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ECO 204--Part Four Test
The final exam will
consist of 75 questions and is worth 150 points. There will be 45
questions
from part four, and 30 questions from parts one, two and three. Below are
50 practice questions
for part four. Some review materials for the comprehensive portion of the
final will be
distributed in class.
True-False. Use "A" for
true and "B" for false.
1. A nation’s exports
depend on domestic output and relative prices.
2. When the foreign
sector is included, a nation’s aggregate demand equals consumption plus
investment
plus government purchases plus
exports minus imports.
3. With freely
fluctuating exchange rates, a nation often experiences a trade deficit and a
capital deficit.
4. To most
economists, one convincing argument for a protective tariff is to protect an
infant industry.
5. The term "dumping"
refers to temporary sales in an economy by foreign governments or firms at a
price below the cost of
production.
6. Members of the WTO
have eliminated all tariffs among member countries.
7. The fact that U.
S. residents want to purchase French goods gives rise to a demand for euros
and
a supply of dollars in the
foreign exchange market.
8. The chief source of
day-to-day changes in exchange rates between countries is fluctuations in
interest
rates.
9. Fixed exchange
rates can be managed in such a way that the full benefits of comparative
advantage can be realized.
10. Many poor countries are
characterized by high inflation and low unemployment.
Multiple choice
11. An increase in U. S. imports
A. reduces the size of a
trade deficit.
B. results from a
decrease in domestic income.
C. increases the size of
the money multiplier.
D. increases domestic
consumption.
12. Which of the following is correct?
A. An increase in U. S.
imports causes equilibrium output to rise.
B. An increase in prices
in other countries will cause U. S. imports to fall.
C. An increase in income
in other countries will reduce U. S. exports.
D. An increase in U. S.
output always causes a reduction in U. S. exports.
13. Suppose the marginal propensity to save is 0.05 and
the marginal propensity to import is 0.15.
If aggregate demand increases
by $20 billion, the resulting change in equilibrium output will be
A. $20 billion per year.
D. $400 billion per year.
B. $100 billion per year.
E. none of the above
C. $133.33 billion per
year.
14, A U. S. trade surplus would imply that the economy is
A. consuming more than it
produces, and net exports would be positive.
B. consuming more than it
produces, and net exports would be negative.
C. consuming less than it
produces, and net exports would be positive.
D. consuming less than it
produces, and net exports would be negative.
15. Which of the following would most likely increase
capital inflow to the U. S.?
A. a decrease in U. S.
interest rates relative to other countries
B. an increase in U. S.
interest rates relative to other countries
C. higher profit incomes
in other countries relative to the U. S.
D. an increase in the U.
S. marginal propensity to import.
16. The principal reason why countries trade is to
A. prevent deficits in
the balance of payments.
B. maximize the dollar
volume of exports.
C. import goods that a
domestic economy wants but cannot efficiently produce in
adequate amounts.
D. prevent global
macroeconomic instability.
17. An increase in the marginal propensity to import
A. will reduce the value
of the marginal propensity to save.
B. will increase the
value of the marginal propensity to consume.
C. will reduce the size
of the multiplier.
D. will increase capital
flows into the United States.
18. When the U. S. has a trade deficit,
A. there will also be a
capital deficit.
B. domestic living
standards fall short of domestic output.
C. the U. S. economy
consumes more than it produces.
D. U. S. production
possibilities exceed U. S. consumption possibilities.
19. An international capital imbalance
A. does not affect a
country’s total balance of payments.
B. may occur because of
interest rate differentials among countries.
C. are not affected by
differing profit opportunities among countries.
D. cannot occur with
freely fluctuating exchange rates.
20. A country with a comparative advantage in producing
computers
A. has a lower
opportunity cost of producing computers than other countries.
B. can produce computers
with fewer resources than any other country.
C. has a greater capacity
to produce computers than any other country.
D. can always produce
more computers per person per day than other countries.
Questions 21-24 refer to the following table which
shows daily production possibilities for wheat
and shrimp in the United States and in Taiwan:
|
Taiwan |
United States |
| |
wheat |
shrimp |
|
wheat |
shrimp |
|
A |
4000 |
0 |
F |
4000 |
0 |
|
B |
3000 |
500 |
G |
3000 |
1000 |
|
C |
2000 |
1000 |
H |
2000 |
2000 |
|
D |
1000 |
1500 |
I |
1000 |
3000 |
|
E |
0 |
2000 |
J |
0 |
4000 |
21. What is the opportunity cost
of wheat in Taiwan?
A. ½ shrimp
C. 2 shrimp
B. 1 shrimp
D. none of the above
22. What is the opportunity cost of shrimp in the United
States?
A. ½ wheat
C. 2 wheat
B. 1 wheat
D. none of the above
23. Which of the following is correct about comparative
advantage of the two countries?
A. Taiwan has a
comparative advantage in both shrimp and wheat.
B. Taiwan has a
comparative advantage in shrimp, the United States in wheat.
C. Taiwan has a
comparative advantage in wheat, the United States in shrimp.
D. The United States has
a comparative advantage in both goods.
24. Suppose that, without trade, Taiwan produces at point
D and the United States produces
at point G. Which of the
following is then correct?
A. World production of
both goods would be higher if Taiwan produced at point B and
the United States produced at point H.
B. World production of
both goods would be higher if Taiwan produced at point A and the
United States produced at point I.
C. There is no better
combination than points D and G.
D. None of the above are
correct.
25. "Absolute advantage" refers to
A. the ability of a
country to produce a specific good at a lower opportunity cost than
other countries.
B. total market
domination by one country in the production of a certain good or service.
C. the ability of a
country to produce a larger quantity of a good per person per day than
other countries.
D. the ability of a country to
guarantee itself favorable terms of trade at the expense of its
trading
partners.
Questions 26 and 27 refer to the following diagram,
illustrating domestic and foreign supply and demand
functions for a particular good in the United States:
26. Under conditions of free
trade,
A. the total amount
supplied to consumers is OD and domestic production is OC.
B. price is OX and
domestic supply is OB.
C. the total amount
supplied is OD and price is OY.
D. foreign supply is OA
and domestic supply is AD.
27. If a protective tariff is erected such that all
foreign supply is eliminated,
A. price will fall from
OY to OX.
B. domestic supply will
decrease from OC to OB.
C. domestic supply will
increase from OB to OC.
D. total output will be
OD and price will be OX.
28. If a foreign country temporarily dumps goods on the
United States,
A. consumers will benefit
from lower prices.
B. prices will rise
because of retaliation by domestic producers.
C. the government buys
the dumped goods in order to protect domestic markets.
D. total consumption in
the United States will be less because domestic producers
are likely to cease producing the good.
29. According to your instructor, which of the following
is a good argument for protective tariffs?
A. to help ensure full
employment in the U. S.
B. to protect an infant
industry until it grows large enough to be efficient
C. to retaliate against
foreign governments which subsidize their export industries
D. all of the above
E. none of the above
30. Voluntary restrictions by a foreign government
A. are superior to
protective tariffs.
B. may result in
increased revenue for the foreign government because the foreign government
will likely require exporters to pay for an export license.
C. are undertaken when
the foreign government wants to retaliate against the other country.
D. don’t work well
because they are largely ignored by the foreign government.
31. The World Trade Organization
A. encourages trade
restrictions to promote higher levels of employment in all participating
countries.
B. established the
European Monetary Union.
C. has organized protests
on behalf of labor unions and environmentalists.
D. has substantially
reduced tariffs among member countries.
32. Which of the following is correct?
A. The European Union has
succeeded in reducing some but not all tariffs among
member countries.
B. NAFTA has run into
considerable controversy that has resulted in all three countries
postponing tariff reductions.
C. All members of the
European Union have adopted the euro as their common currency.
D. NAFTA benefits the
United States and Canada, but harms Mexico
E. none of the above
33. Merchandise and service exports minus merchandise and
service imports equals a country’s
A. current account
balance.
C. balance of payments.
B. capital account
balance.
D. trade balance.
34. Which of the following is true about the official U.
S. balance of international payments,
assuming freely fluctuating
exchange rates?
A. If there is a trade
deficit, the U. S. will have to pay up the difference from its holdings
of foreign currencies.
B. Merchandise and
service exports minus merchandise and service imports always equal zero.
C. If foreigners invest
more in the U. S. than the U. S. invests in foreign countries, there will
be a deficit in the U. S. international capital account.
D. all of the above
E, none of the above
35. When U. S. businesses or individuals wish to increase
their holdings of foreign currencies,
A. U. S. exports will
increase.
B. there will be an
increase in the supply of dollars to the foreign exchange market.
C. there will be an
increase in the supply of foreign currencies to the foreign exchange market.
D. the dollar price of
foreign currencies will fall.
36. When Americans buy Toyotas made in Japan, they are
generating
A. a supply of dollars
and a demand for Japanese yen.
B. a supply of dollars
and a supply of yen.
C. a demand for dollars
and a demand for yen.
D. a demand for dollars
and a supply of yen.
37. If more U. S. citizens decide to travel in Germany
this summer, the result will be
A. a decrease in the
dollar price of euros and a decrease in the euro price of dollars.
B. a decrease in the
dollar price of euros and an increase in the euro price of dollars.
C. an increase in the
dollar price of euros and a decrease in the euro price of dollars.
D. an increase in the
dollar price of euros and an increase in the euro price of dollars.
38. An increase in the dollar
price of foreign currencies will cause
A. U. S. goods to be
cheaper to foreigners.
B. U. S. goods to be more
expensive to foreigners.
C. foreign goods to be
cheaper to U. S. residents.
D. foreign goods to be
more expensive to residents of foreign countries.
39. If interest rates in the U. S. increase relative to
interest rates in other countries, then
A. there will be an
increased demand for dollars by other countries.
B. there will be a
decreased demand for foreign currencies in the U. S.
C. the dollar price of
foreign currencies will fall.
D. all of the above
E. none of the above
40. If the Mexican peso is equal to $0.40, what would be
the peso price of an item that costs $20,000?
A. 2,000 pesos
C. 50,000 pesos
B. 20,000 pesos
D. 10,000 pesos
41. Suppose we had a system of fixed exchange rates
determined by currency values tied to gold.
Further suppose that the U. S.
dollar is defined as being equal to 0.1 ounces of gold and that
the British pound is defined as
being equal to 0.2 ounces of gold. The exchange rate between
dollars and pounds would be
A. $1 = £5.
C. $1 = £0.5.
B. $1 = £2.
D. none of the above
42. If, under the gold standard, the dollar price of
pounds was below equilibrium,
A. there would be a
shortage of pounds.
B. the U. S. would have
to sell pounds or ship gold to the United Kingdom.
C. the U. S. would have a
balance of payments surplus.
D. both A and B above
E. both B and C above
43. Which of the following is true about the United States
during the days of the gold standard?
A. We abandoned the gold
standard after World War II.
B. The Federal Reserve
was and still is required to have gold backing its liabilities.
C. By the early 1970s,
the amount of gold reserves we had was less than our balance of
payments deficits.
D. We frequently ended
with a balance of payments surplus which complicated domestic
monetary and fiscal policy objectives.
E. none of the above
44. One result of fixed exchange rates was that
A. a country might have
to follow undesirable domestic policies to deal with balance of
payments problems that can result from fixed rates.
B. a country might not
have sufficient foreign exchange or gold holdings to cover a potential
balance of payments deficit.
C. countries were ensured
that all the benefits of comparative advantage would be realized
because there was no risk of exchange rate changes.
D. A and B above
E. A and C above
45. "Managed flexibility" or "dirty float"
A. refers to the role of
the World Bank in setting exchange rates.
B. is generally thought
desirable by economists to overcome the risks of engaging in
foreign trade.
C. is used when
government authorities think there is a disorderly market for some
foreign currency.
D. is practiced on a
daily basis by the Federal Reserve.
46. Which of the following is correct?
A. Part of the problem in
poor countries is that there is often a very small urban population,
but a large urban population is necessary to develop manufacturing
industries.
B. Poor countries face a
vicious circle in that they cannot reduce consumption enough to
generate sufficient growth in capital goods.
C. Population growth in
poor countries is too small to generate enough labor to ensure growth.
D. Most poor countries
have a reasonably good agricultural sector, but a poorly developed
industrial sector.
47. Which of the following is correct regarding poor
countries?
A. Over half of the
world’s population live in economies with per capita GDP of less than $100.
B. Most poor countries
try to institute free trade without protective tariffs.
C. Poor countries have
benefited substantially from borrowing technology from developed countries.
D. The most common way
poor countries have improved their standard of living is by printing money.
E. none of the above
48. Birth rates in poor countries
A. are high because the
benefits of having additional children outweigh the costs.
B. are low because
families cannot afford to have many children.
C. are low because
governments in most poor countries have programs to restrict population
growth.
D. are high because of
widespread ignorance among families in poor countries.
49. Per capita GDP is barely growing in many poor
countries because
A. their output of goods
rises too rapidly relative to their output of services.
B. they do not possess
comparative advantage in what they produce.
C. their populations are
increasing as fast or faster than real GDP.
D. all of the above
50. Which of the following is true about development
funding in poor countries?
A. The most successful
strategies have been to raise domestic taxes and restrict
domestic consumption.
B. Aid from foreign
governments has been the most fruitful way to achieve development.
C. Very few loans have
been made by international organizations to poor countries because
of their economic and political instability.
D. Economists argue that
rapid increases in the money supply are the best way to achieve
development.
E. none of the above
ANSWERS
1. B
26. B
2. A
27. C
3. B
28. A
4. B
29. E
5. A
30. B
6. B
31. D
7. A
32. E
8. A
33. D
9. B
34. E
10. B
35. B
11. D
36. A
12. B
37. C
13. B
38. A
14. C
39. D
15. B
40. C
16. C
41. C
17. C
42. D
18. C
43. C
19. B
44. D
20. A
45. C
21. A
46. B
22. B
47. E
23. C
48. A
24. B
49. C
25. C
50. E
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