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Practice Questions:

Practice Questions:
1. When central banks intervene in foreign exchange markets to buy and sell currencies, this activity is reflected in the statement of international transactions as a change in: a. Foreign aid
b. Private capital flows
c. The statistical discrepancy
d. Official reserve holdings

2. Demand for official reserves is the least in which of the following international monetary systems? a. Dirty float
b. Clean float
c. Mixture of clean and dirty floats
d. Fixed rate system

3. The ultimate goal of devaluation is to: a. Reduce both foreign exchange inpayments (export value) and outpayments (import value)
b. Reduce foreign exchange outpayments (import value) and increase foreign exchange inpayments (export value)
c. Reduce foreign exchange inpayments (export value) with foreign exchange outpayments (import value) unchanged
d. Increase both foreign exchange inpayments (export value) and outpayments (import value)

4. Foreign Exchange Arbitrage refers to: a. the simultaneous purchase and sale of a foreign currency asset in different markets to take advantage of price differentials
b. actions taken to lower currency trading risks and make the markets safer
c. the forgiving of penalties and other punishments for illegal foreign exchange activities
d. government purchases or sales of a nation's own currency in international markets to change or stabilize the value of the currency

5. In the Ricardian model of trade comparative advantage is determined by a. Production technologies
b. Relative Factor Endowments
c. Economies of Scale
d. Specific Factors

6. Gains from trade can be attributed to: a. Specialization in production
b. Exposure to different prices
c. Providing resources in short supply
d. All of the above

7. A tariff causes an income redistribution from: a. The government to producers and consumers
b. Producers and consumers to the government
c. Consumers to producers and the government
d. Consumers and the government to producers

8. When a small nation levies a tariff, a. The nation’s terms-of-trade improve
b. The nation’s terms-of-trade deteriorate
c. The tariff burden is shared between citizens in the importer and the exporting nation
d. Citizens in the importer bear the entire burden

9. An increase in demand for the imported good subject to a binding quota: a. Reduces domestic production of the import substitute
b. Reduces domestic price
c. Increases domestic production of the import substitute
d. Increases imports

10. Which of the following policy tools is the least costly means of encouraging a given amount of domestic output? a. A tariff
b. An import quota
c. A subsidy on production of the import substitute
d. A VER

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