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QUESTION: 1 If a central bank wishes to implement an expansionary monetary policy, which one of the following actions would it take? A. Raise the reserve requirement and the rate at which member banks may borrow from the central bank. B. Purchase additional government securities and lower the rate at which member banks may borrow from the central bank. C. Reduce the reserve requirement and raise the rate at which member banks may borrow from the central bank. D. Raise the rate at which member banks may borrow from the central bank and sell government securities.

Answer : A A tight monetary policy means that little money is available for borrowing. When supply is reduced, the price increases. Thus, interest rates are increased when the money supply contracts. Because of high interest rates, the cost of investment is increased and investment is discouraged.

QUESTION: 3 Which of the following is a tool of monetary policy that a nation's central bank could use to stabilize the economy during an inflationary period?

A. Selling government securities. B. Lowering bank reserve requirements. C. Lowering bank discount rates. D. Encouraging higher tax rates.

Answer : A Selling government securities is contractional because it takes money out of circulation.

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A. Reduced business investment due to higher interest rates. B. Reduced business investment due to lower interest rates. C. Increased business investment due to decreased government spending. D. Increased business investment because of reduced confidence in business.

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QUESTION: 2 A tight monetary policy is frequently cited as an important policy instrument for fighting inflation. Keynesian n:mists believe that one of the possible undesirable side effects of such a policy is

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Answer : B A central bank affects monetary policy primarily through the purchase and sale of government securities. A purchase of securities is expansionary because it increases bank reserves and the money supply. However, the sale of government securities by the central bank contracts the money supply by removing resources from the economy. Lowering the reserve requirement the percentage of deposits that a bank must keep on hand) also expands the money supply by increasing the loanable funds held by banks. Similarly, lowering the the rate at which member banks may borrow from the central bank encourages borrowing and increases the money supply.

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The total exports of Vietnam are US $20,000,000 worth of rice to Greece, and the total exports of Greece are US $18 ,i i 11,111100 worth of olives to Vietnam. The terms of trade are

Answer : A A country's terms of trade are calculated by dividing its export price index by its import price index and multiplying by 100. Greece's total exports US $18,000,000) divided by its total imports US $20,000,000) equals 0.9 x 100 = 90. Vietnam's total exports US $20,000,000) divided by its total imports US $18,000,000) equals 1.11 x 100 = 111.

QUESTION: 6 What is the economic term used to describe the situation in which each nation specializes in the production of goods that it produces relatively more efficiently than other nations and imports those goods that are produced relatively more efficiently by other nations?

A. Balance of trade. B. Diminishing returns. C. Relative competition. D. Comparative advantage.

Answer : D The relevant concept is comparative advantage, which compares the costs of inputs within a single country_ In contrast, the concept of absolute advantage with respect of inputs between countries. It is possible that a country might have an absolute advantage, with respect to every product, but comparative. advantage is different from absolute advantage. A particular nation can have a comparative advantage even though it does not

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Answer : D The doctrine of comparative advantage relates to comparative costs within one country. It holds that a country should produce those products in which it has a comparative advantage, not necessarily those products in which it has an absolute advantage. The doctrine suggests that a country should produce those products for which the greatest efficiencies are attainable even if it could also produce other goods more efficiently than another nation. In the long run, importing a product in which a country has an absolute advantage but not a comparative advantage will result in an overall increase in global production.

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A. Efficient trade. B. Diminishing returns. C. Relative competition. D. Comparative advantage.

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QUESTION: 5 The economic reasoning dictating that each nation specialize in the production of goods that it produces relatively more efficiently than other nations and import those goods that are produced relatively more efficiently by other nations is called the doctrine of

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have an absolute advantage. For example assume that Country A can produce Item for US $100 and Item Y for US $200 and that Country B earl produce Item X for US $50 and Item Y for US $150. B has an absolute advantage in the production of both procedures however, B has a comparative advantage in producing Item X 50 100, or 50% of the A cost compared with 150 200, or 75% of the A cost for Item Y)_ A has a comparative advantage in producing Item Y 200 150. or 133% of the B cost, versus 100 50, or 200% for Item X). A nation will benefit by exporting goods in which it has a comparative advantage and importing goods in which it does not have a comparative advantage. Total output will be maximized when each nation specializes in the products in which it has the greatest comparative advantage or the least comparative disadvantage.

QUESTION: 7 If the value of the U.S. dollar in foreign currency markets changes from US $1 = .95 euros to US $1 = .90 euros.

A. The euro has depreciated against the dollar. B. Products imported from Europe to the U.S. will become more expensive. C. U.S. tourists in Europe will find their dollars will buy more European products. D. U.S. exports to Europe should decrease.

Answer : C Although currencies can be supported by various means for short periods, the primary determinant of exchange, rates is the supply of and demand for the various currencies. Under current international agreements, exchange rates are allowed to "float_" During periods of extreme fluctuations, however, governments and control banks may intervene to maintain stability in the market.

QUESTION: 9 Two countries have flexible e change rate systems and an active trading relationship. If incomes <List A> in country 1, everything else being equal, then the currency of country 1 will tend to <List B> relative to the currency of country 2.

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A. Each industrial country's government. B. The International Monetary Fund. C. Supply and demand in the foreign currency market. D. Exporters and importers of manufactured goods.

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QUESTION: 8 Exchange rates are determined by

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Answer : B The dollar has declined in value relative to the euro_ If an American had previously wished to purchase a European product that was priced at 10 euros, the price would have been about US $10.53. After the dollar's decline in value, the price of the item has increased to about US $11.11. Hence, imports from Europe should do-i --se and exports increase

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Answer : C If incomes in country 1 rise, consumers in country 1 will increase their imports from country 2. The resulting increase in the supply of currency 1 will result in a tendency for it to depreciate relative to the currency of country 2.

QUESTION: 10 If the exchange rate has changed from 1 local currency unit LCU) to 5 foreign currency units FCUs) to a rate of 1 LCU to 5.5 FCUs,

Answer : D Exchange rates are determined by the forces of supply and demand on the exchange markets. Often other forces try to intervene in this process of exchange rate determination, but these reflect only short-run policies. An example of this type of policy would be government or central bank intervention in the international money markets.

QUESTION: 12 A domestic entity and a foreign entity purchased the same stock on the foreign stock exchange and held the stock for 1 year. The value of the foreign currency weakened against the domestic currency over this period. Comparing the returns of the two companies, what will be the domestic entity's return?

A. Lower. B. Higher. C. The same. D. Higher in the short-run but lower in the long-run.

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A. Determined directly by the price of gold because the value of the domestic currency is tied to the price of gold. B. Set by the domestic government in consultation with foreign governments. C. Set along with the value of other currencies held by the International Monetary Fund. D. Determined by the forces of supply and demand on the foreign exchange markets.

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QUESTION: 11 The value of the domestic currency in relation to foreign currencies is

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Answer : A If the exchange rate changes from 1 LCU to 5 FCUs to 1 LCU to 5.5 FCUs, the LCU has appreciated by 10% [(5.5 - 5) 5].

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A. The LCU has appreciated by 10%. B. The LCU has depreciated by 10%. C. The FCU has appreciated by 20%. D. The FCU has depreciated by 20%.

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Answer : A The returns on the stock are presumably paid in foreign currency. Hence, the change in the value of the foreign currency relative to the domestic currency does not affect the foreign entity's return. However, the weakening of the foreign currency reduces the amount of domestic currency it will buy, and the domestic entity's return in domestic currency is correspondingly reduced.

QUESTION: 13 If the central bank of a country raises interest rates sharply, the country's currency will likely

A. Increase in relative value. B. Remain unchanged in value. C. Decrease in relative value. D. Decrease sharply in value at first and then return to its initial value.

Answer : A If the real rates of interest are equal, the country with the higher nominal interest rate is expected to experience a higher rate of inflation. A higher rate of inflation is associated with a devaluing currency, so the currency of the country with the higher nominal interest rate will likely be selling at a forward discount.

QUESTION: 15 A German importer of English clothing has contracted to pay an amount fixed in British pounds 3 months from now. lithe importer worries that the euro may depreciate sharply against the British pound in the interim, it would be well advised to Buy pounds in the forward exchange market. B. Sell pounds in the forward exchange market. C. Buy euros in the futures market. D. Sell euros in the futures market.

Answer : A The importer should buy pounds now. If the euro depreciates against the pound in the next 90 days, the gain on the forward exchange contract would offset the loss from having to
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A. Forward discount relative to the currency of Country B. B. Forward premium relative to the currency of Country B. C. Spot discount relative to the currency of Country B. D. Spot premium relative to the currency of Country B.

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QUESTION: 14 Assuming that the real rate of interest is the same in both countries, if Country A has a higher nominal interest rate than Country B, the currency of Country A will likely be selling at a

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Answer : A Exchange rates fluctuate depending upon the demand for each country's currency. If a country raises its interest rates, its currency will appreciate. The demand for investment at the higher interest rates will shift the demand curare for the currency to the right. The reverse holds true for a decrease in interest rates

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pay more euros to satisfy the Ii ability.

QUESTION: 16 An entity has a foreign-currency-denominated trade payable, due in 60 days. To eliminate the foreign currency exchange-rate risk associated with the payable, the entity could

A. Sell foreign currency forward today. B. Wait 60 days and pay the invoice by purchasing foreign currency in the spot market at that time. C. Buy foreign currency forward today_ D. Borrow foreign currency today, convert it to domestic currency on the spot market, and invest the funds in a domestic bank deposit until the invoice payment date.

Answer : C The entity can arrange to purchase the foreign currency today rather than in 60 days by buying the currency in the forward market. This hedging transaction will eliminate the exchange-rate risk associated with the trade payable.

QUESTION: 18 Which of the following is a direct effect of imposing a protective tariff on an imported product?

A. Lower domestic prices on the imported item. B. Lower domestic consumption of the item. C. Reduced domestic production of the item. D. Higher sales revenues for foreign producers of the item.

Answer : B A protective tariff adds to the purchase price of imported goods. If an imported good's sales price is higher than a comparable, less expensive domestic good, consumers will purchase the domestic good. Thus, the direct effect of imposing a protective tariff on an imported good is lower domestic consumption.

QUESTION: 19 A direct effect of imposing a protective tariff on an item for which there are both foreign and domestic producers is that domestic producers will sell, <List A> of the item while domestic consumers consume ,List B> of the item.
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Answer : B Tariffs are excise taxes on imported goods imposed either to generate revenue or protect domestic producers. Thus, consumption taxes on imported goods are tariffs.

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A. Licensing requirements. B. Consumption taxes on imported goods. C. Unreasonable standards pertaining to product quality and safety. D. Domestic content rules.

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QUESTION: 17 Which of the following is a tariff?

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Answer : B Domestic producers are not subject to the tariff and will therefore have a price advantage over their foreign competitors. However, absent such competition, the domestic price of the item will be higher. Domestic producers will sell more at a higher price, and domestic consumers will consume less following the price increase.

QUESTION: 20 One consequence of the imposition of tariffs or quotas on imported products is

Answer : B Despite the advantages of free trade, nations often levy tariffs to discourage the importation of certain products. A tariff is a tax on imports intended to protect a domestic producer from foreign competition. For instance, a tariff on imported autos benefits domestic auto manufacturers because it is an additional cost imposed on domestic consumers of such products. The disadvantages of the tariff are that it may protect an inefficient domestic producer and increase prices paid by domestic consumers.

QUESTION: 22 The graph depicts the domestic supply of and demand for a product that is also sold in the domestic market by foreign producers. The domestic producers are protected by a tariff of the amount Pt minus Pw. Bt is the domestic price including the tariff, and Rw is the world price for the product. The effect of the tariff is to

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A. Domestic producers of B. Domestic producers of goods protected by the tariff. C. Domestic consumers of goods protected by the tariff. D. Foreign producers of goods protected by the tariff.

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QUESTION: 21 Which one of the following groups would be the primary beneficiary of a tariff?

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Answer : D Tariffs lead to higher prices on imported products. Similarly, the imposition of quotas leads to higher prices through an artificial limitation on supply.

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A. Lower prices for domestic products that compete with affected imports. B. Domestic industry opposition to protection from imports. C. Additional consumption of the affected imported products. D. Higher prices for the affected imported products.

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A. Reduce the domestic price from ORw to ORt B. Reduce foreign sales in the domestic market from ac to bc. C. Increase domestic production from Ob to Cc. D. Increase domestic production from Oa to Ob.

QUESTION: 24 Which of the following is an economic rationale for government intervention in trade?

A. Maintaining spheres of influence. B. Protecting infant industries. C. Preserving national identity. D. Dealing with friendly countries.

Answer : B The infant-industry argument contends that protective tariffs are needed to allow new domestic industries to become established. Once such industries reach a maturity stage in their life cycles, the tariffs can supp: - dry be removed.

QUESTION: 25 Government subsidies of the domestic production of military weapons is an

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Answer : C An embargo is a total ban on some kinds of imports. It is an extreme form of the import quota. Embargoes have the effect of totally excluding the exporting entity from selling in that country and are the most restrictive type of import/export law.

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A. Tariffs B. Quotas. C. Embargoes. D. Exchange controls.

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QUESTION: 23 Which of the following measures create the most restrictive barrier to exporting to a country?

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Answer : D Without the tariff, domestic production is determined by the intersection of the Pw line with the domestic supply curve at the quantity Oa. Domestic production increases from Oa to Ob as a result of the introduction of the tariff. Supply intersects the Pt line at a higher price and at a greater domestic quantity, Ob.

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example of what rationale for government intervention in trade?

A. Infant industry concept. B. Maintenance of essential industries. C. Maintenance of extension of spheres of influence. D. Protecting the national identity.

Answer : B Providing subsidies to military weapons manufacturers is an example of the essentialindustry argument. The government protects essential domestic industries during peacetime so that a country is not dependent on foreign sources of supply during war.

QUESTION: 26 Which of the following provides the best justification for reducing trade barriers among nations?

A. Unemployment and productivity rates will rise. B. Unemployment rates will rise and productivity rates will decline. C. Unemployment rates will decline and productivity rates will rise. D. Unemployment and productivity rates will decline.

Answer : D With trade quotas, home jobs will be saved, hence, unemployment will decline. Since jobs will be saved for inefficient industries less efficient than foreign competitors), productivity rates will decline because they will not be specializing in those goods with which they have a comparative advantage.

QUESTION: 28 What are revenue tariffs designed to do?

A. Develop new export opportunities. B. Provide the government with tax revenues. C. Restrict the amount of a commodity that can be imported in a given period.
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Answer : D The general effect of free trade would be to maximize world output because resources in each country would be deployed most efficiently according to the principle of comparative advantage. Comparative advantage means that a country can produce a greater output of certain goods for a given level of input than other goods. Thus, that country should specialize in and export the goods it can produce most efficiently. Total world output will increase in these circumstances.

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A. The military self-sufficiency argument. B. Diversification for stability argument. C. The infant industry argument. D. Increased total world output argument.

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D. Encourage foreign companies to limit the amount of their exports to a particular country.

Answer : B Revenue tariffs are usually applied to products that are not produced domestically. Their purpose is to provide the government with tax revenue.

QUESTION: 29 Governments most likely restrict trade in the long run to I. Help foster new industries. II. Protect declining industries. III. Increase tax revenues. IV. Foster national security.

A. I only. B. I and II only. C. II and III only D. I. II. and IV only

A. The same product sells at different prices in different countries. B. An entity charges less than it costs to make the product to enter or win a market. C. Lower quality versions of the product are sold abroad so as to be affordable. D. Transfer prices are set artificially high so as to minimize tax payments.

Answer : B Dumping is an unfair trade practice that violates international agreements. It occurs when an entity charges a price 1) lower than that in its home market or 2) less than the cost to make the product. Dumping may be done to penetrate a market or as a result of export subsidies.

QUESTION: 31 Which of the following statements is true with respect to international transfer pricing?

A. Transfer prices charged to foreign subsidiaries must be the same as those charged to domestic subsidiaries.
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QUESTION: 30 When a multinational entity decides to sell its products abroad, one of the risks it faces is that the government of the foreign market charges the entity with dumping. Dumping occurs when

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Answer : B Governmental impediments to global competition are generally imposed for the announced purpose of protecting local entities and jobs and developing new industries. They also may have the effect of raising revenue in the short run. In the long run, tax and revenues will decline because of reduced trade. Examples of governmental impediments are tariffs; duties; quotas; domestic content rules; preferences for local entities regarding procurement, taxes. R&D, labor regulations, and other operating rules; and laws e.g., antibribery or tax) enacted by a national government that impede national entities from competing globally. These impediments are most likely when industries are viewed as crucial.

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