PRACTICE MULTIPLE CHOICE QUESTIONS

1. In the long run, countries with faster inflation have had a. appreciating currencies b. no change in the value of their currencies c. depreciating currencies d. at some times and in some places, appreciating currencies, while at other times in other places, depreciating currencies. Answer: c 2. Which of the following observations about a tariff is not true? A tariff: a. is usually an ad valorem tax b. can raise revenues for the imposing government c. usually benefits domestic producers more than consumers d. can be used to protect foreign industries e. all of the above Answer: d 3. An economic transaction is recorded in the balance of payments as a debit if it leads to a. a payment to foreigners b. the receipt of payments from foreigners c. an increase in foreign exchange reserves d. neither an inflow or an outflow of value. Answer: a

4. In the above partial diagram of a tariff, traditional labeling for the four areas shown is a,b,c, and d, moving from left to right. Which areas show the losses to consumers that are not offset by gains to someone else. a. a and b b. a and c c. b and c d. b and d e. c and d Answer: d 5. In the above diagram, the quantity of imports after the imposition of the tariff is seen by a. the area of a b. the length of c c. the width of b c. the areas of b and d e. the combined base of b and d Answer: b 6. In the above diagram, the revenues associated with customs duties are given by a. the height of a b. the area of ac. the area of c d. the base of b e. the area of a minus the area of c. Answer: c 7. Which of the following is not recorded as a debit item in the U.S. balance-of-payments accounts? a. a U.S. grain company engages Russian ships to carry U.S. wheat to Russian ports. b. the U.S. Treasury contributes $1 million to the United Nations Development Fund. c. a French firm sells 25-year bonds, valued at $100 million, in the United States d. a West German firm pays $3 million in interest to the holders of its bonds in the US. Answer: d 8. . Which of the following is true with respect to the infant industry argument for protection? a. It does not refer to temporary protection to establish a domestic industry. b. To be valid, the return to the grown-up industry need not be sufficiently high to repay for the higher prices paid by domestic consumers of the commodity during the infancy period. c. It is inferior to an equivalent production subsidy to the infant industry. d. None of the above. Answer: c 9. The nationally optimal tariff hopes to take advantage of the idea that a. you can increase domestic producers’ well-being by keeping foreign competition minimal b. you can limit imports and extract low import prices from foreign suppliers if you are a major world buyer c. you can gain optimal tariff revenues for public purposes by taxing foreign imports d. you can charge optimal (minimal) tariffs and encourage good will from trade partners, leading to tariff-free exports for domestic producers and workers e. all of the above are true Answer: b 10. Intra-industry trade is more likely to occur between a. rich and poor countries b. countries with high and similar income levels c. developing countries d. developed and developing countries Answer: b Multiple Choice Diagramming. Choose the single, best answer. (2.5 points for each multiple choice question of all types.)

Questions 11 through 23 refer to the diagram above. The diagram illustrates the situation in which an “optimal tariff” can be applied. 11. The diagram represents the market of a country described in international economics as a. small b. tiny c. having monopolistic power d. having monopsonistic power e. both b and c are correct Answer: d 12. The downward sloping curve represents a. domestic supply b. foreign supply c. domestic demand d. demand for importse. all of the above except c Answer: d 13. The upward sloping curve represents a. domestic supply b. supply of imports c. domestic demand d. domestic demand for imports e. all of the above except c Answer: b

14. In the diagram, two prices are shown. The lower price is a. the world market price before trade b. the domestic price before trade c. the world market price after trade d. the domestic price after trade e. both a and c are correct. Answer: c 15. In the diagram, the higher price represents a. the domestic price plus the world price b. the domestic price plus the tariff imposed c. the world price d. the world price plus the tariff imposed. e. both a and b are correct Answer: d 16. The “optimal tariff” can be imposed because a. foreign exporters start to lose market share and are willing to reduce their price to offset that trend b. governments are permitted by the WTO to impose tariffs if domestic markets start to be dominated by foreign exporters c. the government of the importing country is sovereign and can impose whatever taxes or tariffs it wishes to. d. the foreign exporters lose consumer surplus when their purchases go from the larger quantity shown in the diagram to the smaller one as prices go up. e. all of the above are correct Answer: a 17. If foreign sellers are willing to sell in this market below the world market price, the quantity of their sales will be, as compared to the diagram above, a. greater than the larger quantity shown b. at the larger quantity shown c. between the two quantities shown d. at the smaller quantity or less e. at both the larger and smaller quantities shown. Answer; c 18. The “optimal tariff,” then, is optimal for the nation which levies it, if it can get the outcome suggested in question 21. This outcome a. can be determined with great precision if the elasticity of demand can be estimated accurately b. does not account for the possibility of tariff retaliation by partner trading nations c. results in greater revenues for the taxing government and higher consumer prices. d. may imply higher prices for consumers, but the final price will be lower than the original price plus the tariff. e. all of the above are true Answer: e 19. If the general level of prices in the United States increases relative to prices in Japan, a. the value of the dollar will likely depreciate relative to the yen. b. the value of the dollar will likely appreciate relative to the yen. c. the value of the dollar will likely remain constant relative to the yen. d. not enough information is given. Answer: a 20. The organization responsible for mediating trade disputes is the a. International Monetary Fund. b. World Trade Organization. c. World Bank. d. The G-7 Countries. Answer: b 21. The “capital account” in balance of payments data includes a. everything in the balance of trade. b. U.S. government payments to other countries for military bases. c. profits that Nissan of America sends back to Japan. d. new U.S. investments abroad. e. None of the above. Answer: d 22. The optimal monopoly markup is a. higher with more elastic demand for cartel sales b. higher with less elastic demand for cartel sales c. lower with less elastic demand for cartel sales d. higher with more elastic supply schedules Answer: b 23. An international cartel that maximizes its profits is optimal for a. the member countries and the world b. the member countries but not the world c. the consuming countries and the world d. no country at all Answer: b 24. The characteristics of quotas and tariffs are described correctly by which of the following: a. tariffs assure a certain final price for imports, but not as surely as a quota does. b. quotas assure a certain limited quantity of imports, but not as well as a tariff does. c. quotas assure a certain final price for imports better than a tariff does. d. tariffs do not assure a certain limited quantity of imports as a quota does. Answer: d 25. Intervention at the source of a distortion in resource allocation problems and the use of policy tools closest to the sources of the distortions is called a. public policy b. benefit/cost analysis c. the specificity rule d. resource allocation e. the tortion and distortion principle Answer: c 26. The best and probably rarest way to allocate import licenses is a. applying rational rather than arbitrary (bureaucratic) criteria to award import licenses on the basis of merit. b. avoiding injustice and favoritism by granting the scarce and highly demanded licenses on a purely random basis (regarded as the “lottery effect” of license distribution). c. inviting the countries or firms who want to sell the commodity in question to participate in a competitive auction to be held by the customs agency of the importing country for import licenses. d. achieving equity by assigning fixed shares to firms according to the market shares they have previously enjoyed in the market in question. e. it is impossible to tell from the above, since none of the specific differing values achieved by the above methods cannot easily be prioritized by democratic processes. Answer: c 27. “When a country exports a commodity produced with intensive use of its abundant factor, that factor’s returns will rise.” This statement is a. The Hecksher-Ohlin theory b. the Stolper-Samuelson Theorem c. The Leontief paradox c. the modern trade theory Answer: b

28. “Countries export commodities produced through the intensive use of factors which they possess in abundance. Labor abundant countries export labor-intensive commodities and import capital-intensive commodities.” This statement is a. Classical Smith/Ricardo trade theory b. the Stolper-Samuelson Theorem c. The Leontief paradox c. the modern trade theory d. None of the above Answer: d 29. The best way to characterize monopolistic competition is a. a product group of ten to fifteen firms b. a product group of fifteen to twenty firms c. a product group with the same demand curve d. a product group which perceives no interdependence e. an industry made up of many product groups Answer: d 30. Wine costs $10, cloth costs fr 30 and the dollar exchange rate is fr 6. The wine price in terms of cloth is: a. 3 cloth b. 3 wine c. 2 cloth d. 5 wine e. None of the above Answer: c 31. Economies of scale are more likely to occur in a. a small-scale textile industry b. the footwear industry c. the aircraft industry d. small business Answer: C 32. In a monopolistic competition model of trade a. if two countries have the same overall capital-labor ratio there is no trade b. there are gains from trade from an increased variety of goods and large firm scale c. firms earn positive economic profits in the long run d. factor endowments do not play any role in determining inter-industry trade Answer: B 33. In the Heckscher-Ohlin model, international trade is based mostly on a difference in a. technology b. product differentiation c. economies of scale d. factor endowments Answer: D 34. Intra-industry trade (IIT) is a. the result of nations following their comparative advantage. b. the result of capital-intensive nations trading with labor-intensive nations. c. trade among the various firms of a single industry in one country. d. two-way international trade in very similar products. Answer: D 35. Biased growth implies a. trade patterns cannot change b. the growing economy will have increased willingness to trade c. the growing economy will have decreased willingness to trade d. either b or c could be true. Answer: D 36. According to modern (“alternative”) trade theory, a. trade depends on scale economies, not consumer preferences b. trade depends on consumer preferences, not scale economies. c. historical quirks can lead to external economies which promote trade advantages d. trade patterns are unrelated to the industrial or market structures (monopolistic competition or oligopoly) of traded goods. Answer: C

37. Ricardo explained the law of comparative advantage on the basis of a. opportunity costs b. the law of diminishing returns c. economies of scale d. the labor theory of value Answer: d 38. In terms of international trade, a small nation is best described as one which a. is of limited geographical size b. is land-locked nation without sea ports c. doesn’t have many sellers d. has small numbers of buyers and sellers e. is not integrated into the world economy Answer: c 39. The nationally optimal tariff hopes to take advantage of the idea that a. you can increase domestic producers’ well-being by keeping foreign competition minimal b. you can limit imports and extract low import prices from foreign suppliers if you are a major world buyer c. you can gain optimal tariff revenues for public purposes by taxing foreign imports d. you can charge optimal (minimal) tariffs and encourage good will from trade partners, leading to tariff-free exports for domestic producers and workers e. all of the above are true Answer: b 40. “When a country exports a commodity produced with intensive use of its abundant factor, that factor’s returns will rise.” This statement is a. The Hecksher-Ohlin theory b. the Stolper-Samuelson Theorem c. The Leontief paradox c. the modern trade theory Answer: b 41. “In tests run in the late 1940s, it was discovered that the U.S. was actually exporting labor-intensive goods and importing capital-intensive goods.” This statement is a. The Hecksher-Ohlin theory b. the Stolper-Samuelson Theorem c. The Leontief paradox c. the modern trade theory Answer: c