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Sample_Exam_3__Key_ - Economics 340 Exam 3 Sample The...

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Unformatted text preview: Economics 340 Exam 3 Sample The figure below depicts the U.S. market for chocolate. Use the information in this figure to answer questions 1 5. Price ($/unit) 30 Supply 25 20 15 10 50 100 150 300 Quantity Demand 1. If the United States could trade chocolate freely with the rest of the world at a price of $15, how much chocolate would be produced in the United States? A. B. C. D. E. 0 50 100 150 300 2. If the United States could trade chocolate freely with the rest of the world at a price of $15, how much chocolate would be purchased in the United States? A. B. C. D. E. 0 50 100 150 300 3. How many units of chocolate would the the Untied States import if it could trade chocolate freely with the rest of the world at a price of $15,? A. B. C. D. 100 150 0 50 4. What will be the change in consumer surplus if the U.S. begins trading with the rest of the world at an international price for chocolate of $15? A. B. C. D. +$625. -$625. +$375. -$375. 5. What will be the change in producer surplus if the U.S. begins trading with the rest of the world at an international price for chocolate of $15? A. +$625 B. -$625. C. +$375. D. -$375. Questions 6 7 refer to the information in the following table. In China Labor hours to make: 1 DVD Player 1 Computer 2 8 In the Rest of the World 1 5 6. In which good does China have a comparative advantage relative to the rest of the world? A. B. C. D. Neither good both goods DVD Players Computers 7. In which good does China have an absolute advantage relative to the rest of the world? A. B. C. D. Neither good both goods DVD Players Computers 8. A Country only exports a good if it has an absolute advantage in that good. A. True B. False 9. A country only benefits from trade if it has an absolute advantage over its trading partner. A. True B. False 10. According to the theory of comparative advantage, countries will export those goods for which they have a lower opportunity cost and import those goods for which they have a higher opportunity cost than the rest of the world. A. True B. False Questions 16 20 refer to the following Figure. Autarky price of food in terms of clothing = 1/4 Free Trade price of food in terms of clothing = 1/2 11. Use S to represent production and C to represent consumption. Where will Mexico produce and consume in autarky? A. B. C. D. S1; C1 S0; C0 S1; C0 S0; C1 12. Use S to represent production and C to represent consumption. Where will Mexico produce and consume if permitted to trade with the rest of the world? A. B. C. D. S1; C1 S0; C0 S1; C0 S0; C1 13. If trade is permitted, Mexico will import 35 units of clothing. A. True B. False 14. If trade is permitted, Mexico will export 70 units of food. A. True B. False 15. The Heckscher-Ohlin theory of trade differs from the Ricardian model by assuming that there are two inputs. A. True B. False 16. Which of the following puzzles might The Stolper-Samuelson be used to try to explain? A. Why the U.S. imports relatively capital-intensive goods. B. Why the rich got richer and the poor got poorer in the 1980s. C. Why countries sometimes import and export very similar products. 17. Which of the following predicts that trade occurs because of differences in the availability of factor inputs across countries and the differences in the proportions in which the factor inputs are used in producing different products? A. B. C. D. The Stolper-Samuelson theorem. The Heckscher-Ohlin theorem. The comparative advantage theorem. The absolute advantage theorem. Assume that the U.S. is a small importer of USB drives. The world price of USB drives is $8 and the U.S. levies a $4 import tariff. Use this information and the graph below to answer questions 18 20. S D 18. The tariff reduces imports of USB drives. What is the size of the reduction? A. B. C. D. 1900 300 200 100 19. Because of the higher price, some consumers no longer purchase USB drives. What is the value of the loss to these consumers? A. B. C. D. $400 $200 $8,000 $7,800 20. What is the size of the production distortion due to this tariff ? A. B. C. D. $4,800 $4,000 $400 $800 1 Assume that the U.S. is a large importer of canned tuna. Without trade barriers, the world price of tuna is P0 . The U.S. levies an import tariff, raising the domestic price to P1 and reducing the world price to P2. Use this information and the graph below to answer questions 21 23 21. The tariff per unit of imported tuna is A. B. C. D. P1 P0. P0 P2. P1 P2. P1 + P2. 22. What is the value of the gain to those who sold tuna even with free trade? A. B. C. D. (P1 P0)S1. (P1 P2)S1. (P1 P2)S0 (P1 P0)S0 23. The terms of trade gain due to the tariff is measured by (P0 P2)(D1 S1). A. True B. False 24. When does an import tariff increase welfare of the importing country? A. B. C. D. When the consumption distortion is small. When the consumption distortion is smaller than the production distortion. When the terms of trade improve. When the deadweight loss is smaller than the terms of trade gain. 25. What is the definition of a small country? A small country_________ A. B. C. D. accounts for less than 5 percent of the world's imports of a given product. accounts for less than 5 percent of the world's production of a given product. cannot influence the world price of a given product. cannot influence its own consumption of a given product. 26. A specific tariff is a type of NTB. A. True B. False 2 27. Who usually receives the quota rent that is associated with a voluntary export restraint (VER)? A. B. C. D. The government of the importing county The government of the exporting country Producers in the importing country. Producers in the exporting country. 28. Just like a tariff, a quota causes both a production effect and a consumption distortion. A. True B. False 29. An export subsidy increases the price paid by foreign buyers for the product and reduces the price that consumers in the exporting country pay for the product. A. True B. False 30. Assuming a perfectly competitive industry, an export subsidy will reduce a country's welfare if that country is small, but may increase its welfare if the country is large. A. True B. False 31. United Airlines (an American company) buys 5 regional jet aircraft from their manufacturer, Bombardier, (a Canadian company). United pays with a check drawn on its Canadian bank account. How are the two sides of this transaction are recorded in the U.S. balance of payments? A. B. C. D. Debit in the current account and a credit in the financial account. Credit in the current account and a debit in the financial account. Credit in both the current account and the financial account. Cebit in both the current account and the financial account. 32. The United States government pays interest on government bonds owned by a Chinese commercial bank. How are the two sides of this transaction are recorded in the U.S. balance of payments? A. B. C. D. Debit in the current account and a credit in the financial account. Credit in the current account and a debit in the financial account. Credit in both the current account and the financial account. Cebit in both the current account and the financial account. 33. Suppose that the exchange value of the British pound is $1.50 per pound while the exchange value of the Swiss franc is 50 cents per franc. What will be the exchange rate between the pound and the franc? A. B. C. D. 1 franc per pound 2 francs per pound 3 francs per pound 4 francs per pound 3 34. How could you profit if the exchange rate in Paris was $1.30/ while in Bonn the exchange rate was $1.35/? A. B. C. D. Buy euros in Paris and sell dollars in Bonn. Buy euros in Paris and sell euros in Bonn. Buy euros in Bonn and sell euros in Paris. Buy dollars in Paris and sell euros in Bonn. 35. Assume you are an importer of Japanese motorcycles and have to pay 5 million yen (the bill for your latest shipment) at the end of 60 days. How can you remove the risk of loss due to a depreciation of the dollar? A. B. C. D. selling dollars in the forward market for 60-day delivery. buying dollars now and selling them at the end of 60 days. selling 5 million yen in the forward market for 60-day delivery. buying dollars in the forward market for 60-day delivery. 36. Which of the following choices is an example of uncovered international investment for an investor who starts with dollars and wants to end up with dollars in the future,? A. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency. B. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars. C. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate. D. Buy a dollar-denominated financial asset. 37. What type of arbitrage is characterized by buying a country's currency spot and selling that country's currency forward, to make a net profit from the combination of the difference in interest rates between countries and the forward premium on the country's currency? A. B. C. D. covered interest uncovered interest covered currency uncovered currency 38. Suppose that covered interest parity holds. Further suppose that the U.S. interest rate is zero, the British interest rate is 2%, and the spot exchange rate is $1.50 per pound sterling. What is the approximate value of the forward exchange rate? A. B. C. D. $1.44 per pound sterling. $1.47 per pound sterling. $1.53 per pound sterling. $1.56 per pound sterling. 39. If F is the forward exchange rate and E is the spot exchange rate, both measured as dollars per euro, what is the forward premium on the euro? A. B. C. D. 4 40. Suppose that U.S. prices rise 4 percent over the next year while prices in Mexico rise 6%. According to the purchasing power parity theory of exchange rates, what should happen to the exchange rate between the dollar and the peso? A. B. C. D. The dollar should depreciate. The peso should appreciate. The peso should depreciate. The dollar will be worth 1.5 pesos. 41. Based on PPP and the quantity theory of money, if Japan's real income rises relative to real income in the US, the U.S. dollar should appreciate relative to the Japanese yen. A. True B. False 42. According to the quantity theory of money, a 5% increase in a country's money supply will cause the price level in that country to increase by exactly 5%. A. True B. False 43. Milton Friedman, a Nobel Laureate in economics, once argued that "inflation is always and everywhere caused by excessive government debt." A. True B. False 44. The monetary approach to exchange rate determination is based upon the combination of the quantity theory of money with covered interest parity. A. True B. False 45. Suppose that the constant of proportionality in long-run money demand is the same in the U.S. as it is in the U.K. Suppose that for the United States, real GDP is $14 trillion and the money supply is $6 trillion, while for the United Kingdom real GDP is 7 trillion and the money supply is 3, and the British money supply is 3. What is the exchange rate (expressed as U.S. dollars per British pound) implied by the monetary approach to exchange rate determination? A. B. C. D. 0.25 0.50 1.00 2.00 46. In the context of the foreign exchange market, when does "overshooting" occur? A. B. C. D. When exchange rates change suddenly. When national growth rates diverge. When exchange rates adjust more in the long-run than they do in the short-run. When exchange rates adjust more in the short-run than they do in the long-run. 5 47. Suppose that the current spot exchange rate is $1.00 per euro. According to the overshooting model of exchange rate determination, an unexpected 10% increase in the U.S. money supply will cause the exchange rate to immediately jump to a rate more than $1.10 per euro, then gradually return to $1.00 per euro. A. True B. False 48. The overshooting model of exchange rate determination was developed to try to explain why exchange rates are less variable than we would predict given the underlying variability of the economic "fundamentals." A. True B. False 49. Suppose that there is a one-time unexpected increase in the money supply at time T0. The price level is likely to change in the way illustrated in this figure: A. True B. False 50. Let represent private saving, G represent government spending, and T represent taxes. What does national saving equal? A. B. C. D. 51. In the simple model of income determination, an increase in the interest rate makes real investment spending more attractive, thereby leading to more real investment spending. A. True B. False 52. Suppose that national saving is 400 and real investment spending is 300. country's net exports must then be -100. A. True B. False 53. In the simple model of income determination, an increase in real investment spending is not likely to have any effect on a country's net exports. A. True B. False The 6 54. A reduction in a country's interest rate shifts its IS curve up and to the right. A. True B. False 55. An increase in a country's government spending shifts its IS curve up and to the right. A. True B. False 56. An increase in a country's money supply shifts its IS curve up and to the right. A. True B. False 57. A fall in the foreign exchange value of a country's currency shifts its LM curve down and to the right. A. True B. False 58. The diagram below illustrates all combinations of interest rates and income that are consistent with a given exchange rate. Moving from point A to point B causes the current account to deteriorate and the non-official financial account to improve. A. True B. False 59. Suppose that a country's currency floats on the foreign exchange market. The IS-LM diagram for this country is illustrated below. In this situation, expansionary fiscal policy is likely to strengthen the value of that country's currency. A. True B. False 60. Suppose that a country's currency floats on the foreign exchange market. The IS-LM diagram for this country is illustrated below. In this situation, expansionary monetary policy is likely to strengthen the value of that country's currency. A. True B. False 7 ...
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