International
Trade
Practice
Questions: Macro Test #5
1. Suppose two countries are each capable of
producing two given commodities. Instead, each specializes by producing the commodity
for which it has a comparative advantage and then trades with the other
country. Which of the following is most likely to result?
a. The
two countries will become more independent from each other.
b. Unemployment
will increase in one country and decrease in the other.
c. There
will be more efficient production in one country but less efficient production
in the other.
d. Both
countries will become better off.
e. Both
countries will be producing inefficiently.
2. The following data shows the quantities of
soda and cheese that can be produced in the United States and France given the
same amount of resources.
Soda Cheese
(bottles) (pounds)
US 20 60
France 10 40
Which of the following statements is/are
true?
I. France has an absolute advantage in soda production.
II. The US has a comparative advantage in soda production.
III. The US has an absolute advantage in cheese production.
a. I
only e. II and III only
b. II
only f. I and III only
c. III
only g. I, II and III only
d. I
and II only h. none of the above
3. What would happen to interest rates, exports,
and imports if the United States government pursued a contractionary fiscal
policy?
Interest Rate Exports Imports
a. Increase Decrease Decrease
b. Decrease Increase Decrease
c. Decrease Decrease Increase
d. No
Change Decrease Increase
e. Increase Decrease Increase
4. The value of the US dollar will rise relative
to the French franc if …
a. The
US demand for French wine increases.
b. The
federal reserve buys government securities.
c. Prices
rise faster in the United States than in France.
d. The
French demand for American cars and computers increases.
e. Many
Americans decide to visit France.
5. To protect high-cost domestic producers, a
country imposes a quota on an imported commodity, Y. Which of the following is
most likely to occur in the short run?
I. A decrease in domestic production of Y.
II. An increase in domestic production of Y.
III. A decrease in the price of Y.
a. I
only e. II and III only
b. II
only f. I and III only
c. III
only g. I, II and III only
d. I and II only h. none of the above
6. One Monday, Willie, a currency trader for
Lloyd's of London took £100,000 and converted them to dollars. On Friday,
Willie changed the dollars back to pounds. He was so excited by this activity
that he went running into his boss’s office and told him the news. After
Willie's boss looked over the exchange rates, it is most probable that he
US dollars
($) British Pounds (£)
Monday 1.50 1
Friday 2.00 1
a. gave
Willie a bonus because he earned £75,000 for the company.
b. patted
him on the back for earning £25,000 for the company.
c. demoted
him because he lost £25,000 of the company's money.
d. fired
him for losing £75,000 of the company's money.
e. made
him head of the department for earning a total of £175,000 for the company.
7. If other things are held constant, an
increase in United States imports will
a. tend
to cause the dollar to appreciate because the world supply of dollars will
rise.
b. tend
to cause the dollar to appreciate because the world demand for dollars will
rise.
c. tend
to have no effect on the exchange rate for the dollar because exports will also
increase
d. tend
to cause the dollar to depreciate because the world supply of dollars will
increase.
e. tend
to cause the dollar to depreciate because the world demand for dollars will
rise.
8. A
tariff will hurt the consumers of a product most if…
a. The
product has several complementary goods.
b. The
demand for the product is inelastic.
c. The
demand for the product is elastic.
d. The
demand for the product is unit elastic.
9. If
exchange rates are allowed to fluctuate freely and the US demand for Japanese
yen increases, which of the following will happen?
a. The
US balance of trade deficit will increase in the long run.
b. Americans
will have to pay more for Japanese goods.
c. The
dollar would appreciate.
d. The
Japanese would have to pay more for American goods.
e. It
will be more expensive for the Japanese to buy American real estate.
10. Which
of the following would be most likely to happen if nation X devalued its currency?
a. Foreign
goods would become cheaper to X's citizens.
b. X's
exports would increase.
c. A
tourist from X traveling abroad would benefit because he would get more units
of the foreign currency for travelers checks than before devaluation.
d. Foreigners
would find X's goods more expensive than before the devaluation.
11. In
a flexible exchange rate system, which of the following would most likely raise
the value of the United States dollar against the French franc in the short
run?
a. An
increase in the United States demand for French wine.
b. A tightening
of the United States monetary policy.
c. French
expectations of higher inflation in the United States.
d. French expectations that the dollar will soon be fixed at less than its current value.
12. Which of the following best states the thesis of the law
of comparative advantage?
a. Differences
in relative costs of production are key to determining patterns of trade.
b. Differences
in absolute costs of production determine which goods should be traded between
nations.
c. Tariffs
and quotas are beneficial in increasing international competitiveness.
d. Nations
should not specialize in the production of goods and services.
e. Two
nations will not trade if one is more efficient than the other in the
production of all goods.
13. The
following table shows the production possibilities for the only two activities
in a stone-age economy: digging for roots and breaking flint.
Roots Flint__
6 0
5 1
3 2
0 3
_____________________
If people were producing only six roots,
the cost of producing the first unit of flint would be…
a. 0
flints, because that is the number of flints that can be produced in addition
to 6 roots.
b. 1
flint, because that is the number of flints that can be produced in the first
stage of production.
c. 1
root, because that is the number of roots that must be given up to produce the
first flint.
d. 2
roots, because of the law of increasing costs.
e. 5
roots, because that is the number of roots that can be produced in addition to
1 flint.
14. Which of the following is most
consistent with free market philosophy?
a. fixed
exchange rates
b. floating
exchange rates
c. mercantilism
d. non-tariff barrier
15. The
production possibilities table given below shows how many bushels of wheat and
or rice
can be produced
in India and Canada with one unit of input. To achieve gains from
specialization …
__________________________________
Wheat (bushels) Rice
(bushels)
India 10 10
Canada 40 20
__________________________________
a. India
should export rice to Canada and import Canadian wheat.
b. India
should export wheat to Canada and import Canadian wheat.
c. Canada
should produce both wheat and rice and not trade with India.
d. India
should produce both wheat and rice and not trade with Canada.
16. What would happen to interest rates,
exports, and imports if the United States government
pursued an expansionary fiscal
policy?
Interest Rate Exports Imports
a. Increase Decrease Decrease
b. Decrease Increase Decrease
c. Decrease Decrease Increase
d. No
Change Decrease Increase
e. Increase Decrease Increase
17. Suppose a nation is suffering from
demand-pull inflation. Describe how monetary policy could
be used to correct this situation.
18. Given the
previously described monetary policy actions, what will happen to the
international
value of the US dollar? Explain. What will
happen to the US balance of trade?
19. Suppose a nation is suffering from
demand-pull inflation. Describe how fiscal policy could be
used to correct this situation.
20. Given the
previously described fiscal policy actions, what will happen to the
international
value of the US dollar? Explain. What will
happen to the U.S. balance of trade?
21. What are the pros and cons of a strong
dollar?
22. What are the pros and cons of a weak
dollar?
23. What are three disadvantages of trade
barriers for the nation that imposes them?
24. What are the benefits of free trade?
25. Assume that in the small island nation of
Multaluna, cars are sold in two separate and competitive markets (one for
domestically produced cars and one for imported cars).
A) T-Bone, the president of Multaluna, decides to
provide a significant subsidy for domestic car producers.
i) Show (on a graph that represents the
market for domestically produced cars) and explain the impact of this
subsidy on the market for domestically produced cars.
ii) Show
(on a graph that represents the market for imported cars) and explain
the impact of this subsidy on the market for imported cars.
iii) Describe two disadvantages of providing
a subsidy for domestic car producers.
B) Now assume
that Dr. Drew, T-Bone’s chief economic advisor, implements Policy which
combines tax cuts and increases in government spending. Explain
how this policy package will affect each
of the following.
i) The government’s budget
ii) Interest rates in Multaluna
iii) The value of Multaluna’s currency
C) Given
he previously described change in currency value, explain what will
happen to each of the following…
i) The domestic car market.
ii) The market for imported cars.
iii) Multaluna’s GDP.
D) Who
in Multaluna will benefit
from the previously described change in currency value?