by increasing opportunity cost. b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Increasing-Cost Conditions KEYWORDS: BLOOM'S: Understand 98. According to Adam Smith, mutually beneficial trade requires each nation to be the least-cost producer of at least one good that it can export to its trading partner. a. True b. False ANSWER: True FEEDBACK: Correct Smith maintained that each nation would find it advantageous to specialize in the Copyright Cengage Learning. Powered by Cognero.

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production of those goods for which it had an absolute advantage. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 99. If an economy is characterized by increasing opportunity costs, increasing the production of steel by constant amounts results in a constant rate of decrease in the production of autos. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Under increasing-cost conditions, the production possibilities frontiers are drawn bowed outward. The slope of the production possibilities frontier measures the marginal rate of transformation, which indicates the amount of one product that must be sacrificed per unit increase of another product.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC14: - Costs of production TOPICS: Trading under Increasing-Cost Conditions KEYWORDS: BLOOM'S: Apply 100. If Canada produces computers at a lower relative cost than Germany, Canada is said to have a comparative disadvantage in computers. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Comparative costs can be illustrated with the production possibilities frontier for one nation, Canada.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC14: - Costs of production TOPICS: Trading under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply Copyright Cengage Learning. Powered by Cognero.

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101. Mercantilism refers to a system of restraints on imports and the promotion of exports, as used by governments in the 1600s and 1700s. a. True b. False ANSWER: True FEEDBACK: Correct Mercantilists contended that the government should adopt trade controls to limit imports and promote exports. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 102. According to the trade model of David Ricardo, the direction of trade is determined by absolute advantage. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Ricardo argued that mutually gainful trade is possible even if one nation has an absolute disadvantage in the production of both commodities compared with the other nation.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Understand 103. Adam Smith and David Ricardo reasoned that in a world of two countries, at least one country will be worse off as the result of trade. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Smith and Ricardo reasoned that in a world of two countries, both countries would benefit as the result of trade.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Historical Development of Modern Trade Theory BLOOM'S: Understand

104. In his empirical test of the principle of comparative advantage, G. MacDougall found that relatively high export ratios are associated with relatively high labor productivity. a. True b. False ANSWER: True FEEDBACK: Correct Comparing the export patterns of the United States and the United Kingdom, MacDougall found that wage rates and labor productivity were important determinants of international trade patterns. Relatively high export ratios are associated with relatively high labor productivity. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Empirical Evidence on Comparative Advantage KEYWORDS: BLOOM'S: Remember 105. Analysts widely agree that Boeing’s use of production outsourcing for its 787 has been highly successful in generating greater efficiencies in jetliner production. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Outsourcing has created problems for Boeing in the production of jetliners.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Comparative Advantage and Global Supply Chains: Outsourcing KEYWORDS: BLOOM'S: Understand 106. According to the mercantilists, a nation's welfare would improve if it maintained a surplus of exports over imports. a. True b. False ANSWER: True FEEDBACK: Correct The mercantilists contended that the government should adopt trade controls to limit imports and promote exports. Incorrect

POINTS:

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DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 107. The mercantilists maintained that a free-trade policy best enhances a nation's welfare. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The mercantilists contended that the government should adopt trade controls to limit imports and promote exports.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 108. The mercantilists contended that because one nation's gains from trade come from the expense of its trading partners, not all nations could simultaneously realize gains from trade. a. True b. False ANSWER: True FEEDBACK: Correct The mercantilists contended that one nation could gain from trade only at the expense of its trading partners, because the stock of world wealth was fixed at a given moment in time and not all nations could simultaneously have a favorable trade balance. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 109. According to the price-specie-flow-doctrine, a trade-surplus nation would experience gold outflows, a decrease in its Copyright Cengage Learning. Powered by Cognero.

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money supply, and a fall in its price level. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect According to David Hume‘s price-specie-flow doctrine, a favorable trade balance is possible only in the short run because it would automatically be eliminated over time. A trade surplus results in an inflow of gold and silver, which increases the amount of money in circulation. This leads to a rise in the price level relative to that of the nation‘s trading partners, which leads to the purchase of foreignproduced goods while exports decline. As a result, the country‘s trade surplus would eventually be eliminated.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 110. According to the principle of absolute advantage, international trade is beneficial to the world if one nation has an absolute cost advantage in the production of one good while the other nation has an absolute cost advantage in the other good. a. True b. False ANSWER: True FEEDBACK: Correct According to the principle of absolute advantage, each nation would find it advantageous to specialize in the production of those goods for which it had an absolute advantage. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 111. The Ricardian theory of comparative advantage assumes only two nations and two products, that labor can move freely within a nation, and that perfect competition exists in all markets. a. True b. False ANSWER: True FEEDBACK: Correct Ricardo formulated a simplified model based on several assumptions, including Copyright Cengage Learning. Powered by Cognero.

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that the world consists of two nations and two products, that labor can move freely within a nation, and that perfect competition exists in all markets. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Understand 112. A nation's trade triangle denotes its exports, imports, and terms of trade. a. True b. False ANSWER: True FEEDBACK: Correct A nation‘s trade triangle denotes its exports, imports, and terms of trade. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Production Possibilities Frontiers KEYWORDS: BLOOM'S: Understand 113. International trade leads to increased welfare if a nation can achieve a post-trade consumption point lying inside of its production-possibilities frontier. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect International trade leads to increased welfare if a nation can achieve a post-trade consumption point lying outside of its production-possibilities frontier.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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114. If productivity in the German computer industry grows faster than it does in the Japanese computer industry, the opportunity cost of each computer produced in Japan increases relative to the opportunity cost of a computer produced in Germany. a. True b. False ANSWER: True FEEDBACK: Correct The comparative advantage accruing to manufacturers of a particular product in a particular country can vanish over time when productivity growth falls behind that of foreign competitors. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Changing Comparative Advantage KEYWORDS: BLOOM'S: Apply 115. With constant opportunity costs, a nation will achieve the greatest possible gains from trade if it partially specializes in the production of the commodity of its comparative disadvantage. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Complete specialization of a country in the production of a single commodity may occur in the case of constant costs.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Increasing-Cost Conditions KEYWORDS: BLOOM'S: Understand 116. With increasing opportunity costs, comparative advantage depends on a nation's supply conditions and demand conditions; with constant opportunity costs, comparative advantage depends only on demand conditions. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Under constant-cost conditions, domestic relative prices are determined exclusively by a nation‘s supply conditions. Under increasing-cost conditions, relative product prices in each country are determined by both supply and demand factors. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Increasing-Cost Conditions KEYWORDS: BLOOM'S: Understand 117. The existence of exit barriers tends to delay the closing of inefficient firms that face international competitive disadvantages. a. True b. False ANSWER: True FEEDBACK: Correct Exit barriers refer to various cost conditions that make lengthy exit a rational response for high-cost producers. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Mobility, Exit Barriers, and Trade KEYWORDS: BLOOM'S: Understand 118. MacDougall's empirical study of comparative advantage was based on the notion that a product's labor cost is underlaid by labor productivity and the wage rate. a. True b. False ANSWER: True FEEDBACK: Correct MacDougall found that wage rates and labor productivity were important determinants of international trade patterns. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Empirical Evidence on Comparative Advantage KEYWORDS: BLOOM'S: Remember 119. The basic idea of mercantilism was that wealth consisted of the goods and services produced by a nation. Copyright Cengage Learning. Powered by Cognero.

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a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect To the mercantilists, stocks of precious metals represented the wealth of a nation.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Understand 120. According to Adam Smith, international trade was a "win-win" situation because all nations could enjoy gains from trade. a. True b. False ANSWER: True FEEDBACK: Correct Smith challenged the mercantilist views on trade by arguing that, with free trade, all nations could simultaneously enjoy gains from trade. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 121. Complete specialization usually occurs under the assumption of increasing-opportunity costs. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Complete specialization in production is improbable in the case of increasing costs.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC1: - Gains from trade, specialization, and trade Trading Under Constant-Cost Conditions BLOOM'S: Remember

122. Smith contended that gold, silver, and other precious metals constituted the wealth of a nation. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect To the mercantilists, stocks of precious metals represented the wealth of a nation.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Remember 123. The marginal rate of transformation equals the absolute slope of a country's production possibilities frontier. a. True b. False ANSWER: True FEEDBACK: Correct The slope of the production possibilities frontier measures the marginal rate of transformation, which indicates the amount of one product that must be sacrificed per unit increase of another product. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Increasing-Cost Conditions KEYWORDS: BLOOM'S: Understand 124. If Argentina has a comparative advantage over Brazil in beef relative to coffee, Argentina will specialize in beef production. a. True b. False ANSWER: True FEEDBACK: Correct A nation should specialize in the production and export of the commodity for which it has a comparative advantage. Copyright Cengage Learning. Powered by Cognero.

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Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Historical Development of Modern Trade Theory KEYWORDS: BLOOM'S: Apply 125. Although John Stuart Mill recognized that the region of mutually beneficial trade is bounded by the cost ratios of two countries, it was not until David Ricardo developed the theory of reciprocal demand that the equilibrium terms of trade could be determined. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Ricardian trade theory relied solely on supply analysis; it was not able to determine actual terms of trade. This limitation was addressed by Mill in his theory of reciprocal demand.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 126. According to Mill, if we know the domestic demand expressed by both trading partners for both products, the equilibrium terms of trade can be defined. a. True b. False ANSWER: True FEEDBACK: Correct Mill‘s theory asserts that within the limits to the terms of trade, the actual terms of trade are determined by the intensity of each country‘s demand for the other country‘s product. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Understand

127. Assume that Canada has a comparative advantage in wheat and a comparative disadvantage in autos. As the Canadian demand for wheat increases, Canada's equilibrium terms of trade improves. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If Canada has a comparative advantage in wheat and a comparative disadvantage in autos, as the Canadian demand for wheat increases, Canada's equilibrium terms of trade worsens.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Changing Comparative Advantage KEYWORDS: BLOOM'S: Apply 128. The theory of reciprocal demand best applies when two countries are of equal economic size, so that the demand conditions of each nation have a noticeable impact on market prices. a. True b. False ANSWER: True FEEDBACK: Correct The reciprocal-demand theory best applies when both nations are of equal economic size, so that the demand of each nation has a noticeable effect on market price. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 129. The theory of reciprocal demand best applies when one country has a "large" economy and the other country has a "small" economy. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The reciprocal-demand theory best applies when both nations are of equal economic size, so that the demand of each nation has a noticeable effect on Copyright Cengage Learning. Powered by Cognero.

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market price.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 130. If two nations of approximately the same size and with similar taste patterns participate in international trade, the gains from trade tend to be shared about equally between them. a. True b. False ANSWER: True FEEDBACK: Correct If two nations of approximately the same size and with similar taste patterns participate in international trade, the gains from trade will be shared about equally between them. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 131. The expression "importance of being unimportant" suggests that if one nation is much larger than the other, the larger nation realizes most of the gains from trade while the smaller nation realizes fewer gains from trade. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If one nation is significantly larger than the other, the larger nation attains fewer gains from trade while the smaller nation attains most of the gains from trade.

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132. An improvement in a nation's terms of trade occurs if the prices of its exports rise relative to the prices of its imports over a given time. a. True b. False ANSWER: True FEEDBACK: Correct Terms of trade measures the relation between the prices a nation gets for its exports and the prices it pays for its imports. An improvement in a nation's terms of trade occurs if the prices of its exports rise relative to the prices of its imports over a given time. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 133. If a country's terms of trade worsens, it must exchange fewer exports for a given amount of imports. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Terms of trade measures the relation between the prices a nation gets for its exports and the prices it pays for its imports. If a country's terms of trade worsens, it must exchange fewer exports for a given amount of imports.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 134. Terms of trade represents the rate of exchange between a country's exports and imports. a. True b. False ANSWER: True FEEDBACK: Correct Terms of trade measures the relation between the prices a nation gets for its exports and the prices it pays for its imports. Incorrect

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 135. Assume 2000 to be the base year. If by the end of 2018 a country's export price index rose from 100 to 130 while its import price index rose from 100 to 115, its terms of trade would equal 113. a. True b. False ANSWER: True FEEDBACK: Correct The commodity terms of trade is calculated by dividing a nation‘s export price index by its import price index and multiplying by 100 to express the terms of trade in percentages: (130/115) x 100 = 113. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply 136. Assume 2000 to be the base year. If by the end of 2018 a country's export price index rose from 100 to 140 while its import price index rose from 100 to 160, its terms of trade would equal 120. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The commodity terms of trade is calculated by dividing a nation‘s export price index by its import price index and multiplying by 100 to express the terms of trade in percentages: (140/160) x 100 = 88.

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137. Assume 2000 to be the base year. If by the end of 2018 a country's export price index rose from 100 to 125 while its import price index rose from 100 to 125, its terms of trade would equal 100. a. True b. False ANSWER: True FEEDBACK: Correct The commodity terms of trade is calculated by dividing a nation‘s export price index by its import price index and multiplying by 100 to express the terms of trade in percentages: (125/125) x 100 = 100. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Apply 138. The commodity terms of trade is found by dividing a country's import price index by its export price index. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The commodity terms of trade is calculated by dividing a nation‘s export price index by its import price index and multiplying by 100 to express the terms of trade in percentages.

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 140. For the commodity terms of trade to improve, a country's import price index must rise relative to its export price index over a given time. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The commodity terms of trade is calculated by dividing a nation‘s export price index by its import price index and multiplying by 100 to express the terms of trade in percentages.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 141. Is it possible to add up the preferences of all consumers in an entire nation? No. It is impossible to make interpersonal comparisons of satisfaction, and thus it is not ANSWER: possible to add up preferences. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Increasing-Cost Conditions KEYWORDS: BLOOM'S: Apply 142. Who gains more from trade when nations are of unequal economic size? If one nation is significantly larger than the other, the larger nation attains fewer gains ANSWER: from trade, while the smaller nation captures most of the gains from trade. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 143. Is it possible for comparative advantage to change, thus changing the direction of trade? Lagging productivity growth may cause a country to lose its comparative advantage. In a ANSWER: two-product, two-country model, this would change the direction of trade. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Changing Comparative Advantage KEYWORDS: BLOOM'S: Understand 144. Explain the law of comparative advantage. The law of comparative advantage asserts that, with trade, each country will find it ANSWER: favorable to specialize in the production of the good of its comparative advantage and will trade part of this for the good of its comparative disadvantage. Taking advantage of specialization can result in production gains. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 145. Discuss the pitfalls of outsourcing, especially as experienced by Boeing. Boeing outsourced its production capabilities for the Boeing 787 Dreamliner to facilities in ANSWER: several different countries, each of which made one component part of the aircraft. The plane would be assembled in the U.S. Boeing also required these manufacturers, as a condition of getting the contract for production, to fund part of the development of the plane. To save money, some manufacturers outsourced a portion of their part of the job, causing quality problems and production delays. By giving up control over its supply chain, Boeing suffered from delays and parts that did not meet the requirements and could not be assembled. Production of the planes was 4 years behind schedule and costly. POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Comparative Advantage and Global Supply Chains: Outsourcing KEYWORDS: BLOOM'S: Understand 146. Is it possible to estimate the gains from trade? When a nation trades, it enjoys a larger income owing to a wider range of goods available ANSWER: to consumers. Trade also has a positive influence on productivity levels. However, it is extremely difficult to measure these gains, because it requires knowledge of what a nation's imports would cost if it produced them instead of purchasing them from a less expensive source abroad. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Trading Under Constant-Cost Conditions KEYWORDS: BLOOM'S: Understand 147. How does Southwest Airlines justify its outsourcing of some of its telephone reservation work to India? Southwest Airlines maintains that outsourcing helps reduce the firm’s costs and increases ANSWER: its competitiveness. Southwest Airlines also claims that outsourcing allows the firm to repatriate its earnings to the United States and purchase goods from other American companies as business expands. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Comparative Advantage and Global Supply Chains: Outsourcing KEYWORDS: BLOOM'S: Remember

Chapter 03: Sources of Comparative Advantage 1. Which theory suggests that factor (resource) endowments determine a nation’s comparative advantage? a. the Linder theory b. the product life cycle theory Copyright Cengage Learning. Powered by Cognero.

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c. the MacDougall theory d. the Heckscher-Ohlin theory ANSWER: d FEEDBACK: a. b. c. d. Heckscher and Ohlin maintained that factor (resource) endowments determine a nation‘s comparative advantage. Their theory became known as the Heckscher–Ohlin theory.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Remember 2. According to Staffan Linder, trade between two countries tends to be most pronounced when the countries a. have similar tastes and preferences. b. experience economies of large-scale production over large output levels. c. have good political relationships. d. have approximately the same per capita income levels. ANSWER: d FEEDBACK: a. b. c. d. The Linder hypothesis explains which nations will most likely trade with each other. Nations with similar per capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Overlapping Demands as a Basis for Trade KEYWORDS: BLOOM'S: Remember 3. Which theory emphasizes the role of technology in determining the trade patterns of manufactured products? a. factor-endowment theory b. theory of comparative advantage c. product life cycle theory d. theory of overlapping demands Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

c a. b. c. The product life cycle theory focuses on the role of technological innovation as a key determinant of the trade patterns in manufactured products.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Understand 4. Which products would LEAST apply to the product life cycle theory? a. calculators and computers b. coal and crude oil c. home movie cameras d. office machinery ANSWER: b FEEDBACK: a. b. The product life cycle theory emphasizes manufactured goods such as electronic products and office machinery. Coal and crude oil are commodities.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Understand 5. According to the factor-endowment theory, which factor is the ultimate determinant of comparative advantage? a. productivities of labor inputs b. tastes and preferences among nations c. changes in technologies over time d. relative differences in resources ANSWER: d FEEDBACK: a. b. c. Copyright Cengage Learning. Powered by Cognero.

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d. The factor-endowment theory emphasizes the role of relative differences in resource endowments as the ultimate determinant of comparative advantage.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 6. Concerning the influence that transportation costs have on the location of industry, which of the following industries was likely to have the greatest profit gain by locating the production facilities close to resource supplies? a. autos b. steel c. soft drinks d. valuable electronics goods ANSWER: b FEEDBACK: a. b. Goods like steel are heavy and bulky, resulting in a relatively high cost of transporting them compared with the value of the goods themselves. As a result, the steel industry was likely to have the greatest profit gain by locating the production facilities close to resource supplies.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Transportation Costs and Comparative Advantage KEYWORDS: BLOOM'S: Evaluate 7. Assume that Country A, in the absence of trade, finds itself relatively abundant in labor and relatively scarce in land. The factor endowment theory reasons that, with free trade, the internal distribution of national income in Country A will change in favor of a. labor. b. land. c. both labor and land. d. neither labor nor land. ANSWER: a FEEDBACK: a. The factor endowment theory reasons that with free trade, the relative differences in resource prices between nations tend to be eliminated. Thus, if Country A is relatively abundant in labor, then the internal distribution of national income in Country A will change in favor of labor. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Apply 8. When considering the effects of transportation costs, the conclusions of our trade model must be modified. This is because transportation costs result in a. lower trade volume, higher import prices, smaller gains from trade. b. lower trade volume, lower import prices, smaller gains from trade. c. higher trade volume, higher import prices, smaller gains from trade. d. higher trade volume, lower import prices, greater gains from trade. ANSWER: a FEEDBACK: a. Transportation costs tend to reduce the volume of international trade by increasing the prices of traded goods, the degree of specialization, in production among the nations concerned, and thus the gains from trade.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Transportation Costs and Comparative Advantage KEYWORDS: BLOOM'S: Understand 9. Chinese manufacturers face rising wages because of a. China's one-child policy. b. increased migration to the cities. c. reductions in Chinese interest rates. d. restrictions on Chinese labor unions. ANSWER: a FEEDBACK: a. China‘s one-child policy has resulted in the number of young adults shrinking and labor scarcity.

b. c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 10. Assume the cost of transporting autos from Japan to Canada exceeds the pre-trade price difference for autos between Japan and Canada. Trade in autos is a. impossible without subsidies of some form. b. possible ,but only with sufficiently high taxes. c. highly profitable, but only for the largest firms. d. moderately profitable, but only for the smallest firms. ANSWER: a FEEDBACK: a. The basis for trade ceases to exist when the Japanese auto price plus the transportation cost rises to equal Canada‘s auto price. Trade in autos is impossible without subsidies of some form.

d. POINTS:

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DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 12. Hong Kong is relatively abundant in labor, while Canada is relatively abundant in capital. In both countries, the production of shirts is relatively more labor intensive than the production of computers. According to the factorendowment theory, Hong Kong will have a(n) a. absolute advantage in the production of shirts. b. absolute advantage in the production of computers. c. comparative advantage in the production of shirts. d. comparative advantage in the production of computers. ANSWER: c FEEDBACK: a. b. c. The factor-endowment theory emphasizes the role of relative differences in resource endowments as the ultimate determinant of comparative advantage. Hong Kong will have a comparative advantage in the production of shirts.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Analyze 13. For textile production, the U.S. capital/labor ratio is 0.5 and China's capital/labor ratio is 0.02. This means that a. the United States is the relatively capital scarce country. b. China is the relatively labor scarce country. c. China is the relatively capital abundant country. d. the United States is the relatively capital abundant country. ANSWER: d FEEDBACK: a. b. c. d. Because the U.S. capital-labor ratio exceeds China‘s capital-labor ratio, we call the United States relatively capital abundant and China relatively capital scarce.

POINTS: DIFFICULTY:

1 Moderate

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c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Understand 15. A firm is said to enjoy economies of scale over the range of output for which the long-run average cost is a. increasing. b. constant. c. decreasing. d. stagnant. ANSWER: c FEEDBACK: a. b. c. Economies of scale (increasing returns to scale) exist when the expansion of the scale of production capacity of a firm or industry causes total production costs to increase less proportionately than output.

d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Economies of Scale and Comparative Advantage KEYWORDS: BLOOM'S: Understand 16. A product will be internationally traded as long as the pre-trade price differential between the trading partners is a. greater than the cost of transporting it between them. b. equal to the cost of transporting it between them. c. less than the cost of transporting it between them. d. variable, but always decreasing. ANSWER: a FEEDBACK: a. Transportation costs tend to reduce the volume of international trade by increasing the prices of traded goods, the degree of specialization, in production among the nations concerned, and thus the gains from trade. A product will be internationally traded as long as the pre-trade price differential between the trading partners is greater than the cost of transporting it between them.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Transportation Costs and Comparative Advantage KEYWORDS: BLOOM'S: Understand 17. Which of the following suggests that by widening the market's size, international trade can permit longer production runs for manufacturers, which leads to increasing efficiency? a. economies of scale b. diseconomies of scale c. comparative cost theory d. absolute cost theory ANSWER: a FEEDBACK: a. Economies of scale suggest that by widening the size of the domestic market, international trade permits firms to take advantage of longer production runs and increasing efficiencies (such as mass production). Such economies of scale can be translated into lower product prices, which improve a firm‘s competitiveness.

b. c. d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Economies of Scale and Comparative Advantage KEYWORDS: BLOOM'S: Understand 18. Which term best applies to the theory of overlapping demands? a. manufactured goods b. human services c. primary products d. agricultural goods ANSWER: a FEEDBACK: a. The theory of overlapping demands explains which nations will most likely trade with each other. Nations with similar per-capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Overlapping Demands as a Basis for Trade KEYWORDS: BLOOM'S: Apply 19. Relative to Kenya, Japan has relatively higher economies of large-scale production, an abundance of resources, higher labor costs, and more research and development. The Heckscher-Ohlin theory explains Japan’s comparative advantage over Kenya as the result of differences in countries' a. economies of large-scale production. b. relative abundance of various resources. c. relative costs of labor. d. research and development. ANSWER: b FEEDBACK: a. b. The Heckscher-Ohlin theory maintains that factor (resource) endowments

determine a nation‘s comparative advantage. It explains Japan‘s comparative advantage over Kenya as the result of differences in relative abundance of various resources.

c. d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Apply 20. Which statement is true about automation of American factories? a. Automation has led to an increase in the number of factory jobs available. b. Automation has allowed American industries to produce more with fewer workers. c. The cost of using robots and automation in factories is steadily rising. d. Automation of factories has not benefited American workers. ANSWER: b FEEDBACK: a. b. Automation has allowed American industries to produce more with fewer workers.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 21. In the United States, most low-skilled manufacturing jobs have been lost due to a. unfair tariffs. b. international trade. c. immigrants. d. robots and other automation technology. ANSWER: d FEEDBACK: a. b. c. d. Automation has allowed American industries to produce more with fewer workers. Most low-skilled manufacturing jobs have been lost due to robots and other automation technology.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 22. The theory of overlapping demands argues that consumer demand within nations is strongly determined by a. tastes and preferences. b. expectations of future interest rate levels. c. per-capita income levels. d. labor productivities. ANSWER: c FEEDBACK: a. b. c. The theory of overlapping demands explains which nations will most likely trade with each other. Nations with similar per-capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods.

nation‘s comparative advantage. Their theory became known as the Heckscher–Ohlin theory. According to the factor-endowment theory, a country exports goods for which its resource endowments are most suited.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Factor Endowments as a Source of Comparative Advantage BLOOM'S: Understand

24. According to the factor-endowment theory, countries with an abundance of unskilled labor, like China, are likely to a. have higher labor costs. b. have an economic advantage. c. export goods like textiles and toys. d. export goods like aircraft and machinery. ANSWER: c FEEDBACK: a. b. c. The factor-endowment theory emphasizes the role of relative differences in resource endowments as the ultimate determinant of comparative advantage. Countries with an abundance of unskilled labor are likely to export goods like textiles and toys.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Apply 25. For the United States, empirical studies indicate that over the past two decades the cost of international transportation relative to the value of U.S. imports has a. increased. b. decreased. c. not changed. d. remained stagnant on presidential election years. ANSWER: b FEEDBACK: a. b. A product will be internationally traded as long as the pre-trade price differential between the trading partners is greater than the cost of transporting it between them. For the United States, empirical studies indicate that over the past two decades the cost of international transportation relative to the value of U.S. imports has decreased.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC1: - Gains from trade, specialization, and trade Transportation Costs and Comparative Advantage BLOOM'S: Remember

26. Should international transportation costs decrease, the effect on international trade would include a. an increase in the total volume of trade. b. a smaller gain from trade for exporters. c. a decline in exported goods. d. a decrease in the level of specialization in production. ANSWER: a FEEDBACK: a. A product will be internationally traded as long as the pre-trade price differential between the trading partners is greater than the cost of transporting it between them. Should international transportation costs decrease, the effect on international trade would include an increase in the total volume of trade.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Transportation Costs and Comparative Advantage KEYWORDS: BLOOM'S: Understand 27. Which concept explains why countries are generally motivated to manufacture goods that have a high domestic demand? a. demand conditions b. external economies of scale c. home market effect d. overlapping demand ANSWER: d FEEDBACK: a. b. c. d. The theory of overlapping demand explains why firms within a country are generally motivated to manufacture goods for which there is a large domestic market.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Overlapping Demands as a Basis for Trade BLOOM'S: Understand

28. External economies of scale can occur when a. an industry's firms become more dispersed. b. there is a decrease in specialized workers. c. firms seek out consultants for technical knowledge. d. knowledge of production technology spreads through direct contacts. ANSWER: d FEEDBACK: a. b. c. d. External economies of scale exist when the firm‘s average costs decrease as

the industry‘s output increases. This can occur when new knowledge about production technology spreads among firms in the area through direct contacts among firms or as workers transfer from firm to firm.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Economies of Scale and Comparative Advantage KEYWORDS: BLOOM'S: Understand 29. Internal economies of scale provide the incentive for countries to a. specialize in a few products. b. manufacture a wider range of products. c. specialize in products that are in demand abroad. d. manufacture only a few units of products that are in demand. ANSWER: a FEEDBACK: a. Internal economies of scale arise within a firm itself and are built into the shape of its long-run average cost curve. It provides the incentive for countries to reduce unit costs because of labor specialization, managerial specialization, efficient capital, and other factors.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

Economies of Scale and Comparative Advantage BLOOM'S: Understand

30. Proponents of ____ maintain that government should enact policies that encourage the development of emerging "sunrise" industries. a. product life cycle policy b. static comparative advantage policy c. intra-industry trade policy d. industrial policy ANSWER: d FEEDBACK: a. b. c. d. Industrial policy seeks to encourage the development of emerging, sunrise industries through such measures as tax incentives and research and development subsidies.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

Government Regulatory Policies and Comparative Advantage BLOOM'S: Apply

32. Stringent governmental regulations (e.g., air quality standards) imposed on domestic steel manufacturers tend to a. increase the competitiveness of domestic steel manufacturers in the international market. b. reduce the competitiveness of domestic steel manufacturers in the international market. c. increase the profitability and productivity of domestic steel manufacturers. d. reduce the market share of foreign firms selling steel in the domestic market. ANSWER: b FEEDBACK: a. b. Business regulations can affect the competitive position of industries. These regulations often result in cost-increasing compliance measures which can detract from the competitiveness of domestic industries.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Government Regulatory Policies and Comparative Advantage KEYWORDS: BLOOM'S: Understand 33. Dynamic comparative advantage involves a. industrial policy to create comparative advantage. b. less governmental involvement in the economy. c. reduced rules and regulations imposed by foreign governments. d. accepting and working with existing resources. ANSWER: a FEEDBACK: a. Dynamic comparative advantage refers to the creation of comparative advantage through the mobilization of skilled labor, technology, and capital; it can be initiated by either the private or public sector. When government attempts to create comparative advantage, the term industrial policy applies.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Dynamic Comparative Advantage: Industrial Policy KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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34. The simultaneous import and export of computers by Germany is an example of a. intra-industry trade. b. inter-industry trade. c. perfect competition. d. imperfect competition. ANSWER: a FEEDBACK: a. The exchange of goods among nations includes intra-industry trade, two-way trade in a similar product. Intra-industry trade occurs in homogeneous goods as well as in differentiated products.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Intra-Industry Trade KEYWORDS: BLOOM'S: Understand 35. Intra-industry trade in differentiated products can be explained by a. the product life cycle theory. b. the principle of comparative advantage. c. differences in per capita income. d. overlapping demand segments in trading nations. ANSWER: d FEEDBACK: a. b. c. d. The exchange of goods among nations includes intra-industry trade, two-way trade in a similar product. Intra-industry trade occurs in homogeneous goods as well as in differentiated products. Intra-industry trade in differentiated products can be explained by overlapping demand segments in trading nations.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Intra-Industry Trade KEYWORDS: BLOOM'S: Understand 36. Intra-industry trade can be explained in part by Copyright Cengage Learning. Powered by Cognero.

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a. Adam Smith's principle of absolute advantage. b. perfect competition in product markets. c. diseconomies of large-scale production. d. transportation costs between and within nations. ANSWER: d FEEDBACK: a. b. c. d. The exchange of goods among nations includes intra-industry trade, two-way trade in a similar product. Intra-industry trade occurs in homogeneous goods as well as in differentiated products. Intra-industry trade can be explained in part by transportation costs between and within nations.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Intra-Industry Trade KEYWORDS: BLOOM'S: Understand 37. Which trade theory suggests that comparative advantage tends to shift from one nation to another as a product matures? a. factor-price equalization theory b. factor-endowment theory c. product life cycle theory d. theory of comparative advantage ANSWER: c FEEDBACK: a. b. c. The product life cycle theory suggests that a newly produced good, once exported, could ultimately end up being imported as the technology is transferred to foreign nations.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Understand 38. Which theory considers the income distribution effects of trade in the short run? a. specific-factors theory Copyright Cengage Learning. Powered by Cognero.

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b. product life cycle theory c. factor-endowment theory d. Stolper–Samuelson theorem ANSWER: a FEEDBACK: a. The specific-factors theory analyzes the income distribution effects of trade in the short run when resources are immobile among industries. It concludes that resources specific to import-competing industries tend to lose as a result of trade while resources specific to exporting industries tend to gain as a result of trade.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Remember 39. The United States argues that Airbus receives government subsidies in Europe, which places the U.S. at a disadvantage. Which of the following statements reflects a common oppositional European trade view? a. ―All of our industries receive tax support from the government, not just Airbus.‖ b. ―Without subsidies, Airbus will cooperate with Russia to build airplanes.‖ c. ―Although indirect, Boeing also receives subsidies from the United States government.‖ d. ―If we do not offer subsidies for European-made planes, production will shift to East Asia.‖ ANSWER: c FEEDBACK: a. b. c. When government attempts to create comparative advantage, the term industrial policy applies. The statement that reflects a common oppositional European trade view is: ―Although indirect, Boeing also receives subsidies from the United States government.‖

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Dynamic Comparative Advantage: Industrial Policy KEYWORDS: BLOOM'S: Analyze 40. From 2000-2010, which nation lost thousands of jobs to China, where average wages were half of those of this Copyright Cengage Learning. Powered by Cognero.

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country? a. Japan b. Canada c. Germany d. Mexico ANSWER: FEEDBACK:

d a. b. c. d. From 2000-2010, Mexico lost thousands of jobs to China, where average wages were half of those of Mexico.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Remember 41. Boeing Inc. has criticized the Airbus Company's competitiveness on the grounds that Airbus benefits from a. import tariffs protecting Airbus in the European market. b. import quotas protecting Airbus in the European market. c. lenient environmental standards of European governments. d. subsidies supplied by European governments. ANSWER: d FEEDBACK: a. b. c. d. Boeing Inc. has criticized the Airbus Company's competitiveness on the grounds that Airbus benefits from subsidies supplied by European governments.

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b. U.S. aircraft firms have benefited from military-sponsored programs of the U.S. government. c. Airbus' subsidies were totally repaid as the firm realized profits on its aircraft sales. d. without subsidies to Airbus, Europe would be dependent on the United States as a supplier of aircrafts. ANSWER: c FEEDBACK: a. b. c. To justify the subsidies it has received from European governments, the Airbus Company has used all of these arguments, except that Airbus' subsidies were totally repaid as the firm realized profits on its aircraft sales.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Dynamic Comparative Advantage: Industrial Policy KEYWORDS: BLOOM'S: Understand 43. Environmental regulation in the United States a. mostly benefits U.S. steel industries. b. is especially damaging to the forestry industry. c. hurts certain industries while making others more competitive. d. improves quality of life for Americans but harms the economy. ANSWER: c FEEDBACK: a. b. c. Business regulations can affect the competitive position of industries. These regulations often result in cost-increasing compliance measures, which can detract from the competitiveness of domestic industries. Environmental regulation in the United States hurts certain industries while making others more competitive.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Government Regulatory Policies and Comparative Advantage KEYWORDS: BLOOM'S: Understand 44. Which of the following is NOT a claim made by industrial-policy critics? a. Industrial policies result in protectionism and inhibit trade. b. Industrial policies can promote "pork barrel" politics. Copyright Cengage Learning. Powered by Cognero.

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c. Industries do not receive enough governmental assistance. d. Trading nations will develop policy that encourages "beggar-thy-neighbor" practices. ANSWER: c FEEDBACK: a. b. c. Industrial-policy critics contend that if all trading nations take the route of using a combination of trade restrictions on imports and subsidies on exports, a ―beggar-thy-neighbor‖ process of trade-inhibiting protectionism would result. They also point out that the implementation of industrial policies can result in pork barrel politics, with politically powerful industries receiving government assistance.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Dynamic Comparative Advantage: Industrial Policy KEYWORDS: BLOOM'S: Understand 45. Economists David Autor, David Dorn, and Gordon Hanson investigated the effects of trade with China on blue-collar American jobs. Which statement reflects their findings? a. Blue-collar jobs are most affected in industries where China has a comparative advantage. b. Trade with China has resulted in widespread loss of blue-collar jobs across the U.S. c. Trade with China has not resulted in a loss of American jobs. d. American labor markets have been responsive and flexible in response to globalization and trade with China. ANSWER: a FEEDBACK: a. Autor and colleagues and others show evidence that adjustment in America‘s regional labor markets has been quite slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a decade after China‘s trade shock emerged. Blue-collar jobs are most affected in industries where China has a comparative advantage.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 46. Which of the following is NOT an assumption of the factor-endowment theory? Copyright Cengage Learning. Powered by Cognero.

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a. Each country has the same tastes and preferences for all products. b. Labor and capital move effortlessly among industries within a country. c. Each country uses the same technology for all products. d. Comparative advantage is determined by a wide variety of factors. ANSWER: d FEEDBACK: a. b. c. d. The factor-endowment theory emphasizes the role of relative differences in resource endowments as the ultimate determinant of comparative advantage. Assumptions are: each country has the same tastes and preferences for all products; labor and capital move effortlessly among industries within a country; and each country uses the same technology for all products.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 47. In explaining international trade, the product life cycle theory focuses on a. local resources. b. the role of technological innovation. c. per-capita income levels of nations. d. the availability of unskilled labor. ANSWER: b FEEDBACK: a. b. The product life cycle theory focuses on the role of technological innovation as a key determinant of the trade patterns in manufactured products.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Technology as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand Figure 1. An Example of China–U.S. Trade Possibilities

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48. Considering Figure 1, prior to trade the production of textiles and aircraft for both China and the U.S. are 19 and 9, respectively. Which of the following represents the pre-trade situation? a. China has a comparative advantage in the production of textiles, and the U.S. has a comparative advantage in the production of aircraft. b. China has a comparative advantage in the production of aircraft, and the U.S. has a comparative advantage in the production of textiles. c. China has an absolute advantage in the production of both textiles and aircraft. d. The U.S. has an absolute advantage in the production of both textiles and aircraft. ANSWER: a FEEDBACK: a. China has a comparative advantage in the production of textiles, and the U.S. has a comparative advantage in the production of aircraft.

b. c. d. POINTS: 1 DIFFICULTY: Challenging, QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 3.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

Factor Endowments as a Source of Comparative Advantage BLOOM'S: Analyze

49. Considering Figure 1, which of the following would be true? a. China has more of both labor and capital than the U.S. b. The U.S. has more of both labor and capital than China. c. The U.S. is relatively capital abundant, and China is relatively labor abundant. d. The U.S. is relatively labor abundant and China is relatively capital abundant. ANSWER: c FEEDBACK: a. b. c. The U.S. is relatively capital abundant, and China is relatively labor abundant. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 3.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Analyze

50. Considering Figure 1, what are the terms of trade represented? a. The terms of trade are 1½ aircraft per textile. b. The terms of trade are 1½ textiles per aircraft. c. The terms of trade are 1 textile per aircraft. d. The terms of trade are 2/3 textile per aircraft. ANSWER: b FEEDBACK: a. b. The terms of trade are 1½ textiles per aircraft. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 3.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Factor Endowments as a Source of Comparative Advantage Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Analyze

51. According to the Heckscher-Ohlin Theory, ______ is (are) the major determinant(s) of comparative advantage. a. research and development b. innovation c. resource endowments d. acquired advantages in labor productivity ANSWER: c FEEDBACK: a. b. c. Heckscher and Ohlin maintained that factor (resource) endowments determine a nation‘s comparative advantage.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Remember 52. The Heckscher-Ohlin theory assumes that ______ is (are) the same for all countries. a. expenditure on advertising and sales Analytic b. transportation costs c. technology d. levels of personal income ANSWER: c FEEDBACK: a. b. c. The factor-endowment theory is static in that it assumes that factors of production, including technology, are the same for all countries.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Remember 53. If tastes and preferences are identical for two trading nations, then comparative advantage is the result of a. technological conditions of the two nations. b. income levels of the two nations. c. demand conditions of the two nations. Copyright Cengage Learning. Powered by Cognero.

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d. supply conditions of the two nations. ANSWER: d FEEDBACK: a. b. c. d. If tastes and preferences are identical for two trading nations, then comparative advantage is the result of supply conditions of the two nations.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Apply 54. If jetliners are a capital-intensive product that the United States exports, then the Heckscher-Ohlin theory predicts that the United States is a. a labor abundant country. b. a land abundant country. c. a capital abundant country. d. an energy abundant country. ANSWER: c FEEDBACK: a. b. c. According to the factor-endowment theory, a country exports goods for which its resource endowments are most suited. If jetliners are a capital-intensive product, and the United States exports jetliners, then the Heckscher-Ohlin theory predicts that the United States is a capital abundant country.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 55. Which trade theory predicts that countries with similar preferences and technologies but dissimilar factor endowments will experience potential gains from trade? a. specific-factors theory b. Stolper-Samuelson theorem c. Linder's theory d. Heckscher-Ohlin theory ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. d. The Heckscher-Ohlin theory maintains that factor (resource) endowments

determine a nation‘s comparative advantage. It predicts that countries with similar preferences and technologies but dissimilar factor endowments will experience potential gains from trade.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 56. Assume that the United States is relatively scarce in labor and relatively abundant in capital. According to the Heckscher-Ohlin theory, which of the following will occur in the United States in the presence of trade? a. The price of capital will rise and the price of labor will fall. b. The price of capital will fall and the price of labor will rise. c. The price of both capital and labor will fall. d. The price of both capital and labor will rise. ANSWER: a FEEDBACK: a. According to the Heckscher-Ohlin theory, in each nation, the cheap resource becomes relatively more expensive, and the expensive resource becomes relatively less expensive until price equalization occurs.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Apply 57. Assume that the United States is relatively scarce in unskilled labor and relatively abundant in capital. According to the Stolper-Samuelson theorem, free trade policies would tend to be opposed by ______ in the United States. a. unskilled workers b. owners of capital c. both unskilled workers and owners of capital d. neither unskilled workers nor owners of capital ANSWER: a FEEDBACK: a. According to the Stolper–Samuelson theorem, increases in income occur for the abundant resource that is used to determine comparative advantage. Copyright Cengage Learning. Powered by Cognero.

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Conversely, the scarce factor realizes a decrease in income. Thus, free trade policies would tend to be opposed by unskilled workers in the United States.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Apply 58. According to the factor-endowment theory, a. the abundant factor gains from trade. b. the scarce factor gains from trade. c. those disadvantaged by trade outnumber those advantaged by trade. d. everyone necessarily benefits from trade. ANSWER: a FEEDBACK: a. The factor-endowment theory emphasizes the role of relative differences in resource endowments as the ultimate determinant of comparative advantage. The abundant factor gains from trade.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 59. Japan's fading success in the electronics industry can be explained by all of the following, except a. the appreciation of the yen’s exchange value. b. lack of product innovation. c. failure to use economies of large-scale production. d. failure to recognize changing patterns of comparative advantage. ANSWER: c FEEDBACK: a. b. c. Japan's fading success in the electronics industry can be explained by the

appreciation of the yen‘s exchange value, lack of product innovation, and failure to recognize changing patterns of comparative advantage.

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d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Understand 60. Most theories dealing with the principle of comparative advantage explain the pattern of international trade by differences in a. per-capita income levels. b. interest rates. c. demand for consumer products. d. supply of factors of production. ANSWER: d FEEDBACK: a. b. c. d. The immediate basis for trade stems from relative product price differences among nations. Because relative prices are determined by supply and demand conditions, such factors as resource endowments, technology, and national income are ultimate determinants of the basis for trade. Most theories dealing with the principle of comparative advantage explain the pattern of international trade by differences in supply of factors of production.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 61. The Linder theory asserts that countries with ______ will trade more manufactured goods with each other. a. similar demand conditions b. unlike demand conditions c. similar supply conditions d. unlike supply conditions ANSWER: a FEEDBACK: a. The Linder hypothesis explains which nations will most likely trade with each other. Nations with similar per capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods.

b. c. d. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Overlapping Demands as a Basis for Trade KEYWORDS: BLOOM'S: Remember 62. According to the product life cycle theory, comparative advantage a. always remains in the country where the product is first introduced to the market. b. increases as government tariffs and quotas are imposed on imports. c. may shift from the home country to a foreign country as the product matures. d. is the result of lower wages in the home country than in other countries. ANSWER: c FEEDBACK: a. b. c. The product life cycle theory focuses on the role of technological innovation as a key determinant of the trade patterns in manufactured products. It suggests that a newly produced good, once exported, could ultimately end up being imported as the technology is transferred to foreign nations.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Understand 63. Canada simultaneously exports and imports automobiles. This is an example of a. intra-industry specialization, . b. inter-industry specialization, . c. intra-industry trade. d. inter-industry trade. ANSWER: c FEEDBACK: a. b. c. The exchange of goods among nations includes intra-industry trade, two-way trade in a similar product. Intra-industry trade occurs in homogeneous goods as well as in differentiated products.

d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Intra-industry Trade KEYWORDS: BLOOM'S: Understand 64. According to the product life cycle theory, trade between countries is caused by a. diseconomies of large-scale production. b. differences in per-capita income levels. c. the occurrence of monopolies and oligopolies. d. changing patterns of comparative advantage. ANSWER: d FEEDBACK: a. b. c. d. The product life cycle theory focuses on the role of technological innovation as a key determinant of the trade patterns in manufactured products. Trade between countries is caused by changing patterns of comparative advantage.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Understand 65. When transportation costs are included in a trade model a. an exporting country's gains from trade decrease. b. an exporting country's gains from trade increase. c. an exporting country's volume of trade increases. d. an exporting country's terms of trade can improve. ANSWER: a FEEDBACK: a. Transportation costs tend to reduce the volume of international trade by increasing the prices of traded goods, the degree of specialization in production among the nations concerned, and thus the gains from trade. When transportation costs are included in a trade model, an exporting country's gains from trade decrease.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC8: - Understanding and applying economic models Transportation Costs and Comparative Advantage BLOOM'S: Understand

66. In the United States, skilled labor is relatively abundant and unskilled labor is relatively scarce. Exporting goods that require skilled labor will a. reduce wage inequality between skilled and unskilled workers. b. increase wage inequality between skilled and unskilled workers. c. not change the wage inequality between skilled and unskilled workers. d. reduce the number of skilled workers employed in the United States. ANSWER: b FEEDBACK: a. b. According to the Stolper–Samuelson theorem, increases in income occur for the abundant resource that is used to determine comparative advantage. Conversely, the scarce factor realizes a decrease in income. Exporting goods that require skilled labor will increase wage inequality between skilled and unskilled workers.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC6: - Labor markets TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Remember 67. Labor unions in the United States were generally pro-free trade in the 1950s and 1960s. They became concerned about free trade when a. they negotiated wages and benefits above those in a competitive market. b. they realized that their members faced increased competition from producers in other countries. c. they stopped receiving subsidies from the federal government. d. they started losing membership. ANSWER: b FEEDBACK: a. b. Labor unions in the United States were generally pro-free trade in the 1950s and 1960s. They became concerned about free trade when They became concerned about free trade when they realized that their members faced increased competition from producers in other countries.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC6: - Labor markets Government Regulatory Policies and Comparative Advantage BLOOM'S: Remember

68. Regarding governmental subsidies applied to commercial jetliners, the World Trade Organization ruled that during 2010-2012 a. only Airbus had received illegal subsidies. b. only Boeing had received illegal subsidies. c. both Airbus and Boeing had received illegal subsidies. d. neither Airbus nor Boeing had received illegal subsidies. ANSWER: c FEEDBACK: a. b. c. Regarding governmental subsidies applied to commercial jetliners, the World Trade Organization ruled that, during 2010-2012, both Airbus and Boeing had received illegal subsidies.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC10: - The role of government TOPICS: Dynamic Comparative Advantage: Industrial Policy KEYWORDS: BLOOM'S: Remember 69. External economies of scale exist when an industry's outputs increase and a. a firm's long run average cost curve shifts downward. b. a firm's long run average cost curve shifts upward. c. a firm's long run average cost curve stays the same. d. a firm's long run average cost curve hits zero. ANSWER: a FEEDBACK: a. External economies of scale exist when the firm‘s average costs decrease as

the industry‘s output increases. This effect is shown by a downward shift of the firm‘s long-run average cost curve.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Economies of Scale and Comparative Advantage KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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70. As industry output increases, suppose that new knowledge about production technology spreads among firms in the area through direct contacts among firms or as workers transfer from firm to firm. Which concept does this example demonstrate? a. internal economies of scale b. external economies of scale c. the home market effect d. specialization, in production ANSWER: b FEEDBACK: a. b. External economies of scale exist when the firm‘s average costs decrease as

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Economies of Scale and Comparative Advantage KEYWORDS: BLOOM'S: Remember 71. According to Ricardian theory, comparative advantage depends on relative differences in labor productivity. a. True b. False ANSWER: True FEEDBACK: Correct When Ricardo formulated the principle of comparative advantage, he assumed that relative labor productivity, labor costs, and product prices differed in the two countries before trade. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 72. The Heckscher-Ohlin theory asserts that relative differences in labor productivity underlie comparative advantage. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

Correct Incorrect The Heckscher-Ohlin theory maintains that factor (resource) endowments determine a nation‘s comparative advantage.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Remember 73. The factor-endowment theory highlights the relative abundance of a nation's resources as the key factor underlying comparative advantage. a. True b. False ANSWER: True FEEDBACK: Correct The factor-endowment theory emphasizes the role of relative differences in resource endowments as the ultimate determinant of comparative advantage. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 74. According to the factor-endowment theory, a country will export that good which intensively uses the country’s relatively scarce resource. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The factor-endowment theory emphasizes the role of relative differences in resource endowments as the ultimate determinant of comparative advantage. It highlights the relative abundance of a nation's resources as the key factor underlying comparative advantage.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Factor Endowments as a Source of Comparative Advantage BLOOM'S: Understand

75. According to the factor-endowment theory, a country will import that good which intensively uses the country’s relatively abundant resource. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The factor-endowment theory emphasizes the role of relative differences in resource endowments as the ultimate determinant of comparative advantage. A country will export that good which intensively uses the country‘s relatively abundant resource.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 76. The Heckscher-Ohlin theory suggests that land-abundant nations will export land-intensive goods while laborabundant nations will export labor-intensive goods. a. True b. False ANSWER: True FEEDBACK: Correct The Heckscher-Ohlin theory maintained that factor (resource) endowments determine a nation‘s comparative advantage. Land-abundant nations will export land-intensive goods, while labor-abundant nations will export labor-intensive goods. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 77. The Heckscher-Ohlin theory contends that, over a period of years, a country that initially is an exporter of a product will become an importer of that product. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

False Correct Incorrect The Heckscher-Ohlin theory maintained that factor (resource) endowments determine a nation‘s comparative advantage. In each nation, the cheap resource becomes relatively more expensive, and the expensive resource becomes relatively less expensive until price equalization occurs.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 78. The Heckscher-Ohlin theory emphasizes the role of consumer demand in the creation of comparative advantage. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The Heckscher-Ohlin theory maintained that factor (resource) endowments determine a nation‘s comparative advantage.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 79. The factor-endowment theory asserts that specialization and trade tend to encourage equalization in the relative resource prices of trading partners. a. True b. False ANSWER: True FEEDBACK: Correct The factor-endowment theory emphasizes the role of relative differences in resource endowments as the ultimate determinant of comparative advantage. It asserts that specialization and trade tend to encourage equalization in the relative resource prices of trading partners. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 80. According to the factor-endowment theory, international specialization and trade cause a nation's cheap resource to become cheaper and a nation's expensive resource to become more expensive. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The factor-endowment theory emphasizes the role of relative differences in resource endowments as the ultimate determinant of comparative advantage. It asserts that specialization and trade tends to encourage equalization in the relative resource prices of trading partners.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 81. Fears about the downward pressure that low-skilled foreign workers place on the wages of U.S. low-skilled workers have led U.S. labor unions to lobby for import restrictions such as tariffs and quotas. a. True b. False ANSWER: True FEEDBACK: Correct According to the Stolper–Samuelson theorem, increases in income occur for the abundant resource that is used to determine comparative advantage. Conversely, the scarce factor realizes a decrease in income. Thus, fears about the downward pressure that low-skilled foreign workers place on the wages of U.S. low-skilled workers have led U.S. labor unions to lobby for import restrictions such as tariffs and quotas. Incorrect

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82. According to the factor-price equalization theory, international trade encourages the elimination of relative resource prices between nations. a. True b. False ANSWER: True FEEDBACK: Correct According to the factor-price equalization theory, with trade, the price of labor tends to equalize in the two trading partners. By redirecting demand away from the scarce resource and toward the abundant resource in each nation, trade leads to factor-price equalization. In each nation, the cheap resource becomes relatively more expensive, and the expensive resource becomes relatively less expensive until price equalization occurs. Thus, international trade encourages the elimination of relative resource prices between nations. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 83. The specific-factors theory analyzes the income distribution effects of trade in the short run when resources are immobile among industries. a. True b. False ANSWER: True FEEDBACK: Correct The specific-factors theory analyzes the income distribution effects of trade in the short run when resources are immobile among industries. It concludes that resources specific to import-competing industries tend to lose as a result of trade, while resources specific to exporting industries tend to gain as a result of trade. Incorrect

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FEEDBACK:

Correct Incorrect Owners of resources specific to export industries tend to gain from international trade, while owners of factors specific to import-competing industries tend to lose.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 85. The factor-price equalization theory is a short-run version of the specific-factors theory. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The factor-price equalization theory concludes that international trade encourages the elimination of relative resource prices between nations. The specific-factors theory analyzes the income distribution effects of trade in the short run.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 86. With economies of scale, specialization in a few products allows a manufacturer to benefit from longer production runs, which lead to decreasing average cost. a. True b. False ANSWER: True FEEDBACK: Correct Economies of scale (increasing returns to scale) exist when the expansion of the scale of production capacity of a firm or industry causes total production costs to increase less proportionately than output. Specialization in a few products allows a manufacturer to benefit from longer production runs, which lead to decreasing average cost. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC1: - Gains from trade, specialization, and trade Economies of Scale and Comparative Advantage BLOOM'S: Apply

87. With decreasing costs, a country has an incentive to partially specialize in the product of its comparative advantage. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Economies of scale (increasing returns to scale) exist when the expansion of the scale of production capacity of a firm or industry causes total production costs to increase less proportionately than output. Decreasing cost conditions lead to complete specialization in the production of the commodity of comparative advantage.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Economies of Scale and Comparative Advantage KEYWORDS: BLOOM'S: Apply 88. By widening the size of the domestic market, international trade permits companies to take advantage of longer production runs and increasing efficiencies such as mass production. a. True b. False ANSWER: True FEEDBACK: Correct By widening the size of the domestic market, international trade permits firms to take advantage of longer production runs and increasing efficiencies (such as mass production). Such economies of scale can be translated into lower product prices, which improve a firm‘s competitiveness. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Economies of Scale and Comparative Advantage KEYWORDS: BLOOM'S: Understand 89. The theory of overlapping demands applies best to trade in manufactured goods. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

True Correct

The theory of overlapping demands explains which nations will most likely trade with each other. Nations with similar per capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods.

Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Overlapping Demands as a Basis for Trade KEYWORDS: BLOOM'S: Understand 90. Decreasing cost conditions lead to complete specialization in the production of the commodity of comparative advantage. a. True b. False ANSWER: True FEEDBACK: Correct Economies of scale (increasing returns to scale) exist when the expansion of the scale of production capacity of a firm or industry causes total production costs to increase less proportionately than output. Decreasing cost conditions lead to complete specialization in the production of the commodity of comparative advantage. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Economies of Scale and Comparative Advantage KEYWORDS: BLOOM'S: Apply 91. According to Staffan Linder, the factor-endowment theory is useful in explaining trade patterns in manufactured goods, but not primary products. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The Linder hypothesis explains which nations will most likely trade with each other. Nations with similar per capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Overlapping Demands as a Basis for Trade KEYWORDS: BLOOM'S: Apply 92. The theory of overlapping demands asserts that trade in manufactured goods is stronger the less similar the demand structures of two countries. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The theory of overlapping demands explains which nations will most likely trade with each other. Nations with similar per capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Overlapping Demands as a Basis for Trade KEYWORDS: BLOOM'S: Understand 93. The theory of overlapping demands contends that international trade in manufactured products is strongest among nations with similar income levels. a. True b. False ANSWER: True FEEDBACK: Correct The theory of overlapping demands explains which nations will most likely trade with each other. Nations with similar per capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods. Wealthy (industrial) nations are more likely to trade with other wealthy nations, and poor (developing) nations are more likely to trade with other poor nations. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Overlapping Demands as a Basis for Trade KEYWORDS: BLOOM'S: Understand 94. According to the theory of overlapping demands, trade in manufactured goods would be greater among two wealthy Copyright Cengage Learning. Powered by Cognero.

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countries than among a wealthy country and a poor country. a. True b. False ANSWER: True FEEDBACK: Correct The theory of overlapping demands explains which nations will most likely trade with each other. Nations with similar per capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods. Wealthy (industrial) nations are more likely to trade with other wealthy nations, and poor (developing) nations are more likely to trade with other poor nations. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Overlapping Demands as a Basis for Trade KEYWORDS: BLOOM'S: Understand 95. The increased use of robots, combined with rising labor costs in China, has led some U.S. businesses to return to manufacturing in the United States. a. True b. False ANSWER: True FEEDBACK: Correct The increased use of robots, combined with rising labor costs in China, has led some U.S. businesses to return to manufacturing in the United States. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Remember 96. Intra-industry trade would occur if computers manufactured in the United States by IBM were exported to Japan while the United States imported computers manufactured by Hitachi of Japan. a. True b. False ANSWER: True FEEDBACK: Correct The exchange of goods among nations includes intra-industry trade, two-way trade in a similar product. Intra-industry trade occurs in homogeneous goods as well as in differentiated products. Incorrect

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Intra-Industry Trade KEYWORDS: BLOOM'S: Apply 97. Because seasons in the southern hemisphere are opposite those in the northern hemisphere, one would expect intraindustry trade to occur in agricultural products. a. True b. False ANSWER: True FEEDBACK: Correct The exchange of goods among nations includes intra-industry trade, two-way trade in a similar product. Intra-industry trade occurs in homogeneous goods as well as in differentiated products. Intra-industry trade can be explained by product differentiation, economies of scale, seasons of the year, and transportation costs. Incorrect

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99. According to the theory of intra-industry trade, many manufactured goods undergo a trade cycle in which the home country initially is an exporter and eventually becomes an importer of a product. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The product life cycle theory views a variety of manufactured goods as going through a trade cycle, during which a nation initially is an exporter, then loses its export markets, and finally becomes an importer of the product.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Apply 101. According to the product life cycle theory, the first stage of a product's trade cycle is when it is introduced to the home market. a. True b. False ANSWER: True FEEDBACK: Correct According to the product life cycle theory, the introduction stage of the trade cycle begins when an innovator establishes a technological breakthrough in the production of a manufactured good. The manufacturer will most likely operate close to the local market to gain quick feedback on the quality and overall appeal of the product. Incorrect Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Understand 102. According to the product life cycle theory, the last stage of a product's trade cycle is when it becomes an importcompeting good. a. True b. False ANSWER: True FEEDBACK: Correct According to the product life cycle theory, the trade cycle is complete when the production process becomes so standardized that it can be easily used by other nations. The innovating nation may itself become a net importer of the product as its monopoly position is eliminated by foreign competition. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Understand 103. Ricardo's theory of comparative advantage is a static theory that does not consider changes in international competitiveness over the long run. a. True b. False ANSWER: True FEEDBACK: Correct Ricardo's theory of comparative advantage is a static theory that does not consider changes in international competitiveness over the long run. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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104. Dynamic comparative advantage refers to the creation of comparative advantage through the mobilization of skilled labor, technology, and capital. a. True b. False ANSWER: True FEEDBACK: Correct Dynamic comparative advantage refers to the creation of comparative advantage through the mobilization of skilled labor, technology, and capital. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 105. Industrial policy seeks to direct resources to declining industries in which productivity is low, linkages to the rest of the economy are weak, and future competitiveness is remote. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Industrial policy seeks to encourage the development of emerging, sunrise industries through such measures as tax incentives and research and development subsidies.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Dynamic Comparative Advantage: Industrial Policy KEYWORDS: BLOOM'S: Understand 106. Europe's jumbo-jet manufacturer, Airbus, has justified receiving governmental subsidies with the argument that the subsidies prevent the United States from becoming a monopoly in the jumbo-jet market. a. True b. False ANSWER: True FEEDBACK: Correct Europe's jumbo-jet manufacturer, Airbus, has justified receiving governmental subsidies with the argument that the subsidies prevent the United States from becoming a monopoly in the jumbo-jet market. Incorrect

POINTS:

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DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: WTO Rules Illegal Government Subsidies Support Boeing and Airbus KEYWORDS: BLOOM'S: Apply 107. The imposition of pollution-control regulations on domestic steel manufacturers leads to decreases in production costs and an improvement in the steel manufacturers' competitiveness. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Business regulations can affect the competitive position of industries. These regulations often result in cost-increasing compliance measures, which can detract from the competitiveness of domestic industries.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Government Regulatory Policies and Comparative Advantage KEYWORDS: BLOOM'S: Understand 108. Empirical studies conclude that U.S. environmental policies are a more important determinant of trade performance than capital, raw materials, labor skills, and wages. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Business regulations can affect the competitive position of industries. These regulations often result in cost-increasing compliance measures, which can detract from the competitiveness of domestic industries.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Government Regulatory Policies and Comparative Advantage KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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109. Although the theory of comparative advantage explains trade in manufactured goods, it has no explanatory value for trade in business services. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The factor-endowment theory suggests that differences in relative factor endowments among nations underlie the basis for trade. It includes both goods and services.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 110. Most developing countries have pollution-control laws and enforcement policies that are more stringent than those of the major industrial countries. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Most developing countries have pollution-control laws and enforcement policies that are less stringent than those of the major industrial countries.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Government Regulatory Policies and Comparative Advantage KEYWORDS: BLOOM'S: Analyze 111. When transportation costs are added to our trade model, the low-cost exporting country produces less, consumes more, and exports less than that which occurs in the absence of transportation costs. a. True b. False ANSWER: True FEEDBACK: Correct Transportation costs tend to reduce the volume of international trade by increasing the prices of traded goods, the degree of specialization in production among the nations concerned, and thus the gains from trade. When transportation costs are added to our trade model, the low-cost exporting country produces less, consumes more, and exports less than that which occurs in the absence of transportation costs. Copyright Cengage Learning. Powered by Cognero.

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Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Transportation Costs and Comparative Advantage KEYWORDS: BLOOM'S: Apply 112. When transportation costs are added to our trade model, the degree of specialization in production between two countries increases, as do the gains from trade. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Transportation costs tend to reduce the volume of international trade by increasing the prices of traded goods, the degree of specialization in production among the nations concerned, and thus the gains from trade.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Transportation Costs and Comparative Advantage KEYWORDS: BLOOM'S: Analyze 113. In the absence of transportation costs, free trade results in the equalization of the prices of traded goods, as well as resource prices, in the trading nations. a. True b. False ANSWER: True FEEDBACK: Correct The factor-endowment theory suggests that differences in relative factor endowments among nations underlie the basis for trade. The theory also states that with trade, the relative differences in resource prices (and the prices of traded goods) between nations tend to be eliminated. Incorrect

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TOPICS: KEYWORDS:

Factor Endowments as a Source of Comparative Advantage BLOOM'S: Understand

114. In industries where the final product is much less weighty or bulky than the materials from which it is made, firms tend to locate production near resource supplies. a. True b. False ANSWER: True FEEDBACK: Correct In industries where the final product is much less weighty or bulky than the materials from which it is made, firms tend to locate production near resource supplies. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 115. Industrial processes that add weight or bulk to a commodity are likely to be located near the resource market to minimize transportation costs. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect World output has shifted into goods whose value is unrelated to their size and weight. Finished manufactured goods, not raw commodities, dominate the flow of trade. Therefore, less transportation is required for every dollar‘s worth of exports or imports.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Transportation Costs and Comparative Advantage KEYWORDS: BLOOM'S: Understand 116. A product will be traded only if the cost of transporting it between nations is less than the pre-trade difference between their relative product prices. a. True b. False ANSWER: True FEEDBACK: Correct Transportation costs tend to reduce the volume of international trade by Copyright Cengage Learning. Powered by Cognero.

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increasing the prices of traded goods, the degree of specialization in production among the nations concerned, and thus the gains from trade. A product will be internationally traded as long as the pre-trade price differential between the trading partners is greater than the cost of transporting it between them. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Transportation Costs and Comparative Advantage KEYWORDS: BLOOM'S: Understand 117. The principle of comparative advantage includes the costs of moving goods from one nation to another. a. True b. False ANSWER: True FEEDBACK: Correct Economists now realize that, besides embodying production costs, the principle of comparative advantage includes the costs of moving goods from one nation to another. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Transportation Costs and Comparative Advantage KEYWORDS: BLOOM'S: Understand 118. According to the product life cycle theory, comparative advantage shifts from cheap-labor countries to hightechnology countries after a manufactured good becomes standardized. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The product life cycle theory focuses on the role of technological innovation as a key determinant of the trade patterns in manufactured products. Trade between countries is caused by changing patterns of comparative advantage.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Technology as a Source of Comparative Advantage: The Product Cycle Theory BLOOM'S: Understand

119. The product life cycle theory contends that when a new product is introduced to the home market, it generally requires low-skilled labor to produce it. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The product life cycle theory focuses on the role of technological innovation as a key determinant of the trade patterns in manufactured products. Trade between countries is caused by changing patterns of comparative advantage.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Understand 120. Although some people may be harmed by international trade, the Heckscher-Ohlin theory asserts that free trade will promote the standard of living for the nation as a whole. a. True b. False ANSWER: True FEEDBACK: Correct The Heckscher-Ohlin theory maintains that factor (resource) endowments determine a nation‘s comparative advantage. International trade not only can affect the prices of factors of production but also the distribution of income among these factors. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 121. Assume that labor is relatively scarce in the United States. According to the factor-price equalization theory, American labor may opt for trade barriers once trade opens up. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

Correct

According to the factor-price equalization theory, with trade, the price of labor tends to equalize in the two trading partners. Thus, American labor may opt for trade barriers once trade opens up.

Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Apply 122. Both the Ricardo model of comparative advantage and the Heckscher-Ohlin theory assert that trade patterns are largely the result of differences in endowments of factors of production. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The Heckscher-Ohlin theory maintains that factor (resource) endowments determine a nation‘s comparative advantage.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 123. Brazil is labor abundant relative to Germany if the ratio of labor to capital in Brazil is higher than that in Germany. a. True b. False ANSWER: True FEEDBACK: Correct If the ratio of labor to capital in Brazil is higher than that in Germany, Brazil is relatively labor abundant and relatively capital scarce. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC6: - Labor markets TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Apply 124. The Heckscher-Ohlin model assumes that tastes and preferences, and also factor endowments, are identical for Copyright Cengage Learning. Powered by Cognero.

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trading nations. a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect The Heckscher-Ohlin theory maintains that factor (resource) endowments determine a nation‘s comparative advantage.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 125. The Heckscher-Ohlin theory asserts that trade should occur with different factor endowments. This theory is most accurate when explaining trade patterns between industrialized and developing countries. a. True b. False ANSWER: True FEEDBACK: Correct The Heckscher-Ohlin theory maintained that factor (resource) endowments determine a nation‘s comparative advantage. This theory is most accurate when explaining trade patterns between industrialized and developing countries. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Remember 126. The imposition of government regulations (clean environment, workplace safety, product safety) on domestic steel companies tends to result in lower production costs and improved competitiveness. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Business regulations can affect the competitive position of industries. These regulations often result in cost-increasing compliance measures, which can detract from the competitiveness of domestic industries.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC10: - The role of government TOPICS: Government Regulatory Policies and Comparative Advantage KEYWORDS: BLOOM'S: Understand 127. According to the specific-factors theory, resources that are specific to import-competing industries tend to lose as a result of trade, while resources specific to export industries tend to gain as a result of trade. a. True b. False ANSWER: True FEEDBACK: Correct The specific-factors theory analyzes the income distribution effects of trade in the short run when resources are immobile among industries. The specific-factors theory concludes that resources specific to import-competing industries tend to lose as a result of trade, while resources specific to exporting industries tend to gain as a result of trade. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Remember 128. Industrial policy includes using governmental subsidies as a tool to provide domestic firms an edge over foreign competitors in domestic and foreign markets. a. True b. False ANSWER: True FEEDBACK: Correct When government attempts to create comparative advantage, the term industrial policy applies. Industrial policy seeks to encourage the development of emerging, sunrise industries through such measures as tax incentives and research and development subsidies. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Dynamic Comparative Advantage: Industrial Policy KEYWORDS: BLOOM'S: Understand 129. The existence of transportation costs tends to result in increasing gains that a country receives from trade. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

Correct Incorrect Transportation costs tend to reduce the volume of international trade by increasing the prices of traded goods, the degree of specialization in production among the nations concerned, and thus the gains from trade.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Transportation Costs and Comparative Advantage KEYWORDS: BLOOM'S: Understand 130. The product life cycle theory predicts that patterns of comparative advantage change over time. A country that initially exports a product to other countries tends to become a net importer of the product. a. True b. False ANSWER: True FEEDBACK: Correct The product life cycle theory focuses on the role of technological innovation as a key determinant of the trade patterns in manufactured products. Trade between countries is caused by changing patterns of comparative advantage. A country that initially exports a product to other countries tends to become a net importer of the product. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC8: - Understanding and applying economic models TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Remember 131. A change in factor endowments tends to have a similar impact on a production possibilities frontier as a change in technology. a. True b. False ANSWER: True FEEDBACK: Correct A change in factor endowments tends to have a similar impact on a production possibilities frontier as a change in technology. Incorrect

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TOPICS: KEYWORDS:

Factor Endowments as a Source of Comparative Advantage BLOOM'S: Understand

132. Explain the impact of factor price equalization on factor prices between nations In the real world, differences in factor prices tend to exist. Different technologies, ANSWER: imperfect markets, transportation costs, and trade barriers may prevent factor prices from equalizing among nations. POINTS: 1 DIFFICULTY: Difficult QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Apply 133. What is the focus of the product life cycle theory, and where is it applicable? The product life cycle theory focuses on the role of technological innovation as a key ANSWER: determinant of trade patterns. It applies to manufactured goods. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Technology as a Source of Comparative Advantage: The Product Cycle Theory KEYWORDS: BLOOM'S: Understand 134. Explain how immigration and trade may worsen wage inequality, and how college education may mitigate against that. Trade tends to increase the demand for skilled workers relative to unskilled workers, thus ANSWER: worsening wage inequality. Immigration of unskilled workers decreases the supply of skilled workers relative to unskilled workers, thus worsening wage inequality. Alternatively, college education increases the supply of skilled workers relative to unskilled workers, thus reducing wage inequality. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Analyze

135. How does Staffan Linder explain world trade patterns? Linder offers two explanations of world trade patterns. Trade in primary products ANSWER: conforms well to the factor-endowment theory. However, trade in manufactured goods is best explained by overlapping demand structures among nations. For manufactured goods, the basis for trade is stronger when the structure of demand in two nations is more similar due to similar per-capita incomes. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Factor Endowments as a Source of Comparative Advantage KEYWORDS: BLOOM'S: Understand 136. Explain how the Airbus-Boeing subsidies are justified by both firms. Both firms have various arguments in support of their subsidies. Boeing and U.S. officials ANSWER: claim that Airbus receives unfair subsidies that put Boeing at a competitive disadvantage, and that the U.S. subsidies to Boeing offset this competitive disadvantage. Airbus and European officials argue that subsidies to Airbus are necessary to keep Boeing from becoming a monopoly in airline production and thus being able to increase the cost of planes to airlines in Europe. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Dynamic Comparative Advantage: Industrial Policy KEYWORDS: BLOOM'S: Understand

Chapter 04: Tariffs 1. The imposition of tariffs on imports results in deadweight welfare losses for the home economy. These losses consist of the a. protective effect and the consumption effect. b. redistribution effect and the revenue effect. c. revenue effect and the protective effect. d. consumption effect and the redistribution effect. ANSWER: a FEEDBACK: a. If a nation is small, its welfare necessarily falls by the total amount of the Copyright Cengage Learning. Powered by Cognero.

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protective effect plus the consumption effect if it levies a tariff on imports.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Understand 2. Suppose that the United States eliminates its tariff on steel imports, permitting foreign-produced steel to enter the U.S. market. Steel prices to U.S. consumers 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. ANSWER: b FEEDBACK: a. b. If a tariff placed on imported steel is removed, this decreases the costs of a steel-using manufacturer. This decrease leads to a lower price charged by the manufacturer and a gain of international competitiveness. Thus, steel prices to U.S. consumers would be expected to decrease, and the foreign demand for U.S. exports would increase.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: How a Tariff Burdens Exporters KEYWORDS: BLOOM'S: Apply 3. A $100 specific tariff provides home producers more protection from foreign competition 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. ANSWER: a FEEDBACK: a. A specific tariff has the advantage of providing domestic producers more protection during a business recession, when cheaper products are purchased. Copyright Cengage Learning. Powered by Cognero.

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Specific tariffs thus cushion domestic producers progressively against foreign competitors that cut their prices.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Types of Tariffs KEYWORDS: BLOOM'S: Analyze 4. The price of a bag of chips is $1, but a customer is willing to pay up to $3. What would be the consumer surplus on this purchase? a. $3 b. $1 c. $2 d. $4 ANSWER: c FEEDBACK: a. b. c. Consumer surplus refers to the difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay. If the price of a bag of chips is $1, but a customer is willing to pay up to $3, the consumer surplus on this purchase is $2 ($3 - $1 = $2).

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Consumer Surplus and Producer Surplus KEYWORDS: BLOOM'S: Apply 5. When a nation imports materials and other inputs for production duty free, its tariff policy generally results in a. an effective tariff rate less than the nominal tariff rate. b. a nominal tariff rate less than the effective tariff rate. c. a rise in both nominal and effective tariff rates. d. a fall in both nominal and effective tariff rates. ANSWER: b The nominal tariff rate is the official rate that is published in the country’s tariff schedule. RATIONALE: This rate applies to the value of a finished product that is imported into a country. Copyright Cengage Learning. Powered by Cognero.

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The effective tariff rate takes into account not only the nominal tariff rate on a finished product but also any tariff rate applied to imported inputs that are used in producing the finished product. When the tariff on the finished product exceeds the tariff on the imported input, the effective rate of protection exceeds the nominal tariff. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Apply 6. Which argument in favor of tariffs states that developing industries should be initially shielded from competition? a. infant-industry argument b. cheap foreign labor argument c. fair trade argument d. national security argument ANSWER: a FEEDBACK: a. Tariffs are sometimes justified on the grounds that they allow domestic industries to be insulated temporarily from foreign competition until they can grow and develop.

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terms to the domestic producers of the import-competing product.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Understand 8. Which of the following is true concerning a specific tariff? a. It is exclusively used by the U.S. in its tariff schedules. b. It refers to a flat percentage duty applied to a good's market value. c. It is plagued by problems associated with assessing import product values. d. It gives less protection to home producers during times of rising prices. ANSWER: d FEEDBACK: a. b. c. d. During times of rising import prices, a given specific tariff loses some of its protective effect. The result is to encourage domestic producers to produce less-expensive goods, for which the degree of protection against imports is higher.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Types of Tariffs KEYWORDS: BLOOM'S: Understand 9. The primary benefit of tariff protection goes to a. domestic consumers of the good produced. b. domestic producers of the good produced. c. foreign producers of the good produced. d. foreign consumers of the good produced. ANSWER: b FEEDBACK: a. b. The primary benefit of tariff protection goes to domestic producers of the good produced.

c. Copyright Cengage Learning. Powered by Cognero.

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d. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Apply 12. When the production of a commodity does NOT utilize imported inputs, the effective tariff rate a. exceeds the nominal tariff rate on the commodity. b. equals the nominal tariff rate on the commodity. c. is less than the nominal tariff rate on the commodity. d. is a percentage of the nominal tariff rate on the commodity. ANSWER: b The nominal tariff rate is the official rate that is published in the country’s tariff schedule. RATIONALE: This rate applies to the value of a finished product that is imported into a country. The effective tariff rate takes into account not only the nominal tariff rate on a finished product but also any tariff rate applied to imported inputs that are used in producing the finished product. When there are no imported inputs, the effective tariff rate equals the nominal tariff rate on the commodity. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Apply 13. Developing nations often maintain that industrial countries permit raw materials to be imported at very low tariff rates while maintaining high tariff rates on manufactured imports. Which of the following refers to the above statement? a. tariff-quota effect b. nominal tariff effect c. tariff escalation effect d. protective tariff effect ANSWER: c FEEDBACK: a. b. c. When processed goods face higher import tariffs than those levied on basic raw materials, this policy is referred to as tariff escalation.

d. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Escalation KEYWORDS: BLOOM'S: Understand 14. Should the home country be large relative to the world, its imposition of a tariff on imports would lead to an increase in domestic welfare if the terms-of-trade effect exceeds the sum of the a. revenue effect plus redistribution effect. b. protective effect plus revenue effect. c. consumption effect plus redistribution effect. d. protective effect plus consumption effect. ANSWER: d FEEDBACK: a. b. c. d. If the importing nation is large relative to the world, the imposition of an import tariff may improve its international terms of trade by an amount that more than offsets the welfare losses associated with the consumption effect and the protective effect.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Apply 15. If Canada imposes a tariff on imports, Canada's a. terms of trade will improve and volume of imports will decrease. b. terms of trade will worsen and volume of imports will decrease. c. terms of trade will improve and volume of imports will increase. d. terms of trade will worsen and volume of imports will increase. ANSWER: a FEEDBACK: a. If the importing nation is large relative to the world, the imposition of an import tariff may improve its international terms of trade by an amount that more than offsets the welfare losses associated with the consumption effect and the protective effect. Canada‘s terms of trade will improve and volume of imports will decrease.

b. c. Copyright Cengage Learning. Powered by Cognero.

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c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Understand 17. A problem encountered when implementing an "infant industry" tariff is that a. domestic consumers will purchase the foreign good regardless of the tariff. b. Special-interest groups may prevent the tariff's removal when the industry matures. c. most industries require tariff protection when they are mature. d. labor unions will capture the protective effect in higher wages. ANSWER: b FEEDBACK: a. b. Once a protective tariff is imposed, it is difficult to remove, even after industrial maturity has been achieved. Special-interest groups can often convince policy makers that further protection is justified.

c. d. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Arguments for Trade Restrictions KEYWORDS: BLOOM'S: Remember 18. Which of the following is NOT a rationale for tariffs? a. They improve the terms of trade for small and large nations. b. They protect jobs and reduce unemployment. c. They promote growth and development of young industries. d. They promote a level playing field in terms of trade. ANSWER: a FEEDBACK: a. Tariffs are sometimes justified on the grounds that they protect domestic employment and wages, help create a level playing field for international trade, and allow domestic industries to be insulated temporarily from foreign competition until they can grow and develop.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Arguments for Trade Restrictions KEYWORDS: BLOOM'S: Understand 19. The deadweight loss of a tariff is a. a welfare loss since it promotes inefficient production. b. a welfare loss since it reduces the revenue for the government. c. not a welfare loss because society as a whole doesn't pay for the loss. d. not a welfare loss since only business firms suffer revenue losses. ANSWER: a FEEDBACK: a. The protective effect and the consumption effect represent a real cost to society, not a transfer to other sectors of the economy. Together, these two effects equal the deadweight loss of the tariff.

b. c. d. POINTS: DIFFICULTY:

1 Moderate

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC1: - Gains from trade, specialization, and trade Types of Tariffs BLOOM'S: Apply

22. A tax of 15 percent per imported item is an example of a(an) a. ad valorem tariff. b. specific tariff. c. compound tariff. d. optimum tariff. ANSWER: a FEEDBACK: a. An ad valorem (of value) tariff is expressed as a fixed percentage of the value of the imported product.

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24. An optimum tariff benefits a. the importing nation. b. exporting nations. c. the world economy. d. smaller nations. ANSWER: a FEEDBACK:

a. An optimal tariff is only beneficial to the importing nation. b. c. d.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Remember 25. The United States imposes a tariff on imported stereos. This tariff would benefit a. American consumers looking to purchase a stereo. b. retail and shipping companies that import foreign-made stereos. c. stereo producers in the United States. d. the U.S. economy as a whole. ANSWER: c FEEDBACK: a. b. c. The primary benefit of tariff protection goes to domestic producers of the good. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Effects: An Overview KEYWORDS: BLOOM'S: Understand 26. The most vocal political pressure for tariffs is generally made by a. consumers lobbying for export tariffs. b. consumers lobbying for import tariffs. c. producers lobbying for export tariffs. Copyright Cengage Learning. Powered by Cognero.

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d. producers lobbying for import tariffs. ANSWER: d FEEDBACK: a. b. c. d. The U.S. protection policy is dominated by special-interest groups that represent producers.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The Political Economy of Protectionism KEYWORDS: BLOOM'S: Understand 27. Which statement is true about the free-trade argument? a. It has been adopted by numerous nations around the world through reductions in trade barriers. b. It argues that tariffs and other trade barriers force industries to continually adjust practices. c. It advocates for the uninhibited flow of goods, services, and capital between nations. d. It is praised for considering real-world economic conditions and noneconomic factors like national security. ANSWER: c FEEDBACK: a. b. c. The free-trade argument advocates for the uninhibited flow of goods, services, and capital between nations.

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28. Consider Figure 4.1. In the absence of trade, Mexico produces and consumes a. 10 calculators. b. 40 calculators. c. 60 calculators. d. 80 calculators. ANSWER: c FEEDBACK: a. b. c. In the absence of trade, Mexico produces and consumes 60 calculators. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False PREFACE NAME: Figure 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze

29. Consider Figure 4.1. In the absence of trade, Mexico's producer surplus and consumer surplus respectively equal a. $120 and $240. b. $180 and $180. c. $180 and $320. d. $240 and $240. ANSWER: b FEEDBACK: a. b. Consumer surplus refers to the difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay. In the absence of trade, Mexico's producer surplus and consumer surplus respectively equal $180 and $180.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze

30. Consider Figure 4.1. With free trade, Mexico imports a. 40 calculators. b. 60 calculators. c. 80 calculators. d. 100 calculators. ANSWER: d FEEDBACK: a. b. c. d. With free trade, Mexico imports 100 calculators. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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31. Consider Figure 4.1. With free trade, the total value of Mexico's imports equal a. $220. b. $260. c. $290. d. $300. ANSWER: d FEEDBACK: a. b. c. d. With free trade, the total value of Mexico's imports equal $300. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze

32. Consider Figure 4.1. With free trade, Mexico's producer surplus and consumer surplus respectively equal a. $5 and $605. b. $25 and $380. c. $45 and $250. d. $85 and $195. ANSWER: a FEEDBACK: a. With free trade, Mexico's producer surplus and consumer surplus respectively equal $5 and $605.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES: PREFACE NAME:

1 Challenging Multiple Choice False Figure 4.1

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze

33. Consider Figure 4.1. With a per-unit tariff of $3, the quantity of imports decreases to a. 20 calculators. b. 40 calculators. c. 50 calculators. d. 70 calculators. ANSWER: b FEEDBACK: a. b. With a per-unit tariff of $3, the quantity of imports decreases to 40 calculators. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze

34. According to Figure 4.1, the loss in Mexican consumer surplus due to the tariff equals a. $225. b. $265. c. $285. d. $325. ANSWER: c FEEDBACK: a. b. c. The loss in Mexican consumer surplus due to the tariff equals $285. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

Tariff Welfare Effects: Small-Nation Model BLOOM'S: Analyze

35. According to Figure 4.1, the tariff results in the Mexican government collecting a. $100. b. $120. c. $140. d. $160. ANSWER: b FEEDBACK: a. b. The tariff results in the Mexican government collecting $120. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze

36. According to Figure 4.1, Mexican manufacturers gain ____ because of the tariff. a. $75 b. $85 c. $95 d. $105 ANSWER: a FEEDBACK: a. Mexican manufacturers gain $75 because of the tariff. b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze Copyright Cengage Learning. Powered by Cognero.

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37. According to Figure 4.1, the deadweight cost of the tariff totals a. $60. b. $70. c. $80. d. $90. ANSWER: d FEEDBACK: a. b. c. d. The deadweight cost of the tariff totals $90. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze

38. Consider Figure 4.1. The tariff would be prohibitive (i.e., eliminate imports) if it equaled a. $2. b. $3. c. $4. d. $5. ANSWER: d FEEDBACK: a. b. c. d. The tariff would be prohibitive (i.e., eliminate imports) if it equaled $5. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze Assume the United States is a large consumer of steel, able to influence the world price. Its demand and supply schedules are respectively denoted by DU.S. and SU.S. in Figure 4.2. The overall (United States plus world) supply schedule of steel Copyright Cengage Learning. Powered by Cognero.

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is denoted by SU.S.+W. Figure 4.2. Import Tariff Levied by a Large Country

39. Consider Figure 4.2. With free trade, the United States achieves market equilibrium at a price of ____. At this price, ____ of steel are produced by U.S. firms, ____ are bought by U.S. buyers, and ____ are imported. a. $450, 5 tons, 60 tons, 55 tons b. $475, 10 tons, 50 tons, 40 tons c. $525, 5 tons, 60 tons, 55 tons d. $630, 30 tons, 30 tons, 0 tons ANSWER: b FEEDBACK: a. b. With free trade, the United States achieves market equilibrium at a price of $475. At this price, 10 tons of steel are produced by U.S. firms, 50 tons are bought by U.S. buyers, and 40 tons are imported.

c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Analyze

40. Consider Figure 4.2. Suppose the United States imposes a tariff of $100 on each ton of steel imported. With the tariff, the price of steel rises to ____ and imports fall to ____ . a. $550, 20 tons b. $550, 30 tons c. $575, 20 tons d. $575, 30 tons ANSWER: a FEEDBACK: a. With the tariff, the price of steel rises to $550 and imports fall to 20 tons. b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Analyze

41. Consider Figure 4.2. Of the $100 tariff, ____ is passed on to the U.S. consumer via a higher price, while ____ is borne by the foreign exporter. a. $50, $150 b. $25, $75 c. $75, $25 d. $150, $50 ANSWER: c FEEDBACK: a. b. c. Of the $100 tariff, $75 is passed on to the U.S. consumer via a higher price, while $25 is borne by the foreign exporter. Copyright Cengage Learning. Powered by Cognero.

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42. Referring to Figure 4.2, the tariff's deadweight welfare loss to the United States totals a. $450. b. $550. c. $650. d. $750. ANSWER: d FEEDBACK: a. b. c. d. The tariff's deadweight welfare loss to the United States totals $750. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Analyze

43. According to Figure 4.2, the tariff's terms-of-trade effect equals a. $300. b. $400. c. $500. d. $600. ANSWER: c FEEDBACK: a. b. c. The tariff's terms-of-trade effect equals $500. d. POINTS:

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DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Analyze

44. According to Figure 4.2, the tariff changes the overall welfare of the United States by a. rising by $250. b. rising by $500. c. falling by $250. d. falling by $500. ANSWER: c FEEDBACK: a. b. c. The tariff changes the overall welfare of the United States by falling by $250. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Analyze 45. Suppose that the production of $500,000 worth of steel in the United States requires $100,000 worth of iron ore. The U.S. nominal tariff rates are 15 percent for steel and 5 percent for iron ore. Given this information, the effective rate of protection for the U.S. steel industry is approximately a. 6 percent. b. 12.5 percent. c. 18 percent. d. 17.5 percent. ANSWER: c The effective tariff rate is given by the following formula: RATIONALE:

where e = the effective rate of protection n = the nominal tariff rate on the final product = 15% a = the ratio of the value of the imported input to the value of the finished product = Copyright Cengage Learning. Powered by Cognero.

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$100,000/$500,000 = 0.20 b = the nominal tariff rate on the imported input = 5% then e = the effective rate of protection = POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Apply 46. Suppose that the production of a $30,000 automobile in Canada requires $10,000 worth of steel. The Canadian nominal tariff rates for importing these goods are 25 percent for automobiles and 10 percent for steel. Given this information, the effective rate of protection for the Canadian automobile industry is approximately a. 15 percent. b. 33 percent. c. 48 percent. d. 67 percent. ANSWER: b The effective tariff rate is given by the following formula: RATIONALE:

where e = the effective rate of protection n = the nominal tariff rate on the final product = 25% a = the ratio of the value of the imported input to the value of the finished product = $10,000/$30,000 = 0.33 b = the nominal tariff rate on the imported input = 10% then e = the effective rate of protection = POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Apply Exhibit 4.1 Copyright Cengage Learning. Powered by Cognero.

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Assume that the United States imports automobiles from South Korea at a price of $20,000 per vehicle and that these vehicles are subject to an import tariff of 20 percent. Also assume that U.S. components are used in the vehicles assembled by South Korea and that these components have a value of $10,000. 47. Refer to Exhibit 4.1. In the absence of the Offshore Assembly Provision (OAP) of U.S. tariff policy, the price of an imported vehicle to the U.S. consumer after the tariff has been levied is a. $22,000. b. $23,000. c. $24,000. d. $25,000. ANSWER: c In the absence of the OAP, the full value of each vehicle, $20,000, is subject to the tariff. RATIONALE: If the tariff rate is 20 percent, then a duty of $4,000 would be paid, and the price to the U.S. consumer would be $20,000 + $4,000 = $24,000. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Exhibit 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Outsourcing and Offshore Assembly Provision KEYWORDS: BLOOM'S: Analyze

48. Refer to Exhibit 4.1. Under the Offshore Assembly Provision of U.S. tariff policy, the price of an imported vehicle to the U.S. consumer after the tariff has been levied is a. $22,000. b. $23,000. c. $24,000. d. $25,000. ANSWER: a Under the OAP, the 20 percent tariff rate is levied on the value of the imported vehicle RATIONALE: minus the value of the U.S. components used in manufacturing the vehicle. When the vehicle enters the United States, its dutiable value is thus $20,000 - $10,000 = $10,000, and the duty is 0.20 x $10,000 = $2,000. The price to the U.S. consumer after the tariff has been levied is $20,000 + $2,000 = $22,000. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Exhibit 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Outsourcing and Offshore Assembly Provision BLOOM'S: Analyze

49. Suppose an importer of steel is required to pay a tariff of $20 per ton plus 5 percent of the value of steel. This is an example of a. a specific tariff. b. an ad valorem tariff. c. a compound tariff. d. a tariff quota. ANSWER: c FEEDBACK: a. b. c. A compound tariff combines a specific tariff ($20 per ton) with an ad valorem tariff (5 percent of the value of steel).

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Types of Tariffs KEYWORDS: BLOOM'S: Understand 50. A compound tariff is a combination of a(n) a. tariff quota and a two-tier tariff. b. revenue tariff and a protective tariff. c. import tariff and an export tariff. d. specific tariff and an ad valorem tariff. ANSWER: d FEEDBACK: a. b. c. d. A compound tariff combines a specific tariff with an ad valorem tariff. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Types of Tariffs KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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Table 4.1. Production Costs and Prices of Imported and Domestic Smartphones Imported Smartphones Component parts $150 Assembly cost/profit 50 Nominal tariff 25 Import price after tariff $225

Domestic Smartphones Imported component parts $150 Assembly cost 50 Profit 25 Domestic price after tariff $225

51. Consider Table 4.1. Prior to the tariff, the total price of domestically produced smartphones is a. $150. b. $200. c. $225. d. $250. ANSWER: b FEEDBACK: a. b. The total price of domestically produced smartphones is $200 ($150 + $50). c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Analyze

52. Consider Table 4.1. Prior to the tariff, the total price of imported smartphones is a. $150. b. $200. c. $225. d. $235. ANSWER: b FEEDBACK: a. b. The total price of imported smartphones is $200 ($150 + $50). c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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PREFACE NAME: Table 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Analyze

53. Consider Table 4.1. The nominal tariff rate on imported smartphones equals a. 11.1 percent. b. 12.5 percent. c. 16.7 percent. d. 50.0 percent. ANSWER: b FEEDBACK: a. b. The nominal tariff rate on imported smartphones equals 12.5 percent (= $25/$200).

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Analyze

54. Consider Table 4.1. Prior to the tariff, domestic value added equals a. $25. b. $50. c. $75. d. $100. ANSWER: b FEEDBACK: a. b. Prior to the tariff, domestic value added equals $50 (assembly cost). c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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55. Consider Table 4.1. After the tariff, domestic value added equals a. $25. b. $50. c. $75. d. $100. ANSWER: c FEEDBACK: a. b. c. After the tariff, domestic value added equals $75 ($50 + $25). d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Analyze

56. Consider Table 4.1. The effective tariff rate equals a. 11.1 percent. b. 16.7 percent. c. 50.0 percent. d. 100.0 percent. ANSWER: c FEEDBACK: a. b. c. Under the protective umbrella, assembly costs could rise to a level of 50 percent above what would exist under free-trade conditions: [($75 - $50)/ $50 = 0.5]. The effective tariff rate equals 50.0 percent.

d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False PREFACE NAME: Table 4.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Analyze 57. If the domestic value added before an import tariff for a product is $500 and the domestic value added after the tariff is $550, the effective rate of protection is a. 5 percent. b. 8 percent. c. 10 percent. d. 15 percent. ANSWER: c FEEDBACK: a. b. c. Under the protective umbrella, assembly costs could rise to a level of 10 percent above what would exist under free-trade conditions: [($550 - $500)/ $500 = 0.10]. The effective tariff rate equals 10.0 percent.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Apply 59. The offshore assembly provision in the U.S. a. provides favorable treatment to U.S. trading partners. b. discriminates against primary product importers. c. provides favorable treatment to products assembled abroad from U.S. manufactured components. d. hurts the U.S. consumer. ANSWER: c FEEDBACK: a. b. c. The Tariff Act of 1930 created an offshore-assembly provision (OAP) that provides favorable treatment for products assembled abroad from U.S.-made components.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Outsourcing and Offshore-Assembly Provision KEYWORDS: BLOOM'S: Remember 60. For the United States, a foreign trade zone (FTZ) is a. a site within the United States. b. a site outside the United States. c. always located in poorer developing countries. d. is used to discourage trade. ANSWER: a FEEDBACK: a. A foreign-trade zone is an area within the United States where business can operate without having to pay customs duties on imported products or materials for as long as they remain within this area and do not enter the U.S. marketplace.

b. c. d. POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Postponing Import Tariffs BLOOM'S: Remember

Figure 4.3 Domestic Market for Gasoline in the United States

61. Figure 4.3 represents the domestic market for gasoline in the United States. What is the consumer surplus in this market? a. 60 gallons of gasoline b. $120 c. $60 d. $3 ANSWER: b FEEDBACK: a. Copyright Cengage Learning. Powered by Cognero.

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b. Consumer surplus refers to the difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay. If the price of gasoline is $5, and buyers purchase 40 gallons at this price, they spend $200 ($5 x 40). For those 40 gallons, buyers would be willing and able to spend $320 ($8 x 40). The difference between what buyers actually spend and the amount they are willing and able to spend is consumer surplus and equals $120 ($320-$200).

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Consumer Surplus and Producer Surplus KEYWORDS: BLOOM'S: Analyze

62. Figure 4.3 represents the domestic market for gasoline in the United States. What is the producer surplus in this market? a. 60 gallons of gasoline b. $120 c. $60 d. $3 ANSWER: c FEEDBACK: a. b. c. Producer surplus is the revenue producers receive over and above the minimum necessary for production. If the market price of gasoline is $5 per gallon and 40 gallons are supplied, producers receive revenues totaling $200. The minimum revenue they must receive to produce 40 gallons equals $140 ($2 x 40 = $80). Producer surplus is the difference, $60 ($200 - $140 = $60). Graphically, producer surplus is represented by the area above the supply curve and below the good‘s market price.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Consumer Surplus and Producer Surplus KEYWORDS: BLOOM'S: Analyze Figure 4.4 Market for Gasoline in a Small Nation Copyright Cengage Learning. Powered by Cognero.

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63. Figure 4.4 represents the market for gasoline in a small nation. The free-trade world price of gasoline is $3.50. Suppose this small nation imposes a tariff on gasoline of $.50 per gallon. The change in producer surplus would be a. area a + b. b. area a. c. area a + b + f. d. area a + b + f + g + h. ANSWER: b FEEDBACK: a. b. The redistributive effect is the transfer of the consumer surplus in monetary terms to the domestic producers of the import-competing product. This is represented by area a.

c. d. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze

64. Figure 4.4 represents the market for gasoline in a small nation. The free-trade world price of gasoline is $3.50. Suppose this small nation imposes a tariff on gasoline of $.50 per gallon. The change in producer surplus would be a. $15. b. $12.50. c. $47.50. d. $57.50. ANSWER: b FEEDBACK: a. b. The change in producer surplus would be $12.50. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze

65. Figure 4.4 represents the market for gasoline in a small nation. The free trade world price of gasoline is $3.50. Suppose this small nation imposes a tariff on gasoline of $.50 per gallon. The decline in consumer surplus would be a. area a + b. b. area a. c. area a + b + c + d + e. d. area a + b + f + g + h. ANSWER: c FEEDBACK: a. b. c. The decline in consumer surplus would be area a + b + c + d + e. d. Copyright Cengage Learning. Powered by Cognero.

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66. Figure 4.4 represents the market for gasoline in a small nation. The free-trade world price of gasoline is $3.50. Suppose this small nation imposes a tariff on gasoline of $.50 per gallon. The change in consumer surplus would be a. $15. b. $12.50. c. $27.50. d. $57.50. ANSWER: c FEEDBACK: a. b. c. The change in consumer surplus would be $27.50. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 4.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze 67. Suppose that Mexico is a small country that imposes a tariff on imports. This results in a. an improving terms of trade for Mexico. b. a worsening terms of trade for Mexico. c. no change in terms of trade for Mexico. d. better protection from competition for Mexico. ANSWER: c FEEDBACK: a. b. c. For a small nation, a tariff placed on an imported product is shifted totally to the domestic consumer via a higher product price. A tariff on imports results in no change in the terms of trade for Mexico.

d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Understand 68. Suppose that Canada levies a tariff on imports that is a fixed percentage of the product's price. This refers to a. a compound tariff. b. an ad valorem tariff. c. a specific tariff. d. an effective tariff. ANSWER: b FEEDBACK: a. b. An ad valorem (of value) tariff is expressed as a fixed percentage of the value of the imported product.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC14: - Costs of production TOPICS: Types of Tariffs KEYWORDS: BLOOM'S: Understand 69. Suppose that Mexico levies a tariff on steel that is collected as a fixed amount of money per ton imported. This refers to a. a compound tariff. b. an ad valorem tariff. c. a specific tariff. d. an effective tariff. ANSWER: c FEEDBACK: a. b. c. A specific tariff represents a fixed amount of money per unit of the imported commodity.

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TOPICS: KEYWORDS:

Types of Tariffs BLOOM'S: Understand

70. In general, tariffs tend to have a. only protective effects. b. only consumption effects. c. only revenue effects. d. revenue effects, protective effects, and consumption effects. ANSWER: d FEEDBACK: a. b. c. d. In general, tariffs tend to have revenue effects, protective effects, and consumption effects.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Remember 71. Suppose that Germany levies a tariff on oranges, but none are grown in Germany. This tariff has a. only a protective effect. b. only a revenue effect. c. both a protective effect and revenue effect. d. no effects on trade. ANSWER: b FEEDBACK: a. b. The tariff‘s revenue effect represents the government‘s collections of duty. Government revenue is found by multiplying the number of imports times the tariff.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Apply 72. If Brazil levies a tariff on oil that is so high that it effectively prohibits imports of oil, the tariff has a. only a protective effect. Copyright Cengage Learning. Powered by Cognero.

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b. only a revenue effect. c. both a revenue effect and a protective effect. d. no effect on trade. ANSWER: a FEEDBACK: a. A tariff on oil that is so high that it effectively prohibits imports of oil has only a protective effect.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Tariff Welfare Effects: Consumer Surplus and Producer Surplus KEYWORDS: BLOOM'S: Remember 74. The difference between the maximum amount buyers are willing to pay for a given quantity of a good and the amount actually paid is called a. deadweight loss. b. deadweight gain. c. producer surplus. d. consumer surplus. Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

d a. b. c. d. Consumer surplus refers to the difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Tariff Welfare Effects: Consumer Surplus and Producer Surplus KEYWORDS: BLOOM'S: Remember 75. If Ecuador is considered a small country, a tariff will ______ increase its national welfare. a. never b. always c. sometimes d. only slightly ANSWER: a FEEDBACK: a. For a small nation, a tariff placed on an imported product is shifted totally to the domestic consumer via a higher product price. A tariff will never increase its national welfare.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Understand 76. If Germany is considered a large country, a tariff will ______ increase its national welfare. a. never b. always c. sometimes d. have limited ability to ANSWER: c FEEDBACK: a. b. c. If the importing nation is large relative to the world, the imposition of an import tariff may improve its international terms of trade by an amount that more than Copyright Cengage Learning. Powered by Cognero.

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offsets the welfare losses associated with the consumption effect and the protective effect.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Understand 77. Suppose that Japan levies a 40-percent tariff on pickup trucks and a 20-percent tariff on engines. The effective rate of protection on pickup trucks a. is higher with the tariff on engines. b. is lower with the tariff on engines. c. is the same with or without the tariff on engines. d. is equal to the tariff on engines. ANSWER: a FEEDBACK: a. When the tariff on the finished product (40 percent) exceeds the tariff on the imported input (20 percent), the effective rate of protection exceeds the nominal tariff.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC14: - Costs of production TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Understand 78. For industrial nations, tariffs on raw materials are generally a. higher than on agricultural products. b. lower than on manufactured products. c. equal to tariffs on manufactured products. d. lower than on agricultural products. ANSWER: b FEEDBACK: a. b. The industrialized nations‘ low tariffs on primary commodities encourage the developing nations to expand operations in these sectors, while the high, protective rates levied on manufactured goods pose a significant entry barrier for any developing nation wishing to compete in this area.

c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC14: - Costs of production TOPICS: Tariff Escalation KEYWORDS: BLOOM'S: Understand 79. The U.S. constitution allows the country to levy tariffs a. only on exports. b. only on imports. c. on both exports and imports. d. on neither exports nor imports. ANSWER: b FEEDBACK: a. b. The Constitution was worded to prevent export tariffs: ―No tax or duty shall be laid on articles exported from any state.‖

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Tariff Concept KEYWORDS: BLOOM'S: Understand 80. For developing countries, import tariffs generally are ______ than tariff levels in advanced countries. a. higher b. lower c. the same as d. less protective ANSWER: a FEEDBACK: a. For developing countries, import tariffs generally are higher than tariff levels in advanced countries.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Easy Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Tariff Concept KEYWORDS: BLOOM'S: Remember 81. For a large nation, the levying of an import tariff on steel a. necessarily causes the nation's welfare to decline. b. causes the price of steel on the world market to decline. c. causes the price of steel for domestic consumers to rise by the full amount of the tariff. d. necessarily causes the nation's welfare to increase. ANSWER: b FEEDBACK: a. b. A tariff may increase national welfare when it is imposed by an importing nation that is large enough that changes in the quantity of its imports, by means of tariff policy, influence the world price of the product.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Understand 82. When no imported inputs are used in the production of computers, the effective tariff rate on computers a. exceeds the nominal tariff rate on computers. b. is less than the nominal tariff rate on computers. c. equals the nominal tariff rate on computers. d. equals zero. ANSWER: c FEEDBACK: a. b. c. The effective rate of protection considers the total effect of a country‘s tariff structure when both finished products and intermediate goods are imported. When no imported inputs are used, the effective tariff rate equals the nominal tariff rate.

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KEYWORDS:

BLOOM'S: Understand

83. If the world price is $40, a specific tariff of $10 is equivalent to an ad valorem tariff of a. $10. b. $20. c. 20 percent. d. 25 percent. ANSWER: d FEEDBACK: a. b. c. d. A specific tariff is expressed in terms of a fixed amount of money per physical unit of the imported product ($10). An ad valorem (of value) tariff is expressed as a fixed percentage of the value of the imported product (25% x $40 = $10).

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Tariffs KEYWORDS: BLOOM'S: Understand 84. To protect domestic producers from foreign competition, the U.S. government levies both import tariffs and export tariffs. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The United States cannot levy export tariffs.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Types of Tariffs KEYWORDS: BLOOM'S: Understand 85. With a compound tariff, a domestic importer of an automobile might be required to pay a duty of $200 plus 4 percent of the value of the automobile. a. True b. False ANSWER: True FEEDBACK: Correct A compound tariff combines a specific tariff ($200) with an ad valorem tariff (4 percent of the value). Copyright Cengage Learning. Powered by Cognero.

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Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Types of Tariffs KEYWORDS: BLOOM'S: Remember 87. During a recession, when consumers tend to purchase cheaper products, a specific tariff provides domestic producers a greater amount of protection against import-competing goods than other types of tariffs. a. True b. False ANSWER: True FEEDBACK: Correct A specific tariff represents a fixed amount of money per unit of the imported commodity and has the advantage of providing domestic producers more protection during a business recession, when cheaper products are purchased. Specific tariffs thus cushion domestic producers progressively against foreign competitors who cut their prices. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

Types of Tariffs BLOOM'S: Remember

88. An ad valorem tariff provides domestic producers less protection against import-competing goods during periods of changing prices. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect An ad valorem (of value) tariff is expressed as a fixed percentage of the value of the imported product. It tends to maintain a constant degree of protection for domestic producers during periods of changing prices.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Types of Tariffs KEYWORDS: BLOOM'S: Remember 89. With a compound tariff, the "specific" portion neutralizes the cost disadvantage of domestic manufacturers that results from tariff protection granted to domestic suppliers of raw materials, and the "ad valorem" portion grants protection to the finished-goods industry. a. True b. False ANSWER: True A compound tariff combines a specific tariff with an ad valorem tariff. RATIONALE: A specific tariff represents a fixed amount of money per unit of the imported commodity. It neutralizes the cost disadvantage of domestic manufacturers that results from tariff protection granted to domestic suppliers of raw materials. An ad valorem tariff is stated as a fixed percentage of the value of an imported commodity. It grants protection to the finished-goods industry. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Types of Tariffs KEYWORDS: BLOOM'S: Remember 90. The nominal tariff rate signifies the total increase in domestic productive activities compared to what would occur under free-trade conditions. Copyright Cengage Learning. Powered by Cognero.

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a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect The nominal tariff rate applies to the value of a finished product that is imported into a country. No value is added.

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Escalation KEYWORDS: BLOOM'S: Understand 93. Under the Offshore Assembly Provision (OAP) of U.S. tariff policy, U.S. import duties apply only to the value added in the foreign assembly process if U.S.-made components are used by overseas companies in their assembly operations. a. True b. False ANSWER: True FEEDBACK: Correct Under OAP, when U.S.-made components are sent abroad and assembled to become a finished good, the cost of the U.S.-made components is not included in the dutiable value of the imported assembled good into which it has been incorporated. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Outsourcing and Offshore Assembly Provision KEYWORDS: BLOOM'S: Remember 94. Bonded warehouses and foreign-trade zones have the effect of allowing domestic importers to prorate their input duties over time. a. True b. False ANSWER: True FEEDBACK: Correct American trade laws mitigate the effects of import duties by allowing U.S. importers to postpone and prorate over time their duty obligations by means of bonded warehouses and foreign-trade zones. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Postponing Import Tariffs KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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95. A country whose imports of a product constitute a very small portion of the world market supply of that product is a price taker. Thus, this country faces a constant world price for the imports of this product. a. True b. False ANSWER: True FEEDBACK: Correct To measure the effects of a tariff on a nation‘s welfare, consider the case of a nation whose imports constitute a small portion of the world market supply. This small nation would be a price taker, facing a constant world price level for its import commodity. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Understand 96. Graphically, consumer surplus is the area above the demand curve and below the product's market price. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Consumer surplus refers to the difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay. Graphically, consumer surplus is represented by the area under the demand curve and above the good‘s market price.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Consumer Surplus and Producer Surplus KEYWORDS: BLOOM'S: Understand 97. Producer surplus is the revenue producers receive over and above the minimum necessary for production. a. True b. False ANSWER: True FEEDBACK: Correct Producer surplus is the revenue producers receive over and above the minimum necessary for production. Graphically, producer surplus is represented by the area above the supply curve and below the good‘s market price. Incorrect

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Consumer Surplus and Producer Surplus KEYWORDS: BLOOM'S: Understand 98. For a small country, a tariff raises the domestic price of an imported product by the full amount of the tariff. a. True b. False ANSWER: True FEEDBACK: Correct For a small nation, a tariff placed on an imported product is shifted totally to the domestic consumer via a higher product price. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Understand 99. Although an import tariff provides the domestic government additional tax revenue, it benefits domestic consumers at the expense of domestic producers. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect For a small nation, a tariff placed on an imported product is shifted totally to the domestic consumer via a higher product price.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Understand 100. An import tariff reduces the welfare of a small country by an amount equal to the redistribution effect plus the revenue effect. a. True Copyright Cengage Learning. Powered by Cognero.

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b. False ANSWER: FEEDBACK:

False Correct Incorrect If a nation is small compared with the rest of the world, its welfare falls by the total amount of the protective effect plus the consumption effect if it levies a tariff on imports.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Understand 101. The deadweight losses of an import tariff consist of the protection effect plus the consumption effect. a. True b. False ANSWER: True FEEDBACK: Correct If a nation is small compared with the rest of the world, its welfare falls by the total amount of the protective effect plus the consumption effect if it levies a tariff on imports, the so-called deadweight losses resulting from a tariff. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Understand 102. The redistribution effect is the transfer of producer surplus to domestic consumers of the import-competing product. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The redistributive effect is the transfer of the consumer surplus in monetary terms to the domestic producers of the import-competing product.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Tariff Welfare Effects: Small-Nation Model BLOOM'S: Understand

103. If a country accounts for a negligible portion of international trade in a particular product, its levying an import tariff on that product necessarily increases its overall welfare. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect This small nation would be a price taker, facing a constant world price level for its import commodity. Its welfare falls by the total amount of the protective effect.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Understand 104. Changes in a large country's economic conditions or trade policies can affect the terms at which it trades with other countries. a. True b. False ANSWER: True FEEDBACK: Correct If the importing nation is large relative to the world, its economic conditions or trade policies can affect the terms at which it trades with other countries. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Understand 105. If a large country levies a tariff on imports it cannot improve the terms at which it trades with other countries. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If the importing nation is large relative to the world, the imposition of an import tariff may improve its international terms of trade. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Understand 106. For a large country, a tariff on an imported product may be partially absorbed by the domestic consumer via a higher purchase price and partially absorbed by the foreign producer via a lower export price. a. True b. False ANSWER: True FEEDBACK: Correct For a large nation, a tariff on an imported product may be partially shifted to the domestic consumer via a higher product price and partially absorbed by the foreign exporter via a lower export price. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Understand 107. If a small country levies a tariff on an imported good, its overall welfare increases if the monetary value of the tariff's consumption effect plus protective effect is less than the monetary value of the terms-of-trade effect. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If a nation is small, its welfare necessarily falls by the total amount of the protective effect plus the consumption effect if it levies a tariff on imports.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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108. A tariff on steel imports tends to improve the competitiveness of domestic automobile companies. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Domestic exporters that purchase imported inputs subject to tariffs face higher costs and a reduction in competitiveness.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Arguments for Trade Restrictions KEYWORDS: BLOOM'S: Understand 109. A tariff can be thought of as a tax on imported goods. a. True b. False ANSWER: True FEEDBACK: Correct Tariffs are taxes on imports. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Effects: An Overview KEYWORDS: BLOOM'S: Understand 110. Seekers of protectionism are often established firms in an aging industry that have lost their comparative advantage. a. True b. False ANSWER: True FEEDBACK: Correct Seekers of protectionism are often established firms in an aging industry that have lost their comparative advantage. High costs may result from a lack of modern technology, inefficient management procedures, outmoded work rules, or high payments to domestic workers. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC1: - Gains from trade, specialization, and trade The Political Economy of Protectionism BLOOM'S: Apply

111. Companies whose foreign sales constitute a substantial portion of total sales are not be concerned about import protection. a. True b. False ANSWER: True FEEDBACK: Correct The demand for protection may be influenced by the degree of export dependence. Companies whose foreign sales constitute a substantial portion of total sales are concerned that the imposition of domestic trade barriers might invite retaliation overseas that would ruin their export markets. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: The Political Economy of Protectionism KEYWORDS: BLOOM'S: Understand 112. According to the infant-industry argument, temporary tariff protection granted to an infant industry will help it become competitive in the world market. When international competitiveness is achieved, the tariff should be removed. a. True b. False ANSWER: True FEEDBACK: Correct According to the infant-industry argument, only after the young companies have had time to become efficient producers should the tariff barriers be lifted and free trade take place. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Arguments for Trade Restrictions KEYWORDS: BLOOM'S: Apply Exhibit 4.2 In the absence of international trade, assume that the equilibrium price and quantity of motorcycles in Canada is $14,000 and 10 units, respectively. Assuming that Canada is a small country unable to affect the world price of motorcycles, Copyright Cengage Learning. Powered by Cognero.

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suppose its market is opened to international trade. As a result, the price of motorcycles falls to $12,000 and the total quantity demanded rises to 14 units; out of this total, 6 units are produced in Canada while 8 units are imported. Now assume that the Canadian government levies an import tariff of $1,000 on motorcycles. With the tariff, 8 units are produced in Canada and quantity demanded is 12 units. 113. Refer to Exhibit 4.2. As a result of the tariff, the price of imported motorcycles equals $13,000 and imports total 4 cycles. a. True b. False ANSWER: True FEEDBACK: Correct If the Canadian government levies an import tariff of $1,000 on motorcycles, the price of imported motorcycles equals $13,000 ($12,000 + $1,000). Imports total 4 cycles (12 units - 8 units). Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False PREFACE NAME: Exhibit 4.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Analyze

114. Refer to Exhibit 4.2. The tariff leads to an increase in Canadian consumer surplus totaling $11,000. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Consumer surplus falls as a result of the price increase.

115. Refer to Exhibit 4.2. The tariff's redistribution effect equals $1,000. a. True b. False ANSWER: True Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

Correct

The redistributive effect is the transfer of the consumer surplus in monetary terms ($1,000) to the domestic producers of the import-competing product.

Incorrect

116. Refer to Exhibit 4.2. The tariff's revenue effect equals $6,000. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The tariff‘s revenue effect represents the government‘s collections of duty. Government revenue is found by multiplying the number of imports times the tariff (10 x $1000 = $10,000).

117. Refer to Exhibit 4.2. All of the import tariff is shifted to the Canadian consumer via a higher price of motorcycles. a. True b. False ANSWER: True FEEDBACK: Correct For a small nation, a tariff placed on an imported product is shifted totally to the domestic consumer via a higher product price. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False PREFACE NAME: Exhibit 4.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC1: - Gains from trade, specialization, and trade Tariff Welfare Effects: Small-Nation Model BLOOM'S: Understand

118. Unlike a specific tariff, an ad valorem tariff offers a constant rate of protection. a. True b. False ANSWER: True FEEDBACK: Correct An ad valorem (of value) tariff is expressed as a fixed percentage of the value of the imported product. It tends to maintain a constant degree of protection for domestic producers during periods of changing prices. Incorrect

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a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect A compound tariff combines a specific tariff with an ad valorem tariff.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC1: - Gains from trade, specialization, and trade Tariff Welfare Effects: Large-Nation Model BLOOM'S: Understand

123. A tariff can increase the welfare of a large country if the favorable terms-of-trade effect is greater than the unfavorable protective effect and consumption effect. a. True b. False ANSWER: True FEEDBACK: Correct If the importing nation is large relative to the world, the imposition of an import tariff may improve its international terms of trade by an amount that more than offsets the welfare losses associated with the consumption effect and the protective effect. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Welfare Effects: Large-Nation Model KEYWORDS: BLOOM'S: Understand 124. If the world price of steel is $600 per ton, a specific tariff of $120 per ton is equivalent to an ad valorem tariff of 25 percent. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect A specific tariff is expressed in terms of a fixed amount of money per physical unit of the imported product ($120). An ad valorem (of value) tariff is expressed as a fixed percentage of the value of the imported product (25% x $600 = $150).

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Types of Tariffs KEYWORDS: BLOOM'S: Understand 125. Suppose that the tariff on imported steel is 40 percent, the tariff on imported iron ore is 20 percent, and 30 percent of the cost of producing a ton of steel consists of the iron ore it contains. The effective rate of protection of steel is approximately 49 percent. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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ANSWER: RATIONALE:

True The effective tariff rate is given by the following formula:

where e = the effective rate of protection n = the nominal tariff rate on the final product = 40% a = the ratio of the value of the imported input to the value of the finished product = 30% b = the nominal tariff rate on the imported input = 20% then e = the effective rate of protection = POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Apply 126. Assume that the United States imports laptops from South Korea at a price of $200 per unit and that these laptops are subject to an import tariff of 20 percent. Also assume that U.S. components are used in the laptops assembled by South Korea and that these components have a value of $100. Under the Offshore Assembly Provision of U.S. tariff policy, the price of an imported laptop to the U.S. consumer after the tariff has been levied is $220. a. True b. False ANSWER: True FEEDBACK: Correct Specific tariff: $200 per unit. Ad valorem tariff: 20% x $100 = $20. Compound tariff: $200 + $20 = $220. Incorrect

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a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect Specific tariff: $300 per unit. Ad valorem tariff: 25% x $100 = $25. Compound tariff: $300 + $2 = $325.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC14: - Costs of production TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Remember 129. If Japan is a large country, it cannot influence the terms of trade when it imposes a tariff on imports. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If the importing nation is large relative to the world, the imposition of an import tariff may improve its international terms of trade.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Tariff Welfare Effects: Large-Nation Model BLOOM'S: Understand

130. If a small country levies a tariff on imports, its overall national welfare necessarily falls. a. True b. False ANSWER: True FEEDBACK: Correct If a nation is small compared with the rest of the world, its welfare falls by the total amount of the protective effect plus the consumption effect if it levies a tariff on imports. Incorrect

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Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC14: - Costs of production TOPICS: Tariff Welfare Effects: Small-Nation Model KEYWORDS: BLOOM'S: Remember 133. For many industrial countries, import tariffs tend to increase with stages of processing and manufacturing. a. True b. False ANSWER: True FEEDBACK: Correct For many industrial countries, although raw materials are often imported at zero or low tariff rates, the nominal and effective protection increases at each stage of production. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Outsourcing and Offshore Assembly Provision KEYWORDS: BLOOM'S: Remember 135. Tariff avoidance is the legal utilization of the tariff system to one's own advantage in order to reduce the amount of Copyright Cengage Learning. Powered by Cognero.

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tariff that is payable by means that are within the law. a. True b. False ANSWER: True FEEDBACK: Correct Tariff avoidance is the legal use of the tariff system to one‘s own advantage to reduce the amount of tariff payable by legal means. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC10: - The role of government TOPICS: Dodging Import Tariffs: Tariff Avoidance and Tariff Evasion KEYWORDS: BLOOM'S: Remember 136. Tariff evasion occurs when individuals or firms escape tariffs by illegal means such as smuggling imported goods into a country. a. True b. False ANSWER: True FEEDBACK: Correct Tariff evasion occurs when individuals or firms evade tariffs by illegal means such as smuggling imported goods into a country. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC10: - The role of government TOPICS: Dodging Import Tariffs: Tariff Avoidance and Tariff Evasion KEYWORDS: BLOOM'S: Remember 137. A foreign-trade zone (FTZ) is an area within the United States where businesses can operate without the responsibility of paying customs duties on imported products or materials for as long as they remain within this area and do not enter the U.S. marketplace. a. True b. False ANSWER: True FEEDBACK: Correct A foreign-trade zone (FTZ) is an area within the United States where businesses can operate without having to pay customs duties on imported products or materials for as long as they remain within this area and do not enter the U.S. marketplace. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Postponing Import Tariffs KEYWORDS: BLOOM'S: Remember 138. Empirical studies show that virtually all U.S. import tariffs are "progressive" in that they disproportionately negatively impact upper-income groups rather than lower-income groups. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Tariff effects are regressive. They disproportionately negatively impact lower income groups.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Tariffs and the Poor: Regressive Tariffs KEYWORDS: BLOOM'S: Understand 139. Frederic Bastiat's Petition of the Candle Makers is a satire that illustrates the disadvantages of free trade as opposed to protectionism. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Free-trade advocate Frederic Bastiat presented the French Chamber of Deputies with a satire of protectionists‘ arguments in 1845called Petition of the Candle Makers.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Would a Tariff Wall Really Protect U.S. Jobs KEYWORDS: BLOOM'S: Remember 140. A worker is likely to benefit from a tariff in the short run if the worker is employed in the industry that is protected by the tariff. a. True b. False ANSWER: True FEEDBACK: Correct Import-competing producers and workers can benefit from tariffs through Copyright Cengage Learning. Powered by Cognero.

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increases in output, profits, jobs, and compensation. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC6: - Labor markets TOPICS: How a Tariff Burdens Exporters KEYWORDS: BLOOM'S: Understand 141. Democratic candidates for federal public office in the United States have always advocated for tariffs, while Republican candidates uniformly favor free trade. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect During the 2016 presidential election, candidates from both parties made trade protectionism a priority in their campaigns.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Would a Tariff Wall Really Protect U.S. Jobs? KEYWORDS: BLOOM'S: Apply 142. Regressive tariffs benefit the poor because they are levied only on luxury items. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Regressive tariffs hurt the poor. Relatively high U.S. tariffs are placed on cheaper products rather than on luxuries.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Tariffs and the Poor: Regressive Tariffs KEYWORDS: BLOOM'S: Apply 143. Most American importers support tariffs because, in the United States, tariffs are levied directly on exporters. a. True Copyright Cengage Learning. Powered by Cognero.

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b. False ANSWER: FEEDBACK:

False Correct Incorrect In the United States, tariffs are levied on importers.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: How a Tariff Burdens Exporters KEYWORDS: BLOOM'S: Analyze 144. Can import duties have unintended side effects? Describe one example. Yes. Duties may discourage a company from importing goods in amounts large enough to ANSWER: take advantage of quantity discount pricing. Also, up-front payment of these duties may impose financial hardships on importers. For example, if the United States stops importing foreign manufactured microchip processors and instead relies on domestic production, the result could be inefficient production. This could lead to an increase in consumer prices of electronics which use the processor. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Effects: An Overview KEYWORDS: BLOOM'S: Understand 145. What happens to effective protection when the value added by the domestic producer declines? The degree of effective protection increases. This is because as value added is less ANSWER: important, it can experience a relatively larger percentage increase per unit of output. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Effective Rate of Protection KEYWORDS: BLOOM'S: Understand 146. Is it possible for a low nominal tariff rate to understate the effective rate of protection? What is tariff escalation? Yes. In some countries, the effective rate of protection is more than twice the nominal rate. ANSWER: Copyright Cengage Learning. Powered by Cognero.

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The effective rate of protection takes into account the effects of tariffs levied on raw materials and intermediate goods. Tariff structures of industrialized nations have generally been characterized by rates that give greater protection to intermediate and finished products than to primary commodities. This is referred to as tariff escalation. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Tariff Escalation KEYWORDS: BLOOM'S: Analyze 147. How can tariffs be justified? Tariffs are justified on the grounds that they protect domestic employment and wages, help ANSWER: create a level playing field for international trade, equate the cost of imported products with the cost of domestically produced goods, and allow domestic industries to be insulated temporarily from foreign competition until they can grow and develop or protect industries necessary for national security. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC1: - Gains from trade, specialization, and trade TOPICS: Arguments for Trade Restrictions KEYWORDS: BLOOM'S: Analyze

Chapter 05: Nontariff Trade Barriers 1. The imposition of a tariff on imported steel for the home country results in a. improving terms of trade and rising volume of trade. b. higher steel prices and falling steel consumption. c. lower profits for domestic steel companies. d. higher unemployment for domestic steel workers. ANSWER: b FEEDBACK: a. b. The imposition of a tariff on imported steel for the home country results in higher steel prices and falling steel consumption.

c. d. POINTS: DIFFICULTY:

1 Easy

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Analyze 2. Which of the following refers to a market-sharing pact negotiated by trading partners to moderate the intensity of international competition? a. orderly marketing agreement b. local content requirements c. import quota d. trigger price mechanism ANSWER: a FEEDBACK: a. Besides implementing import quotas, countries have used export quotas to restrain trade. When doing so, they typically negotiate a market-sharing pact known as a voluntary export restraint agreement, which is also known as an orderly marketing agreement.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Export Quotas KEYWORDS: BLOOM'S: Remember 3. Suppose the United States and Japan enter into a voluntary export agreement in which Japan imposes an export quota on its automakers. The largest share of the export quota's revenue effect would tend to be captured by a. the U.S. government. b. Japanese automakers. c. American auto consumers. d. American autoworkers. ANSWER: b FEEDBACK: a. b. Because an export quota is administered by the government of the exporting nation (supply-side restriction), its revenue effect tends to be captured by sellers from the exporting nation.

c. d. POINTS: DIFFICULTY:

1 Easy

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Export Quotas KEYWORDS: BLOOM'S: Analyze 4. Suppose the government grants a subsidy to domestic producers of an import-competing good. The subsidy tends to result in deadweight losses for the domestic economy in the form of the a. consumption effect. b. redistribution effect. c. revenue effect. d. protective effect. ANSWER: d FEEDBACK: a. b. c. d. A subsidy granted to exporters allows them to sell their products abroad at prices below their costs. However, it entails a deadweight welfare loss to the home country in the form of the protective effect and the consumption effect.

c. d. POINTS: DIFFICULTY:

1 Challenging

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Subsidies KEYWORDS: BLOOM'S: Understand 6. Suppose the government grants a subsidy to its export firms that permits them to charge lower prices on goods sold abroad. The export revenue of these firms would rise if the foreign demand is a. elastic in response to the price reduction. b. inelastic in response to the price reduction. c. unit elastic in response to the price reduction. d. weak. ANSWER: a FEEDBACK: a. A subsidy granted to exporters allows them to sell their products abroad at prices below their costs. The export revenue of these firms would rise if the foreign demand is elastic in response to the price reduction.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Subsidies KEYWORDS: BLOOM'S: Analyze 7. Because export subsidies tend to result in domestic exporters charging lower prices on their goods sold overseas, the home country's a. export revenues will decrease. b. export revenues will rise. c. terms of trade will worsen. d. terms of trade will improve. ANSWER: c FEEDBACK: a. b. c. A subsidy granted to exporters allows them to sell their products abroad at prices below their costs. It results in a terms-of-trade effect and an export revenue effect.

d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Subsidies KEYWORDS: BLOOM'S: Understand 8. Which trade restriction stipulates the percentage of a product's total value that must be produced domestically in order for that product to be sold domestically? a. import quota b. orderly marketing agreement c. local content requirement d. government procurement policy ANSWER: c FEEDBACK: a. b. c. Domestic content requirements stipulate the minimum percentage of a

product‘s value that must be produced in the home country for that product to be sold tariff free.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Domestic Content Requirements KEYWORDS: BLOOM'S: Understand 9. The imposition of a domestic content requirement by the United States would cause consumer surplus for Americans to a. rise. b. fall. c. remain unchanged. d. impose downward pressure on wages of workers. ANSWER: b FEEDBACK: a. b. Domestic content protection tends to impose welfare losses on the domestic economy in the form of higher production costs and higher-priced goods. The imposition of a domestic content requirement by the United States would cause consumer surplus for Americans to fall.

c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Domestic Content Requirements KEYWORDS: BLOOM'S: Understand 10. Domestic content legislation applied to autos would tend to a. support wage levels of American autoworkers. b. lower auto prices for American autoworkers. c. encourage American automakers to locate production overseas. d. increase profits of American auto companies. ANSWER: a FEEDBACK: a. The effect of content requirements is to pressure both domestic and foreign firms that sell products in the home country to use domestic inputs (workers) in the production of those products. This would tend to support wage levels of American autoworkers.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Domestic Content Requirements KEYWORDS: BLOOM'S: Understand 11. Compared to an import quota, an equivalent tariff may provide a less certain amount of protection for home producers because a. a tariff has no deadweight loss in terms of production and consumption. b. foreign firms may absorb the tariff by offering exports at lower prices. c. tariffs are effective only if home demand is perfectly elastic. d. quotas do not result in increases in the price of the imported good. ANSWER: b FEEDBACK: a. b. Although quotas have many of the same economic effects as tariffs, they tend to be more restrictive. With an equivalent import tariff, foreign firms may absorb the tariff by offering exports at lower prices.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Absolute Import Quota BLOOM'S: Understand

12. Empirical studies show that because voluntary export quotas are typically administered by exporting countries, foreign exporters tend to a. raise their export prices, thus capturing much of the quota's revenue effect. b. lower their export prices, thus losing much of the quota's revenue effect. c. raise their export prices, thus selling more goods overseas. d. lower their export prices, thus selling fewer goods overseas. ANSWER: a FEEDBACK: a. Empirical studies show that because voluntary export quotas are typically administered by exporting countries, foreign exporters tend to raise their export prices, thus capturing much of the quota's revenue effect.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Export Quotas KEYWORDS: BLOOM'S: Understand 13. Concerning the restrictive impact of an import quota, assume there occurs an increase in the domestic demand for the import product. As long as the quota falls short of what would be imported under free market conditions, the economy's adjustment to the increase in demand would take the form of a. a decrease in domestic production of the import good. b. an increase in the amount of the good being imported. c. an increase in the domestic price of the import good. d. a decrease in domestic consumption of the import good. ANSWER: c FEEDBACK: a. b. c. With an import quota, an increase in demand induces an increase in product price. The price increase leads to a rise in production and a fall in consumption of the import-competing good, while the level of imports remains constant.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Absolute Import Quota BLOOM'S: Analyze

14. Assume the U.S. has a competitive advantage in producing calculators, while the rest of the world has a competitive advantage in steel. Suppose the U.S. and the rest of the world enter into an agreement to lower import quotas below existing levels on calculators and steel. Which of the following would least likely occur for the U.S.? Rising levels of a. consumer surplus for American buyers of steel. b. producer surplus for American steelmakers. c. production in the American calculator industry. d. producer surplus for American calculator producers. ANSWER: b FEEDBACK: a. b. By increasing supplies of an imported product, a lower import quota leads to lower import prices. This price umbrella allows domestic producers of the import-competing goods to lower prices. The result is an increase in the consumer surplus for American buyers of steel, an increase in the producer surplus for American steelmakers, and an increase in the producer surplus for American calculator producers.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Analyze 15. A firm that faces problems of falling sales and excess productive capacity might resort to international dumping if it a. can charge higher prices in markets that are elastic to price changes. b. earns revenues on foreign sales that at least cover variable costs. c. can sell at that price where domestic and foreign demand elasticities equate. d. is able to force foreign prices below marginal production costs. ANSWER: b FEEDBACK: a. b. A firm that faces problems of falling sales and excess productive capacity might resort to international dumping if it earns revenues on foreign sales that at least cover variable costs.

c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Is Antidumping Law Unfair? KEYWORDS: BLOOM'S: Understand 16. A producer successfully practicing international dumping would charge a. a relatively higher price in the more inelastic market. b. a relatively higher price in the more elastic market. c. the same price in all markets, regardless of their elasticities. d. different prices in all markets, regardless of their elasticities. ANSWER: a FEEDBACK: a. A producer will charge a higher price in the less-elastic demand (lesscompetitive) market and a lower price in the more-elastic demand (morecompetitive) market.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Is Antidumping Law Unfair? BLOOM'S: Remember

18. The United Auto Workers union attempted to win the approval of legislation that would moderate the practice of foreign sourcing on the part of American auto manufacturers. Which of the following best represents this legislation? a. voluntary export quotas b. trigger price mechanism c. tariff quotas d. local content laws ANSWER: d FEEDBACK: a. b. c. d. Domestic content requirements try to limit the practice of foreign sourcing and encourage the development of domestic industry.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Domestic Content Requirements KEYWORDS: BLOOM'S: Remember 19. The U.S.-Japanese agreement in 1981 to limit imports of small Japanese cars to the U.S. a. affected Japanese automakers uniformly. b. resulted in losses to the Japanese auto industry. c. cost the U.S. consumer for every Japanese import purchased. d. did not save any U.S. jobs. ANSWER: c FEEDBACK: a. b. c. By requiring Japanese auto companies to form an export cartel against the U.S. consumer, the quota allowed large, established firms (Toyota, Nissan, and Honda) to increase prices on autos sold in the United States.

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TOPICS: KEYWORDS:

Export Quotas BLOOM'S: Understand

20. If a tariff and an import quota lead to equivalent increases in the domestic price of steel, then a. the quota results in efficiency reductions but the tariff does not. b. the tariff results in efficiency reductions but the quota does not. c. they have different impacts on how much is produced and consumed. d. they have different impacts on how income is distributed. ANSWER: d In a growing market, an import tariff is a less-restrictive trade barrier than an equivalent RATIONALE: import quota. With an import tariff, the adjustment that occurs in response to an increase in domestic demand is an increase in the amount of the product that is imported. With an import quota, an increase in demand induces an increase in product price. The price increase leads to a rise in production and a fall in consumption of the import-competing good, while the level of imports remains constant If a tariff and an import quota lead to equivalent increases in the domestic price of steel, then they have different impacts on how income is distributed. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Understand 21. If a tariff and an import quota lead to equivalent increases in the domestic price of steel, then a. the quota results in efficiency reductions but the tariff does not. b. the tariff results in efficiency reductions but the quota does not. c. they have identical impacts on how much is produced and consumed. d. they have identical impacts on how income is distributed. ANSWER: c In a growing market, an import tariff is a less-restrictive trade barrier than an equivalent RATIONALE: import quota. With an import tariff, the adjustment that occurs in response to an increase in domestic demand is an increase in the amount of the product that is imported. With an import quota, an increase in demand induces an increase in product price. The price increase leads to a rise in production and a fall in consumption of the import-competing good, while the level of imports remains constant. If a tariff and an import quota lead to equivalent increases in the domestic price of steel, then they have identical impacts on how much is produced and consumed. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Absolute Import Quota BLOOM'S: Understand

22. From the perspective of the American public as a whole, export subsidies levied by overseas governments on goods sold to the United States a. help more than they hurt. b. hurt more than they help. c. are equivalent to an import quota. d. are equivalent to an export quota. ANSWER: a FEEDBACK: a. From the perspective of the American public as a whole, export subsidies levied by overseas governments on goods sold to the United States help more than they hurt. However, it entails a deadweight welfare loss to the home country in the form of the protective effect and the consumption effect.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Subsidies BLOOM'S: Understand

24. If import licenses are auctioned off to domestic importers in a competitive market, their scarcity value (revenue effect) accrues to a. foreign corporations. b. foreign workers. c. domestic corporations. d. the domestic government. ANSWER: d FEEDBACK: a. b. c. d. If government desired to capture the revenue effect of an import quota, it could auction import quota licenses to the highest bidder in a competitive market.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Understand 25. A specification of a maximum amount of a foreign produced good that will be allowed to enter the country over a given period is referred to as a. a domestic subsidy. b. an export subsidy. c. an import quota. d. an export quota. ANSWER: c FEEDBACK: a. b. c. An import quota is a government-imposed limit on the quantity of a product that can be imported.

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KEYWORDS:

BLOOM'S: Understand

26. Import quotas tend to lead to all of the following, except a. domestic producers of the imported good being harmed. b. domestic consumers of the imported good being harmed. c. prices increasing in the importing country. d. prices falling in the exporting country. ANSWER: a FEEDBACK: a. By restricting available supplies of an imported product, a quota leads to higher import prices. This price umbrella allows domestic producers of the importcompeting good to raise prices. The result is a decrease in the consumer surplus. Of this amount, the welfare loss to the importing nation consists of the protective effect, the consumption effect, and that portion of the revenue effect that is captured by the foreign exporter.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Understand 27. To maintain that South Koreans are dumping their VCRs in the United States is to maintain that a. Koreans are selling VCRs in the United States below their production cost. b. Koreans are selling VCRs in the United States above their production cost. c. the cost of manufacturing VCRs in Korea is lower in Korea than in the United States because wages are lower in Korea. d. the cost of manufacturing VCRs in Korea is higher in Korea than in the United States because wages are higher in Korea. ANSWER: a FEEDBACK: a. International dumping occurs when a firm sells its product abroad at a price that is less than average total cost or less than that charged to domestic buyers of the same product.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Dumping BLOOM'S: Understand

28. If the home country's government grants a subsidy on a domestically produced good, domestic producers tend to a. capture the entire subsidy in the form of higher profits. b. increase their level of production. c. reduce wages paid to domestic workers. d. consider the subsidy as an increase in production cost. ANSWER: b FEEDBACK: a. b. If the home country's government grants a subsidy on a domestically produced good, domestic producers tend to increase their level of production. The subsidy revenue accruing to the producer is absorbed by producer surplus and high-cost production (protective effect).

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KEYWORDS:

BLOOM'S: Remember

30. In certain industries, Japanese employers do not lay off workers. Therefore, they sometimes have excess supplies of goods that they cannot sell on the home market without lowering prices. To hold down losses, they sell goods in overseas markets at prices well beneath those in Japan. This practice is best referred to as a. orderly marketing. b. trigger pricing. c. domestic content pricing. d. dumping. ANSWER: d FEEDBACK: a. b. c. d. International dumping occurs when a firm sells its product abroad at a price that is less than average total cost or less than that charged to domestic buyers of the same product.

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31. Consider Figure 5.1. With free trade, the quantity of steel imported by Mexico equals a. 2 tons. b. 4 tons. c. 6 tons. d. 8 tons. ANSWER: c FEEDBACK: a. b. c. With free trade, the quantity of steel imported by Mexico equals 6 tons. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Analyze

32. Consider Figure 5.1. With free trade, Mexico's consumer surplus and producer surplus respectively equal a. $2000 and $1200. b. $3200 and $200. c. $3600 and $800. d. $4000 and $600. ANSWER: b FEEDBACK: a. b. With free trade, Mexico's consumer surplus and producer surplus respectively equal $3200 and $200.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Analyze

33. Referring to Figure 5.1, suppose the Mexican government imposes an import quota equal to 2 tons of steel. If Mexican steel importers behave as monopoly buyers and foreign exporters behave as competitive sellers, the overall welfare loss of the quota to Mexico equals a. $200. b. $400. c. $600. d. $800. ANSWER: b FEEDBACK: a. b. If Mexican steel importers behave as monopoly buyers and foreign exporters behave as competitive sellers, the overall welfare loss of the quota to Mexico equals $400.

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TOPICS: KEYWORDS:

Absolute Import Quota BLOOM'S: Apply

34. Referring to Figure 5.1, suppose the Mexican government imposes an import quota equal to 2 tons of steel. If foreign exporters behave as monopoly sellers, and Mexican importers behave as competitive buyers, the overall welfare loss of the quota to Mexico equals a. $200. b. $400. c. $600. d. $800. ANSWER: d FEEDBACK: a. b. c. d. If foreign exporters behave as monopoly sellers, and Mexican importers behave as competitive buyers, the overall welfare loss of the quota to Mexico equals $800.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Apply

35. Referring to Figure 5.1, suppose the Mexican government imposes an import quota equal to 2 tons of steel. If the Mexican government auctions import licenses to the highest foreign bidder, the overall welfare loss of the quota to Mexico equals a. $200. b. $400. c. $600. d. $800. ANSWER: b FEEDBACK: a. b. If the Mexican government auctions import licenses to the highest foreign bidder, the overall welfare loss of the quota to Mexico equals $400.

c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Challenging Multiple Choice False

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PREFACE NAME: Figure 5.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Apply

36. Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). The quantity of imports equals a. 1 ton. b. 2 tons. c. 3 tons. d. 4 tons. ANSWER: d FEEDBACK: a. b. c. d. If the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy), the quantity of imports equals 4 tons.

37. Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). The total cost of the subsidy to the Mexican government equals a. $200. b. $400. c. $600. d. $800. ANSWER: d FEEDBACK: a. b. c. d. If the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy), the total cost of the subsidy to the Mexican government equals $800.

POINTS:

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DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Subsidies KEYWORDS: BLOOM'S: Apply

38. Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). As a result of the subsidy, Mexican steel producers gain ____ of producer surplus. a. $200 b. $400 c. $600 d. $800 ANSWER: c FEEDBACK: a. b. c. As a result of the subsidy, Mexican steel producers gain $600 of producer surplus.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Subsidies KEYWORDS: BLOOM'S: Apply

39. Consider Figure 5.1. Suppose instead that the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). As a result of the subsidy, the welfare loss to Mexico due to inefficient domestic production equals a. $200. b. $400. c. $600. d. $800. ANSWER: a FEEDBACK: a. As a result of the subsidy, the welfare loss to Mexico due to inefficient domestic production equals $200.

b. Copyright Cengage Learning. Powered by Cognero.

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40. Consider Figure 5.1. Suppose the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). The overall deadweight welfare loss to Mexico equals a. $200. b. $400. c. $600. d. $800. ANSWER: a FEEDBACK: a. The overall deadweight welfare loss to Mexico equals $200. b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Subsidies KEYWORDS: BLOOM'S: Apply

41. Consider Figure 5.1. Suppose the rest of the world voluntarily agrees to reduce steel shipments to Mexico vis-a-vis an export quota equal to 2 tons. Assuming Mexican importers behave as competitive buyers while foreign exporters behave as monopoly sellers, the overall welfare loss of the quota to Mexico is a. $200. b. $400. c. $600. d. $800. ANSWER: d FEEDBACK: a. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. The overall welfare loss of the quota to Mexico is $800. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Export Quota KEYWORDS: BLOOM'S: Apply

42. Consider Figure 5.1. Suppose the rest of the world voluntarily agrees to reduce steel shipments to Mexico vis-a-vis an export quota equal to 2 tons. Assuming Mexican importers behave as monopoly buyers while foreign exporters behave as competitive sellers, the overall welfare loss of the quota to Mexico is a. $200. b. $400. c. $600. d. $800. ANSWER: b FEEDBACK: a. b. The overall welfare loss of the quota to Mexico is $400. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Export Quota KEYWORDS: BLOOM'S: Apply Figure 5.2 illustrates the revenue and cost conditions of ABC Inc., which sells calculators in Canada and France. Figure 5.2. International Dumping

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43. Consider Figure 5.2. In the absence of international dumping, ABC Inc. maximizes profits by selling ____ calculators at a price of $____; the firm realizes profits totaling $____. a. 27, 5, 54 b. 27, 5, 36 c. 24, 4, 46 d. 24, 4, 28 ANSWER: a FEEDBACK: a. In the absence of international dumping, ABC Inc. maximizes profits by selling 27 calculators at a price of $5; the firm realizes profits totaling $54.

b. c. d. POINTS: 1 DIFFICULTY: 3 QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Dumping KEYWORDS: BLOOM'S: Analyze

44. Consider Figure 5.2. ABC Inc. sells 27 calculators at a price of $5 each, realizing profits totaling $54. Of this quantity, ABC Inc. sells ____ calculators in Canada and realizes revenues totaling $____; the firm sells ____ calculators in France and realizes revenues totaling $____. a. 15, 35, 9, 45 b. 15, 45, 9, 35 c. 21, 105, 6, 30 d. 21, 30, 6, 105 ANSWER: c FEEDBACK: a. Copyright Cengage Learning. Powered by Cognero.

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b. c. Of this quantity, ABC Inc. sells 21calculators in Canada and realizes revenues totaling $105; the firm sells 6 calculators in France and realizes revenues totaling $30.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Dumping KEYWORDS: BLOOM'S: Apply

45. Consider Figure 5.2. With international dumping, ABC Inc. sells ____ calculators to Canadian buyers at a price of $____ and ____ calculators to French buyers at a price of $____. a. 15, 4, 12, 7 b. 15, 7, 12, 5 c. 9, 5, 15, 6 d. 9, 6, 15, 5 ANSWER: b FEEDBACK: a. b. With international dumping, ABC Inc. sells 15 calculators to Canadian buyers at a price of $7 and 12 calculators to French buyers at a price of $5.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Dumping KEYWORDS: BLOOM'S: Apply

46. Consider Figure 5.2. Compared with the total revenue and total profit that ABC Inc. realizes in the absence of dumping, with dumping the firm attains a a. fall in revenue of $18 and fall in profits of $15. b. fall in revenue of $18 and fall in profits of $18. c. rise in revenue of $18 and rise in profits of $15. d. rise in revenue of $18 and rise in profits of $18. ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. d. Compared with the total revenue and total profit that ABC Inc. realizes in the absence of dumping, with dumping the firm attains a rise in revenue of $18 and rise in profits of $18.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Dumping KEYWORDS: BLOOM'S: Analyze Figure 5.3 illustrates the apple market for Sweden, assumed to be a small country that is unable to affect the world price. SSweden is the domestic supply and DSweden is the domestic demand. SSweden+Quota is Sweden's supply schedule with an import quota. Figure 5.3. Sweden's Apple Market

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47. Consider Figure 5.3. In the absence of trade, Sweden's equilibrium price and quantity of apples would be a. $0.60 and 22 pounds. b. $0.60 and 14 pounds. c. $1.00 and 18 pounds. d. $1.40 and 14 pounds. ANSWER: d FEEDBACK: a. b. c. d. In the absence of trade, Sweden's equilibrium price and quantity of apples would be $1.40 and 14 pounds.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Analyze

48. Consider Figure 5.3. Suppose the rest of the world can supply apples to Sweden at a price of $0.60 per pound. With free trade, Sweden produces ____ pounds of apples and imports ____ pounds of apples. a. 10, 8 b. 10, 18 c. 6, 22 d. 6, 16 ANSWER: d FEEDBACK: a. b. c. d. With free trade, Sweden produces 6 pounds of apples and imports 16 pounds of apples.

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49. Consider Figure 5.3. At the free-trade price of $0.60 per pound, Sweden's consumer surplus totals ____ and producer surplus totals ____. a. $10.80, $2.40 b. $14.60, $3.90 c. $24.20, $1.80 d. $32.40, $2.30 ANSWER: c FEEDBACK: a. b. c. At the free-trade price of $0.60 per pound, Sweden's consumer surplus totals $24.20 and producer surplus totals $1.80.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Apply

50. Consider Figure 5.3. If SSweden+Quota represents the supply schedule after a quota is levied, Sweden's imports will equal a. 6 apples. b. 8 apples. c. 10 apples. d. 12 apples. ANSWER: b FEEDBACK: a. b. If SSweden+Quota represents the supply schedule after a quota is levied, Sweden's imports will equal 8 apples.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Apply

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51. Consider Figure 5.3. After the quota is levied, the price of apples in Sweden will equal a. $0.60 per pound. b. $1.00 per pound. c. $1.40 per pound. d. $1.80 per pound. ANSWER: b FEEDBACK: a. b. After the quota is levied, the price of apples in Sweden will equal $1.00 per pound.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Apply

52. Consider Figure 5.3. As a result of the quota, Sweden's consumer surplus a. increases by $6. b. increases by $8. c. decreases by $6. d. decreases by $8. ANSWER: d FEEDBACK: a. b. c. d. As a result of the quota, Sweden's consumer surplus decreases by $8. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Apply

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53. Consider Figure 5.3. The quota leads to a deadweight welfare loss for Sweden of an amount equaling a. $0.80. b. $1.60. c. $2.40. d. $3.20. ANSWER: b FEEDBACK: a. b. The quota leads to a deadweight welfare loss for Sweden of an amount equaling $1.60.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Apply

54. Consider Figure 5.3. The quota's revenue effect equals a. $1.60. b. $2.40. c. $3.20. d. $4.00. ANSWER: c FEEDBACK: a. b. c. The quota's revenue effect equals $3.20. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Apply

55. Consider Figure 5.3. Assume that Swedish import companies behave as competitive buyers while foreign export companies behave as monopoly sellers. Compared to free trade, Sweden's import quota results in domestic welfare Copyright Cengage Learning. Powered by Cognero.

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a. gains totaling $3.20. b. gains totaling $4.80. c. losses totaling $3.20. d. losses totaling $4.80. ANSWER: FEEDBACK:

d a. b. c. d. Compared to free trade, Sweden's import quota results in domestic welfare losses totaling $4.80.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Analyze

56. Consider Figure 5.3. Assume that Swedish import companies behave as monopoly buyers while foreign export companies behave as competitive sellers. Compared to free trade, Sweden's import quota results in domestic welfare a. gains totaling $1.60. b. gains totaling $3.20. c. losses totaling $1.60. d. losses totaling $3.20. ANSWER: c FEEDBACK: a. b. c. Compared to free trade, Sweden's import quota results in domestic welfare losses totaling $1.60.

57. Consider Figure 5.3. If the Swedish government auctions import licenses to the highest bidder in a competitive Copyright Cengage Learning. Powered by Cognero.

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market, it could realize revenues of up to a. $3.20. b. $4.00. c. $4.80. d. $5.60. ANSWER: a FEEDBACK: a. If the Swedish government auctions import licenses to the highest bidder in a competitive market, it could realize revenues of up to $3.20.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Analyze Figure 5.4 illustrates the calculator market for Venezuela, assumed to be a small country that is unable to affect the world price. SVenezuela is the domestic supply schedule and DVenezuela is the domestic demand schedule. Figure 5.4. Venezuelan Calculator Market

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58. Consider Figure 5.4. Suppose the rest of the world supplies calculators to Venezuela at a price of $4 each. With free trade, Venezuelan imports a total of a. 8 calculators. b. 16 calculators. c. 20 calculators. d. 24 calculators. ANSWER: c FEEDBACK: a. b. c. With free trade, Venezuelan imports a total of 20 calculators. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

Absolute Import Quota BLOOM'S: Analyze

59. Consider Figure 5.4. Assume the Venezuelan government grants its manufacturers a production subsidy of $4 per calculator. After the subsidy is granted, Venezuelan imports a total of a. 8 calculators. b. 12 calculators. c. 16 calculators. d. 20 calculators. ANSWER: c FEEDBACK: a. b. c. After the subsidy is granted, Venezuelan imports a total of 16 calculators. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Subsidies KEYWORDS: BLOOM'S: Apply

60. Consider Figure 5.4. The cost of the production subsidy to the Venezuelan government totals a. $32. b. $40. c. $48. d. $54. ANSWER: a FEEDBACK: a. The cost of the production subsidy to the Venezuelan government totals $32. b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Subsidies KEYWORDS: BLOOM'S: Apply Copyright Cengage Learning. Powered by Cognero.

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61. Consider Figure 5.4. The increase in Venezuelan producer surplus under the production subsidy totals a. $16. b. $20. c. $24. d. $32. ANSWER: c FEEDBACK: a. b. c. The increase in Venezuelan producer surplus under the production subsidy totals $24.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Subsidies KEYWORDS: BLOOM'S: Apply

62. Consider Figure 5.4. The production subsidy results in an overall welfare loss for Venezuela totaling a. $8. b. $12. c. $16. d. $20. ANSWER: a FEEDBACK: a. The production subsidy results in an overall welfare loss for Venezuela totaling $8.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Subsidies KEYWORDS: BLOOM'S: Apply Copyright Cengage Learning. Powered by Cognero.

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63. A voluntary export restraint agreement a. typically applies only to the world's most important exporting nation(s). b. typically applies only to the world's least important exporting nation (s). c. is always more restrictive on trade than a tariff or import quota. d. allows producers with superior products to participate in market. ANSWER: a FEEDBACK: a. A voluntary export restraint agreement typically applies only to the world's most important exporting nation(s).

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d. total cost. ANSWER: FEEDBACK:

a a. Many economists argue that fair value should be based on average variable cost rather than average total cost, especially when the domestic economy realizes a temporary downturn in demand.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Is Antidumping Law Unfair? KEYWORDS: BLOOM'S: Remember Figure 5.6 Domestic Supply and demand for Wine - U.S.

66. Consider Figure 5.6. In the global market for wine, the EU is willing to supply as much wine as the U.S. demands at $8 per bottle. How much will the U.S. produce and import in these circumstances? a. 5 bottles, 40 bottles b. 40 bottles, 0 bottles c. 5 bottles, 35 bottles d. 5 bottles, 0 bottles Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

c a. b. c. If the EU is willing to supply as much wine as the U.S. demands at $8 per bottle, the U.S. will produce 5 bottles and import 35 bottles.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.6 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Analyze

67. Consider Figure 5.6. In the global market for wine, the EU is willing to supply as much wine as the U.S. demands at $8 per bottle. What will happen to the price of a bottle of wine in the U.S. if a quota of 15 bottles of wine is imposed? a. increase to $15 b. increase to $10 c. stay the same at $8 d. decrease to $5 ANSWER: a FEEDBACK: a. If a quota of 15 bottles of wine is imposed, the price of a bottle of wine in the U.S. will increase to $15.

68. Consider Figure 5.6. In the global market for wine, the EU is willing to supply as much wine as the U.S. demands at $8 per bottle. If the U.S. imposes a quota of 15 bottles of wine, how much wine will U.S. consumers demand, how much wine will U.S. producers produce, and how much wine will be imported? a. 30 bottles, 20 bottles, 10 bottles Copyright Cengage Learning. Powered by Cognero.

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b. 40 bottles, 25 bottles, 15 bottles c. 30 bottles, 30 bottles, 0 bottles d. 30 bottles, 15 bottles, 15 bottles ANSWER: d FEEDBACK: a. b. c. d. If the U.S. imposes a quota of 15 bottles of wine, U.S. consumers will demand 30 bottles, U.S. producers will produce 15 bottles, and 15 bottles will be imported.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.6 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Apply

69. Consider Figure 5.6. In the global market for wine, the EU is willing to supply as much wine as the U.S. demands at $8 per bottle. If the U.S. imposes a quota of 15 bottles of wine what will happen to consumer surplus? a. decreases by $210 b. decreases by $245 c. stays the same d. increases by $70 ANSWER: b FEEDBACK: a. b. If the U.S. imposes a quota of 15 bottles of wine, the consumer surplus decreases by $245.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.6 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Apply

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70. Consider Figure 5.6. In the global market for wine, the EU is willing to supply as much wine as the U.S. demands at $8 per bottle. If the U.S. imposes a quota of 15 bottles of wine, how much revenue will the U.S. government collect? a. 0 b. $35 c. $70 d. $105 ANSWER: a FEEDBACK: a. If the U.S. imposes a quota of 15 bottles of wine, the U.S. government will collect no revenue.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 5.6 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Apply 71. Under U.S. law, a(n) ___________duty is levied when the U.S. Department of Commerce determines a class or kind of foreign merchandise is being sold at less than fair value (LTFV). a. dumping b. antidumping c. margin of dumping d. below-cost sales ANSWER: b FEEDBACK: a. b. Under U.S. law, an antidumping duty is levied when the U.S. Department of Commerce determines a class or kind of foreign merchandise is being sold at LTFV and the U.S. International Trade Commission determines that LTFV imports are causing or threatening material injury (such as unemployment and lost sales and profits) to a U.S. industry.

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72. Which is NOT a material injury caused by LTFV? a. unemployment b. lost sales c. lost profit d. general expenses ANSWER: d FEEDBACK: a. b. c. d. The U.S. International Trade Commission determines if LTFV imports are causing or threatening material injury (such as unemployment and lost sales and profits) to a U.S. industry.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Antidumping Regulations KEYWORDS: BLOOM'S: Understand 73. The margin of dumping is calculated as a. difference between the local market value and the U.S. price. b. difference between the foreign-market value and the U.S. price. c. difference between the U.S. market value and the foreign price. d. difference between the foreign market value and the foreign price. ANSWER: b FEEDBACK: a. b. The margin of dumping is calculated as the difference between the foreignmarket value and the U.S. price.

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b. estimated dumping margin on all sales of that product. c. estimated manufacturing cost on all imports of that product. d. estimated dumping margin on all exports of that product. ANSWER: a FEEDBACK: a. Antidumping duties are imposed in addition to the normal tariff in order to neutralize the effects of price discrimination or below-cost sales. The margin of dumping is calculated as the difference between the foreign market value and the U.S. price. The U.S. importer must pay a special tariff equal to the estimated dumping margin on all imports of that product.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Antidumping Regulations KEYWORDS: BLOOM'S: Apply 75. Assume that the Commerce Department makes a preliminary investigation on imports of furniture by a company and finds evidence of dumping and collects an estimated dumping margin on all imports of that product. On further investigation it is determined that dumping has NOT happened. Then, the special tariff collected is a. replaced with a permanent tariff, collected from the importer. b. returned partially to the importer. c. retained fully by the Commerce Department. d. rebated to the importer. ANSWER: d FEEDBACK: a. b. c. d. If the International Trade Commission rules that import-competing firms were not injured by the dumping, then the special tariffs are rebated to U.S. importers.

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a. due to the tough import competition it faced from Samsung and LG. b. due to the country-hopping technique that Samsung and LG indulged in c. due to President Donald Trump’s ―America First‖ policy d. because Samsung and LG practiced unlawful pricing of washing machines imported from South Korea and Mexico ANSWER: b FEEDBACK: a. b. Because enforcement of U.S. antidumping law is generally country specific, both Samsung and LG shifted production from South Korea and Mexico to China, therefore rendering the new tariffs moot. This practice is known as country hopping.

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of profit must be equal to at least _____ for the cost-based definition criterion of foreign market value to be met. a. $44,000 b. $6,500 c. $56,000 d. $49,000 ANSWER: a FEEDBACK: a. When a cost-based definition of foreign market value is used, the amount for profit must equal at least 8.0 percent of the manufacturing cost plus general expenses, or $44,000 (8% x $550,000).

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Other Nontariff Trade Barriers KEYWORDS: BLOOM'S: Remember 80. The U.S. government, through explicit laws, openly discriminates against __________ in its purchasing decisions. a. government agencies b. domestic suppliers Copyright Cengage Learning. Powered by Cognero.

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c. foreign suppliers d. private agencies ANSWER: FEEDBACK:

c a. b. c. The U.S. government, through explicit laws, openly discriminates against foreign suppliers in its purchasing decisions.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Other Nontariff Trade Barriers KEYWORDS: BLOOM'S: Remember 81. Nontariff barriers on import of automobiles tend to a. increase the cost of imported automobiles. b. decrease the jobs for domestic automobile workers. c. decrease profits of import-competing automobile producers. d. increase cost of automobiles at home market. ANSWER: a FEEDBACK: a. Nontariff barriers on import of automobiles tend to increase the cost of imported automobiles.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Other Nontariff Trade Barriers KEYWORDS: BLOOM'S: Analyze 82. Assume that a truck manufacturer has light trucks with the following fuel economy. Which would NOT meet the CAFE standard by 2026? a. 48.8 miles per gallon b. 42.3 miles per gallon c. 40.6 miles per gallon d. 37.2 miles per gallon ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. d. Under the current laws, by 2026, passenger cars are required to reach 54.5 miles per gallon and light trucks 40.3 miles per gallon.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Other Nontariff Trade Barriers KEYWORDS: BLOOM'S: Apply 83. Assume that the U.S. government is working on a large infrastructure project and approaches China, Canada, and France for various products it needs. It would have to take an exception from adhering to the ________ policy. a. Buy Canada b. Buy France c. Buy American d. Buy China ANSWER: c FEEDBACK: a. b. c. The U.S. government passed the Buy American Act in 1933. This act requires federal agencies to purchase materials and products from an American company if its prices are not ―unreasonably‖ higher than those of foreign competitors.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Other Nontariff Trade Barriers KEYWORDS: BLOOM'S: Apply 84. The following are quotes received by U.S. government for a particular work. Which is most likely to get selected based on the government procurement policies? a. domestic supplier 1 - $112 per unit b. Chinese supplier - $106 per unit c. domestic supplier 2 - $115 d. French supplier - $110 ANSWER: a The U.S. government passed the Buy American Act in 1933. This act requires federal RATIONALE: Copyright Cengage Learning. Powered by Cognero.

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agencies to purchase materials and products from an American company if its prices are not ―unreasonably‖ higher than those of foreign competitors. The most likely quote to get selected based on the government procurement policies domestic supplier 1 at $112 per unit. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Other Nontariff Trade Barriers KEYWORDS: BLOOM'S: Analyze 85. Government imposed limits on the quantities of goods traded between nations are called a. quotas. b. domestic content requirements. c. customs duties. d. tariffs. ANSWER: a FEEDBACK: a. An import quota is a government-imposed limit on the quantities of goods that can be imported.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Remember 86. Nontariff trade barriers include all of the following, except a. antidumping regulations b. subsidies. c. customs duties. d. domestic content regulations. ANSWER: c FEEDBACK: a. b. c. Nontariff trade barriers include domestic content requirements, subsidies, and antidumping regulations.

d. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Introduction KEYWORDS: BLOOM'S: Remember 87. Similar to import tariffs, quotas on imports result in a. higher levels of consumer surplus. b. lower levels of producer surplus. c. higher prices for domestic consumers. d. higher prices for foreign consumers. ANSWER: c FEEDBACK: a. b. c. By restricting available supplies of an imported product, a quota leads to higher import prices. This price umbrella allows domestic producers of the importcompeting good to raise prices. The result is a decrease in the consumer surplus.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Understand 88. Import quotas a. increase the price to the domestic consumer. b. have a protective effect but not a consumption effect. c. have a consumption effect but not a protective effect. d. generate no deadweight welfare losses for the home country. ANSWER: a FEEDBACK: a. By restricting available supplies of an imported product, a quota leads to higher import prices for domestic consumers.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Easy Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Remember 89. Throughout the world, governments auction quota licenses a. never. b. always. c. often. d. seldom. ANSWER: d FEEDBACK: a. b. c. d. Governments seldom auction quota licenses. Member countries of the WTO have agreed to eliminate absolute quotas and replace them with tariff-rate quotas and eventually tariffs.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Understand 90. A licensing requirement, or an unreasonable standard regulating the safety or quality of a product that is imported into a country, is called a a. nontariff barrier to trade. b. voluntary export restriction. c. protective tariff. d. customs duty. ANSWER: a FEEDBACK: a. Policies other than tariffs that restrict international trade are referred to as nontariff trade barriers (NTBs). Examples include a licensing requirement, or an unreasonable standard regulating the safety or quality of a product that is imported into a country.

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TOPICS: KEYWORDS:

Introduction BLOOM'S: Understand

91. An example of a nontariff trade barrier would be a. a tax on an imported product. b. a tax on an exported product. c. a minimum restriction on the quantity of imports. d. a subsidy granted to import-competing producers. ANSWER: d FEEDBACK: a. b. c. d. Policies other than tariffs that restrict international trade are referred to as nontariff trade barriers (NTBs). NTBs include subsidies.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Introduction KEYWORDS: BLOOM'S: Remember 92. If Canada was to levy a quota on chocolate imported from Denmark, a. Canada would decrease its exports of chocolate. b. the price of chocolate in Denmark would increase. c. employment of workers in Denmark's chocolate industry would increase. d. consumer surplus would decline in Canada. ANSWER: d FEEDBACK: a. b. c. d. By restricting available supplies of an imported product, a quota leads to higher import prices. This price umbrella allows domestic producers of the importcompeting good to raise prices. The result is a decrease in the consumer surplus.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking United States - BUSPROG2: - Analytic Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Analyze

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93. Import quotas will increase the price consumers pay for imported goods and a. increase the volume of imports. b. increase the volume of exports. c. decrease the volume of imports. d. decrease the volume of exports. ANSWER: c FEEDBACK: a. b. c. By restricting available supplies of an imported product, a quota leads to higher import prices and a decrease the volume of imports.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Understand 94. A removal of an import quota tends to result in a. lower import prices for domestic consumers. b. higher profits for domestic producers. c. a reduced quantity of the imported good. d. lower levels of consumer surplus. ANSWER: a FEEDBACK: a. By increasing supplies of an imported product, the removal of an import quota leads to lower import prices for domestic consumers.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Understand 95. For a tariff-rate quota, there is a limitation on a. the within-quota tariff rate exceeds the over-quota tariff rate. b. the within-quota tariff rate equals the over-quota tariff rate. c. the within-quota tariff rate is less than the over-quota tariff rate. d. the amount of the product that may be imported during the quota period. ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. A tariff-rate quota is a two-tier tariff placed on an imported product. It permits a limited number of goods to be imported at a lower tariff rate (the within-quota rate), whereas any imports beyond this limit face a higher tariff (the over-quota rate).

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Tariff-Rate Quota: A Two-Tier Tariff KEYWORDS: BLOOM'S: Remember 96. A tariff-rate quota a. tends to result in a revenue effect. b. displays either tariff-like or quota-like characteristics c. is a single-tier tariff. d. is applied for many years continuously. ANSWER: a FEEDBACK: a. A tariff-rate quota tends to result in a revenue effect. Of the revenue generated by a tariff-rate quota, some accrues to the domestic government as tariff revenue and the remainder is captured by producers as windfall profits.

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automobiles to the United States. This limitation was known as an export quota.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Export Quotas KEYWORDS: BLOOM'S: Understand 98. A domestic content requirement placed on automobiles would tend to result in a. rising production costs of autos. b. decreasing prices of autos. c. higher levels of consumer surplus. d. higher levels of auto imports. ANSWER: a FEEDBACK: a. Domestic content protection tends to impose welfare losses on the domestic economy in the form of higher production costs and higher-priced goods.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking United States - BUSPROG2: - Analytic Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Domestic Content Requirements KEYWORDS: BLOOM'S: Understand 99. According to U.S. trade law, which of the following is/are illegal in American markets? a. dumping only b. export subsidies only c. dumping and export subsidies d. neither dumping nor export subsidies ANSWER: c FEEDBACK: a. b. c. According to U.S. trade law dumping and export subsidies are illegal in American markets.

d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking United States - BUSPROG2: - Analytic Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Antidumping Regulations KEYWORDS: BLOOM'S: Understand 100. Suppose that Airbus sells jetliners in the United States at prices below fair value, to drive Boeing out of business and then become a monopoly. This conduct is known as a. persistent dumping. b. predatory dumping. c. sporadic dumping. d. subsidization dumping. ANSWER: b FEEDBACK: a. b. Predatory dumping occurs when a producer temporarily reduces the prices charged abroad to drive foreign competitors out of business. When the producer succeeds in acquiring a monopoly position, prices are then raised commensurate with its market power.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking United States - BUSPROG2: - Analytic Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Dumping KEYWORDS: BLOOM'S: Analyze 101. Which government agency/agencies make investigations in order to resolve dumping cases? a. Antitrust Division of the Justice Department b. Federal Trade Commission c. the International Trade Commission and the Commerce Department d. Federal Trade Commission and Consumer Product Safety Commission ANSWER: c FEEDBACK: a. b. c. The International Trade Commission and the Commerce Department make investigations in order to resolve dumping cases.

d. POINTS: DIFFICULTY:

1 Easy

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Antidumping Regulations KEYWORDS: BLOOM'S: Remember 102. In the post-World War II era, nontariff trade barriers have decreased in importance relative to tariff barriers. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect With the decline in import tariffs in the past two decades, nontariff trade barriers have gained in importance as a measure of protection.

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FEEDBACK:

Correct Incorrect To avoid the problems of a global quota system, import quotas have usually been allocated to specific countries; this type of quota is known as a selective quota.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Absolute Import Quota BLOOM'S: Understand

107. Import quotas can yield revenue for the domestic government if it auctions import licenses to the highest bidder in a competitive market. a. True b. False ANSWER: True FEEDBACK: Correct If the government desired to capture the revenue effect of an import quota, it could auction import quota licenses to the highest bidder in a competitive market. Incorrect

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Incorrect By restricting available supplies of an imported product, a quota leads to higher import prices. This price umbrella allows domestic producers of the importcompeting good to raise prices. The result is a decrease in the consumer surplus. Of this amount, the welfare loss to the importing nation consists of the protective effect, the consumption effect, and that portion of the revenue effect that is captured by the foreign exporter.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Understand 112. With a quota placed on imported sugar, increased domestic demand leads to increased sugar imports but NOT to higher sugar prices. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect With an import quota, an increase in demand induces an increase in product price. The price increase leads to a rise in production and a fall in consumption of the import-competing good, while the level of imports remains constant.

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ANSWER: FEEDBACK:

True Correct

An orderly marketing agreement is a market-sharing pact negotiated by trading nations. Its effect is to moderate the intensity of international competition.

Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Absolute Import Quota BLOOM'S: Understand

117. Voluntary export restraint agreements typically apply to all of the world's exporting nations rather than only the most important exporting nations. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Voluntary export restraint agreements typically apply to only the most important exporting nations.

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ANSWER: FEEDBACK:

True Correct

When increases in nonrestraint supply offset part of the cutback in shipments that occur under an export quota, the overall inefficiency loss for the importing country is less than that which would have occurred in the absence of nonrestrained exports.

Incorrect

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Domestic Content Requirements KEYWORDS: BLOOM'S: Understand 122. Local content laws stipulate the maximum percentage of a product's total value that must be produced domestically for that product to be sold domestically. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Domestic content requirements stipulate the minimum percentage of a product‘s value that must be produced in the home country for that product to be sold tariff free.

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ANSWER: FEEDBACK:

True Correct

Domestic content protection tends to impose welfare losses on the domestic economy in the form of higher production costs and higher-priced goods.

Incorrect

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TOPICS: KEYWORDS:

Subsidies BLOOM'S: Understand

127. A subsidy granted to an import-competing producer imposes a deadweight loss on the domestic economy equal to the redistribution effect plus consumption effect. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect A subsidy granted to exporters entails a deadweight welfare loss to the home country in the form of the protective effect and the consumption effect.

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POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Subsidies KEYWORDS: BLOOM'S: Understand 131. International dumping occurs when foreign buyers are charged higher prices than domestic buyers for an identical product, after allowing for transportation costs and tariff duties. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect International dumping occurs when a firm sells its product abroad at a price that is less than average total cost or less than that charged to domestic buyers of the same product.

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132. Sporadic (distress) dumping would occur if domestic orange producers dispose of an excess quantity of oranges, resulting from an abnormally large harvest, by selling them at lower prices abroad than at home. a. True b. False ANSWER: True FEEDBACK: Correct Sporadic dumping (distress dumping) occurs when a firm disposes of excess inventories on foreign markets by selling abroad at lower prices than at home. Unforeseen changes in supply and demand conditions can result in excess inventories and thus in dumping. Incorrect

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elastic demand (less-competitive) market and a lower price in the more-elastic demand (more-competitive) market.

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TOPICS: KEYWORDS:

Dumping BLOOM'S: Understand

137. A firm suffering idle plant capacity would minimize losses by selling its product abroad at a lower price than at home, provided that the foreign price more than covers average variable cost. a. True b. False ANSWER: True FEEDBACK: Correct A firm suffering idle plant capacity would minimize losses by selling its product abroad at a lower price than at home, provided that the foreign price more than covers average variable cost. Successful dumping leads to additional revenue and profits for the firm compared to what would be realized in the absence of dumping. Incorrect

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b. False ANSWER: FEEDBACK:

False Correct Incorrect The margin of dumping is calculated as the difference between the foreign market value and the U.S. price.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Other Nontariff Trade Barriers BLOOM'S: Understand

142. If the Japanese demand for computers is elastic and the Canadian demand for computers is inelastic, a profitmaximizing firm would charge a higher price to Canadian buyers than to Japanese buyers. a. True b. False ANSWER: True FEEDBACK: Correct A producer will charge a higher price in the less-elastic demand (lesscompetitive) market and a lower price in the more-elastic demand (morecompetitive) market. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Dumping KEYWORDS: BLOOM'S: Analyze 143. If the Australian government imposes a domestic content requirement of 75 percent on autos, at least 25 percent of an auto's value must be produced in a foreign country if that auto is to be sold in Australia. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Domestic content requirements stipulate the minimum percentage of a product‘s value that must be produced in the home country for that product to be sold tariff free.

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FEEDBACK:

Correct

The U.S. price of sugar has often been almost twice the world market price because of the tariff-rate quota. The world price of sugar averaged $0.26 per pound in 2013, compared with $0.43 in the United States.

Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Tariff-Rate Quota: A Two-Tier Tariff KEYWORDS: BLOOM'S: Understand Figure 5.5 illustrates the television market for Mexico, assumed to be a small country that is unable to affect the world price. SMexico is the domestic supply schedule and DMexico is the domestic demand schedule. Suppose that Japan can supply televisions to Mexico at a price of $100 per set. Figure 5.5. Mexico's Television Market

145. Consider Figure 5.5. With free trade, Mexicans produce 4 TVs, consume 24 TVs, and import 20 TVs. Copyright Cengage Learning. Powered by Cognero.

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a. True b. False ANSWER: FEEDBACK:

True Correct With free trade, Mexicans produce 4 TVs, consume 24 TVs, and import 20 TVs. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False PREFACE NAME: Figure 5.5 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Analyze

146. Consider Figure 5.5. Suppose that the governments of Mexico and Japan negotiate a voluntary export agreement in which Japanese TV exports to Mexico are limited to 8 units. Under the quota, the price of TVs in Mexico equals $250, while Mexicans produce 10 TVs and purchase 18 TVs. a. True b. False ANSWER: True FEEDBACK: Correct Under the quota, the price of TVs in Mexico equals $250, while Mexicans produce 10 TVs and purchase 18 TVs. Incorrect

147. Consider Figure 5.5. Compared to free trade, the Japanese export quota leads to an increase in Mexican producer surplus of $1,050. a. True b. False ANSWER: True FEEDBACK: Correct Compared to free trade, the Japanese export quota leads to an increase in Mexican producer surplus of $1,050. Incorrect Copyright Cengage Learning. Powered by Cognero.

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148. Consider Figure 5.5. The Japanese export quota's revenue effect totals $1,200. a. True b. False ANSWER: True FEEDBACK: Correct The Japanese export quota's revenue effect totals $1,200. Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False PREFACE NAME: Figure 5.5 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Export Quotas KEYWORDS: BLOOM'S: Analyze

149. Consider Figure 5.5. Assuming that the revenue effect of the export quota accrues to Japanese firms, the overall welfare loss to Mexico equals $2,100 as a result of the quota. a. True b. False ANSWER: True FEEDBACK: Correct Assuming that the revenue effect of the export quota accrues to Japanese firms, the overall welfare loss to Mexico equals $2,100 as a result of the quota. Incorrect

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TOPICS: KEYWORDS:

Export Quotas BLOOM'S: Analyze

150. Excessive sea transport and freight regulations are examples of nontariff trade barriers. a. True b. False ANSWER: True FEEDBACK: Correct Excessive sea transport and freight regulations are examples of nontariff trade barriers. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Other Nontariff Trade Barriers KEYWORDS: BLOOM'S: Remember 151. For the United States, corporate average fuel economy standards (CAFÉ) provide a minimum limit on the total gallons of gas that an automobile can consume per mile driven. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect CAFE standards are based on the average fuel efficiency of all vehicles sold by all manufacturers.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Other Nontariff Trade Barriers KEYWORDS: BLOOM'S: Remember 152. In 1933, the U.S. government enacted the Buy American Act, which requires federal agencies to purchase materials and products from American suppliers if their prices are NOT unreasonably higher than those of foreign competitors. a. True b. False ANSWER: True FEEDBACK: Correct The U.S. government passed the Buy American Act in 1933. This act requires federal agencies to purchase materials and products from an American company if its prices are not ―unreasonably‖ higher than those of foreign competitors. Incorrect

POINTS: DIFFICULTY:

1 Easy

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QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Other Nontariff Trade Barriers KEYWORDS: BLOOM'S: Remember 153. A subsidy granted to an import-competing producer tends to be absorbed by producer surplus and higher costs of production. a. True b. False ANSWER: True FEEDBACK: Correct The subsidy revenue accruing to the producer is absorbed by producer surplus and high-cost production (protective effect). Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Subsidies KEYWORDS: BLOOM'S: Remember 154. For a tariff-rate quota, the within-quota tariff rate is higher than the over-quota tariff rate. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect A tariff-rate quota is a two-tier tariff placed on an imported product. It permits a limited number of goods to be imported at a lower tariff rate (the within-quota rate), whereas any imports beyond this limit face a higher tariff (the over-quota rate).

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FEEDBACK:

Correct

A subsidy granted to import-competing producers is often preferred to an import tariff on the grounds that it results in a smaller deadweight welfare loss and allows consumption to remain unchanged.

Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Subsidies KEYWORDS: BLOOM'S: Understand 156. According to U.S. trade law, dumping is defined as selling a product at a price that is greater than fair value. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect According to U.S. trade law, dumping is defined as selling a product at a price that is lower than fair value.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Dumping KEYWORDS: BLOOM'S: Understand 157. The most likely and/or common reason for international dumping is that firms are international price discriminators, responding to different demand conditions in different markets. a. True b. False ANSWER: True FEEDBACK: Correct International dumping occurs when a firm sells its product abroad at a price that is less than average total cost or less than that charged to domestic buyers of the same product. The most likely and/or common reason for international dumping is that firms are international price discriminators, responding to different demand conditions in different markets. Incorrect

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KEYWORDS:

BLOOM'S: Understand

158. Is a tariff-rate quota a two-tier tariff? Why? Yes. It allows a specified number of goods to be imported at one tariff rate, whereas any ANSWER: imports above this level face a higher tariff rate. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Tariff-Rate Quota: A Two-Tier Tariff KEYWORDS: BLOOM'S: Remember 159. What is the price-based definition of dumping? Price-based dumping occurs when a foreign firm sells a good at a price in a foreign ANSWER: country that is below the price for which it sells the product at home. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Antidumping Regulations KEYWORDS: BLOOM'S: Remember 160. Describe some of the differences between tariffs and quotas. Tariffs and quotas differ in their revenue effects and restrictive impacts on the volume of ANSWER: trade. While quotas are easier to administer and manage, they do not provide the government with revenue. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Absolute Import Quota KEYWORDS: BLOOM'S: Remember 161. What are the intent and impact of domestic content requirements? Domestic content requirements try to limit the practice of job outsourcing and also ANSWER: Copyright Cengage Learning. Powered by Cognero.

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encourage the development of domestic industry. They stipulate the minimum percentage of a product's value that must be produced in the home country for that product to be sold there. Domestic content protection tends to impose welfare losses on the domestic economy in the form of higher production costs and higher-priced goods. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Domestic Content Requirements KEYWORDS: BLOOM'S: Understand

Chapter 06: Trade Regulations and Industrial Policies 1. The World Trade Organization was established by the ____ of multilateral trade negotiations. a. Kennedy Round b. Tokyo Round c. Uruguay Round d. Clinton Round ANSWER: c FEEDBACK: a. b. c. On January 1, 1995, the day that the Uruguay Round took effect, GATT was transformed into the WTO.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Remember 2. 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. tax advantages extended to minority-owned exporting firms. d. duties that offset commercial dumping on the part of foreign firms. ANSWER: a FEEDBACK: a. The escape clause provides temporary safeguards (relief) to U.S. firms and workers who are substantially injured from surges in imports that are fairly traded. To offset surging imports, the escape clause allows the president to Copyright Cengage Learning. Powered by Cognero.

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terminate or modify trade concessions granted to foreign nations and to levy trade restrictions.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Safeguards (The Escape Clause): Emergency Protection from Imports KEYWORDS: BLOOM'S: Remember 3. Adjustment assistance is sometimes used to assist a. in retraining workers displaced by imports. b. in retraining workers displaced by exports. c. foreign firms injured by our quotas. d. foreign firms injured by our tariffs. ANSWER: a FEEDBACK: a. Because foreign competition may displace import-competing producers, the United States and other nations have initiated programs of trade-adjustment assistance involving government aid to adversely affected businesses, workers, and communities.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Adjustment Assistance KEYWORDS: BLOOM'S: Remember 4. The Export-Import Bank of the United States (Eximbank) encourages American firms to sell overseas by providing direct loans and loan guarantees to foreign purchasers of American goods. To American firms, this represents a a. specific subsidy. b. ad valorem subsidy. c. domestic subsidy. d. export subsidy. ANSWER: d FEEDBACK: a. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. Eximbank provides export subsidies to American manufacturers to encourage international sales, thus providing jobs for Americans.

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traded. To offset surging imports, the escape clause allows the president to terminate or modify trade concessions granted to foreign nations and to levy trade restrictions.

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c. The Uruguay Round achieved cuts in tariffs. Progress was also made in decreasing or eliminating nontariff barriers.

b. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Smoot-Hawley Act KEYWORDS: BLOOM'S: Understand 12. Countervailing duties are intended to neutralize any unfair advantage that foreign exporters might gain over domestic producers because of foreign a. tariffs. b. subsidies. c. quotas. d. buy-national policies. ANSWER: b FEEDBACK: a. b. Countervailing duties are intended to offset any unfair competitive advantage that foreign producers might gain over domestic producers because of foreign subsidies.

c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Countervailing Duties: Protection Against Foreign Export Subsidies KEYWORDS: BLOOM'S: Remember 13. Trade theory suggests that the United States would gain from a subsidy provided by Japan to its calculator producers if the gains to American consumers of calculators more than offset the losses to American calculator producers. This occurs as long as the United States a. is a net importer of calculators. b. is a net exporter of calculators. c. has an absolute advantage in calculator production. d. has a comparative advantage in calculator production. ANSWER: a FEEDBACK: a. Economic theory suggests that if a nation is a net importer of a product subsidized or dumped by foreigners, then the nation as a whole gains from the foreign subsidy or dumping. This is because the gains to domestic consumers of the subsidized or dumped good more than offset the losses to domestic producers of the import-competing goods.

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approval, the president could lower tariffs by up to 50 percent of the existing level.

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through the most-favored-nation (MFN) clause. This clause means that countries cannot discriminate between their trading partners participating in a trade agreement.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reciprocal Trade Agreements Act KEYWORDS: BLOOM'S: Remember 17. ______________ attempt to produce a fair and free-trading environment in which there exists a level playing field. a. Trade-remedy laws b. Industrial policies c. Strategic trade policies d. Economic sanctions ANSWER: a FEEDBACK: a. Trade-remedy laws can help protect domestic firms from stiff foreign competition. These laws include the escape clause, provisions for antidumping and countervailing duties, and Section 301 of the 1974 Trade Act, which addresses unfair trading practices of foreign nations.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Safeguards (The Escape Clause): Emergency Protection from Imports KEYWORDS: BLOOM'S: Remember 18. Suppose the United States imposes trade sanctions (export quotas) on grain sold to the Russians. Assuming other nations do NOT increase grain exports to the Russians, all of the following would occur, except a. grain prices would rise in Russia. b. consumer surplus would decrease for the Russians. c. grain prices would rise in the United States. d. export revenues would decrease for U.S. producers. ANSWER: c FEEDBACK: a. b. c. Economic sanctions placed against a target country have the effect of forcing it Copyright Cengage Learning. Powered by Cognero.

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to operate inside its production possibilities curve. Sanctions would not affect grain prices in the United States.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Sanctions KEYWORDS: BLOOM'S: Analyze 19. Suppose the president lowers tariffs on radios as the result of negotiations under the trade agreements program. Radio producers in the United States can appeal under the a. escape clause if rising imports substantially injure the U.S. radio industry. b. escape clause if rising unemployment occurs even though imports remain unchanged. c. infant industry clause if rising imports cause unemployment to rise among U.S. radio workers. d. infant industry clause if rising imports result in losses for U.S. radio companies. ANSWER: a FEEDBACK: a. The escape clause provides temporary safeguards (relief) to U.S. firms and workers who are substantially injured from surges in imports that are fairly traded. To offset surging imports, the escape clause allows the president to terminate or modify trade concessions granted to foreign nations and to levy trade restrictions.

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d. The Uruguay Round of multilateral trade negotiations went beyond tariff reductions to liberalize various nontariff trade barriers.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: General Agreement on Tariffs and Trade KEYWORDS: BLOOM'S: Remember 22. In 1990, the United States and its allies imposed trade sanctions on exports/imports to/from Iraq in response to its invasion of Kuwait. The sanctions would induce smaller losses in Iraq's consumer surplus the a. lesser its initial dependence on foreign products. b. less elastic Iraq's demand schedule. c. lesser the available output from alternative suppliers. d. more inelastic Iraq's supply schedule. ANSWER: a FEEDBACK: a. Economic sanctions placed against a target country have the effect of forcing it to operate inside its production possibilities curve. The sanctions would induce smaller losses in Iraq's consumer surplus the lesser its initial dependence on foreign products.

b. c. d. Copyright Cengage Learning. Powered by Cognero.

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POINTS: DIFFICULTY:

1 Easy

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Industrial Policies of the United States KEYWORDS: BLOOM'S: Remember 25. Countervailing duties may be imposed a. in response to a foreign export subsidy. b. in response to a foreign antidumping tariff. c. to promote exports of domestic companies. d. to promote imports of domestic consumers. ANSWER: a FEEDBACK: a. Countervailing duties are intended to offset any unfair competitive advantage that foreign producers might gain over domestic producers because of foreign subsidies.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Countervailing Duties: Protection against Foreign Export Subsidies KEYWORDS: BLOOM'S: Remember 26. The World Trade Organization provides for all of the following, except a. usage of the normal-trade-relation (most-favored-nation) clause. b. assistance in the settlement of trade disagreements. c. multilateral tariff reductions. d. bilateral tariff reductions. ANSWER: d FEEDBACK: a. b. c. d. The World Trade Organization (WTO) was created to administer the provisions of multilateral trade agreements, to resolve international trade disagreements, and to meet periodically to consider new trade liberalization agreements.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Remember 27. In U.S. trade law, which measure permits the levying of restrictions on fairly traded imports that harm or threaten to harm American manufacturers? a. antidumping duty b. countervailing duty c. national security clause d. escape clause ANSWER: d FEEDBACK: a. b. c. d. The escape clause provides temporary safeguards (relief) to U.S. firms and workers who are substantially injured from surges in imports that are fairly traded. To offset surging imports, the escape clause allows the president to terminate or modify trade concessions granted to foreign nations and to levy trade restrictions.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Safeguards (The Escape Clause): Emergency Protection from Imports KEYWORDS: BLOOM'S: Remember 28. Which international organization stipulates procedures for the settlement of international trade disputes? a. World Trade Organization b. World Bank c. International Monetary Fund d. Organization of Economic Development ANSWER: a FEEDBACK: a. The World Trade Organization (WTO) embodies the main provisions of GATT and provides a mechanism intended to improve the process of resolving trade disputes among member nations.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Easy Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: General Agreement on Tariffs and Trade KEYWORDS: BLOOM'S: Remember 29. The most recent round of multilateral trade negotiations is the a. Kennedy Round. b. Tokyo Round. c. Doha Round. d. Geneva Round. ANSWER: c FEEDBACK: a. b. c. The most recent round of multilateral trade negotiations was the Doha Round that was launched in Doha, Qatar, in 2002.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: General Agreement on Tariffs and Trade KEYWORDS: BLOOM'S: Remember Assume Boeing Inc. (of the United States) and Airbus Industries (of Europe) rival for monopoly profits in the Canadian aircraft market. Suppose the two firms face identical cost and demand conditions, as shown in Figure 6.1. Figure 6.1. Strategic Trade Policy: Boeing versus Airbus

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30. Referring to Figure 6.1, assume that Boeing is the first to enter the Canadian market. Without a governmental subsidy, the firm maximizes profits by selling ______________ aircraft at a price of $______________, and realizes profits totaling $______________. a. 4, $12 million, $16 million b. 4, $16 million, $12 million c. 8, $12 million, $16 million d. 8, $16 million, $12 million ANSWER: a FEEDBACK: a. Without a governmental subsidy, the firm maximizes profits by selling 4 aircraft at a price of $12 million, and realizes profits totaling $16 million.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Strategic Trade Policy KEYWORDS: BLOOM'S: Analyze

31. Consider Figure 6.1. At the monopoly price as established by Boeing, Canadian consumers realize $______________ of consumer surplus from the availability of aircraft. a. $4 million Copyright Cengage Learning. Powered by Cognero.

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b. $8 million c. $12 million d. $16 million ANSWER: FEEDBACK:

b a. b. At the monopoly price as established by Boeing, Canadian consumers realize $8 million of consumer surplus from the availability of aircraft.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Strategic Trade Policy KEYWORDS: BLOOM'S: Analyze

32. Consider Figure 6.1. Suppose the European government provides Airbus a subsidy of $4 million on each aircraft manufactured and that the subsidy convinces Boeing to exit the Canadian market. As the monopoly seller, Airbus maximizes profit by selling ______________ aircraft at a price of $______________, and realizes profits totaling $______________. a. 6, $10 million, $36 million b. 6, $12 million, $24 million c. 12, $10 million, $36 million d. 12, $12 million, $24 million ANSWER: a FEEDBACK: a. As the monopoly seller, Airbus maximizes profit by selling 6 aircraft at a price of $10 million, and realizes profits totaling $36 million.

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33. Referring to Figure 6.1, the total cost of the Airbus subsidy to the European taxpayer equals a. $16 million. b. $20 million. c. $24 million. d. $28 million. ANSWER: c FEEDBACK: a. b. c. The total cost of the Airbus subsidy to the European taxpayer equals $24 million.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Strategic Trade Policy KEYWORDS: BLOOM'S: Analyze

34. Referring to Figure 6.1, the Airbus subsidy leads to a (an) increase/decrease in Canadian consumer surplus of $______________, as compared to the consumer surplus that existed in the absence of a subsidy. a. increase of $8 million b. increase of $10 million c. decrease of $8 million d. decrease of $10 million ANSWER: b FEEDBACK: a. b. The Airbus subsidy leads to an increase in Canadian consumer surplus of $$10 million, as compared to the consumer surplus that existed in the absence of a subsidy.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Strategic Trade Policy KEYWORDS: BLOOM'S: Analyze Copyright Cengage Learning. Powered by Cognero.

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35. Consider Figure 6.1. For Europe as a whole (Airbus and European taxpayers), the subsidy leads to a (an) ______________ in net revenues of $______________. a. increase, $12 million b. increase, $16 million c. decrease, $12 million d. decrease, $16 million ANSWER: a FEEDBACK: a. For Europe as a whole (Airbus and European taxpayers), the subsidy leads to an increase in net revenues of $12 million.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Strategic Trade Policy KEYWORDS: BLOOM'S: Analyze Figure 6.2 illustrates the calculator market for Mexico, assumed to be a small nation that is unable to influence the South Korean (world) price. Assume the South Korean price to be $60 per calculator. Figure 6.2. Effects of an Export Subsidy

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36. Consider Figure 6.2. With free trade, Mexican consumers purchase ______________ calculators, Mexican firms produce ______________ calculators, and ______________ calculators are imported. a. 10, 4, 6 b. 10, 6, 4 c. 10, 8, 2 d. 10, 2, 8 ANSWER: b FEEDBACK: a. b. With free trade, Mexican consumers purchase 10 calculators, Mexican firms produce 6 calculators, and 4 calculators are imported.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Antidumping Duties: Protection Against Foreign Dumping KEYWORDS: BLOOM'S: Analyze Copyright Cengage Learning. Powered by Cognero.

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37. Consider Figure 6.2. With free trade, Mexicans attain $______________ of consumer surplus from the availability of calculators, while Mexican producer surplus equals $______________. a. $400, $200 b. $200, $400 c. $500, $180 d. $500, $240 ANSWER: c FEEDBACK: a. b. c. With free trade, Mexicans attain $500 of consumer surplus from the availability of calculators, while Mexican producer surplus equals $180.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Antidumping Duties: Protection Against Foreign Dumping KEYWORDS: BLOOM'S: Analyze

38. Consider Figure 6.2. To help its firms further penetrate export markets, suppose the South Korean government provides them a production subsidy of $20 per calculator. With the subsidy, South Korean firms charge a price of $______________ and export ______________ calculators to Mexico. a. $40, 8 b. $40, 10 c. $20, 8 d. $20, 10 ANSWER: a FEEDBACK: a. With the subsidy, South Korean firms charge a price of $40 and export 8 calculators to Mexico.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Antidumping Duties: Protection Against Foreign Dumping Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Analyze

39. Consider Figure 6.2. The South Korean subsidy ______________ Mexican manufacturers, since their producer surplus ______________ by $______________. a. helps, rises, $60 b. helps, rises, $100 c. hurts, falls, $60 d. hurts, falls, $100 ANSWER: d FEEDBACK: a. b. c. d. The South Korean subsidy hurts Mexican manufacturers because their producer surplus falls by $100.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Antidumping Duties: Protection Against Foreign Dumping KEYWORDS: BLOOM'S: Analyze

40. Consider Figure 6.2. For Mexico's producers and consumers as a whole, the South Korean subsidy leads to a(n) a. $120 welfare gain. b. $320 welfare gain. c. $120 welfare loss. d. $320 welfare loss. ANSWER: a FEEDBACK: a. For Mexico's producers and consumers as a whole, the South Korean subsidy leads to a $120 welfare gain.

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KEYWORDS:

BLOOM'S: Analyze

41. Consider Figure 6.2. As a result of the South Korean subsidy, Mexicans find their consumer surplus a. rising by $160. b. rising by $220. c. falling by $160. d. falling by $220. ANSWER: b FEEDBACK: a. b. As a result of the South Korean subsidy, Mexicans find their consumer surplus rising by $220.

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42. Consider Figure 6.3. With free trade, Iraq purchases ______________ computers at a price of $______________ and realizes $______________ of consumer surplus from the availability of computers. a. 30, $3,000, $25,000 b. 30, $3,000, $35,000 c. 30, $3,000, $45,000 d. 30, $3,000, $55,000 ANSWER: c FEEDBACK: a. b. c. With free trade, Iraq purchases 30 computers at a price of $3,000 and realizes $45,000 of consumer surplus from the availability of computers.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Antidumping Duties: Protection against Foreign Dumping KEYWORDS: BLOOM'S: Analyze

43. Consider Figure 6.3. In response to Iraq's armed invasion of neighboring countries, suppose the United States imposes a partial embargo that limits exports to Iraq to 10 computers. The export quota leads to a(n) ______________ in the price of computers equal to $______________ and a(n) ______________ in consumer surplus equal to $______________. a. increase, $2,000, decrease, $40,000 b. increase, $4,000, decrease, $60,000 c. decrease, $2,000, increase, $40,000 d. decrease, $4,000, increase, $60,000 ANSWER: a FEEDBACK: a. The export quota leads to an increase in the price of computers equal to $2,000 and a decrease in consumer surplus equal to $40,000.

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44. Consider Figure 6.3. Of the quota-induced change in Iraqi consumer surplus, $______________ is NOT transferred to other sectors of Iraq's economy and represents deadweight loss. a. $5,000 b. $10,000 c. $15,000 d. $20,000 ANSWER: d FEEDBACK: a. b. c. d. Of the quota-induced change in Iraqi consumer surplus, $20,000 is not transferred to other sectors of Iraq's economy and represents deadweight loss.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Economic Sanctions KEYWORDS: BLOOM'S: Analyze

45. Consider Figure 6.3. Of the quota-induced change in Iraqi consumer surplus, the amount of the change in Iraq's consumer surplus that is transferred to other sectors of Iraq's economy is captured by the United States as a. tax revenue. b. export revenue. c. producer surplus. d. consumer surplus. ANSWER: b FEEDBACK: a. b. The amount of the change in Iraq's consumer surplus that is transferred to other sectors of Iraq's economy is captured by the United States as export revenue.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Economic Sanctions Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Analyze

46. Consider Figure 6.3. For the United States, the export quota results in a (an) a. improvement in its terms of trade with Iraq. b. increase in its export revenue. c. increase in domestic computer prices. d. decrease in domestic consumer surplus. ANSWER: a FEEDBACK: a. For the United States, the export quota results in an improvement in its terms of trade with Iraq.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Economic Sanctions KEYWORDS: BLOOM'S: Analyze 47. The implicit industrial policies of the U.S. government have included a. formulating industry-specific economic policies designed to promote national champions. b. nationalizing basic industries such as steel and autos. c. encouraging cartelization of aircraft and aluminum manufacturers. d. providing support for industries such as energy and defense. ANSWER: d FEEDBACK: a. b. c. d. The U.S. government has provided support for the shipping, aerospace, shipbuilding, energy, and defense industries, primarily on the grounds of national security.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Industrial Policies of the United States KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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48. Economic sanctions are most effective in causing the target nation to modify its behavior when the a. target nation had negligible economic relationships with the imposing nation prior to the sanctions. b. people of the target nation have weak cultural ties to the people of the imposing nation. c. sanctions are levied by a large number of nations. d. target government is supported by the majority of its people. ANSWER: c FEEDBACK: a. b. c. Among the most important determinants of the success of economic sanctions are (1) the number of nations imposing sanctions, (2) the degree to which the target nation has economic and political ties to the imposing nation(s), (3) the extent of political opposition in the target nation, and (4) cultural factors in the target nation.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Economic Sanctions KEYWORDS: BLOOM'S: Understand 49. In 1995, the ______________ was established to administer the new global trade rules agreed in the Uruguay Round of multilateral trade negotiations. a. World Trade Organization b. Organization for Economic Cooperation and Development c. General Agreement on Tariffs and Trade (GATT) d. United Nations ANSWER: a FEEDBACK: a. In 1995, GATT was transformed into the World Trade Organization (WTO), which was established to administer the new global trade rules agreed upon in the Uruguay Round of multilateral trade negotiations.

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50. In 1995, the General Agreement on Tariffs and Trade (GATT) was replaced by the ______________. a. Agency for International Development b. Organization for Economic Cooperation and Development c. United Nations Center for Trade and Development d. World Trade Organization ANSWER: d FEEDBACK: a. b. c. d. In 1995, GATT was transformed into the World Trade Organization (WTO). POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: General Agreement on Tariffs and Trade KEYWORDS: BLOOM'S: Remember 51. Which is NOT a factor influencing the success of sanctions? a. cultural factors, including nationalistic attitudes b. degree to which the target nation has economic ties to the imposing nation c. the number of nations imposing sanctions d. lack of political opposition in the target nation ANSWER: d FEEDBACK: a. b. c. d. Among the most important determinants of the success of economic sanctions are (1) the number of nations imposing sanctions, (2) the degree to which the target nation has economic and political ties to the imposing nation(s), (3) the extent of political opposition in the target nation, and (4) cultural factors in the target nation.

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b. will not be implicit. c. have never been used by the U.S. government. d. should be approved by the World Trade Organization. ANSWER: a FEEDBACK: a. Industrial policies involve government channeling of resources into specific, targeted industries that the government views as important for future economic growth.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Industrial Policies of the United States KEYWORDS: BLOOM'S: Understand 53. Trade adjustment assistance policies a. can resolve all workers' challenges to free trade. b. attempt to share gains from free trade with disadvantaged workers. c. have never been used to sustain a losing business concern. d. are financed by state and local tax revenues. ANSWER: b FEEDBACK: a. b. One way to balance gains of free trade realized broadly throughout the economy, with costs usually more concentrated, is to address the needs of firms and workers that have been adversely affected. Trade adjustment assistance policies attempt to share gains from free trade with disadvantaged workers.

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54. Consider the Japanese market for jetliners as depicted in Figure 6.4. Suppose the lone producer of jetliners in the world is Boeing, which faces a constant marginal cost of $20 million per jetliner. What price will Boeing charge for jetliners in the Japanese market, and how many will they sell? a. $20 million, 23 b. $20 million, 46 c. $30 million, 46 d. $30 million, 23 ANSWER: d FEEDBACK: a. b. c. d. Boeing will charge $30 million for jetliners in the Japanese market, and will sell 23 jetliners.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

Strategic Trade Policy BLOOM'S: Analyze

55. Consider the Japanese market for jetliners as depicted in Figure 6.4. Suppose the lone producer of jetliners in the world is Boeing, which faces a constant marginal cost of $20 million per jetliner. How much profit will Boeing make? a. 0 b. $150 million c. $230 million d. $250 million ANSWER: c FEEDBACK: a. b. c. Boeing will make a profit of $230 million. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Strategic Trade Policy KEYWORDS: BLOOM'S: Analyze

56. Consider the Japanese market for jetliners as depicted in Figure 6.4. Suppose the lone producer of jetliners in the world is Boeing, which faces a constant marginal cost of $20 million per jetliner. How much consumer surplus will the Japanese airlines that purchase the jetliners earn from their transactions with Boeing? a. 0 b. $115 million c. $230 million d. $250 million ANSWER: b FEEDBACK: a. b. The consumer surplus is $115 million. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC7: - Reading and interpreting graphs Strategic Trade Policy BLOOM'S: Analyze

Figure 6.5 Japanese Market for Jetliners

57. Consider the Japanese market for jetliners as depicted in Figure 6.5. Suppose the lone producer of jetliners in the world is Boeing, which faces a constant marginal cost of $20 million per jetliner, but now a European manufacturer, Airbus, begins production. Airbus faces the same marginal cost as Boeing, but the European government provides Airbus a subsidy of $8 million per jetliner produced. As a result of the competition, Boeing exits the Japanese market, leaving Airbus as a monopoly. How many jetliners will Airbus produce, and at what price will they sell them? a. 23, $30 million b. 32, $26 million c. 23, $26 million d. 32, $30 million ANSWER: b FEEDBACK: a. b. Airbus will produce 32 jetliners and sell them at a price of $26 million. c. d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.5 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Strategic Trade Policy KEYWORDS: BLOOM'S: Analyze

58. Consider the Japanese market for jetliners as depicted in Figure 6.5. Suppose the lone producer of jetliners in the world is Boeing, which faces a constant marginal cost of $20 million per jetliner, but now a European manufacturer, Airbus, begins production. Airbus faces the same marginal cost as Boeing, but the European government provides Airbus a subsidy of $8 million per jetliner produced. As a result of the competition, Boeing exits the Japanese market leaving Airbus as a monopoly. How much profit will Airbus earn? a. $230 million b. $350 million c. $416 million d. $450 million ANSWER: c FEEDBACK: a. b. c. Airbus will earn a profit of $416 million. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.5 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Strategic Trade Policy KEYWORDS: BLOOM'S: Analyze

59. Consider the Japanese market for jetliners as depicted in Figure 6.5. Suppose the lone producer of jetliners in the world is Boeing, which faces a constant marginal cost of $20 million per jetliner, but now a European manufacturer, Airbus, begins production. Airbus faces the same marginal cost as Boeing, but the European government provides Airbus a subsidy of $8 million per jetliner produced. As a result of the competition, Boeing exits the Japanese market, leaving Airbus as a monopoly. As a result of the entry of the subsidized producer, what will happen to the consumer surplus gained by Japanese airlines from buying jetliners? a. decrease by $109 million b. nothing c. increase by $50 million d. increase by $109 million Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

c a. b. c. The consumer surplus gained by Japanese airlines from buying jetliners is an increase of $50 million.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 6.5 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Strategic Trade Policy KEYWORDS: BLOOM'S: Analyze 60. The purpose of the countervailing duty is to a. increase the price of the imported good. b. decrease the price of the imported good. c. increase the price of the exported good. d. decrease the price of the exported good. ANSWER: a FEEDBACK: a. Countervailing duties are intended to offset any unfair competitive advantage that foreign producers might gain over domestic producers because of foreign subsidies. The tariff would increase the price of the imported good.

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b. c. Providing discounts to electricity when energy is the largest expense can be categorized as illegal subsidy.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Countervailing Duties: Protection against Foreign Export Subsidies KEYWORDS: BLOOM'S: Apply 63. Compared with other displaced workers, ______________ workers tend to face ______________ adjustment costs as they must endure longer ______________ spells and larger wage losses once reemployed. a. trade-displaced, higher, unemployment b. unemployed, higher, nonproductive c. trade-displaced, lower, unemployment d. unemployed, lower, nonproductive ANSWER: a FEEDBACK: a. Compared with other displaced workers, trade-displaced workers tend to face higher adjustment costs as they must endure longer unemployment spells and larger wage losses once reemployed.

b. Copyright Cengage Learning. Powered by Cognero.

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c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Adjustment Assistance KEYWORDS: BLOOM'S: Remember 64. John, aged 55 years, has lost his job as a maintenance mechanic in a company he had worked at for 10 years. The company has now shifted overseas. He has since joined another concern where he is being paid $30,000, compared to the $39,000 he was earning previously. Is he eligible for wage insurance? If no, why? If yes, how much would he get? a. People above 60 years of age only can claim wage insurance. b. Yes, people above 50 can claim wage insurance. He will get $4,500. c. People above 55 years of age only can claim wage insurance. d. Yes, people 55 years and above can claim wage insurance. He will get $5,500. ANSWER: b Wage insurance is available to workers age 50 and older and who obtain reemployment at a RATIONALE: lower wage. The wage-insurance program provides a cash payment equal to 50 percent of the difference between the worker’s new wage and previous wage up to a two-year maximum of $10,000. The wage difference is $9,000 ($39,000 -$30,000), insurance is 50% x $9,000 = $4,500. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Adjustment Assistance KEYWORDS: BLOOM'S: Apply 65. Julia lost her job because of foreign competition. She has now trained in nursing and is working in a hospital. Which benefit of the U.S. government helped her make this adjustment? a. wage insurance b. weekly income support c. reimbursement of relocation costs d. assistance in preparing for and obtaining new employment ANSWER: d FEEDBACK: a. b. c. d. The benefit she will receive is assistance in preparing for and obtaining new Copyright Cengage Learning. Powered by Cognero.

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employment, such as support for workers developing skills for a new occupation.

c. d. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Sanctions KEYWORDS: BLOOM'S: Remember 68. Which is the main reason for sanctions NOT being able to pressure North Korea into changing its behavior? a. North Korea’s trade and financial relations with the rest of the world are limited. b. China has refrained from implementing substantial sanctions against its neighbor. c. The tension that prevails between the United States and North Korea. d. It sees nuclear weapons as the only way to survive its repressive regime. ANSWER: a FEEDBACK: a. One reason why sanctions have not pressured North Korea into changing its

behavior is because North Korea‘s trade and financial relations with the rest of the world are limited. These modest relations restrict the scope of sanctions and their leverage on North Korea.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Sanctions KEYWORDS: BLOOM'S: Remember 69. Which is NOT a sanction placed against North Korea? a. cap on the amount of oil that can be purchased b. restrict trade only to textiles and coal c. ban on entry of North Koreans into other countries d. ban on financial institutions doing business with North Korea ANSWER: b FEEDBACK: a. b. UN sanctions against banned trade in textiles and coal along with other commodities such as natural gas, iron ore, gold, and rare earth minerals. Caps were also placed on the amount of oil that North Korea could purchase, thus decreasing oil imports by North Korea by 30 percent. They also barred countries from employing North Korean laborers except when deemed for vital humanitarian reasons. In addition, the United States expanded sanctions to hit any individuals, companies, and financial institutions doing business with North Korea. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC10: - The role of government TOPICS: U.S. Tariff Policies before 1930 KEYWORDS: BLOOM'S: Remember 71. During the 1780s-1790s, the largest source of revenue for the U.S. government came from a. the personal income tax. b. the corporate income tax. c. the social security tax. d. import tariffs. ANSWER: d FEEDBACK: a. b. c. d. Tariffs were the largest source of federal revenue throughout the late 1700s and 1800s, accounting for more than 90 percent of federal revenue.

POINTS: DIFFICULTY:

1 Easy

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: U.S. Tariff Policies before 1930 KEYWORDS: BLOOM'S: Remember 72. In 1791, Alexander Hamilton presented to Congress his famous "Report on Manufacturers," which proposed that young industries of the United States be granted import protection. Hamilton was using the ______________ to justify protection a. revenue argument b. scientific tariff argument c. infant industry argument d. cheap foreign labor argument ANSWER: c FEEDBACK: a. b. c. In 1791, Alexander Hamilton presented to Congress his famous ―Report on

Manufacturers,‖ which proposed that the young industries of the United States be granted import protection until they could grow and prosper—the infant industry argument.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: U.S. Tariff Policies before 1930 KEYWORDS: BLOOM'S: Remember 73. For the United States in the early 1800s, a. Northern manufacturers favored high tariffs while Southern farmers opposed them. b. Southern farmers favored high tariffs while northern manufacturers opposed them. c. high tariffs were favored by Northern manufacturers and Southern farmers. d. low tariffs were favored by Northern manufacturers and Southern farmers. ANSWER: a FEEDBACK: a. For the United States, in the early 1800s, Northern manufacturers favored high tariffs. Intense political opposition to higher tariffs came from Southerners, who had almost no manufacturing industry and imported many products with high tariffs.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: U.S. Tariff Policies before 1930 KEYWORDS: BLOOM'S: Remember 74. The Smoot-Hawley Tariff Act of 1930 a. decreased U.S. tariffs to the lowest level since the early 1800s. b. decreased U.S. tariffs to the lowest level since the late 1800s. c. increased U.S. tariffs to an average of 53 percent on protected imports. d. resulted in foreign nations increasing their tariffs on U.S. export. ANSWER: c FEEDBACK: a. b. c. The Smoot–Hawley Act of 1930 raised U.S. tariffs to an all-time high, 53 percent on protected imports.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Smoot–Hawley Act KEYWORDS: BLOOM'S: Remember 75. Concerning the tariff policy of the United States, the country imposes a. identical tariff rates on products from all countries. b. lower tariff rates on products from countries with most-favored-nation (MFN) status. c. higher tariff rates on products from countries with most-favored-nation status. d. zero tariff rates on products from all developing countries. ANSWER: b The Reciprocal Trade Agreements Act provided generalized tariff reductions through the RATIONALE: most-favored-nation clause. This clause means that the country imposes lower tariff rates on products from countries with MFN status. In 1998, the U.S. government replaced most-favored-nation (MFN) status with normal trade relations. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reciprocal Trade Agreements Act KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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76. Soon after the United States implemented the Smoot-Hawley Tariff Act of 1930, a. the volume of international trade dramatically increased. b. employment in the United States rapidly increased. c. about 25 countries levied import tariffs on U.S. products. d. the world returned to a policy of free trade. ANSWER: c FEEDBACK: a. b. c. The Smoot-Hawley Tariff Act of 1930 provoked retaliation by 25 trading partners of the United States.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reciprocal Trade Agreements Act KEYWORDS: BLOOM'S: Remember 78. The Reciprocal Trade Agreements Act of 1934 allowed the president to lower tariffs by up to ______________ of the existing level, subject to a tariff reduction by our trading partner. a. 15 percent b. 35 percent c. 50 percent Copyright Cengage Learning. Powered by Cognero.

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d. 75 percent ANSWER: FEEDBACK:

c a. b. c. Without congressional approval, the president could lower tariffs by up to 50 percent of the existing level.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reciprocal Trade Agreements Act KEYWORDS: BLOOM'S: Understand 80. Section 301 of the Trade Act of 1974 emphasized a. the use of strategic trade policy. b. the welfare effects of export subsidies. c. relatively low-wage levels of developing countries. d. unfair trading practices of American trading partners. ANSWER: d FEEDBACK: a. b. Copyright Cengage Learning. Powered by Cognero.

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c. d. Trade-remedy laws can help protect domestic firms from stiff foreign competition. These laws include the escape clause, provisions for antidumping and countervailing duties, and Section 301 of the 1974 Trade Act, which addresses unfair trading practices of foreign nations.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Safeguards (the Escape Clause): Emergency Protection from Imports KEYWORDS: BLOOM'S: Remember 81. The ______________ is an international organization that establishes codes of conduct for international trade. Bank for International Settlements a. International Monetary Fund b. World Bank c. World Trade Organization (WTO) d. Bank for International Settlements ANSWER: c FEEDBACK: a. b. c. The World Trade Organization is an international organization that establishes codes of conduct for international trade.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Remember 82. The ______________ provides a forum for multinational trade negotiations, intended on reducing barriers to trade. a. United Nations b. World Trade Organization (WTO) c. International Monetary Fund d. Bank for International Settlements ANSWER: b FEEDBACK: a. b. The World Trade Organization provides a forum for multinational trade negotiations, intended on reducing barriers to trade, and provides a mechanism intended to improve the process of resolving trade disputes among member nations.

c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Countervailing Duties: Protection against Foreign Export Subsidies KEYWORDS: BLOOM'S: Remember 84. How many nations are members of the World Trade Organization? a. 90 b. 110 c. 130 d. 164 ANSWER: d FEEDBACK: a. b. c. d. In 2020, the WTO consisted of 164 nations, accounting for more than 97 percent of world trade.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Remember 85. The primary objective of the World Trade Organization is to a. maximize tariff revenue for developing-country governments. b. promote bilateral trade negotiations among nations. c. liberalize international trade among member countries. d. increase the protection of firms and workers against foreign competition. ANSWER: c FEEDBACK: a. b. c. The primary objective of the WTO is to liberalize international trade among member countries.

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KEYWORDS:

BLOOM'S: Understand

87. If higher labor standards were implemented as a condition for support of more liberal trade rules of the World Trade Organization, such policies could a. help labor in advanced countries but harm labor in developing countries. b. help labor in developing countries but harm labor in advanced countries. c. help labor in advanced countries and developing countries. d. harm labor in advanced countries and developing countries. ANSWER: a FEEDBACK: a. If higher labor standards were implemented as a condition for support of more liberal trade rules of the World Trade Organization, such policies could help labor in advanced countries but harm labor in developing countries.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC6: - Labor markets TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Understand 88. As a condition for the World Trade Organization's enactment of new policies, developing countries pressure the WTO for a. more stringent environmental-protection policies in advanced countries. b. additional expenditures on policies to protect intellectual property. c. import tariff reductions in advanced countries. d. domestic content laws in advanced countries. ANSWER: c FEEDBACK: a. b. c. As a condition for the World Trade Organization's enactment of new policies, developing countries pressure the WTO for import tariff reductions in advanced countries.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Understand 89. The World Trade Organization Copyright Cengage Learning. Powered by Cognero.

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a. consists of the World Bank and the International Monetary Fund. b. is intended to promote bilateral trade negotiations between two countries. c. attempts to use world trade rules to help resolve trade disputes among member countries. d. promotes international trade by granting loan guarantees to foreign customers who make purchases on credit. ANSWER: c FEEDBACK: a. b. c. The World Trade Organization was created to administer the provisions of multilateral trade agreements, to resolve international trade disagreements, and to meet periodically to consider new trade liberalization agreements.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Understand 90. The ______________ was created to administer the provisions of multilateral trade agreements, to resolve international trade disagreements, and to meet periodically to consider new trade liberalization agreements. a. North American Free Trade Agreement b. European Union c. World Bank d. World Trade Organization (WTO) ANSWER: d FEEDBACK: a. b. c. d. The World Trade Organization was created to administer the provisions of multilateral trade agreements, to resolve international trade disagreements, and to meet periodically to consider new trade liberalization agreements.

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d. those desiring anarchy as the new global order ANSWER: b FEEDBACK: a. b. Proponents of free trade based on comparative advantage are most likely to support the mission of the World Trade Organization.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Apply 92. Critics of the World Trade Organization maintain that liberalized trade can result in a. environmental degradation. b. higher wages paid to workers. c. business firms providing labor protections such as workplace safety. d. win for small countries that do not have much bargaining power. ANSWER: a FEEDBACK: a. Some environmentalists are concerned that there are circumstances in which trade and the pursuit of trade liberalization may have harmful environmental effects.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Understand 93. The purpose of the U.S. Trade Adjustment Assistance Program is to a. provide production subsidies to American exporting companies. b. protect American jobs and wages by imposing import tariffs and quotas. c. provide benefits to American workers who are dislocated because of international trade. d. provide price supports for American farmers harmed by international trade. ANSWER: c FEEDBACK: a. b. Copyright Cengage Learning. Powered by Cognero.

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c. One way to balance gains of free trade realized broadly throughout the economy, with costs usually more concentrated, is to address the needs of firms and workers that have been adversely affected. Trade adjustment assistance policies attempt to share gains from free trade with disadvantaged workers.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC6: - Labor markets TOPICS: Trade Adjustment Assistance KEYWORDS: BLOOM'S: Understand 94. Advocates of the U.S. Trade Adjustment Assistance Program maintain that it a. allows the U.S. government to subsidize firms with comparative advantages. b. decreases the prices of imports that compete with American-produced goods. c. increases the political acceptances of efforts to reduce trade barriers. d. allows the United States to be a net exporter of oil and natural gas. ANSWER: c FEEDBACK: a. b. c. Advocates of the U.S. Trade Adjustment Assistance Program maintain that it increases the political acceptances of efforts to reduce trade barriers.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Adjustment Assistance KEYWORDS: BLOOM'S: Understand 95. Critics of the U.S. Trade Adjustment Assistance Program argue that a. it increases the prices of goods and services that are imported by Americans. b. it encourages American companies to outsource more of their production overseas. c. it lessens the desire of American firms to invest in new technologies to improve their competitiveness. d. American workers whose jobs are displaced by imports are no more deserving of aid than other Americans suffering job losses. ANSWER: d FEEDBACK: a. b. c. d. Critics of the U.S. Trade Adjustment Assistance Program argue that American Copyright Cengage Learning. Powered by Cognero.

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workers whose jobs are displaced by imports are no more deserving of aid than other Americans suffering job losses.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC6: - Labor markets TOPICS: Trade Adjustment Assistance KEYWORDS: BLOOM'S: Understand 96. Assume that trade restrictions are adopted by a country. The General Agreement on Tariffs and Trade (GATT) would have obligated the country to use a tariff rather than a quota because a tariff is more visible and its trade effects are more easily determined. a. True b. False ANSWER: True FEEDBACK: Correct GATT obligated its members to use tariffs rather than quotas to protect their domestic industries. GATT‘s presumption was that quotas were inherently more trade distorting than tariffs because they allowed the user to discriminate between suppliers, were not predictable and transparent to the exporter, and imposed a maximum ceiling on imports. Incorrect

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TOPICS: KEYWORDS:

Smoot-Hawley Act BLOOM'S: Remember

98. With the passage of the Smoot-Hawley Act in 1930, U.S. average tariffs were raised to over 50 percent on protected imports. a. True b. False ANSWER: True FEEDBACK: Correct The high point of U.S. protectionism occurred with the passage of the SmootHawley Act in 1930, under which U.S. average tariffs were raised to 53 percent on protected imports. Incorrect

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two-thirds, world trade declined, and the global economy fell into the Great Depression.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Reciprocal Trade Agreements Act BLOOM'S: Remember

103. According to the normal-trade-relations (most-favored-nation, or MFN) principle, if the United States extends MFN treatment to China and then grants a low tariff on imports of shirts from South Korea, the United States is obligated to provide the identical low tariff on imports of shirts from China. a. True b. False ANSWER: True The Reciprocal Trade Agreements Act provided generalized tariff reductions through the RATIONALE: MFN clause. This clause means that countries cannot discriminate between their trading partners participating in a trade agreement. If the United States extends MFN treatment to China and then grants a low tariff on imports of shirts from South Korea, the United States is obligated to provide the identical low tariff on imports of shirts from China. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reciprocal Trade Agreements Act KEYWORDS: BLOOM'S: Remember 104. U.S. tariffs on imports from countries issued normal-trade-relations (most-favored-nation) status are often three or four times as high as those on comparable imports from nations NOT receiving that status. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The Reciprocal Trade Agreements Act provided generalized tariff reductions through the most-favored-nation (MFN) clause. This clause means that the country imposes lower tariff rates on products from countries with MFN status.

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a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect With the advent of GATT, trade negotiations were conducted on a multilateral basis that involved all GATT members participating in the negotiations.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Remember 108. The only members of the World Trade Organization, are developing countries rather than developed countries. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect In 2020, the WTO consisted of 164 nations accounting for more than 97 percent of world trade.

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b. False ANSWER: FEEDBACK:

True Correct

According to the fast-track provision of U.S. trade law, once the trade negotiations are completed, their outcome is subject only to a straight up-or-down vote (without amendment) in both houses of Congress within 90 legislative days of submission.

Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: General Agreement on Tariffs and Trade KEYWORDS: BLOOM'S: Remember 113. Among the codes of conduct addressed at the Tokyo Round of multilateral trade negotiations were customs valuation, product standards, subsidies and countervailing duties, government procurement policies, and import licensing procedures. a. True b. False ANSWER: True FEEDBACK: Correct At the Tokyo Round, codes of conduct were established in six areas: customs valuation, import licensing, government procurement, technical barriers to trade (such as product standards), antidumping procedures, and countervailing duties. Incorrect

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competition. a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect The escape clause provides temporary safeguards (relief) to U.S. firms and workers who are substantially injured from surges in imports that are fairly traded. To offset surging imports, the escape clause allows the president to terminate or modify trade concessions granted to foreign nations and to levy trade restrictions.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Antidumping Duties: Protection Against Foreign Dumping BLOOM'S: Understand

120. An antidumping duty levied on imports of foreign-produced steel leads to an increase in consumer surplus in the home country. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Economic theory suggests that if a nation is a net importer of a product subsidized or dumped by foreigners, then the nation as a whole gains from the foreign subsidy or dumping. This is because the gains to domestic consumers of the subsidized or dumped good more than offset the losses to domestic producers of the import-competing goods.

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ANSWER: FEEDBACK:

False Correct Incorrect Intellectual property includes copyrights, trademarks, and patents.

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TOPICS: KEYWORDS:

Industrial Policies of the United States BLOOM'S: Remember

125. Industrial policies of the U.S. government have included subsidizing particular firms to promote national champions, nationalizing basic industries, and encouraging cartelization of industries. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Industrial policies involve government channeling of resources into specific, targeted industries that it views as important for future economic growth and are designed to enhance the competitiveness of domestic producers.

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telecommunications, power-generating equipment, and energy developments. Incorrect

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KEYWORDS:

BLOOM'S: Remember

130. In the post-World War II era, the U.S. government formed industrial policies to encourage the development of its aerospace, energy, shipbuilding, and defense industries. a. True b. False ANSWER: True FEEDBACK: Correct The U.S. government has provided support for the shipping, aerospace, shipbuilding, energy, and defense industries, primarily on the grounds of national security. Incorrect

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export profits, which more than offset the cost of the subsidy to domestic taxpayers. a. True b. False ANSWER: True FEEDBACK: Correct According to the strategic trade policy concept, government can assist firms in capturing economic profits from foreign competitors. A subsidy granted to domestic exporters may lead to increased export profits, which more than offset the cost of the subsidy to domestic taxpayers. Incorrect

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of Kuwait. Iraq did not withdraw its military forces from Kuwait as a result.

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140. Concerning industrial policies, the United States has nationalized its major industries in an attempt to promote global champions. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Industrial policies involve government channeling of resources into specific, targeted industries that the government views as important for future economic growth and are designed to enhance the competitiveness of domestic producers.

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Remember 143. The World Trade Organization (WTO) brings into the multilateral trading system manufactured goods and agricultural products but NOT trade in services, intellectual property protection, and investment. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The WTO has a far wider scope than the old GATT, bringing into the multilateral trading system for the first time trade in services, intellectual property, and investment.

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145. Safeguard protection (the escape clause) applies to permanent protection provided to home industries encountering competition from unfairly traded foreign goods. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The escape clause provides temporary safeguards (relief) to U.S. firms and workers who are substantially injured from surges in imports that are fairly traded.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Safeguards (the Escape Clause): Emergency Protection from Imports KEYWORDS: BLOOM'S: Understand 146. Regarding the overall welfare of an importing country, dumping is beneficial to the country. a. True b. False ANSWER: True FEEDBACK: Correct Economic theory suggests that if a nation is a net importer of a product subsidized or dumped by foreigners, then the nation as a whole gains from the foreign subsidy or dumping. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Antidumping Duties: Protection against Foreign Dumping KEYWORDS: BLOOM'S: Remember 147. The Smoot-Hawley Tariff Act of 1930 cut U.S. import tariffs to record low levels. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The Smoot-Hawley Act of 1930 raised U.S. tariffs to an all-time high, 53 percent on protected imports.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Smoot–Hawley Act BLOOM'S: Remember

148. Under U.S. trade law, safeguards (the escape clause) allow for the setting of trade restrictions on unfairly traded products that harm American producers. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The escape clause provides temporary safeguards (relief) to U.S. firms and workers who are substantially injured from surges in imports that are fairly traded. To offset surging imports, the escape clause allows the president to terminate or modify trade concessions granted to foreign nations and to levy trade restrictions.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Safeguards (the Escape Clause): Emergency Protection from Imports KEYWORDS: BLOOM'S: Remember 149. Critics of the U.S. Trade Adjustment Assistance Program wonder what makes losing one’s job to international trade worthy of the special treatment. a. True b. False ANSWER: True FEEDBACK: Correct Some critics ponder what makes losing one‘s job to international trade worthy of the special treatment provided by trade-adjustment assistance compared to losing one‘s job because of cyclical downturns in the economy or technological change. Incorrect

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FEEDBACK:

Correct

U.S. antidumping duties are intended to neutralize two unfair trading practices: export sales in the United States at prices below average total cost, and international price discrimination in which foreign firms sell in the United States at a price lower than that charged in the exporter‘s home market. The effect of antidumping duties is to impose a floor on the price of foreign goods that are imported by the home country.

Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Antidumping Duties: Protection against Foreign Dumping KEYWORDS: BLOOM'S: Remember 151. The Doha Round of trade negotiations addressed both tariffs and nontariff trade barriers and aimed to negotiate global rules in four new areas. a. True b. False ANSWER: True FEEDBACK: Correct The aims of the Doha Round were to decrease trade-distorting subsidies, cut tariffs, free up trade in services, and negotiate global rules in four new areas— competition, investment, government procurement, and trade facilitation. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: General Agreement on Tariffs and Trade KEYWORDS: BLOOM'S: Understand 152. If fast-track authority is approved and trade negotiations are completed, Congress must vote on the agreement (without amendment) within 90 legislative days of submission. a. True b. False ANSWER: True FEEDBACK: Correct According to the fast-track provision of U.S. trade law, once the trade negotiations are completed, their outcome is subject only to a straight up-or-down vote (without amendment) in both houses of Congress within 90 legislative days of submission. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Easy True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Promotion Authority (Fast-Track Authority) KEYWORDS: BLOOM'S: Remember 153. The United States has often regarded China as a major violator of intellectual property laws. a. True b. False ANSWER: True FEEDBACK: Correct When China became a member of the WTO in 2001, it agreed to implement the WTO‘s standards on IPR protection and rules for enforcement. However, the United States has often regarded China as a major violator of intellectual property laws. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC10: - The role of government TOPICS: Protection of Intellectual Property Rights KEYWORDS: BLOOM'S: Remember 154. For the United States, the trade adjustment assistance program is founded on the rationale that if society enjoys welfare gains from the increased efficiency stemming from trade liberalization, compensation should be provided for those who are injured by import competition. a. True b. False ANSWER: True FEEDBACK: Correct Because foreign competition may displace import-competing producers, the United States and other nations have initiated programs of trade-adjustment assistance involving government aid to adversely affected businesses, workers, and communities. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Adjustment Assistance KEYWORDS: BLOOM'S: Remember 155. The purpose of the U.S. Export-Import Bank (Eximbank) is to provide subsidized loans to American import– competing producers. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

Correct Incorrect Eximbank provides export subsidies to American manufacturers to encourage international sales, thus providing jobs for Americans.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Industrial Policies of the United States KEYWORDS: BLOOM'S: Remember 156. Delta Airlines and Southwest Airlines have been critics of the U.S. Export-Import Bank. They maintain that, because they are American companies, they cannot benefit from the Bank's export subsidies. However, their foreign rivals do benefit from the Bank's export subsidies. a. True b. False ANSWER: True FEEDBACK: Correct Carriers such as Delta Airlines and Southwest Airlines contend that because they are American companies, they cannot receive these export subsidies, which can greatly increase an airline‘s access to funding and cut its cost of borrowing, while their foreign rivals can benefit from such subsidies. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Industrial Policies of the United States KEYWORDS: BLOOM'S: Remember 157. Responding to Russia's annexation of Crimea in 2014, the United States and its allies imposed economic sanctions against Russia. a. True b. False ANSWER: True FEEDBACK: Correct In 2004, the United States and its allies imposed economic sanctions against Russia to discourage annexation of Crimea. Incorrect

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KEYWORDS:

BLOOM'S: Remember

158. Under the World Trade Organization (WTO), when countries agree to open their markets for goods or services, they "bind" their commitments. These bindings amount to ceilings on import tariff rates. a. True b. False ANSWER: True FEEDBACK: Correct Under the WTO, when members open their markets through the removal of barriers to trade, they bind their commitments. Therefore, when they reduce their tariffs through negotiations, they commit to bind the tariff reduction at a fixed level negotiated with their trading partners, beyond which tariffs may not be increased. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Remember 159. Normal trade relations (the most-favored-nation clause) tend to result in discriminatory treatment regarding tariff reductions among nations. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The Reciprocal Trade Agreements Act provided generalized tariff reductions through the most-favored-nation (MFN) clause. This clause means that countries cannot discriminate between their trading partners participating in a trade agreement.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reciprocal Trade Agreements Act KEYWORDS: BLOOM'S: Remember 160. In the early 1800s, southern states pressed for free trade so that they could buy cheaper foreign manufactured goods in exchange for their agricultural goods. a. True b. False ANSWER: True FEEDBACK: Correct In the early 1800s, southern states pressed for free trade. They claimed that with tariffs, they would have to pay more for manufactured imports while getting less for the cotton they sold abroad. Copyright Cengage Learning. Powered by Cognero.

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Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: U.S. Tariff Policies before 1930 KEYWORDS: BLOOM'S: Understand 161. One objective of the World Trade Organization (WTO) is to encourage a nondiscriminatory trade environment. a. True b. False ANSWER: True One objective of the WTO is to encourage a nondiscriminatory trade environment. RATIONALE: According to GATT (and its successor, the WTO), a member country should not discriminate between its trading partners. The two pillars of the nondiscrimination principle are the most-favored-nation principle and the national treatment principle. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Remember 162. Critics of the World Trade Organization argue that liberalized trade can result in environmental degradation and business firms avoiding labor protections such as collective bargaining rights and workplace safety. a. True b. False ANSWER: True FEEDBACK: Correct Some environmentalists are concerned that concerned that there are circumstances in which trade and the pursuit of trade liberalization may have harmful environmental effects, and business firms avoiding labor protections such as collective bargaining rights and workplace safety. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: World Trade Organization KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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163. What is the essential idea behind strategic trade policy? The essential notion underlying strategic trade policy is imperfect competition. ANSWER: POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Strategic Trade Policy KEYWORDS: BLOOM'S: Understand 164. What is the basis for trade adjustment assistance? The rationale for trade adjustment assistance is that if society in general enjoys welfare ANSWER: gains from the increased efficiency stemming from trade liberalization, some sort of compensation should be provided for those who are temporarily injured by import competition. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Adjustment Assistance KEYWORDS: BLOOM'S: Understand 165. Explain how advocates of strategic trade policy differ from the classical free traders in their treatment of externalities. Advocates of strategic trade policy recognize that the classical argument for free trade ANSWER: considered externalities at length. The difference, they maintain, is that the classical theory was based on perfect competition and thus could not appreciate the most likely source of the externality, whereas modern theories based on imperfect competition can. The externality in question is the ability of companies to capture the fruits of expensive innovation. Classical theory based on perfect competition neglected this factor because large fixed costs are involved in innovation and research and development, and such costs ensure that the number of competitors in an industry will be small. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Strategic Trade Policy Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Understand

Chapter 07: Trade Policies for the Developing Nations 1. Which of the following is NOT a major factor that encourages developing nations to form international commodity agreements? a. inelastic commodity supply schedules b. inelastic commodity demand schedules c. export markets that tend to be unstable d. worsening commodity terms of trade ANSWER: d FEEDBACK: a. b. c. d. Developing nations complain that their commodity terms of trade have deteriorated, suggesting that the prices of their exports relative to their imports have fallen.

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TOPICS: KEYWORDS:

Stabilizing Primary Product Prices BLOOM'S: Understand

3. Concerning the price elasticities of supply and demand for commodities, empirical estimates suggest that most commodities have a. inelastic supply and demand schedules. b. inelastic supply schedules and elastic demand schedules. c. elastic supply schedules and inelastic demand schedules. d. elastic supply schedules and elastic demand schedules. ANSWER: a FEEDBACK: a. Economists maintain that a key factor underlying the instability of primaryproduct prices and producer revenues is the low price elasticity of the demand and supply schedules for commodities.

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KEYWORDS:

BLOOM'S: Apply

5. A primary goal of international commodity agreements has been the a. maximization of members' revenues via export taxes. b. nationalization of corporations operating in member nations. c. adoption of tariff protection against industrialized nation sellers. d. moderation of commodity price fluctuations when markets are unstable. ANSWER: d FEEDBACK: a. b. c. d. In an attempt to stabilize export prices and revenues of primary products, developing nations have formed international commodity agreements (ICAs). These agreements are between leading producing and consuming nations of commodities about matters such as stabilizing prices and export revenues, ensuring adequate supplies to consumers, and promoting the economic development of producers.

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7. Which method has NOT generally been used by international commodity agreements to stabilize commodity prices? a. production quotas applied to the level of commodity output b. buffer stock arrangements among producing nations c. export restrictions applied to international sales of commodities d. measures to nationalize foreign-owned production operations ANSWER: d FEEDBACK: a. b. c. d. International commodity agreements have been formed to stabilize the prices and revenues of producers of primary products. The methods used to attain this stability are buffer stocks, export controls, and multilateral contracts.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Remember 9. An obstacle that can arise in forming a cartel is that a. the demand for commodities tends to be price inelastic. Copyright Cengage Learning. Powered by Cognero.

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b. substitute products exist for many commodities. c. commodity produces have dominated world markets. d. the production of most commodities is capital intensive. ANSWER: b FEEDBACK: a. b. The price-making ability of a cartel is weakened when buyers can substitute other goods (coal and natural gas) for the good that it produces (oil).

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Understand 10. Which device has been used by the International Wheat Agreement to stipulate the minimum prices at which importers will buy stipulated quantities from producers and the maximum prices at which producers will sell stipulated quantities to importers? a. buffer stocks b. export controls c. multilateral contracts d. production controls ANSWER: c FEEDBACK: a. b. c. The International Wheat Agreement utilized multilateral contracts. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Stabilizing Primary-Product Prices KEYWORDS: BLOOM'S: Remember 11. If the countries that export bauxite form a cartel to boost the price of bauxite in order to increase sales revenue, then they believe that the demand for bauxite a. is inelastic with respect to price changes. b. is elastic with respect to price changes. c. will increase in response to a price increase. Copyright Cengage Learning. Powered by Cognero.

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d. will not change in response to a price change. ANSWER: a FEEDBACK: a. When the demand for a commodity is highly price inelastic, decreases in supply by the cartel will generate an increase in price.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Apply 12. If the supply schedule for tin is relatively inelastic to price changes, a decrease in the demand schedule for tin will cause a a. decrease in price and an increase in sales revenue. b. decrease in price and a decrease in sales revenue. c. increase in price and an increase in sales revenue. d. increase in price and a decrease in sales revenue. ANSWER: b FEEDBACK: a. b. When the supply of a commodity is highly price inelastic, decreases (or increases) in demand will generate a decrease in price and a decrease in sales revenue.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Understand 13. Which of the following could partially explain why the terms of trade of developing countries might deteriorate over time? a. Developing-country exports mainly consist of manufactured goods. b. Developing-country imports mainly consist of primary products. c. Commodity export prices are determined in highly competitive markets. d. Commodity export prices are solely determined by developing countries. Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

c a. b. c. Observers contend that the export prices of primary products of developing nations are determined in competitive markets. These prices fluctuate downward as well as upward. This could partially explain why the terms of trade of developing countries might deteriorate over time.

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d. import substitution ANSWER: FEEDBACK:

d a. b. c. d. Import substitution involves extensive use of trade barriers to protect domestic industries from import competition. The strategy is inward oriented in that trade and industrial incentives favor production for the domestic market over the export market.

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b. export-led growth. c. international commodity agreement. d. reciprocal trade agreement. ANSWER: a FEEDBACK: a. Some industrial countries have extended nonreciprocal tariff preferences to exports of developing nations. Under this generalized system of preferences (GSP), major advanced nations temporarily reduce tariffs on designated manufactured imports from developing nations below the levels applied to imports from other advanced nations.

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d. produce less output and charge a lower price. ANSWER: c FEEDBACK: a. b. c. A cartel behaves like a profit-maximizing monopolist and will produce less output and charge a higher price.

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ANSWER: FEEDBACK:

a a. The East Asian economies use an industrialization policy of outward orientation and export promotion.

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supported by a United Nations (UN) study in 1949. Because of inadequacies in data and the problems of constructing price indexes, the UN study was hardly conclusive. Other studies led to opposite conclusions about terms-of-trade movements.

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FEEDBACK:

a. b. Hong Kong and South Korea pursue an industrialization policy of outward orientation and export promotion.

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b. Stabilizing commodity prices around long-term trends tends to benefit exporters at the expense of importers in markets characterized by supply-side disturbances.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Understand 29. To be considered a good candidate for an export cartel, a commodity should a. be a manufactured good. b. be a primary product. c. have a low price elasticity of supply. d. have a high price elasticity of demand. ANSWER: c FEEDBACK: a. b. c. To be considered a good candidate for an export cartel, a commodity should have a low price elasticity of supply. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Aiding the Developing Nations KEYWORDS: BLOOM'S: Remember The diagram below illustrates the international tin market. Assume that producing and consuming countries establish an international commodity agreement under which the target price of tin is $5 per pound. Figure 7.1. Defending the Target Price in Face of Changing Demand Conditions

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31. Consider Figure 7.1. Suppose the demand for tin increases from D0 to D1. Under a buffer stock system, the bufferstock manager could maintain the target price by a. selling 15 pounds of tin. b. selling 30 pounds of tin. c. buying 15 pounds of tin. d. buying 30 pounds of tin. ANSWER: b FEEDBACK: a. b. During periods of rising tin demand, the buffer stock manager could maintain the target price by selling 30 pounds of tin to prevent the price from rising above the ceiling level.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 7.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Stabilizing Primary-Product Prices KEYWORDS: BLOOM'S: Analyze Copyright Cengage Learning. Powered by Cognero.

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32. Consider Figure 7.1. Suppose the demand for tin decreases from D0 to D2. Under a buffer stock system, the bufferstock manager could maintain the target price by a. selling 15 pounds of tin. b. selling 30 pounds of tin. c. buying 15 pounds of tin. d. buying 30 pounds of tin. ANSWER: d FEEDBACK: a. b. c. d. During periods of declining tin demand, the buffer stock manager could maintain the target price by buying 30 pounds of tin to prevent the price from falling below the floor level.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 7.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Stabilizing Primary-Product Prices KEYWORDS: BLOOM'S: Analyze

33. Consider Figure 7.1. Suppose the demand for tin decreases from D0 to D2. Under a system of export quotas, the tin producers could maintain the target price by a. increasing the quantity of tin supplied by 15 pounds. b. increasing the quantity of tin supplied by 30 pounds. c. decreasing the quantity of tin supplied by 15 pounds. d. decreasing the quantity of tin supplied by 30 pounds. ANSWER: d FEEDBACK: a. b. c. d. Under a system of export quotas, the tin producers could maintain the target price by decreasing the quantity of tin supplied by 30 pounds.

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TOPICS: KEYWORDS:

Stabilizing Primary-Product Prices BLOOM'S: Analyze

The diagram below illustrates the international tin market. Assume that the producing and consuming countries establish an international commodity agreement under which the target price of tin is $5 per pound. Figure 7.2. Defending the Target Price in Face of Changing Supply Conditions

34. Consider Figure 7.2. Suppose the supply of tin increases from S0 to S1. Under a buffer-stock system, the buffer-stock manager could maintain the target price by a. purchasing 15 pounds of tin. b. purchasing 30 pounds of tin. c. selling 15 pounds of tin. d. selling 30 pounds of tin. ANSWER: b FEEDBACK: a. b. Under a buffer-stock system, the buffer-stock manager could maintain the target price by purchasing 30 pounds of tin.

c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Challenging Multiple Choice

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HAS VARIABLES: False PREFACE NAME: Figure 7.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Stabilizing Primary-Product Prices KEYWORDS: BLOOM'S: Analyze

35. Consider Figure 7.2. Suppose the supply of tin decreases from S0 to S2. Under a buffer-stock system, the buffer-stock manager could maintain the target price by a. purchasing 15 pounds of tin. b. purchasing 30 pounds of tin. c. selling 15 pounds of tin. d. selling 30 pounds of tin. ANSWER: d FEEDBACK: a. b. c. d. Under a buffer-stock system, the buffer-stock manager could maintain the target price by selling 30 pounds of tin.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 7.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Stabilizing Primary-Product Prices KEYWORDS: BLOOM'S: Analyze

36. Consider Figure 7.2. Assume there exists a cartel of several producers that is maximizing total profit. If one producer cheats on the cartel agreement by decreasing its price and increasing its output, then the rational action of the other producers is to a. increase their price in order to regain sacrificed profits. b. decrease their price as well. c. continue selling at the agreed-upon price. d. give the product away for free. ANSWER: b FEEDBACK: a. b. Each supplier has the incentive to sell more than its assigned quota at the cartel price. If one producer cheats on the cartel agreement by decreasing its price and increasing its output, then the rational action of the other producers is to decrease their price as well. But if all cartel members sell more than their quotas, the cartel price will fall toward the competitive level and profits will vanish. Copyright Cengage Learning. Powered by Cognero.

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c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 7.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Analyze

37. A reason why it is difficult for producers to maintain a cartel is that a. the elasticity of demand for the cartel's output decreases over time. b. producers in the cartel have the economic incentive to cheat. c. economic profits discourage other producers from entering the industry. d. producers in the cartel have the motivation to lower, but not raise, price. ANSWER: b FEEDBACK: a. b. Each supplier has the incentive to sell more than its assigned quota at the cartel price. If one producer cheats on the cartel agreement by decreasing its price and increasing its output, then the rational action of the other producers is to decrease their price as well. But if all cartel members sell more than their quotas, the cartel price will fall toward the competitive level and profits will vanish.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 7.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Understand 38. Once a cartel establishes its profit-maximizing price, a. entry into the industry of new competitors will not affect the cartel's profits. b. output changes by cartel members have no effect on the market price. c. each cartel member is tempted to cheat on the cartel price in order to add to its profit. d. all cartel members have a strong incentive to adhere to the agreed-upon price. ANSWER: c FEEDBACK: a. Copyright Cengage Learning. Powered by Cognero.

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b. c. Each supplier has the incentive to sell more than its assigned quota at the cartel price. If one producer cheats on the cartel agreement by decreasing its price and increasing its output, then the rational action of the other producers is to decrease their price as well. But if all cartel members sell more than their quotas, the cartel price will fall toward the competitive level and profits will vanish.

39. Consider Figure 7.3. Under competitive conditions, the quantity of oil produced equals a. 40 barrels. Copyright Cengage Learning. Powered by Cognero.

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b. 70 barrels. c. 90 barrels. d. 110 barrels. ANSWER: FEEDBACK:

d a. b. c. d. Under competitive conditions, the quantity of oil produced equals 110 barrels.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 7.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Apply

40. Consider Figure 7.3. Under competitive conditions, the price of a barrel of oil equals a. $7. b. $11. c. $12. d. $16. ANSWER: b FEEDBACK: a. b. Under competitive conditions, the price of a barrel of oil equals $11. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 7.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Apply

41. Consider Figure 7.3. Under competitive conditions, producer profits total a. $0. b. $140. c. $200. Copyright Cengage Learning. Powered by Cognero.

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d. $280. ANSWER: FEEDBACK:

a a. Under competitive conditions, producer profits total $0. b. c. d.

42. Consider Figure 7.3. Under a profit-maximizing cartel, the quantity of oil produced equals a. 40 barrels. b. 70 barrels. c. 90 barrels. d. 110 barrels. ANSWER: b FEEDBACK: a. b. Under a profit-maximizing cartel, the quantity of oil produced equals 70 barrels. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 7.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Apply

43. Consider Figure 7.3. Under a profit-maximizing cartel, the price of a barrel of oil equals a. $7. b. $11. c. $16. d. $19. ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. Under a profit-maximizing cartel, the price of a barrel of oil equals $16. d.

44. Consider Figure 7.3. Under a profit-maximizing cartel, producers realize a. profits totaling $280. b. profits totaling $360. c. losses totaling $140. d. losses totaling $180. ANSWER: a FEEDBACK: a. Under a profit-maximizing cartel, producers realize profits totaling $280. b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 7.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Apply 45. 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 advantages. d. tax breaks granted to industries with comparative advantages. ANSWER: a FEEDBACK: a. Import substitution involves extensive use of trade barriers to protect domestic industries from import competition. The strategy is inward oriented in that trade and industrial incentives favor production for the domestic market over the export market. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution Versus Export Led Growth KEYWORDS: BLOOM'S: Remember 46. Export-led growth tends to a. exploit domestic comparative advantages. b. discourage competition in the global economy. c. lead to unemployment among domestic workers. d. help firms benefit from diseconomies of large-scale production. ANSWER: a FEEDBACK: a. An export-led growth or export-oriented policy is outward oriented because it links the domestic economy to the world economy. Instead of pursuing growth through the protection of domestic industries suffering comparative disadvantage, the strategy exploits domestic comparative advantages.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution Versus Export Led Growth KEYWORDS: BLOOM'S: Remember 47. By adhering to an import-substitution policy, which country wound up as a computer-unfriendly nation? a. Hong Kong b. South Korea c. Brazil d. Singapore ANSWER: c FEEDBACK: a. b. c. By adhering to its import-substitution policy, Brazil wound up a largely computer-unfriendly nation. For example, by 1991, only 12 percent of smallCopyright Cengage Learning. Powered by Cognero.

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and medium-sized Brazilian companies were at least partially computerized, and many Brazilian companies postponed modernization because computers could not be imported.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution Versus Export Led Growth KEYWORDS: BLOOM'S: Remember 48. The characteristics that have underlaid the economic success of the "high-performing Asian Economies" have included all of the following, except a. high rates of domestic investment. b. diseconomies of scale occurring at low output levels. c. large endowments of human capital. d. high levels of labor productivity. ANSWER: b FEEDBACK: a. b. The foundation of the growth of high-performing Asian Economies has included high rates of investment, the increasing endowments of an educated workforce, and the use of export-promotion policies.

b. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: India: Breaking Out of the Third World KEYWORDS: BLOOM'S: Understand 52. India switched to an outward-oriented, market-based economy a. in 1947. b. in the 1990s. c. in the late 1980s. d. in the early 2000s. ANSWER: b FEEDBACK: a. b. By 1991, policy makers in India realized that their system of state controls and import substitution was strangling the economy and that reforms were needed. The result was a clear switch toward an outward-oriented, market-based economy.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Remember 54. A key factor underlying the instability of primary product prices and export receipts of developing nations is the a. low price elasticity of the demand of primary products. b. high price elasticity of the supply of primary products. c. high price elasticity of the demand of primary products. d. high price elasticity of the demand and supply of primary products. ANSWER: a FEEDBACK: a. A key factor underlying the instability of primary product prices and export receipts of developing nations is the low price elasticity of the demand of primary products. When the demand for a commodity is highly price inelastic, increases (or decreases) in supply will generate wide variations in price.

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55. Consider the global market for tin represented by Figure 7.4. Initially, equilibrium is at point A with a market price of $3.50 per pound and 50,000 pounds. In order to keep tin price relatively stable, an International Tin Agreement has set a price floor of $3.27 and a ceiling of $4.02. As the demand for tin increases to D1, how will the buffer-stock manager need to respond? a. buy 10,000 pounds of tin b. buy 20,000 pounds of tin c. sell 10,000 pounds of tin d. sell 20,000 pounds of tin ANSWER: d FEEDBACK: a. b. c. d. During periods of rising tin demand, the buffer-stock manager sells tin to prevent the price from rising above the ceiling level. The buffer-stock manager needs to sell 20,000 pounds of tin.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 7.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Stabilizing Primary-Product Prices KEYWORDS: BLOOM'S: Analyze Figure 7.5 Global Market for Tin Copyright Cengage Learning. Powered by Cognero.

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56. Figure 7.5 represents the global market for tin. The initial equilibrium price and quantity is at point A. As a result of an International Tin Agreement, a price range of $3.27–$4.02 is set. As the supply of tin increases from S0 to S1, the buffer-stock manager will need to a. buy 10,000 pounds of tin. b. buy 20,000 pounds of tin. c. sell 10,000 pounds of tin. d. sell 20,000 pounds of tin. ANSWER: b FEEDBACK: a. b. During periods of abundant tin supplies, the manager purchases tin to prevent the price from falling below the floor level. The buffer-stock manager will need to buy 20,000 pounds of tin.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 7.5 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Stabilizing Primary-Product Prices KEYWORDS: BLOOM'S: Analyze 57. Recent trade patterns indicate that most of world trade occurs Copyright Cengage Learning. Powered by Cognero.

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a. among advanced (industrial) countries. b. among developing countries. c. between regional trade blocks, such as NAFTA and the EU. d. between developing countries and advanced countries. ANSWER: a FEEDBACK: a. Recent trade patterns indicate that most of world trade occurs among advanced (industrial) countries. Trade among developing nations is relatively minor, although it has increased in recent years.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Developing Nation Trade Characteristics KEYWORDS: BLOOM'S: Remember 58. Import substitution is an example of a. an inward-oriented growth strategy. b. an outward-oriented growth strategy. c. the principle of absolute advantage. d. export led growth. ANSWER: a FEEDBACK: a. The import substitution strategy is inward oriented in that trade and industrial incentives favor production for the domestic market over the export market.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution versus Export-Led Growth KEYWORDS: BLOOM'S: Remember 59. Outward-oriented growth strategies emphasize a. the allocation of resources according to the principle of absolute advantage. b. the allocation of resources according to the principle of comparative advantage. c. the principle of strategic trade policy. d. the principle of industrial policy. ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. Export promotion or an export-oriented policy links the domestic economy to the world economy. Instead of pursuing growth through the protection of domestic industries suffering comparative disadvantage, the strategy involves promoting growth through the export of manufactured goods.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution versus Export-Led Growth KEYWORDS: BLOOM'S: Remember 60. Developing countries tend to export ______ because many of them have large endowments of ______. a. primary products, natural resources b. primary products, capital c. capital goods, advanced technology d. capital goods, investment funds ANSWER: a FEEDBACK: a. The composition of developing nations‘ exports has an emphasis on primary products (agricultural goods, raw materials, and fuels), as many of them have large endowments of natural resources.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Developing Nation Trade Characteristics KEYWORDS: BLOOM'S: Remember 61. Import substitution emphasizes decreasing reliance on international trade by a. developing import-competing industries. b. adopting free-trade policies. c. subsidizing efficient exporting industries. d. reducing import tariffs on labor-intensive goods. ANSWER: a FEEDBACK: a. Import substitution involves extensive use of trade barriers to protect domestic industries from import competition. Its strategy is inward oriented in that trade and industrial incentives favor production for the domestic market, thus decreasing reliance on international trade by developing import-competing Copyright Cengage Learning. Powered by Cognero.

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industries.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution versus Export-Led Growth KEYWORDS: BLOOM'S: Understand 62. Developing countries often argue that their terms of trade have worsened because a. their import prices have declined relative to their export prices. b. their import prices have risen relative to their export prices. c. their import prices and export prices have increased. d. their import prices and export prices have decreased. ANSWER: b FEEDBACK: a. b. Developing nations complain that their commodity terms of trade have deteriorated in the past century or so, suggesting that the prices of their exports relative to their imports have fallen.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Remember 63. Comparing per-capita incomes of many developing countries and industrial countries, we tend to see a. lower per-capita incomes in industrial countries. b. lower per-capita incomes in developing countries. c. identical per-capita incomes in developing countries. d. identical per-capita incomes in industrial countries. ANSWER: b FEEDBACK: a. b. There are lower per-capita incomes in developing countries. c. d. POINTS:

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DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Introduction KEYWORDS: BLOOM'S: Remember 64. Comparing life expectancy and adult literacy of developing countries and industrial countries, we tend to see a. lower life expectancy and higher adult literacy in developing countries. b. higher life expectancy and lower adult literacy in developing countries. c. higher life expectancy and higher adult literacy in developing countries. d. lower life expectancy and lower adult literacy in industrial countries. ANSWER: d FEEDBACK: a. b. c. d. Developing nations tend to be characterized by lower life expectancies and lower levels of adult literacy.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Introduction KEYWORDS: BLOOM'S: Remember 65. The trade problems of the developing countries have included all of the following, except a. unstable export markets. b. worsening terms of trade. c. rising prices of primary-product exports. d. limited export access to the markets of industrial countries. ANSWER: c FEEDBACK: a. b. c. Among the alleged problems facing the developing nations are unstable export markets, worsening terms of trade, and limited market access.

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TOPICS: KEYWORDS:

Trade Problems of the Developing Nations BLOOM'S: Remember

66. Developing countries sometimes encounter the tariff-escalation policies of advanced countries. This means that advanced countries a. impose higher tariffs on processed products than on primary products. b. impose higher tariffs on primary products than on processed products. c. impose identical tariffs on primary products and processed products. d. allow free trade on primary products and processed products. ANSWER: a FEEDBACK: a. Average tariff rates in advanced countries are low, but they maintain barriers in exactly the areas where developing nations have comparative advantage: agriculture and labor-intensive manufactured goods.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Remember 67. For most developing countries, the majority of their exports consists of a. capital-intensive agricultural products. b. capital intensive manufactured products. c. financial and legal services. d. primary products. ANSWER: d FEEDBACK: a. b. c. d. Developing nations exports are concentrated in primary products. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Remember 68. The developing countries tend to reside in all of the following regions, except a. North America. Copyright Cengage Learning. Powered by Cognero.

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b. Latin America. c. Africa. d. the Middle East. ANSWER: FEEDBACK:

a a. Developing countries tend to reside in Latin America, Africa, and the Middle East. North America is considered to have advanced (industrial) countries.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Introduction KEYWORDS: BLOOM'S: Remember 69. The advanced (industrial) countries of the world tend to be characterized by all of the following, except a. relatively high per-capita incomes. b. relatively long-life expectancies. c. relatively high levels of adult literacy. d. relatively high reliance on exports of primary products. ANSWER: d FEEDBACK: a. b. c. d. Advanced nations are characterized by relatively high per-capita incomes, longer life expectancies, and higher levels of adult literacy.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Introduction KEYWORDS: BLOOM'S: Remember 70. Of the manufactured goods exported by developing countries, most of them are ______ and include ______ of technology in their production. a. labor intensive, modest amounts b. labor intensive, large amounts c. capital intensive, modest amounts d. capital intensive, large amounts ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. Of the manufactured goods that are exported by developing nations, many (such as textiles) are labor intensive and include only modest amounts of technology in their production.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Developing Nation Trade Characteristics KEYWORDS: BLOOM'S: Remember 71. Developing countries include all of the following, except a. El Salvador. b. Vietnam. c. Canada. d. India. ANSWER: c FEEDBACK: a. b. c. Developing nations are most of those in Africa, Asia, Latin America, and the Middle East. Canada is considered and advanced nation.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Remember 73. Economists note that instability of the prices of primary products (tin, coffee, copper) is mainly caused by a. low price elasticity of demand and low price elasticity of supply. b. low price elasticity of demand and high price elasticity of supply. c. high price elasticity of demand and low price elasticity of supply. d. high price elasticity of demand and high price elasticity of supply. ANSWER: a FEEDBACK: a. Economists maintain that a key factor underlying the instability of primaryproduct prices and producer revenues is the low price elasticity of the demand and supply schedules for commodities.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC15: - Elasticity United States - PA - DISC9: - Supply and demand TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Remember 74. Developing countries often argue that advanced countries protect their farmers with a. low import tariffs and high export subsidies. b. high import tariffs and high export subsidies. c. high import tariffs and low export subsidies. d. low import tariffs and low export subsidies. ANSWER: b FEEDBACK: a. b. Developing countries often argue that advanced countries protect their farmers with high import tariffs and high export subsidies. Average tariff rates in advanced countries are low, but they maintain barriers in exactly the areas where developing nations have comparative advantage: agriculture and laborintensive manufactured goods.

c. d. POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Understand 75. A sweatshop includes all of the following, except a. poor and unsafe working conditions. b. high wages and benefits for workers. c. unreasonable hours for workers. d. child labor. ANSWER: b FEEDBACK: a. b. A sweatshop is a factory that has poor and unsafe working conditions, unreasonable hours, unfair wages, child labor, and a lack of benefits for workers.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC6: - Labor markets TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Remember 76. Efforts to stabilize export prices and revenues include all of the following, except a. production and export controls. b. buffer stocks. c. multilateral contracts. d. limited market access. ANSWER: d FEEDBACK: a. b. c. d. International commodity agreements have been formed to stabilize the prices and revenues of producers of primary products. The methods used to attain this stability are buffer stocks, export controls, and multilateral contracts.

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TOPICS: KEYWORDS:

Stabilizing Primary-Product Prices BLOOM'S: Remember

77. The ability of OPEC nations to operate as a successful cartel tend to decrease as a. the number of members of the cartel decline. b. the cost of production differences among the cartel members rises. c. the demand for oil rises in the world market. d. the availability of substitutes for OPEC oil falls. ANSWER: b FEEDBACK: a. b. When cartel members‘ costs and product demands differ, it is more difficult to agree on price. Such differences result in a dissimilar profit-maximizing price for each member, so there is no single price that can be agreed upon by all members.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Remember 78. The mission of the ______ is to provide loans to developing countries to build schools, hospitals, roads, and bridges in order to reduce poverty and stimulate economic development. a. Bank for International Settlements b. International Monetary Fund c. World Trade Organization d. World Bank ANSWER: d FEEDBACK: a. b. c. d. The World Bank is an international organization that provides loans to developing nations aimed at poverty reduction and economic development.

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79. The mission of the ______ is to provide financial assistance to developing countries facing a balance of payments deficits and a financial crisis. a. Bank for International Settlements b. International Monetary Fund c. World Trade Organization d. World Bank ANSWER: b FEEDBACK: a. b. The International Monetary Fund can be thought of as a bank for the central banks of member nations. Its mission is to provide financial assistance to developing countries facing a balance of payments deficits and a financial crisis.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Aiding the Developing Nations KEYWORDS: BLOOM'S: Remember 80. Challenges for China's economy include a. increasing the presence of state-owned enterprises. b. lowering labor costs that detract from the competitiveness of China's exporting companies. c. U.S holdings of China’s securities. d. reliance on investment spending. ANSWER: d FEEDBACK: a. b. c. d. A challenge for China concerns its overreliance on investment and underreliance on consumption. Chinese officials know that a rebalancing is needed because the substantial increases in investment that have fueled China‘s robust economic growth for the past three decades are not sustainable.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC16: - Measuring the economy TOPICS: China's Great Leap Forward KEYWORDS: BLOOM'S: Remember 81. Developing countries that emphasize production in raw materials and agricultural goods may realize a long-run decline in their international terms of trade as the result of Copyright Cengage Learning. Powered by Cognero.

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a. an inelastic demand for these products in advanced countries. b. a sizable decrease in the amount of these products supplied to the world market. c. an increased demand for these products in advanced countries. d. an elastic demand for these products in advanced countries. ANSWER: a FEEDBACK: a. Developing countries that emphasize production in raw materials and agricultural goods may realize a long-run decline in their international terms of trade as the result of an inelastic demand for these products in advanced countries.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Understand 83. Which of the following has resulted in the economic instability of developing countries? a. a fall in the prices of natural resources of developing countries b. a rise in the prices of natural resources of developing countries c. a rise in the labor productivity of developing countries d. a rise in the rate of saving of developing countries Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

a a. In some developing nations, exports are concentrated in only one or a few primary products. A fall in the prices of that product can significantly reduce export revenues and seriously disrupt domestic income and employment levels.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC16: - Measuring the economy TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Remember 84. Developing countries tend to have all of the following, except a. high rates of population growth. b. low levels of per-capita income. c. high levels of labor productivity. d. a high percentage of the labor force in agriculture. ANSWER: c FEEDBACK: a. b. c. Developing nations tend to be characterized by relatively low levels of percapita income, high rates of population growth, and a high percentage of the labor force in agriculture.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC16: - Measuring the economy TOPICS: Developing Nation Trade Characteristics KEYWORDS: BLOOM'S: Remember 85. One factor that discourages economic growth in developing countries is a. an increase in the level of literacy among adults. b. a limited supply of capital goods and technology. c. a shortage of land. d. excessive amounts of public infrastructure. ANSWER: b FEEDBACK: a. b. One requirement for economic development in a low-income economy is an increase in the nation‘s stock of capital and technology.

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c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Remember 86. The developing nations are most of those in Africa, Asia, North America, and Western Europe. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The developing nations are most of those in Africa, Asia, Latin America, and the Middle East.

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88. The majority of developing-nation exports are primary products, such as agricultural goods and raw materials; of the manufactured goods exported by developing nations, most are labor-intensive goods. a. True b. False ANSWER: True FEEDBACK: Correct Developing nations‘ exports have an emphasis on primary products (agricultural goods, raw materials, and fuels). Of the manufactured goods that are exported by developing nations, many (such as textiles) are labor intensive and include only modest amounts of technology in their production. Incorrect

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Incorrect

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KEYWORDS:

BLOOM'S: Understand

93. If the demand for coffee is price inelastic, an increase in the supply of coffee leads to falling prices and rising sales revenues. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect When the demand for a commodity is highly price inelastic, increases in supply will generate a substantial drop in price and a fall in producer revenues.

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relations with advanced nations. Incorrect

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TOPICS: KEYWORDS:

Stabilizing Primary-Product Prices BLOOM'S: Apply

98. To prevent the market price of tin from rising above the target price, the manager of a buffer stock will purchase excess supplies of tin from the market. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect During periods of rising tin demand, the buffer-stock manager sells tin to prevent the price from rising above the ceiling level.

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price may result in depletion of the tin stockpile, which undermines the effectiveness of this price-stabilization tool and lends to an upward revision of the ceiling price.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Stabilizing Primary-Product Prices BLOOM'S: Understand

103. It is widely agreed that import-substitution policies have been a main contributor to above-average growth rates in developing countries. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Nations emphasizing export promotion have tended to realize higher rates of economic growth than nations emphasizing import-substitution policies.

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ANSWER: FEEDBACK:

False Correct Incorrect The East Asian economies pursue an industrialization policy of outward orientation and export promotion.

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TOPICS: KEYWORDS:

The OPEC Oil Cartel BLOOM'S: Remember

108. A cartel tends to be most successful in maximizing the profits of its members when there are many producers in the cartel, and these producers' cost and demand conditions greatly differ from each other. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The larger the number of sellers, the more difficult it is to form a cartel. When cartel members‘ costs and product demands differ, it is more difficult to agree on price. Such differences result in a dissimilar profit-maximizing price for each member, so there is no single price that can be agreed upon by all members.

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ANSWER: FEEDBACK:

True Correct

Import substitution involves extensive use of trade barriers to protect domestic industries from import competition. Developing countries have often felt that it is easier to protect their manufacturers, via import-substitution policies, against foreign competitors than to force industrial nations to reduce trade restrictions on products exported by developing countries.

Incorrect

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution Versus Export Led Growth KEYWORDS: BLOOM'S: Understand 113. After gaining independence from Britain in 1947, India began practicing socialism and adopted an importsubstitution model to run its economy. a. True b. False ANSWER: True FEEDBACK: Correct After gaining independence from Britain in 1947, India began practicing socialism and adopted an import-substitution model to run its economy. Both of these resulted from India‘s fear of imperialism of any kind following its independence. Incorrect

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a. True b. False ANSWER: FEEDBACK:

True Correct

By the 1990s, China had dismantled much of its centrally planned economy and permitted free enterprise to replace it.

Incorrect

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance China‘s Great Leap Forward BLOOM'S: Remember

118. East Asian economies have followed a ―flying geese‖ pattern of economic growth. a. True b. False ANSWER: True FEEDBACK: Correct It is widely recognized that East Asian economies have followed a ―flying geese‖ pattern of economic growth in which nations gradually move up in technological development by following in the pattern of nations ahead of them in the development process. Incorrect

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FEEDBACK:

Correct Incorrect OPEC has used production quotas to support prices and earnings above what could be achieved in more competitive conditions.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Aiding the Developing Nations BLOOM'S: Understand

123. Under the generalized system of preferences program, the industrialized countries agree to maintain lower tariffs on imports of natural resources and higher tariffs on imports of manufactured goods. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Many advanced nations have extended nonreciprocal tariff preferences to exports of developing nations. Under this generalized system of preferences (GSP), major advanced nations temporarily reduce tariffs on designated manufactured imports from developing nations below the levels applied to imports from other advanced nations.

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ANSWER: FEEDBACK:

True Correct

Economic downturn is generally problematic for cartels. As market sales dwindle in a weakening economy, profits fall. During periods of weak demand, OPEC has implemented production (export) quotas to ensure that excess oil supplies be kept off the market.

Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Remember 127. Evidence shows that the largest amount of trade occurs between developing countries. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Recent trade patterns indicate that most of world trade occurs among advanced (industrial) countries.

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TOPICS: KEYWORDS:

Developing Nation Trade Characteristics BLOOM'S: Remember

128. Import substitution decreases reliance on international trade by fostering export-competing industries. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Import substitution involves extensive use of trade barriers to protect domestic industries from import competition. The import substitution strategy is inward oriented in that trade and industrial incentives favor production for the domestic market over the export market.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution versus Export-Led Growth KEYWORDS: BLOOM'S: Understand 129. Along the "ladder of economic development," Canada and Germany would be located along the higher steps, while Ecuador and Venezuela would be located along the lower steps. a. True b. False ANSWER: True FEEDBACK: Correct Think of the world economy as a ladder. On the bottom rungs are developing nations (Ecuador and Venezuela), toward the top are advanced nations (Canada and Germany). Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC16: - Measuring the economy TOPICS: Tensions between Developing Nations and Advanced Nations KEYWORDS: BLOOM'S: Apply 130. A sweatshop is a factory that has poor and unsafe working conditions, unreasonable hours for workers, low wages and benefits, and child labor. a. True b. False ANSWER: True FEEDBACK: Correct A sweatshop is a factory that has poor and unsafe working conditions, unreasonable hours, unfair wages, child labor, and a lack of benefits for workers. Incorrect Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC6: - Labor markets TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Remember 131. The Fair Trade Movement attempts to help poor coffee growers in developing countries by providing them higher prices for their coffee beans. a. True b. False ANSWER: True FEEDBACK: Correct The objective of the fair-trade coffee movement is to increase the income of poor farmers in developing nations by implementing a system by which the farmers can sell their beans directly to roasters and retailers, bypassing the traditional practice of selling to middlemen in their own nations. This arrangement permits farmers to earn a higher price for their beans. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Stabilizing Primary-Product Prices KEYWORDS: BLOOM'S: Remember 132. Recent technological advances in oil production such as hydraulic fracturing and horizontal drilling have threatened the market share and profitability of the OPEC nations. a. True b. False ANSWER: True FEEDBACK: Correct U.S. crude oil production has dramatically risen as hydraulic fracturing and other technologies have unlocked large resources of oil previously trapped in shale rock in North Dakota and Texas. This threatens the market share and profitability of the OPEC nations. Incorrect

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133. According to the generalized system of preferences of the United States, exports from developing countries face higher import tariff rates than exports from industrialized countries. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Many advanced nations have extended nonreciprocal tariff preferences to exports of developing nations. Under this generalized system of preferences (GSP), major advanced nations temporarily reduce tariffs on designated manufactured imports from developing nations below the levels applied to imports from other advanced nations.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Aiding the Developing Nations KEYWORDS: BLOOM'S: Remember 134. Import substitution policies seek to promote industrialization by establishing barriers to foreign goods to encourage domestic production. a. True b. False ANSWER: True FEEDBACK: Correct Import substitution involves extensive use of trade barriers to protect domestic industries from import competition. The import substitution strategy is inward oriented in that trade and industrial incentives favor production for the domestic market over the export market. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution versus Export-Led Growth KEYWORDS: BLOOM'S: Remember 135. Import substitution policies have been highly successful in fostering employment in new, emerging industries because these policies prevent the import of foreign capital goods. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Empirical studies appeared to suggest that developing countries that adopted freer trade policies tended to grow faster than those that adopted protectionist policies. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution versus Export-Led Growth KEYWORDS: BLOOM'S: Understand 136. Export promotion policies attempt to encourage production of goods for sale overseas, which fosters additional export revenues; import substitution policies attempt to replace imported goods with domestic production. a. True b. False ANSWER: True FEEDBACK: Correct Export promotion or an export-oriented policies attempt to encourage production of goods for sale overseas, which fosters additional export revenues; import substitution policies attempt to replace imported goods with domestic production. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution versus Export-Led Growth KEYWORDS: BLOOM'S: Understand 137. Import substitution policy tends to be anti-trade, while outward looking development is pro-trade. a. True b. False ANSWER: True FEEDBACK: Correct Import substitution involves extensive use of trade barriers to protect domestic industries from import competition. Export promotion or an export-oriented policies attempt to encourage production of goods for sale overseas. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution versus Export-Led Growth KEYWORDS: BLOOM'S: Understand 138. What are some major trade problems faced by developing nations? Trade problems include lack of diversification of economies, unstable export markets, ANSWER: declining terms of trade over time, and lack of access to markets of advanced countries. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Trade Problems of the Developing Nations KEYWORDS: BLOOM'S: Understand 139. Are economic downturns helpful to cartels? No, they are generally problematic for cartels. As market sales dwindle in a weakening ANSWER: economy, profits fall. Cartel members may conclude that they can escape serious decreases in profits by reducing prices, in the expectation of gaining sales at the expense of other cartel members. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The OPEC Oil Cartel KEYWORDS: BLOOM'S: Understand 140. What are some of the growth strategies that have been employed by the developing nations? How successful are these strategies? Besides attempting to stabilize commodity prices, developing nations have promoted ANSWER: internal industrialization through policies of import substitution and export promotion. Countries emphasizing export promotion have tended to realize higher rates of economic growth than countries emphasizing import-substitution policies. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Growth Strategies: Import Substitution Versus Export Led Growth KEYWORDS: BLOOM'S: Understand 141. Describe the flying-geese pattern of economic growth. What countries have pursued this strategy? It is widely recognized that East Asian economies have followed the flying-geese pattern ANSWER: of growth. This pattern of growth occurs when countries gradually move up in technological development by following in the pattern of countries ahead of them in the Copyright Cengage Learning. Powered by Cognero.

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development process. For example, Malaysia and Taiwan take over leadership in apparel and textiles from Japan as Japan moves into higher-technology sectors of automotive and electronic products. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: East Asian Economies KEYWORDS: BLOOM'S: Understand

Chapter 08: Regional Trading Arrangements 1. The European Union is primarily intended to permit a. countries to adopt scientific tariffs on imports. b. an agricultural commodity cartel within the group. c. the adoption of export tariffs for revenue purposes. d. free movement of resources and products among member nations. ANSWER: d FEEDBACK: a. b. c. d. The European Union is a common market. A common market is a group of trading nations that permits the free movement of factors of production across national borders within the economic bloc.

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c. The ultimate degree of economic union would be the unification of national monetary policies and the acceptance of a common currency administered by a supranational monetary authority. The economic union would thus include the dimension of a monetary union.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Arrangements KEYWORDS: BLOOM'S: Remember 3. Which of the following represents the stage where economic integration is least complete? a. free trade area b. monetary union c. common market d. customs union ANSWER: a FEEDBACK: a. A free-trade area is an association of trading nations in which members agree to remove all tariff and nontariff barriers among themselves. Each member maintains its own set of trade restrictions against outsiders. It represents the stage where economic integration is least complete.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Arrangements KEYWORDS: BLOOM'S: Remember 4. Customs union theory reasons that the formation of a customs union will decrease members' real welfare when the a. trade diversion effect exceeds the trade creation effect. b. trade production effect exceeds the trade consumption effect. c. trade consumption effect exceeds the trade production effect. d. trade creation effect exceeds the trade diversion effect. ANSWER: a FEEDBACK: a. The movement toward freer trade under a customs union affects world welfare in two opposing ways: a welfare-increasing trade-creation effect and a welfaredecreasing traded-diversion effect. Its trade diversion effect generally implies a Copyright Cengage Learning. Powered by Cognero.

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welfare loss. Trade diversion occurs when imports from a low-cost supplier outside the union are replaced by purchases from a high-cost supplier within the union.

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b. c. The European Union (EU) achieved the status of a common market in 1992. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Arrangements KEYWORDS: BLOOM'S: Remember 7. Which device has the European Union used to equalize farm-product import prices with politically determined European Union prices, regardless of shifts in world prices? a. variable levies b. import quotas c. import subsidies d. domestic content regulations ANSWER: a FEEDBACK: a. A common agricultural policy has supported EU farm prices through a system of variable levies that applies tariffs to agricultural imports entering the European Union.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The European Union KEYWORDS: BLOOM'S: Remember 8. Which trade instrument has the European Union used to insulate its producers and consumers of agricultural goods from the impact of changing demand and supply conditions in the rest of the world? a. domestic content regulations b. variable import levies c. voluntary export quotas d. orderly marketing agreements ANSWER: b FEEDBACK: a. b. The European Union‘s common agricultural policy has used variable levies to protect EU farmers from low-cost foreign competition. During periods of falling Copyright Cengage Learning. Powered by Cognero.

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world prices, the sliding scale nature of the variable levy results in automatic increases in the European Union‘s import tariff.

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d. A free-trade area is an association of trading nations in which members agree to remove all tariff and nontariff barriers among themselves. Each member maintains its own set of trade restrictions against outsiders. It represents the stage where economic integration is least complete. The U.S.–Mexico–Canada Agreement is a free-trade agreement.

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trade diversion effect generally implies a welfare loss. Trade diversion occurs when imports from a low-cost supplier outside the union are replaced by purchases from a high-cost supplier within the union.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Arrangements KEYWORDS: BLOOM'S: Remember 14. A static welfare effect resulting from the formation of the European Union would be a. economies of scale. b. trade diversion. c. investment incentives. d. increased competition. ANSWER: b FEEDBACK: a. b. A static welfare effect resulting from the formation of the European Union would Copyright Cengage Learning. Powered by Cognero.

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be trade diversion.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Remember 16. Which organization was founded in 1957 whose objective was to create an economic union among its members? a. General Agreements on Tariffs and Trade b. Organization of Economic Cooperation and Development c. European Union d. Latin American Free Trade Association ANSWER: c FEEDBACK: a. b. c. The European Union was originally founded in 1957 by the Treaty of Rome. Its objective was to create an economic union among its members.

d. POINTS:

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c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Easy Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: North American Free Trade Agreement: United States–Mexico–Canada Agreement KEYWORDS: BLOOM'S: Remember 19. The North American Free Trade Agreement is a a. monetary union. b. free trade area. c. common market. d. customs union. ANSWER: b FEEDBACK: a. b. The North American Free Trade Agreement is free trade area between United States, Mexico, and Canada; this was replaced by the USMCA in 2020.

levy results in automatic increases in the European Union‘s import tariff. The levy is determined daily and equals the difference between the lowest price on the world market and the support price.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance The European Union BLOOM'S: Remember

21. Members of the European Union find that "trade creation" is fostered when their economies are a. highly competitive. b. highly noncompetitive. c. small in economic importance. d. geographically distant. ANSWER: a FEEDBACK: a. Empirical evidence suggests that the European Union has realized welfare benefits in trade creation that have outweighed the losses from trade diversion. Members have realized dynamic benefits from integration in the form of additional competition.

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KEYWORDS:

BLOOM'S: Remember

23. When the United States, Canada, and Mexico form a free trade area, and Mexico begins importing a product from Canada rather than from the lowest-cost world producer a. trade diversion occurs. b. trade creation occurs. c. world welfare rises. d. world welfare falls to zero. ANSWER: a FEEDBACK: a. Trade diversion occurs when imports from a low-cost supplier outside the union are replaced by purchases from a high-cost supplier within the union.

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25. Which country is NOT a member of the European Union? a. Spain b. Germany c. France d. Iceland ANSWER: d FEEDBACK: a. b. c. d. Iceland is not a member of the European Union. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The European Union KEYWORDS: BLOOM'S: Remember 26. The common agricultural policy of the European Union has a. increased American farm exports to the EU. b. decreased American farm exports to the EU. c. lowered the price of American farm exports to the EU. d. not affected the price of American farm exports to the EU. ANSWER: b FEEDBACK: a. b. The European Union‘s common agricultural policy has used variable levies to protect EU farmers from low-cost foreign competition. This has decreased American farm exports to the EU.

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d. a common tariff levied on imports from non-members. ANSWER: b FEEDBACK: a. b. A common market is a group of trading nations that permits (1) the free movement of goods and services among member nations, (2) the initiation of common external trade restrictions against non-members, and (3) the free movement of factors of production across national borders within the economic bloc.

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Figure 8.1. Effects of a Customs Union

29. Consider Figure 8.1. With free trade, Greece imports a. 3 calculators from France. b. 5 calculators from France. c. 3 calculators from Germany. d. 5 calculators from Germany. ANSWER: d FEEDBACK: a. b. c. d. With free trade, Greece imports 5 calculators from Germany. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 8.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Analyze

30. Consider Figure 8.1. Assume Greece levies a per-unit tariff of $20 on imports from both Germany and France. Greece will import a. 1 calculator from Germany. Copyright Cengage Learning. Powered by Cognero.

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b. 1 calculator from France. c. 3 calculators from Germany. d. 3 calculators from France. ANSWER: a FEEDBACK: a. If Greece levies a per-unit tariff of $20 on imports from both Germany and France, Greece will import 1 calculator from Germany.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 8.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Analyze

31. Consider Figure 8.1. Assume Greece levies a per-unit tariff of $20 on imports from both Germany and France. As a result of the $20 tariff, Greece's consumer surplus falls by a. $90. b. $100. c. $110. d. $120. ANSWER: d FEEDBACK: a. b. c. d. As a result of the $20 tariff, Greece's consumer surplus falls by $120. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 8.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Analyze

32. Consider Figure 8.1. Assume Greece levies a per-unit tariff of $20 on imports from both Germany and France. The deadweight welfare loss to Greece resulting from the $20 tariff equals a. $20. Copyright Cengage Learning. Powered by Cognero.

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b. $40. c. $60. d. $80. ANSWER: FEEDBACK:

b a. b. The deadweight welfare loss to Greece resulting from the $20 tariff equals $40. c. d.

33. Referring to Figure 8.1, suppose Greece forms a customs union with France. Greece will import a. 3 calculators at a per-unit price of $30. b. 3 calculators at a per-unit price of $40. c. 6 calculators at a per-unit price of $30. d. 6 calculators at a per-unit price of $40. ANSWER: a FEEDBACK: a. If Greece forms a customs union with France, Greece will import 3 calculators at a per-unit price of $30.

34. Consider Figure 8.1. The value of the trade diversion effect resulting from the Greece/France customs union equals a. $5. b. $10. c. $15. Copyright Cengage Learning. Powered by Cognero.

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d. $20. ANSWER: FEEDBACK:

b a. b. The value of the trade diversion effect resulting from the Greece/France customs union equals $10.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 8.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Analyze 35. Consider Figure 8.1. The value of the trade creation effect resulting from the Greece/France customs union equals a. $5. b. $10. c. $15. d. $20. ANSWER: b FEEDBACK: a. b. The value of the trade creation effect resulting from the Greece/France customs union equals $10.

36. Consider Figure 8.1. Comparing trade creation and trade diversion effects, the impact of the Greece/France customs union on the welfare of Greece is a. a $5 increase in economic welfare. b. a $10 increase in economic welfare. c. a $5 decrease in economic welfare. d. no change in economic welfare. ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. d. Comparing trade creation and trade diversion effects, the impact of the Greece/France customs union on the welfare of Greece is no change in economic welfare.

37. Consider Figure 8.1. Suppose Greece had formed a customs union with Germany rather than France. The value of the trade diversion effect would be a. $0. b. $5. c. $10. d. $15. ANSWER: a FEEDBACK: a. The value of the trade diversion effect would be $0 ($10 -$10). b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 8.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Analyze

38. According to Figure 8.1, the formation of a Greece/Germany customs union would result in a. $20 of trade diversion. b. $40 of trade diversion. c. $20 of trade creation. d. $40 of trade creation. ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. d. The formation of a Greece/Germany customs union would result in $40 of trade creation.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 8.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Analyze 39. In 1989, Canada and the United States agreed to implement a (an) ____ over a 10-year period. a. customs union b. common market c. free-trade area d. economic union ANSWER: c FEEDBACK: a. b. c. In 1989, the United States and Canada successfully negotiated a free-trade agreement under which free trade between the two nations would be phased in over a 10-year period.

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foreign insurers operating in Mexico.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The European Union KEYWORDS: BLOOM'S: Remember 42. By removing discriminatory government procurement laws within the European Union, member nations hoped to benefit from all of the following EXCEPT a. EU governments could purchase from the cheapest foreign suppliers. b. increased competition occurs as domestic firms compete with foreign firms previously shut out of the domestic market. c. industries are restructured which permits surviving firms to achieve economies of scale. d. agricultural prices fall as more farmers are allowed to produce their commodities. ANSWER: d FEEDBACK: a. b. c. Copyright Cengage Learning. Powered by Cognero.

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d. A common agricultural policy has supported EU farm prices through a system of variable levies and voluntary export agreements.

b. c. d. Copyright Cengage Learning. Powered by Cognero.

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c. d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Apply 47. If the United States and Canada abolish all tariffs on each other's goods and implement a common tariff on goods imported from other countries, there occurs a (an) a. free trade area. b. customs union. c. common market. d. economic union. ANSWER: b FEEDBACK: a. b. A customs union is an agreement among two or more trading partners to remove all tariff and nontariff trade barriers between themselves. In addition, each member nation imposes identical trade restrictions against nonparticipants.

c. Copyright Cengage Learning. Powered by Cognero.

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c. d. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: North American Free Trade Agreement: United States–Mexico–Canada Agreement KEYWORDS: BLOOM'S: Understand 52. When Mexico became a part of the North American Free Trade Agreement, along with Canada and the United States, it a. eliminated tariffs against Canada and the United States but maintained them against non-members. b. eliminated tariffs against Canada, the United States, and all non-member countries. c. increased tariffs against Canada, the United States, and all non-member countries. d. increased tariffs against Canada and the United States but did not change them against non-member countries. ANSWER: a FEEDBACK: a. A free-trade area is an association of trading nations in which members agree to remove all tariff and nontariff barriers among themselves. Each member maintains its own set of trade restrictions against outsiders. An example of this stage of integration was the NAFTA, which consisted of Canada, Mexico, and the United States. It has since been replaced by the United States–Mexico– Canada Agreement (USMCA).

b. Copyright Cengage Learning. Powered by Cognero.

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do not promote economic systems.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Impetus for Regionalism KEYWORDS: BLOOM'S: Remember 56. As new regional trading arrangements are formed, the opportunity cost of remaining outside a. increases. b. decreases. c. either increases or decreases. d. neither increases nor decreases. ANSWER: a FEEDBACK: a. As new regional trading arrangements are formed or existing ones are expanded or deepened, the opportunity cost of remaining outside an arrangement increases. Non-member exporters could realize costly decreases in market share if their sales are diverted to companies of the member nations.

b. c. d. Copyright Cengage Learning. Powered by Cognero.

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c. d. POINTS:

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DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Regional Integration Versus Multilateralism KEYWORDS: BLOOM'S: Understand 59. All of the following are factors mitigating against global trade liberalization EXCEPT a. regional trading arrangements may limit trade liberalization with outsiders. b. a small nation might do better entering into a pact with a larger nation rather than competing globally. c. trading bloc members may not realize economies of scale through global liberalization. d. trading bloc members prefer competing globally rather than locally. ANSWER: d Trade liberalization under a regional trading arrangement is different from the multilateral RATIONALE: liberalization embodied in the WTO. Under regional trading arrangements, nations reduce trade barriers only for a small group of partner nations. Under the WTO, trade liberalization by any one nation is extended to all WTO members. If trading bloc members prefer competing globally rather than locally they would want multilateral liberalization. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Regional Integration Versus Multilateralism KEYWORDS: BLOOM'S: Understand 60. Regarding a common market, which of the following is true? a. It permits the free movement of goods and service among non-members. b. It exercises common external trade restrictions against members. c. It represents a more complete integration of member nations than a customs union. d. It restricts the movement of factors of production across national borders. ANSWER: c FEEDBACK: a. b. c. The common market represents a more complete stage of integration than a free-trade area or a customs union.

d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Arrangements KEYWORDS: BLOOM'S: Remember 61. The United States serves as an example of a. a common market. b. a common union. c. a monetary union. d. a free trade area. ANSWER: c FEEDBACK: a. b. c. The United States serves as an example of a monetary union among fifty states. The Federal Reserve serves as the single central bank for the nation; it issues currency and conducts the nation‘s monetary policy.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Agreements KEYWORDS: BLOOM'S: Remember 62. The task of creating an economic union is a. difficult. b. relatively easy. c. similar to creating a customs union. d. the simplest of all economic integrations. ANSWER: a FEEDBACK: a. The task of creating an economic union is much more ambitious than achieving the other forms of integration. This is because an economic union requires an agreement to transfer economic sovereignty to a supranational authority.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Types of Regional Trading Agreements BLOOM'S: Understand

63. Suppose that Canada has domestic firms that could supply its entire market for radios at a price of $50, while U.S. firms could supply radios at $40 and Mexico at $30. Suppose that Canada initially has a 50 percent tariff on imports of radios and then forms a free trade area with Mexico. As a result, Canada realizes a. trade creation, no trade diversion, and overall welfare gains. b. trade creation, no trade diversion, and overall welfare losses. c. trade diversion, no trade creation, and potential overall welfare losses. d. trade diversion, trade creation, and potential overall welfare gains. ANSWER: a Trade creation occurs when a domestic production of one customs union member is RATIONALE: replaced by another member’s lower-cost imports. Canada’s entry into the free-trade area results in its dropping all tariffs against Mexico. Facing a lower import price of $30, Canada increases its consumption of radios and has a welfare gain. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Apply 64. The formation of the European Monetary Union is expected to entail benefits for member countries which include all of the following EXCEPT a. greater certainty for investors within the EMU. b. lower costs of transactions within the EMU. c. independent monetary policies run by the central bank of each member country. d. enhanced competition among companies in member countries. ANSWER: c FEEDBACK: a. b. c. The broader benefits of a single currency must be compared against the loss of two policy instruments: an independent monetary policy and the option of changing the exchange rate.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance The Eurozone—Europe‘s Monetary Union BLOOM'S: Remember

65. According to the theory of optimum currency areas, a currency area has the least chance for success when a. countries of the currency area have differing business cycles. b. workers have a high degree of mobility across borders of the currency area. c. prices and wages can be adjusted in response to economic disturbances. d. a single monetary policy affects all member countries in the same manner. ANSWER: a FEEDBACK: a. The theory of optimal currency areas concludes that for a currency area to have the best chance of success, the countries involved should have similar business cycles and economic structures.

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67. World welfare under a customs union a. increases because of a trade creation effect. b. increases because of a trade diversion effect. c. is not affected by the trade creation and the trade diversion effects. d. decreases because of a trade creation effect. ANSWER: a FEEDBACK: a. World welfare under a customs union increases because of a trade creation effect. Trade creation occurs when a domestic production of one customs union member is replaced by another member‘s lower-cost imports.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Understand 68. A common market a. allows the imposition of common external trade barriers against non-members. b. represents less economic integration than a free trade area. c. does not permit free movement of goods among member nations. d. does not allow free movement of factors of production among nations. ANSWER: a FEEDBACK: a. A common market is a group of trading nations that permits (1) the free movement of goods and services among member nations, (2) the initiation of common external trade restrictions against non-members, and (3) the free movement of factors of production across national borders within the economic bloc.

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69. The gains from having an optimum currency include a. price differentiation. b. lower competition. c. lower transaction costs. d. independent monetary policies run by the central bank of each member country. ANSWER: c FEEDBACK: a. b. c. According to the theory of optimal currency areas, gains are to be had from

sharing a currency across countries‘ boundaries, including more uniform prices, lower transaction costs, greater certainty for investors, and enhanced competition.

70. Consider Figure 8.2. With free trade, Portugal will Copyright Cengage Learning. Powered by Cognero.

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a. import 0 tons of steel for Germany and 15 tons of steel from France at $300 per ton. b. import 25 tons of steel from Germany at $200 per ton and 15 tons of steel from France at $300 per ton. c. import 15 tons of steel from Germany at $200 per ton and 10 tons of steel from France at $200 per ton. d. import 25 tons of steel from Germany at $200 per ton and 0 tons from France. ANSWER: d FEEDBACK: a. b. c. d. With free trade, Portugal will import 25 tons of steel from Germany at $200 per ton and 0 tons from France.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 8.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Apply

71. Consider Figure 8.2. With free trade, Portugal will a. produce 10 tons of steel, consume 35 tons of steel, and import 25 tons of steel. b. produce 15 tons of steel, consume 30 tons of steel, and import 15 tons of steel. c. produce 0 tons of steel, consume 35 tons of steel, and import 35 tons of steel. d. produce 15 tons of steel, consume 35 tons of steel, and import 20 tons of steel. ANSWER: a FEEDBACK: a. With free trade, Portugal will produce 10 tons of steel, consume 35 tons of steel, and import 25 tons of steel.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 8.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Apply 72. Advocates of the North American Free Trade Agreement hoped that a (an) __________ in Mexican exports would __________ the migration of labor from Mexico to the United States. a. increase, increase Copyright Cengage Learning. Powered by Cognero.

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b. increase, decrease c. decrease, increase d. decrease, decrease ANSWER: FEEDBACK:

b a. b. Advocates of the North American Free Trade Agreement hoped that by helping Mexico develop as part of an integrated North America and increase exports, the migration of labor from Mexico to the United States would decrease.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: North American Free Trade Agreement: United States–Mexico–Canada Agreement KEYWORDS: BLOOM'S: Understand 73. American critics of the North American Free Trade Agreement thought that it could a. cause American workers to migrate to Mexico to find jobs. b. cause U.S. companies to move to Mexico to benefit from lower labor costs. c. cause Mexican companies to move to the United States to benefit from higher labor productivity. d. cause Mexican companies to move to the United States to benefit from higher labor costs. ANSWER: b FEEDBACK: a. b. According to NAFTA critics, U.S. companies would move to Mexico to capitalize on Mexico‘s cheap labor.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: North American Free Trade Agreement: United States–Mexico–Canada Agreement KEYWORDS: BLOOM'S: Remember 74. American critics of the North American Free Trade Agreement thought that it could cause some U.S. companies to move to Mexico to benefit from a. lenient environment policies of the Mexican government. b. high wages of Mexican workers. c. low productivity of Mexican workers. Copyright Cengage Learning. Powered by Cognero.

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d. high corporate tax rates of the Mexican government. ANSWER: a FEEDBACK: a. Mexico‘s environmental regulations have been criticized as less stringent than those of the United States. American labor and environmental activists fear that polluting Mexican plants might cause plants in the United States, which are cleaner but more expensive to operate, to close down.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: North American Free Trade Agreement: United States–Mexico–Canada Agreement KEYWORDS: BLOOM'S: Remember 75. For the United States, the political debate of joining NAFTA was very intense because of Mexico's a. relatively high wage levels. b. relatively high levels of environmental enforcement. c. relatively high standards for protecting workers. d. relatively low-skilled workers. ANSWER: d FEEDBACK: a. b. c. d. The political debate of joining NAFTA was very intense because of Mexico's relatively low-skilled workers. American labor unions were concerned that Mexico‘s low wage scale encourages U.S. companies to locate in Mexico, resulting in job losses in the United States.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: North American Free Trade Agreement: United States–Mexico–Canada Agreement KEYWORDS: BLOOM'S: Understand 76. When the United States was considering joining NAFTA, many economists predicted that the U.S. factor of production that would be most harmed was a. skilled labor. b. unskilled labor. c. capital. Copyright Cengage Learning. Powered by Cognero.

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d. entrepreneurship. ANSWER: FEEDBACK:

b a. b. Many economists predicted that the U.S. factor of production that would be most harmed was unskilled labor. Unskilled workers are most vulnerable to competition from low-paid workers abroad.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: North American Free Trade Agreement: United States–Mexico–Canada Agreement KEYWORDS: BLOOM'S: Remember 77. The USMCA is essentially a a. free trade area. b. customs union. c. economic union. d. monetary union. ANSWER: a FEEDBACK:

a. The U.S.–Mexico–Canada Agreement is a free-trade agreement. b. c. d.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Arrangements KEYWORDS: BLOOM'S: Remember 78. A customs union that results in a sizable amount of __________ would be beneficial to global welfare. a. trade creation b. trade diversion c. trade restrictions d. trade diversification ANSWER: a FEEDBACK: a. A customs union that results in a sizable amount of trade creation would be beneficial to global welfare. The larger the size and the greater the number of nations in the union, the greater the gains are likely to be because there is a Copyright Cengage Learning. Powered by Cognero.

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greater possibility that the world‘s low-cost producers will be union members.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Understand 79. Relative to a regional trade agreement, a multilateral trade agreement may be more beneficial to global welfare in that it entails a. less trade creation. b. less trade diversion. c. more trade diversion. d. more trade consumption. ANSWER: b FEEDBACK: a. b. Trade diversion occurs when imports from a low-cost supplier outside the union are replaced by purchases from a high-cost supplier within the union. A multilateral trade agreement may less trade diversion.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Understand 80. In terms of static economic analysis, if a customs union results in a large amount of trade creation relative to trade diversion, world welfare a. increases. b. decreases. c. either increases or decreases. d. neither increases nor decreases. ANSWER: a FEEDBACK: a. From a static perspective, the formation of a customs union yields net welfare gains if the consumption and production benefits of trade creation more than offset the loss in world efficiency owing to trade diversion.

b. Copyright Cengage Learning. Powered by Cognero.

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c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Remember 81. In terms of static economic analysis, if a customs union results in a small amount of trade creation relative to trade diversion, world welfare a. increases. b. decreases. c. either increases or decreases. d. neither increases nor decreases. ANSWER: b FEEDBACK: a. b. From a static perspective, the formation of a customs union yields net welfare gains if the consumption and production benefits of trade creation more than offset the loss in world efficiency owing to trade diversion.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Understand 82. An objective of all of the members of the European Union has been to a. abolish tariff and nontariff barriers to trade among member countries. b. adopt identical fiscal policies for all countries belonging to the EU. c. form a customs union agreement with members of NAFTA. d. establish a common currency and a common monetary policy. ANSWER: a FEEDBACK: a. An objective of all of the members of the European Union has been to abolish tariff and nontariff barriers to trade among member countries. The elimination of these barriers resulted in the formation of a European common market.

b. c. d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The European Union KEYWORDS: BLOOM'S: Understand 83. Members of the Eurozone have adopted further economic integration than the other members by a. abolishing tariff and nontariff barriers to trade among each other. b. adopting uniform policies on the movement of factors of production. c. establishing common trade policies against countries that were not members of the EU. d. implementing a common currency and a common monetary policy. ANSWER: d FEEDBACK: a. b. c. d. The euro is the official currency of 19 of the 27-member states of the European Union. These states, known collectively as the Eurozone, have implemented a common currency and a common monetary policy.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The European Union KEYWORDS: BLOOM'S: Understand 84. If the United States and Canada implement a regional trading agreement that results in the two countries eliminating trade barriers between themselves while maintaining separate trade barriers against non-member countries, they have formed a a. common market. b. customs union. c. free trade area. d. economic union. ANSWER: c FEEDBACK: a. b. c. A free-trade area is an association of trading nations in which members agree to remove all tariff and nontariff barriers among themselves. Each member maintains its own set of trade restrictions against outsiders.

d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Challenging Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Arrangements KEYWORDS: BLOOM'S: Apply 85. The formation of a regional trading bloc results in trade creation if a. inefficient domestic production is replaced by more efficient production from another member country. b. inefficient domestic production is replaced by more efficient production from a non-member country. c. member countries import more but export less to non-member countries. d. member countries export less but import more from non-member countries. ANSWER: a FEEDBACK: a. There are dynamic welfare gains that stem from greater competition, economies of scale, and the stimulus to investment spending that economic integration makes possible. With freer trade, domestic producers must compete or face the possibility of financial bankruptcy. To survive in expanded and morecompetitive markets, producers must cut waste, keep prices down, improve quality, and raise productivity.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Understand 86. Regarding stages of economic integration, a customs union a. goes beyond a free trade area by including a common external tariff. b. falls short of a free trade area by excluding a common external tariff. c. goes beyond a common market by including a common transportation policy. d. goes beyond a common market by including a common agricultural policy. ANSWER: a FEEDBACK: a. The stages of economic integration are (a) free-trade area, (b) customs union, (c) common market, (d) economic union, and (e) monetary union. A customs union is an agreement among two or more trading partners to remove all tariff and nontariff trade barriers between themselves. In addition, each member nation imposes identical trade restrictions against nonparticipants.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Arrangements KEYWORDS: BLOOM'S: Remember 87. If several countries form a regional trading pact that removes tariffs between the members, implements a common external tariff structure, permits free mobility of factors of production, and integrates fiscal policies, they have formed a/an a. customs union. b. economic union. c. free trade area. d. common market. ANSWER: b FEEDBACK: a. b. A common market could evolve to the stage of economic union, in which national, social, taxation, and fiscal policies are harmonized and administered by a supranational institution.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Arrangements KEYWORDS: BLOOM'S: Apply 88. After Brexit, the U.K.’s and the European Union have a/an a. free trade area. b. customs union. c. common market. d. economic union. ANSWER: c FEEDBACK: a. b. c. The Brexit ‗divorce settlement‘ consisted of a free trade agreement in which there would be no tariffs or quotas placed on traded goods between the United Kingdom and the 27 members of the European Union.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Types of Regional Trading Arrangements BLOOM'S: Remember

89. Countries pursuing membership in the European Monetary Union (Eurozone) are supposed to meet "convergence criteria," which includes a. price instability. b. high long-term interest rates. c. sound governmental finances. d. unstable exchange rates. ANSWER: c FEEDBACK: a. b. c. The specific convergence criteria as mandated by the Maastricht Treaty are price stability, low long-term interest rates, stable exchange rates, and sound public finances.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The European Union KEYWORDS: BLOOM'S: Remember 90. According to the theory of optimal currency areas, there are gains to be achieved from sharing a currency across national boundaries. These gains include a. higher transactions costs. b. greater uncertainty for investors. c. monetary policies run by central banks of member nations. d. enhanced competition. ANSWER: d FEEDBACK: a. b. c. d. According to the theory of optimal currency areas, gains are to be had from

sharing a currency across countries‘ boundaries, including more uniform prices, lower transaction costs, greater certainty for investors, and enhanced competition.

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KEYWORDS:

BLOOM'S: Understand

91. The theory of optimal currency areas concludes that for a currency area to have the best chance of success a. workers in the affected country must be able to work freely in their countries. b. prices and wages are fixed. c. countries should have similar business cycles. d. countries should have different economic structures. ANSWER: c FEEDBACK: a. b. c. The theory of optimal currency areas concludes that for a currency area to have the best chance of success, the countries involved should have similar business cycles and economic structures.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Eurozone—Europe‘s Monetary Union KEYWORDS: BLOOM'S: Understand 92. The European Union protects its agricultural producers from import competition through a system of variable levies that applies tariffs to agricultural imports. a. True b. False ANSWER: True FEEDBACK: Correct A common agricultural policy has supported EU farm prices through a system of variable levies that applies tariffs to agricultural imports entering the European Union. Incorrect

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FEEDBACK:

Correct

During periods of falling world prices, the variable levy results in automatic increases in the European Union‘s import tariff. During periods of rising world prices, the variable levy results in automatic decreases in the European Union‘s import tariff.

Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Analyze 96. If Chile and Mexico abolish all tariffs on each other's products while maintaining their own tariffs against other countries, these two countries have formed a customs union. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect A customs union is an agreement among two or more trading partners to remove all tariff and nontariff trade barriers between themselves. In addition, each member nation imposes identical trade restrictions against nonparticipants.

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b. False ANSWER: FEEDBACK:

True Correct

The term economic integration refers to the process of eliminating restrictions on international trade, payments, and factor input mobility.

Incorrect

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Types of Regional Trading Arrangements BLOOM'S: Remember

101. If the United Kingdom and Italy eliminate all tariffs on each other's goods and all restrictions to factor movements between them and if they implement a uniform system of import restrictions against the rest of the world, these countries have formed a common market. a. True b. False ANSWER: True FEEDBACK: Correct A common market is a group of trading nations that permits (1) the free movement of goods and services among member nations, (2) the initiation of common external trade restrictions against non-members, and (3) the free movement of factors of production across national borders within the economic bloc. Incorrect

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FEEDBACK:

Correct Incorrect Trade creation occurs when a domestic production of one customs union member is replaced by another member‘s lower-cost imports.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Remember 106. For countries forming a customs union, the trade creation effect represents a welfare loss and the trade diversion effect represents a welfare gain. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect A customs union may add to welfare by way of trade creation, its trade diversion effect generally implies a welfare loss.

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ANSWER: FEEDBACK:

False Correct Incorrect Trade creation occurs when a domestic production of one customs union member is replaced by another member‘s lower-cost imports.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Effects of a Regional Trading Arrangement BLOOM'S: Understand

111. If a customs union included all of the countries in the world, there could exist only trade creation, not trade diversion. a. True b. False ANSWER: True FEEDBACK: Correct Trade creation occurs when a domestic production of one customs union member is replaced by another member‘s lower-cost imports. Trade diversion occurs when imports from a low-cost supplier outside the union are replaced by purchases from a high-cost supplier within the union. Incorrect

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makes possible. Incorrect

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116. To protect its farmers from foreign competition, the European Union has utilized variable import levies and export subsidies. a. True b. False ANSWER: True FEEDBACK: Correct A common agricultural policy has supported EU farm prices through a system of variable levies that applies tariffs to agricultural imports entering the European Union. Exports of any surplus quantities of EU produce have been assured through the adoption of export subsidies. Incorrect

POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The European Union KEYWORDS: BLOOM'S: Understand 119. On January 31, 2020, Britain officially left the European Union, but their commercial relationship remained essentially unchanged until a later date. a. True b. False ANSWER: True FEEDBACK: Correct On January 31, 2020, Britain officially left the European Union. However, the terms of their relationship remained unsettled as London and Brussels agreed that their commercial relationship would remain essentially unchanged until December 31, 2020. Incorrect

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b. False ANSWER: FEEDBACK:

True Correct

Canada‘s benefits from NAFTA have been mostly in the form of safeguards: maintenance of its status in international trade, no loss of its current free-trade preferences in the U.S. market, and equal access to Mexico‘s market.

Incorrect

POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: North American Free Trade Agreement: United States–Mexico–Canada Agreement KEYWORDS: BLOOM'S: Remember 124. U.S. labor unions argued against the North American Free Trade Agreement on the grounds that it would result in U.S. companies relocating in Mexico in order to take advantage of lower wage rates. a. True b. False ANSWER: True FEEDBACK: Correct American labor unions were concerned that Mexico‘s low wage scale encourages U.S. companies to locate in Mexico, resulting in job losses in the United States. Incorrect

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126. All welfare consequences of a regional trading arrangement are dynamic. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect There are dynamic welfare effects that stem from greater competition, economies of scale, and the stimulus to investment spending that economic integration makes possible. From a static perspective, the formation of a customs union yields net welfare gains if the consumption and production benefits of trade creation more than offset the loss in world efficiency owing to trade diversion.

POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Remember 129. Following World War II, Western European nations suffered from balance-of-payments deficits that were due to reconstruction. a. True b. False ANSWER: True FEEDBACK: Correct In the years immediately after World War II, Western European countries suffered balance-of-payment deficits in response to reconstruction efforts. Incorrect

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131. Advocates of the North American Free Trade Agreement hoped that a rise in Mexican exports to the United States would discourage labor migration from Mexico to the United States. a. True b. False ANSWER: True FEEDBACK: Correct Advocates of the North American Free Trade Agreement hoped that by helping Mexico develop as part of an integrated North America and increase exports, the migration of labor from Mexico to the United States would decrease. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: North American Free Trade Agreement: United States–Mexico–Canada Agreement KEYWORDS: BLOOM'S: Understand 132. Under the North American Free Trade Agreement, Canada, Mexico, and the United States agreed to adopt free trade among each other but also to fully harmonize their fiscal and monetary policies. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The success of Europe in forming the European Union inspired the United States to launch several regional free-trade agreements, including NAFTA. Further integration was never a goal.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: North American Free Trade Agreement: United States–Mexico–Canada Agreement KEYWORDS: BLOOM'S: Understand 133. A free trade area and a customs union differ in the way in which member nations treat imports from non-member nations. a. True b. False ANSWER: True FEEDBACK: Correct In a free-trade area each member maintains its own set of trade restrictions against outsiders. In a customs union each member nation imposes identical trade restrictions against nonparticipants. Incorrect

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Arrangements KEYWORDS: BLOOM'S: Understand 134. In terms of static economic analysis, if a customs union results in a large amount of trade diversion relative to trade creation, world welfare declines. a. True b. False ANSWER: True FEEDBACK: Correct From a static perspective, the formation of a customs union yields net welfare gains if the consumption and production benefits of trade creation more than offset the loss in world efficiency owing to trade diversion. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of a Regional Trading Arrangement KEYWORDS: BLOOM'S: Remember 135. A free trade area is like a customs union EXCEPT its members adopt a common external tariff structure. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect In a free-trade area each member maintains its own set of trade restrictions against outsiders. In a customs union each member nation imposes identical trade restrictions against nonparticipants.

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ANSWER: FEEDBACK:

True Correct

An optimal currency area is a region in which it is economically preferable to have a single official currency rather than multiple official currencies.

Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Eurozone—Europe‘s Monetary Union KEYWORDS: BLOOM'S: Remember 137. An advantage of the European Monetary Union (Eurozone) is that its member countries have common fiscal policies. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The Eurozone countries do not have a fiscal union, implying that they have separate government spending and taxation programs.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Eurozone—Europe‘s Monetary Union KEYWORDS: BLOOM'S: Remember 138. What is meant by economic integration? The term refers to the process of eliminating restrictions on international trade, payments, ANSWER: and factor input mobility. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Regional Trading Arrangements KEYWORDS: BLOOM'S: Remember 139. What factors influence the extent of trade creation and trade diversion? Trade creation and diversion are influenced by the degree of competitiveness that memberANSWER: nation economies have prior to formation of the customs union, the number and size of its members, and the size of its external tariff against non-members. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The European Union KEYWORDS: BLOOM'S: Understand 140. Explain the theory of optimum currency areas. Much of the analysis of the benefits and costs of Europe's common currency is based on ANSWER: the theory of an optimum currency area. According to this theory, the gains to be had from sharing a currency across countries' boundaries include more uniform prices; lower transaction costs, greater certainty for investors, and enhanced competition. These gains must be compared against the loss of an independent monetary policy and the option of changing the exchange rate. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Eurozone—Europe‘s Monetary Union KEYWORDS: BLOOM'S: Remember 141. Who were the losers in the United States as a result of the North American Free Trade Agreement? All labor-intensive, lower-wage, and import-competing businesses lost from reduced tariffs ANSWER: on competing imports. Workers in import-competing businesses lose if their businesses close or relocate. Agricultural producing states saw an influx of cheaper Mexican agricultural products. The Teamsters Union did not want competition from Mexican truck drivers. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: North American Free Trade Agreement: United States–Mexico–Canada Agreement KEYWORDS: BLOOM'S: Understand

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Chapter 09: International Factor Movements and Multinational Enterprises 1. Which of the following economic forces underlie the international flow of goods and services? a. Productive factors move from nations where they are scarce to nations where they are abundant. b. Productive factors flow in response to differences in returns when they are less than the costs of moving from one country to another. c. Productive factors move for reasons that are significantly different from those economic forces that explain the international movement flow of goods and services. d. Productive factors move from where they are abundant to where they are scarce. ANSWER: d FEEDBACK: a. b. c. d. Productive factors move, when they are permitted to, from nations where they are abundant (low productivity) to nations where they are scarce (high productivity).

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3. The source (home) location of most of the world's leading multinational enterprises is a. North America and Europe. b. North America and Asia. c. Europe and South America. d. Europe and Asia. ANSWER: a FEEDBACK: a. The source (home) location of most of the world's leading multinational enterprises is North America and Europe.

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a. forward vertical integration. b. forward conglomerate integration. c. backward vertical integration. d. backward conglomerate integration. ANSWER: a FEEDBACK: a. Forward vertical integration occurs when the parent firm establishes subsidiaries in the direction of the final consumer market.

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b. conglomerate integration. c. forward vertical integration. d. backward vertical integration. ANSWER: b FEEDBACK: a. b. Diversification into nonrelated markets it is known as conglomerate integration. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Understand 8. Which of the following BEST refers to the outright construction or purchase abroad of productive facilities, such as manufacturing plants, by domestic residents? a. foreign direct investment b. portfolio investment c. short-term capital investment d. long-term capital investment ANSWER: a FEEDBACK: a. Foreign direct investment is the acquisition of a controlling interest in an overseas company or facility.

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FEEDBACK:

a. In recent years, most foreign direct investment in the United States has come from Europe.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Remember 10. In recent years, the largest amount of U.S. direct investment abroad has occurred in a. Latin America. b. Europe. c. China. d. Russia. ANSWER: b FEEDBACK: a. b. The largest share of U.S. direct investment abroad has occurred in Europe. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Remember 11. The largest share of U.S. direct investment abroad has recently gone to a. Canada. b. China. c. Europe. d. Latin America. ANSWER: c FEEDBACK: a. b. c. The largest share of U.S. direct investment abroad has recently gone to Europe.

d. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Remember 12. MOST foreign direct investment in the United States occurs in a. finance and insurance. b. information technology. c. manufacturing. d. mining and extraction. ANSWER: c FEEDBACK: a. b. c. Most foreign direct investment in the United States occurs in manufacturing. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Remember 13. Apple develops new iPhones in the United States but builds them overseas. Which type of integration is this? a. conglomerate b. vertical c. horizontal d. forward ANSWER: b FEEDBACK: a. b. Vertical integration occurs when the parent MNE decides to establish foreign subsidiaries to produce intermediate goods or inputs that go into the production of a finished good.

c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Apply 14. Imagine that the Brazilian aircraft manufacturer Embraer purchases a 10-percent share of a Canadian aircraft distribution company in order to facilitate the marketing and sales of its aircraft in Canada. This is an example of a. portfolio investment. b. forward integration. c. conglomerate integration. d. horizontal integration. ANSWER: b FEEDBACK: a. b. Forward integration occurs when the parent firm establishes subsidiaries in the direction of the final consumer market.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Apply 15. Imagine that, in 2016, a U.S. firm acquired a plant in France. In 2017, that plant accounted for 10 percent of the U.S. firm’s sales. Why is the U.S. firm NOT a multinational enterprise? a. The U.S. firm is a multinational enterprise because it engages in foreign direct investment. b. Its foreign sales took place in a different year than its foreign acquisition. c. Because of its trade agreements with France, a U.S. firm operating there is not considered multinational. d. Its foreign sales are less than 25 percent. ANSWER: d FEEDBACK: a. b. c. d. A typical MNE has a high ratio of foreign sales to total sales, often 25 percent or more.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance The Multinational Enterprise BLOOM'S: Evaluate

16. Which of the following is NOT a significant motive for the formation of multinational enterprises? a. avoiding tariffs by obtaining foreign manufacturing facilities b. obtaining the benefits from overseas comparative advantages c. the acquisition of natural resource supply sources d. subsidies granted by the home government to overseas corporations ANSWER: d FEEDBACK: a. b. c. d. Among the major factors that influence decisions to undertake foreign direct investment are (a) market demand, (b) trade restrictions, (c) investment regulations, and (d) labor productivity and costs.

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KEYWORDS:

BLOOM'S: Apply

18. Imagine that Microsoft is having difficulty selling laptops in Kenya because of differences in local tastes. It decides to build a subsidiary in Kenya. This is an example of a _______________ motive for foreign direct investment. a. cost factor b. demand factor c. country risk d. backward integration ANSWER: b FEEDBACK: a. b. With the realization that local taste differences exist, setting up an overseas subsidiary to tap the Kenyan market is an example of a factor motive for foreign direct investment.

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20. Imagine that a U.S. firm issues a press release regarding its intentions to acquire a foreign firm, a competitor. This competitor is located in a country with cheaper raw materials, more productive labor, and lower corporate tax rates. Which of factor is consistent with a demand motive for foreign direct investment? a. The foreign firm is a competitor. b. There are cheaper raw materials. c. There is more productive labor. d. None of these are correct. ANSWER: a FEEDBACK: a. MNEs search for new markets and sources of demand. Acquiring a foreign competitor is consistent with a demand motive for foreign direct investment.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Motives for Foreign Direct Investment KEYWORDS: BLOOM'S: Evaluate 21. Suppose a U.S. CEO wants to expand her firm’s manufacturing production. She argues it should occur in another country because U.S. wages are 15 percent higher. Which of the following will refute her argument? a. U.S. workers are 20 percent more productive. b. The foreign country is closer to a source of a needed raw material. c. The foreign country has a free trade agreement with an important market for the finished good. d. None of these are correct. ANSWER: a FEEDBACK: a. Among the major factors that influence decisions to undertake foreign direct investment are (a) market demand, (b) trade restrictions, (c) investment regulations, and (d) labor productivity and costs. If U.S. workers are 20 percent more productive, that will refute her argument.

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22. Which of the following is an example of a cost motive for the formation of multinational enterprises? a. avoiding tariffs by obtaining foreign manufacturing facilities b. to utilize less productive foreign labor c. to have production farther from markets for the finished good d. to pay higher corporate taxes ANSWER: a FEEDBACK: a. Multinationals often seek to increase profit levels through reductions in production costs. Circumventing import tariff barriers is an example of a cost motive for the formation of multinational enterprises.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Motives for Foreign Direct Investment KEYWORDS: BLOOM'S: Understand 23. Suppose that a steel company locates a production facility near a source of iron. This is an example of a. a demand factor motive for foreign direct investment. b. a cost factor motive for foreign direct investment. c. a government policy motive for foreign direct investment. d. a raw material motive for foreign direct investment. ANSWER: b FEEDBACK: a. b. Multinationals often seek to increase profit levels through reductions in production costs. The pursuit of essential raw materials may underlie a company‘s intent to go multinational and is an example of a cost factor motive.

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b. the size of the foreign market. c. the amount of fixed cost a firm must bear when establishing an overseas facility. d. All of these are correct. ANSWER: d FEEDBACK: a. b. c. d. The decision to establish foreign manufacturing operations through direct investment or licensing depends on the extent of economies of scale, transportation and distribution costs, and international trade barriers.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Supplying Products to Foreign Buyers: Whether to Produce Domestically or Abroad KEYWORDS: BLOOM'S: Remember 25. Suppose that Samsung’s production costs are the same in both China and India. Also suppose that Samsung can produce cell phones in China for an average cost of $10 per phone for 300 million phones, $12 per phone for 200 million phones, and $15 per phone for 100 million phones. If customers in India demand 100 million phones and customers in China demand 200 million phones, Samsung’s lowest-cost option is to a. produce phones only in India and export phones to China. b. produce phones only in China and export phones to India. c. produce 100 million phones in India for Indian demand and produce 200 million phones in China for Chinese demand. d. produce 150 million phones in India for Indian demand and 50 million to export to China and produce 150 million phones in China for Chinese demand. ANSWER: b FEEDBACK: a. b. Samsung‘s lowest-cost option is to produce phones only in China (customers in China demand 200 million phones) and export phones to India (100 million phones) for an average cost of $10 per phone for 300 million phones.

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26. Suppose that Samsung’s production costs are the same in both China and India. Also suppose that Samsung can produce cell phones in China for an average cost of $10 per phone for 300 million phones, $12 per phone for 200 million phones, and $15 per phone for 100 million phones. If customers in India demand 100 million phones and customers in China demand 200 million phones, and there are transportation costs of $6 per phone, Samsung’s lowest-cost option is to a. produce phones only in India and export phones to China. b. produce phones only in China and export phones to India. c. produce 100 million phones in India for Indian demand and produce 200 million phones in China for Chinese demand. d. produce 150 million phones in India for Indian demand and 50 million to export to China and produce 150 million phones in China for Chinese demand. ANSWER: b FEEDBACK: a. b. Samsung‘s lowest-cost option is to produce phones only in China, even after factoring in transportation cost. The average cost will rise to $12 per phone for 300 million phones. [(200 x $10) + (100 x $16)]/300 = $12.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Supplying Products to Foreign Buyers: Whether to Produce Domestically or Abroad KEYWORDS: BLOOM'S: Analyze 27. Suppose that Samsung’s production costs are the same in both China and India. Also suppose that Samsung can produce cell phones in China for an average cost of $10 per phone for 300 million phones, $12 per phone for 200 million phones, and $15 per phone for 100 million phones. If customers in India demand 100 million phones and customers in China demand 200 million phones, and there is an Indian tariff of $10 per phone, Samsung’s lowest-cost option is to a. produce phones only in India and export phones to China. b. produce phones only in China and export phones to India. c. produce 100 million phones in India for Indian demand and produce 200 million phones in China for Chinese demand. d. produce 150 million phones in India for Indian demand and 50 million to export to China and produce 150 million phones in China for Chinese demand. ANSWER: c FEEDBACK: a. b. c. Samsung‘s lowest-cost option is to produce 100 million phones in India for Indian demand and produce 200 million phones in China for Chinese demand. The lowest-cost option per phone is $11.67 {[(200 x $10) + (100 x $15)]/300]}. The alternative is to pay the tariff which will raise the cost to $13.33 {[(200 x $10) + (100 x $20)]/300]}.

d. POINTS: DIFFICULTY:

1 Challenging

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Supplying Products to Foreign Buyers: Whether to Produce Domestically or Abroad KEYWORDS: BLOOM'S: Analyze 28. Suppose that General Motors’ per unit costs for a Mexican subsidiary are $17,000 per truck for 10,000 trucks, and $17,500 per truck for 12,000 trucks. A local Mexican firm can produce the same amounts at $16,500 and $18,000. These trucks can also be produced in Michigan and exported to Mexico at a constant cost of $18,500 per truck. If Mexican demand for trucks is 10,000 trucks, General Motor’s lowest-cost option is to a. use a licensing agreement and have the Mexican firm produce the trucks. b. use a Mexican subsidiary. c. export the trucks to Mexico. d. export 5,000 trucks to Mexico and use a Mexican subsidiary for the other 5,000 trucks. ANSWER: a FEEDBACK: a. If Mexican demand for trucks is 10,000 trucks, General Motors‘ lowest-cost option is to use a licensing agreement and have the Mexican firm produce the trucks ($17,000 per truck for 10,000 trucks).

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Supplying Products to Foreign Buyers: Whether to Produce Domestically or Abroad KEYWORDS: BLOOM'S: Apply 29. Once a firm knows that foreign demand exists, its next step is to a. use foreign direct investment. b. negotiate a licensing agreement with the foreign government. c. cease operations in its home country. d. ascertain the lowest-cost method of supplying goods abroad. ANSWER: d FEEDBACK: a. b. c. d. Once a firm knows that foreign demand exists, its next step is to ascertain the lowest-cost method of supplying goods abroad. The decision to establish foreign operations through direct investment or licensing depends on (1) the extent to which capital is used in the production process, (2) the size of the foreign market, and (3) the amount of fixed cost a business must bear when establishing an overseas facility. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Supplying Products to Foreign Buyers: Whether to Produce Domestically or Abroad KEYWORDS: BLOOM'S: Understand 30. Suppose that a local firm in a foreign market is incapable of adapting its operations to a multinational enterprise’s production process. In this case______________ is not the lowest-cost method of supplying goods abroad. a. licensing b. foreign direct investment c. direct exporting d. backward integration ANSWER: a FEEDBACK: a. Licensing is widely used in practice presupposes that local firms are capable of adapting their operations to the production process or technology of the parent organization.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Supplying Products to Foreign Buyers: Whether to Produce Domestically or Abroad KEYWORDS: BLOOM'S: Understand 31. Suppose that regardless of the amount of production, a subsidiary’s per unit costs are always less than a local firm’s. If there are significant tariffs, in this case ________________is likely to be the lowest-cost method of supplying goods abroad. a. licensing b. subsidiary production c. direct exporting d. vertical integration ANSWER: b FEEDBACK: a. b. If there are significant tariffs and a subsidiary‘s per unit costs are always less

than a local firm‘s, subsidiary production is likely to be the lowest-cost method of supplying goods abroad.

c. d. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Supplying Products to Foreign Buyers: Whether to Produce Domestically or Abroad KEYWORDS: BLOOM'S: Understand 32. Suppose that there are significant costs associated with coordinating a subsidiary with the parent organization and assessing the market potential of a foreign country. If there are also significant tariffs, in this case ________________is likely to be the lowest-cost method of supplying goods abroad. a. licensing b. subsidiary production c. direct exporting d. conglomerate integration ANSWER: a FEEDBACK: a. If there are significant costs and tariffs and a subsidiary‘s per unit costs are always less than a local firm‘s, licensing is likely to be the lowest-cost method of supplying goods abroad.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Supplying Products to Foreign Buyers: Whether to Produce Domestically or Abroad KEYWORDS: BLOOM'S: Understand 33. Concerning the decision by an American to lend or invest abroad, which country is generally considered to be the most risky? a. Germany b. Switzerland c. Singapore d. Sudan ANSWER: d FEEDBACK: a. b. c. d. Sudan has the lowest composite risk rating (48.3) and is considered to be the most risky.

POINTS:

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c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Country Risk Analysis KEYWORDS: BLOOM'S: Remember 35. A U.S. firm is deciding on whether or not to build a production facility in Montenegro. All else being equal, if Montenegro has a very low foreign debt as a percentage of GDP, it therefore has relatively low a. economic risk. b. political risk. c. investment risk. d. financial risk. ANSWER: d FEEDBACK: a. b. c. d. Financial risk analysis investigates a country‘s ability to finance its debt obligations and includes factors such as foreign debt as a percentage of gross domestic product (GDP). A country with low foreign debt as a percentage of GDP has relatively low financial risk.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Country Risk Analysis KEYWORDS: BLOOM'S: Apply 36. A U.S. firm is deciding on whether or not to build a production facility in Uruguay. All else being equal, if Uruguay has a relatively high inflation rate, it therefore has relatively high a. economic risk. b. political risk. c. investment risk. d. financial risk. ANSWER: a FEEDBACK: a. Economic risk analysis determines a country‘s current economic strengths and weaknesses by looking at its rate of growth in GDP, per capita GDP, inflation rate, etc. A relatively high inflation rate indicates relatively high economic risk.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Country Risk Analysis KEYWORDS: BLOOM'S: Apply 37. A U.S. firm is deciding on whether or not to build a production facility in Tunisia. All else being equal, if Tunisia has very little corruption, it therefore has relatively low a. economic risk. b. political risk. c. investment risk. d. financial risk. ANSWER: b FEEDBACK: a. b. Political risk analysis is intended to assess the political stability of a country and includes criteria such as government stability, corruption, domestic conflict, religious tensions, and ethnic tensions. Very little corruption indicates relatively low political risk.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Country Risk Analysis BLOOM'S: Apply

38. Trade analysis involving multinational enterprises differs from conventional trade analysis in that multinational enterprise analysis emphasizes a. absolute cost differentials rather than comparative cost differentials. b. the international movement of factor inputs rather than finished goods. c. purely competitive markets rather than imperfectly competitive markets. d. portfolio investments rather than direct foreign investments. ANSWER: b FEEDBACK: a. b. The major difference between the multinational enterprise analysis and the conventional trade model is that the former stresses the international movement of factor inputs, whereas the latter is based on the movement of merchandise among nations.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Understand 39. Trade analysis involving multinational enterprises is in agreement with conventional trade analysis in that both emphasize a. absolute cost differentials rather than comparative cost differentials. b. the international movement of factor inputs rather than finished goods. c. purely competitive markets rather than imperfectly competitive markets. d. that production will take place in a low-cost country. ANSWER: d FEEDBACK: a. b. c. d. The major difference between the multinational enterprise analysis and the conventional trade model is that the former stresses the international movement of factor inputs, whereas the latter is based on the movement of merchandise among nations.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance The Multinational Enterprise BLOOM'S: Understand

40. Trade analysis involving multinational enterprises differs from conventional trade analysis in that multinational enterprise analysis emphasizes a. intrafirm sales where prices are determined by factors other than a competitive pricing system. b. the international movement of finished goods. c. purely competitive markets rather than imperfectly competitive markets. d. portfolio investments rather than direct foreign investments. ANSWER: a FEEDBACK: a. Conventional trade theory assumes that commodities are traded between independent, competitive businesses, whereas MNEs are often vertically integrated businesses with substantial intrafirm sales.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Understand 41. Since the 1980s, Japanese auto companies have invested billions of dollars in U.S.-based assembly facilities known as transplants. This investment is explained by all of the following, except the desire to a. silence critics who insist that autos sold in the United States must be built there. b. avoid the potential import barriers of the United States. c. provide a hedge against fluctuations in the dollar-yen exchange rate. d. All of these are correct. ANSWER: d FEEDBACK: a. b. c. d. Establishing transplants in the United States provides a number of benefits to Japanese automakers, including opportunities to silence critics who insist that autos sold in the United States must be built there, avoid the potential import barriers of the United States, gain access to an expanding market at a time when the Japanese market is nearing saturation, and provide a hedge against fluctuations in the yen-dollar exchange rate.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG3: - Analytic Technology STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Foreign Auto Assembly Plants in the United States KEYWORDS: BLOOM'S: Remember 42. Most of Toyota’s auto plants in the United States are located in a. the Pacific Northwest states, such as Washington and Idaho. b. mountain states such as Wyoming and Montana. c. southern states such as Tennessee, Kentucky, and Alabama. d. northeastern states such as Main, Vermont, and New Hampshire ANSWER: c FEEDBACK: a. b. c. Most of Toyota‘s auto plants in the United States are located in southern states, including Kentucky, Alabama, Indiana; Texas, West Virginia, and Mississippi.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Foreign Auto Assembly Plants in the United States KEYWORDS: BLOOM'S: Remember 43. The market power effect of an international joint venture can lead to welfare losses for the domestic economy unless offset by cost reductions. Which type of cost reduction would NOT lead to offsetting welfare gains for the overall economy? a. research and development generating improved technology b. development of more productive machinery c. new work rules promoting worker efficiency d. lower wages extracted from workers ANSWER: d FEEDBACK: a. b. c. d. A cost reduction that represents a transfer of dollars from domestic workers does not constitute an overall welfare gain for the economy.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance International Joint Ventures BLOOM'S: Apply

44. All of the following are potential advantages of an international joint venture, except a. sharing research and development costs among corporations. b. forestalling protectionism against imports. c. establishing work rules promoting higher labor productivity. d. operating at diseconomy-of-scale output levels. ANSWER: d FEEDBACK: a. b. c. d. International joint ventures can yield welfare-increasing effects as well as market power effects. Operating at diseconomy-of-scale output levels is not a potential advantage of an international joint venture.

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KEYWORDS:

BLOOM'S: Remember

46. International joint ventures can lead to welfare losses when the newly established firm a. adds to the pre-existent productive capacity. b. enters markets neither parent could have entered individually. c. yields cost reductions unavailable to parent firms. d. gives rise to increased amounts of market power. ANSWER: d FEEDBACK: a. b. c. d. The formation of a joint venture may result in welfare losses. For instance, it may give rise to increased market power, suggesting greater ability to influence market output and price.

47. Which term best describes the relationship between Kellogg Inc. and Wilmar International Limited? a. multinational enterprise b. international joint venture c. multilateral contract d. international commodity agreement ANSWER: b FEEDBACK: a. b. America‘s cereal and snack company Kellogg Inc. and Singapore‘s premier agribusiness firm Wilmar International Limited formed an international joint venture in 2012 to sell cereals to consumers in China.

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Figure 9.1 illustrates the market conditions facing SKF and Timken, initially operating as competitors in the domestic ball bearing market. Each firm realizes constant long-run costs, MC0=AC0. Figure 9.1. International Joint Venture

48. Consider Figure 9.1. With SKF and Timken behaving as competitors, the equilibrium price and output respectively equal a. $4 and 2 units. b. $4 and 4 units. c. $6 and 2 units. d. $6 and 4 units. ANSWER: b FEEDBACK: a. b. The equilibrium price and output respectively equal $4 and 4 units. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: International Joint Ventures KEYWORDS: BLOOM'S: Analyze

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49. Consider Figure 9.1. At the equilibrium price, the domestic economy attains ____ of economic surplus. a. $4 b. $8 c. $12 d. $16 ANSWER: b FEEDBACK: a. b. At the equilibrium price, the domestic economy attains $8 of economic surplus. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: International Joint Ventures KEYWORDS: BLOOM'S: Apply

50. Consider Figure 9.1. Suppose that SKG and Timken jointly form a new firm, Venture Company, whose ball bearings replace the output sold by the parents in the domestic market. Assuming that Venture Company operates as a monopoly and that its costs equal MC0=AC0, the firm's price, output, and total profit would respectively equal a. $6, 2 units, $4. b. $4, 2 units, $2. c. $6, 4 units, $4. d. $4, 4 units, $2. ANSWER: a FEEDBACK: a. If Venture Company operates as a monopoly and its costs equal MC0=AC0, the firm's price, output, and total profit would respectively equal $6, 2 units, $4.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: International Joint Ventures KEYWORDS: BLOOM'S: Analyze

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51. Consider Figure 9.1. Compared to the market equilibrium position achieved by SKG and Timken as competitors, Venture Company as a monopoly leads to a deadweight welfare loss at a. $2. b. $4. c. $6. d. $8. ANSWER: a FEEDBACK: a. Venture Company as a monopoly leads to a deadweight welfare loss at $2. b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: International Joint Ventures KEYWORDS: BLOOM'S: Analyze

52. Consider Figure 9.1. Assume Venture Company's formation yields new cost reductions, indicated by MC1=AC1, which result from technological advances. Compared to the original competitive equilibrium, the net effect of Venture Company's formation on welfare now is a. no change. b. a gain of $5.50. c. a gain of $2.50. d. a loss of $5.50. ANSWER: b FEEDBACK: a. b. Compared to the original competitive equilibrium, the net effect of Venture Company's formation on welfare now is a gain of $5.50.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: International Joint Ventures KEYWORDS: BLOOM'S: Analyze Copyright Cengage Learning. Powered by Cognero.

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53. Consider Figure 9.1. Assume Venture Company's formation yields new cost reductions, indicated by MC1=AC1, which result from wage concessions accepted by Venture Company employees. Compared to the original competitive equilibrium, the net effect of Venture Company's formation on welfare now is a. no change. b. a gain of $5.50. c. a loss of $2.50. d. a loss of $3.50. ANSWER: d FEEDBACK: a. b. c. d. Compared to the original competitive equilibrium, the net effect of Venture Company's formation on welfare now is a loss of $3.50.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: International Joint Ventures KEYWORDS: BLOOM'S: Analyze

54. Consider Figure 9.1. Assume Venture Company's formation yields new cost reductions, indicated by MC1=AC1, which result from changes in work rules by Venture Company employees that lead to higher worker productivity. Compared to the original competitive equilibrium, the net effect of Venture Company's formation on welfare now is a. no change. b. a gain of $2.50. c. a gain of $5.50. d. a loss of $5.50. ANSWER: c FEEDBACK: a. b. c. Compared to the original competitive equilibrium, the net effect of Venture Company's formation on welfare now is a gain of $5.50.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

International Joint Ventures BLOOM'S: Analyze

55. American labor unions maintain that U.S. multinational enterprises a. export American jobs by investing overseas. b. export American jobs by keeping investment in the United States. c. import cheap foreign workers by shifting U.S. investment overseas. d. import cheap foreign workers by keeping U.S. investment at home. ANSWER: a FEEDBACK: a. Because labor unions are confined to individual countries, the multinational nature of these businesses permits them to escape much of the collectivebargaining influence of domestic unions.

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57. Multinational enterprises face problems because they a. cannot benefit from the advantages of comparative advantage. b. may raise political problems in countries where their subsidiaries operate. c. can invest only at home, but not overseas. d. can invest only overseas, but not at home. ANSWER: b FEEDBACK: a. b. A controversial issue involving the conduct of MNEs is their effect on the political policies of the host and source governments. Many nations fear that the presence of MNEs in a given country results in a loss of its national sovereignty.

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b. make it harder for nations to foster activities of comparative advantage. c. always enjoy political harmony in nations where their subsidiaries operate. d. require governmental subsidies in order to conduct worldwide operations. ANSWER: a FEEDBACK: a. Multinational enterprises increase the transfer of technology between nations. b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Understand Figure 9.2 represents the U.S. labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S0 and consists entirely of native U.S. workers. The demand schedule of labor is denoted by D0. Figure 9.2. U.S. Labor Market

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60. Consider Figure 9.2, at labor market equilibrium, _____ workers are hired at a wage rate of $____ per hour, while total labor income equals $____. a. 2, 12, 24 b. 2, 12, 36 c. 3, 9, 27 d. 3, 9, 36 ANSWER: a FEEDBACK: a. At labor market equilibrium, 2 workers are hired at a wage rate of $12 per hour, while total labor income equals $24.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Analyze

61. Consider Figure 9.2. At labor market equilibrium, income earned by U.S. capital owners equals a. $3. b. $6. c. $9. d. $12. ANSWER: b FEEDBACK: a. b. At labor market equilibrium, income earned by U.S. capital owners equals $6. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Analyze

62. Consider Figure 9.2. Assume that Mexican labor migration yields a new labor supply curve, S1, which is the Copyright Cengage Learning. Powered by Cognero.

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combination of domestic labor supply and Mexican labor. As the result of the Mexican migration to the United States, a. U.S. capital owners lose income. b. native U.S. workers lose income. c. U.S. capital owners and native U.S. workers lose income. d. U.S. capital owners and native U.S. workers gain income. ANSWER: a FEEDBACK: a. As the result of the Mexican migration to the United States, U.S. capital owners lose income.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Analyze

63. Consider Figure 9.2. Policies that permit Mexican workers to freely migrate to the United States would likely be resisted by a. U.S. capital owners. b. native U.S. workers. c. U.S. capital owners and native U.S. workers. d. neither U.S. capital owners nor native U.S. workers. ANSWER: b FEEDBACK: a. b. Policies that permit Mexican workers to freely migrate to the United States would likely be resisted by native U.S. workers.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Analyze Figure 9.3 Figure 9.3 represents the Mexican labor market. Assume that labor and capital are the only factors of production. Also assume the initial supply schedule of labor is denoted by S0 and consists entirely of native Mexican Copyright Cengage Learning. Powered by Cognero.

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workers. The demand schedule of labor is denoted by DMexico.

64. Consider Figure 9.3. At labor market equilibrium with supply S0, _____ workers are hired at a wage rate of ____ pesos per hour, while total labor income equals ____ pesos. a. 6, 7, 42 b. 6, 6, 36 c. 7, 7, 49 d. 7, 6, 42 ANSWER: a FEEDBACK: a. At labor market equilibrium with supply S0, 6 workers are hired at a wage rate of 7 pesos per hour, while total labor income equals 42 pesos.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

International Labor Mobility: Migration BLOOM'S: Analyze

65. Consider Figure 9.3. At labor market equilibrium, the income earned by Mexican capital owners equals a. 3 pesos. b. 6 pesos. c. 9 pesos. d. 12 pesos. ANSWER: a FEEDBACK: a. At labor market equilibrium, the income earned by Mexican capital owners equals 3 pesos.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 9.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Analyze

66. Consider Figure 9.3. If Honduran migration to Mexico results in the labor force increasing to 12 workers, denoted by labor supply curve S1, the wage rate for native Mexican workers a. decreases and payments to Mexican capital owners increase. b. decreases and payments to Mexican capital owners decrease. c. increases and payments to Mexican capital owners increase. d. workers increases and payments to Mexican capital owners decrease. ANSWER: a FEEDBACK: a. If Honduran migration to Mexico results in the labor force increasing to 12 workers, denoted by labor supply curve S1, the wage rate for native Mexican workers decreases and payments to Mexican capital owners increase.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC7: - Reading and interpreting graphs International Labor Mobility: Migration BLOOM'S: Analyze

67. ____ refers to highly educated and skilled people who migrate from poor developing countries to wealthy industrial countries. a. Direct investment b. Portfolio investment c. Transfer pricing d. Brain drain ANSWER: d FEEDBACK: a. b. c. d. Brain drain is the emigration of highly educated and skilled people from developing nations to industrial nations, thus limiting the growth potential of the developing nations.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Understand 68. "Guest worker" programs generally result in temporary migration of workers from a. wealthy nations to wealthy nations. b. wealthy nations to impoverished nations. c. impoverished nations to wealthy nations. d. impoverished nations to impoverished nations. ANSWER: c FEEDBACK: a. b. c. When a country allows the immigration of foreign workers on a temporary basis when needed, these workers are known as guest workers. This generally results in the temporary migration of workers from impoverished nations to wealthy nations.

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KEYWORDS:

BLOOM'S: Understand

69. Who tends to benefit from increased immigration? a. owners of capital in the home country b. labor in the home country c. both owners of capital and labor in the home country d. neither owners of capital nor labor in the home country ANSWER: a FEEDBACK: a. Increased immigration provides a cheap supply of agricultural and low-skilled workers, and tends to benefit the owners of capital in the home country.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Understand 70. The least common type of migration pattern is for people to migrate permanently from a. rich nations to rich nations. b. poor nations to poor nations. c. poor nations to rich nations. d. rich nations to poor nations. ANSWER: d FEEDBACK: a. b. c. d. The least common type of migration pattern is for people to migrate permanently from rich nations to poor nations.

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d. the simultaneous movements of capital and labor from a source country to a host country. ANSWER: b FEEDBACK: a. b. Brain drain is the emigration of highly educated and skilled people from developing nations to industrial nations, thus limiting the growth potential of the developing nations.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Remember 72. Critics of U.S. trade and immigration policy maintain that immigrants a. take jobs away from Americans b. suppress domestic wages c. consume sizable amounts of public services d. All of these are correct ANSWER: d FEEDBACK: a. b. c. d. Critics maintain that immigrants take jobs away from Americans, suppress domestic wages, and consume sizable amounts of public services.

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c. d. American labor unions do not accuse U.S. multinational firms of operating at output levels where scale economies occur.

b. c. d. Copyright Cengage Learning. Powered by Cognero.

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c. d. POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Multinational Enterprises as a Source of Conflict KEYWORDS: BLOOM'S: Understand 78. The ______ refers to the price charged for goods sold to a subsidiary of a multinational enterprise by another subsidiary in another country a. corporate price b. transfer price c. monopoly price d. dumping price ANSWER: b FEEDBACK: a. b. Transfer pricing is the pricing of goods within an MNE. The transfer price may be a purely arbitrary figure that means it may be unrelated to costs incurred or operations carried out.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Multinational Enterprises as a Source of Conflict KEYWORDS: BLOOM'S: Understand 79. In 2016, three of the world’s five largest corporations were based in a. the U.S. b. Germany. c. Canada. d. China. ANSWER: d FEEDBACK: a. b. c. d. In 2016, three of the world‘s five largest corporations were based in China. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

The Multinational Enterprise BLOOM'S: Remember

80. Immigration tends to reduce the incomes of all factors of production. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Migration increases output and decreases wages in the country of immigration because it decreases output and increases wages in the country of emigration.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Understand 81. Transfer pricing allows MNEs to reduce their taxable income. a. True b. False ANSWER: True FEEDBACK: Correct Transfer pricing allows MNEs to reduce their taxable income in the higher-tax country. The increased income of the subsidiary that occurs because of the inflated transfer price is taxed at the lower rate. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Multinational Enterprises as a Source of Conflict KEYWORDS: BLOOM'S: Understand 82. MNEs can resist a government’s attempts to redistribute national income through taxation. a. True b. False ANSWER: True FEEDBACK: Correct By using accounting techniques that shift profits overseas, an MNE may be able to evade the taxes of a host country. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Multinational Enterprises as a Source of Conflict KEYWORDS: BLOOM'S: Remember 83. An MNE may be able to evade the taxes of a host country. a. True b. False ANSWER: True FEEDBACK: Correct By using accounting techniques that shift profits overseas, an MNE may be able to evade the taxes of a host country. An MNE could accomplish this evasion by raising prices on goods from its subsidiaries in nations with modest tax rates to reduce profits on its operations in a high-tax nation where most of its business actually takes place. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Multinational Enterprises as a Source of Conflict KEYWORDS: BLOOM'S: Remember 84. In recent years, Canada has virtually closed its borders to foreign workers who desire to migrate to the country. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Canada today has one of the highest immigration rates in the world.

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undocumented, the figure is no more than 6 percent in Canada.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Remember 86. In recent years, the majority of U.S. foreign direct investment has flowed to Asia, especially in the services sector. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect In recent years, the majority of U.S. foreign direct investment (FDI) has flowed to Europe, Latin America, and Canada, especially in the manufacturing sector.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Multinational Enterprises as a Source of Conflict KEYWORDS: BLOOM'S: Understand 87. Most Japanese auto assembly plants located in the United States are located in southern states such as Texas, Alabama, and Tennessee. a. True b. False ANSWER: True FEEDBACK: Correct Most of Toyota‘s auto plants in the United States are located in southern states, including Kentucky, Alabama, Indiana; Texas, West Virginia, and Mississippi. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Foreign Auto Assembly Plants in the United States KEYWORDS: BLOOM'S: Understand 88. Concerning the decision of a U.S. resident to lend or invest abroad, Zimbabwe and Sudan have recently been considered to be relatively safe investments regarding the risk of default. a. True Copyright Cengage Learning. Powered by Cognero.

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b. False ANSWER: FEEDBACK:

False Correct Incorrect Both Zimbabwe and Sudan have very low composite risk ratings and are considered to be very high risk.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Country Risk Analysis KEYWORDS: BLOOM'S: Analyze 89. Multinational enterprises can escape the collective bargaining influence of domestic unions. a. True b. False ANSWER: True FEEDBACK: Correct Because labor unions are confined to individual countries, MNEs can escape much of the collective bargaining influence of domestic unions and can seek out those countries where labor has minimal market power. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Multinational Enterprises as a Source of Conflict KEYWORDS: BLOOM'S: Understand 90. Royal Dutch Shell, Walmart Stores, and Sinopec Group are among the world's smallest corporations in recent years. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Royal Dutch Shell, Walmart Stores, and Sinopec Group are among the world's largest corporations in recent years.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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91. International trade in goods and services and flows of productive factors are substitutes for each other. a. True b. False ANSWER: True FEEDBACK: Correct The economic forces underlying the international movement in factors of production are virtually identical to those underlying the international flow of goods and services. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Remember 94. Sinopec Group would undertake forward integration if it acquired oil wells in the Middle East. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Forward integration occurs when the parent firm establishes subsidiaries in the direction of the final consumer market.

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Incorrect In practice, most vertical foreign investment is backward.

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99. Foreign direct investment would occur if Mobile Inc. of the United States acquired sufficient common stock in a foreign oil company to assume voting control. a. True b. False ANSWER: True FEEDBACK: Correct Foreign direct investment is the acquisition of a controlling interest in an overseas company or facility. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Understand 102. Both economic theory and empirical studies support the notion that foreign direct investment is conducted in anticipation of future profits. a. True b. False ANSWER: True FEEDBACK: Correct Foreign direct investment is the acquisition of a controlling interest in an overseas company or facility. Both economic theory and empirical studies support the idea that foreign direct investment is conducted in anticipation of future profits. Incorrect

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a. True b. False ANSWER: FEEDBACK:

True Correct

When the Canadian market‘s size is large enough to permit efficient production in Canada, a U.S. firm increases profits by establishing a Canadian production subsidiary or licensing the rights to a Canadian firm to produce and market its product in Canada.

Incorrect

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environmental, and other regulations than U.S.-owned companies.

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109. Mergers differ from joint ventures in that they involve the creation of a new business firm, rather than the union of two existing companies. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect A joint venture is a business organization created by two or more companies that combines their skills and assets.

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Joint Ventures KEYWORDS: BLOOM'S: Understand 112. International joint ventures tend to yield a welfare-increasing market-power effect and a welfare-decreasing costreduction effect. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect International joint ventures can yield welfare-increasing effects as well as market power effects.

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more than offsets the market-power effect. a. True b. False ANSWER: True FEEDBACK: Correct A joint venture leads to improvements in national welfare if its cost-reduction effect is the result of improvements in technology and productivity and if it more than offsets the market-power effect. Incorrect

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Joint Ventures KEYWORDS: BLOOM'S: Understand 117. A joint venture among two large, competing companies tends to yield a market-power effect, which results in a reduction in consumer surplus that is not offset by a corresponding gain to producers. a. True b. False ANSWER: True FEEDBACK: Correct A joint venture leads to improvements in national welfare if its cost reduction effect is the result of improvements in technology and productivity and if it more than offsets the market-power effect. Incorrect

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direct investment. a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect If earnings from the host country are used to expand those same Mexican production operations, this is an example of foreign direct investment.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Multinational Enterprises as a Source of Conflict KEYWORDS: BLOOM'S: Understand 122. The theory of multinational enterprise is totally inconsistent with the principle of comparative advantage. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect From a trade theory perspective, the multinational enterprise analysis is fundamentally in agreement with the predictions of the comparative-advantage principle. Both approaches agree that a given commodity will be produced in a low-cost country.

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ANSWER: FEEDBACK:

False Correct Incorrect The operations of an MNE have effects on employment in both the host and source countries.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Understand 127. The migration of workers from Mexico to the United States tends to exert downward pressure on the wages of native U.S. workers who compete against Mexican workers for jobs. a. True b. False ANSWER: True FEEDBACK: Correct Prior to migration, the wage rate in the United States exceeds that of Mexico. Responding to the wage differential, Mexican workers immigrate to the United States; this leads to a reduction in the Mexican labor supply and an increase in the U.S. labor supply. Wage rates will continue to rise in Mexico and fall in the United States until they eventually equalize. Incorrect

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a. True b. False ANSWER: FEEDBACK:

True Correct

Developing nations have sometimes feared open immigration policies because they can result in the emigration of highly educated and skilled people from developing nations to industrial nations, thus limiting the growth potential of the developing nations.

Incorrect

POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Understand 132. Labor migration tends to increase output and decrease wages in the country of immigration while decreasing output and increasing wages in the country of emigration. a. True b. False ANSWER: True FEEDBACK: Correct Migration increases output and decreases wages in the country of immigration because it decreases output and increases wages in the country of emigration. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Understand 133. Are there any differences between the theory of multinational enterprises and conventional trade theory? There are major differences. The conventional model assumes that commodities are traded ANSWER: between independent, competitive businesses. However, multinational enterprises are often vertically integrated businesses with substantial intrafirm sales. Also, multinational enterprises may use transfer pricing to maximize overall company profits of any single subsidiary. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Multinational Enterprise KEYWORDS: BLOOM'S: Understand 134. What are the disadvantages of forming joint ventures? A joint venture is a cumbersome organization compared with a single organization. ANSWER: Control is divided, creating problems of "two masters." Success or failure depends on how well companies work together despite having different objectives, corporate cultures, and ways of doing things. The action of corporate chemistry is hard to predict, but it is critical Copyright Cengage Learning. Powered by Cognero.

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because joint-venture agreements usually provide both partners an ongoing role in management. When joint-venture ownership is divided equally, as often occurs, deadlocks in decision-making can take place. Even when negotiated balance is achieved, it can be upset by changing corporate goals or personnel. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Joint Ventures KEYWORDS: BLOOM'S: Understand 135. What are the key elements underlying Canada’s immigration policy? [From the text, page 339] Canadians realize the positive benefits of immigration including ANSWER: economic development and the creation of jobs for native-born Canadians. This is because a large proportion of Canadian immigrants are highly skilled people who are net contributors to the economy. Also, with a sparse population and low birth rate, Canada needs immigrants for population growth and economic development. About two-thirds of Canada’s permanent visas are granted for Canada’s economic needs, including the filling of labor shortages; in contrast, about two-thirds of U.S. green cards are granted for family reunions. Canadians consider multiculturalism as a key ingredient of their national identity. They contend that people who are exposed to different viewpoints and cultures are more likely to cooperate with one another or reach a compromise when differences occur and become more productive by learning from others. Canadians generally see immigration as adding to the social fabric of the country. Finally, Canada has little reason to fear illegal immigration. Although Canada and the United States share a long border, millions of Americans do not wish to move to Canada. In other words, the United States serves as a buffer zone for unauthorized immigration that reduces Canadian anxiety about it. Canada emphasizes open immigration policies that accept talented foreigners who have the skills the country needs and the desire to succeed. Canada has transformed itself into an immigrant country, with a foreign-born population (20 percent) exceeding that of the United States (13 percent). Most Canadians feel that this infusion of talent has added to the economic vitality of Canada. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Labor Mobility: Migration KEYWORDS: BLOOM'S: Understand 136. What particular aspects of multinational operations generate potential conflict? Answers should focus on issues such as employment impacts, technology transfer, national ANSWER: sovereignty, balance-of-payments, transfer pricing, and tax policy. Answers could also Copyright Cengage Learning. Powered by Cognero.

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include negative net welfare impacts of joint ventures. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking TOPICS: Multinational Enterprises as a Source of Conflict KEYWORDS: BLOOM'S: Understand

Chapter 10: The Balance of Payments 1. On balance-of-payments statements, merchandise imports are classified in the a. current account. b. capital account. c. unilateral transfer account. d. official settlements account. ANSWER: a FEEDBACK: a. The current account of the balance-of-payments refers to the monetary value of international flows associated with transactions in goods, services, income flows, and unilateral transfers. Merchandise trade includes all of the goods the United States exports or imports.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Remember 2. The balance of international indebtedness is a record of a country's international a. investment position over a period of time. b. investment position at a fixed point in time. c. trade position over a period of time. d. trade position at a fixed point in time. ANSWER: b FEEDBACK: a. b. The international investment position of a nation at a particular time is measured by the balance of international indebtedness. The balance of international indebtedness is a stock concept (at a single point in time). Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Apply 5. Which of the following would call for an inflow of payments to the United States? a. American imports of German steel b. gold flowing out of the United States c. American unilateral transfers to less-developed countries d. American firms selling insurance to British shipping companies ANSWER: d FEEDBACK: a. b. c. d. A capital (financial) inflow can be likened to the export of goods and services, such as American firms selling insurance to British shipping companies.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Double Entry Accounting KEYWORDS: BLOOM'S: Understand 7. Which of the following is classified as a credit in U.S. balance-of-payments? a. U.S. exports b. U.S. gifts to other countries c. a flow of gold out of the U.S. d. foreign loans made by U.S. companies ANSWER: a FEEDBACK: a. A credit transaction is one that results in a receipt of a payment from foreigners, such as merchandise exports.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Double Entry Accounting KEYWORDS: BLOOM'S: Understand Table 10.1 gives hypothetical figures for U.S. international transactions. Table 10.1. U.S. International Transactions

Transaction

Amount (Billions of Dollars)

Merchandise imports Military transactions, net Remittances, pensions, transfers U.S. private assets abroad Merchandise exports Investment income, net U.S. government grants (excluding military) Foreign private assets in the U.S. Compensation of employees Allocation of SDRs Travel and transportation receipts, net

-110 -5 -20 -50 115 15 -5 25 -5 5 20

8. Referring to Table 10.1, the merchandise trade balance equals a. $5 billion. Copyright Cengage Learning. Powered by Cognero.

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b. $15 billion. c. $20 billion. d. $25 billion. ANSWER: FEEDBACK:

a a. Combining the exports and imports of goods gives the merchandise trade balance of $5 billion ($115-$110).

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 10.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Apply

9. Referring to Table 10.1, the current account balance equals a. $5 billion. b. $10 billion. c. $15 billion. d. $20 billion. ANSWER: a FEEDBACK: a. The current account refers to the monetary value of international flows associated with transactions in goods, services, income flows, and unilateral transfers. The current account balance ($5 billion) equals goods and services ($5 billion + $0), or all items except for assets and allocations of SDRs.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 10.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Apply 10. Unlike balance-of-payments, the balance of international indebtedness indicates the international Copyright Cengage Learning. Powered by Cognero.

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a. investment position of a country at a given moment in time. b. investment position of a country over a one-year period. c. trade position of a country at a given moment in time. d. trade position of a country over a one-year period. ANSWER: a FEEDBACK: a. The balance of international indebtedness indicates the international investment position of a country at a given moment in time.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance of International Indebtedness KEYWORDS: BLOOM'S: Understand 11. If an American purchases a ticket from Scandinavian Airlines, paying by a personal check, which of the following entries would be the result? a. a credit in Norway's service account b. a debit in Norway's service account c. a credit in the U.S. unilateral transfers account d. a debit in the U.S. unilateral transfers account ANSWER: a FEEDBACK: a. A credit transaction is one that results in a receipt of a payment from foreigners. From Norway‘s perspective, a foreigner paying a domestic airline is a credit in Norway's service account.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Double Entry Accounting KEYWORDS: BLOOM'S: Apply 12. If a resident of Japan purchases an insurance policy from the U.S. insurance company Progressive, which entry would be the result? a. a debit in the U.S. service account b. a credit in the U.S. service account Copyright Cengage Learning. Powered by Cognero.

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c. a credit in Japan's unilateral transfers account d. a debit in Japan's unilateral transfers account ANSWER: b FEEDBACK: a. b. A credit transaction is one that results in a receipt of a payment from foreigners. From the U.S. perspective, the payment to a U.S. insurance company is a credit in the U.S. service account.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Double Entry Accounting KEYWORDS: BLOOM'S: Apply 13. A credit transaction would appear on the balance-of-payments as a result of a. the import of goods and services. b. domestic residents touring overseas. c. transfer payments made to foreign relatives. d. an inflow of investment capital. ANSWER: d FEEDBACK: a. b. c. d. A credit transaction is one that results in a receipt of a payment from foreigners. From the U.S. perspective, an inflow of investment capital is a credit in the U.S. service account.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Double Entry Accounting KEYWORDS: BLOOM'S: Remember 14. A debit transaction would appear on the balance-of-payments as a result of a. outflows of investment capital. b. the export of services abroad. c. transfer payments received by domestic residents. d. the export of goods abroad. ANSWER: a FEEDBACK: a. A debit transaction would appear on the balance-of-payments as a result of Copyright Cengage Learning. Powered by Cognero.

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outflows of investment capital.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Remember 15. The current account of the United States includes all of the following, except a. trade in goods and services. b. unilateral transfers. c. income receipts and payments. d. gold flows between the United States and foreign central banks. ANSWER: d FEEDBACK: a. b. c. d. The current account of the balance-of-payments refers to the monetary value of international flows associated with transactions in goods, services, income flows, and unilateral transfers.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Remember 16. The _____ tabulates the U.S. balance-of-payments. a. U.S. International Trade Commission b. U.S. Department of Labor c. Council of Economic Advisors d. U.S. Department of Commerce ANSWER: d FEEDBACK: a. b. c. d. The U.S. Department of Commerce tabulates the U.S. balance-of-payments. POINTS:

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DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: U.S. Balance-of-Payments KEYWORDS: BLOOM'S: Remember 17. Credit items on the U.S. balance-of-payments statement result in a. a deficit on the current account of the United States. b. a deficit on the capital and financial account of the United States. c. an inflow of foreign exchange for the United States. d. an outflow of foreign exchange for the United States. ANSWER: c FEEDBACK: a. b. c. A credit transaction is one that results in a receipt of a payment from foreigners. It results in an inflow of foreign exchange for the United States.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Understand 18. If Japanese investors purchase Treasury bills of the U.S. government, this results in a a. debit transaction in the U.S. current account. b. credit transaction in the U.S. current account. c. debit transaction in the U.S. capital and financial account. d. credit transaction in the U.S. capital and financial account. ANSWER: d FEEDBACK: a. b. c. d. Capital and financial transactions in the balance-of-payments include all international purchases or sales of assets. The purchase of Treasury bills by foreigners is recorded as a credit transaction in the U.S. capital and financial account.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Balance-of-Payments Structure BLOOM'S: Apply

19. If U.S. investors purchase Treasury bills of the British government, this results in a a. debit transaction in the U.S. current account. b. credit transaction in the U.S. current account. c. debit transaction in the U.S. capital and financial account. d. credit transaction in the U.S. capital and financial account. ANSWER: c FEEDBACK: a. b. c. Capital and financial transactions in the balance-of-payments include all international purchases or sales of assets. The purchase of British Treasury bills by Americans is recorded as a debit transaction in the U.S. capital and financial account.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Apply 20. A deficit in the U.S. current account is offset by a surplus a. in the U.S. trade account. b. in the U.S. balance-of-payments. c. in the U.S. capital and financial account. d. in the U.S. official reserve assets. ANSWER: c FEEDBACK: a. b. c. If the current account registers a deficit, the capital and financial account must register a surplus, or net capital or financial inflow.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does A Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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21. In recent years, ______ has been the world's largest international debtor. a. the United States. b. China. c. Japan. d. the United Kingdom. ANSWER: a FEEDBACK: a. In recent years, the United States has been the world's largest international debtor.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: U.S. Balance-of-Payments KEYWORDS: BLOOM'S: Remember 22. A debit in the U.S. current account would be represented by a. earnings on U.S. investments abroad flowing into the United States. b. gifts that Americans make to the poor in Africa. c. Chinese investors purchasing the securities of the U.S. government. d. exports of Boeing jetliners to South Korea. ANSWER: b FEEDBACK: a. b. Unilateral transfers in the current account are transfers of goods and services (gifts in kind) or financial assets (money gifts) between the United States and the rest of the world. A gift that Americans make to the poor in Africa is a debit transaction that leads to a payment to foreigners.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Remember 23. If General Electric Inc. pays dividends to its Canadian stockholders, this represents a a. debit in the U.S. current account. b. credit in the U.S. current account. c. debit in the U.S. capital and financial account. Copyright Cengage Learning. Powered by Cognero.

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d. credit in the U.S. capital and financial account. ANSWER: a FEEDBACK: a. A debit transaction is one that leads to a payment to foreigners. From the U.S. perspective, this is a debit in the U.S. current account.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Double Entry Accounting KEYWORDS: BLOOM'S: Understand 24. If the United States is a net borrower from, or lender to, the rest of the world, this is best indicated by the U.S. a. balance-of-payments position. b. current account balance. c. merchandise trade balance. d. net export balance. ANSWER: b FEEDBACK: a. b. If a country realizes a deficit in its current account, it becomes a net demander of funds from the rest of the world.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does A Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Understand 25. The value of direct investment by Ford Motor Co. in Canada is included in the U.S. a. capital and financial account. b. current account. c. net export account. d. merchandise trade account. ANSWER: a FEEDBACK: a. Capital and financial transactions in the balance-of-payments include all international purchases or sales of assets, such as a direct investment by Ford Motor Co. in Canada.

b. Copyright Cengage Learning. Powered by Cognero.

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c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Remember 26. To "balance" the U.S. balance-of-payments, U.S. Commerce Department statisticians employ a. accounting transactions. b. inflows or outflows of gold reserves. c. statistical discrepancy. d. inflows or outflows of government securities. ANSWER: c FEEDBACK: a. b. c. Because total debits must equal total credits in principle, statisticians insert a residual to make them equal. This correcting entry is known as statistical discrepancy.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Remember 27. Concerning the U.S. balance-of-payments statement, the sum of debits and credits on all transactions will always a. be equal. b. show a deficit. c. show a surplus. d. be unequal. ANSWER: a FEEDBACK: a. Owing to double-entry bookkeeping, a nation‘s balance-of-payments will always balance.

b. c. d. POINTS: DIFFICULTY:

1 Easy

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Double Entry Accounting KEYWORDS: BLOOM'S: Remember 28. When the United States imports goods and services from other countries, it a. makes payments to other countries. b. receives payments from other countries. c. becomes a net lender to other countries. d. receives interest income from other countries. ANSWER: a FEEDBACK: a. When the United States imports goods and services from other countries, it makes payments to other countries.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does a Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Understand 29. Concerning the balance-of-payments statement, the ______ indicates the receipts from exports of goods and services sold overseas, the payments for imports of goods and services from overseas, unilateral transfers (net), and income receipts and payments (net). a. capital and financial account b. current account c. official reserve asset account d. monetary gold account ANSWER: b FEEDBACK: a. b. The current account of the balance-of-payments refers to the monetary value of international flows associated with transactions in goods, services, income flows, and unilateral transfers.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Balance-of-Payments Structure BLOOM'S: Remember

30. For the United States, the largest component of its current account transactions consists of a. payments for imports of goods and services and receipts from exports of goods and services. b. payments for military transactions with other countries. c. travel and transportations payments and receipts with other countries. d. unilateral transfers to other countries and from other countries. ANSWER: a FEEDBACK: a. For the United States, the largest component of its current account transactions consists of payments for imports of goods and services and receipts from exports of goods and services.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: U.S. Balance-of-Payments KEYWORDS: BLOOM'S: Understand 31. Mary Smith, a resident of Denver, Colorado, purchases a Swiss watch in Zurich. On the U.S. balance-of-payments statement, this transaction appears on the a. official reserve asset account. b. net borrowing and lending account. c. current account. d. services account. ANSWER: c FEEDBACK: a. b. c. On the U.S. balance-of-payments statement, this transaction appears on the current account.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: U.S. Balance-of-Payments KEYWORDS: BLOOM'S: Apply Copyright Cengage Learning. Powered by Cognero.

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32. Which transaction would result in a credit for the United States? a. U.S. households importing beer from German breweries b. Chinese investors purchasing securities of the U.S. government c. German tourists visiting Yellowstone National Park d. U.S. construction firms contracting with Japanese architects to design their buildings ANSWER: c FEEDBACK: a. b. c. A credit transaction is one that results in a receipt of a payment from foreigners. From the U.S. perspective, German tourists visiting Yellowstone National Park is recorded as a credit.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Double Entry Accounting KEYWORDS: BLOOM'S: Understand 33. For the U.S. balance-of-payments statement, which of the following is NOT recorded in the capital and financial account? a. net interest income from international investments b. purchases of Chinese stocks and bonds c. sales of Mexican stocks and bonds d. the acquiring of a business firm in another country ANSWER: a FEEDBACK: a. Capital and financial transactions in the balance-of-payments include all international purchases or sales of assets.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Understand 34. A negative balance in the capital and financial account suggests that a country a. is realizing a surplus on its current account. b. is realizing a deficit on its current account. c. is borrowing from the rest of the world. Copyright Cengage Learning. Powered by Cognero.

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d. imports more goods and services than it exports. ANSWER: a FEEDBACK: a. If the current account registers a surplus, the capital and financial account must register a surplus deficit, or net capital or financial outflow.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does A Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Understand 35. A positive balance in the capital and financial account suggests that a country a. is realizing a surplus on its current account. b. is realizing a deficit on its current account. c. is lending to the rest of the world. d. exports more goods and services than it imports. ANSWER: b FEEDBACK: a. b. If the current account registers a deficit, the capital and financial account must register a surplus, or net capital or financial inflow.

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c. d. Capital and financial transactions in the balance-of-payments include all international purchases or sales of assets.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Apply 37. If the United States has a negative balance on its current account, it a. is a net lender to the rest of the world. b. is a net borrower from the rest of the world. c. realizes a negative balance on its capital and financial account. d. runs a surplus in the budget of the federal government. ANSWER: b FEEDBACK: a. b. If a country realizes a deficit in its current account, it becomes a net demander of funds from the rest of the world.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does A Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Remember 38. Concerning the U.S. balance-of-payments statement, throughout the past 30 years, a. the current account balance and the capital account balance have moved in the opposite direction. b. the current account balance and the capital account balance have moved in the same direction. c. the official reserve assets of the U.S. government have shrunk to zero. d. unilateral transfers have shrunk significantly. ANSWER: a FEEDBACK: a. Concerning the U.S. balance-of-payments statement, throughout the past 30 years, the current account balance and the capital account balance have moved in the opposite direction.

b. c. d. POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: U.S. Balance-of-Payments KEYWORDS: BLOOM'S: Understand 39. Throughout the past 30 years, the U.S. balance-of-payments statement has indicated both a. a positive balance on the current account and a positive balance on the capital and financial account. b. a negative balance on the current account and a negative balance on the capital and financial account. c. a positive balance on the current account and a negative balance on the capital and financial account. d. a negative balance on the current account and a positive balance on the capital and financial account. ANSWER: d FEEDBACK: a. b. c. d. Throughout the past 30 years, the U.S. balance-of-payments statement has indicated both a negative balance on the current account and a positive balance on the capital and financial account.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does A Current Account Deficit (Surplus) Mean? Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Understand

41. In recent decades, the United States has been an example of a. a net exporter of goods. b. a net importer of services. c. a net lending country. d. a net borrowing country. ANSWER: d FEEDBACK: a. b. c. d. Since the early 1980s, the U.S. current account has moved from a small surplus to a large deficit.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does A Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Remember 42. If Germany has invested over its history more in other countries than other countries have invested in Germany, then Germany is a a. net creditor nation. b. net debtor nation. c. net importer of goods and services. d. net exporter of stocks and bonds. ANSWER: a FEEDBACK: a. Germany is considered a net creditor to the rest of the world when the accumulated value of German-owned assets abroad exceeds the value of foreign-owned assets in Germany.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance of International Indebtedness KEYWORDS: BLOOM'S: Understand 43. Over its history, suppose that France has borrowed more from the rest of the world than it has lent to the rest of the world. This means that France Copyright Cengage Learning. Powered by Cognero.

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a. has realized continuous deficits in its current account. b. has realized continuous surpluses in its goods and services account. c. has a very large unilateral transfers balance. d. is a net-creditor nation. ANSWER: a FEEDBACK: a. If a country realizes a deficit in its current account, it becomes a net demander of funds from the rest of the world. France has realized continuous deficits in its current account.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance of International Indebtedness KEYWORDS: BLOOM'S: Apply 44. If the U.S. current account balance is negative, a. the United States lends to other countries who purchase goods and services from the United States. b. the United States borrows from other countries to pay for the goods and services that the United States buys from them. c. the U.S. balance of international indebtedness shows that the United States is a net creditor nation. d. the U.S. balance of international indebtedness shows that the United States is a net exporting nation. ANSWER: b FEEDBACK: a. b. If a country realizes a deficit in its current account, it becomes a net demander of funds from the rest of the world. The United States borrows from other countries to pay for the goods and services that the United States buys from them.

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b. Americans can borrow at lower interest rates for homes and automobiles. c. the U.S. government can finance larger deficits longer and at lower interest rates. d. All of these are correct. ANSWER: d FEEDBACK: a. b. c. d. The United States realizes substantial benefits from the dollar serving as the main reserve currency of the world, including: Americans can buy goods at a marginally cheaper price than households in other nations who must exchange their currency with each purchase and pay a transaction cost; Americans can borrow at lower interest rates for homes and automobiles; and the U.S. government can finance larger deficits longer and at lower interest rates.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: The Dollar as the World‘s Reserve Currency KEYWORDS: BLOOM'S: Remember 46. In recent years, the two largest holders of U.S. government securities have been a. China and Japan. b. Mexico and Canada. c. Brazil and Spain. d. Germany and France. ANSWER: a FEEDBACK: a. China and Japan are major suppliers of capital to the United States b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does a Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Understand 47. Adopting the special drawing right (SDR) as a reserve currency might possibly occur if the United States was to operate continuous bad economic policy in the form of a. deficit spending. b. high inflation. c. currency depreciation. Copyright Cengage Learning. Powered by Cognero.

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d. All of these are correct. ANSWER: d In 2009, officials at the central bank of China proposed adopting the special drawing right RATIONALE: as a reserve currency. Their goal was to adopt a reserve currency that is disconnected from a single country (the United States) and would remain stable in the long run, lessening the financial risks caused by the volatility of the dollar. This could occur if the United States was to operate continuous bad economic policy in the form of deficit spending, high inflation and currency depreciation. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: The Dollar as the World‘s Reserve Currency KEYWORDS: BLOOM'S: Remember 48. For the United States, a loss in its reserve currency position would likely result in which of the following? a. imports becoming more expensive b. lower interest rates on private debt. c. more foreign investment in the United States d. higher interest rates on government debt ANSWER: d FEEDBACK: a. b. c. d. For the United States, a loss in its reserve currency position would likely result in higher interest rates on government debt.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Dollar as the World‘s Reserve Currency KEYWORDS: BLOOM'S: Remember 49. The ______ is currently the main reserve currency of the global trading and financial system. a. Euro b. Chinese yuan c. British pound d. None of these is correct. ANSWER: d FEEDBACK: a. b. Copyright Cengage Learning. Powered by Cognero.

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c. d. The U.S. dollar is currently the main reserve currency of the global trading and financial system.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: The Dollar as the World‘s Reserve Currency KEYWORDS: BLOOM'S: Remember 50. As the world’s main reserve currency, the U.S. dollar is used throughout the world as a a. medium of exchange. b. unit of account. c. store of value. d. All of these are correct. ANSWER: d FEEDBACK: a. b. c. d. As the world‘s main reserve currency, the U.S. dollar is used throughout the world as a medium of exchange, unit of account, and store of value.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: The Dollar as the World‘s Reserve Currency KEYWORDS: BLOOM'S: Remember 51. About two-thirds of the world’s official foreign-exchange reserves are held in a. gold. b. British pounds. c. Japanese yen. d. U.S. dollars. ANSWER: d FEEDBACK: a. b. c. d. About two-thirds of the world‘s official foreign-exchange reserves are held in U.S. dollars.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Dollar as the World‘s Reserve Currency KEYWORDS: BLOOM'S: Remember 52. Because the United States continues to run significant ___________, some have argued that ____________ should be a reserve currency, because it is _______________. a. current account surpluses, the Swiss franc, more fiat-based than the U.S. dollar b. current account deficits, a cryptocurrency, a more sound money c. capital and financial account deficits, the British pound, more highly valued now after Brexit d. current account deficits, the Euro, more fully backed by gold than the dollar ANSWER: b FEEDBACK: a. b. Because the United States continues to run significant current account deficits, some have argued that a cryptocurrency should be a reserve currency, because it is a more sound money.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Dollar as the World‘s Reserve Currency KEYWORDS: BLOOM'S: Analyze 53. Which of the following represents a problem with the Chinese yuan becoming a reserve currency? a. China does not have an open financial market. b. China does not have a large economy. c. China holds too many dollars. d. The yuan is not currently part of the SDR. ANSWER: a FEEDBACK: a. For the yuan to become a reserve currency, China would need at least two things: a large economy and an open financial market. China has the first but not the second.

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TOPICS: KEYWORDS:

The Dollar as the World‘s Reserve Currency BLOOM'S: Remember

54. If an American receives dividends from the shares of stock they own in Toyota, Inc., a Japanese firm, the transaction would be recorded on the U.S. balance-of-payments as a a. capital account debit. b. capital account credit. c. current account debit. d. current account credit. ANSWER: d FEEDBACK: a. b. c. d. The current account of the balance-of-payments refers to the monetary value of international flows associated with transactions in goods, services, income flows, and unilateral transfers. Dividends are recorded as current account credit because it is a receipt of a payment from foreigners.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Balance-of-Payments Structure BLOOM'S: Apply

56. The U.S. balance of trade position is in part determined by a. exchange rates. b. growth of foreign consumers’ incomes. c. relative prices in world markets. d. All of these are correct. ANSWER: d FEEDBACK: a. b. c. d. The U.S. balance of trade position is in part determined by exchange rates,

growth of foreign consumers‘ incomes, and relative prices in world markets.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Understand 57. U.S. military aid granted to foreign countries is entered in the a. merchandise trade account. b. capital account. c. current account. d. official settlements account. ANSWER: c FEEDBACK: a. b. c. The current account of the balance-of-payments refers to the monetary value of international flows associated with transactions in goods, services, income flows, and unilateral transfers. Services include transfers of goods under military programs, such as U.S. military aid.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Understand

58. If the U.S. faces a balance-of-payments deficit on the current account, it must run a surplus on a. the official settlements account. b. the capital and financial account. c. either the official settlements account or the capital and financial account. d. both the official settlements account and the capital account. ANSWER: c FEEDBACK: a. b. c. If the current account registers a deficit, either the official settlements account or the capital and financial account must register a surplus, or net capital or financial inflow.

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a. merchandise exports exceed its merchandise imports. b. merchandise imports exceed its merchandise exports. c. goods and services exports exceed its goods and services imports. d. goods and services imports exceed its goods and services exports. ANSWER: b FEEDBACK: a. b. A balance of trade deficit results when merchandise imports exceed merchandise exports.

$800 billion $200 billion Page 596

Foreign assets in the U.S. Foreign official assets Foreign private assets

$600 billion $300 billion

62. Consider Table 10.2. The U.S. balance of international indebtedness suggests that the United States is a net a. debtor. b. creditor. c. spender. d. exporter. ANSWER: b FEEDBACK: a. b. U.S.-owned assets abroad are $1,000 billion. Foreign-owned assets in the United States are $900 billion. The net international investment position is +$100 billion, which suggests that the United States is a net creditor.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 10.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance of International Indebtedness KEYWORDS: BLOOM'S: Apply 63. Credit (+) items in the balance-of-payments correspond to anything that a. involves receipts from foreigners. b. involves payments to foreigners. c. decreases the domestic money supply. d. increases the demand for foreign exchange. ANSWER: a FEEDBACK: a. A credit transaction is one that results in a receipt of a payment from foreigners. b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Double Entry Accounting Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Remember

64. Debt (-) items in the balance-of-payments correspond to anything that a. involves receipts from foreigners. b. involves payments to foreigners. c. increases the domestic money supply. d. decreases the demand for foreign exchange. ANSWER: b FEEDBACK: a. b. A debit transaction is one that leads to a payment to foreigners. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Double Entry Accounting KEYWORDS: BLOOM'S: Remember 65. When all of the debit or credit items in the balance-of-payments are combined, a. merchandise imports equal merchandise exports. b. capital imports equal capital exports. c. services exports equal services imports. d. the total surplus or deficit equals zero. ANSWER: d FEEDBACK: a. b. c. d. Owing to double-entry bookkeeping, a nation‘s balance-of-payments will always balance. The total surplus or deficit equals zero.

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c. payments for American services to foreigners. d. private gifts to foreign residents. ANSWER: d FEEDBACK: a. b. c. d. A debit transaction is one that leads to a payment to foreigners, such as private gifts to foreign residents.

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b. If a country realizes a deficit in its current account, it becomes a net demander of funds from the rest of the world.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does a Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Understand 69. Reducing a current account deficit requires a country to a. increase private saving relative to investment. b. increase private consumption relative to saving. c. increase private investment relative to consumption. d. increase private investment relative to saving. ANSWER: a FEEDBACK: a. Reducing a current account deficit requires a country to increase private saving relative to investment.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does a Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Analyze 70. Reducing a current account deficit requires a country to a. increase the government's deficit and increase private investment relative to saving. b. increase the government's deficit and decrease private investment relative to saving. c. decrease the government's deficit and increase private investment relative to saving. d. decrease the government's deficit and decrease private investment relative to saving. ANSWER: d FEEDBACK: a. b. c. d. Reducing a current account deficit requires a country to decrease the government's deficit and decrease private investment relative to saving. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does a Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Analyze 72. Concerning a country's business cycle, rapid growth of production and employment is commonly associated with a. large or growing trade deficits and current account deficits. b. large or growing trade deficits and current account surpluses. c. small or shrinking trade deficits and current account deficits. d. small or shrinking trade deficits and current account surpluses. ANSWER: a FEEDBACK: a. Concerning the business cycle, rapid growth of production and employment is commonly associated with large or growing trade and current account deficits.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

Page 601

NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does a Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Understand 73. Assuming there is a burden from a current account deficit, that burden would have the least impact on a country if the current account deficit is used to finance a. unemployment compensation benefits. b. Social Security benefits. c. expenditures on food and recreation. d. investment in plant and equipment. ANSWER: d FEEDBACK: a. b. c. d. When current account deficits reflect strong, profitable investment programs, they work to raise the rate of output and employment growth, not destroy jobs and production.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance What Does a Current Account Deficit (Surplus) Mean? BLOOM'S: Understand

75. Which of the following represents a problem with the SDR becoming a reserve currency? a. The SDR does not include the U.S. dollar. b. The SDR does not have an established settlement mechanism. c. The SDR gets too much of its value from the Chinese yuan. d. The SDR is only available to a small group of countries. ANSWER: b FEEDBACK: a. b. A problem with the SDR becoming a reserve currency is that it does not have an established settlement mechanism.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Dollar as the World‘s Reserve Currency KEYWORDS: BLOOM'S: Remember 76. Which of the following supports China’s argument for having the SDR become a reserve currency? a. China has a very limited financial stake in dollar-denominated financial assets. b. China runs a trade deficit with its largest trade partner. c. China converts surplus dollars into Japanese yen and uses them to buy Japanese government securities. d. None of these is correct. ANSWER: b FEEDBACK: a. b. The fact that China runs a trade deficit with its largest trade partner supports China‘s argument for having the SDR become a reserve currency.

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a. It is not fiat money. b. Its value is backed by gold. c. It is highly centralized. d. It is volatile. ANSWER: a FEEDBACK: a. A possible benefit of using a cryptocurrency like Bitcoin as a reserve currency is that it is not fiat money.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Dollar as the World‘s Reserve Currency KEYWORDS: BLOOM'S: Remember 78. Germany’s position as a ___________ is because it ________. a. net debtor, spends too much and saves too little b. net creditor, spends too much and saves too little c. net debtor, spends too little and saves too much d. net creditor, spends too little and saves too much ANSWER: d FEEDBACK: a. b. c. d. Germany‘s position as a net creditor is because it spends too little and saves too much.

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FEEDBACK:

a. Greece‘s position as a net debtor is because it spends too much and saves too little.

Amount (Billions of Dollars)

Allocation of SDRs Changes in U.S. assets abroad Statistical discrepancy Merchandise imports Payments on foreign assets in U.S. Remittances, pensions, transfers Travel and transportation receipts, net Military transactions, net Investment income, net Merchandise exports U.S. government grants (excluding military) Changes in foreign assets in the U.S. Other services, net Receipts on U.S. investments abroad Compensation of employees

10 100 -15 -400 -20 -60 30 -10 100 350 -20 190 80 30 -10

80. Refer to Table 10.3. The merchandise trade balance registered a deficit of $50 billion. a. True b. False ANSWER: True FEEDBACK: Correct The merchandise trade balance (exports + imports) registered a deficit of $50 billion ($350 - $400). Incorrect

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES: PREFACE NAME:

1 Challenging True / False False Table 10.3

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81. Refer to Table 10.3. The services balance registered a surplus of $100 billion. a. True b. False ANSWER: True FEEDBACK: Correct The services balance registered a surplus of $100 billion. Incorrect

82. Refer to Table 10.3. The goods and services balance registered a surplus of $50 billion. a. True b. False ANSWER: True FEEDBACK: Correct The goods and services balance (merchandise trade account + services) registered a surplus of $50 billion (-$50 billion + $100 billion). Incorrect

83. Refer to Table 10.3. The unilateral transfers balance registered a deficit of $40 billion. a. True Copyright Cengage Learning. Powered by Cognero.

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b. False ANSWER: FEEDBACK:

False Correct Incorrect Unilateral transfers are transfers of goods and services (gifts in kind) or financial assets (money gifts) between the United States and the rest of the world. U.S. government grants (excluding military) registered a deficit of $20 billion.

84. Refer to Table 10.3. The net exports component of the U.S. gross domestic product registered $-110 billion. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The net exports (exports - imports) component of the U.S. gross domestic product registered $-50 billion (($350 - $400).

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False PREFACE NAME: Table 10.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Understand 85. The balance-of-payments refers to the stock of trade and investment transactions that exists at a particular point in time. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The balance-of-payments is a record of a nation‘s economic transactions with all other nations for a given year.

POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Understand 86. Referring to the balance-of-payments statement, an economic transaction refers to the exchange of goods, services, and assets between residents of one country and those abroad. a. True b. False ANSWER: True FEEDBACK: Correct The balance-of-payments is a record of a nation‘s economic transactions with all other nations for a given year. Incorrect

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ANSWER: FEEDBACK:

False Correct Incorrect Owing to double-entry bookkeeping, a nation‘s balance-of-payments will always balance. It does not necessarily follow that any single subaccount or subaccounts of the statement must balance.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Understand 91. The goods and services account of the balance-of-payments shows the monetary value of international flows associated with transactions in goods, services, and unilateral transfers. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The goods and services account of the balance-of-payments shows the monetary value of international flows associated with transactions in goods and services.

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ANSWER: FEEDBACK:

True Correct

Exports and imports of services include a variety of items, including shipping, tourists, construction services, legal services, technical services, and the like.

Incorrect

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Easy True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Understand 96. The merchandise trade account on the balance-of-payments statement is defined the same way as net exports, which constitute part of the nation's gross domestic product. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The merchandise trade balance is the combination the exports and imports of goods. Net exports are defined as exports minus imports.

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ANSWER: FEEDBACK:

False Correct Incorrect Unilateral transfers include transfers of goods and services (gifts in kind) or financial assets (money gifts) between the United States and the rest of the world.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Understand 101. On the U.S. balance-of-payments statement, a capital inflow would occur if a Swiss resident purchases the securities of the U.S. government. a. True b. False ANSWER: True FEEDBACK: Correct A capital (financial) inflow can be likened to the export of goods and services. Incorrect

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Repayment of a loan by the Mexican firm is registered as an inflow. Incorrect

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106. If the current account of the balance-of-payments registers a deficit, the capital account registers a surplus, and vice versa. a. True b. False ANSWER: True FEEDBACK: Correct If the current account of the balance-of-payments registers a deficit, the capital account registers a surplus, and vice versa. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does a Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Understand 109. Concerning the balance-of-payments, a current account deficit results in a worsening of a country's net foreign investment position. a. True b. False ANSWER: True FEEDBACK: Correct A current account deficit results in a worsening of a country's net foreign investment position. Incorrect

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b. False ANSWER: FEEDBACK:

True Correct

Because total debits must equal total credits in principle, statisticians insert a residual to make them equal. This correcting entry is known as statistical discrepancy.

Incorrect

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TOPICS: KEYWORDS:

U.S. Balance-of-Payments BLOOM'S: Remember

114. The U.S. unilateral transfers balance has consistently registered a surplus in the past two decades. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The U.S. unilateral transfers balance has consistently registered a deficit in the past two decades.

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119. The net debtor status that the United States achieved in its balance of international indebtedness by the mid-1980s reflected the continuous current account surplus that the United States attained in its balance-of-payments during the 1970s. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The net debtor status that the United States achieved in its balance of international indebtedness by the mid-1980s reflected the continuous current account deficit.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Double Entry Accounting KEYWORDS: BLOOM'S: Understand 122. That German investors collect interest income on their holdings of U.S. Treasury bills constitutes a credit transaction on the U.S. balance-of-payments. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect A credit transaction is one that results in a receipt of a payment from foreigners.

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FEEDBACK:

Correct

To reduce a current account deficit, a country should either decrease the budget deficit of its government or reduce investment spending relative to saving.

Incorrect

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KEYWORDS:

BLOOM'S: Understand

127. For the United States, a consequence of its current account deficit is a growing foreign ownership of the capital stock of the United States and a rising fraction of U.S. income that must be diverted abroad in the form of interest and dividends to foreigners. a. True b. False ANSWER: True FEEDBACK: Correct A consequence of the U.S. current account deficit is a growing foreign ownership of the capital stock of the United States and a rising fraction of U.S. income that must be diverted abroad in the form of interest and dividends to foreigners. Incorrect

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Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Remember 130. For the first time since World War II, the United States became a net international creditor in the mid-1980s and has remained so ever since. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect By 1987, the United States had become a net international debtor and has maintained that position.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance of International Indebtedness KEYWORDS: BLOOM'S: Remember 131. Because the rest of the world has accepted dollars, the United States has faced virtually no (or minimal) constraints on its ability to realize current account deficits. a. True b. False ANSWER: True FEEDBACK: Correct Because the rest of the world has accepted dollars, the United States has faced virtually no (or minimal) constraints on its ability to realize current account deficits. Incorrect

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a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect If a country realizes a deficit in its current account, it becomes a net demander of funds from the rest of the world. If a country realizes a surplus in its current account, it becomes a net supplier of funds to the rest of the world. Thus, all countries of the world cannot simultaneously have balance-of-payments deficits.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does a Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Understand 133. The official reserve assets of the United States consist of special drawing rights (SDRs), foreign currencies, gold, and drawings at the International Monetary Fund (IMF). a. True b. False ANSWER: True FEEDBACK: Correct The official reserve assets of the United States include gold, foreign currencies, special drawing rights, and reserve position in the IMF. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Remember 134. Because the United States dollar is the main reserve currency of the world, the U.S. government must pay higher interest rates to foreigners who purchase its securities. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Because the United States dollar is the main reserve currency of the world, the U.S. government pays lower interest rates to foreigners who purchase its securities.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Easy True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC10: - The role of government TOPICS: The Dollar as the World‘s Reserve Currency KEYWORDS: BLOOM'S: Remember 135. Americans would have to pay more for imported goods if the U.S. dollar were to lose its position as the main reserve currency of the world and depreciate because foreigners no longer bought dollars as they did when the dollar served as the reserve currency. a. True b. False ANSWER: True FEEDBACK: Correct Americans would have to pay more for imported goods if the U.S. dollar were to lose its position as the main reserve currency of the world and the dollar were to depreciate. Incorrect

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ANSWER: FEEDBACK:

True Correct

In 2009, officials at the central bank of China proposed an overhaul of the international monetary system in which the SDR would eventually replace the dollar as the world‘s main reserve currency

Incorrect

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140. In recent years, most economists have argued that the U.S. dollar should be replaced by either the British pound or the Japanese yen as the world’s main reserve currency. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect In 2009, officials at the central bank of China proposed an overhaul of the international monetary system in which the special drawing right would eventually replace the dollar as the world‘s main reserve currency.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: The Dollar as the World‘s Reserve Currency KEYWORDS: BLOOM'S: Remember 141. What are the components of the current account of the balance-of-payments? The current account includes transactions in goods and services, income flows, and ANSWER: unilateral transfers. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance-of-Payments Structure KEYWORDS: BLOOM'S: Understand 142. Concerning the balance of international indebtedness, when is a country a net creditor or a net debtor? A country is a net creditor when its claims on foreign nations exceed foreign claims on it. ANSWER: The nation is a net debtor when foreign nations' claims on it exceed its claims on foreign nations. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance of International Indebtedness KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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143. How do we measure the international investment position of the United States at any point in time? How did the U.S. become a net debtor nation so rapidly? The international investment position of the United States is measured by the monetary ANSWER: value of U.S. assets abroad versus foreign assets in the United States. Unlike the balanceof-payments, which is a flow concept, the balance of international indebtedness is a stock concept. The reason for the U.S. becoming a net debtor nation is that foreign investors have placed more funds in the United States than the U.S. residents have invested abroad. The United States has been considered attractive to foreign investors. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Balance of International Indebtedness KEYWORDS: BLOOM'S: Understand 144. What does a current account deficit mean? When a country realizes a deficit in its current account, it has an excess of imports over ANSWER: exports of goods, services, income, and unilateral transfers. This leads to an increase in net foreign claims upon the home country. The home country becomes a net demander of funds from abroad, the demand being met through borrowing from other countries or liquidating foreign assets. The result is a worsening of the home country's net foreign investment position. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Does a Current Account Deficit (Surplus) Mean? KEYWORDS: BLOOM'S: Understand

Chapter 11: Foreign Exchange 1. Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days. You can remove the risk of loss due to a devaluation of the pound sterling by a. selling sterling in the forward market for 60-day delivery.

b. buying sterling now and selling it at the end of 60 days. c. selling the dollar equivalent in the forward market for 60-day delivery. d. keeping the sterling in Britain after it is delivered to you. ANSWER: a FEEDBACK: a. The risk of loss due to a devaluation of the pound sterling can be removed by selling sterling in the forward market for 60-day delivery. Copyright Cengage Learning. Powered by Cognero.

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c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Understand 3. Concerning the covering of exchange market risks, assuming that a depreciation of the domestic currency is anticipated, one can say that there is an incentive for a. exporters to rush to cover their future needs. b. importers to rush to cover their future needs. c. both exporters and importers to rush to cover their future needs. d. neither exporters nor importers to rush to cover their future needs. ANSWER: b FEEDBACK: a. b. An expected depreciation of the domestic currency is an incentive for exporters to cover their future needs as U.S. exporting firms will find it easier to sell goods to foreign markets.

c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Understand 4. When short-term interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a(n) a. increase in the spot price of the yen. b. increase in the forward price of the dollar. c. sale of dollars in the forward market. d. purchase of yen in the spot market. ANSWER: c Interest arbitrage refers to the process of moving funds into foreign currencies to take RATIONALE: advantage of higher investment returns abroad. Covered interest arbitrage involves two basic steps: 1. An investor exchanges yen for dollars at the current spot rate and invests the dollars at the higher interest rate. 2. At the same time, the investor contracts in the forward market to sell the dollars that will be received as the proceeds from the investment, with a delivery date to coincide with the maturity of the investment. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interest Arbitrage, Currency Risk, and Hedging KEYWORDS: BLOOM'S: Understand 5. An appreciation in the value of the U.S. dollar against the British pound would tend to a. discourage the British from buying American goods. b. discourage Americans from buying British goods. c. increase the number of dollars that could be bought with a pound. d. discourage U.S. tourists from traveling to Britain. ANSWER: a FEEDBACK: a. An appreciation in the value of the U.S. dollar against the British pound would tend to discourage the British from buying American goods and U.S. exporting firms find it harder to compete in foreign markets.

b. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Foreign-Exchange Market KEYWORDS: BLOOM'S: Understand 7. A depreciation of the dollar refers to a. a fall in the dollar price of foreign currency. b. an increase in the dollar price of foreign currency. c. a loss of foreign-exchange reserves for the U.S. d. an intervention in the international money market. ANSWER: b FEEDBACK: a. b. Currency depreciation means that it takes more units of the dollar to purchase a unit of some foreign currency.

c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Remember 8. If Canadian speculators believed the Swiss franc was going to appreciate against the U.S. dollar, they would a. purchase Canadian dollars. b. purchase U.S. dollars. c. purchase Swiss francs. d. sell Swiss francs. ANSWER: c FEEDBACK: a. b. c. Profits in the foreign-exchange market can be earned by initially buying a currency at a low price and then selling it at a higher price later on. Canadian speculators would purchase Swiss francs.

1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forward and Futures Markets KEYWORDS: BLOOM'S: Understand 10. The exchange rate is kept the same in all parts of the market by a. forward cover. b. hedging. c. exchange speculation. d. exchange arbitrage. ANSWER: d FEEDBACK: a. b. c. d. Exchange arbitrage brings about an identical price for the same currency in different locations and thus results in one market.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Remember 11. If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days, you could remove the risk of loss due to the appreciation of the pound by a. buying dollars in the forward market for delivery in 30 days. b. selling dollars in the forward market for delivery in 30 days. c. buying the pounds in the forward market for delivery in 30 days. d. selling the pounds in the forward market for delivery in 30 days. ANSWER: c FEEDBACK: a. b. c. By buying the pounds in the forward market for delivery in 30 days, you could remove the risk of loss if the pound appreciates.

d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Understand 12. An increase in the dollar price of other currencies tends to cause a. U.S. goods to be cheaper than foreign goods. b. U.S. goods to be more expensive than foreign goods. c. foreign goods to be more expensive to residents of foreign nations. d. foreign goods to be cheaper to residents of the United States. ANSWER: a FEEDBACK: a. A depreciation of the dollar tends to cause U.S. goods to be cheaper than foreign goods.

Page 636

TOPICS: KEYWORDS:

Exchange-Rate Determination BLOOM'S: Understand

14. A U.S. export company scheduled to receive 1 million pounds six months from today can hedge its foreign-exchange risk by a. buying 1 million pounds in the forward market today for delivery in six months. b. buying 1 million pounds in the spot market for delivery in six months. c. selling 1 million pounds in the spot market for delivery in six months. d. selling 1 million pounds in the forward market today for delivery in six months. ANSWER: d FEEDBACK: a. b. c. d. A U.S. export company scheduled to receive 1 million pounds six months from today can hedge its foreign-exchange risk by selling 1 million pounds in the forward market today for delivery in six months.

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KEYWORDS:

BLOOM'S: Understand

16. Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and a. reduce the demand for dollars. b. increase the demand for dollars. c. reduce the supply of dollars. d. increase the supply of dollars. ANSWER: b FEEDBACK: a. b. Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain. The countries have to pay in dollars for the grain, increasing the demand for dollars.

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18. Suppose that a Swiss watch that costs 400 francs in Switzerland costs $200 in the United States. The exchange rate between the franc and the dollar is a. 2 francs per dollar. b. 1 franc per dollar. c. $2 per franc. d. $3 per franc. ANSWER: a FEEDBACK: a. The exchange rate between the franc and the dollar is 400 francs/$200 = 2 francs per dollar.

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a. America's demand for Swiss merchandise rises. b. America's demand for Swiss merchandise falls. c. Switzerland's demand for American merchandise rises. d. Switzerland's demand for American merchandise falls. ANSWER: c FEEDBACK: a. b. c. The supply of foreign exchange refers to the amount of foreign exchange that will be offered to the market at various exchange rates, all other factors held constant. The supply of francs slopes upward because as the dollar price of the franc rises Switzerland's demand for American merchandise rises.

Page 640

b. a decrease in the demand for yen. c. an increase in the supply of yen to Canada. d. a decrease in the supply of yen to Canada. ANSWER: a FEEDBACK: a. An increase in the Canadian demand for Japanese computers results in an increase in the demand for yen.

Britain (Pound) 30-day Forward 60-day Forward 180-day Forward

U.S. Dollar Equivalent

Currency Per U.S. Dollar

Tuesday

Monday

Tuesday

Monday

1.4270 1.4211 1.4090 1.3930

1.4390 1.4333 1.4220 1.4070

0.7008 0.7037 0.7097 0.7179

0.6949 0.6977 0.7032 0.7107

23. Consider Table 11.1. If one were to buy pounds for immediate delivery, on Tuesday the dollar cost of each pound would be a. $0.7008. b. $0.7037. c. $1.4211. d. $1.4270. ANSWER: d FEEDBACK: a. b. c. d. £1 = $1.4270. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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PREFACE NAME: Table 11.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Apply

24. Consider Table 11.1. If one were to sell dollars for immediate delivery, on Tuesday the pound cost of each dollar would be a. 0.7008 pounds per dollar. b. 0.7037 pounds per dollar. c. 1.4270 pounds per dollar. d. 1.4211 pounds per dollar. ANSWER: a FEEDBACK: a. $1 = 1/$1.4270 = £0.7008. b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 11.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Apply

25. Consider Table 11.1. Comparing Tuesday to the previous Monday, by Tuesday the dollar had a. depreciated against the pound. b. appreciated against the pound. c. not changed against the pound. d. depreciated against the peso. ANSWER: b Monday: £1 = $1.4390. RATIONALE: Tuesday: £1 = $1.4270. When the dollar price of pounds decreases, the value of the dollar has appreciated relative to the pound. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 11.1 Copyright Cengage Learning. Powered by Cognero.

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26. Consider Table 11.1. Concerning the Tuesday quotations: compared to the cost of buying 100 pounds on the spot market, if 100 pounds were bought for future delivery, then in 180 days the dollar cost of the pounds would be a. $3.40 higher. b. $3.40 lower. c. $6.80 higher. d. $6.80 lower. ANSWER: b Spot rate on Tuesday: 100 x $1.4270 = $142.70. RATIONALE: 180-day forward rate: 100 x 1.3930 = $139.30. In 180 days, the dollar cost of the pounds would be $142.70 - $139.30 = $3.40 lower. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 11.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Apply 27. Which method of trading currencies involves the conversion of one currency into another at one point in time with an agreement to reconvert it back to the original currency at some point in the future? a. forward transaction b. futures transaction c. spot transaction d. swap transaction ANSWER: d FEEDBACK: a. b. c. d. A currency swap is the conversion of one currency to another currency at one point in time, with an agreement to convert it to the original currency at a specified time in the future.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Types of Foreign-Exchange Transactions BLOOM'S: Remember

28. Most foreign-exchange trading occurs between banks and a. national governments. b. other banks. c. corporations. d. household investors. ANSWER: b FEEDBACK: a. b. Most foreign-exchange trading is in the interbank market. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Foreign-Exchange Transactions KEYWORDS: BLOOM'S: Remember 29. The most important (in terms of dollar value) type of foreign exchange transaction by U.S. banks is the a. spot transaction. b. forward transaction. c. swap transaction. d. option transaction. ANSWER: a FEEDBACK: a. A spot transaction is one in which a trader can make an outright purchase or sale of a currency now, as in ―on the spot.‖

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foreign currency. a. offer rate b. bid rate c. spread rate d. transaction rate ANSWER: FEEDBACK:

b a. b. The bid rate refers to the price that the bank is willing to pay for a unit of foreign currency.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interbank Trading KEYWORDS: BLOOM'S: Understand 32. In the interbank market for foreign exchange, the ____ refers to the difference between the offer rate and the bid rate. a. cross rate b. option Copyright Cengage Learning. Powered by Cognero.

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c. arbitrage d. spread ANSWER: FEEDBACK:

d a. b. c. d. The difference between the bid and the offer rate is the spread.

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ANSWER: FEEDBACK:

d a. b. c. d. Cross-exchange rate: $ value of pound /$ value of Swiss franc = $2 / $0.50 = 4 francs per pound.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Analyze Exhibit 11.1 Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485. 35. Refer to Exhibit 11.1. By investing in U.K. treasury bills rather than U.S. treasury bills, and NOT covering exchange rate risk, U.S. investors earn an extra return of a. 4 percent per year or 1 percent for the 6 months. b. 4 percent per year or 2 percent for the 6 months. c. 2 percent per year or 0.5 percent for the 6 months. d. 2 percent per year or 1 percent for the 6 months. ANSWER: b An investor exchanges dollars for pounds at the current spot rate and invests the pounds at RATIONALE: the higher interest rate. By investing in U.K. treasury bills rather than U.S. treasury bills, U.S. investors earn an extra return of 4 percent per year (8% - 4%) or 2 % for the 6 months. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Exhibit 11.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interest Arbitrage, Currency Risk, and Hedging KEYWORDS: BLOOM'S: Analyze

36. Refer to Exhibit 11.1. If U.S. investors cover their exchange rate risk, then the extra return for the six months on the U.K. treasury bills is Copyright Cengage Learning. Powered by Cognero.

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a. 1.0 percent. b. 1.5 percent. c. 2.0 percent. d. 2.5 percent. ANSWER: RATIONALE:

a Covered interest arbitrage involves two steps: 1. An investor exchanges dollars for pounds at the current spot rate of $1.50 and invests the pounds at the higher interest rate of 8% (4% for six months). 2. At the same time, the investor contracts in the forward market to sell the pounds that will be received as the proceeds from the investment, with a six-month delivery date to coincide with the maturity of the investment at $1.485.The difference between the spot rate and the forward rate earns an extra 1% [(($1.50-$1.485)/$1.485) x 100]. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Exhibit 11.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interest Arbitrage, Currency Risk, and Hedging KEYWORDS: BLOOM'S: Analyze

37. Refer to Exhibit 11.1. If the price of the six-month forward pound were to ____, then U.S. investors would no longer earn a return through covered interest arbitrage. a. rise to $1.56 b. rise to $1.52 c. fall to $1.47 d. fall to $1.45 ANSWER: a FEEDBACK: a. If the price of the six-month forward pound were to rise to $1.56, then U.S. investors would lose 4% in the forward market, which would wipe out the gain of 4% extra interest.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Exhibit 11.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interest Arbitrage, Currency Risk, and Hedging KEYWORDS: BLOOM'S: Analyze Copyright Cengage Learning. Powered by Cognero.

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38. Assume that you are the Chase Manhattan Bank of the United States, with 1 million Swiss francs in your vault that you need to use in 30 days. Moreover, you need 500,000 British pounds for the next 30 days. You arrange to loan your francs to Barclays Bank of London for 30 days in exchange for 500,000 pounds today and reverse the transaction at the end of 30 days. You have just arranged a a. forward contract. b. futures contract. c. spot contract. d. currency swap. ANSWER: d FEEDBACK: a. b. c. d. A currency swap is the conversion of one currency to another currency at one point in time, with an agreement to convert it to the original currency at a specified time in the future.

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39. Refer to Figure 11.1. At the equilibrium exchange rate of ____ per franc, ____ francs will be purchased at a total dollar cost of ____. a. $0.50, 5 million, $2.5 million b. $0.50, 5 million, $1.5 million c. $0.70, 3 million, $2.1 million d. $0.70, 7 million, $4.9 million ANSWER: a FEEDBACK: a. At the equilibrium exchange rate of $0.50 per franc, 5 million francs will be purchased at a total dollar cost of $2.5 million (5 million x $0.50).

Page 650

TOPICS: KEYWORDS:

Exchange-Rate Determination BLOOM'S: Analyze

40. Refer to Figure 11.1. Suppose the exchange rate is $0.70 per franc. At this exchange rate, there is an ____ of francs, which leads to a ____ in the dollar price of the franc, a(n) ____ in the quantity of francs supplied, and a(n) ____ in the quantity of francs demanded. a. excess demand, rise, increase, decrease b. excess demand, rise, decrease, increase c. excess supply, fall, decrease, increase d. excess supply, fall, increase, decrease ANSWER: c FEEDBACK: a. b. c. At the exchange rate of $0.70 per franc, there is an excess supply of francs, which leads to a fall in the dollar price of the franc, a decrease in the quantity of francs supplied, and an increase in the quantity of francs demanded.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 11.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Analyze

41. Refer to Figure 11.1. Suppose the exchange rate is $0.30 per franc. At this exchange rate, there is an ____ of francs, which leads to a ____ in the dollar price of the franc, a(n) ____ in the quantity of francs supplied, and a(n) ____ in the quantity of francs demanded. a. excess demand, rise, increase, decrease b. excess demand, rise, decrease, increase c. excess supply, fall, decrease, increase d. excess supply, fall, increase, decrease ANSWER: a FEEDBACK: a. At the exchange rate is $0.30 per franc, there is an excess demand of francs, which leads to a rise in the dollar price of the franc, an increase in the quantity of francs supplied, and a decrease in the quantity of francs demanded.

b. c. d. POINTS: DIFFICULTY:

1 Challenging

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 11.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: 0 KEYWORDS: BLOOM'S: Analyze

42. Refer to Figure 11.1. Suppose the exchange rate is $.70 per franc. Free-market forces would lead to a(n) ____ of the dollar against the franc and a(n) ____ in U.S. international competitiveness. a. depreciation, improvement b. depreciation, worsening c. appreciation, improvement d. appreciation, worsening ANSWER: d FEEDBACK: a. b. c. d. If the exchange rate is $.70 per franc, free-market forces would lead to an appreciation of the dollar against the franc and a worsening in U.S. international competitiveness.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 11.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Analyze

43. Refer to Figure 11.1. Suppose the exchange rate is $0.30 per franc. Free-market forces would lead to a(n) ____ of the dollar against the franc and a(n) ____ in U.S. international competitiveness. a. depreciation, improvement b. depreciation, worsening c. appreciation, improvement d. appreciation, worsening ANSWER: a FEEDBACK: a. At the exchange rate is $0.30 per franc, free-market forces would lead to a depreciation of the dollar against the franc and an improvement in U.S. international competitiveness. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 11.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Analyze The figure below illustrates the market for Swiss francs in a world of market-determined exchange rates. Assume the equilibrium exchange rate is $0.5 per franc, given by the intersection of schedules S0 and D0. Figure 11.2. Market for Francs

44. Refer to Figure 11.2. A shift in the demand for francs from D0 to D1, or a shift in the supply of francs from S0 to S2, would result in a(n) a. depreciation in the dollar against the franc. Copyright Cengage Learning. Powered by Cognero.

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b. appreciation in the dollar against the franc. c. unchanged dollar/franc exchange rate. d. depreciation in the franc against the dollar. ANSWER: a FEEDBACK: a. A shift in the demand for francs from D0 to D1, or a shift in the supply of francs from S0 to S2, would result in a depreciation in the dollar against the franc.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 11.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Analyze

45. Refer to Figure 11.2. A shift in the demand for francs from D0 to D2, or a shift in the supply of francs from S0 to S1, would result in a(n) a. depreciation in the dollar against the franc. b. appreciation in the dollar against the franc. c. no change in the dollar/franc exchange rate. d. appreciation in the franc against the dollar. ANSWER: b FEEDBACK: a. b. A shift in the demand for francs from D0 to D2, or a shift in the supply of francs from S0 to S1, would result in an appreciation in the dollar against the franc.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 11.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Analyze 46. A(n) ____ is an arrangement by which two parties exchange one currency for another and agree that the exchange will be reversed at a stipulated date in the future. Copyright Cengage Learning. Powered by Cognero.

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a. arbitrage b. swap c. option d. hedge ANSWER: FEEDBACK:

b a. b. A currency swap is the conversion of one currency to another currency at one point in time, with an agreement to convert it to the original currency at a specified time in the future.

Dollars per Pound

Quantity of Pounds Demanded

1,000 800 600 400 200

2.00 1.80 1.60 1.40 1.20

200 400 600 800 1,000

47. Refer to Table 11.2. The equilibrium exchange rate equals a. $1.20 per pound. b. $1.40 per pound. c. $1.60 per pound. d. $1.80 per pound. ANSWER: c FEEDBACK: a. b. c. The equilibrium exchange rate equals $1.60 per pound. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Challenging Multiple Choice False

Page 655

PREFACE NAME: Table 11.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Apply

48. Refer to Table 11.2. At the exchange rate of $1.40 per pound, there is an ____ for pounds. This imbalance causes ____ in the price of the pound, which leads to ____ in the quantity of pounds supplied and ____ in the quantity of pounds demanded. a. excess supply, a decrease, an increase, a decrease b. excess supply, an increase, a decrease, an increase c. excess demand, an increase, an increase, a decrease d. excess demand, an increase, a decrease, an increase ANSWER: c FEEDBACK: a. b. c. At the exchange rate of $1.40 per pound, there is an excess demand for pounds. This imbalance causes an increase in the price of the pound, which leads to an increase in the quantity of pounds supplied and a decrease in the quantity of pounds demanded.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 11.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Understand

49. Refer to Table 11.2. At the exchange rate of $1.80 per pound, there is an ____ for pounds. This imbalance causes ____ in the price of the pound, which leads to ____ in the quantity of pounds supplied and ____ in the quantity of pounds demanded. a. excess supply, a decrease, a decrease, an increase b. excess supply, an increase, a decrease, an increase c. excess demand, an increase, an increase, a decrease d. excess demand, an increase, a decrease, an increase ANSWER: a FEEDBACK: a. At the exchange rate of $1.80 per pound, there is an excess supply for pounds. This imbalance causes a decrease in the price of the pound, which leads to a decrease in the quantity of pounds supplied and an increase in the quantity of pounds demanded. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 11.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Understand Table 11.3. Key Currency Cross Rates

Canada Japan Mexico Switzerland U.K. Euro U.S.

Dollar

Euro

Pound

Swiss Franc

1.5326 124.48 9.7410 1.5655 0.68540 1.06430 ..........

1.4400 116.96 9.1526 1.4709 0.6440 .......... 0.9396

2.2362 181.63 14.213 2.2842 .......... 1.5529 1.4591

0.9790 79.515 6.2223 .......... 0.4378 0.67984 0.63877

50. Referring to Table 11.3, the cross-exchange rate between the euro and Swiss franc is approximately a. .68 euros per franc. b. .68 francs per euro. c. .64 euros per franc. d. .64 francs per euro. ANSWER: a FEEDBACK: a. Cross-exchange rate: $ value of Swiss franc/$ value of euro = $0.63877$0.9396 = 0.68 euros per franc.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 11.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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51. Referring to Table 11.3, the yen cost of purchasing 100 British pounds is roughly a. 18,000 yen. b. 19,000 yen. c. 20,000 yen. d. 21,000 yen. ANSWER: a FEEDBACK: a. Yen cost of purchasing 100 British pounds = £100 x 181.63 = 18,163 yen, or approximately 18,000 yen.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 11.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Apply Table 11.4. Forward Exchange Rates U.S. Dollar Equivalent

Switzerland (Franc) 30-day forward 90-day forward 180-day forward

Wednesday

Tuesday

0.6598 0.6592 0.6585 0.6577

.6590 .6585 .6578 .6572

52. Refer to Table 11.4. On Wednesday, the 30-day forward franc was selling at a a. 1 percent premium per annum against the dollar. b. 2 percent premium per annum against the dollar. c. 1 percent discount per annum against the dollar. d. 2 percent discount per annum against the dollar. ANSWER: c On Wednesday, the 30-day forward franc was selling at a 1 percent discount per annum RATIONALE: against the dollar: [(0.6592-0.6598)/0.6598] x 12/1 x 100 = -1.09% POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 11.4 Copyright Cengage Learning. Powered by Cognero.

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53. Refer to Table 11.4. On Wednesday, the 90-day forward franc was selling at a a. 0.8 percent premium per annum against the dollar. b. 1.6 percent premium per annum against the dollar. c. 0.8 percent discount per annum against the dollar. d. 1.6 percent discount per annum against the dollar. ANSWER: c On Wednesday, the 90-day forward franc was selling at a 0.8 percent discount per annum RATIONALE: against the dollar: [(0.6585-0.6598)/0.6598] x 12/3 x 100 = -0.788% POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 11.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Understand

54. Refer to Table 11.4. On Wednesday, the 180-day forward franc was selling at a a. 0.6 percent premium per annum against the dollar. b. 1.6 percent premium per annum against the dollar. c. 0.6 percent discount per annum against the dollar. d. 1.6 percent discount per annum against the dollar. ANSWER: c On Wednesday, the 180-day forward franc was selling at a 0.6 percent discount per annum RATIONALE: against the dollar: [(0.6577-0.6598)/0.6598] x 12/6 x 100 = -0.6365% POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 11.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates BLOOM'S: Understand

55. Refer to Table 11.4. Comparing the franc's forward rates against the franc's spot rate, the exchange market's consensus is that over the period of a forward contract, the franc's spot rate will a. depreciate against the dollar. b. appreciate against the dollar. c. remain constant against the dollar. d. remain constant against the euro. ANSWER: a FEEDBACK: a. Comparing the franc's forward rates against the franc's spot rate, the exchange market's consensus is that over the period of a forward contract, the franc's spot rate will depreciate against the dollar.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 11.4 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Understand 56. The offer rate a. is the price at which the bank is willing to sell a unit of foreign currency. b. is the price that the bank is willing to pay for a unit of foreign currency. c. is synonymous with the spread rate. d. is synonymous with the exchange rate. ANSWER: a FEEDBACK: a. The offer rate is the price at which the bank is willing to sell a unit of foreign currency.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interbank Trading KEYWORDS: BLOOM'S: Understand 57. When the dollar depreciates, a. U.S. exporters tend to sell more goods in foreign markets. b. U.S. consumers see a lower price on foreign goods. c. More foreign tourists can afford to visit the United States. d. U.S. inflation is low. ANSWER: a FEEDBACK: a. When the dollar depreciates, U.S. exporters tend to sell more goods in foreign markets as the price of U.S. exports decline.

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KEYWORDS:

BLOOM'S: Understand

Figure 11.3 The Market for the Euro

59. Refer to Figure 11.3. If the supply curve is represented by S0, then the equilibrium exchange rate is a. $1.20. b. $1.00. c. $0.80. d. $0.60. ANSWER: b FEEDBACK: a. b. If the supply curve is represented by S0, then the equilibrium exchange rate is $1.00.

c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 11.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Analyze

60. Refer to Figure 11.3. If the supply curve shifts from S2 to S1, then a. the dollar has depreciated relative to the euro. b. the dollar has appreciated relative to the euro. c. the euro has depreciated relative to the dollar. d. U.S. consumers will be inclined to buy more European goods. ANSWER: a FEEDBACK: a. If the supply curve shifts from S2 to S1, then the dollar has depreciated relative to the euro.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 11.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Analyze 61. The nominal exchange rate is the a. rate at which stocks and bonds may be exchanged for currency. b. the rate at which domestic bank deposits and foreign bank deposits are exchanged. c. the price of one country's currency in terms of another country's currency. d. rate of return on Treasury bills, notes, and bonds. ANSWER: c FEEDBACK: a. b. c. The nominal exchange rate is the price of one country's currency in terms of another country's currency. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Remember 62. The real exchange rate differs from the nominal exchange rate in that the real exchange rate a. does not account for the purchasing power of the currency. b. adjusts the nominal exchange rate for interest rate differentials among countries. c. is fixed, while the nominal exchange rate is flexible. d. embodies the changes in price levels of countries in its calculation. ANSWER: d FEEDBACK: a. b. c. d. The real exchange rate is the nominal exchange rate adjusted for relative price levels.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Understand 63. When the real exchange rate of Japan's yen appreciates, a. the yen's nominal exchange rate must remain constant. b. the yen's nominal exchange rate must also appreciate. c. the yen's nominal exchange rate must depreciate. d. Japanese goods are less competitive on international markets. ANSWER: d FEEDBACK: a. b. c. d. The real exchange rate is the nominal exchange rate adjusted for relative price levels. When the real exchange rate of Japan's yen appreciates, Japanese goods are less competitive on international markets.

POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Analyze 64. When the real exchange rate of the Japanese yen depreciates, a. the yen's nominal exchange rate must also depreciate. b. the yen's nominal exchange rate must remain constant. c. the yen will trade for more units of a foreign currency. d. the yen will trade for fewer units of a foreign currency. ANSWER: d FEEDBACK: a. b. c. d. The real exchange rate is the nominal exchange rate adjusted for relative price levels. When the real exchange rate of the Japanese yen depreciates, the yen will trade for fewer units of a foreign currency.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Apply 65. All of the following are main centers for foreign-exchange trading, except a. Tokyo. b. London. c. Edmonton. d. New York. ANSWER: c FEEDBACK: a. b. c. Three of the world‘s largest foreign- exchange markets are located in New York, Tokyo, and London.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Foreign-Exchange Market BLOOM'S: Remember

66. Throughout the foreign-exchange market, trading in currencies a. occurs at any hour of the day or night. b. occurs at prices established by the U.S. and British governments. c. is conducted on centralized trading floors in Paris and Hong Kong. d. is restricted to the hours between 1 P.M and 3 P.M., Eastern Time Zone. ANSWER: a FEEDBACK: a. In the foreign-exchange market, currencies are traded around the clock and throughout the world.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Foreign-Exchange Market KEYWORDS: BLOOM'S: Remember 67. Concerning the spot market for foreign-exchange transactions, a. currencies are bought and sold for delivery at a particular date in the future. b. currencies are traded for immediate delivery. c. currency exchange rates are set by government regulatory agencies. d. currency exchange rates are set by central banks. ANSWER: b FEEDBACK: a. b. Currencies are traded for immediate delivery in the spot market for foreignexchange transactions.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forward and Futures Market KEYWORDS: BLOOM'S: Remember 68. Concerning foreign-exchange trading, bank purchases from and sales to their customers are classified as retail transactions when the amount involved Copyright Cengage Learning. Powered by Cognero.

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a. is less than 100,000 units of currency. b. is less than 500,000 units of currency. c. is less than 1 million units of currency. d. is greater than 1 million units of currency. ANSWER: c FEEDBACK: a. b. c. Bank purchases from and sales to their customers are classified as retail transactions when the amount involved is less than 1 million currency units.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interbank Trading KEYWORDS: BLOOM'S: Remember 70. In recent years, the largest amount of foreign-exchange trading has involved a. foreign-exchange swaps and spot transactions. b. spot transactions and forward transactions. c. forward transactions and foreign-exchange swaps. d. foreign-exchange options and spot transactions. ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. Foreign-exchange swaps and spot-market transactions are the two most important types of foreign-exchange transactions.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Foreign-Exchange Transactions KEYWORDS: BLOOM'S: Remember 71. In recent years, the smallest amount of foreign-exchange trading has involved a. spot transactions. b. forward transactions. c. foreign-exchange options. d. foreign-exchange swaps. ANSWER: b FEEDBACK: a. b. The smallest amount of foreign-exchange trading has involved forward transactions.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Foreign-Exchange Transactions KEYWORDS: BLOOM'S: Remember 72. Concerning foreign-exchange trading, which of the following characterizes a forward contract? a. It is an agreement between a holder and a writer. b. Its contract size can be tailored to the needs of the exporter, importer, and so on. c. Its date of delivery is non-negotiable. d. It does not obligate a person to carry out a transaction if the price has changed. ANSWER: b FEEDBACK: a. b. Forward contracts are ―over-the-counter,‖ bilateral contracts tailored to the needs of two parties.

c. d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forward and Futures Market KEYWORDS: BLOOM'S: Understand 73. Concerning foreign-exchange trading, a "forward contract" a. has no defined expiration date at which settlement must occur. b. has contract costs based on the brokerage fees for sell and buy orders. c. is issued by a major commercial bank, like Citibank or Barclays. d. is traded on IMM’s market floor. ANSWER: c FEEDBACK: a. b. c. Forward contracts are executed between banks or between a bank and a customer.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forward and Futures Markets KEYWORDS: BLOOM'S: Understand 74. Concerning foreign-exchange trading, a futures contract is characterized by which of the following? a. The size of the contract is standardized in round lots. b. The contract's costs are based on bid/offer spread. c. Trading happens over the counter by telephone. d. The date of delivery is negotiable. ANSWER: a FEEDBACK: a. A futures contract is characterized by the size of the contract, which is standardized in round lots.

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TOPICS: KEYWORDS:

Forward and Futures Markets BLOOM'S: Understand

75. A call option provides an options holder a. the obligation to buy foreign currency at a specific price. b. the obligation to sell foreign currency at a specific price. c. the right to buy foreign currency at a specific price. d. the right to sell foreign currency at a specific price. ANSWER: c FEEDBACK: a. b. c. A call option gives the holder the right to buy foreign currency at a specified price.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Foreign Currency Options KEYWORDS: BLOOM'S: Remember 76. A put option provides an options holder a. the obligation to buy foreign currency at a specific price. b. the obligation to sell foreign currency at a specific price. c. the right to buy foreign currency at a specific price. d. the right to sell foreign currency at a specific price. ANSWER: d FEEDBACK: a. b. c. d. A put option gives the holder the right to sell foreign currency at a specified price.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Foreign Currency Options KEYWORDS: BLOOM'S: Remember 77. The ______ is the price at which a foreign currency option can be exercised—that is, the price at which the foreign currency is bought or sold a. strike price Copyright Cengage Learning. Powered by Cognero.

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b. terms of trade c. rate of exchange d. exercise price ANSWER: FEEDBACK:

a a. The price at which the option can be exercised (the price at which the foreign currency is bought or sold) is called the strike price.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Foreign Currency Options KEYWORDS: BLOOM'S: Remember 78. The demand for foreign exchange results from transactions that appear on the a. credit side of a country's balance of payments statement. b. debit side of a country's balance of payments statement. c. both the credit side and the debit side of a country's balance of payments statement. d. neither the credit side nor the debit side of a country balance of payments statement. ANSWER: b The equilibrium rate of exchange in a free market is determined by the intersection of the RATIONALE: supply and demand schedules of foreign exchange. These schedules are derived from the credit and debit items in a nation’s balance of payments. The demand for foreign exchange corresponds to the debit items on a nation’s balance-ofpayments statement. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Remember 79. The supply for foreign exchange results from transactions that appear on the a. credit side of a country's balance of payments statement. b. debit side of a country's balance of payments statement. c. both the credit side and the debit side of a country's balance of payments statement. d. neither the credit side nor the debit side of a country balance of payments statement. ANSWER: a The equilibrium rate of exchange in a free market is determined by the intersection of the RATIONALE: Copyright Cengage Learning. Powered by Cognero.

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supply and demand schedules of foreign exchange. These schedules are derived from the credit and debit items in a nation’s balance of payments. The supply of foreign exchange corresponds to the credit items. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Remember The next five questions refer to the table below, which shows the supply and demand schedules of British pounds. Quantity of Pounds Supplied Dollars per Pound Quantity of Pounds Demanded 100 $2.50 20 80 2.00 40 60 1.50 60 40 1.00 80 20 0.50 100 80. In the table above, the equilibrium exchange rate is shown as a. $2.50 per pound. b. $2.00 per pound. c. $1.50 per pound. d. $1.00 per pound. ANSWER: c FEEDBACK: a. b. c. The equilibrium exchange rate is shown as $1.50 per pound. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Preface 1 NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Analyze

81. In the table above, if the exchange rate is equal to $2.00 per pound, then there is a ______, and the exchange rate will______. a. surplus of pounds, decrease b. surplus of pounds, increase Copyright Cengage Learning. Powered by Cognero.

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c. shortage of pounds, decrease d. shortage of pounds, increase ANSWER: a FEEDBACK: a. If the exchange rate is equal to $2.00 per pound, then there is a surplus of pounds, and the exchange rate will decrease.

82. In the table above, if the exchange rate is equal to $1.00 per pound, then there is a ______, and the exchange rate will______. a. surplus of pounds, decrease b. surplus of pounds, increase c. shortage of pounds, decrease d. shortage of pounds, increase ANSWER: d FEEDBACK: a. b. c. d. If the exchange rate is equal to $1.00 per pound, then there is a shortage of pounds, and the exchange rate will increase.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Preface 1 NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Analyze

83. In the table above, a change in the ______ will result in a movement along the supply schedule of pounds. a. dollar/pound exchange rate b. rate of interest in the United States Copyright Cengage Learning. Powered by Cognero.

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c. per-capita income of Americans d. level of technology in the United States ANSWER: a FEEDBACK: a. A change in the dollar/pound exchange rate will result in a movement along the supply schedule of pounds.

84. In the table above, a change in the ______ will result in a movement along the demand schedule for pounds. a. dollar/pound exchange rate b. rate of interest in the United States c. per-capita income of Americans d. level of technology in the United States ANSWER: a FEEDBACK: a. A change in the dollar/pound exchange rate will result in a movement along the demand schedule for pounds.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Preface 1 NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Analyze 85. The exchange rate is the price at which the ______ of Switzerland exchanges for the ______ of Germany. a. francs; goods and services b. goods and services; goods and services c. francs; euros d. euros; francs Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

a a. The exchange rate is the price at which the francs of Switzerland exchanges for the goods and services of Germany.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Apply 87. Assume that the exchange rate between the euro and the pound has changed from 2 euros per pound to 3 euros per pound. We can say that the a. euro appreciated against the pound. b. euro depreciated against the pound. c. the euro has been officially revalued. d. both the euro and the pound have appreciated. ANSWER: b FEEDBACK: a. b. Currency depreciation means that it takes more units of a nation‘s currency to purchase a unit of some foreign currency. If the pound has changed from 2 euros per pound to 3 euros per pound, we can say that the euro depreciated Copyright Cengage Learning. Powered by Cognero.

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against the pound.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Apply 88. When the U.S. dollar appreciates against the Mexican peso, the peso becomes ______, and the U.S. exchange rate ______. a. less expensive; declines b. less expensive; rises c. more expensive; declines d. more expensive; rises ANSWER: a FEEDBACK: a. U.S. dollar appreciation means that it takes fewer dollars to purchase Mexican pesos. The peso becomes less expensive, and the U.S. exchange rate declines.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Apply 89. Last month, the exchange rate between the U.S. dollar and the Japanese yen was 100 yen per dollar. The exchange rate is currently at 110 per dollar. We can say that a. the dollar appreciated against the yen, and the yen depreciated against the dollar. b. the dollar depreciated against the yen, and the yen appreciated against the dollar. c. the dollar and the yen both appreciated. d. the dollar and the yen both depreciated. ANSWER: a Last month: $1 = 100 yen. RATIONALE: This month: $1 = 110 yen. The dollar appreciated against the yen, and the yen depreciated against the dollar. POINTS: 1 DIFFICULTY: Challenging Copyright Cengage Learning. Powered by Cognero.

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Analyze Answer the next question on the basis of the table below, which shows the exchange rate between various currencies and the U.S. dollar. December 2015 Exchange Rate December 2016 Exchange Rate Currency (dollars per unit of foreign currency) (dollars per unit of foreign currency) Mexican peso $0.07 $0.09 Swiss franc $1.10 $1.05 Japanese yen $0.010 $0.012 British pound $1.64 $1.58 90. Demand for U.S. dollars would result from a. an American tourist visiting the British Museum in London. b. a Japanese investor purchasing German securities. c. Honda, a Japanese auto company, buying land in Alabama. d. Airbus, a European firm, selling jetliners to airlines in South Korea. ANSWER: c FEEDBACK: a. b. c. Demand for U.S. dollars would result from a Japanese auto company buying land in Alabama.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: New Preface NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Understand 91. When the exchange rate (dollars per pound) decreases, the a. quantity of pounds demanded decreases. b. quantity of pounds demanded decreases. c. demand curve for pounds shifts rightward. d. demand curve for pounds shifts leftward. ANSWER: b FEEDBACK: a. b. When the exchange rate (dollars per pound) decreases, the quantity of pounds demanded decreases.

c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Understand 92. When the exchange rate (dollars per pound) falls, the a. quantity of pounds supplied decreases. b. quantity of pounds supplied increases. c. supply curve of pounds shifts rightward. d. supply curve of pounds shifts leftward. ANSWER: a FEEDBACK: a. When the exchange rate (dollars per pound) falls, the quantity of pounds supplied decreases.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Understand 93. The demand curve for British pounds slopes downward because as the dollar ______, British goods become ______ for Americans. Therefore, Americans purchase ______ British goods and the quantity of pounds demanded increases. a. appreciates against the pound; less expensive; more b. appreciates against the pound; more expensive; fewer c. depreciates against the pound; less expensive; more d. depreciates against the pound; more expensive; more ANSWER: a FEEDBACK: a. The demand curve for British pounds slopes downward because as the dollar appreciates against the pound, British goods become less expensive for Americans. Therefore, Americans purchase more British goods, and the quantity of pounds demanded increases.

b. c. d. POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Understand 94. The supply curve of British pounds slopes upward because as the dollar _____, American goods become ______ for the British. Therefore, the British purchase ______ American goods and the quantity of pounds supplied increases. a. depreciates against the pound; less expensive; more b. depreciates against the pound; more expensive; less c. appreciates against the pound; more expensive; more d. appreciates against the pound; less expensive; less ANSWER: a FEEDBACK: a. The supply curve of British pounds slopes upward because as the dollar depreciates against the pound, American goods become less expensive for the British. Therefore, the British purchase more American goods, and the quantity of pounds supplied increases.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC9: - Supply and demand TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Understand 95. Concerning the exchange rate index of the U.S. dollar, suppose that the dollar's real exchange rate index rises from 95 to 115. This means that a. the dollar has depreciated against the currencies of its major trading partners. b. the dollar has appreciated against the currencies of its major trading partners. c. the dollar's nominal exchange rate index falls. d. the dollar's nominal exchange rate index remains constant. ANSWER: b FEEDBACK: a. b. If the dollar's real exchange rate index rises from 95 to 115, this means that the dollar has appreciated against the currencies of its major trading partners.

c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Challenging Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Apply 96. Concerning the exchange-rate index of the U.S. dollar, suppose that the dollar's real exchange-rate index falls from 125 to 110. This means that a. U.S. goods are less competitive on foreign markets. b. U.S. goods are more competitive on foreign markets. c. the dollar has appreciated against the currencies of its major trading partners. d. U.S. price levels are identical to its trading partners. ANSWER: b FEEDBACK: a. b. If the dollar's real exchange-rate index falls from 125 to 110, this means that U.S. goods are more competitive on foreign markets.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Apply 97. The pound shows a forward discount against the dollar (the forward rate is less than the spot rate) when a. interest rates in the United Kingdom are higher than those in the United States. b. interest rates in the United Kingdom are lower than those in the United States. c. real GDP is higher in the United Kingdom than in the United States. d. real GDP is lower in the United Kingdom than in the United States. ANSWER: a FEEDBACK: a. When the currency is worth less (less expensive) in the forward market than in the spot market, it is said to be at a discount.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

Rates BLOOM'S: Understand

98. The pound shows a forward premium against the dollar (the forward rate is greater than the spot rate) when a. interest rates in the United Kingdom are higher than those in the United States. b. interest rates in the United Kingdom are lower than those in the United States. c. real GDP is higher in the United Kingdom than in the United States. d. real GDP is lower in the United Kingdom than in the United States. ANSWER: b FEEDBACK: a. b. When a foreign currency is worth more (more expensive) in the forward market than in the spot market, it is said to be at a premium.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Understand 99. Suppose you can make profits in the foreign-exchange market by buying a foreign currency at a low price, then selling it at a higher price later on. you are engaging in a a. discount position. b. premium position. c. short position. d. long position. ANSWER: d FEEDBACK: a. b. c. d. Profits in the foreign-exchange market can be earned by initially buying a currency at a low price, then selling it at a higher price later on. This is a long position: Realizing gains from an expected appreciation of a currency.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Foreign-Exchange Market Speculation KEYWORDS: BLOOM'S: Analyze Copyright Cengage Learning. Powered by Cognero.

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100. You are engaging in a ______ if you initially sell a currency (that you do not own) at a high price, then buy it back later on at a low price. a. discount position b. premium position c. short position d. long position ANSWER: c FEEDBACK: a. b. c. Profits in the foreign-exchange market can be earned by initially selling at a high price, then buying it back later on at a low price. This is a short position: Realizing profits from an expected depreciation of a currency.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Foreign-Exchange Market Speculation KEYWORDS: BLOOM'S: Analyze 101. In 1987, currency speculator Andy Krieger made a lucrative currency trade. Believing that the New Zealand dollar was overvalued, Krieger bet on its fall, selling hundreds of millions of dollars at a time and pushing its value down. He profited by re-buying New Zealand dollars when the price bottomed out. Krieger was engaging in a(n) a. discount position. b. premium position. c. short position. d. long position. ANSWER: c FEEDBACK: a. b. c. Profits in the foreign-exchange market can be earned by initially at a high price and then buying it back later on at a low price. Krieger was engaging in a short position: realizing profits from an expected depreciation of a currency.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Foreign-Exchange Market Speculation KEYWORDS: BLOOM'S: Understand 102. During 2012–2013, currency speculator George Soros made a lucrative currency trade. Having expectations of a future depreciation of the yen, Soros made big bets against it. He sold large amounts of yen, pushed its value down, and Copyright Cengage Learning. Powered by Cognero.

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profited by re-buying the yen when its price bottomed out. Soros was engaging in a a. long position. b. short position. c. premium position. d. discount position. ANSWER: b FEEDBACK: a. b. Profits in the foreign-exchange market can be earned by initially at a high price and then buying it back later on at a low price. Soros was engaging in a short position: realizing profits from an expected depreciation of a currency.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Foreign-Exchange Market Speculation KEYWORDS: BLOOM'S: Understand 103. When you arrive at Heathrow Airport in London and go to the foreign-exchange kiosk to exchange dollars for pounds, you are trading in the a. spot market. b. forward market. c. futures market. d. options market. ANSWER: a FEEDBACK: a. The spot market is where foreign exchange can be bought and sold for delivery immediately.

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d. It executes profitable trades immediately. ANSWER: b FEEDBACK: a. b. Advocates of automated forex trading maintain that the system minimizes emotions through the trading process.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Foreign Currency Trading Becomes Automated KEYWORDS: BLOOM'S: Remember 105. What is a limitation of the automated trading system? a. has potential for system quirks b. generates orders as soon as trade rules are fulfilled c. trades multiple accounts at one time d. Traders can backtest their rules to determine if the result is profitable. ANSWER: a FEEDBACK: a. Automated trading systems require monitoring because of the potential for mechanical failures, connectivity issues, power losses, computer crashes, and system quirks.

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b. Once this strategy is built into the software, the trader can activate the software, and the software does the trading. In this example, the trade is exited.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Foreign Currency Trading Becomes Automated KEYWORDS: BLOOM'S: Analyze 107. Concerning foreign-exchange trading, the bid rate refers to the price that a bank is willing to pay for a unit of foreign currency; the offer rate is the price at which the bank is willing to sell a unit of foreign currency. a. True b. False ANSWER: True FEEDBACK: Correct The bid rate refers to the price that the bank is willing to pay for a unit of foreign currency. The offer rate is the price at which the bank is willing to sell a unit of foreign currency. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interbank Trading KEYWORDS: BLOOM'S: Remember 108. If a household purchases small amounts of foreign currency from an automated teller machine (ATM), the bank typically imposes an additional service charge for the transaction. a. True b. False ANSWER: True FEEDBACK: Correct Automated teller machines (ATMs) typically add 2 percent and additional service charges in many parts of the world. Incorrect

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KEYWORDS:

BLOOM'S: Remember

109. The foreign-exchange market refers to the organizational setting within which individuals and businesses, but NOT government and banks, buy and sell foreign currencies and other debt instruments. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The foreign-exchange market provides the institutional framework within which individuals, businesses, governments, and financial institutions purchase and sell foreign exchange.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Foreign-Exchange Market KEYWORDS: BLOOM'S: Remember 110. Most foreign-exchange transactions involve the transfer of cash, rather than electronic balances, between commercial banks or foreign-exchange dealers. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Most forex transactions involve the transfer of electronic balances between commercial banks or foreign-exchange dealers.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Foreign-Exchange Market KEYWORDS: BLOOM'S: Remember 111. In recent years, the estimated amount of foreign-exchange transactions is about $1 trillion a day. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The estimated worldwide trading in the forex transactions is about $6.6 trillion a day.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Foreign-Exchange Market KEYWORDS: BLOOM'S: Remember 112. Unlike stock or commodity exchanges, the foreign exchange market is not an organized structure; it has no centralized meeting place and no formal requirements for participation. a. True b. False ANSWER: True FEEDBACK: Correct Unlike stock or commodity exchanges, the foreign-exchange market is not an organized structure. It has no centralized meeting place and no formal requirements for participation. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Foreign-Exchange Market KEYWORDS: BLOOM'S: Remember 113. Throughout the world, the foreign-exchange market is open for business only during the hours of 9 A.M. to 3 P.M., Pacific Standard Time. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect In the foreign-exchange market, currencies are traded around the clock and throughout the world.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Foreign-Exchange Market KEYWORDS: BLOOM'S: Remember 114. The major banks that trade foreign exchange generally do not deal directly with one another but instead use the services of foreign-exchange brokers. a. True b. False ANSWER: True FEEDBACK: Correct The major banks that trade foreign exchange generally do not deal directly with Copyright Cengage Learning. Powered by Cognero.

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one another but instead use the services of foreign-exchange brokers. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Foreign-Exchange Market KEYWORDS: BLOOM'S: Remember 115. Estimates are that speculation accounts for only about 10 percent of the daily trading activity in the foreign-exchange market. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Estimates are that speculation accounts for about 90 percent of the daily trading activity in the foreign-exchange market.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Foreign-Exchange Market KEYWORDS: BLOOM'S: Remember 116. Concerning the volume of foreign-exchange market trading, forward transactions and foreign-exchange options are the two dominant instruments of foreign exchange. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Foreign-exchange swaps and spot-market transactions are the two most important types of foreign-exchange transactions.

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a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect The offer rate is higher than the bid rate.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interbank Trading KEYWORDS: BLOOM'S: Understand 118. A foreign currency trader who works for a bank is assigned a position limit that stipulates the amount of buying and selling that can be conducted in a given currency. a. True b. False ANSWER: True FEEDBACK: Correct Traders are subject to position limits that stipulate the amount of buying and selling that can be conducted in a given currency. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interbank Trading KEYWORDS: BLOOM'S: Understand 119. If the dollar cost of the U.K. pound is $1.50, and the dollar cost of the Swiss franc is $1, then the cross-exchange rate between the pound and the franc is 0.67 francs per pound. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Cross-exchange rate: $ value of pound /$ value of Swiss franc = $1.50 / $1 = 1.50 francs per pound

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Evaluate

120. In 2013, Japanese automakers found that their vehicles were becoming more affordable to American consumers. Why? The exchange value of the yen was appreciating against the dollar. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Currency depreciation means that it takes more units of a nation‘s currency to purchase a unit of some foreign currency. If the price of Japan cars was going down, the yen was depreciating (dollar appreciating).

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Reading Foreign-Exchange Quotations KEYWORDS: BLOOM'S: Remember 121. When conducting foreign exchange trading, commercial banks like Bank of America offer forward contracts. The size of these contracts can be tailored to the needs of an importer or importer, and their date of delivery is negotiable. a. True b. False ANSWER: True FEEDBACK: Correct When conducting foreign exchange trading, commercial banks like Bank of America offer forward contracts. The size of these contracts can be tailored to the needs of an importer or importer, and their date of delivery is negotiable. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forward and Futures Markets KEYWORDS: BLOOM'S: Remember 122. Trading in foreign currencies can be conducted in the futures market, such as the International Monetary Market of the Chicago Mercantile Exchange. a. True b. False ANSWER: True FEEDBACK: Correct Trading in foreign currencies can be conducted in the futures market, such as the International Monetary Market of the Chicago Mercantile Exchange. Incorrect

POINTS:

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DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forward and Futures Markets KEYWORDS: BLOOM'S: Remember 123. Futures contracts of the International Monetary Market have no set size, the contracts’ dates of delivery are negotiable, and their costs are based on the bid-offer spread. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect IMM contracts have standardized contract amounts, deliver only on particular dates, and brokerage fees for sell and buy orders.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forward and Futures Markets KEYWORDS: BLOOM'S: Remember 124. Concerning foreign currency trading, an option contract provides the holder the right to buy or sell a fixed amount of currency at a prearranged price within a few days or a couple of years. a. True b. False ANSWER: True FEEDBACK: Correct Foreign currency options provide an options holder the right to buy or sell a fixed amount of foreign currency at a prearranged price within a few days or a couple of years. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Foreign Currency Options KEYWORDS: BLOOM'S: Remember 125. If the dollar’s real exchange rate index increases, then American products become more affordable to foreign buyers. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

Correct Incorrect If the dollar‘s real exchange rate index increases, then American products become less affordable to foreign buyers.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Understand 126. The nominal exchange rate equals the real exchange rate adjusted for changes in the price level. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The real exchange rate equals the nominal exchange rate adjusted for changes in the price level.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Understand 127. Arbitrage tends to bring about an identical price for the same currency in different locations and thus results in one market. a. True b. False ANSWER: True FEEDBACK: Correct Exchange arbitrage permits the rates of exchange in different parts of the world to be kept the same. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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128. If the dollar/franc exchange rate is 1 franc = $1.20 in New York and 1 franc = 1.22 in Zurich, then arbitragers would find it profitable to purchase francs in Zurich and immediately resell them in New York. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If the dollar/franc exchange rate is 1 franc = $1.20 in New York and 1 franc = 1.22 in Zurich, then arbitragers would find it profitable to purchase francs in New York and immediately resell them in Zurich.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Understand 130. Suppose the selling price of one-month forward British pounds is $1.6036 per pound and the spot price of the pound is $1.6039. This means that there is an annual forward discount on the pound equal to 0.2 percent. a. True b. False ANSWER: True The annual forward discount on the pound is: RATIONALE: [(1.6036-1.6039)/1.6039] x 12/1 x 100 = -0.2 percent. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC18: - International trade and economy TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Apply 131. If interest rates in the U.K. are higher than those in the United States, then the pound shows a forward discount, which means the forward rate is less than the spot rate. a. True b. False ANSWER: True FEEDBACK: Correct When the currency is worth less (less expensive) in the forward market than in the spot market, it is said to be at a discount. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC18: - International trade and economy TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Remember 132. If British interest rates are lower than those of the United States, then the pound shows a forward discount, which means the forward rate is less than the spot rate. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect When the United Kingdom‘s interest rates are lower than those of the United States, the pound shows a forward premium that means the forward rate is higher than the spot rate.

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FEEDBACK:

Correct Hedging is the process of avoiding or covering a foreign-exchange risk. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC18: - International trade and economy TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Remember 134. Concerning the management of foreign exchange risk, some business firms do not hedge at all either because they cannot determine how much money will be coming in from abroad, or because they have a deliberate strategy of allowing currencies to balance each other out around the world. a. True b. False ANSWER: True FEEDBACK: Correct Some business firms do not hedge at all either because they cannot determine how much money will be coming in from abroad, or because they have a deliberate strategy of allowing currencies to balance each other out around the world. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC18: - International trade and economy TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Remember 135. Assume that Boeing anticipates receiving 1 billion francs in three months from its exports of jetliners to Switzerland. To avoid the risk of an appreciation of the dollar against the franc, Boeing could contract to sell its expected franc receipts in the forward market at today’s forward rate. a. True b. False ANSWER: True FEEDBACK: Correct To avoid the risk of an appreciation of the dollar against the franc, Boeing could contract to sell its expected franc receipts in the forward market at today‘s forward rate. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Challenging True / False False

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NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Apply 136. Suppose that Walmart owes 100 million yen to a Japanese radio manufacturer in three-months' time. To cover itself against the risk of the dollar appreciating against the yen during this period, Walmart could buy 100 million yen in the forward market at today’s forward rate for delivery in three months. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect To cover itself against the risk of the dollar appreciating against the yen during this period, Walmart could sell 100 million yen in the forward market at today‘s forward rate for delivery in three months.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Apply 137. International investors who hedge against exchange rate risk often use currency forward contracts. a. True b. False ANSWER: True FEEDBACK: Correct International investors also make use of the forward market for hedging purposes. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC18: - International trade and economy TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Understand 138. The euro shows a forward discount against the dollar (the forward rate is less than the spot rate) when interest rates in Europe are lower than those in the United States. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

False Correct Incorrect When Europe‘s interest rates are lower than those of the United States, the euro shows a forward premium that means the forward rate is higher than the spot rate.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC18: - International trade and economy TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Apply 139. A speculator takes a long position by initially buying a currency at a low price and then selling it at a higher price later on. a. True b. False ANSWER: True FEEDBACK: Correct Profits in the foreign-exchange market can be earned by initially buying a currency at a low price and then selling it at a higher price later on. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Foreign-Exchange Market Speculation KEYWORDS: BLOOM'S: Understand 140. A speculator engages in a short position by initially selling a currency (that she does not own) at a high price and then buying it back later at a low price. a. True b. False ANSWER: True FEEDBACK: Correct Profits in the foreign-exchange market can be earned by initially at a high price and then buying it back later on at a low price. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Foreign-Exchange Market Speculation Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Understand

141. Similar to stock and commodity exchanges, the foreign-exchange market is an organized structure with a central meeting place and formal licensing requirements. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Unlike stock or commodity exchanges, the foreign-exchange market is not an organized structure. It has no centralized meeting place and no formal requirements for participation.

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b. False ANSWER: FEEDBACK:

True Correct

A currency swap is the conversion of one currency to another currency at one point in time, with an agreement to convert it to the original currency at a specified time in the future.

Incorrect

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Interbank Trading BLOOM'S: Remember

149. If Citibank quoted bid and offer rates for the Swiss franc at $0.4850/$0.4854, then the bank would be prepared to buy, say, 1 million francs for $485,000 and sell them for $485,400. a. True b. False ANSWER: True Bid: 1 million francs x $0.4850 = $485,000. RATIONALE: Offer: 1 million francs x $0.4854 = $485,400. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interbank Trading KEYWORDS: BLOOM'S: Understand 150. If Chase Manhattan Bank quotes bid and offer rates for the Swiss franc at $0.5250/$0.5260, then the bank would realize profits of $1,000 on the purchase and sale of 1 million francs. a. True b. False ANSWER: True Bid: 1 million francs x $0.5250 = $525,000. RATIONALE: Offer: 1 million francs x $0.5260 = $526,000. Profit: $526,000 - $525,000 = $1,000 POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interbank Trading KEYWORDS: BLOOM'S: Understand 151. If a Citibank dealer expects the Swiss franc to appreciate against the U.S. dollar, then she will attempt to lower both bid and offer rates for the franc to persuade other dealers to buy francs from Citibank and dissuade other dealers from selling francs to Citibank. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If a Citibank dealer expects the Swiss franc to appreciate, they will raise bid and Copyright Cengage Learning. Powered by Cognero.

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offer rates for the franc in order to encourage other dealers to sell francs to Citibank and dissuade other dealers from buying francs from Citibank.

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KEYWORDS:

BLOOM'S: Apply

154. If it takes 113.28 yen to buy $1, then it takes $.009624 to buy 1 yen. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If $1 = 113.28 yen, then 1 yen = $1/113.28 yen = $.008828

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forward and Futures Markets KEYWORDS: BLOOM'S: Understand 157. A foreign currency option is an agreement between a holder (corporation) and a writer (commercial bank) that gives the holder the right to buy or sell a certain amount of foreign currency at any time through some specified date. a. True b. False ANSWER: True FEEDBACK: Correct Incorrect A foreign currency option is an agreement between a holder (corporation) and a writer (commercial bank) that gives the holder the right to buy or sell a certain amount of foreign currency at any time through some specified date.

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b. False ANSWER: FEEDBACK:

False Correct Incorrect The demand for foreign exchange corresponds to the debit items on a nation‘s balance-of-payments statement.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Exchange-Rate Determination BLOOM'S: Understand

162. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, an increase in the demand schedule causes an appreciation of the dollar against the pound. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, an increase in the demand schedule causes a depreciation of the dollar against the pound.

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FEEDBACK:

Correct

Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, an increase in the supply schedule causes an appreciation of the dollar against the pound.

Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates BLOOM'S: Understand

167. If the trade-weighted dollar moves from an index value to 100 to 110, then the dollar depreciates by 10 percent against the trade-weighted averages of the exchange rates of the major trading partners of the United States. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect An increase in the nominal exchange-rate index indicates a dollar appreciation relative to the currencies of the other nations in the index and a loss of competitiveness for the United States.

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a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect Exchange arbitrage allows the rates of exchange in different regions of the world to be kept the same. This is achieved by selling a currency when its price is high and purchasing when the price is low.

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Indexes of the Foreign-Exchange Value of the Dollar: Nominal and Real Exchange Rates KEYWORDS: BLOOM'S: Analyze 172. Currency arbitrage tends to result in identical yen/dollar exchange rates in New York and in Tokyo. a. True b. False ANSWER: True FEEDBACK: Correct Exchange arbitrage allows the rates of exchange in different regions of the world to be kept the same. Incorrect

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174. Assume that Boeing anticipates receiving 20 million yen in three months from exports of jumbo jets to a Japanese airline. The firm could hedge against the risk of a depreciation of the dollar against the yen by contracting to sell its expected yen proceeds for dollars in the forward market at today's forward rate. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If the dollar is expected to depreciate, Boeing should do nothing. It will receive more dollars after the dollar depreciates (yen appreciates).

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Interest Arbitrage, Currency Risk, and Hedging KEYWORDS: BLOOM'S: Understand 176. A currency speculator's goal is to buy a currency at a low price and immediately resell it at a higher price, thus realizing a riskless profit. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Speculation is the attempt to profit by trading on expectations about prices in the future. This entails risk. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Foreign-Exchange Market Speculation KEYWORDS: BLOOM'S: Remember 177. What foreign-exchange transactions do banks typically engage in? Banks typically engage in spot, forward, and swap transactions. ANSWER: POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Types of Foreign-Exchange Transactions KEYWORDS: BLOOM'S: Remember 178. How is the equilibrium rate of exchange determined? The equilibrium rate of exchange in a free market is determined by the intersection of the ANSWER: supply and demand schedules of foreign exchange. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange-Rate Determination KEYWORDS: BLOOM'S: Remember 179. Is it possible to trade foreign exchange in the futures market? How does such trading differ from the forward market? Yes. In the futures market, contracting parties agree to future exchanges of currencies and ANSWER: set applicable exchange rates in advance. The futures market is distinguished from the forward market in that only a limited number of leading currencies are traded; moreover, trading takes place in a standardized contract amount and in a specific geographic location. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic Copyright Cengage Learning. Powered by Cognero.

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forward and Futures Markets KEYWORDS: BLOOM'S: Understand 180. Where are foreign currency options traded? Foreign-currency options are traded in a variety of currencies in Europe and the United ANSWER: States. The bank market for foreign-currency options consists of large U.S. banks that write options for their corporate customers. In addition, the Amsterdam, Montreal, and Philadelphia exchanges provide centralized trading floors devoted to foreign-currencyoption trading. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Foreign Currency Options KEYWORDS: BLOOM'S: Understand

Chapter 12: Exchange-Rate Determination 1. The relationship between the exchange rate and the prices of tradable goods is known as the a. purchasing-power-parity theory. b. asset-markets theory. c. monetary theory. d. balance-of-payments theory. ANSWER: a FEEDBACK: a. According to the purchasing-power-parity theory, changes in relative national price levels determine changes in exchange rates over the long run.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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2. If the exchange rate between Swiss francs and British pounds is five francs per pound, then the number of pounds that can be obtained for 200 francs equals a. 20 pounds. b. 40 pounds. c. 60 pounds. d. 80 pounds. ANSWER: b If there are five francs per pound, then: RATIONALE: 1 franc = 1/5 = 0.20 pounds, 200 francs = 200 x 0.20 = 40 pounds. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 3. Low real interest rates in the United States tend to a. decrease the demand for dollars, thus causing the dollar to depreciate. b. decrease the demand for dollars, thus causing the dollar to appreciate. c. increase the demand for dollars, thus causing the dollar to depreciate. d. increase the demand for dollars, thus causing the dollar to appreciate. ANSWER: a FEEDBACK: a. Low real interest rates in the United States tend to decrease the demand for dollars, thus causing the dollar to depreciate. U.S. investors will be attracted to the relatively high interest rates in other countries;d at the same time, foreign investors will find investing in the United States less attractive than before. Demand for dollars will fall.

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c. increase the demand for dollars, thus causing the dollar to depreciate. d. increase the demand for dollars, thus causing the dollar to appreciate. ANSWER: d FEEDBACK: a. b. c. d. High real interest rates in the United States tend to increase the demand for dollars, thus causing the dollar to appreciate. Foreign investors will be attracted to the relatively high interest rates in the United States and at the same time, U.S. investors will find investing in the United States more attractive than before. Demand for dollars will rise.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 5. Assume that the United States faces an 8 percent inflation rate, while no (zero) inflation exists in Japan. According to the purchasing-power parity theory, the dollar would be expected to a. appreciate by 8 percent against the yen. b. depreciate by 8 percent against the yen. c. depreciate by 7 percent against the yen. d. appreciate by 7 percent against the yen. ANSWER: b According to the purchasing-power-parity theory, changes in relative national price levels RATIONALE: determine changes in exchange rates over the long run. A currency maintains its purchasing power parity if it depreciates by an amount equal to the excess of domestic inflation over foreign inflation (depreciates by 8 percent against the yen). POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 6. In the presence of purchasing-power parity, if one dollar exchanges for two British pounds and if a smartphone costs $400 in the United States, then in Great Britain the smartphone should cost a. 200 pounds. b. 400 pounds. Copyright Cengage Learning. Powered by Cognero.

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c. 600 pounds. d. 800 pounds. ANSWER: FEEDBACK:

d a. b. c. d. If 1 dollar = 2 British pounds, according to PPP, in Great Britain the smartphone should cost 800 pounds (400 x 2).

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 7. If wheat costs four dollars per bushel in the United States and two British pounds per bushel in Great Britain, then in the presence of purchasing-power parity the exchange rate should be a. $.50 per pound. b. $1.00 per pound. c. $2.00 per pound. d. $8.00 per pound. ANSWER: c In the United States, 1 bushel of wheat = 4 dollars. RATIONALE: In Great Britain, 1 bushel of wheat = 2 British pounds. According to PPP the exchange rate should be 2 pounds = 4 dollars, or 1 pound = 2 dollars. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 8. A primary reason that explains the appreciation in the value of the U.S. dollar in the 1980s is a. large trade surpluses for the United States. b. relatively high inflation rates in the United States. c. lack of investor confidence in the U.S. monetary policy. d. relatively high interest rates in the United States. ANSWER: d FEEDBACK: a. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. In the late 1970s, real interest rates in the United States were at low levels, as was the trade-weighted value of the dollar. By the early 1980s, U.S. real interest rates were increasing. This movement attracted investment funds to the United States that caused the dollar‘s exchange value to rise.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Remember 10. When the price of foreign currency (i.e., the exchange rate) is below the equilibrium level, a. an excess demand for that currency exists in the foreign exchange market. b. an excess supply of that currency exists in the foreign exchange market. c. the demand for foreign exchange shifts outward to the right. d. the demand for foreign exchange shifts backward to the left. ANSWER: b FEEDBACK: a. b. There is a view that there exists some equilibrium level or path to which a Copyright Cengage Learning. Powered by Cognero.

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currency will eventually gravitate. When the price of foreign currency is below the equilibrium level, an excess supply of that currency exists in the foreign exchange market.

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c. d. In the long run, as a country becomes more productive relative to other countries, its currency appreciates.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Determines Exchange Rates? KEYWORDS: BLOOM'S: Understand 14. For the United States, suppose the annual interest rate on government securities equals 8 percent, while the annual inflation rate equals 4 percent. For Japan, suppose the annual interest rate on government securities equals 10 percent, while the annual inflation rate equals 7 percent. These variables would cause investment funds to flow from a. the United States to Japan, thus causing the dollar to depreciate. b. the United States to Japan, thus causing the dollar to appreciate. c. Japan to the United States, thus causing the yen to depreciate. d. Japan to the United States, thus causing the yen to appreciate. ANSWER: c A currency maintains its purchasing power parity if it depreciates by an amount equal to the RATIONALE: excess of domestic inflation over foreign inflation. In Japan the real interest rate is 10 - 7 =3%, and in the U.S., the real interest rate is 8 - 4 = 4%. Copyright Cengage Learning. Powered by Cognero.

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Investment funds will flow from Japan to the United States, thus causing the yen to depreciate. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 15. For the United States, suppose the annual interest rate on government securities equals 12 percent, while the annual inflation rate equals 8 percent. For Japan, suppose the annual interest rate equals 5 percent, while the annual inflation rate equals 0 percent. These variables would cause investment funds to flow from a. the United States to Japan, thus causing the dollar to depreciate. b. the United States to Japan, thus causing the dollar to appreciate. c. Japan to the United States, thus causing the yen to depreciate. d. Japan to the United States, thus causing the yen to appreciate. ANSWER: a A currency maintains its purchasing power parity if it depreciates by an amount equal to the RATIONALE: excess of domestic inflation over foreign inflation. In Japan the interest rate is 5 - 0 = 5%, and in the U.S., the real interest rate is 12 - 8 = 4%. Investment funds will flow from the United States to Japan, thus causing the dollar to depreciate. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 16. Given a system of floating exchange rates, stronger U.S. preferences for imports would trigger a. an increase in the demand for imports and an increase in the demand for foreign currency. b. an increase in the demand for imports and a decrease in the demand for foreign currency. c. a decrease in the demand for imports and an increase in the demand for foreign currency. d. a decrease in the demand for imports and a decrease in the demand for foreign currency. ANSWER: a FEEDBACK: a. Increased demand for imports results in an increase in the demand for foreign currency (a depreciation in the domestic currency).

b. c. Copyright Cengage Learning. Powered by Cognero.

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Relatively low productivity and high inflation rates in the United States result in an increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 19. Under a system of floating exchange rates, relatively high productivity and low inflation rates in the United States result in a. an increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar. b. an increase in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar. c. a decrease in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar. d. a decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar. ANSWER: d In the long run, exchange rates are determined by four key factors: relative price levels, RATIONALE: relative productivity levels, consumer preferences for domestic or foreign goods, and trade barriers. Relatively high productivity and low inflation rates in the United States result in a decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 20. Which example of market expectations causes the dollar to depreciate against the yen? Expectations that the U.S. economy will have a. faster economic growth than Japan. b. higher future interest rates than Japan. c. more rapid money supply growth than Japan. d. higher inflation rates than Japan. ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. d. In the short run, market expectations also influence exchange-rate movements. Future expectations of high domestic inflation rates tend to cause the domestic currency to depreciate.

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FEEDBACK:

a. According to the asset market approach to exchange rate determination, investors consider two key factors when deciding between domestic and foreign investments: relative interest rates and expected changes in exchange rates.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 23. Which of the following is likely to result in long-run depreciation of the U.S. dollar relative to the euro? a. relatively low interest rates in the United States b. relatively high labor productivity in the United States c. tariffs levied by the United States on steel imports from Europe d. stronger American preferences for goods produced in Europe ANSWER: d FEEDBACK: a. b. c. d. In the long run, exchange rates are determined by four key factors: relative price levels, relative productivity levels, consumer preferences for domestic or foreign goods, and trade barriers. Stronger American preferences for goods produced in Europe (increased demand for imports) results in a depreciation of the U.S. dollar relative to the euro.

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b. c. d. In the long run, exchange rates are determined by four key factors: relative price levels, relative productivity levels, consumer preferences for domestic or foreign goods, and trade barriers. An increased demand for a country‘s exports causes its currency to appreciate in the long run.

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c. According to the asset market approach to exchange rate determination, expectations about the future path of the exchange rate itself will figure prominently in the investor‘s calculation of what they will actually earn from a foreign investment denominated in another currency.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Remember 28. An exchange rate is said to ____ when its short-run response to a change in market fundamentals is greater than its long-run response. a. overshoot b. undershoot c. depreciate d. appreciate ANSWER: a FEEDBACK: a. An exchange rate is said to overshoot when its short-run response (depreciation or appreciation) to a change in market fundamentals is greater than its long-run response. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Overshooting KEYWORDS: BLOOM'S: Remember 29. Concerning exchange rate forecasting, ____ is a common-sense approach based on a wide array of political and economic data. a. econometric analysis b. technical analysis c. judgmental analysis d. sunspot analysis ANSWER: c FEEDBACK: a. b. c. Judgmental forecasts are sometimes known as subjective or common sense models. They require the gathering of a wide array of political and economic data and the interpretation of these data in terms of the timing, direction, and magnitude of exchange-rate changes.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forecasting Foreign-Exchange Rates KEYWORDS: BLOOM'S: Rememeber 30. Concerning exchange rate forecasting, ____ involves the use of historical exchange rate data to estimate future values, while ignoring the economic determinants of exchange rate movements. a. econometric analysis b. judgmental analysis c. technical analysis d. sunspot analysis ANSWER: c FEEDBACK: a. b. Copyright Cengage Learning. Powered by Cognero.

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c. Technical analysis involves the use of historical exchange-rate data to estimate future values. This approach is technical in that it extrapolates from past exchange-rate trends and projects them into the future to generate forecasts while ignoring economic and political determinants of exchange-rate movements.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forecasting Foreign-Exchange Rates KEYWORDS: BLOOM'S: Remember 31. Concerning exchange rate forecasting, ____ relies on econometric models that are based on macroeconomic variables likely to affect currency values. a. fundamental analysis b. technical analysis c. judgmental analysis d. sunspot analysis ANSWER: a FEEDBACK: a. Fundamental analysis involves consideration of economic variables that are likely to affect the supply and demand of a currency and its exchange value. Fundamental analysis uses computer-based econometric models that are statistical estimations of economic theories.

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b. c. In a free market, exchange rates are determined by market fundamentals and market expectations. The former includes real interest rates, consumer preferences for domestic or foreign products, productivity, investment profitability, product availability, monetary and fiscal policy, and government trade policy.

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c. d. Over the long run, foreign-exchange transactions are dominated by flows of goods, services, and investment capital that respond to forces such as inflation rates, investment profitability, consumer tastes, productivity, and government trade policy.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Determines Exchange Rates? KEYWORDS: BLOOM'S: Remember 35. Exchange rate determination in the short run is underlied by which of the following? a. Tariffs and quotas affect trade patterns only in the short run. b. Prices of goods and services affect trade patterns only in the short run. c. Expected returns on financial assets affect investment flows in the short run. d. Preferences for goods and services affect trade flows only in the short run. ANSWER: c FEEDBACK: a. b. c. In the short run, foreign-exchange transactions are dominated by transfers of assets (bank accounts, government securities) that respond to differences in real interest rates and to shifting expectations of future exchange rates.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Determines Exchange Rates? KEYWORDS: BLOOM'S: Remember 36. That identical goods should cost the same in all nations, assuming it is costless to ship goods between nations and there are no barriers to trade, is a reflection of the a. monetary approach to exchange-rate determination. b. law of one price. c. fundamentalist approach to exchange-rate determination. d. exchange-rate-overshooting principle. ANSWER: b FEEDBACK: a. b. The law of one price asserts that identical goods should be sold everywhere at the same price when converted to a common currency, assuming that it is Copyright Cengage Learning. Powered by Cognero.

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costless to ship the good between nations, there are no barriers to trade, and markets are competitive.

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Future expectations of slower domestic economic growth, rising domestic interest rates, and low domestic inflation rates tend to cause the domestic currency to appreciate, as demand for the currency increases.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 39. The quantity of Canadian dollars supplied to the foreign exchange market would increase if, other things remaining equal, a. preferences for imports rise in Canada. b. labor productivity increases in Canada. c. prices of goods and services decrease in Canada. d. import tariffs rise in Canada. ANSWER: a An increased demand for a country’s exports causes its currency to appreciate in the long RATIONALE: run. The quantity of Canadian dollars supplied to the foreign exchange market would increase if, other things remaining equal, preferences for imports rise in Canada. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 40. The U.S. demand for pesos would shift to the right if there occurred a(n) a. change in preferences toward U.S. manufactured goods. b. increase in the dollar/peso exchange rate. c. decrease in the U.S. population. d. increase in the U.S. price level. ANSWER: d FEEDBACK: a. b. c. d. In the short run, market expectations influence exchange-rate movements. Future expectations of slower domestic economic growth, rising domestic interest rates, and low domestic inflation rates tend to cause the domestic Copyright Cengage Learning. Powered by Cognero.

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currency to appreciate, as demand for the currency increases.

41. Refer to Figure 12.1. Should preferences for imports rise in the United States and fall in Switzerland, there would occur a(n) a. increase in the demand for francs and a decrease in the supply of francs-depreciation of the dollar. b. increase in the demand for francs and a decrease in the supply of francs-appreciation of the dollar. c. decrease in the demand for francs and a decrease in the supply of francs-appreciation of the dollar. d. decrease in the demand for francs and a increase in the supply of francs-depreciation of the dollar. ANSWER: a An increased demand for imports results in a depreciation in the domestic currency. RATIONALE:

POINTS: DIFFICULTY:

Should preferences for imports rise in the United States and fall in Switzerland, there would occur an increase in the demand for francs and a decrease in the supply of francsdepreciation of the dollar. 1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 12.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze

42. Refer to Figure 12.1. Should real interest rates in the United States rise relative to real interest rates in Switzerland, there would occur a(n) a. increase in the demand for francs and a decrease in the supply of francs-depreciation of the dollar. b. increase in the demand for francs and a decrease in the supply of francs-appreciation of the dollar. c. decrease in the demand for francs and an increase in the supply of francs-appreciation of the dollar. d. decrease in the demand for francs and a decrease in the supply of francs-depreciation of the dollar. ANSWER: c FEEDBACK: a. b. c. Should real interest rates in the United States rise relative to real interest rates in Switzerland, there would occur a decrease in the demand for francs and an increase in the supply of francs-appreciation of the dollar.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 12.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Analyze

43. Refer to Figure 12.1. Should the U.S. price level rise relative to the Swiss price level, there would occur a(n) a. increase in the demand for francs and an increase in the supply of francs-appreciation of the dollar. b. decrease in the demand for francs and a decrease in the supply of francs-depreciation of the dollar. c. increase in the supply of francs and a decrease in the demand for francs-appreciation of the dollar. d. decrease in the supply of francs and an increase in the demand for francs-depreciation of the dollar. ANSWER: d An increase in the U.S. price level relative to price levels in other countries causes the RATIONALE: dollar to depreciate in the long run.

POINTS:

Should the U.S. price level rise relative to the Swiss price level, there would occur a decrease in the supply of francs and an increase in the demand for francs-depreciation of the dollar. 1

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 12.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze

44. Refer to Figure 12.1. Should the United States impose tariffs on imports from Switzerland, there would occur a(n) a. increase in the demand for francs and a depreciation of the dollar. b. decrease in the demand for francs and an appreciation of the dollar. c. decrease in the supply of francs and an appreciation of the dollar. d. increase in the supply of francs and a depreciation of the dollar. ANSWER: b Trade barriers such as tariffs and quotas cause a currency appreciation in the long run for RATIONALE: the country imposing the barriers. Should the United States impose tariffs on imports from Switzerland, there would occur a decrease in the demand for francs and an appreciation of the dollar. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 12.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze

45. Refer to Figure 12.1. Should Swiss labor productivity rise, leading to a decrease in Swiss manufacturing costs, there would occur a(n) a. increase in the supply of francs and a depreciation of the dollar. b. increase in the supply of francs and an appreciation of the dollar. c. decrease in the demand for francs and an appreciation of the dollar. d. increase in the demand for francs and a depreciation of the dollar. ANSWER: d If productivity gains are passed forward to domestic and foreign buyers in the form of RATIONALE: lower prices, the nation’s exports tend to increase and imports tend to decrease.

POINTS: DIFFICULTY:

Should Swiss labor productivity rise, leading to a decrease in Swiss manufacturing costs, there would occur an increase in the demand for francs and a depreciation of the dollar. 1 Challenging

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46. Refer to Figure 12.1. If Switzerland experienced a disastrous wheat-crop failure, leading to additional wheat imports from the United States, there would occur an a. increase in the supply of francs and an appreciation of the dollar. b. increase in the supply of francs and a depreciation of the dollar. c. increase in the demand for francs and a depreciation of the dollar. d. increase in the demand for francs and an appreciation of the dollar. ANSWER: a An increased demand for imports results in a depreciation in the domestic currency. RATIONALE: If Switzerland experienced a disastrous wheat-crop failure, leading to additional wheat imports from the United States, there would occur an increase in the supply of francs and an appreciation of the dollar. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 12.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze 47. Given floating exchange rates, if Japan increases its demand for Canadian goods at the same time that Canada increases its demand for Japanese goods, then we would expect the yen's exchange value to a. appreciate against the dollar. b. depreciate against the dollar. c. remain constant against the dollar. d. appreciate, depreciate, or remain constant against the dollar. ANSWER: d FEEDBACK: a. b. c. d. An increased demand for imports results in a depreciation in the domestic currency. An increased demand for exports results in an appreciation in the domestic currency. We would expect the yen's exchange value to appreciate, depreciate, or remain constant against the dollar.

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze 48. Given floating exchange rates, assume that the Swiss decrease their import purchases from Italy while the Italians increase their purchases of Swiss government securities. The first action by itself would lead to a(n) ____ of the franc against the lira while the second action by itself would lead to a(n) ____ of the franc against the lira. a. appreciation, appreciation b. depreciation, depreciation c. appreciation, depreciation d. depreciation, appreciation ANSWER: a FEEDBACK: a. A decreased demand for imports results in an appreciation in the domestic currency. An increased demand for foreign government securities results in an appreciation in the foreign currency.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze 49. Given floating exchange rates, a simultaneous decrease in the Canadian demand for British products and increase in the British desire to invest in Canadian government securities would cause a(n) a. appreciation of the pound against the dollar. b. depreciation of the pound against the dollar. c. unchanged pound/dollar exchange rate. d. appreciation of both the pound and dollar. ANSWER: b FEEDBACK: a. b. A simultaneous decrease in the Canadian demand for British products and increase in the British desire to invest in Canadian government securities would cause a depreciation of the pound against the dollar.

c. d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 50. Assume a system of floating exchange rates. Due to a high savings rate, suppose the level of savings in Japan is in excess of domestic investment needs. If Japanese residents invest abroad, then the yen's exchange value will ____, and the Japanese trade balance will move toward ____. a. appreciate, deficit b. appreciate, surplus c. depreciate, deficit d. depreciate, surplus ANSWER: d FEEDBACK: a. b. c. d. If Japanese residents invest abroad, then the yen's exchange value will depreciate and the Japanese trade balance will move toward surplus.

POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 52. For purchasing-power parity to exist, a. flows of currency in the trade account must be offset by flows of currency in the capital account. b. the nominal interest rate must be equal to the real interest rate in all countries. c. converting a sum of funds from one currency to another does not alter its purchasing power. d. a country's trade account must always be in balance. ANSWER: c FEEDBACK: a. b. c. The law of one price asserts that identical goods should be sold everywhere at the same price when converted to a common currency.

POINTS: DIFFICULTY: QUESTION TYPE:

If a U.S. resident anticipates that the exchange value of the dollar is going to appreciate against the pound, she should borrow needed funds from British banks rather than U.S. banks interest rates in the United States and Britain are the same. 1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 54. Given a system of floating exchange rates, if Canada's labor productivity rises relative to the labor productivity of its trading partners, then a. Canadian imports will fall, and the dollar will appreciate. b. Canadian imports will fall, and the dollar will depreciate. c. Canadian imports will rise, and the dollar will appreciate. d. Canadian imports will rise, and the dollar will depreciate. ANSWER: a FEEDBACK: a. If productivity gains are passed forward to domestic and foreign buyers in the form of lower prices, the nation‘s exports tend to increase and imports tend to decrease. The increased demand for a Canada‘s exports, and falling imports, causes its dollar to appreciate in the long run.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 55. Assume that labor productivity growth is slower in the United States than in its trading partners. Given a system of floating exchange rates, the impact of this growth differential for the United States will be a. increased exports and an appreciation of the dollar. b. increased exports and a depreciation of the dollar. c. increased imports and an appreciation of the dollar. d. increased imports and a depreciation of the dollar. ANSWER: d FEEDBACK: a. b. c. d. In the long run, as a country becomes less productive relative to other countries, its currency depreciates.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 56. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing-power parity, if the price of traded goods rises by 10 percent in the United States and remains constant in Japan, then the exchange rate will become a. 72 yen per dollar. b. 81 yen per dollar. c. 99 yen per dollar. d. 108 yen per dollar. ANSWER: b The law of one price predicts that the foreign-exchange value of a currency tends to RATIONALE: appreciate or depreciate at a rate equal to the difference between foreign and domestic inflation. The exchange rate between the U.S. dollar and the Japanese yen is 90 yen = 1 dollar. If the price of traded goods rises by 10 percent in the United States and remains constant in Japan, then the exchange rate will become 90 x (1- 10%) = 81 yen per dollar. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 57. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing-power parity, if the price of traded goods rises by 5 percent in the United States and 15 percent in Japan, then the exchange rate will become a. 72 yen per dollar. b. 81 yen per dollar. c. 99 yen per dollar. d. 108 yen per dollar. ANSWER: c The law of one price predicts that the foreign-exchange value of a currency tends to RATIONALE: appreciate or depreciate at a rate equal to the difference between foreign and domestic inflation.

POINTS: DIFFICULTY: QUESTION TYPE:

The exchange rate between the U.S. dollar and the Japanese yen is 90 yen = 1 dollar. If the price of traded goods rises by 5 percent in the United States and remains constant in Japan, then the exchange rate will become 90 x (15% - 5%) = 99 yen per dollar. 1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 58. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing power parity, if the price of traded goods falls by 5 percent in the United States and rises by 5 percent in Japan, then the exchange rate will become a. 72 yen per dollar. b. 81 yen per dollar. c. 99 yen per dollar. d. 108 yen per dollar. ANSWER: b The law of one price predicts that the foreign-exchange value of a currency tends to RATIONALE: appreciate or depreciate at a rate equal to the difference between foreign and domestic inflation. If the price of traded goods falls by 5 percent in the United States and rises by 5 percent in Japan, then Japan’s inflation rate is 10% higher. The exchange rate between the U.S. dollar and the Japanese yen is 90 yen = 1 dollar. If the price of traded goods rises by 10 percent in Japan, then the exchange rate will become 90 x (1- (10%) = 81 yen per dollar. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 59. Suppose that the yen-dollar exchange rate changes from 85 yen per dollar to 80 yen per dollar. One can say that the a. yen has appreciated against the dollar, and the dollar has depreciated against the yen. b. yen has depreciated against the dollar, and the dollar has appreciated against the yen. c. yen has appreciated against the dollar, and the dollar has appreciated against the yen. d. yen has depreciated against the dollar, and the dollar has depreciated against the yen. ANSWER: a FEEDBACK: a. If the yen-dollar exchange rate changes from 85 yen per dollar to 80 yen per dollar, the yen has appreciated against the dollar, and the dollar has depreciated against the yen.

b. c. d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 60. Given a floating exchange rate system, an increase in ____ would cause the dollar to appreciate against the euro. a. U.S. labor costs b. the U.S. money supply c. U.S. prices of goods d. U.S. real interest rates ANSWER: d FEEDBACK: a. b. c. d. According to the asset market approach to exchange rate determination, investors consider two key factors when deciding between domestic and foreign investments: relative interest rates and expected changes in exchange rates.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze 62. When deciding between U.S. and British government securities, an American investor typically considers a. U.S. and British interest rates and anticipated changes in the exchange rate. b. budget deficits of the U.S. government and British government. c. shifts in the demand for U.S. goods and British goods. d. U.S. and British inflation rates and anticipated changes in the exchange rate. ANSWER: a FEEDBACK: a. According to the asset market approach to exchange rate determination, investors consider two key factors when deciding between domestic and foreign investments: relative interest rates and expected changes in exchange rates.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Analyze 63. In the long run, exchange rates are primarily determined by a. agreements among governments of the world's industrial countries. b. relative interest rates in developing countries and industrial countries. c. economic fundamentals, such as relative productivity levels. d. the rate at which country's currencies exchange for gold. ANSWER: c FEEDBACK: a. b. c. In the long run, exchange rates are determined by four key factors: relative price levels, relative productivity levels, consumer preferences for domestic or foreign goods, and trade barriers.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Determining Long-Run Exchange Rates BLOOM'S: Understand

64. Increased tariffs on U.S. steel imports cause the dollar to ____ in the ____. a. appreciate, long run b. depreciate, long run c. appreciate, short run d. depreciate, short run ANSWER: a FEEDBACK: a. Trade barriers such as tariffs and quotas cause a currency appreciation in the long run for the country imposing the barriers.

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66. Relatively high interest rates in the United States cause the dollar to ____ in the ____. a. appreciate, long run b. depreciate, long run c. appreciate, short run d. depreciate, short run ANSWER: c FEEDBACK: a. b. c. High real interest rates in the United States tend to increase the demand for dollars, thus causing the dollar to appreciate in the short run.

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b. exchange rate appreciation in the short run. c. exchange rate depreciation in the long run. d. exchange rate appreciation in the long run. ANSWER: a FEEDBACK: a. According to the asset market approach to exchange rate determination, investors consider two key factors when deciding between domestic and foreign investments: relative interest rates and expected changes in exchange rates. Easy credit and low short-term interest rates lead to exchange rate depreciation in the short run.

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d. interest rates. ANSWER: FEEDBACK:

d a. b. c. d. Over the long run, foreign-exchange transactions are dominated by flows of goods, services, and investment capital that respond to forces such as inflation rates, investment profitability, consumer tastes, productivity, and government trade policy.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Determines Exchange Rates? KEYWORDS: BLOOM'S: Remember 71. Which is NOT true about the purchasing-power parity theory? a. The problem of choosing the appropriate price index exists. b. It overlooks the influence of capital flows. c. The government policy may modify exchange rates. d. It is an infallible guide to exchange rate determination. ANSWER: d FEEDBACK: a. b. c. d. The purchasing-power-parity theory overlooks the fact that exchange-rate movements may be influenced by investment flows; faces the problems of choosing the appropriate price index to be used in price calculations; and determining the equilibrium period to use as a base. Government policy may also interfere with the operation of the theory by implementing trade restrictions that disrupt the flow of exports and imports among nations.

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72. Consider Figure 12.3. The market is initially governed by demand curve D0 and supply curve S0. Suppose the domestic price level rises rapidly in the United States but stays relatively constant in the United Kingdom, which supply and demand curves depict the new situation? a. S1 and D2 b. S2 and D1 c. S0 and D2 d. S0 and D1 ANSWER: RATIONALE:

a An increase in the U.S. price level relative to price levels in other countries causes the dollar to depreciate in the long run.

As U.S. consumers buy relatively low-priced U.K. goods, the demand for pounds increases. Conversely, as the U.K. consumers purchase less relatively high-priced U.S. goods, the supply of pounds decreases. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 12.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze

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73. Consider Figure 12.3. The market is initially governed by demand curve D0 and supply curve S0. Suppose US productivity growth is faster than the UK, which supply and demand curves depict the new situation? a. S1 and D2 b. S2 and D1 c. S0 and D2 d. S0 and D1 ANSWER: RATIONALE:

b In the long run, as a country becomes more productive relative to other countries, its currency appreciates.

As U.S. goods become relatively less expensive, the United Kingdom demands more U.S. goods, which results in an increase in the supply of pounds. Also, Americans demand fewer U.K. goods, which become relatively more expensive, causing the demand for pounds to decrease. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 12.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze

74. Consider Figure 12.3. The market is initially governed by demand curve D0 and supply curve S0. Suppose US consumers develop stronger preferences for UK made goods, which supply and demand curves depict the new situation? a. S1 and D2 b. S2 and D1 c. S0 and D2 d. S0 and D1 ANSWER: RATIONALE:

c An increased demand for imports results in a depreciation in the domestic currency.

As US consumers develop stronger preferences for UK made goods, the demand for pounds increases. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 12.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze Copyright Cengage Learning. Powered by Cognero.

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75. Consider Figure 12.3. The market is initially governed by demand curve D0 and supply curve S0. Suppose the US government raises tariffs for UK made goods, which supply and demand curves depict the new situation? a. S1 and D2 b. S2 and D1 c. S0 and D2 d. S0 and D1 ANSWER: RATIONALE:

d Trade barriers such as tariffs and quotas cause a currency appreciation in the long run for the country imposing the barriers.

This tariff causes the demand for pounds to decrease. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 12.3 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze 76. Suppose that Barclays Bank of the United Kingdom expects the exchange rate to be $1.40 per pound at the end of the year. If today's exchange rate is $1.50 per pound, then Barclays will a. sell dollars today because it anticipates losses from buying dollars and holding them. b. buy dollars today because it anticipates profits from buying dollars and holding them. c. not buy dollars nor sell dollars because no profits can be realized. d. stop transacting with both dollar and pound till they stabilize. ANSWER: b Over short periods of time, decisions to hold domestic or foreign financial assets play a RATIONALE: large role in exchange-rate determination. This, in turn, is determined by expectations of future exchange rates. Barclays Bank of the United Kingdom expects the exchange rate to be $1.40 per pound at the end of the year, then it expects the pound to depreciate (dollar to appreciate). Barclays will buy dollars today because it anticipates profits from buying dollars and holding them. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Analyze Copyright Cengage Learning. Powered by Cognero.

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Use the following table to answer the next two questions European Expected value of the dollar in three months Investor (dollars per euro) Investor #1 $1.30 Investor #2 $1.20 Investor #3 $1.15 77. If the current exchange value of the dollar is $1.25 per euro, then a. European Investor #1 expects a dollar depreciation against the euro, but European Investors #2 and #3 expect a dollar appreciation. b. European Investor #1 expects a dollar appreciation against the euro, but European #2 and #3 expect a dollar depreciation. c. all three European investors expect that the dollar will depreciate against the euro. d. all three European investors expect that the dollar will appreciate against the euro. ANSWER: a FEEDBACK: a. If the current exchange value of the dollar is $1.25 per euro, then European Investor #1 expects a dollar depreciation against the euro, but European Investors #2 and #3 expect a dollar appreciation.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Question 136 and 137 NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze

78. If the current exchange value of the dollar is $1.25 per euro, then a. European Investor #1 has less incentive to invest in the United States and thus demands fewer dollars. b. European Investor #2 has less incentive to invest in the United States and thus demands fewer dollars. c. European Investor #3 has less incentive to invest in the United States and thus demands fewer dollars. d. all three European investors have less incentive to invest in the United States and thus demands fewer dollars. ANSWER: a FEEDBACK: a. If the current exchange value of the dollar is $1.25 per euro, then European Investor #1 has less incentive to invest in the United States and thus demands fewer dollars.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False PREFACE NAME: Question 136 and 137 NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze 79. Factors that will shift the demand curve for pounds include all of the following EXCEPT a. the expected future exchange rate of the pound. b. inflation rates around the world. c. interest rates around the world. d. the current exchange rate of the pound. ANSWER: d FEEDBACK: a. b. c. d. According to the asset market approach to exchange rate determination, investors consider two key factors when deciding between domestic and foreign investments: relative interest rates and expected changes in exchange rates. Inflation rates will affect the real interest rate.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 80. The demand curve for euros in the foreign exchange market will increase (shift rightward) if a. European interest rates fall relative to foreign interest rates. b. the current exchange value of the euro depreciates. c. Europe increases tariffs and applies more stringent quotas on imported goods. d. the rate of inflation in Europe is less than the rate of inflation throughout the world. ANSWER: d FEEDBACK: a. b. c. d. The demand curve for euros in the foreign exchange market will increase (shift rightward) if the rate of inflation in Europe is less than the rate of inflation throughout the world.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Determining Short-Run Exchange Rates: The Asset Market Approach BLOOM'S: Understand

81. If the interest rate in Japan increases while the interest rate in the United States remains constant, then a. the demand curve for dollars shifts to the left. b. the demand curve for dollars shifts to the right. c. the demand curve for yen shifts to the left. d. the demand curves for both yen and dollars remain constant. ANSWER: a FEEDBACK: a. If the interest rate in Japan increases while the interest rate in the United States remains constant, then the demand curve for dollars shifts to the left.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Analyze 82. If the rate of inflation in Japan dramatically increases while the rate of inflation in the United States remains constant, then a. the demand curve for dollars shifts to the left. b. the demand curve for dollars shifts to the right. c. the demand curve for yen shifts to the right. d. the demand curves for both yen and dollars remain constant. ANSWER: b FEEDBACK: a. b. If the rate of inflation in Japan dramatically increases while the rate of inflation in the United States remains constant, then the demand curve for dollars shifts to the right.

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83. Suppose that the exchange value of the dollar currently equals one hundred yen. As a result of changing economic conditions, suppose that people anticipate that the dollar will be worth 120 yen in three months. This expectation results in a. an increase in the value of U.S. exports to Japan. b. an increase in the demand for the yen. c. a decrease in the demand for dollars. d. an increase in the demand for dollars. ANSWER: d FEEDBACK: a. b. c. d. People anticipate that the dollar will appreciate against the yen. This expectation results in an increase in the demand for dollars.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Analyze 84. If economic growth perks up in the United States so that investors think they can realize larger profits from American assets, then the a. supply of U.S. dollars will increase in the foreign exchange market. b. the demand for U.S. dollars will increase in the foreign exchange market. c. the demand for U.S. dollars will decrease in the foreign exchange market. d. the demand for U.S. dollars will remain constant in the foreign exchange market. ANSWER: b FEEDBACK: a. b. An increase in economic causes the demand for U.S. dollars to increase in the foreign exchange market.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 85. The supply curve of dollars decreases (shifts to the left) in the foreign exchange market. This could be the result of a. the current exchange rate of the dollar rising (appreciating). b. the current exchange rate of the dollar falling (depreciating). c. an increase in the U.S. inflation rate relative to the inflation rate in other countries. Copyright Cengage Learning. Powered by Cognero.

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d. a decrease in the U.S. inflation rate relative to the inflation rate in other countries. ANSWER: c FEEDBACK: a. b. c. An increase in the U.S. inflation rate relative to the inflation rate in other countries causes the supply curve of dollars decreases (shifts to the left) in the foreign exchange market.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 86. If the U.S. interest rate rises relative to the foreign interest rate, then in the foreign exchange market a. the demand for dollars increases, and the supply of dollars increases. b. the demand for dollars increases, and the supply of dollars decreases. c. the demand for dollars decreases, and the supply of dollars increases. d. the demand for dollars decreases, and the supply of dollars decreases. ANSWER: b FEEDBACK: a. b. Foreign investors will be attracted to the relatively high interest rates in the United States and will demand more dollars to buy U.S. Treasury bills. The demand for dollars rises. At the same time, U.S. investors will find investing in foreign countries less attractive than before, so fewer dollars will be offered to buy foreign currencies for purchases of foreign securities. The supply of dollars decreases.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 87. Suppose that $1 will buy 0.8 Swiss francs in 2015 and 0.9 francs in 2016. This change would have occurred as a result of a. an increase in the demand for dollars in the foreign exchange market. b. a decrease in the demand for dollars in the foreign exchange market. c. an increase in the supply of dollars in the foreign exchange market. d. no change in the supply of dollars in the foreign exchange market. Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

a a. This change would have occurred as a result of an increase in the demand for dollars in the foreign exchange market.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 88. A decrease in the U.S. demand for automobile imports will cause the supply curve of dollars to ______ and result in a(n) ___________. a. increase; appreciation of the dollar b. increase; depreciation of the dollar c. decrease; appreciation of the dollar d. decrease; depreciation of the dollar ANSWER: c FEEDBACK: a. b. c. A decreased demand for imports results in an appreciation in the domestic currency.

c. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 90. An increase in the British demand for exports of American steel will ______ the demand for U.S. dollars and result in a (an) ______ of the dollar. a. increase; appreciation b. increase; depreciation c. decease; appreciation d. decrease; depreciation ANSWER: a FEEDBACK: a. An increased demand for a country‘s exports causes its currency to appreciate in the long run.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 91. British investors will expect that the U.S. dollar will appreciate against the pound in the future if there are expectations that a. the U.S. price level will increase relative to the British price level. b. U.S. labor productivity will increase relative to British labor productivity. c. the U.S. demand for British imports will increase. d. U.S. tariffs on British imports will decline. ANSWER: b FEEDBACK: a. b. In the long run, as a country becomes more productive relative to other countries, its currency appreciates.

c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC4: - Productivity and growth TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 92. In the foreign exchange market, a decrease in the world demand for Japanese exports a. shifts the demand curve for yen leftward, which causes the yen to depreciate. b. shifts the demand curve for yen leftward, which causes the yen to appreciate. c. shifts the demand curve for yen rightward, which causes the yen to depreciate. d. shifts the demand curve for yen rightward, which causes the yen to appreciate. ANSWER: a FEEDBACK: a. A decreased demand for exports results in a depreciation in the domestic currency.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 93. Due to increased air travel, suppose that Saudi Arabian Airlines purchases forty jetliners from Airbus, a European firm. This results in a. a decrease in the demand curve (leftward shift) for euro. b. an increase in the demand curve (rightward shift) for euro. c. a decrease in the supply curve (leftward shift) of euro. d. an increase in the supply curve (rightward shift) of euro. ANSWER: b FEEDBACK: a. b. An increased demand for a country‘s exports causes its currency to appreciate in the long run.

c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply Copyright Cengage Learning. Powered by Cognero.

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94. Hyundai Inc is a South Korean company that manufactures automobiles. If Hyundai purchases sheet steel from U.S. Steel Inc., then a. the demand for dollars increases, and the dollar appreciates against the won. b. the demand for dollars increases, and the dollar depreciates against the won. c. the demand for dollars decreases, and the dollar appreciates against the won. d. the demand for dollars decreases, and the dollar depreciates against the won. ANSWER: a FEEDBACK: a. An increased demand for a country‘s exports causes its currency to appreciate in the long run.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 95. The U.S. interest rate minus the foreign interest rate is called the U.S. interest rate differential. The U.S. interest rate differential would increase if a. the U.S. interest rate decreases, and the foreign interest rate remains constant. b. the U.S. interest rate decreases, and the foreign interest rate increases. c. the U.S. interest rate increases, and the foreign interest rate increases. d. the U.S. interest rate increases, and the foreign interest rate decreases. ANSWER: d FEEDBACK: a. b. c. d. U.S. interest rate differential = U.S. interest rate - foreign interest rate The U.S. interest rate differential would increase if U.S. interest rate increase and foreign interest rate decrease.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 96. Suppose that the interest rate in Great Britain increases, while the interest rate in the United States remains constant. As a result, a. the demand curve for pounds decreases, and the pound depreciates against the dollar. Copyright Cengage Learning. Powered by Cognero.

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b. the demand curve for pounds increases, and the pound depreciates against the dollar. c. the demand curve for pounds increases, and the pound appreciates against the dollar. d. the demand curve for pounds decreases, and the pound appreciates against the dollar. ANSWER: c FEEDBACK: a. b. c. U.S. investors will be attracted to the relatively high interest rates in Great Britain and will demand more pounds to buy U.K. Treasury bills. The demand for pounds rises, and the pound appreciates against the dollar.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 98. When The Economist magazine runs articles using the Big Mac hamburger to value exchange rates, it is using the principle of a. exchange arbitrage. b. market expectations. c. purchasing power parity. d. interest rate parity. Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

c a. b. c. The law of one price asserts that identical goods (Big Mac hamburgers) should be sold everywhere at the same price when converted to a common currency.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 99. The theory of purchasing power parity states that changes in the nominal exchange rate arise from differences in ______ among countries. a. nominal interest rates b. real interest rates c. inflation rates d. productivity rates ANSWER: c FEEDBACK: a. b. c. According to the purchasing-power-parity theory, changes in relative national price levels determine changes in exchange rates over the long run.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Remember 100. Which of the following does NOT explain long-run movements in exchange rates? a. productivity differences among nations b. price level differences among nations c. barriers to trade (tariffs and quotas) among nations d. interest rate differences among nations ANSWER: d FEEDBACK: a. b. c. Copyright Cengage Learning. Powered by Cognero.

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d. In the long run, exchange rates are determined by four key factors: relative price levels, relative productivity levels, consumer preferences for domestic or foreign goods, and trade barriers.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Remember 101. The law of one price would least likely apply to a. steel. b. oil. c. corn. d. houses. ANSWER: d FEEDBACK: a. b. c. d. The law of one price holds reasonably well for globally tradable commodities. The law does not appear to apply well to nontradable goods and services such as housing, and personal services. These products are largely insulated from global competition, and their prices can vary from place to place.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 102. A relatively high rate of inflation in the United States will result in a. an appreciation of the dollar against foreign currencies in the long run. b. a depreciation of the dollar against foreign currencies in the long run. c. an appreciation of the dollar against foreign currencies in the short run. d. a depreciation of the dollar against foreign currencies in the short run. ANSWER: b FEEDBACK: a. b. According to the purchasing-power-parity theory, changes in relative national price levels determine changes in exchange rates over the long run. A currency maintains its purchasing power parity if it depreciates by an amount equal to the excess of domestic inflation over foreign inflation.

c. d. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 103. Suppose that trade barriers and transportation costs are nonexistent. If the exchange rate is 0.9 Swiss francs per dollar, then according to the law of one price, a refrigerator that costs $1,000 in the United States will cost a. 1,900 francs in Switzerland. b. 900 francs in Switzerland. c. 1,300 francs in Switzerland. d. 1,000 francs in Switzerland. ANSWER: b FEEDBACK: a. b. If the exchange rate is 0.9 Swiss francs per dollar, then according to the law of one price, a refrigerator that costs $1,000 in the United States will cost 900 francs in Switzerland ($1,000 x 0.90).

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 104. According to the theory of purchasing power parity, if the price level in France rises by 6 percent and the price level in the United States rises by 4 percent, then the dollar will a. appreciate by 2 percent against the euro in the short run. b. depreciate by 2 percent against the euro in the short run. c. appreciate by 2 percent against the euro in the long run. d. depreciate by 2 percent against the euro in the long run. ANSWER: c If the price level in France rises by 6 percent and the price level in the United States rises RATIONALE: by 4 percent, then inflation is higher in France by 2%.

POINTS: DIFFICULTY:

According to the purchasing-power-parity theory, a currency maintains its purchasing power parity if it appreciates by an amount equal to the excess of foreign inflation over domestic inflation. Thus. the dollar will appreciate by 2 percent against the euro in the long run. 1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 105. If Americans develop stronger preferences for Canadian natural gas, then the likely result is that a. the exchange value of the U.S. dollar will fall relative to the exchange value of the Canadian dollar. b. the exchange value of the U.S. dollar will rise relative to the exchange value of the Canadian dollar. c. the price of Canadian natural gas will decline when measured in terms of the Canadian dollar. d. the price of Canadian natural gas will remain constant when measured in terms of the Canadian dollar. ANSWER: a FEEDBACK: a. An increased demand for imports results in a depreciation in the domestic currency.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 106. In the long run, exchange rates are mainly determined by a. the difference between short-run interest rates in each county. b. the rate at which a country's currency exchanges for silver or gold. c. agreements among governments in the major banking countries of the world. d. market fundamentals, such as productivity levels or price levels in various countries. ANSWER: d FEEDBACK: a. b. c. d. In the long run, exchange rates are determined by four key factors: relative price levels, relative productivity levels, consumer preferences for domestic or foreign goods, and trade barriers.

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KEYWORDS:

BLOOM'S: Remember

107. If the rate of growth in labor productivity in the United States increases relative to the rate of growth in labor productivity in other countries, then a. the dollar's exchange value depreciates against other currencies. b. the dollar's exchange value remains constant against other currencies. c. Americans are willing to pay more U.S. dollars per unit of foreign currency. d. Americans are willing to pay fewer U.S. dollars per unit of foreign currency. ANSWER: d FEEDBACK: a. b. c. d. In the long run, as a country becomes more productive relative to other countries, its currency appreciates.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 108. If American consumers increase their demand for Mercedes Benz automobiles manufactured in Germany, then a. the U.S. dollar's exchange value appreciates against the euro. b. the U.S. dollar's exchange value remains constant against the euro. c. Americans are willing to pay fewer U.S. dollars for the euro. d. Americans are willing to pay more U.S. dollars for the euro. ANSWER: d FEEDBACK: a. b. c. d. An increased demand for imports results in a depreciation in the domestic currency.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 109. If the United States reduces its tariffs on the import of natural gas, then a. the dollar's exchange value depreciates. b. the dollar's exchange value appreciates. Copyright Cengage Learning. Powered by Cognero.

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c. natural gas becomes more expensive for Americans. d. natural gas prices do not change for Americans. ANSWER: a FEEDBACK: a. Trade barriers such as tariffs and quotas cause a currency depreciation in the long run for the country reduces the barriers.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 110. When evaluating the financial investments in the home country and a foreign country, investors generally consider a. labor productivity levels and rates of technological development. b. budget surpluses or deficits of the home country and foreign country. c. domestic and foreign interest rates and expected fluctuations in the exchange rate. d. domestic and foreign price levels and the expected fluctuations in the exchange rate. ANSWER: c FEEDBACK: a. b. c. In the short run, the exchange rate between the dollar and the foreign currencies reflects relative interest rates and expected changes in the exchange rate. So, investors generally consider domestic and foreign interest rates and expected fluctuations in the exchange rate when evaluating financial investments.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Remember 111. Concerning exchange rate forecasting, ______ are common sense models that require the gathering of a wide array of political and economic data and the interpretation of these data in terms of the timing, direction, and magnitude of exchange rate changes. a. judgmental forecasts b. technical forecasts c. fundamental forecasts d. econometric forecasts Copyright Cengage Learning. Powered by Cognero.

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ANSWER: FEEDBACK:

a a. Judgmental forecasts are sometimes known as subjective or common sense models. They require the gathering of a wide array of political and economic data and the interpretation of these data in terms of the timing, direction, and magnitude of exchange-rate changes.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forecasting Foreign-Exchange Rates KEYWORDS: BLOOM'S: Remember 112. In a free market, exchange rates are determined by market fundamentals and market expectations. a. True b. False ANSWER: True FEEDBACK: Correct The factors that cause the supply and demand schedules of currencies to change include market fundamentals (economic variables) and include market expectations about future exchange rates. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Determines Exchange Rates? KEYWORDS: BLOOM'S: Remember 114. Market expectations include news about market fundamentals and speculative views about future exchange rates. a. True b. False ANSWER: True FEEDBACK: Correct Market expectations include news about future market fundamentals and traders‘ opinions about future exchange rates. Incorrect

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b. False ANSWER: FEEDBACK:

True Correct

In a free market, currency values are determined by the unregulated forces of supply and demand as long as central banks do not intervene in the foreign exchange markets.

Incorrect

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118. Refer to Figure 12.2. If the United States decreases tariffs on imports from Switzerland, then there would occur a decrease in the demand for francs and a decrease in the dollar price of the franc. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Trade barriers such as tariffs and quotas cause a currency depreciation in the long run for the country reduces the barriers.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False PREFACE NAME: Figure 12.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze

119. Refer to Figure 12.2. If Swiss manufacturing costs increase relative to those of the United States, then there would occur an increase in the supply of francs and an appreciation in the dollar's exchange value. a. True b. False ANSWER: True FEEDBACK: Correct A decrease in the U.S. price level relative to price levels in other countries causes the dollar to appreciate in the long run. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False PREFACE NAME: Figure 12.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Analyze

120. Refer to Figure 12.2. If the Federal Reserve adopts a restrictive monetary policy that leads to relatively high interest rates in the United States, then the demand for francs would decrease, the supply of francs would increase, and the dollar's exchange value would appreciate. a. True b. False ANSWER: True FEEDBACK: Correct In the short run, relatively low domestic interest rates tend to promote the depreciation of a currency's exchange value, while relatively high domestic interest rates lead to currency appreciation. Incorrect

121. Refer to Figure 12.2. As the profitability of assets in Switzerland rises relative to the profitability of assets in the United States, U.S. residents make additional investments in Switzerland; this leads to an increased demand for francs and a depreciation of the dollar's exchange value. a. True b. False ANSWER: True FEEDBACK: Correct As the profitability of assets in Switzerland rises relative to the profitability of assets in the United States, U.S. residents make additional investments in Switzerland; this leads to an increased demand for francs and a depreciation of the dollar's exchange value. Incorrect

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TOPICS: KEYWORDS:

Determining Short-Run Exchange Rates: The Asset Market Approach BLOOM'S: Analyze

122. Under floating exchange rates, short-run exchange rates are primarily determined by national differences in real interest rates and shifting expectations of future exchange rates. a. True b. False ANSWER: True FEEDBACK: Correct In the short run, foreign-exchange transactions are dominated by transfers of assets that respond to differences in real interest rates and to shifting expectations of future exchange rates. Incorrect

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levels, relative productivity levels, consumer preferences for domestic or foreign goods, and trade barriers.

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KEYWORDS:

BLOOM'S: Understand

127. A country having stronger preferences for imports than its trading partners have for its exports finds its demand for foreign exchange rising more rapidly than its supply of foreign exchange. a. True b. False ANSWER: True FEEDBACK: Correct An increased demand for imports results in a depreciation in the domestic currency. Incorrect

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132. According to the law of one price, identical goods should cost the same in all nations, assuming there are no shipping costs nor trade barriers. a. True b. False ANSWER: True FEEDBACK: Correct The law of one price asserts that identical goods should be sold everywhere at the same price when converted to a common currency, assuming that it is costless to ship the good between nations, there are no barriers to trade, and markets are competitive. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Remember 133. The purchasing- power-parity theory predicts that if the U.S. inflation rate exceeds the Japanese inflation rate by 4 percent, then the dollar's exchange value will appreciate by 4 percent against the yen. a. True b. False ANSWER: False According to the purchasing-power-parity theory, changes in relative national price levels RATIONALE: determine changes in exchange rates over the long run. A currency maintains its purchasing power parity if it depreciates by an amount equal to the excess of domestic inflation over foreign inflation. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 134. Assume the initial yen/dollar exchange rate to be 100 yen per dollar. If the U.S. inflation rate is 2 percent, and the Japanese inflation rate is 7 percent, then the exchange rate should move to 105 yen per dollar according to the purchasingpower-parity theory. a. True b. False ANSWER: True If the U.S. inflation rate is 2 percent, and the Japanese inflation rate is 7 percent, then RATIONALE: Japan’s inflation is higher by 5 percent. Copyright Cengage Learning. Powered by Cognero.

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According to the purchasing-power-parity theory, the yen maintains its purchasing power parity if it depreciates by an amount equal to the excess of domestic inflation over foreign inflation. The yen will depreciate by 5% to 105 yen per dollar. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 135. Assume the initial dollar/pound exchange rate to be $2 per pound. If the U.S. inflation rate is 8 percent, and the U.K. inflation rate is 3 percent, then the exchange rate should move to $2.10 per pound according to the purchasing-powerparity theory. a. True b. False ANSWER: True If the U.S. inflation rate is 8 percent, and the U.K. inflation rate is 3 percent, then U.S RATIONALE: inflation is higher by 5 percent. According to the purchasing-power-parity theory, the dollar maintains its purchasing power parity if it depreciates by an amount equal to the excess of domestic inflation over foreign inflation. The dollar will depreciate by 5% to $2.10 per pound. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Apply 136. If consumer tastes in the United States change in favor of goods produced in France, then the demand for francs will increase, which causes an appreciation of the dollar against the franc under a floating exchange rate system. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect An increased demand for imports results in a depreciation in the domestic currency.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 137. If the United States experiences an enormous wheat crop failure, then it will have to import more wheat, and the dollar's exchange value will depreciate under a system of floating exchange rates. a. True b. False ANSWER: True FEEDBACK: Correct An increased demand for imports results in a depreciation in the domestic currency. Incorrect

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b. False ANSWER: FEEDBACK:

False Correct Incorrect Trade barriers such as tariffs and quotas cause a currency appreciation in the long run for the country imposing the barriers.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 140. According to the "Big Mac" index, if a Big Mac costs $2.28 in the United States and 25.75 krone in Denmark (equivalent to $4.25), then the Danish krone is an undervalued currency. a. True b. False ANSWER: False If the price of the Big Mac was 25.75 krone in Denmark while the U.S. price was $2.28, the RATIONALE: implied exchange rate is 11.29 krone per dollar (25.75 krone/$2.28). However, the exchange rate is given as 6.06 krone per dollar (25.75 krone/$4.25). Therefore, the Big Mac Index suggested that the krone is overvalued against the dollar by 86 percent [1-(11.29/6.06)]. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 141. According to the "Big Mac" index, if a Big Mac costs $2.28 in the United States and 48 baht in Thailand (equivalent to $1.91), then the baht is an undervalued currency. a. True b. False ANSWER: True If the price of the Big Mac was 48 baht in Thailand while the U.S. price was $2.28, the RATIONALE: implied exchange rate is 21.05 baht per dollar (48 baht/$2.28). However, the exchange rate is given as 25.13 baht per dollar (48 baht/$1.91). Therefore, the Big Mac Index suggested that the baht is undervalued against the dollar by Copyright Cengage Learning. Powered by Cognero.

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16 percent [1-(21.05/25.13)]. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 142. In the short run, exchange rates are primarily determined by investor expectations of returns on assets, such as government securities and bank accounts. a. True b. False ANSWER: True FEEDBACK: Correct Over short periods of time, decisions to hold domestic or foreign financial assets play a large role in exchange-rate determination. This, in turn, is determined by expectations of future exchange rates. Incorrect

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KEYWORDS:

BLOOM'S: Remember

144. Changes in market expectations have their greatest impact on exchange-rate changes over the long run as opposed to the short run. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Changes in market fundamentals exert a disproportionately large short-run impact on exchange rates.

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149. According to exchange-rate overshooting, an appreciation of the Australian dollar is likely to be greater over a long time period than over a short time period. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect An exchange rate is said to overshoot when its short-run response (depreciation or appreciation) to a change in market fundamentals is greater than its long-run response. Changes in market fundamentals exert a disproportionately large short-run impact on exchange rates.

POINTS:

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DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forecasting Foreign-Exchange Rates KEYWORDS: BLOOM'S: Remember 152. Concerning exchange rate forecasting, technical analysis extrapolates from past exchange-rate trends while ignoring economic and political determinants of exchange rates. a. True b. False ANSWER: True FEEDBACK: Correct Technical analysis extrapolates from past exchange-rate trends and projects them into the future to generate forecasts while ignoring economic and political determinants of exchange-rate movements. Incorrect

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154. If investors anticipate that the exchange value of the euro will appreciate against the dollar in the future, then the current exchange value of the euro will appreciate against the dollar. a. True b. False ANSWER: True FEEDBACK: Correct According to the asset market approach to exchange rate determination, investors consider two key factors when deciding between domestic and foreign investments: relative interest rates and expected changes in exchange rates. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 155. If investors anticipate that the exchange value of the euro will depreciate against the dollar in the future, then the current exchange value of the euro will appreciate against the dollar. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect According to the asset market approach to exchange rate determination, investors consider two key factors when deciding between domestic and foreign investments: relative interest rates and expected changes in exchange rates.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 156. If short-term interest rates rise in Germany, then the exchange value of the dollar will appreciate against the euro in the long run. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Should real interest rates in Germany rise there would occur an increase in the demand for the euro and an appreciation of the euro.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 157. A rise in the expected rate of inflation in Canada will cause the exchange value of the Canadian dollar to depreciate. a. True b. False ANSWER: True FEEDBACK: Correct A currency maintains its purchasing power parity if it depreciates by an amount equal to the excess of domestic inflation over foreign inflation. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 158. If the interest rate in Japan increases, investors increase their demand for yen, and the yen's exchange value appreciates. a. True b. False ANSWER: True FEEDBACK: Correct Should real interest rates in Japan rise there would occur a decrease in the demand for yen and an appreciation of the yen. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short Run Exchanges Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand 159. According to the purchasing power parity theory, if the inflation rate in Mexico is greater than the inflation rate in Switzerland, then the nominal exchange value of the peso will appreciate against the franc. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect A currency maintains its purchasing power parity if it depreciates by an amount Copyright Cengage Learning. Powered by Cognero.

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equal to the excess of domestic inflation over foreign inflation.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 160. The theory of purchasing power parity broadens the law of one price to a group of goods. a. True b. False ANSWER: True FEEDBACK: Correct The purchasing-power-parity theory provides a generalized explanation of exchange rates based on the prices of many goods. Therefore, the purchasingpower-parity theory is simply the application of the law of one price to national price levels. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Remember 161. If American consumers increase their demand for British goods, then they are willing to pay fewer U.S. dollars per British pound. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect In the long run, American consumer preferences for British goods will depreciate the dollar against the pound.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 162. In the long run, exchange rates are mainly determined by economic fundamentals, such as the productivity levels of different countries. Copyright Cengage Learning. Powered by Cognero.

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a. True b. False ANSWER: FEEDBACK:

True Correct

Over the long run, foreign-exchange transactions are dominated by flows of goods, services, and investment capital that respond to forces such as inflation rates, investment profitability, consumer tastes, productivity, and government trade policy.

Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Determines Exchange Rates? KEYWORDS: BLOOM'S: Remember 163. In the short run, exchange rates are determined by the rate at which a country's currency exchanges for silver and gold. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect In the short run, foreign-exchange transactions are dominated by transfers of assets that respond to differences in real interest rates and to shifting expectations of future exchange rates.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: What Determines Exchange Rates? KEYWORDS: BLOOM'S: Remember 164. The nominal interest rate equals the real interest rate minus the inflation rate. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The nominal interest rate equals the inflation rate minus the real interest rate.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC17: - The role of money Determining Short-Run Exchange Rates: The Asset Market Approach BLOOM'S: Remember

165. A country's market fundamentals include economic variables, such as productivity, inflation, consumer preferences, and real interest rates. a. True b. False ANSWER: True FEEDBACK: Correct Market fundamentals (economic variables) such as productivity, inflation rates, real interest rates, consumer preferences, and government trade policy. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC16: - Measuring the economy TOPICS: What Determines Exchange Rates? KEYWORDS: BLOOM'S: Remember 166. According to the safe-haven effect, investors may be willing to sacrifice an amount of return if an economy offers them a low risk repository for their funds. a. True b. False ANSWER: True FEEDBACK: Correct Some investors may be willing to sacrifice a significant amount of return if an economy offers them an especially low-risk repository for their funds (safe-haven effect). Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Remember 167. In recent decades, the safe-haven effect has applied to the United States, with a long history of stable government, relatively stable economy, and large and efficient financial markets. a. True b. False ANSWER: True FEEDBACK: Correct Some investors may be willing to sacrifice a significant amount of return if an economy offers them an especially low-risk repository for their funds (safe-haven effect). In recent decades, the United States—with a long history of stable Copyright Cengage Learning. Powered by Cognero.

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government, steady economic growth, and large and efficient financial markets— could be expected to draw foreign investment for this reason. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC19: - Efficiency and equity TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Remember 168. The volatility of exchange rates is reinforced by the phenomenon of overshooting, in which exchange rates depreciate or appreciate more in the long run than in the short run. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect An exchange rate is said to overshoot when its short-run response (depreciation or appreciation) to a change in market fundamentals is greater than its long-run response.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Exchange Rate Overshooting KEYWORDS: BLOOM'S: Remember 169. For the British pound, exchange rate overshooting is explained by the long run supply schedule of pounds being more inelastic than the short run supply schedule of pounds. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Exchange-rate overshooting can be explained by the tendency of elasticities to be smaller in the short run than in the long run.

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170. Concerning exchange rate forecasting, judgmental forecasts are common sense models that rely on a wide array of political and economic data. a. True b. False ANSWER: True FEEDBACK: Correct Judgmental forecasts are sometimes known as subjective or common sense models. They require the gathering of a wide array of political and economic data and the interpretation of these data in terms of the timing, direction, and magnitude of exchange-rate changes. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Forecasting Foreign-Exchange Rates KEYWORDS: BLOOM'S: Remember 171. Exchange rates are volatile in the short run because expectations about the variables that affect exchange rates change frequently. a. True b. False ANSWER: True FEEDBACK: Correct Exchange-rate volatility is intensified because of overshooting. An exchange rate is said to overshoot when its short-run response (depreciation or appreciation) to a change in market fundamentals is greater than its long-run response. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Overshooting KEYWORDS: BLOOM'S: Remember 172. What is the purchasing power parity approach to exchange rate determination? The purchasing power parity approach asserts that changes in relative national price levels ANSWER: determine changes in exchange rates over the long run. A currency maintains its purchasing power parity if it depreciates (appreciates) by an amount equal to the excess of domestic (foreign) inflation over foreign (domestic) inflation. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic Copyright Cengage Learning. Powered by Cognero.

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation Rates, Purchasing Power Parity, and Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 173. In a free market, What Determines Exchange Rates? in the long run and the short run? The long run determinants of exchange rates include market fundamentals, such as ANSWER: consumer preferences for domestic and foreign goods, government trade policies, productivity levels, and relative price levels. In the short run, exchange rates are determined by interest rate differentials and market expectations concerning economic growth, inflation rates, and interest rates. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Long-Run Exchange Rates KEYWORDS: BLOOM'S: Understand 174. What is exchange rate overshooting? An exchange rate is said to overshoot when its short-run response to a change in market ANSWER: fundamentals is greater than its long-run response. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Overshooting KEYWORDS: BLOOM'S: Understand 175. What is the asset market approach to exchange rate determination? Over short periods of time, decisions to hold domestic or foreign financial assets play a ANSWER: much greater role in exchange rate determination than the demand for imports and exports does. According to the asset market approach, investors consider two key factors when deciding between domestic and foreign investments: relative interest rates and expected changes in exchange rates. Changes in these factors, in turn, account for fluctuations in exchange rates that we observe in the short run. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Determining Short-Run Exchange Rates: The Asset Market Approach KEYWORDS: BLOOM'S: Understand

Chapter 13: Exchange-Rate Adjustments and the Balance of Payments 1. According to the absorption approach, the economic circumstances that best warrant a currency devaluation is where the domestic economy faces a. unemployment coupled with a trade deficit. b. unemployment coupled with a trade surplus. c. full employment coupled with a trade deficit. d. full employment coupled with a trade surplus. ANSWER: a FEEDBACK: a. With the economy operating below maximum capacity, the price incentives of depreciation would tend to direct idle resources into the production of goods for export, in addition to diverting spending away from imports to domestically produced substitutes. The impact of the depreciation is to expand domestic output as well as improve the trade balance.

c. d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Understand 3. Assume that Brazil has a constant money supply and that it devalues its currency. The monetary approach to devaluation reasons that one of the following tends to occur for Brazil. a. Domestic prices rise, the purchasing power of money falls, and consumption falls. b. Domestic prices rise, the purchasing power of money rises, and consumption rises. c. Domestic prices fall, the purchasing power of money rises, and consumption falls. d. Domestic prices fall, the purchasing power of money rises, and consumption rises. ANSWER: a FEEDBACK: a. According to the monetary approach, currency depreciation would increase the price level. This increase would increase the demand for money, decrease the purchasing power of money, and lower consumption.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Monetary Approach to Currency Depreciation KEYWORDS: BLOOM'S: Apply 4. According to the Marshall-Lerner condition, a currency depreciation will best lead to an improvement on the home country's trade balance when the a. home demand for imports is inelastic and foreign export demand is inelastic. b. home demand for imports is inelastic and foreign export demand is elastic. c. home demand for imports is elastic and foreign export demand is inelastic. d. home demand for imports is elastic and foreign export demand is elastic. ANSWER: d FEEDBACK: a. b. c. d. The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works best when demand elasticity is high. The Marshall–Lerner condition states that depreciation will improve the trade balance if the currency-depreciating nation‘s demand elasticity for imports plus the foreign demand elasticity for the nation‘s exports exceeds 1.0.

POINTS:

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DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Understand 5. Assume an economy operates at full employment and faces a trade deficit. According to the absorption approach, currency devaluation will improve the trade balance if domestic a. interest rates rise, thus encouraging investment spending. b. income rises, thus stimulating consumption. c. output falls to a lower level. d. spending is cut, thus freeing resources to produce exports. ANSWER: d FEEDBACK: a. b. c. d. With an economy operating at full employment, no unutilized resources are available for additional production. The only way that currency depreciation can improve the trade balance is for the economy to somehow cut domestic absorption, freeing resources needed to produce additional export goods and import substitutes.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Apply 6. An appreciation of the U.S. dollar tends to a. discourage foreigners from making investments in the United States. b. discourage Americans from purchasing foreign goods and services. c. increase the number of dollars that could be bought with foreign currencies. d. discourage Americans from traveling overseas. ANSWER: a FEEDBACK: a. An appreciation in the domestic currency‘s exchange value tends to increase the firm‘s costs by the same proportion in terms of the foreign currency and discourage investments in the United States.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Easy Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rate Changes on Costs and Prices KEYWORDS: BLOOM'S: Remember 7. The Marshall-Lerner condition deals with the impact of currency depreciation on a. domestic income. b. domestic absorption. c. purchasing power of money balances. d. relative prices. ANSWER: d FEEDBACK: a. b. c. d. The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works best when demand elasticity is high. The general rule that determines the actual outcome is the so-called Marshall– Lerner condition.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Remember 8. According to the J-curve concept, there are multiple potential outcomes on the balance of payments from a currency depreciation. Which of the following is NOT one of those outcomes? a. The effects of a currency depreciation are transmitted primarily via the income adjusted mechanism. b. The effects of a currency depreciation are likely to be adverse or negative in the short run. c. In the long run, the effects of a currency depreciation are likely to be positive given favorable elasticity conditions. d. The effects of a currency depreciation may be influenced by offsetting devaluations made by other countries. ANSWER: a FEEDBACK: a. The time path of currency depreciation can be explained in terms of the J-curve effect. According to this concept, the response of trade flows to changes in relative prices increases with the passage of time. Currency depreciation tends to worsen a country‘s trade balance in the short run, only to be followed by an improvement in the long run (assuming favorable elasticities).

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Analyze 9. Which of the following is true for the J-curve effect? a. It applies to the interest rate effects of currency depreciation. b. It applies to the income effects of currency depreciation. c. It suggests that demand tends to be most elastic over the long run. d. It suggests that demand tends to be least elastic over the long run. ANSWER: c FEEDBACK: a. b. c. The J-curve effect suggests that demand tends to be most elastic over the long run.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Analyze 10. American citizens planning a vacation abroad would welcome a. an appreciation of the dollar. b. a depreciation of the dollar. c. higher wages extended to foreign workers. d. lower wages extended to foreign workers. ANSWER: a FEEDBACK: a. An appreciation of the dollar would lower the costs of a vacation in the foreign country.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rate Changes on Costs and Prices KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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11. Assume the Canadian demand elasticity for imports equals 0.2, while the foreign demand elasticity for Canadian exports equals 0.3. Responding to a trade deficit, suppose the Canadian dollar depreciates by 20 percent. Other things equal, for Canada, the depreciation would lead to a. a worsening trade balance—a larger deficit. b. an improving trade balance—a smaller deficit. c. an unchanged trade balance. d. None of these are correct. ANSWER: a FEEDBACK: a. The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works best when demand elasticity is high. The Marshall-Lerner condition states that if the sum of the demand elasticities is less than 1.0, depreciation will worsen the trade balance.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Apply 12. Assume the Canadian demand elasticity for imports equals 1.2, while the foreign demand elasticity for Canadian exports equals 1.8. Responding to a trade deficit, suppose the Canadian dollar depreciates by 10 percent. Other things equal, for Canada, the depreciation would lead to a. a worsening trade balance—a larger deficit. b. an improving trade balance—a smaller deficit. c. an unchanged trade balance. d. None of these are correct. ANSWER: b FEEDBACK: a. b. The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works best when demand elasticity is high. The Marshall-Lerner condition states that depreciation will improve the trade balance if the currency-depreciating nation‘s demand elasticity for imports plus the foreign demand elasticity for the nation‘s exports exceeds 1.0.

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TOPICS: KEYWORDS:

Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach BLOOM'S: Apply

13. Because of the J-curve effect and partial currency pass-through, a depreciation of the domestic currency tends to increase the size of a a. trade surplus in the short run. b. trade surplus in the long run. c. trade deficit in the short run. d. trade deficit in the long run. ANSWER: c FEEDBACK: a. b. c. The time path of currency depreciation can be explained in terms of the J-curve effect. According to this concept, the response of trade flows to changes in relative prices increases with the passage of time. Currency depreciation tends to worsen a country‘s trade balance in the short run, only to be followed by an improvement in the long run (assuming favorable elasticities).

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Understand 14. From 1985 to 1988, the U.S. dollar depreciated over 50 percent against the yen, yet Japanese export prices to Americans did not come down the full extent of the dollar depreciation. This is best explained by a. partial currency pass-through. b. complete currency pass-through. c. a partial J-curve effect. d. a complete J-curve effect. ANSWER: a FEEDBACK: a. The extent that exchange-rate changes lead to changes in import prices and export prices is known as the pass-through relation. Partial pass-through occurs when a change in the exchange rate brings about a less than proportionate change in export prices and import prices.

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TOPICS: KEYWORDS:

Exchange Rate Pass-Through BLOOM'S: Remember

15. According to the Marshall-Lerner condition, a currency depreciation is least likely to lead to an improvement in the home country's trade balance when a. home demand for imports is inelastic and foreign export demand is inelastic. b. home demand for imports is elastic and foreign export demand is inelastic. c. home demand for imports is inelastic and foreign export demand is elastic. d. home demand for imports is elastic and foreign export demand is elastic. ANSWER: a FEEDBACK: a. The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works best when demand elasticity is high. If the sum of the demand elasticities is less than 1.0, depreciation will worsen the trade balance.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Analyze 16. If foreign manufacturers cut manufacturing costs and profit margins in response to a depreciation in the U.S. dollar, the effect of these actions is to a. shorten the amount of time in which the depreciation leads to a smaller trade deficit. b. shorten the amount of time in which the depreciation leads to a smaller trade surplus. c. lengthen the amount of time in which the depreciation leads to a smaller trade deficit. d. lengthen the amount of time in which the depreciation leads to a smaller trade surplus. ANSWER: c FEEDBACK: a. b. c. If foreign manufacturers cut manufacturing costs and profit margins in response to a depreciation in the U.S. dollar, the effect of these actions is to lengthen the amount of time in which the depreciation leads to a smaller trade deficit.

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17. The shift in focus toward imperfectly competitive markets in domestic and international trade questions the concept of a. official exchange rates. b. complete currency pass-through. c. exchange arbitrage. d. trade-adjustment assistance. ANSWER: b FEEDBACK: a. b. Empirical evidence suggests that pass-through tends to be partial rather than complete. Partial pass-through is explained by currency invoicing, market-share strategies, and sizable distribution costs.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Understand 18. Complete currency pass-through arises when a 10-percent depreciation in the value of the dollar causes U.S.________prices to __________. a. import, fall by 10 percent b. import, rise by 10 percent c. export, rise by 10 percent d. export, rise by 20 percent ANSWER: b FEEDBACK: a. b. The extent that exchange-rate changes lead to changes in import prices and export prices is known as the pass-through relation. Complete pass-through occurs when a change in the exchange rate brings about a proportionate change in export prices and import prices. Thus, a 10 percent depreciation in the value of the dollar causes U.S. import prices to rise by 10 percent.

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a. the J-curve effect. b. the Marshall-Lerner condition. c. the absorption approach. d. the pass-through effect. ANSWER: d FEEDBACK: a. b. c. d. The extent that exchange-rate changes lead to changes in import prices and export prices is known as the pass-through effect.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Understand 20. Which approach predicts that if an economy operates at full employment and faces a trade deficit, currency devaluation (depreciation) will improve the trade balance only if domestic spending is cut, thus freeing resources to produce exports? a. the absorption approach b. the Marshall-Lerner condition c. the monetary approach d. the elasticity approach ANSWER: a FEEDBACK: a. With an economy operating at full employment, no unutilized resources are available for additional production. National output is at a fixed level. The only way that currency depreciation can improve the trade balance is for the economy to somehow cut domestic absorption, freeing resources needed to produce additional export goods and import substitutes.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 21. Which approach analyzes a nation's balance of payments in terms of money demand and money supply? a. the expenditure approach b. the absorption approach Copyright Cengage Learning. Powered by Cognero.

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c. the elasticity approach d. the monetary approach ANSWER: d FEEDBACK:

a. b. c. d. The monetary approach to depreciation emphasizes the effect that depreciation has on the purchasing power of money balances and the resulting impacts on domestic expenditures and import levels. It analyzes a nation's balance of payments in terms of money demand and money supply.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Monetary Approach to Currency Depreciation KEYWORDS: BLOOM'S: Remember 22. The ________ effect suggests that following a currency depreciation, a country's trade balance worsens for a period before it improves. a. Marshall-Lerner b. J-curve c. absorption d. pass-through ANSWER: b FEEDBACK: a. b. The time path of currency depreciation can be explained in terms of the J-curve effect. According to this concept, the response of trade flows to changes in relative prices increases with the passage of time. Currency depreciation tends to worsen a country‘s trade balance in the short run, only to be followed by an improvement in the long run (assuming favorable elasticities).

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d. continually improves. ANSWER: c FEEDBACK:

a. b. c. The time path of currency appreciation can be explained in terms of the J-curve effect. According to this concept, the response of trade flows to changes in relative prices increases with the passage of time. Currency appreciation tends to improve a country‘s trade balance in the short run and worsen it in the long run.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Understand 24. Which approach considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in the short run? a. the monetary approach b. the absorption approach c. the expenditure approach d. the pass-through approach ANSWER: d FEEDBACK: a. b. c. d. The extent that exchange-rate changes lead to changes in import prices and export prices is known as the pass-through approach.

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FEEDBACK:

a. b. The extent that exchange-rate changes lead to changes in import prices and export prices is known as the pass-through approach. The longer the currency pass-through period, the longer the time period required for currency depreciation to have the intended effect on the trade balance.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Analyze 26. The shorter the currency pass-through period, the _______ required for currency depreciation to have the intended effect on the trade balance. a. shorter the time period b. longer the time period c. larger the spending cut d. smaller the spending cut ANSWER: a FEEDBACK: a. The extent that exchange-rate changes lead to changes in import prices and export prices is known as the pass-through approach. The shorter the currency pass-through period, the shorter the time period required for currency depreciation to have the intended effect on the trade balance.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Analyze 27. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars. A depreciation of the dollar's exchange value a. enhances its international competitiveness. b. worsens its international competitiveness. c. does not affect its international competitiveness. d. None of these are correct. ANSWER: a FEEDBACK: a. A dollar depreciation tends to lower U.S. export prices in terms of a foreign Copyright Cengage Learning. Powered by Cognero.

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currency, which induces an increase in the quantity of U.S. goods sold abroad. A depreciation of the dollar's exchange value enhances its international competitiveness.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Analyze 28. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars. An appreciation of the dollar's exchange value a. enhances its international competitiveness. b. worsens its international competitiveness. c. does not affect its international competitiveness. d. None of these are correct. ANSWER: b FEEDBACK: a. b. A dollar appreciation tends to raise U.S. export prices in terms of a foreign currency, which induces a decrease in the quantity of U.S. goods sold abroad. A depreciation of the dollar's exchange value worsens its international competitiveness.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Analyze 29. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a larger portion of Ford's total costs, a dollar appreciation leads to a _______ in the peso cost of a Ford vehicle and a _______ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated. a. smaller increase, larger decrease b. smaller increase, smaller decrease c. larger increase, smaller decrease d. larger increase, larger decrease ANSWER: a FEEDBACK: a. Manufacturers often obtain inputs from abroad whose costs are denominated in Copyright Cengage Learning. Powered by Cognero.

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terms of a foreign currency. As foreign currency–denominated costs become a larger portion of a producer‘s total costs, an appreciation of the dollar leads to a smaller increase in the foreign currency cost of the firm‘s output and a larger decrease in the domestic cost of the firm‘s output compared to the cost changes that occur when all input costs are dollar denominated.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Apply 30. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a larger portion of Ford's total costs, a dollar depreciation leads to a/an ________ in the peso cost of a Ford vehicle and a /an ________ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated. a. decrease, increase b. increase, decrease c. decrease, decrease d. increase, increase ANSWER: a FEEDBACK: a. Manufacturers often obtain inputs from abroad whose costs are denominated in terms of a foreign currency. As foreign currency-denominated costs become a larger portion of a producer‘s total costs, a depreciation of the domestic currency‘s exchange value leads to a decrease in the foreign currency cost of the firm‘s output and an increase in the domestic cost of the firm‘s output compared to the cost changes that occur when all input costs are dollar denominated.

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b. J-curve effect c. L-curve effect d. T-curve effect ANSWER: FEEDBACK:

b a. b. According to the J-curve effect, currency depreciation tends to worsen a

country‘s trade balance in the short run, only to be followed by an improvement in the long run.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Remember 33. Assume that a country is operating at full employment. According to the absorption approach, the only way that currency depreciation can improve the balance of trade is for the country to implement a. expansionary fiscal policy to increase domestic spending. b. expansionary monetary policy to increase domestic spending. c. contractionary fiscal policy or monetary policy to cut domestic spending. d. import tariffs and quotas that increase spending on domestically produced goods. ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. With an economy operating at full employment, no unutilized resources are available for additional production. The only way that currency depreciation can improve the trade balance is for the economy to somehow cut domestic absorption. Domestic policy makers could decrease absorption by adopting restrictive fiscal and monetary policies in the face of higher prices resulting from the depreciation.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Apply 34. Empirical evidence regarding the effects of currency devaluation on the balance of trade indicates that a. complete exchange-rate pass-through generally occurs. b. partial exchange-rate pass-through generally occurs. c. currency devaluations always improve the trade balance in the short run. d. currency devaluations always worsen the trade balance in the long run. ANSWER: b FEEDBACK: a. b. Empirical evidence suggests that pass-through tends to be partial rather than complete.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Understand 35. Assume that a country operates at less than full employment and has excess productive capacity. According to the absorption approach, a currency depreciation tends to a. expand domestic output and improve the balance of trade. b. expand domestic output and worsen the balance of trade. c. contract domestic output and improve the balance of trade. d. contract domestic output and worsen the balance of trade. ANSWER: a FEEDBACK: a. With the economy operating below maximum capacity, the price incentives of depreciation would tend to direct idle resources into the production of goods for Copyright Cengage Learning. Powered by Cognero.

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export, in addition to diverting spending away from imports to domestically produced substitutes. The impact of the depreciation is to expand domestic output as well as improve the trade balance.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Apply 36. According to the absorption approach, a currency depreciation leads to an improvement in the balance of trade when a country a. operates at full employment with no excess production capacity. b. operates at unemployment with excess production capacity. c. realizes high rates of inflation. d. realizes high rates of deflation. ANSWER: b FEEDBACK: a. b. With the economy operating below maximum capacity, the price incentives of depreciation would tend to direct idle resources into the production of goods for export, in addition to diverting spending away from imports to domestically produced substitutes. The impact of the depreciation is to expand domestic output as well as improve the trade balance.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 37. Concerning a currency depreciation, the elasticity approach and the absorption approach are theories that deal with the impact of the depreciation on a. exports and imports of goods and services. b. the domestic supply and demand of money. c. capital inflows and capital outflows. d. rates of inflation and rates of deflation. ANSWER: a FEEDBACK: a. Concerning a currency depreciation, the elasticity approach and the absorption Copyright Cengage Learning. Powered by Cognero.

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approach are theories that deal with the impact of the depreciation on exports and imports of goods and services.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Understand 38. The ______ is a theory of exchange rate adjustment and the balance of payments that considers how domestic spending on domestic goods and the trade balance changes relative to domestic output. a. monetary approach b. elasticity approach c. portfolio approach d. absorption approach ANSWER: d FEEDBACK: a. b. c. d. The absorption approach emphasizes the income effects of currency depreciation. It considers how domestic spending on domestic goods and the trade balance changes relative to domestic output.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 39. According to the Marshall-Lerner condition, a currency devaluation will be successful in improving a country's trade balance if the a. sum of the elasticities of supply is more than 1. b. sum of the elasticities of supply is less than 1. c. sum of the elasticities of demand is more than 1. d. sum of the elasticities of demand is less than 1. ANSWER: c FEEDBACK: a. b. c. The Marshall-Lerner condition states that depreciation will improve the trade Copyright Cengage Learning. Powered by Cognero.

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balance if the currency-depreciating nation‘s demand elasticity for imports plus the foreign demand elasticity for the nation‘s exports exceeds 1.0.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Remember 40. Suppose a country devalues its currency. If the country's demand for imports is ______, the price increase resulting from the devaluation results in a relatively small decrease in the volume of imports, causing total import expenditures to increase. a. perfectly elastic b. relatively elastic c. unit elastic d. relatively inelastic ANSWER: d FEEDBACK: a. b. c. d. The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works best when demand elasticity is high. If the sum of the demand elasticities is relatively inelastic, depreciation will cause total import expenditures to increase and worsen the trade balance.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Apply 41. Suppose a country devalues its currency. If the country's demand for imports is ______, the price increase resulting from the devaluation results in a relatively large decrease in the volume of imports, causing total import expenditures to decrease. a. perfectly inelastic b. relatively inelastic c. unit elastic d. relatively elastic ANSWER: d FEEDBACK: a. b. Copyright Cengage Learning. Powered by Cognero.

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c. d. The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works best when demand elasticity is high. If the sum of the demand elasticities is elastic, depreciation will cause total import expenditures to decrease and improve the trade balance.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Analyze 42. Given favorable elasticity conditions, other things being equal, an appreciation of the yen results in a. a smaller Japanese trade deficit. b. a larger Japanese trade surplus. c. decreased prices for imported products for Japan. d. increased prices for imported products for Japan. ANSWER: c FEEDBACK: a. b. c. Given favorable elasticity conditions, other things being equal, an appreciation of the yen results in decreased prices of imported products for Japan.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Apply 43. Given favorable elasticity conditions, other things being equal a depreciation of the euro tends to result in a. lower prices of imported products for Italy. b. higher prices of imported products for Italy. c. a larger trade deficit for Italy. d. a smaller trade surplus for Italy. ANSWER: b FEEDBACK: a. b. Given favorable elasticity conditions, other things equal a depreciation of the euro results in increased prices of imported products for Italy.

c. d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Apply 44. According to the J-curve effect, a depreciation of the pound's exchange value has a. b. no impact on a U.K. balance-of-trade deficit in the long run. c. an immediate negative effect on the U.K. balance of trade. d. an immediate positive effect on the U.K. balance of trade. ANSWER: c FEEDBACK: a. b. c. The time path of currency depreciation can be explained in terms of the J-curve effect. According to this concept, the response of trade flows to changes in relative prices increases with the passage of time. Currency depreciation tends to worsen a country‘s trade balance in the short run.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Apply 45. According to the J-curve effect, an appreciation of the yen’s exchange value has a. no impact on the Japanese trade balance in the short run. b. no impact on the Japanese trade balance in the long run. c. an immediate negative effect on the Japanese trade balance. d. an immediate positive effect on the Japanese trade balance. ANSWER: d FEEDBACK: a. b. c. d. The time path of currency appreciation can be explained in terms of the J-curve effect. According to this concept, the response of trade flows to changes in relative prices increases with the passage of time. Currency appreciation tends to improve a country‘s trade balance in the short run.

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Apply 46. According to the Marshall-Lerner condition, currency depreciation has no effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals a. 0.1. b. 0.5. c. 1.0. d. 2.0. ANSWER: c FEEDBACK: a. b. c. The trade balance will be neither helped nor hurt if the sum of the demand elasticities equals 1.0.

balance if the currency-depreciating nation‘s demand elasticity for imports plus the foreign demand elasticity for the nation‘s exports exceeds 1.0.

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TOPICS: KEYWORDS:

Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach BLOOM'S: Understand

48. According to the Marshall-Lerner condition, currency depreciation would have a negative effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals a. 0.5. b. 1.0. c. 1.5. d. 2.0. ANSWER: a FEEDBACK: a. The Marshall–Lerner condition states that if the sum of the demand elasticities is less than 1.0, depreciation will worsen the trade balance.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Understand 49. According to the absorption approach, after a currency depreciation, which of the following causes a trade deficit to decrease? a. a decline in domestic interest rates b. a rise in domestic imports c. a rise in government spending d. a decline in domestic absorption ANSWER: d FEEDBACK: a. b. c. d. The absorption approach emphasizes the income effects of currency depreciation. It considers how domestic spending on domestic goods and the trade balance changes relative to domestic output.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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50. The absorption approach to currency depreciation is represented by which of the following equations? a. B = Y - A b. Y = C + I + G + (X-M) c. I + X = S + M d. S - I = X - M ANSWER: a FEEDBACK: a. The absorption approach consolidates C + I + G into a single term A that is referred to as absorption, and designates net exports (X - M) as B. Total domestic output equals the sum of absorption plus net exports: Y = A + B. This can be rewritten as: B = Y - A.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Remember 52. The time period that it takes for companies to increase output of commodities for which demand has increased due to currency depreciation is known as the a. recognition lag. Copyright Cengage Learning. Powered by Cognero.

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b. decision lag. c. replacement lag. d. production lag. ANSWER: FEEDBACK:

d a. b. c. d. The time period that it takes for companies to increase output of commodities for which demand has increased due to currency depreciation is known as the production lag.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Remember 53. According to the J-curve effect, currency appreciation a. decreases a trade surplus. b. increases a trade surplus. c. decreases a trade surplus before increasing a trade surplus. d. increases a trade surplus before decreasing a trade surplus. ANSWER: d FEEDBACK: a. b. c. d. The time path of currency appreciation can be explained in terms of the J-curve effect. According to this concept, the response of trade flows to changes in relative prices increases with the passage of time. Currency appreciation tends to improve a country‘s trade balance in the short run and worsens in the long run.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Understand 54. According to the J-curve effect, currency depreciation a. decreases a trade deficit. b. increases a trade deficit. c. decreases a trade deficit before increasing a trade deficit. Copyright Cengage Learning. Powered by Cognero.

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d. increases a trade deficit before decreasing a trade deficit. ANSWER: d FEEDBACK: a. b. c. d. The time path of currency depreciation can be explained in terms of the J-curve effect. According to this concept, the response of trade flows to changes in relative prices increases with the passage of time. Currency depreciation tends to worsen a country‘s trade balance in the short run, only to be followed by an improvement in the long run (assuming favorable elasticities).

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Understand 55. The analysis of the effects of a currency depreciation on a country’s trade balance include all of the following, except a. the absorption approach. b. the elasticity approach. c. the fiscal approach. d. the monetary approach. ANSWER: c FEEDBACK: a. b. c. The analysis of the effects of a currency depreciation on a country‘s trade balance include the absorption approach, the elasticity approach, and the monetary approach.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 56. According to the absorption approach equation B = Y - A, currency devaluation improves a nation's trade balance if a. Y increases and A increases. b. Y decreases and A decreases. c. Y increases and/or A decreases. d. Y decreases and/or A increases. ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. The absorption approach consolidates C + I + G into a single term, A, which is referred to as absorption, and designates net exports (X - M) as B. Total domestic output equals the sum of absorption plus net exports: Y = A + B. This can be rewritten as: B = Y - A. currency devaluation improves a nation's trade balance if Y increases and/or A decreases.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Monetary Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 58. The Marshall-Lerner condition suggests that depreciation of the Swiss franc leads to a worsening of Switzerland's trade balance if the a. elasticity of demand for Swiss exports is 0.4 while the Swiss elasticity of demand for imports is 0.2. b. elasticity of demand for Swiss exports is 0.6 while the Swiss elasticity of demand for imports is 0.4. c. elasticity of demand for Swiss exports is 0.5 while the Swiss elasticity of demand for imports is 0.7. d. elasticity of demand for Swiss exports is 0.6 while the Swiss elasticity of demand for imports is 0.7. ANSWER: a FEEDBACK: a. The Marshall-Lerner condition states that if the sum of the demand elasticities is Copyright Cengage Learning. Powered by Cognero.

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less than 1.0, depreciation will worsen the trade balance.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Apply Table 13.1. Hypothetical Costs of Producing an Automobile for Toyota Inc. of Japan Cost Component

Yen Cost

Labor Materials Steel Other materials Total material costs Other costs Total costs

1,200,000

Dollar-Equivalent Cost

800,000 1,600,000 2,400,000 400,000 4,000,000

59. Refer to Table 13.1. Assume that Toyota obtains all inputs from Japanese suppliers and that the yen/dollar exchange rate is 200 yen per dollar. The dollar-equivalent cost of a Toyota automobile equals a. $5000. b. $10,000. c. $15,000. d. $20,000. ANSWER: d FEEDBACK: a. b. c. d. The dollar-equivalent cost of a Toyota automobile equals $20,000 (4,000,000 yen / 200 yen).

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 13.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Apply Copyright Cengage Learning. Powered by Cognero.

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60. Refer to Table 13.1. Assume that Toyota Inc. obtains all of its automobile inputs from Japanese suppliers. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the yen cost of a Toyota automobile equals a. 4,000,000 yen. b. 6,000,000 yen. c. 8,000,000 yen. d. 10,000,000 yen. ANSWER: a FEEDBACK: a. If the yen's exchange value appreciates, the yen cost of a Toyota automobile stays the same and equals 4,000,000 yen.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 13.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rate Changes on Costs and Prices KEYWORDS: BLOOM'S: Apply

61. Refer to Table 13.1. Assume that Toyota Inc. obtains all of its automobile inputs from Japanese suppliers. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the dollar-equivalent cost of a Toyota automobile equals a. $10,000. b. $20,000. c. $30,000. d. $40,000. ANSWER: d FEEDBACK: a. b. c. d. If the yen's exchange value appreciates, the dollar-equivalent cost of a Toyota automobile equals $40,000 (4,000,000 yen / 100).

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 13.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates Changes on Costs and Prices Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Apply

62. Refer to Table 13.1. Assume that Toyota Inc. imports steel from U.S. suppliers, whose costs are denominated in dollars, while all other inputs are obtained from Japanese suppliers, whose costs are denominated in yen. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the yen cost of a Toyota automobile equals a. 2,400,000 yen. b. 3,000,000 yen. c. 3,600,000 yen. d. 4,200,000 yen. ANSWER: c FEEDBACK: a. b. c. If the yen's exchange value appreciates, the dollar-equivalent cost of steel changes and equals 400,000 yen. The dollar-equivalent cost of a Toyota automobile equals 3,600,000 yen.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 13.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Cost Cutting Strategies of Manufacturers in Response to Currency Appreciation KEYWORDS: BLOOM'S: Apply

63. Refer to Table 13.1. Assume that Toyota Inc. imports steel from U.S. suppliers, whose costs are denominated in dollars, while all other inputs are obtained from Japanese suppliers, whose costs are denominated in yen. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the dollar-equivalent cost of a Toyota automobile equals a. $24,000. b. $30,000. c. $36,000. d. $42,000. ANSWER: c FEEDBACK: a. b. c. If the yen's exchange value appreciates, the dollar-equivalent cost of a Toyota automobile equals $36,000 (3,600,000 yen / 100).

d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES: PREFACE NAME:

1 Moderate Multiple Choice False Table 13.1

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Apply 64. One of the lags that occurs between changes in relative prices and the quantities of goods traded is the a. recognition lag. b. recovery lag. c. implementation lag. d. legislative lag. ANSWER: a FEEDBACK: a. The time period lags that occurs between changes in relative prices and the quantities of goods traded is the recognition lag.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Remember 65. The Marshall-Lerner condition illustrates a. the price effects of a nation's currency depreciation on its trade deficit. b. the income effects of a nation's currency appreciation on its trade deficit. c. the effect of fixed exchange rate systems on the trade balance. d. the change in money demand and money supply and its effect on a trade deficit. ANSWER: a FEEDBACK: a. The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works best when demand elasticity is high. The Marshall-Lerner condition illustrates the price effects of a nation's currency depreciation on its trade deficit.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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66. The absorption approach to currency depreciation focuses on a. the purchasing power of money. b. relative price effects. c. income effects. d. price elasticity of demand. ANSWER: c FEEDBACK: a. b. c. The absorption approach emphasizes the income effects of currency depreciation. It considers how domestic spending on domestic goods and the trade balance changes relative to domestic output.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 67. Currency devaluation is initiated by governmental policy rather than the free-market forces of supply and demand. a. True b. False ANSWER: True FEEDBACK: Correct Currency depreciation (devaluation) may affect a nation‘s trade position through its impact on relative prices, incomes, and the purchasing power of money balances and is initiated by governmental policy. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rate Changes on Costs and Prices KEYWORDS: BLOOM'S: Understand 68. If a currency's exchange rate is overvalued, a government would likely initiate actions to revalue the currency. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If a currency's exchange rate is overvalued, market forces will adjust it back to long run equilibrium.

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rate Changes on Costs and Prices KEYWORDS: BLOOM'S: Understand 69. If a currency's exchange rate is undervalued, a government would likely initiate actions to devalue the currency. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If a currency's exchange rate is undervalued, market forces will adjust it back to long-run equilibrium.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rate Changes on Costs and Prices KEYWORDS: BLOOM'S: Understand 70. The purpose of currency devaluation is to cause a depreciation in a currency's exchange value. a. True b. False ANSWER: True FEEDBACK: Correct The purpose of currency devaluation is to cause a depreciation in a currency's exchange value. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rate Changes on Costs and Prices KEYWORDS: BLOOM'S: Understand 71. The purpose of currency revaluation is to cause an appreciation in a currency's exchange value. a. True b. False ANSWER: True FEEDBACK: Correct The purpose of currency revaluation is to cause an appreciation in a currency's exchange value. Copyright Cengage Learning. Powered by Cognero.

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Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rate Changes on Costs and Prices KEYWORDS: BLOOM'S: Understand 72. Assume that General Motors employs labor and materials, whose costs are denominated in dollars, in the production of automobiles. If the dollar's exchange value depreciates by 10 percent against the yen, the yen-denominated cost of a GM vehicle rises by 10 percent. a. True b. False ANSWER: True FEEDBACK: Correct A depreciation of the dollar (appreciation of the yen) tends to increase the costs by the same proportion in terms of the yen. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Understand 73. Assume that General Motors employs labor and materials, whose costs are denominated in dollars, in the production of automobiles. If the dollar's exchange value appreciates by 10 percent against the yen, the yen-denominated cost of a GM vehicle falls by 10 percent. a. True b. False ANSWER: True FEEDBACK: Correct An appreciation of the dollar (depreciation of the yen) tends to decrease the costs by the same proportion in terms of the yen. Incorrect

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depreciation improves its international competitiveness. a. True b. False ANSWER: True FEEDBACK: Correct If the exchange value of the dollar appreciates against other currencies, it causes American goods to become less competitive in world markets. If the exchange value of the dollar depreciates against other currencies, it causes American goods to become more competitive in world markets. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Understand 75. When manufacturing automobiles, suppose that General Motors uses labor and materials with costs denominated in dollars and pounds, respectively. If the dollar's exchange value appreciates by 15 percent against the pound, the pounddenominated cost of a GM vehicle rises by 15 percent. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect An appreciation in the domestic currency‘s exchange value tends to increase the firm‘s costs by the same proportion in terms of the foreign currency.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Understand 76. According to the absorption approach, currency devaluation best improves a country's trade balance when its economy is at maximum capacity. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect With an economy operating at full employment, no unutilized resources are available for additional production. The only way that currency depreciation can improve the trade balance is for the economy to somehow cut domestic absorption, freeing resources needed to produce additional export goods and import substitutes.

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 77. When manufacturing computer software, suppose that Microsoft Inc. uses labor and materials with costs denominated in dollars and Swiss francs, respectively. If the dollar's exchange value depreciates 10 percent against the Swiss franc, the Swiss franc-denominated cost of the firm's software falls by 10 percent. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If the dollar's exchange value depreciates 10 percent against the Swiss franc, the Swiss franc-denominated cost of the firm's software rises by 10 percent.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Understand 78. When producing jetliners, suppose that Boeing employs labor and materials with costs denominated in dollars and Chinese yuan, respectively. If the dollar's exchange value depreciates 20 percent against the yuan, the yuan-denominated cost of a Boeing jetliner falls by an amount less than 20 percent. a. True b. False ANSWER: True FEEDBACK: Correct If the dollar's exchange value depreciates 20 percent against the yuan, the yuandenominated cost of a Boeing jetliner falls by an amount less than 20 percent. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Understand 79. As yen-denominated costs become a larger portion of Ford's total costs, a dollar appreciation results in a smaller increase in the yen-denominated cost of a Ford auto than occurs when all input costs are dollar denominated. a. True Copyright Cengage Learning. Powered by Cognero.

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b. False ANSWER: FEEDBACK:

True Correct

As yen-denominated costs become a larger portion of Ford's total costs, a dollar appreciation results in a smaller increase in the yen-denominated cost of a Ford auto than occurs when all input costs are dollar denominated.

Incorrect

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TOPICS: KEYWORDS:

Effects of Exchange Rates on Costs and Prices BLOOM'S: Understand

82. By increasing relative U.S. production costs, a dollar depreciation tends to increase U.S. export prices in foreigncurrency terms, which results in an increase in the quantity of U.S. goods exported abroad. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect By increasing relative U.S. production costs, a dollar depreciation tends to decrease U.S. export prices in foreign-currency terms, which results in an increase in the quantity of U.S. goods exported abroad.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rates on Costs and Prices KEYWORDS: BLOOM'S: Understand 83. Suppose the exchange value of the franc rises against the currencies of Switzerland's major trading partners. To protect themselves from decreases in foreign sales caused by the franc's appreciation, Swiss companies could shift production to countries whose currencies had depreciated against the franc. a. True b. False ANSWER: True FEEDBACK: Correct To protect themselves from decreases in foreign sales caused by the franc's appreciation, Swiss companies could shift production to countries whose currencies had depreciated against the franc. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Cost Cutting Strategies of Manufacturers in Response to Currency Appreciation KEYWORDS: BLOOM'S: Understand 84. In the early 1990s, the yen sharply appreciated against the dollar. To protect themselves from export reductions caused by the yen's appreciation, Japanese auto companies transferred increasing amounts of auto production from the United States to Japan. a. True b. False ANSWER: False FEEDBACK: Correct Copyright Cengage Learning. Powered by Cognero.

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Incorrect To protect themselves from export reductions caused by the yen's appreciation, Japanese auto companies transferred increasing amounts of auto production from Japan to the United States.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Cost Cutting Strategies of Manufacturers in Response to Currency Appreciation KEYWORDS: BLOOM'S: Understand 85. The elasticity approach to currency depreciation emphasizes the income effects of depreciation. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The elasticity approach emphasizes the relative price effects of depreciation.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Understand 86. The elasticity approach to currency depreciation emphasizes the relative price effects of depreciation and suggests that depreciation best improves a country's trade balance when the elasticities of demand for the country's imports and exports are high. a. True b. False ANSWER: True FEEDBACK: Correct The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation best improves a country's trade balance when demand elasticity is high. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Understand 87. The absorption approach to currency devaluation deals with the income effects of devaluation, while the elasticity Copyright Cengage Learning. Powered by Cognero.

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approach to devaluation deals with the price effects of devaluation. a. True b. False ANSWER: True FEEDBACK: Correct The absorption approach emphasizes the income effects of currency depreciation. The elasticity approach to devaluation deals with the price effects of devaluation. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 88. According to the absorption approach, an increase in domestic expenditures must occur for currency devaluation to promote balance of trade equilibrium. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect According to the absorption approach, if the economy is operating below maximum capacity, the price incentives of depreciation would tend to direct idle resources into the production of goods for export, in addition to diverting spending away from imports to domestically produced substitutes. The impact of the depreciation is to expand domestic output as well as improve the trade balance.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 89. The monetary approach emphasizes the effects of currency depreciation on the purchasing power of money, and the resulting impact on domestic expenditure levels. a. True b. False ANSWER: True FEEDBACK: Correct The monetary approach to depreciation emphasizes the effect that depreciation has on the purchasing power of money balances and the resulting impacts on domestic expenditures and import levels. Incorrect

POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Monetary Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 90. According to the Marshall-Lerner condition, currency depreciation will worsen a country's balance of trade if the country's elasticity of demand for imports plus the foreign demand elasticity for the country's exports exceeds 1.0. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The Marshall-Lerner condition states that depreciation will improve the trade balance if the currency-depreciating nation‘s demand elasticity for imports plus the foreign demand elasticity for the nation‘s exports exceeds 1.0.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Understand 91. The Marshall-Lerner condition asserts that if the sum of a country's elasticity of demand for imports and the foreign elasticity of demand for the country's exports equals 1.0, a depreciation of the country's currency will not affect its balance of trade. a. True b. False ANSWER: True FEEDBACK: Correct The Marshall-Lerner condition states that the trade balance will be neither helped nor hurt if the sum of the demand elasticities equals 1.0. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Understand 92. Suppose the U.S. price elasticity of demand for imports equals 0.4 and the foreign demand elasticity for the U.S. exports equals 0.2. According to the Marshall-Lerner condition, a depreciation of the dollar's exchange value will improve the U.S. balance of trade. Copyright Cengage Learning. Powered by Cognero.

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a. True b. False ANSWER: FEEDBACK:

False Correct Incorrect If the sum of the demand elasticities is less than 1.0, depreciation will worsen the trade balance.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Apply 93. The Marshall-Lerner condition suggests that if the sum of a country's elasticity of demand for imports and the foreign elasticity of demand for the country's exports exceeds 1.0, an appreciation of the country's exchange rate will worsen its balance of trade. a. True b. False ANSWER: True FEEDBACK: Correct The Marshall-Lerner condition states that depreciation will improve the trade balance if the currency-depreciating nation‘s demand elasticity for imports plus the foreign demand elasticity for the nation‘s exports exceeds 1.0. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Understand 94. Suppose the U.S. price elasticity of demand for imports equals 1.2 and the foreign elasticity of demand for U.S. exports equals 1.5. According to the Marshall-Lerner condition, an appreciation of the dollar's exchange value would worsen the U.S. balance of trade. a. True b. False ANSWER: True FEEDBACK: Correct The Marshall-Lerner condition states that if the sum of the demand elasticities is greater than 1.0, appreciation will worsen the trade balance. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Apply 95. Empirical research suggests that the U.S. price elasticities of demand for imports and exports are very inelastic, suggesting that currency depreciation would result in a worsening of its balance of trade. a. True b. False ANSWER: True FEEDBACK: Correct The elasticity approach emphasizes the relative price effects of depreciation and suggests that depreciation works best when demand elasticity is high. If the sum of the demand elasticities is less than 1.0, depreciation will worsen the trade balance. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Understand 96. The J-curve effect implies that in the short run a currency depreciation will result in a balance of trade surplus for the home country. As time passes, however, the home country's balance of trade will move toward deficit. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The time path of currency depreciation can be explained in terms of the J-curve effect. According to this concept, the response of trade flows to changes in relative prices increases with the passage of time. Currency depreciation tends to worsen a country‘s trade balance in the short run, only to be followed by an improvement in the long run (assuming favorable elasticities).

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ANSWER: FEEDBACK:

True Correct

The time path of currency appreciation can be explained in terms of the J-curve effect. According to this concept, the response of trade flows to changes in relative prices increases with the passage of time. Currency appreciation tends to improve a country‘s trade balance in the short run and worsen it in the long run.

Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Apply 98. The J-curve effect implies that the price elasticity of demand for imports and exports is more elastic in the short run than in the long run. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The J-curve effect implies that the price elasticity of demand for imports and exports is more elastic in the long run than in the short run.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Understand 99. The extent to which changing currency values result in changing relative prices of imports and exports is known as the J-curve effect. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The time path of currency depreciation can be explained in terms of the J-curve effect. According to this concept, the response of trade flows to changes in relative prices increases with the passage of time. Currency depreciation tends to worsen a country‘s trade balance in the short run, only to be followed by an improvement in the long run (assuming favorable elasticities).

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: J-Curve Effect: Time Path of Depreciation KEYWORDS: BLOOM'S: Understand 100. Complete currency pass through suggests that if the dollar's exchange value depreciates by 10 percent, imports will become 10 percent more expensive to Americans while U.S. exports will become 10 percent cheaper to foreigners. a. True b. False ANSWER: True FEEDBACK: Correct The extent that exchange-rate changes lead to changes in import prices and export prices is known as the pass-through relation. Complete pass-through occurs when a change in the exchange rate brings about a proportionate change in export prices and import prices. Thus, a 10-percent depreciation in the value of the dollar causes U.S. import prices to rise by 10 percent and U.S. export prices to fall by 10 percent. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Analyze 101. Partial currency pass-through implies that if the dollar's exchange value appreciates by 10 percent, imports would become, say, 6 percent more expensive to Americans while U.S. exports would become, say, 8 percent cheaper to foreigners. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Partial pass-through occurs when a change in the exchange rate brings about a less than proportionate change in export prices and import prices. Thus, an appreciation in the value of the dollar causes U.S. import prices to fall and U.S. export prices to rise.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Analyze 102. Suppose the U.S. economy is operating at full capacity and the dollar's exchange value depreciates. According to the absorption approach, the United States would have to accept reductions in domestic spending if its trade balance is to Copyright Cengage Learning. Powered by Cognero.

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improve as a result of the depreciation. a. True b. False ANSWER: True FEEDBACK: Correct With an economy operating at full employment, no unutilized resources are available for additional production. National output is at a fixed level. The only way that currency depreciation can improve the trade balance is for the economy to somehow cut domestic absorption, freeing resources needed to produce additional export goods and import substitutes. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 103. According to the J-curve effect, following a currency devaluation, the balance of trade improves before it worsens. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect According to the J-curve effect, currency devaluation tends to worsen a country‘s trade balance in the short run, only to be followed by an improvement in the long run.

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Easy True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Remember 105. The shorter the pass-through period, the sooner the impact of depreciation on export prices and import prices. a. True b. False ANSWER: True FEEDBACK: Correct The shorter the currency pass-through period, the shorter the time period required for currency depreciation to have the intended effect on the trade balance. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Analyze 106. Assume that a country operates at full employment. According to the absorption approach, the only way that currency depreciation can improve the country's trade balance is for the country to reduce domestic spending, thus freeing resources needed to produce additional export goods and import substitutes. a. True b. False ANSWER: True FEEDBACK: Correct With an economy operating at full employment, no unutilized resources are available for additional production. National output is at a fixed level. The only way that currency depreciation can improve the trade balance is for the economy to somehow cut domestic absorption, freeing resources needed to produce additional export goods and import substitutes. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Apply 107. Assume that a country experiences unemployment and excess production capacity. According to the absorption approach, a currency depreciation tends to decrease domestic output and worsen the balance of trade. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

Correct Incorrect With the economy operating below maximum capacity, the price incentives of depreciation would tend to direct idle resources into the production of goods for export, in addition to diverting spending away from imports to domestically produced substitutes. The impact of the depreciation is to expand domestic output as well as improve the trade balance.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Apply 108. According to the absorption approach, a currency depreciation best improves a country's balance of trade if the country operates at full employment with no excess production capacity. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect With an economy operating at full employment, no unutilized resources are available for additional production. National output is at a fixed level. The only way that currency depreciation can improve the trade balance is for the economy to somehow cut domestic absorption, freeing resources needed to produce additional export goods and import substitutes.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 109. The dominant use of dollars in invoicing U.S. trade helps explain the partial pass-through of changes in the dollar's exchange rate to U.S. import prices. a. True b. False ANSWER: True FEEDBACK: Correct Empirical evidence suggests that pass-through tends to be partial rather than complete. Partial pass-through is explained by currency invoicing, market-share strategies, and sizable distribution costs. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Easy True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Remember 110. The desire of foreign producers to preserve market share for goods sold in the United States helps contribute to complete exchange-rate pass-through following a depreciation of the dollar. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Complete pass-through occurs when a change in the exchange rate brings about a proportionate change in export prices and import prices. This change depends in part on the willingness of exporters to permit the change in the exchange rate to affect the prices they charge for their goods measured in terms of the buyer‘s currency.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC11: - Markets, market failure, and externalities TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Understand 111. To the extent that labor unions attain higher wages during periods of currency depreciation, the resulting wage inflation reduces the improving competitiveness of a country's business firms caused by depreciation. a. True b. False ANSWER: True FEEDBACK: Correct If the exchange value of the dollar depreciates against other currencies, it causes American goods to become more competitive in world markets. However, this will be offset by rising inflation (higher prices), which causes American goods to become less competitive in world markets. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money United States - PA - DISC3: - International trade and finance TOPICS: Effects of Exchange Rate Changes on Costs and Prices KEYWORDS: BLOOM'S: Analyze 112. Suppose a country devalues its currency. If the country's demand for imports is inelastic, the price increase resulting from the devaluation results in a relatively small decrease in the volume of imports, causing total import expenditures to increase. Copyright Cengage Learning. Powered by Cognero.

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a. True b. False ANSWER: FEEDBACK:

True Correct

If a country is importing inelastic products its consumers are unlikely to import significantly less in the face of a depreciated currency. Therefore, currency depreciation will worsen the country‘s balance of trade.

Incorrect

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Analyze 113. Suppose a country devalues its currency. If the country's demand for imports is elastic, the price increase resulting from the devaluation results in a relatively small decrease in the volume of imports, causing total import expenditures to increase. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect If the country's demand for imports is elastic, the price increase resulting from the devaluation results in a relatively large decrease in the volume of imports, causing total import expenditures to decrease.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach KEYWORDS: BLOOM'S: Analyze 114. How do demand elasticities influence a country's trade position when exchange rates change? According to the elasticity approach, currency depreciation leads to the greatest ANSWER: improvement in a country's trade position when demand elasticities are high. This is because the response of trade volumes to exchange-rate changes is highest when demand is elastic. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach BLOOM'S: Understand

115. How is the absorption approach used for analyzing the effects of currency devaluation? The absorption approach provides insights about the changes in the trade balance by ANSWER: considering the impact of devaluation on the spending behavior of the domestic economy and the influence of domestic spending on the trade balance. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Absorption Approach to Currency Depreciation KEYWORDS: BLOOM'S: Understand 116. What is a pass-through relationship? The extent to which exchange-rate changes lead to changes in import prices and export ANSWER: prices is known as the pass-through relationship. Complete (partial) pass-through occurs when a change in the exchange rate brings about a proportionate (less than proportionate) change in export prices and import prices. Empirical evidence suggests that pass-through tends to be partial rather than complete. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange Rate Pass-Through KEYWORDS: BLOOM'S: Understand 117. How do movements in exchange rates affect domestic costs in the presence of foreign sourcing? Manufacturers often obtain inputs from abroad with costs denominated in terms of a ANSWER: foreign currency. As foreign-currency-denominated costs become a larger portion of a producer's total costs, an appreciation of the domestic currency leads to a smaller increase in the foreign-currency cost of the firm's output and a larger decrease in the domestic cost of the firm's output, compared to the cost changes that occur when all input costs are denominated in the domestic currency. The opposite applies for currency depreciation. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Cost Cutting Strategies of Manufacturers in Response to Currency Appreciation Copyright Cengage Learning. Powered by Cognero.

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KEYWORDS:

BLOOM'S: Understand

Chapter 14: Exchange-Rate Systems and Currency Crises 1. Of the 189 members of the International Monetary Fund in 2018, the most frequently used exchange-rate arrangement is a. freely fluctuating exchange rates. b. adjustable pegged exchange rates. c. managed floating exchange rates. d. pegged or fixed exchange rates. ANSWER: d FEEDBACK: a. b. c. d. Of the 189 members of the International Monetary Fund in 2018, 24 countries use hard pegs, and 89 countries use soft pegs.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange-Rate Practices KEYWORDS: BLOOM'S: Remember 2. Which exchange-rate mechanism is intended to insulate the balance of payments from short-term capital movements while providing exchange rate stability for commercial transactions? a. dual exchange rates b. managed floating exchange rates c. adjustable pegged exchange rates d. crawling pegged exchange rates ANSWER: d FEEDBACK: a. b. c. d. Under a crawling-peg exchange-rate system, a nation makes frequent devaluations (or revaluations) of its currency to restore payments balance. This insulates the balance of payments from short-term capital movements while providing exchange rate stability for commercial transactions.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance The Crawling Peg BLOOM'S: Analyze

3. Which exchange-rate mechanism calls for frequent redefining of the par value by small amounts to remove a payment’s disequilibrium? a. dual exchange rates b. adjustable pegged exchange rates c. managed floating exchange rates d. crawling pegged exchange rates ANSWER: d FEEDBACK: a. b. c. d. Under a crawling-peg exchange-rate system, a nation makes frequent devaluations (or revaluations) of its currency to restore payments balance. The term crawling peg implies that par value changes are implemented in many small steps, making the process of exchange-rate adjustment continuous.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Crawling Peg KEYWORDS: BLOOM'S: Remember 4. Other things being equal, under managed floating exchange rates, if the rate of inflation in the United States is less than the rate of inflation of its trading partners, the dollar will likely a. appreciate against foreign currencies. b. depreciate against foreign currencies. c. be officially revalued by the government. d. be officially devalued by the government. ANSWER: a FEEDBACK: a. Under managed floating exchange rates, if the rate of inflation in the United States is less than the rate of inflation of its trading partners, the dollar will likely appreciate against foreign currencies.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Managed Floating Rates BLOOM'S: Apply

5. Other things being equal, under adjustable pegged exchange rates, if the rate of inflation in the United States exceeds the rate of inflation of its trading partners a. U.S. exports tend to rise and imports tend to fall. b. U.S. imports tend to rise and exports tend to fall. c. U.S. foreign exchange reserves tend to rise. d. U.S. foreign exchange reserves remain constant. ANSWER: b FEEDBACK: a. b. Under adjustable pegged exchange rates, if the rate of inflation in the United States exceeds the rate of inflation of its trading partners U.S. imports tend to rise and exports tend to fall.

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TOPICS: KEYWORDS:

The Crawling Peg BLOOM'S: Apply

7. Which exchange-rate system does NOT require monetary reserves for official exchange rate intervention? a. floating exchange rates b. pegged exchange rates c. managed floating exchange rates d. dual exchange rates ANSWER: a FEEDBACK: a. Floating exchange rates do not require monetary reserves for official exchangerate intervention.

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9. With a/an _____, market forces of supply and demand determine currency values. a. adjustable pegged exchange-rate system b. dual exchange-rate system c. jointly floating exchange-rate system d. freely floating exchange-rate system ANSWER: c FEEDBACK: a. b. c. With a jointly floating exchange-rate system, market forces of supply and demand determine currency values.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Floating Exchange Rates KEYWORDS: BLOOM'S: Synthesize 10. Under the historic adjustable pegged exchange-rate system, member countries were permitted to correct persistent and sizable payment deficits (i.e., fundamental disequilibrium) by a. officially revaluing their currencies. b. officially devaluing their currencies. c. allowing their currencies to depreciate in the free market. d. allowing their currencies to appreciate in the free market. ANSWER: b FEEDBACK: a. b. Under the adjustable pegged system, currencies were tied to each other to provide stable exchange rates for commercial and financial transactions. When the balance of payments moved away from its long-run equilibrium position, a nation could re-peg its exchange rate via devaluation or revaluation policies. The purpose of devaluation is to cause the home currency‘s exchange value to depreciate, thus counteracting a payments deficit.

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11. Which exchange-rate system involves a "leaning against the wind" strategy in which short-term fluctuations in exchange rates are reduced without adhering to any particular exchange rate over the long run? a. pegged or fixed exchange rates b. adjustable pegged exchange rates c. managed floating exchange rates d. freely floating exchange rates ANSWER: c FEEDBACK: a. b. c. Under a managed floating exchange-rate system, member nations should intervene in the foreign-exchange market as necessary to prevent sharp and disruptive exchange-rate fluctuations. This policy is known as ―leaning against the wind‖—intervening to reduce short-term fluctuations in exchange rates without attempting to adhere to any particular rate over the long run.

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13. The Bretton Woods Agreement of 1944 established a monetary system based on a. gold and managed floating exchange rates. b. gold and adjustable pegged exchange rates. c. special drawing rights and managed floating exchange rates. d. special drawing rights and adjustable pegged exchange rates. ANSWER: b FEEDBACK: a. b. Under the Bretton Woods system, each member nation set the par value of its currency in terms of gold and adjustable pegged exchange rates. The main feature of the adjustable pegged system was that currencies were tied to each other to provide stable exchange rates for commercial and financial transactions.

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a. pegged exchange rates. b. freely floating exchange rates. c. managed floating exchange rates. d. crawling pegged exchange rates. ANSWER: a FEEDBACK: a. Anchoring to a single currency (pegged exchange rates) is generally done by developing nations whose trade and financial relations are mainly with a single, industrial country partner.

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c. be officially revalued. d. neither appreciate not depreciate. ANSWER: a FEEDBACK: a. Because floating rates fluctuate, they permit continuous adjustment in the balance of payments. The currencies of countries with trade surpluses will appreciate. So, it costs more to buy goods from them and it costs them less to buy goods from others.

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b. decrease, inducing a depreciation in the yen. c. increase, inducing an appreciation in the yen. d. decrease, inducing an appreciation in the yen. ANSWER: c FEEDBACK: a. b. c. Under a floating exchange-rate system, an increase in U.S. imports of Japanese goods will cause a demand for Japanese yen to increase, inducing an appreciation in the yen.

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demand for the dollar will likely a. increase, inducing an appreciation in value relative to other currencies. b. decrease, inducing a depreciation in value relative to other currencies. c. decrease, inducing an appreciation in value relative to other currencies. d. increase, inducing a depreciation in value relative to other currencies. ANSWER: a FEEDBACK: a. With floating exchange rates, market forces of supply and demand determine currency values. If the Federal Reserve decreases the money supply of the United States, supply will shift to the left and the dollar will likely appreciate in value relative to other currencies.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Floating Exchange Rates KEYWORDS: BLOOM'S: Understand 22. Other things being equal, under a floating exchange-rate system, if the U.S. dollar depreciates against the Swiss franc a. American exports to Switzerland will be cheaper in francs. b. American exports to Switzerland will be more expensive in francs. c. American imports from Switzerland will be cheaper in dollars. d. None of these are correct. ANSWER: a FEEDBACK: a. The higher value of the franc prompts Swiss residents to increase the quantity of francs supplied on the foreign-exchange market to purchase more U.S. goods, which are now cheaper in terms of the franc.

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a. 2 percent b. 5 percent c. 10 percent d. 25 percent ANSWER: FEEDBACK:

c a. b. c. Under the Bretton Woods system, member nations could correct fundamental disequilibrium by re-pegging their currencies up to 10 percent without permission from the IMF and by greater than 10 percent with the fund‘s permission.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Remember 24. In recent years, the United States has accused China of manipulating the yuan so as to gain an unfair competitive advantage in global trade. The United States has argued that the central bank of China has a. sold yuan and bought dollars, thus depreciating the yuan against the dollar. b. sold yuan and bought dollars, thus appreciating the yuan against the dollar. c. bought yuan and sold dollars, thus depreciating the yuan against the dollar. d. bought yuan and sold dollars, thus appreciating the yuan against the dollar. ANSWER: a FEEDBACK: a. The United States has accused China of manipulating the yuan and has argued that the central bank of China has sold yuan and bought dollars, thus depreciating the yuan against the dollar. China‘s currency policy has resulted in its yuan being significantly undervalued relative to the dollar, giving the Chinese an unfair competitive advantage.

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manipulation by a. selling yuan and buying dollars, thus depreciating the yuan against the dollar. b. selling and buying dollars, thus appreciating the yuan against the dollar. c. buying yuan and selling dollars, thus depreciating the yuan against the dollar. d. buying yuan and selling dollars, thus appreciating the yuan against the dollar. ANSWER: d FEEDBACK: a. b. c. d. The United States has accused China of manipulating the yuan and has argued that the central bank of China has sold yuan and bought dollars, thus depreciating the yuan against the dollar. China‘s currency policy has resulted in its yuan being significantly undervalued relative to the dollar, giving the Chinese an unfair competitive advantage. Proposals have been made that the United States should offset China's currency manipulation by buying yuan and selling dollars, thus appreciating the yuan against the dollar.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Currency Manipulation and Currency Wars KEYWORDS: BLOOM'S: Remember 26. In a managed floating exchange-rate system, temporary stabilization of the dollar's exchange value requires the Federal Reserve to adopt a (an) ____ monetary policy when the dollar is appreciating and a (an) ____ policy when the dollar is depreciating. a. expansionary, expansionary b. expansionary, contractionary c. contractionary, expansionary d. contractionary, contractionary ANSWER: b FEEDBACK: a. b. In the absence of international policy coordination, stabilizing a currency‘s exchange value requires a central bank to initiate an expansionary monetary policy to offset an appreciation of its currency and a contractionary monetary policy to offset a depreciation of its currency.

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KEYWORDS:

BLOOM'S: Apply

27. Other things being equal, the central bank of the United Kingdom could prevent the pound from appreciating by a. selling pounds on the foreign-exchange market. b. buying pounds on the foreign-exchange market. c. reducing its inflation rate relative to its trading partners. d. promoting domestic investment and technological development. ANSWER: a FEEDBACK: a. Other things being equal, the central bank of the United Kingdom could prevent the pound from appreciating by selling pounds on the foreign exchange market.

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b. permit a country to undervalue its currency in the exchange markets. c. increase the supply of foreign currency when imports increase and exceed exports. d. decrease the supply of foreign currency when imports increase and exceed exports. ANSWER: c FEEDBACK: a. b. c. An exchange-stabilization fund is used to defend the official rate under a fixedrate system. The sale of foreign currencies causes the home currency‘s exchange value to depreciate, thus counteracting a payments deficit.

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c. an appreciation in both currencies. d. an appreciation in neither currency. ANSWER: d FEEDBACK: a. b. c. d. A currency devaluation results in a depreciation in both currencies. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Apply 32. Suppose that Japan maintains a pegged exchange rate that overvalues the yen. Other things being equal, this would likely result in a. Japanese exports becoming cheaper in world markets. b. imports becoming expensive in the Japanese market. c. unemployment for Japanese workers. d. full employment for Japanese workers. ANSWER: c FEEDBACK: a. b. c. An overvalued yen would result in increased imports, decreased exports, falling output, and rising unemployment.

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FEEDBACK:

a. b. c. To defend a pegged exchange rate that overvalues its currency, a country could purchase its own currency in international markets.

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35. Refer to Figure 15.1. With a system of floating exchange rates, the equilibrium exchange rate is a. $0.40 per franc. b. $0.50 per franc. c. $0.60 per franc. d. $0.70 per franc. ANSWER: b FEEDBACK: a. b. With a system of floating exchange rates, the equilibrium exchange rate is $0.50 per franc.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 15.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Floating Exchange Rates KEYWORDS: BLOOM'S: Analyze

36. Refer to Figure 15.1. Suppose that the United States increases its imports from Switzerland, resulting in a rise in the demand for francs from D0 to D1. Other things being equal, under a floating exchange-rate system, the new equilibrium exchange rate would be Copyright Cengage Learning. Powered by Cognero.

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a. $0.40 per franc. b. $0.50 per franc. c. $0.60 per franc. d. $0.70 per franc. ANSWER: FEEDBACK:

c a. b. c. The excess demand for francs leads to an increase in the exchange rate from $0.50 to $0.60 per franc.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 15.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Floating Exchange Rates KEYWORDS: BLOOM'S: Analyze

37. Refer to Figure 15.1. Suppose the United States decreases investment spending in Switzerland, thus reducing the demand for francs from D0 to D2. Other things being equal, under a floating exchange-rate system, the new equilibrium exchange rate would be a. $0.40 per franc. b. $0.50 per franc. c. $0.60 per franc. d. $0.70 per franc. ANSWER: a FEEDBACK: a. A decrease in the demand for francs leads to an appreciation of the dollar against the franc from $0.50 to $40.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 15.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Floating Exchange Rates KEYWORDS: BLOOM'S: Analyze

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38. Refer to Figure 15.1. Suppose the demand for francs increases from D0 to D1. Other things being equal, under a fixed exchange-rate system, the U.S. exchange-stabilization fund could maintain a fixed exchange rate of $0.50 per franc by a. selling francs for dollars on the foreign-exchange market. b. selling dollars for francs on the foreign-exchange market. c. decreasing U.S. exports, thus decreasing the supply of francs. d. stimulating U.S. imports, thus increasing the demand for francs. ANSWER: a FEEDBACK: a. To prevent a franc appreciation (dollar depreciation), the exchange-stabilization fund would purchase the excess supply of dollars with an equivalent amount of francs.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 15.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Fixed Exchange Rates KEYWORDS: BLOOM'S: Analyze Table 15.1. The Market for Swiss Francs Quantity of Francs Demanded

Dollar Price of Francs

Quantity of Francs Supplied

600 500 400 300 200 100 0

$0.05 0.10 0.15 0.20 0.25 0.30 0.35

0 100 200 300 400 500 600

39. Refer to Table 15.1. Under a system of floating exchange rates, the equilibrium exchange rate equals a. $0.15 per franc. b. $0.20 per franc. c. $0.25 per franc. d. $0.30 per franc. ANSWER: b FEEDBACK: a. b. Under a system of floating exchange rates, the equilibrium exchange rate equals $0.20 per franc.

c. d. POINTS:

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DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 15.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Floating Exchange Rates KEYWORDS: BLOOM'S: Analyze

40. Refer to Table 15.1. If monetary authorities fix the exchange rate at $0.10 per franc, there would be a a. shortage of 200 francs. b. shortage of 400 francs. c. surplus of 200 francs. d. surplus of 400 francs. ANSWER: b FEEDBACK: a. b. If monetary authorities fix the exchange rate at $0.10 per franc, there would be a shortage of 400 francs.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 15.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange Rates KEYWORDS: BLOOM'S: Analyze

41. Refer to Table 15.1. If monetary authorities fix the exchange rate at $0.30 per franc, there will be a a. shortage of 200 francs. b. shortage of 400 francs. c. surplus of 200 francs. d. surplus of 400 francs. ANSWER: d FEEDBACK: a. b. c. d. If monetary authorities fix the exchange rate at $0.30 per franc, there will be a surplus of 400 francs.

POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Table 15.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange Rates KEYWORDS: BLOOM'S: Analyze 42. Under managed floating exchange rates, other things being equal, the Federal Reserve could offset an appreciation of the dollar against the yen by a. increasing the money supply, which promotes falling interest rates and net investment outflows. b. increasing the money supply, which promotes rising interest rates and net investment inflows. c. decreasing the money supply, which promotes falling interest rates and net investment outflows. d. decreasing the money supply, which promotes rising interest rates and net investment inflows. ANSWER: a FEEDBACK: a. Under managed floating exchange rates, stabilizing a currency‘s exchange value requires a central bank to initiate an expansionary monetary policy to offset an appreciation of its currency.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Apply 43. Under managed floating exchange rates, other things being equal, a central bank would initiate a. a contractionary monetary policy to offset a depreciation of its currency. b. a contractionary monetary policy to offset an appreciation of its currency. c. an expansionary monetary policy to offset a depreciation of its currency. d. None of these are correct. ANSWER: a FEEDBACK: a. Under managed floating exchange rates, stabilizing a currency‘s exchange value requires a central bank to initiate a contractionary monetary policy to offset a depreciation of its currency.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate Multiple Choice

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Apply 44. To offset an appreciation of the dollar against the yen, other things being equal, the Federal Reserve would a. sell dollars on the foreign exchange market and lower domestic interest rates. b. sell dollars on the foreign exchange market and raise domestic interest rates. c. buy dollars on the foreign exchange market and lower domestic interest rates. d. buy dollars on the foreign exchange market and raise domestic interest rates. ANSWER: a FEEDBACK: a. Under managed floating exchange rates, to offset an appreciation of the dollar against the yen the Federal Reserve would sell dollars on the foreign exchange market and lower domestic interest rates.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Increasing the Credibility of Fixed Exchange Rates BLOOM'S: Understand

46. If Mexico dollarizes its economy, it essentially a. allows the Federal Reserve to be its lender of last resort. b. accepts the monetary policy of the Federal Reserve. c. ensures that its business cycle is identical to that of the U.S. d. abandons its ability to run governmentally balanced budgets. ANSWER: b FEEDBACK: a. b. Dollarization occurs when residents of a country use the U.S. dollar alongside or instead of their own currency. The country essentially accepts the monetary policy of the Federal Reserve.

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KEYWORDS:

BLOOM'S: Understand

48. An objective of the dollarization of the Mexican economy would be to a. shield its economy from hyperinflation, currency depreciation, and capital flight. b. allow the Federal Reserve to be its lender of last resort. c. ensure that its monetary policy is independent of the Federal Reserve. d. permit it to benefit from tariffs and subsidies imposed by the U.S. government. ANSWER: a FEEDBACK: a. Dollarization is seen as a way to protect a country‘s growth and prosperity from inflation, currency depreciation, and speculative attacks against the local currency.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Understand 49. In order to stabilize a currency, a currency board needs to a. use an expansionary monetary policy to offset currency depreciation. b. use an expansionary monetary policy to offset currency appreciation. c. use a contractionary policy to offset currency appreciation. d. None of these are correct. ANSWER: d FEEDBACK: a. b. c. d. The most vital contribution a currency board can make to exchange-rate stability is to impose discipline on the process of money creation. This discipline results in greater stability in domestic prices, which, in turn, stabilizes the value of the domestic currency.

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50. The crawling peg is a(n) a. fixed exchange-rate system. b. floating exchange-rate system. c. compromise between fixed and floating exchange rates. d. exchange-rate system used by nations experiencing no inflation. ANSWER: c FEEDBACK: a. b. c. Under a crawling-peg exchange-rate system, a nation makes frequent devaluations (or revaluations) of its currency to restore payments balance. It is a compromise between fixed and floating exchange rates.

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52. Refer to Figure 15.2. Demand and supply of British pounds is initially D0 and S0. With a system of floating exchange rates, the equilibrium exchange rate is a. $0.40 per pound. b. $0.60 per pound. c. $0.80 per pound. d. $1 per pound. ANSWER: c FEEDBACK: a. b. c. With a system of floating exchange rates, the equilibrium exchange rate is $0.80 per pound.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 15.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Floating Exchange Rates KEYWORDS: BLOOM'S: Analyze

53. Refer to Figure 15.2. Suppose that the United States increases its imports from England. Other things being equal, Copyright Cengage Learning. Powered by Cognero.

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under a floating exchange-rate system the new equilibrium exchange rate would be a. $0.40 per pound. b. $0.60 per pound. c. $0.80 per pound. d. $1 per pound. ANSWER: d FEEDBACK: a. b. c. d. An increase in the demand for pounds leads to a depreciation of the dollar against the pound. The new equilibrium exchange rate would be $1 per pound.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 15.2 NATIONAL STANDARDS: United States - BUSPROG: Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Floating Exchange Rates KEYWORDS: BLOOM'S: Analyze

54. Refer to Figure 15.2. Suppose the United States decreases financial investment in England. Other things being equal, under a floating exchange-rate system the new equilibrium exchange rate would be a. $0.40 per pound. b. $0.60 per pound. c. $0.80 per pound. d. $1 per pound. ANSWER: d FEEDBACK: a. b. c. d. A decrease in the demand for pounds leads to an appreciation of the dollar against the pound. The new equilibrium exchange rate would be $1 per pound.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 15.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Floating Exchange Rates KEYWORDS: BLOOM'S: Analyze

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55. Refer to Figure 15.2. Suppose the demand for pounds increases from D0 to D1. Other things being equal, under a fixed exchange-rate system the U.S. exchange stabilization fund could maintain a fixed exchange rate of $0.80 per pound by a. selling pounds for dollars on the foreign exchange market. b. selling dollars for pounds on the foreign exchange market. c. decreasing U.S. exports, thus decreasing the supply of pounds. d. stimulating U.S. imports, thus increasing the demand for pounds. ANSWER: a FEEDBACK: a. If the demand for pounds increases from D0 to D1, the pound would appreciate (and dollar depreciate). To defend the official exchange rate of $0.80 per pound, the exchange stabilization fund must purchase the excess supply of dollars with an equivalent amount of pounds.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Figure 15.2 NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC7: - Reading and interpreting graphs TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Analyze 56. In 1944, financial ministers throughout the world met in New Hampshire to set up an adjustable pegged exchangerate system. This system became known as the a. General Agreement on Tariffs and Trade. b. Bretton Woods system. c. Bank for International Settlements. d. World Bank. ANSWER: b FEEDBACK: a. b. In 1944, delegates from 44 member nations of the still-forming United Nations met at Bretton Woods, New Hampshire, to create a new international monetary system. This system became known as the Bretton Woods system.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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57. The Bretton Woods system of 1944-1973 was essentially a system of a. freely fluctuating exchange rates. b. crawling pegged exchange rates. c. managed floating exchange rates. d. adjustable pegged exchange rates. ANSWER: d FEEDBACK: a. b. c. d. The international monetary system that became known as the Bretton Woods system was a semi-fixed exchange-rate system known as adjustable pegged exchange rates.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Remember 58. The Bretton Woods system of 1944-1973 was based upon a. the international silver standard. b. the international gold standard. c. freely fluctuating exchange rates. d. relatively stable exchange rates. ANSWER: d FEEDBACK: a. b. c. d. The Bretton Woods system of 1944-1973 was based upon relatively stable exchange rates. Exchange rates were almost fixed, being kept within a band of 1 percent on either side of parity for a total spread of 2 percent.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Remember 59. The result of devaluations of the dollar in the early 1970s was to a. increase the price of U.S. exports. b. decrease the price of U.S. exports. c. decrease the price of U.S. imports. Copyright Cengage Learning. Powered by Cognero.

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d. increase the U.S. balance of payments surplus. ANSWER: b FEEDBACK: a. b. The result of devaluations of the dollar in the early 1970s was to decrease the price of U.S. exports.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Understand 60. According to the Bretton Woods system of 1944-1973, the United States was designated as the a. par value country. b. floating exchange rate country. c. reserve currency country. d. liquidity deficit country. ANSWER: c FEEDBACK: a. b. c. Under the Bretton Woods system, the United States was designated as the reserve currency country and had a commitment to exchange gold for dollars at $35 per ounce.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Understand 61. Under the Bretton Woods system of 1944-1973, a. member countries set the par value of their currencies in terms of gold. b. market exchange rates were almost fixed. c. currency devaluations or revaluations could be used to adjust the par value of a currency when it became overvalued or undervalued. d. All of these are correct. ANSWER: d FEEDBACK: a. b. Copyright Cengage Learning. Powered by Cognero.

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c. d. Under the Bretton Woods system, each member nation set the par value of its currency in terms of gold; market exchange rates were almost fixed; and devaluations or revaluations could be used to adjust the par value of a currency when it became overvalued or undervalued.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Remember 62. Suppose Japan runs a trade deficit. Other things being equal, if the Japanese yen appreciates against other currencies in the exchange markets, this will a. have no effect on the Japanese balance of trade. b. tend to improve the Japanese balance of trade because Japanese imports will become more expensive. c. tend to worsen the Japanese balance of trade because Japanese exports will become cheaper. d. None of these is correct. ANSWER: c FEEDBACK: a. b. c. If the Japanese yen appreciates against other currencies in the exchange markets, this will tend to worsen the Japanese balance of trade because Japanese exports will become cheaper.

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b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Floating Exchange Rates KEYWORDS: BLOOM'S: Apply 64. Assume that interest rates in London increase relative to those in Switzerland. Other things being equal, under a floating exchange-rate system one would expect the pound (relative to the Swiss franc) to a. depreciate due to the increased demand for pounds. b. depreciate due to the increased demand for Swiss francs. c. appreciate due to the increased demand for Swiss francs. d. appreciate due to the increased demand for pounds. ANSWER: d FEEDBACK: a. b. c. d. If interest rates in London increase relative to those in Switzerland, under a floating exchange-rate system one would expect the pound (relative to the Swiss franc) to appreciate due to the increased demand for pounds.

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dollar.

d. POINTS:

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DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Floating Exchange Rates KEYWORDS: BLOOM'S: Understand 68. Which of the following is not a potential disadvantage of freely floating exchange rates? a. They require larger amounts of international reserves than other exchange systems. b. Demand for imports and exports may be influenced by price speculation. c. There may occur large amounts of destabilizing speculation. d. Capital movements among nations may be hindered via exchange rate fluctuations. ANSWER: a FEEDBACK: a. Fixed exchange rates require larger amounts of international reserves than other exchange-rate systems.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Floating Exchange Rates BLOOM'S: Understand

70. A potential disadvantage of freely floating exchange rates is that there would a. exist excessive amounts of hedging in the foreign exchange markets. b. be a lack of incentive to initiate exchange arbitrage. c. be excessive amounts of destabilizing speculation. d. exist a devaluation bias in the exchange markets. ANSWER: c FEEDBACK: a. b. c. Critics of floating rates maintain that an unregulated market may lead to wide fluctuations in currency values, discouraging foreign trade and investment.

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TOPICS: KEYWORDS:

Floating Exchange Rates BLOOM'S: Apply

72. Under a system of floating exchange rates, other things being equal, a U.S. trade deficit with Japan will cause a. a flow of gold from the United States to Japan. b. the U.S. government to ration yen to U.S. importers. c. an increase in the dollar price of yen. d. a decrease in the dollar price of yen. ANSWER: c FEEDBACK: a. b. c. Under a system of floating exchange rates, other things being equal, a U.S. trade deficit with Japan will cause an increase in the dollar price of yen.

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could ____ the U.S. money supply, which would promote a (an) ____ in U.S. interest rates and a ____ in investment flows to the United States. a. increase, decrease, decrease b. increase, increase, decrease c. decrease, decrease, decrease d. decrease, increase, decrease ANSWER: a FEEDBACK: a. In the absence of international policy coordination, stabilizing a currency‘s exchange value requires a central bank to initiate an expansionary monetary policy to offset an appreciation of its currency. This would promote a decrease in U.S. interest rates and a decrease in investment flows to the United States.

b. c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Apply 75. Other things being equal, to temporarily offset a depreciation in the dollar's exchange value, the Federal Reserve could ____ the U.S. money supply, which would promote a (an) ____ in U.S. interest rates and a (an) ____ in investment flows to the United States. a. increase, decrease, decrease b. increase, increase, increase c. decrease, decrease, increase d. decrease, increase, increase ANSWER: d FEEDBACK: a. b. c. d. By increasing money supply, the amount of dollars supplied will increase (supply will shift to the right). This would promote an increase in U.S. interest rates and an increase in investment flows to the United States.

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76. When the United States abandoned the Bretton Woods system in 1973, it adopted a system of a. managed floating exchange rates. b. freely fluctuating exchange rates. c. adjustable pegged exchange rates. d. crawling pegged exchange rates. ANSWER: a FEEDBACK: a. When the United States abandoned the Bretton Woods system in 1973, it adopted a system of managed floating exchange rates.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Remember 77. Under a system of fixed exchange rates, the purpose of currency devaluation is to cause the exchange value of a currency to ______, thus counteracting a balance-of-payments ______. a. depreciate, deficit b. depreciate, surplus c. appreciate, deficit d. appreciate, surplus ANSWER: a FEEDBACK: a. Under a fixed exchange-rate system, a nation‘s monetary authority may decide to pursue a balance-of-payments equilibrium by devaluing or revaluing its currency. The purpose of devaluation is to cause the home currency‘s exchange value to depreciate, thus counteracting a payments deficit.

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b. depreciate, surplus c. appreciate, deficit d. appreciate, surplus ANSWER: FEEDBACK:

d a. b. c. d. Under a fixed exchange-rate system, a nation‘s monetary authority may decide to pursue a balance-of-payments equilibrium by devaluing or revaluing its currency. The purpose of currency revaluation is to cause the home currency‘s exchange value to appreciate, counteracting a payments surplus.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Remember 79. In recent years, members of the International Monetary Fund (IMF) have adopted exchange-rate systems including a. currency board arrangements. b. fixed exchange rates. c. crawling pegged exchange rates. d. All of these are correct. ANSWER: d FEEDBACK: a. b. c. d. Members of the International Monetary Fund have been free to follow any exchange-rate policy that conforms to three principles: Exchange rates should not be manipulated; Members should act to counter short-term disorderly conditions in exchange markets; and when members intervene in exchange markets, they should take into account the interests of other members.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange-Rate Practices KEYWORDS: BLOOM'S: Remember 80. In recent years, members of the International Monetary Fund have adopted exchange-rate systems, including a. independently floating exchange rates. b. managed floating exchange rates. c. crawling pegged exchange rates. Copyright Cengage Learning. Powered by Cognero.

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d. All of these are correct. ANSWER: d FEEDBACK:

a. b. c. d. Members of the International Monetary Fund have been free to follow any exchange-rate policy that conforms to three principles: Exchange rates should not be manipulated; Members should act to counter short-term disorderly conditions in exchange markets; and when members intervene in exchange markets, they should take into account the interests of other members.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange-Rate Practices KEYWORDS: BLOOM'S: Remember 81. Countries tend to be less served by a fixed exchange-rate system when a. they are small, open economies. b. their inflation differentials are modest. c. they are highly exposed to international capital movements. d. their wages are quite flexible to changing market conditions. ANSWER: c FEEDBACK: a. b. c. The more open an economy to international capital, the harder it is to sustain a fixed rate.

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FEEDBACK:

a. b. c. d. Members of the International Monetary Fund have been free to follow any exchange-rate policy that conforms to three principles. Exchange rates should not be manipulated to prevent effective balance-of-payments adjustments or to gain unfair competitive advantage over other members. Members should act to counter short-term disorderly conditions in exchange markets. When members intervene in exchange markets, they should take into account the interests of other members.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Exchange-Rate Practices KEYWORDS: BLOOM'S: Remember 83. The "impossible trinity" explains the relationship between a. free movements of international capital. b. independent monetary policies of countries. c. fixed exchange-rate systems of countries. d. All of these are correct. ANSWER: d FEEDBACK: a. b. c. d. Countries can adopt only two of the following three policies—free capital flows, a fixed exchange rate, and an independent monetary policy. This restriction is referred to as the ―impossible trinity.‖

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Choosing an Exchange-Rate System: Constraints Imposed by Free Capital Flows KEYWORDS: BLOOM'S: Remember 84. Hong Kong essentially has fixed the exchange value of its currency to the a. euro. b. British pound. c. U.S. dollar. d. Canadian dollar. ANSWER: c FEEDBACK: a. Copyright Cengage Learning. Powered by Cognero.

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b. c. Hong Kong essentially fixes the value of its currency to the U.S. dollar and allows free capital flows.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Choosing an Exchange-Rate System: Constraints Imposed by Free Capital Flows KEYWORDS: BLOOM'S: Remember 85. With fixed exchange rates, assume that the home currency becomes overvalued relative to its par value. Other things being equal, to maintain the fixed exchange rate the home country's central bank must a. purchase the home currency, and as a result it loses international reserves. b. purchase the home currency, and as a result it gains international reserves. c. sell the home currency, and as a result it loses international reserves. d. sell the home currency, and as a result it gains international reserves. ANSWER: d FEEDBACK: a. b. c. d. If the home currency becomes overvalued relative to its par value, maintaining the official rate may require the central bank to sell its currency and buy foreign currencies. These purchases will increase a nation‘s stock of international reserves.

POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Understand 86. With fixed exchange rates, assume that the home currency becomes undervalued relative to its par value. Other things being equal, to maintain the fixed exchange rate, the home country's central bank must a. purchase the home currency, and as a result it loses international reserves. b. purchase the home currency, and as a result it gains international reserves. c. sell the home currency, and as a result it loses international reserves. d. sell the home currency, and as a result it gains international reserves. ANSWER: a FEEDBACK: a. If the home currency becomes undervalued relative to its par value, maintaining the official rate may require the central bank to buy its currency and sell foreign currencies. These sales will decrease a nation‘s stock of international reserves.

b. Copyright Cengage Learning. Powered by Cognero.

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c. d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Apply 87. With fixed exchange rates, assume that the home currency becomes undervalued—that is, above its par value when expressed as the home currency price of the foreign currency. Other things being equal, to maintain the fixed exchange rate, the home country's central bank must a. sell the home currency and purchase foreign currencies. b. sell the home currency and sell foreign currencies. c. purchase the home currency and sell foreign currencies. d. purchase the home currency and purchase foreign currencies. ANSWER: c FEEDBACK: a. b. c. If the home currency becomes undervalued relative to its par value, maintaining the official rate may require the central bank to buy its currency and sell foreign currencies.

d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Apply 88. Under a system of fixed exchange rates, other things being equal, if the par value of the fixed exchange rate is overvalued, then its central bank's effort to prevent the currency from ______ will lead to a (an) ______. a. depreciating, increase in international reserves b. depreciating, decrease in international reserves c. appreciating, increase in international reserves d. appreciating, decrease in international reserves ANSWER: c FEEDBACK: a. b. c. If the home currency becomes overvalued relative to its par value, maintaining the official rate may require the central bank to sell its currency and buy foreign currencies. These purchases will increase a nation‘s stock of international reserves. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Apply 89. A central bank that desires a (an) ______ of its currency would likely implement a ______ monetary policy. a. depreciation, contractionary b. depreciation, neutral c. appreciation, contractionary d. appreciation, expansionary ANSWER: c FEEDBACK: a. b. c. A central bank would initiate a contractionary monetary policy to cause an appreciation of its currency.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Understand 90. A central bank that desires a (an) ______ of its currency would likely implement a ______ monetary policy. a. depreciation, expansionary b. depreciation, neutral c. appreciation, neutral d. appreciation, expansionary ANSWER: a FEEDBACK: a. A central bank would initiate an expansionary monetary policy to cause a depreciation of its currency.

b. c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Easy Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Understand 91. Under a system of managed floating exchange rates, central banks intervene in the foreign-exchange market to a. moderate long run movements in exchange rates. b. reinforce long run movements in exchange rates. c. moderate short run fluctuations in exchange rates. d. reinforced short run fluctuations in exchange rates. ANSWER: c FEEDBACK: a. b. c. Under a system of managed floating exchange rates, central banks intervene in the foreign-exchange market to moderate short run fluctuations in exchange rates.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Understand 92. Proponents of a fixed exchange-rate system maintain that it is superior to a floating exchange-rate system because a. the balance of payments adjusts continuously to exchange-rate movements. b. governments can establish independent monetary and fiscal policies. c. disorderly exchange-rate movements can disrupt trade and investment patterns. d. floating exchange rates operate under simplified institutional arrangements. ANSWER: c FEEDBACK: a. b. c. Disorderly exchange markets are a disadvantage of a floating exchange-rate system and can disrupt trade and investment patterns.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Understand Copyright Cengage Learning. Powered by Cognero.

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93. Proponents of a freely floating exchange-rate system maintain that it is superior to a fixed exchange-rate system because it a. keeps inflation under control. b. provides a simple and clear exchange rate target. c. provides continuous adjustment in the balance of payments. d. helps prevent disorderly exchange rate movements that can disrupt trade. ANSWER: c FEEDBACK: a. b. c. An advantage of a floating exchange-rate system is that it provides continuous adjustment in the balance of payments.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG - Diversity STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Understand 94. For the United States, its current exchange-rate system is generally considered to be a a. freely floating exchange-rate system. b. managed floating exchange-rate system. c. crawling pegged exchange-rate system. d. currency board system. ANSWER: b FEEDBACK: a. b. The United States‘ current system is generally considered to be a managed floating exchange-rate system.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Remember 95. Countries such as Bolivia and Costa Rica have adopted crawling pegged exchange rates. Under this system, a country a. makes small, frequent changes in the par value of its currency to moderate balance-of-payments disequilibrium. b. allows its currency to float freely in the foreign exchange market in the short run and long run. c. maintains a system of completely fixed exchange rates. Copyright Cengage Learning. Powered by Cognero.

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d. smooths fluctuations in exchange rates over the long run, but not in the short run. ANSWER: a FEEDBACK: a. Under a crawling-peg exchange-rate system, a nation makes frequent devaluations (or revaluations) of its currency to restore payments balance. The term crawling peg implies that par value changes are implemented in a large number of small steps, making the process of exchange-rate adjustment continuous.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Crawling Peg KEYWORDS: BLOOM'S: Remember 96. Sources of currency crisis for emerging countries have included all of the following, except a. weak banks and financial systems. b. governmental budget deficits financed by inflation. c. governments prone to being overthrown by force. d. All of these are correct. ANSWER: d FEEDBACK: a. b. c. d. Sources of currency crisis for emerging countries have included weak banks and financial systems, budget deficits financed by inflation, and political instability.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: The Crawling Peg KEYWORDS: BLOOM'S: Remember 97. For developing countries, currency boards and dollarization are intended to a. convince speculators that the exchange rate is unchangeable. b. promote confidence in the soundness of the nation's money supply. c. arrest any tendencies in an economy toward inflation. d. All of these are correct. ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. c. d. Currency boards and dollarization are explicitly intended to maintain fixed exchange rates and prevent currency crises.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Remember 98. For developing countries, efforts to prevent speculation and currency crises have included a. controls on capital flows. b. more freely floating exchange rates. c. greater reliance on foreign capital. d. abandoning fixed exchange-rate systems. ANSWER: a FEEDBACK: a. Capital controls are sometimes used by governments in an attempt to support fixed exchange rates and prevent speculative attacks on currencies.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Remember 99. In recent years, the United States has accused China of manipulating the yuan so as to gain an unfair competitive advantage in global trade. The United States has argued that China has a. maintained an overvalued yuan that makes U.S. exports to China more expensive. b. maintained an undervalued yuan that makes U.S. exports to China more expensive. c. helped the yuan's exchange value to appreciate, thus making U.S. exports to China more expensive. d. revalued the yuan by adjusting its part value upward, thus making U.S. exports to China more expensive. ANSWER: b FEEDBACK: a. b. The United States has accused China of manipulating the yuan and has argued that the central bank of China has sold yuan and bought dollars, thus depreciating the yuan against the dollar. China‘s currency policy has resulted in its yuan being significantly undervalued relative to the dollar, giving the Chinese Copyright Cengage Learning. Powered by Cognero.

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an unfair competitive advantage. An undervalued yuan makes U.S. exports to China more expensive.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Currency Manipulation and Currency Wars KEYWORDS: BLOOM'S: Remember 100. Which of the following is an example of currency manipulation that would likely move Japan’s trade balance to a trade surplus? a. when Japan buys yen and sells dollars b. when Japan sells U.S. treasuries c. when Japan buys yen and sells U.S. treasuries d. when Japan buys U.S. treasuries and sells yen ANSWER: d FEEDBACK: a. b. c. d. A weak currency cheapens the price of a country‘s exports, making them more attractive to international buyers by undercutting competitors. If Japan buys U.S. treasuries and sells yen, this will likely move Japan‘s trade balance to a trade surplus.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Currency Manipulation and Currency Wars KEYWORDS: BLOOM'S: Remember 101. In the 2000s, the U.S. accused which country of currency manipulation? a. Canada b. Mexico c. Switzerland d. South Korea ANSWER: d FEEDBACK: a. b. c. d. In the 2000s, the U.S. accused South Korea of currency manipulation. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Currency Manipulation and Currency Wars KEYWORDS: BLOOM'S: Remember 102. Which of the following is an example of the reasons that other countries have accused the U.S. of currency manipulation? a. The Federal Reserve increases the money supply to grow the U.S. economy. b. The Federal Reserve uses contractionary monetary policy to fight inflation. c. The Federal Reserve uses expansionary monetary policy to fight inflation. d. The Federal Reserve shrinks the money supply to grow the U.S. economy. ANSWER: a FEEDBACK: a. When the Federal Reserve increased the money supply to grow the U.S. economy during the Great Recession, the policy also caused the dollar‘s exchange value to depreciate. Other countries then accused the U.S. of currency manipulation.

POINTS: DIFFICULTY:

1 Easy

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Currency Manipulation and Currency Wars KEYWORDS: BLOOM'S: Remember 104. With a system of fixed exchange rates, a country that exhausts its international reserves in an attempt to keep its currency from _____ will have to ______ its currency a. depreciating, devalue b. depreciating, revalue c. appreciating, devalue d. appreciating, revalue ANSWER: a FEEDBACK: a. A currency crisis ends when selling pressure stops. One way to end pressure is to devalue—that is, establish a new exchange rate at a sufficiently depreciated level.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Capital Controls KEYWORDS: BLOOM'S: Understand 105. If a central bank were to prevent its currency from depreciating, it would likely adopt a (an) ______ monetary policy to ______ the domestic interest rate, thus strengthening its currency. a. contractionary, decrease b. contractionary, increase c. expansionary, decrease d. expansionary, increase ANSWER: b FEEDBACK: a. b. To prevent a depreciation in the home currency‘s exchange value, a central bank can initiate a contractionary monetary policy that leads to higher domestic interest rates, increased investment inflows, and increased demand for the home currency.

c. d. POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Understand 106. If a central bank were to prevent its currency from appreciating, it would likely adopt a (an) ______ monetary policy to ______ the domestic interest rate, thus strengthening its currency. a. contractionary, decrease b. contractionary, increase c. expansionary, decrease d. expansionary, increase ANSWER: c FEEDBACK: a. b. c. To prevent an appreciation in the home currency‘s exchange value, a central bank can initiate an expansionary monetary policy that leads to lower domestic interest rates, decreased investment inflows, and decreased demand for the home currency.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Understand 107. For a developing country, a _____ can promote economic instability because it forces the country to ______. a. capital inflow, adopt a contractionary monetary policy b. capital inflow, adopt an expansionary monetary policy c. capital outflow, devalue its currency d. capital outflow, revalue its currency ANSWER: c FEEDBACK: a. b. c. A currency crisis ends when selling pressure stops. One way to end pressure is to devalue—that is, establish a new exchange rate at a sufficiently depreciated level. This can promote economic instability.

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TOPICS: KEYWORDS:

Capital Controls BLOOM'S: Understand

108. For Ecuador, the result of adopting the dollar as its official currency is that a. its government cannot capture revenue (seigniorage) by issuing currency. b. there tends to be greater promise of lower interest rates and greater financial stability. c. the rate of inflation in Ecuador is tied to that of the United States. d. All of these are correct. ANSWER: d FEEDBACK: a. b. c. d. Dollarization is seen as a way to protect a country‘s growth and prosperity from inflation, currency depreciation, and speculative attacks against the local currency.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Remember 109. A ______ is a type of a fixed exchange-rate system in which the commitment to the fixed exchange rate is very firm a. currency board b. monetary policy board c. fiscal policy board d. customs board ANSWER: a FEEDBACK: a. A currency board is a type of a fixed exchange-rate system in which the commitment to the fixed exchange rate is very firm.

b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Remember 110. Hong Kong provides an example of a country that has maintained a currency board. The purpose of its currency board is to Copyright Cengage Learning. Powered by Cognero.

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a. maintain a system of freely floating exchange rates. b. maintain an especially strong commitment to a fixed exchange rate. c. to totally replace the currency of Hong Kong with the U.S. dollar. d. to totally replace the currency of Hong Kong with the euro. ANSWER: b FEEDBACK: a. b. To restore confidence in its currency, in 1983 the government of Hong Kong adopted a currency board system. It pegged its exchange rate at HK $7.8 = US $1.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Remember 111. By adopting a currency board, a developing country hopes to a. drive interest rates down in order to increase domestic investment spending. b. have its central bank switch from an inflationary policy to a deflationary policy. c. discourage speculative attacks on its currency. d. replace monetary policy with fiscal policy during times of economic downturn. ANSWER: c FEEDBACK: a. b. c. Currency boards and dollarization are explicitly intended to maintain fixed exchange rates and prevent currency crises.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Understand 112. For Ecuador, an advantage of adopting the dollar as its official currency is that a. the Federal Reserve becomes Ecuador's lender of last resort. b. Ecuador escapes the likelihood of a speculative attack. c. Ecuador's government can capture revenue by issuing currency (called seigniorage). d. Ecuador’s monetary policy becomes independent from that of the Federal Reserve. ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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FEEDBACK:

a. b. Dollarization is considered to be one way of avoiding the capital outflows that often precede or accompany a speculative attack.

c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Understand 113. When Zimbabwe adopted the U.S. dollar as legal tender and the medium of exchange, this policy allowed Zimbabwe to a. give-up monetary credibility. b. decrease budgetary discipline. c. quash hyperinflation. d. retain control of its monetary policy. ANSWER: c FEEDBACK: a. b. c. Dollarization allowed Zimbabwe to quash hyperinflation, increase budgetary discipline, and re-establish monetary credibility, thus promoting economic growth for the country.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC10: - The role of government TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Understand 114. For a developing country, a _____ can foster economic instability because it can result in a lending boom and ______ by banks, which promotes a financial crisis. a. capital inflow, excessive risk taking b. capital inflow, inadequate risk taking c. capital outflow, excessive risk taking d. capital outflow, inadequate risk taking ANSWER: a FEEDBACK: a. Weak banks can trigger speculative attacks if people think the central bank will rescue the banks even at the cost of spending much of its foreign reserves to do so. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC16: - Measuring the economy TOPICS: Capital Controls KEYWORDS: BLOOM'S: Understand 115. The tie between gold and the international value of the dollar ended in 1971. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect The United States suspended the dollar‘s convertibility into gold in August 1971. This suspension terminated the U.S. commitment to exchange gold for dollars at $35 per ounce and abolished the tie between gold and the international value of the dollar.

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TOPICS: KEYWORDS:

Fixed Exchange-Rate System BLOOM'S: Remember

117. Today, fixed exchange rates are used primarily by small, developing countries that tie their currencies to a key currency such as the U.S. dollar. a. True b. False ANSWER: True FEEDBACK: Correct Small, developing nations often anchor their currencies to a single currency or a currency basket. Incorrect

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122. Pegging to a single currency is generally done by developing nations whose trade and financial relationships are mainly with a single, industrial country partner. a. True b. False ANSWER: True FEEDBACK: Correct Pegging to a single currency is generally done by developing nations whose trade and financial relations are mainly with a single, industrial country partner. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Understand 125. Special drawing rights (SDRs) represent an important currency basket against which developing countries maintain pegged exchange rates. a. True b. False ANSWER: True FEEDBACK: Correct Developing nations often choose to anchor their exchange rates to SDRs. Incorrect

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Incorrect The special drawing right is a currency basket composed of five key currencies of IMF members: yuan, euros, yen, pounds, and dollars.

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TOPICS: KEYWORDS:

Fixed Exchange-Rate System BLOOM'S: Understand

130. Most nations currently allow their currencies' exchange values to be determined solely by the forces of supply and demand in a free market. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Most nations maintain neither completely fixed nor floating exchange rates. Contemporary exchange-rate systems generally embody some features of each of these standards.

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currency basket.

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KEYWORDS:

BLOOM'S: Understand

135. Other things being equal, to keep the yen's exchange value from appreciating against the dollar, Japan's exchangestabilization fund would buy yen for dollars on the foreign exchange market. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect To keep the yen's exchange value from appreciating against the dollar, Japan's exchange-stabilization fund would sell yen for dollars on the foreign exchange market.

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percent against the franc. The net effect is a 5% (10%-5%) devaluation of the shilling against the franc.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Fixed Exchange-Rate System BLOOM'S: Understand

140. Unlike floating exchange rates, fixed exchange rates are not characterized by par values and central bank intervention in the foreign exchange market. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Under a fixed exchange-rate system, a government defines the official exchange rate for its currency. Central banks intervene to prevent the market exchange rate from moving above or below the official rate.

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FEEDBACK:

Correct

The main feature of the adjustable pegged system was that currencies were tied to each other to provide stable exchange rates for commercial and financial transactions. When the balance of payments moved away from its long-run equilibrium position, a nation could re-peg its exchange rate via devaluation or revaluation policies.

Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Understand 145. Under managed floating exchange rates, market forces are allowed to determine exchange rates in the short run while central bank intervention is used to stabilize exchange rates in the long run. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Under a managed float, market intervention is used to stabilize exchange rates in the short run; in the long run, a managed float allows market forces to determine exchange rates.

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b. False ANSWER: FEEDBACK:

True Correct

To offset an appreciation in the home currency‘s exchange value, a central bank can initiate a contractionary monetary policy that leads to lower domestic interest rates, increased investment outflows, and decreased demand for the home currency.

Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Remember 149. Full dollarization occurs when residents of a country adopt the U.S. dollar as their currency. a. True b. False ANSWER: True FEEDBACK: Correct Full dollarization means the elimination of the country‘s currency and its complete replacement with the U.S. dollar. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Challenging True / False False

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NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC10: - The role of government TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Understand 150. If Ecuador adopts the U.S. dollar as its official currency, the country loses its foreign reserves. a. True b. False ANSWER: True FEEDBACK: Correct To replace its currency, Ecuador would sell foreign reserves (mostly U.S. Treasury securities) to buy dollars and exchange all outstanding sucre notes for dollar notes. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Understand 151. If Argentina adopts the U.S. dollar as its official currency, it seeks to eliminate the possibility of a speculative attack against its currency. a. True b. False ANSWER: True FEEDBACK: Correct Dollarization is considered to be one way of avoiding the capital outflows that often precede or accompany a speculative attack. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Understand 152. A currency board is a type of a floating exchange-rate system in which the commitment to the floating exchange rate is very strong. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect A currency board is a monetary authority that issues notes and coins convertible into a foreign currency at a fixed exchange rate. Copyright Cengage Learning. Powered by Cognero.

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POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Increasing the Credibility of Fixed Exchange Rates KEYWORDS: BLOOM'S: Remember 153. If the Federal Reserve wants to see the dollar's exchange value depreciate, it could pursue a contractionary monetary policy. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect To offset a depreciation in the home currency‘s exchange value, a central bank can initiate a contractionary monetary policy that leads to higher domestic interest rates, increased investment inflows, and increased demand for the home currency.

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC12: - Monetary and fiscal policy TOPICS: Managed Floating Rates KEYWORDS: BLOOM'S: Remember 154. In recent years, the United States has accused China of manipulating the yuan so as to gain an unfair competitive advantage in global trade. The United States has argued that the central bank of China has sold yuan and bought dollars, thus depreciating the yuan against the dollar a. True b. False ANSWER: True FEEDBACK: Correct The United States has accused China of manipulating the yuan and has argued that the central bank of China has sold yuan and bought dollars, thus depreciating the yuan against the dollar. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Currency Manipulation and Currency Wars KEYWORDS: BLOOM'S: Remember Copyright Cengage Learning. Powered by Cognero.

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155. Sources of a currency crisis often include weak financial systems and budget deficits financed by inflation. a. True b. False ANSWER: True FEEDBACK: Correct Among the causes of currency crises are budget deficits financed by inflation, weak financial systems, political uncertainty, and changes in interest rates on world markets. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC17: - The role of money TOPICS: Currency Manipulation and Currency Wars KEYWORDS: BLOOM'S: Remember 156. Restrictions on capital outflows may further increase after the controls are implemented. a. True b. False ANSWER: True FEEDBACK: Correct Evidence suggests that capital outflows may further increase after the controls are implemented because confidence in the government is weakened. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Capital Controls KEYWORDS: BLOOM'S: Remember 157. An argument can be made for controls on the outflow of capital for developing countries because a currency crisis forces a country to revalue its currency. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect A currency crisis ends when selling pressure stops. One way to end pressure is to devalue—that is, establish a new exchange rate at a sufficiently depreciated level.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC17: - The role of money Capital Controls BLOOM'S: Understand

158. Although controls on the outflow of capital for developing countries may be appealing, they tend to suffer from people finding ways to evade the controls and move funds out of the country. a. True b. False ANSWER: True FEEDBACK: Correct Restrictions on capital outflows often result in evasion as government officials get paid to ignore domestic residents who shift funds overseas. Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Capital Controls KEYWORDS: BLOOM'S: Remember 159. The Bretton Woods system of 1944-1973 was a flexible exchange-rate system in which member countries allowed their currencies to float within wide bands. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Under the Bretton Woods system, each member nation set the par value of its currency in terms of gold or, alternatively, the gold content of the U.S. dollar in 1944. Market exchange rates were almost fixed

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Remember 160. The exchange-rate system established by the Bretton Woods Agreement of 1944-1973 was an adjustable pegged system. a. True b. False ANSWER: True FEEDBACK: Correct The exchange-rate system established by the Bretton Woods Agreement of 1944-1973 was a kind of semi-fixed exchange-rate system known as adjustable pegged exchange rates. The Bretton Woods system lasted from 1946 until 1973. Copyright Cengage Learning. Powered by Cognero.

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Incorrect

POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Remember 161. When pursued over the long run, a policy of increasing the domestic money supply to offset an appreciation of the home country's currency results in inflation and a decrease in home-country competitiveness in key industries. a. True b. False ANSWER: True FEEDBACK: Correct Over the long run, a policy of increasing the domestic money supply to offset an appreciation of the home country's currency results in inflation and a decrease in home-country competitiveness in key industries. Incorrect

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Choosing an Exchange-Rate System: Constraints Imposed by Free Capital Flows BLOOM'S: Understand

163. What is an SDR? ANSWER:

A special drawing right, or SDR, is a currency basket composed of five currencies established by the International Monetary Fund. Nations desiring exchange rate stability are attracted to the SDR as a currency basket against which to anchor their currency values. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Fixed Exchange-Rate System KEYWORDS: BLOOM'S: Remember 164. What is the difference between crawling peg and adjustable pegged exchange rates? Under the adjustable peg, currencies are tied to a par value that changes infrequently but ANSWER: suddenly, usually in large jumps. The crawling peg allows a nation to make small changes in par values, perhaps several times a year, so that they creep along slowly in response to evolving market conditions. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: The Crawling Peg KEYWORDS: BLOOM'S: Understand 165. How can currency boards and dollarization prevent currency crises? A currency board is a monetary authority that issues notes and coins convertible into a ANSWER: foreign currency at a fixed exchange rate. The most vital contribution a currency board can make to exchange-rate stability is to impose discipline on the process of money creation. This results in greater stability on domestic prices, which in turn stabilizes the value of the domestic currency. Dollarization occurs when residents of a county use the U.S. dollar alongside or instead of their own currency. Dollarization is seen as a way to protect a country's growth and prosperity from bouts of inflation, currency depreciation, and speculative attacks against the local currency. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay Copyright Cengage Learning. Powered by Cognero.

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HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Currency Crises KEYWORDS: BLOOM'S: Understand

Chapter 15: Macroeconomic Policy in an Open Economy 1. A nation experiences internal balance if it achieves a. full employment. b. price stability. c. full employment and price stability. d. unemployment and price instability. ANSWER: c FEEDBACK: a. b. c. The goal of internal balance has two dimensions: full employment and price stability.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Objectives of Nations KEYWORDS: BLOOM'S: Remember 2. A nation experiences external balance if it achieves a. no net changes in its international gold stocks. b. productivity levels equal to those of its trading partners. c. a trade surplus. d. neither deficits nor surpluses in its current account. ANSWER: d FEEDBACK: a. b. c. d. The economic objective of external balance is current account equilibrium (neither deficits nor surpluses in the current account).

POINTS: DIFFICULTY: QUESTION TYPE: HAS VARIABLES:

1 Moderate Multiple Choice False

Page 922

NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Objectives of Nations KEYWORDS: BLOOM'S: Understand 3. A nation experiences overall balance if it achieves a. neither deficits nor surpluses in its current account, full employment, and price stability. b. a trade surplus, full employment, and price stability. c. full employment, price stability, and no change in its money supply. d. full employment, price stability, and maximum productivity. ANSWER: a FEEDBACK: a. A nation realizes overall balance when it attains both internal and external balance (neither deficits nor surpluses in its current account, full employment, and price stability).

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TOPICS: KEYWORDS:

Economic Objectives of Nations BLOOM'S: Understand

5. Which of the following are expenditure-changing policies? a. currency devaluation and revaluation b. import quotas and tariffs c. monetary and fiscal policies d. wage and price controls ANSWER: c FEEDBACK: a. b. c. Expenditure-changing policies are monetary and fiscal policies. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Policy Instruments KEYWORDS: BLOOM'S: Understand 6. Which of the following is an example of an expenditure-switching policy? a. an increase in the money supply b. a decrease in government spending c. an increase in business taxes d. a decrease in import tariffs ANSWER: d FEEDBACK: a. b. c. d. Expenditure-switching policies modify the direction of demand, shifting it between domestic output and imports. A decrease in import tariffs will divert spending from domestically produced goods to foreign-produced goods.

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a. an increase in import tariffs b. a decrease in import quotas c. higher income taxes d. an increase in the money supply ANSWER: d FEEDBACK: a. b. c. d. Expenditure-changing policies include fiscal policy, (government spending and taxes) and monetary policy (changes in the money supply and interest rates). Depending on the direction of change, expenditure-changing policies are either expenditure-increasing or reducing. An increase in the money supply is an expenditure-increasing policy.

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9. Given fixed exchange rates, assume Mexico initiates expansionary monetary and fiscal policies to combat recession. Other things being equal, these policies will also a. increase both imports and exports. b. increase exports and reduce imports. c. reduce a balance-of-payments surplus. d. reduce a balance-of-payments deficit. ANSWER: c FEEDBACK: a. b. c. An expansionary fiscal policy will increase aggregate demand; an expansionary monetary policy will depreciate the Mexican peso. As a result, exports will decrease and imports will increase. The decline in net exports reduces a balance-of-payments surplus.

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11. The appropriate expenditure-switching policy to correct a trade surplus is a. currency revaluation. b. currency devaluation. c. expansionary monetary policy. d. contractionary fiscal policy. ANSWER: a FEEDBACK: a. Expenditure-switching policies modify the direction of demand, shifting it between domestic output and imports. Under a system of fixed exchange rates, a nation with a trade surplus could revalue its currency to decrease the international competitiveness of its firms, thus diverting spending from domestically produced goods to foreign-produced goods. This will reduce a trade surplus.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Policy Instruments KEYWORDS: BLOOM'S: Apply 12. The appropriate expenditure-switching policy to correct a trade deficit is a. contractionary monetary policy. b. expansionary fiscal policy. c. currency devaluation. d. currency revaluation. ANSWER: c FEEDBACK: a. b. c. Expenditure-switching policies modify the direction of demand, shifting it between domestic output and imports. Under a system of fixed exchange rates, a nation with a trade deficit could devalue its currency to increase the international competitiveness of its firms, thus diverting spending from foreignproduced goods to domestically produced goods. This will correct a trade deficit.

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TOPICS: KEYWORDS:

Policy Instruments BLOOM'S: Apply

13. Suppose the United States has a floating exchange rate and faces domestic recession and a trade deficit. Assuming it desires overall balance, if the United States implements an expansionary monetary policy, other things being equal one would expect which of the following to occur? a. the recession to become less severe and the trade deficit to become less severe b. the recession to become more severe and the trade deficit to become less severe c. the recession to become less severe and the trade deficit to become more severe d. the recession to become more severe and the trade deficit to become more severe ANSWER: a Given a system of floating exchange rates, an expansionary monetary policy increases the RATIONALE: supply of money and results in a lower domestic interest rate that initially generates more spending on consumption and investment and causes aggregate demand to increase. This will result in the recession to become less severe. The decreasing interest rate induces investors to place their funds in foreign capital markets. As investors sell dollars to purchase foreign currency used to facilitate foreign investments, the dollar depreciates. This depreciation results in an increase in exports and a decrease in imports. This rise in net exports causes the trade deficit to become less severe. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Macroeconomic Stability and the Current Account: Policy Agreement Versus Policy Conflict KEYWORDS: BLOOM'S: Apply 14. Suppose the United States has a floating exchange rate and faces domestic inflation and a trade surplus. Assuming it desires overall balance, if the United States pursues contractionary monetary policy, other things being equal one would expect which of the following to occur? a. inflation to become more severe and the trade surplus to become less severe b. inflation to become less severe and the trade surplus to become less severe c. inflation to become less severe and the trade surplus to become more severe d. inflation to become more severe and the trade surplus to become more severe ANSWER: b Given a system of floating exchange rates, a contractionary monetary policy decreases the RATIONALE: supply of money and results in a higher domestic interest rate that causes aggregate demand to decrease and inflation to become less severe.

POINTS: DIFFICULTY:

The increasing interest rate induces investors to place their funds in domestic capital markets. As investors buy dollars and sell foreign currency, the dollar appreciates. This appreciation results in a decrease in exports and an increase in imports. This fall in net exports causes the trade surplus to become less severe. 1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Macroeconomic Stability and the Current Account: Policy Agreement Versus Policy Conflict KEYWORDS: BLOOM'S: Apply 15. Suppose Brazil has a floating exchange rate and faces domestic recession and a trade surplus. Assuming it desires overall balance, if Brazil revalues its currency, other things being equal one would expect which of the following to occur? a. the recession to become less severe and the trade surplus to become less severe b. the recession to become more severe and the trade surplus to become more severe c. the recession to become more severe and the trade surplus to become less severe d. the recession to become less severe and the trade surplus to become more severe ANSWER: c FEEDBACK: a. b. c. Given a system of floating exchange rates, a revaluation of the currency would decrease exports and increase imports. This fall in net exports causes the recession to become more severe and the trade surplus to become less severe.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Macroeconomic Stability and the Current Account: Policy Agreement Versus Policy Conflict KEYWORDS: BLOOM'S: Apply 16. Suppose Brazil has a floating exchange rate and faces domestic inflation and a trade deficit. Assuming it desires overall balance, if Brazil shrinks its money supply, other things being equal one would expect which of the following to occur? a. inflation to become more severe and the trade deficit to become less severe, an example of policy agreement b. inflation to become more severe and the trade deficit to become more severe, an example of policy conflict c. inflation to become less severe and the trade deficit to become less severe, an example of policy agreement d. inflation to become less severe and the trade deficit to become more severe, an example of policy conflict ANSWER: d A reduction of money supply results in a higher domestic interest rate that causes aggregate RATIONALE: demand to decrease. This would cause inflation to become less severe. The increasing interest rate causes the currency to appreciate. This appreciation results in a decrease in exports and an increase in imports. This fall in net exports causes the trade deficit to become more severe. Copyright Cengage Learning. Powered by Cognero.

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d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in a Closed Economy KEYWORDS: BLOOM'S: Apply 18. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. Other being things equal, the initial and secondary effects of the policy a. cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real output. b. cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real output. c. have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output. d. have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output. ANSWER: a An expansionary monetary policy increases the supply of money and results in a lower RATIONALE: domestic interest rate that initially generates more spending on consumption and investment and causes aggregate demand to increase. The secondary effect of the expansionary monetary policy is that, because investment is highly mobile between countries, the decreasing domestic interest rate induces investors to place their funds in foreign capital markets and the currency depreciates. This depreciation results in an increase in exports, a decrease in imports, and an improvement in the current Copyright Cengage Learning. Powered by Cognero.

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account. The improving current account provides an extra boost to aggregate demand that expands further, thus strengthening the policy's expansionary effect on real output. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Understand 19. A problem that economic policy makers confront when attempting to promote both internal and external balance for the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on a. trade flows. b. capital flows. c. both trade flows and capital flows. d. None of these are correct. ANSWER: c FEEDBACK: a. b. c. Changing net exports and other determinants of aggregate demand impacts trade flows. Changing the relative interest rate across nations induces investment flows.

d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Understand 20. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. Other things being equal, the initial and secondary effects of the policy a. cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real output. b. cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real output. c. have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output. d. have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output. ANSWER: c An expansionary fiscal policy causes equilibrium real GDP and interest rates to increase. A RATIONALE: higher interest rate causes the value of the currency to appreciate, which results in falling exports and rising imports. As the current account worsens, aggregate demand decreases and equilibrium real GDP contracts. Copyright Cengage Learning. Powered by Cognero.

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Because the initial and secondary effects of the fiscal policy are conflicting, the policy’s expansionary effect on real output is weakened. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Understand 21. A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession? a. expansionary fiscal policy b. expansionary monetary policy c. contractionary fiscal policy d. contractionary monetary policy ANSWER: a In an economy with capital mobility and fixed exchange rates, the initial and secondary RATIONALE: effects of an expansionary fiscal policy reinforce each other. The initial effect of an expansionary fiscal policy is to increase aggregate demand. The secondary effect of the expansionary fiscal policy is that increased spending causes the government’s budget to go into deficit. As the government demands more money to finance its excess spending, the domestic interest rate rises. A higher interest rate attracts an inflow of investment from foreigners. Appreciation cannot occur because of the fixed exchangerate system, and the government must intervene in the foreign-exchange market. The purchase of foreign currency results in an increase in the domestic money supply. The effect of the rise in the money supply is to increase the amount of loanable funds available in the economy. As these funds are channeled into domestic spending, aggregate demand increases again. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Understand 22. A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession? a. expansionary fiscal policy b. expansionary monetary policy c. contractionary fiscal policy d. contractionary monetary policy ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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RATIONALE:

An expansionary monetary policy causes an increase in the supply of money and lowers the domestic interest rate. That generates more spending on consumption and investment and causes aggregate demand to increase.

The secondary effect of the expansionary monetary policy is that, because investment is highly mobile between countries, the decreasing interest rate induces investors to place their funds in foreign capital markets and the domestic currency depreciates. This depreciation results in an increase in exports, a decrease in imports, and an improvement in the current account. The improving current account provides an extra boost to aggregate demand. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Understand 23. Given an open economy with high capital mobility, which of the following statements is NOT true? a. Fiscal policy is strengthened under fixed exchange rates. b. Monetary policy is weakened under fixed exchange rates. c. Monetary policy is strengthened under floating exchange rates. d. Fiscal policy is strengthened under floating exchange rates. ANSWER: d FEEDBACK: a. b. c. d. An expansionary fiscal policy in an economy with capital mobility and floating exchange rates is less effective in stimulating the economy than it is in a closed economy.

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ANSWER: RATIONALE:

b In an open economy, under a system of managed-floating exchange rates, monetary policy is more successful in promoting internal balance, while fiscal policy is less successful.

Both policies cause aggregate demand to increase or decrease by changing net exports and other determinants of aggregate demand. The secondary effects of fiscal policy have conflicting impacts on aggregate demand, while the secondary effects of monetary policy are strengthened. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Understand 25. Given a system of floating exchange rates and high capital mobility, other being things equal, an expansionary monetary policy by the Federal Reserve will cause a. the dollar to appreciate and U.S. net exports to decrease. b. the dollar to appreciate and U.S. net exports to increase. c. the dollar to depreciate and U.S. net exports to increase. d. the dollar to depreciate and U.S. net exports to decrease. ANSWER: c An increase in the supply of money results in a lower domestic interest rate that initially RATIONALE: generates more spending on consumption and investment and causes aggregate demand to increase. The secondary effect of an expansionary monetary policy is that, because investment is highly mobile between countries, the decreasing interest rate induces investors to place their funds in foreign capital markets. As investors sell dollars to purchase foreign currency used to facilitate foreign investments, the dollar depreciates. This depreciation results in an increase in exports, a decrease in imports, and an increase in U.S. net exports. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Apply 26. Given a system of floating exchange rates, other things being equal, an expansionary fiscal policy by the United States will cause a. the dollar to appreciate and will decrease U.S. net exports. b. the dollar to appreciate and will increase U.S. net exports. c. the dollar to depreciate and will increase U.S. net exports. Copyright Cengage Learning. Powered by Cognero.

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d. the dollar to depreciate and will decrease U.S. net exports. ANSWER: a The initial effect of an expansionary fiscal policy is to increase aggregate demand. As the RATIONALE: increased government spending causes the government’s budget to go into deficit, the interest rate rises. A higher interest rate causes an inflow of investment from foreigners, which results in an increase in the demand for U.S. dollars in the foreign exchange market. The exchange value of the dollar thus appreciates, which results in falling exports, rising imports, and a decrease in U.S. net exports. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Apply 27. All of the following are obstacles to international economic policy coordination, except a. different national objectives and institutions. b. different national political climates. c. different phases in the business cycle. d. different national currencies. ANSWER: d FEEDBACK: a. b. c. d. Problems that confront international economic policy coordination are: (a) different national economic objectives, (b) different national institutions, (c) different national political climates, and (d) different phases in the business cycle.

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d. domestic money supply to increase and a rise in aggregate demand. ANSWER: a FEEDBACK: a. If a central bank intervenes in the foreign-exchange market by buying its currency with foreign currency, the purchase causes the domestic money supply, as well as the availability of loanable funds in the economy to decrease. The resulting decrease in domestic spending leads to a decline in aggregate demand.

b. c. d. POINTS: 1 DIFFICULTY: Moderate, QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Apply 29. At the ________, the Group-of-Five nations agreed to intervene in the currency markets to promote depreciation in the U.S. dollar's exchange value. a. Plaza Agreement of 1985 b. Louvre Accord of 1987 c. Bonn Summit of 1978 d. Tokyo Summit of 1962 ANSWER: a FEEDBACK: a. At the Plaza Agreement of 1985, the Group-of-Five nations agreed to intervene in the currency markets to promote depreciation in the U.S. dollar's exchange value.

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d. beggar-thy-neighbor policies. ANSWER: c FEEDBACK: a. b. c. The Plaza Agreement and Louvre Accord are examples of international economic policy coordination.

d. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Economic Policy Coordination KEYWORDS: BLOOM'S: Remember Exhibit 15.1 At the Plaza Agreement of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information. 31. Refer to Exhibit 15.1. Other things equal, to help drive the dollar's exchange value downward, the Federal Reserve would a. reduce taxes. b. increase taxes. c. decrease the money supply. d. increase the money supply. ANSWER: d FEEDBACK: a. b. c. d. To help drive the dollar's exchange value downward, the Federal Reserve would increase the money supply.

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Exhibit 16.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Apply

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32. Refer to Exhibit 15.1. The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar's exchange value downward, the required policy may also cause a. higher inflation in the U.S. b. a larger budget deficit in the U.S. c. higher unemployment in the U.S. d. slower economic growth in the U.S. ANSWER: a FEEDBACK: a. To drive the dollar's exchange value downward, the Federal Reserve was pursuing an expansionary monetary policy that would have resulted in higher inflation.

b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False PREFACE NAME: Exhibit 16.1 NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Analyze 33. Under a fixed exchange-rate system and high capital mobility, other things being equal, an expansion in the domestic money supply leads to a a. trade deficit and capital inflow. b. trade deficit and capital outflow. c. trade surplus and capital inflow. d. trade surplus and capital outflow. ANSWER: b Under a fixed exchange-rate system and high capital mobility, other things being equal, an RATIONALE: expansion in the domestic money supply leads to a trade deficit and capital outflow. The initial effect of the monetary expansion is to reduce the domestic interest rate, resulting in increased consumption and investment that expand aggregate demand. The secondary effect of the monetary expansion is that a lower interest rate causes a capital outflow and a depreciation of the domestic currency. To maintain a fixed exchange rate, the central bank intervenes in the foreign-exchange market and purchases the domestic currency. This purchase causes the domestic money supply to decrease as well as the availability of loanable funds in the economy. The resulting decrease in domestic spending leads to a decrease in aggregate demand. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic Copyright Cengage Learning. Powered by Cognero.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - BUSPROG1: - Reflective Thinking United States - PA - DISC3: - International trade and finance Monetary and Fiscal Policy in an Open Economy BLOOM'S: Analyze

34. Under a fixed exchange-rate system and high capital mobility, other things being equal, an expansionary fiscal policy leads to a a. trade deficit and capital inflow. b. trade deficit and capital outflow. c. trade surplus and capital inflow. d. trade surplus and capital outflow. ANSWER: a The initial effect of an expansionary fiscal policy is an increase aggregate demand. RATIONALE: The second effect of the expansionary fiscal policy is that increased spending causes the government’s budget to go into deficit. As the government demands more money to finance its excess spending, the domestic interest rate rises. A higher interest rate attracts an inflow of investment from foreigners that results in an increased demand for domestic currency in the foreign-exchange market. The currency is under pressure to appreciate. This appreciation results in a fall in exports, a rise in its imports, and a larger current account deficit (trade deficit). POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Analyze 35. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. Other things being equal, this also causes the a. domestic money supply to decrease and a decline in aggregate demand. b. domestic money supply to increase and a decline in aggregate demand. c. domestic money supply to decrease and a rise in aggregate demand. d. domestic money supply to increase and a rise in aggregate demand. ANSWER: a FEEDBACK: a. If a central bank intervenes in the foreign-exchange market and buys its currency with foreign currency, this purchase causes the domestic money supply to decrease. The resulting decrease in domestic spending leads to a decline in aggregate demand.

b. c. d. POINTS: DIFFICULTY:

1 Moderate

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QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Monetary and Fiscal Policy in an Open Economy KEYWORDS: BLOOM'S: Apply 36. Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency. Other things being equal, this also causes the a. domestic money supply to decrease and a decline in aggregate demand. b. domestic money supply to increase and a decline in aggregate demand. c. domestic money supply to decrease and a rise in aggregate demand. d. domestic money supply to increase and a rise in aggregate demand. ANSWER: d FEEDBACK: a. b. c. d. If a central bank intervenes in the foreign-exchange market and sells its currency with foreign currency, this sale causes the domestic money supply to increase. The resulting increase in domestic spending leads to a rise in aggregate demand.

b. c. d. Copyright Cengage Learning. Powered by Cognero.

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c. d. Copyright Cengage Learning. Powered by Cognero.

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b. c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation With Unemployment KEYWORDS: BLOOM'S: Understand 41. Suppose that Kenya uses a floating exchange rate and experiences high capital mobility. Assume that Kenya is experiencing a recession and high inflation. In order to achieve overall balance, other things being equal, Kenya will likely need to implement a. contractionary fiscal policy. b. wage and price controls. c. expansionary fiscal policy. d. contractionary monetary policy. ANSWER: b FEEDBACK: a. b. To decrease inflation, a reduction in aggregate demand is required; to decrease unemployment, an expansion in aggregate demand is required. Achieving overall balance involves three separate targets: current account equilibrium, full employment, and price stability. To ensure all three objectives can be achieved Copyright Cengage Learning. Powered by Cognero.

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simultaneously, monetary and fiscal policy may not be enough; direct controls may also be needed. Kenya will likely need to implement wage and price controls.

c. d. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Inflation With Unemployment KEYWORDS: BLOOM'S: Understand 42. Which of the following explains why the aggregate supply curve is generally upward sloping? a. When real output decreases, per-unit production costs tend to increase. b. When aggregate demand shifts rightward, aggregate supply also always shifts rightward as well. c. When real output increases, per-unit production costs decrease. d. When real output increases, per-unit production costs increase as well. ANSWER: d FEEDBACK: a. b. c. d. As the economy approaches full employment, scarcities in resource markets develop. Increasing aggregate demand places upward pressure on resource prices, increasing per-unit production costs and causing the aggregate supply curve to slope upward.

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domestic interest rate, which initially generates more spending on consumption and investment and causes aggregate demand to increase. The secondary effect of the expansionary monetary policy is that because investment is highly mobile, the decreasing domestic interest rate induces investors to place their funds in foreign capital markets and the currency depreciates. This depreciation results in an increase in exports, a decrease in imports, and an improvement in the current account. An economy realizes overall balance when it attains internal balance (full employment and price stability) and external balance (neither deficits nor surpluses in its current account). POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Macroeconomic Stability and the Current Account: Policy Agreement Versus Policy Conflict KEYWORDS: BLOOM'S: Apply 44. A nation realizes internal balance if the economy achieves full employment and price stability. a. True b. False ANSWER: True FEEDBACK: Correct Internal balance has two dimensions: a fully employed economy and price stability. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Economic Objectives of Nations KEYWORDS: BLOOM'S: Understand 46. A nation realizes external balance when its current account is in equilibrium, i.e., neither a trade balance nor a trade deficit. a. True b. False ANSWER: True FEEDBACK: Correct A nation is said to be in external balance when it realizes neither deficits nor surpluses in its current account. Incorrect

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FEEDBACK:

Correct Incorrect Expenditure-switching policies (exchange-rate adjustments) modify the direction of demand, shifting it between domestic output and imports.

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STATE STANDARDS: TOPICS: KEYWORDS:

United States - PA - DISC3: - International trade and finance Policy Instruments BLOOM'S: Understand

51. Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and services produced domestically and those imported. a. True b. False ANSWER: False FEEDBACK: Correct Incorrect Expenditure-switching policies (exchange-rate adjustments) modify the direction of demand, shifting it between domestic output and imports.

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of demand, shifting it between domestic output and imports. Direct controls are selective expenditure-switching policies whose objective is to control particular items in the current account. Direct controls include tariffs, quotas, and subsidies. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Policy Instruments KEYWORDS: BLOOM'S: Understand 54. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect. a. True b. False ANSWER: True The initial effect of a rise in government spending is to increase aggregate demand. As the RATIONALE: increased government spending causes the government’s budget to go into deficit, the interest rate rises. A higher interest rate causes an inflow of investment from foreigners, which results in an increase in the demand for the currency in the foreign-exchange market. The exchange value of currency thus appreciates, which results in falling exports, rising imports, and a deterioration of the current account. As the current account worsens, aggregate demand decreases. Because the initial and secondary effects of the fiscal policy are conflicting, the policy’s expansionary effect is weakened. POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Macroeconomic Policy in an Open Economy KEYWORDS: BLOOM'S: Understand 55. Given an open economy with high capital mobility and fixed exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy cause aggregate demand to increase, thus strengthening the policy's expansionary effect. a. True b. False ANSWER: False Given an open economy with high capital mobility, monetary policy is weakened under RATIONALE: fixed exchange rates. Initially, the policy causes aggregate demand to expand by increasing domestic consumption and investment. The secondary effect of the monetary expansion is Copyright Cengage Learning. Powered by Cognero.

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that the currency is under pressure to depreciate because of lower interest rates. To maintain a fixed exchange rate, the central bank intervenes in the foreign-exchange market. The purchase of its currency causes the domestic money supply to decrease as well as the availability of loanable funds in the economy. The resulting decrease in domestic spending leads to a decrease in aggregate demand. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Macroeconomic Policy in an Open Economy KEYWORDS: BLOOM'S: Understand 56. When the economy is in deep recession or depression, it is operating on that portion of its aggregate supply curve that is horizontal. a. True b. False ANSWER: True FEEDBACK: Correct When the economy is in deep recession or depression, the aggregate supply curve is horizontal. Because excess capacity in the economy places no upward pressure on prices, changes in aggregate demand cause changes in real output but no change in the price level. Incorrect

POINTS: DIFFICULTY: QUESTION TYPE:

1 Moderate True / False

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HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Aggregate Demand and Aggregate Supply: A Brief Review KEYWORDS: BLOOM'S: Understand 58. Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange rates. a. True b. False ANSWER: True FEEDBACK: Correct Fiscal policy causes aggregate demand to expand by increasing domestic consumption, investment, or government spending. In an open economy, the policy has a secondary effect on aggregate demand: It causes aggregate demand to increase by changing net exports and other determinants of aggregate demand. Incorrect

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KEYWORDS:

BLOOM'S: Understand

60. Under floating exchange rates and high capital mobility, an expansionary monetary policy would help a country resolve a recession and a current account deficit. a. True b. False ANSWER: True An expansionary monetary policy increases the supply of money and results in a lower RATIONALE: domestic interest rate that initially generates more spending on consumption and investment and causes aggregate demand to increase. The secondary effect of the expansionary monetary policy is that because investment is highly mobile between countries, the decreasing domestic interest rate induces investors to place their funds in foreign capital markets and the currency depreciates. This depreciation results in an increase in exports, a decrease in imports, and an improvement in the current account. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Macroeconomic Stability and the Current Account: Policy Agreement Versus Policy Conflict KEYWORDS: BLOOM'S: Understand 61. Exchange-rate management policies require international policy coordination because a depreciation of one nation's currency implies an appreciation of its trading partner's currency. a. True b. False ANSWER: True FEEDBACK: Correct International economic policy coordination is the attempt to significantly modify national policies—monetary policy, fiscal policy, and exchange-rate policy—in recognition of international economic interdependence. Exchange-rate management policies require international policy coordination because a depreciation of one nation's currency implies an appreciation of its trading partner's currency. Incorrect

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62. Under a system of fixed exchange rates, currency devaluation and revaluation primarily affect the economy's current account. a. True b. False ANSWER: True Expenditure-switching policies (exchange-rate adjustments) modify the direction of RATIONALE: demand, shifting it between domestic output and imports. A nation with a trade deficit could devalue its currency to increase the international competitiveness of its firms, thus diverting spending from foreign-produced goods to domestically produced goods. Revaluing its currency would have the opposite effect. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Policy Instruments KEYWORDS: BLOOM'S: Understand 63. Fiscal and monetary policies are generally used to combat domestic recession and inflation and have secondary effects on the balance of payments. a. True b. False ANSWER: True FEEDBACK: Correct To achieve overall balance, nations implement expenditure-changing policies (monetary and fiscal policies). In an open economy, these policies have a secondary effect on aggregate demand: they cause aggregate demand to increase or decrease by changing net exports and other determinants of aggregate demand. Incorrect

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Germany, Great Britain, and France.

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67. There was widespread agreement among the Group of Five (G-5) nations in 1985 that the dollar was overvalued and that the twin U.S. deficits (trade and federal budget) were too large. a. True b. False ANSWER: True FEEDBACK: Correct Fearing a disaster in the world trading system, government officials of the Group of Five (G-5) nations—the United States, Japan, West Germany, Great Britain, and France— met at New York‘s Plaza Hotel in 1985. There was widespread agreement that the dollar was overvalued and that the twin U.S. deficits (trade and federal budget) were too large. Incorrect

POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Economic Policy Coordination KEYWORDS: BLOOM'S: Understand 68. What policy instrument should be used when demand-pull inflation exists? With demand-pull inflation, internal balance can be viewed as a single target that requires ANSWER: reduction in aggregate demand via monetary policy or fiscal policy. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: Policy Instruments KEYWORDS: BLOOM'S: Understand 69. What happens to the balance of payments under a fixed exchange-rate system, when expansionary or contractionary monetary policy is used? Under a fixed exchange-rate system, the balance of payments position is worsened when ANSWER: expansionary monetary policy is used. Alternatively, the balance of payments position improves with the use of contractionary policy. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Subjective Short Answer HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance Copyright Cengage Learning. Powered by Cognero.

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TOPICS: KEYWORDS:

Monetary and Fiscal Policy in an Open Economy BLOOM'S: Understand

70. Was the Plaza Agreement of 1985 a success? The Plaza Agreement was generally viewed as a modest success. The United States and ANSWER: West Germany disagreed over the rate of inflation in West Germany. The slow progress made by the United States in reducing the budget deficit in 1987 also strained the pact. The agreement, however, survived numerous attacks, with participating nations repeatedly expressing support for it. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Economic Policy Coordination KEYWORDS: BLOOM'S: Understand 71. What is international economic policy coordination? International economic policy coordination is the attempt to significantly modify national ANSWER: policies in recognition of international economic interdependence. Nations regularly consult with each other in the context of the IMF, OECD, Bank for International Settlements, and Group of Seven. The Plaza Agreement and Louvre Accord are examples of international economic policy coordination. POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Essay HAS VARIABLES: False STUDENT ENTRY MODE: Basic NATIONAL STANDARDS: United States - BUSPROG: - Analytic United States - BUSPROG1: - Reflective Thinking STATE STANDARDS: United States - PA - DISC3: - International trade and finance TOPICS: International Economic Policy Coordination KEYWORDS: BLOOM'S: Understand

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