JOHN RAPP

Part One Notes Part One Test Part Two Notes Part Two Test Part Three Notes Part Three Test Part Four Notes Part Four Test 204 Grades

 

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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