Sample Test Questions for International Economics 300 Below are a set of sample test questions taken from

previous exams in Internatio nal Economics 300. The answers are indicated by the *. Please note that it is po ssible that questions may have the * in the wrong place. You should think throug h all of these. Also, these are only sample questions. They are put here because students often think it is helpful to see past exams. The fact that these are h ere does not represent a commitment that questions on your exam will be like the se or on the same subject matter. This is especially so because the subject matt er and organization of the course has recently been adjusted. 1. If two countries trade, and if they are both specialized in production, then world prices are determined by A) supply conditions only. B) demand conditions o nly. *C) both supply and demand conditions. D) neither supply and/or demand cond itions. 2. An increase in the return to land may be the result of A) an increase in the supply of labor. B) an increase in the price of food. C) an increase in the supp ly of capital. E) (A) and (C). *D) (A) and (B).

3. Suppose an economy is characterized by the relationships specified in the spe cific factors model. Assume that there are three factors of production, where la bor and land are used in agriculture and labor and capital are used in industry. Then in the short-run, an increase in the price of food will lead to: *A) an in crease in the real income of landowners, a decrease in the real income of capita lists, and an ambiguous effect on the real income of workers. B) an increase in the real income of landowners and capitalists and an ambiguous effect on the rea l income of workers. C) an increase in the real income of landowners and a decre ase in the real income of workers and capitalists. D) an increase in the real in come of capitalists and a decrease in the real income of landowners. 4. As more labor is allocated to industry there is: A) decreasing returns to sca le. B) diminishing returns to capital. *C) diminishing returns to labor. D) incr easing returns to scale. E) increasing returns to labor. 5. The optimal tariff of a small country is: A) positive and smaller than that o f a large country. B) positive and larger than that of a large country. *C) zero . D) negative.

6. The theory of collective action suggests that industries are more likely to b e protected if *A) the number of firms in the industry is small. B) the number o f firms in the industry is large. C) many jobs are at stake. D) many low-wage wo rkers face unemployment. 7. Economists argue that A) countries with export surpluses will have a comparat ive advantage in the production of all goods. *B) efficiency in international tr ade requires countries to produce those goods in which they have a comparative a dvantage. C) efficiency in international trade requires countries to produce tho se goods in which they have an absolute advantage. D) efficiency in internationa l trade requires countries that have an absolute advantage in the production of all goods to become self sufficient. 8. Under free trade, world prices for exports and imports would be such that *A) the quantity supplied by exporters would just equal the quantity demanded by im porters. B) countries would specialize production along lines of absolute advant age. C) every country would be self sufficient in all goods. D) all countries wo uld show a slight export surplus. 9. Suppose that shoes can be produced with two hours of labor input in Italy and three hours of labor input in the United States, and that shirts can be produce d with four hours of labor in both countries, then it is correct to say that, A) Italy has a comparative advantage in the production of shirts. *B) Italy has an absolute advantage in the production of shirts.

C) the U.S. has a comparative advantage in the production of shirts. D) the U.S. has an absolute advantage in the production of shirts. 10. The imposition of a tariff on steel will lead to all but which of the follow ing? A) a lower volume of steel imports. B) higher domestic steel prices. C) red uced domestic demand for steel. *D) reduced domestic production of steel as high er steel prices reduce demand. 11. The difference between a large country and a small country in international trade is A) primarily a matter of the number of different products that a countr y supplies to the world. B) purely a matter of geography. *C) primarily a matter of influence over world prices. D) exclusively a matter of comparative advantag e. 12. Refer to the diagram 1 above. Country A has an ______________ advantage in t he production of both good X and good Y and Country B has a ______________ advan tage in the production of good X. A) comparative; absolute. B) comparative; comp arative. *C) absolute; comparative. D) absolute; absolute. 13. Refer to the diagram above. Equilibrium for these two countries is character ized by A) autarky, trade would not be mutually beneficial. *B) Country A export ing good Y to country B.

C) Country A exporting both goods X and Y to country B. D) Country A exporting g ood X to country B. 14. A country is said to be labor abundant if A) (LA/KA) < (LB/KB) B) (w/r)A > ( w/r)B *C) (w/r)A < (w/r)B D) none of the above. 15. According to the Heckscher-Ohlin theorem A) increasing the relative supply o f one factor, holding relative goods prices constant, leads to a biased expansio n of production possibilities favoring the relative supply of the good which use s that factor intensively. *B) countries tend to export goods whose production i s intensive in factors with which they are relatively abundantly endowed. C) cou ntries tend to specialize in the production of the good in which they have the g reatest comparative advantage. D) trade in goods leads to an equalization in the rewards to factors across countries. 16. Assume that Zanzibar is labor abundant and that Omnibar is capital abundant. These two countries both produce carpet (which is labor intensive) and radar eq uipment (which is capital intensive). Assume that capital is immobile in the sho rt run and that labor is mobile between both industries within each country in t he short and long run. If Zanzibar and Omnibar begin to trade, we would expect t hat in Omnibar A) the return to capital in the carpet market would fall. B) the return to capital in the radar industry would rise. *C) purchasing power would b e lower for owners of radar capital and higher for owners of carpet capital.

D) purchasing power would be higher for owners of radar capital and lower for ow ners of carpet capital. 17. In trade between a small and a large nation A) the gains from trade are like ly to be equally shared. B) the large nation is likely to receive all the gains from trade. *C) the small nation is likely to receive all the gains from trade. D) we cannot say. 18. If Px/Py is lower in country A than in country B under autarky then A) count ry A has a comparative advantage in commodity Y. *B) country B has a comparative advantage in commodity Y. C) country B has a comparative advantage in commodity X. D) none of the above. 19. If the world price, Px/Py, happens to exceed the equilibrium world price Px/ Py then, A) the country importing commodity X will want to import more of X than at equilibrium. B) the country exporting commodity X will want to export less o f X than at equilibrium. *C) the country exporting commodity X will want to expo rt more of X than at equilibrium. D) the equilibrium, relative Px/Py will rise. 20. If a country's tastes for its import commodity increases then Pimports/Pexpo rts for the country _______________ and trade volume _________________. A) decre ases; increases. B) decreases; decreases.

C) increases; increases. *D) increases; decreases. 21. In the Heckscher-Ohlin model of trade, international trade is based mostly o n a difference in A) economies of scale. *B) factor endowments. C) tastes. D) te chnology. 22. If a small nation increases the tariff on its import commodity then A) the p rotection cost of the tariff decreases. B) the deadweight loss decreases. *C) th e rent to domestic producers of the commodity increases. D) all of the above. 23. According to the Heckscher-Ohlin (factor proportions model), international t rade will *A) reduce international differences in per capita incomes. B) increas e international differences in per capita incomes. C) possibly increase or reduc e international differences in per capita incomes. D) lead to complete specializ ation. 24. Intra-industry trade takes place A) because perfect competition is the preva lent form of market organization. B) because products are homogeneous. *C) in or der to take advantage of economies of scale.

D) all of the above. 25. The Leontief paradox refers to the empirical finding that U.S. A) exports ar e more K-intensive than import substitutes. *B) imports substitutes are more K-i ntensive than exports. C) exports are more L-intensive than imports. D) imports are more K-intensive than exports. 26. A proportionately greater increase in the nation's supply of labor than of c apital is likely to result in a decrease in Pimports/Pexports if the nation expo rts *A) the L-intensive commodity. B) the K-intensive commodity. C) both commodi ties. D) either commodity. 27. The imposition of an import tariff by a small nation A) increases the relati ve price of the import commodity for domestic producers and consumers and leaves the nation's welfare unchanged. *B) increases the relative price of the import commodity for domestic producers and consumers and reduces the nation's welfare. C) reduces the relative price of the import commodity for the nation as a whole and reduces the nation's welfare. D) reduces the relative price of the import c ommodity for domestic producers and consumers and increases the nation's welfare . 28. According to the Stolper-Samuelson theorem, the imposition of a tariff by a nation *A) increases the real return of the nation's scarce factor. B) increases the real return of the nation's abundant factor.

C) reduces the real return of the nation's scarce factor. D) leaves the real ret urn of the nation's abundant factor unchanged. 29. An increase in the demand of the imported commodity subject to a given impor t quota A) reduces the domestic quantity demanded of the commodity. *B) increase s the domestic production of the commodity. C) reduces the domestic price of the commodity. D) reduces the producer surplus. 30. The tandard antage. ation's expression "gains from trade" refers to *A) the increase in a nation's s of living derived from specialization and trade based on comparative adv B) the foreign currencies earned by exporting goods and services. C) a n surplus of exports over imports. D) a nation's balance of trade.

31. A country, previously producing two goods, wine and wheat, enters into a fre e-trade situation in which the country exports wine and imports wheat. The expec ted result of this exchange will be A) an increase in the country's consumption of wheat but no possible increase in its consumption of wine. B) an increase in the country's consumption of wine but no possible increase in its consumption of wheat. *C) an increase in the country's consumption of both goods. D) increased domestic production of both wheat and wine. 32. Trade, whether between individuals or nations, promotes

*A) specialization. B) lower standards of living. C) higher product prices. D) s elf-sufficiency. The production possibilities given below shows how many bushels of either wheat or rice can be produced in India and Canada with one unit of resources. Assume w e are in the Ricardian model with labor as the only factor of production. Wheat (bushels) 6 13 Rice (bushels) 13 5 Number of Laborers 100 10 India Canada 33. Referring to the chart above: India has an absolute advantage in the product ion of A) wheat. *B) rice. C) both rice and wheat. D) neither rice nor wheat. 34. Referring to the chart above, if the relative price (Price/Pwheat) under fre e trade is 2, India will produce A) neither rice nor wheat but import them from Canada. B) 600 bushels of wheat. *C) 1300 bushels of rice. D) 600 bushels of ric e and 1300 bushels of wheat. 35. Under a regime of managed floating exchange rates, the balance of the offici al reserve transactions account is A) always negative.

B) always positive. C) *zero. D) may be positive or negative. 35. An appreciation in the dollar vis-a-vis other currencies should lead to all but which of the following? A) A decrease in exports. B) An increase in imports. C) * A shift of the Y - A curve to the right. D) A leftward shift of the X - M curve. curve. 36. Changes in the exchange rate A) reflect changes in the purchasing power of o ne currency relative to the rest of the world. B) indicate changes in the prices of goods produced in one country relative to the rest of the world. C) are posi tive if domestic prices in one country are climbing relative to those in the res t of the world. D) can be caused by changes in either the domestic price index o r the price index of goods produces and traded across the rest of the world. E) * all of the above. 37. The Brentton-Woods System was one of A) * relatively fixed exchange rates se t across the world by international agreement. B) extremely flexible exchange ra tes monitored across the world by international agencies. C) actively managed, f loating exchange rates dominated by the major currency markets around the world.

D) laissez-faire exchange rate policy that allowed countries to focus entirely o n domestic policy issues. 38. If the German mark appreciates relative to the British pound, then a mark wi ll buy A) fewer pounds than before. B) *more pounds than before. C) the same num ber of pounds as before. D) zero pounds since only the mark has value. 39. The relative purchasing power-parity theory postulates that: A) the equilibr ium exchange rate is equal to the ratio of the price level in the two nations. B ) *the change in the exchange rate over a period of time should be proportional to the relative change in the price level in the two nations over the same time period. C) change in the exchange rate over a period of time should be be propor tional to the absolute change in the price level in the two nations over the sam e time period. D) the exchange rate at a period of time should be proportional t o the relative prices in the two nations. 40. An autonomous increase in saving from a condition of equilibrium in national income and in the trade balance results in the nation's income: A) rising and i ts trade balance turning into surplus. B) *falling and its trade balance turning into surplus. C) falling and its trade balance turning into deficit. D) rising and its trade balance turning into deficit. 41. To correct a balance of trade deficit and unemployment a nation requires a:

A) devaluation and expansionary fiscal and monetary policies. B) devaluation and contractionary fiscal and monetary policies. C) * devaluation and either expans ionary or contractionary fiscal and monetary policies. D) revaluation and either expansionary or contractionary fiscal and monetary policies. 42. An autonomous improvement in the nation's trade balance under fixed exchange rates will cause the nation's aggregate demand curve to A) *shift to the right. B) shift to the left. C) remain unchanged. D) any of the above. 43. An excessive money growth in the nation over time under a flexible exchange rate system results in a: A) *depreciation of the nation's currency. B) apprecia tion of the nation's currency. C) leaves the nation's currency unchanged. D) any of the above. 44. Everything else equal, the volume of trade is likely to be: A) larger under a flexible than under a fixed exchange rate system. B) *larger under a fixed tha n under a flexible exchange rate system. C) equal under a flexible and fixed exc hange rate system. D) any of the above. 45. The European Monetary System is or most resembles a :

A) *fixed exchange rate system. B) a managed exchange rate system. C) a crawling peg system. D) a freely flexible exchange rate system. 46. The present international monetary system is a : A) gold standard. B) flexib le exchange rate system. C) *managed exchange rate system (a dirty float). D) a target zone system. 47. The main reason why one nation trades with another is to A) save its natural resources from rapid deterioration. B) *exploit the advantages of specializatio n. C) eliminate the danger of retaliation from other nations. D) improve politic al alliances. 48. A restriction of imports that is accomplished by a quota normally A) *can be accomplished also by a tariff. B) cannot be replicated exactly by imposing a ta riff. C) can be accomplished also by an export subsidy. D) can be accomplished a lso by negotiations within GATT. 49. The infant-industry argument is valid when A) a new industry is suffering fi nancial losses.

B) a new industry is less efficient than foreign competitors. C) *the industry's prospective gains are sufficient to repay the social (deadweight) losses incurr ed while it is being protected. D) the industry is not likely to be profitable i n the future. 50. The anti-dumping argument A) calls for protectionist measures when foreigner s charge unconscionable high prices for products dumped on our markets. B) *call s for protectionist measures against countries that subsidize exports and dump t heir goods at unconscionable low prices on our markets. C) is valid on strictly economic criteria. D) is derived from the notion that high import prices are bad for a country. 51. Currency values will appreciate in those countries with A) *lower inflation rates than the rest of the world; slower growth in aggregate demand; or high int erest rates. B) higher inflation rates than the rest of the world; rapid growth in aggregate demand; or low interest rates. C) lower inflation rates than the re st of the world; rapid growth in aggregate demand; or low interest rates. D) hig her inflation rates than the rest of the world; slower growth in aggregate deman d; or low interest rates. 52. Other things equal, a rise in the interest rates in the U.S. often will A) l ead to a depreciation of the dollar. B) *lead to an appreciation of the dollar. C) lead to a decrease in the amount of foreign capital attracted to the U.S.

D) shift the demand curve for dollars to the left. 53. An autonomous (exogenous) increase in exports or decrease in imports, A) *has a multiplier effect on the economy, just like an increase in consumption, investment, or government purchas es. B) affects the price level but not the equilibrium level of GDP. C) affects the equilibrium level of GDP but not the price level. D) has no effect on the ec onomy if the change is autonomous and not induced. 54. For John to have a comparative advantage in the production of pins means tha t, relative to Jack, with the same resources: A) *John is better at producing pi ns than at producing needles. B) John is better at producing both pins and needl es. C) John can produce pins more efficiently than Jack. D) John can produce mor e pins than Jack. 55. The Heckscher-Ohlin theorem sates that ____ advantage in the production of a good ________________. A) absolute, scare input put intensively. C) *comparative, abundant arce input intensively. a country will have a(n) ____________ which uses its relatively ___________ intensively. B) absolute, abundant in input intensively. D) comparative, sc

56. Arboc is growing at a rate of 3% while Arbez is growing at a rate of 7%. It is likely that exports from Arboc will _______________ and that its imports will _________________. A) *increase, increase.

B) increase, decrease. C) decrease, increase. D) decrease, decrease. 57. Arboc is growing at a rate of 3% while Arbez is growing at a rate of 7%. All else equal, we would expect to see the ________________ currency depreciating. The new exchange rate will __________________ the consumers of Arboc. A) Arboc, hurt. B) Arboc, benefit. C) Arbez, hurt. D) *Arbez, benefit. 58. The balance on current account: A) will be zero when merchandise exports equ al merchandise imports. B) shows the direction and amount of gold flows between the nation and its trading partners. C) includes capital inflows but not capital outflows. D) *shows the relationship between U.S. sales of goods and services a broad and U.S. purchases of goods and services from abroad. 59. Which of the following will decrease demand for British pounds? * A) Income in the U.S. decreases B) The inflation rate increases in the U.S. relative to th e inflation rate in England C) U.S. companies decide to increase their investmen t in England D) More U.S. citizens decide to travel to England 60. The gains of trade can be demonstrated by a consumption possibilities curve that is:

A) identical with the production possibilities curve B) outside of, but parallel to, the production possibilities curve * C) outside of, and with different slop e than, the production possibilities curve D) inside of, but parallel to, the pr oduction possibilities curve. 70. The supply of dollars in the foreign exchange market is likely to be upwards sloping because as the price of a dollar (the exchange ratE) falls, A) American s demand more foreign goods because these goods have become less expensive to Am erican consumers. * B) Americans demand fewer goods because these goods have bec ome more expensive to American consumers C) foreigners demand more American good s because these goods have become less expensive to foreign consumers. D) foreig ners demand more foreign goods because these goods have become more expensive to foreign consumers 71. Suppose that the price of a television set is $100 in the U.S. and 8000 yen in Japan. If the current exchange rate is 100 yen to the dollar, then purchasing -power-parity theory would predict that in the long run A) Japan will begin to i mport television sets from the U.S. B) the exchange value of the yen will deprec iate * C) the exchange value of the yen will appreciate D) the exchange value of the dollar will appreciate 72 According to the theory of covered interest arbitrage, if there is a positive interest difference in favor of the foreign country, and it exceeds the forward discount on the foreign currency there will be a: A) capital inflow under cover ed interest arbitrage. * B) capital outflow under covered interest arbitrage.

C) no capital flow under a covered interest arbitrage. D) any of the above. 73. A U.S. importer scheduled to make a payment of 100,000 in three months can he dge his foreign exchange risk by: A) purchasing $100,000 in the spot market for delivery in three months. B) selling 100,000 in the spot market for delivery in t hree months. * C) purchasing 100,000 in the forward market for delivery in three months. D) selling 100,000 in the forward market for delivery in three months. 74. If the three-month forward rate is $2/1 and a speculator anticipates that spo t rate will be $2.03/1 in three months, he can earn a profit by: A) selling pound s forward. * B) purchasing pounds forward. C) selling dollars forward. D) purcha sing dollars forward. 75. A capital outflow from New York to London under covered interest arbitrage c an take place if the positive interest differential in favor of London is: A) sm aller than the forward discount on the pound. B) equal to the forward discount o n the pound. * C) larger than the forward discount on the pound. D) none of the above. 76. The appreciation of the currency of country A will tend to: * A) stimulate i mports to country A B) discourage imports to country A

C) increase exports from country A D) discourage foreign travel by the citizens of country A 77. If the Federal Reserve pursues an expansionary domestic monetary policy A) c apital outflows will be discouraged * B) the foreign exchange value of the U.S. dollar is likely to decrease C) capital inflows will be encouraged D) there shou ld be no effect oneither foreign exchange rates or on foreign investment in the U.S. 78. If the exchange rate maintains its Purchasing Power Parity, then inflation r ates of 10% in France and 5% in the US will result in: A) 15% increase in the fr anc price of the dollar B) 5% increase in the dollar price of franc * C) 5% incr ease in the franc price of the dollar D) 15% decrease in the dollar price of fra nc 79. Which of the following would be a credit item in the U.S. balance of payment s? A) a U.S. citizen travels to England for a two-week vacation B) a U.S. firm h ires a non-U.S. citizen * C) a U.S. company sells computer software to a company in Spain D) the U.S. government lends Russia money 80. When the U.S. acquires assets abroad, it is in essence A) borrowing money, a nd foreign debts to the U.S. decrease B) borrowing money, and foreign debts to t he U.S. increase

C) lending money, and foreign debts to the U.S. decrease * D) lending money, and foreign debts to the U.S. increase 81. The effect of a sustained increase in government spending (or investment) on income A) is larger in an open economy than in a closed economy B) is the same regardless of whether the economy is open or closed * C) is smaller in an open e conomy than in a closed economy D) could be larger or smaller in an open economy than in a closed economy 82. Hedging refers to: A) the acceptance of a foreign exchange risk. B) *the cov ering of a foreign exchange risk. C) foreign exchange speculation. D) foreign ex change arbitrage. 83. To correct a balance of payments surplus and inflation a nation requires a: A) devaluation and expansionary fiscal and monetary policies. B) devaluation and contractionary fiscal and monetary policies. * C) devaluation and either expans ionary or contractionary fiscal and monetary policies. D) revaluation and either expansionary or contractionary fiscal and monetary policies. 84. A fixed exchange rate maintained above the equilbirium would tend to: * A) r educe the country's reserves of gold and foreign exchange over time B) increase the country's reserves of gold and foreign exchange over time C) shift the suppl y curve for that country's currency in the foreign exchange

market to the left D) make the country's exports cheaper in foreign countries th an at the equilibrium exchange rate 85. A country's balance of payments deficit can be elimated if: A) imports incre ase B) the deficit country's government adds to its liabilities to foreign gover nments C) the deficit country reduces its stocks of official reserves * D) excha nge rates are allowed to fluctuate freely 86. If country A has a budget deficit that is being funded by the purchases of b onds by individuals in country B, it can be expected that: * A) the value of cur rency of country A should increase relative to that of country B B) there will b e an increased demand for country B's currency by those in country A C) there sh ould be no immediate change in the value of country A's currency, but country A' s currency should increase in value in the future D) the central bank will inter vene to halt the purchase of the country's domestic bonds 87. With fixed exchange rates and zero capital mobility, national income and tra de surplus move: * A) in opposite directions B) in the same direction C) sometim e in opposite directions and sometime in the same direction D) in the same direc tion as imports

88. Labor in developing countries generally: A) opposes an inflow of foreign dir ect investments from abroad. * B) favors an inflow of foreign direct investments from abroad. C) is indifferent to foreign direct investments from abroad. D) we cannot say without additional information. 89. Owners of capital in developing countries generally: * A) oppose an inflow o f foreign direct investments from abroad. B) favor an inflow of foreign direct i nvestments from abroad. C) are indifferent to foreign direct investments from ab road. D) we cannot say without additional information. 90. According to the infant industry argument for tariffs, a new small industry: A) must be protected even if it will never have a comparative advantage B) must be protected permanently to provide for a diversified economy C) will need prot ection once it develops economies of scale * D) must be protected temporarily un til it can develop economies of scale 91. A fixed exchange rate system without a band of allowed fluctuation would req uire the nation's monetary authorities to intervene in the foreign exchange mark et: A) never. B) seldom. * C) constantly. D) we cannot say. 92. Under a flexible as compared to a fixed exchange rate system:

* A) a nations can more easily achieve its desired inflation-unemployment tradeo ff. B) it is more difficult for a nation to achieve its desired inflation-unempl oyment tradeoff. C) it is more difficult for a nation to achieve internal balanc e. D) it is more difficult for a nation to achieve external balance.

MULTIPLE-CHOICE QUESTIONS, CHP. 18 1. The major difference between a closed economy and an open economy is that a(n ) a. closed economy balances budget, while an open economy does not. b. open eco nomy is a market economy, while a closed economy relies on planning. c. open eco nomy interacts with the rest of the world, while a closed economy does not. d. c losed economy keeps political affairs secret, while an open economy does not. A rise in net exports shifts the aggregate a. demand curve inward. b. demand curve outward. c. supply curve outward. d. supply curve inward. A recession abroad wo uld a. increase U.S. net exports and increase aggregate demand. b. increase U.S. net exports and increase aggregate supply. c. reduce U.S. net exports and reduc e aggregate demand. d. reduce U.S. net exports and increase aggregate demand. An increase in the U.S. price level relative to the price level of other countries would a. increase U.S. net exports and increase aggregate demand. b. increase U .S. net exports and increase aggregate supply. c. reduce U.S. net exports and re duce aggregate demand. d. reduce U.S. net exports and increase aggregate demand. + 2. + 3. + 4. + . Figure 18-1 5. + 6. Which of the following is correct? a. IM + X = G T b. I + G + T = S + X M c. I + G + X = S + T + IM d. I + T + G = S X IM A closed economy is one that a. uses t ariffs. b. uses quotas to restrict trade. c. uses exchange controls. d. does not trade with other nations. +

7. + 8. + An increase in the value of the U.S. dollar relative to the Japanese yen will a. increase aggregate demand in the United States. b. decrease aggregate supply in the United States. c. increase aggregate demand in Japan. d. increase aggregate supply in Japan. An appreciation of the Japanese yen relative to the U.S. dolla r will a. increase aggregate demand in the United States. b. increase aggregate supply in the United States. c. increase aggregate demand in Japan. d. decrease aggregate supply in Japan. If a currency depreciates, a country net exports s a. fall and AD increases. b. rise and AD increases. c. fall and AD decreases. d. ri se and AD decreases. An increase in the price level in the economies of U.S. tra ding partners will cause the aggregate expenditures function in the United State s to a. shift up. b. shift down. c. get flatter. d. get steeper. An increase in the U.S. price level relative to the price level of U.S. trading partners will c ause the aggregate expenditures function in the United States to a. shift up. b. shift down. c. get flatter. d. get steeper. 9. + 10. + 11. +

Figure 18-2 12. + Which of the following explains the movements in Figure 18-2? a. an increase in the U.S. price level b. a decrease in the U.S. price level c. an appreciation of the U.S. dollar d. an expansionary monetary policy Which of the following expla ins the movements in Figure 18-2? a. an increase in U.S. imports b. a decrease i n U.S. exports c. an increase in U.S. exports d. a decrease in U.S. net exports If Mexico experiences a period of stable prices while the United States experien ces rapid inflation, what will happen in Mexico? a. an increase in aggregate sup ply b. a decrease in aggregate supply c. a decrease in aggregate demand d. an in crease in aggregate demand 13. + 14. + Figure 18-3

15. + Which of the situations illustrated in Figure 18-3 shows the effects of a curren cy appreciation leading to a recession? a. 1 b. 2 c. 3 d. 4 Which of the situati ons illustrated in Figure 18-3 shows the effects of a currency appreciation lead ing to real GDP growth? a. 1 b. 2 c. 3 d. 4 When the U.S. dollar appreciates, a. U.S. exports rise. b. U.S. imports decline. c. aggregate demand shifts inward. d. aggregate demand shifts outward. d. Japanese net exports to increase. What ef fect did the increase in the value of the dollar have on the U.S. trade deficit in the period from 1997 to 2000? a. It decreased the trade deficit as Americans bought more U.S. capital goods. b. It decreased the trade deficit as foreigners were attracted to the increased value of U.S. products. c. It increased the trad e deficit as U.S. investors bought more domestic financial assets. d. It increas ed the trade deficit as Americans bought more imports and foreigners bought fewe r U.S. products. 16. + 17. + 18. + AGGREGATE SUPPLY IN AN OPEN ECONOMY 19. + In an open economy, aggregate supply consists of domestic production a. plus imp orts. b. plus exports. c. minus imports. d. minus exports. If the dollar rises i n value compared to other currencies, what will happen in the United States? a. an increase in aggregate demand b. an increase in aggregate supply c. a decrease in aggregate supply d. an increase in the U.S. price level When the dollar depr eciates, the prices of imported inputs a. fall and aggregate supply shifts outwa rd. b. fall and aggregate supply shifts inward. c. rise and aggregate supply shi fts outward. d. rise and aggregate supply shifts inward. 20. + 21. +

22. + When the dollar appreciates, the prices of imported inputs a. fall and aggregate supply shifts outward. b. fall and aggregate supply shifts inward. c. rise and aggregate supply shifts outward. d. rise and aggregate supply shifts inward. The main input into the production of Starbuck coffee is imported coffee beans. If t he s dollar depreciates, how will this affect the U.S. retail coffee market? a. Input prices will fall and supply will decrease. b. Input prices will fall and s upply will increase. c. Input prices will rise and supply will decrease. d. Inpu t prices will rise and supply will increase. 23. + THE MACROECONOMIC EFFECTS OF EXCHANGE RATES 24. + 25. A currency appreciation should a. reduce net exports and therefore increase aggr egate demand. b. raise net exports and therefore decrease aggregate demand. c. r educe net exports and therefore decrease aggregate demand. d. raise net exports and therefore increase aggregate demand. What are the economic effects of a curr ency depreciation? a. It will decrease aggregate demand and aggregate supply, so that output will certainly fall, and prices may fall as well. b. It will increa se aggregate demand and aggregate supply, so that output will certainly rise, an d prices may rise as well. c. It will increase aggregate demand and decrease agg regate supply, so that prices will certainly rise and output may rise as well. d . It will decrease aggregate demand and increase aggregate supply, so that price s will certainly fall and output may fall as well. Following the economic crisis in 1994-1995, the Mexican peso fell sharply in value. What will be the main eco nomic effects in Mexico of such an exchange rate change? a. It will decrease agg regate demand and aggregate supply, so that output will certainly fall, and pric es may fall as well. b. It will increase aggregate demand and aggregate supply, so that output will certainly rise, and prices may rise as well. c. It will incr ease aggregate demand and decrease aggregate supply, so that prices will certain ly rise and output may rise as well. d. It will decrease aggregate demand and in crease aggregate supply, so that prices will certainly fall and output may fall as well. The principal danger to Japan in 2001 when the yen was appreciating was that this would a. increase aggregate demand and make inflation worse. b. decre ase aggregate demand and make the recession worse. c. decrease aggregate demand and make inflation worse. d. increase aggregate demand and make the recession wo rse. + 26. + 27. +

28. + If U.S. interest rates rise while foreign interest rates remain unchanged, a. GD P will not change since the shift in aggregate supply cancels the positive effec ts on aggregate demand. b. the dollar will depreciate and thus reduce prices and output. c. foreign capital will be attracted to the United States and the dolla r will appreciate. d. net exports will increase and the economy will expand. Figure 18-5 29. + 30. Which of the graphs in Figure 18-5 are consistent with an appreciation of the U. S. dollar caused by an increase in U.S. interest rates? a. 1 b. 2 c. 3 d. 4 Whic h of the graphs in Figure 18-5 are consistent with a depreciation of the U.S. do llar and an increase in net exports caused by a decrease in U.S. interest rates? a. 1 b. 2 c. 3 d. 4 + FISCAL AND MONETARY POLICIES IN AN OPEN ECONOMY 31. + 32. + A rise in the domestic interest rate leads to capital a. outflows and exchange r ate appreciation. b. outflows and exchange rate depreciation. c. inflows and exc hange rate depreciation. d. inflows and exchange rate appreciation. A currency a ppreciation a. reduces aggregate demand and increases aggregate supply. b. reduc es aggregate demand and aggregate supply. c. increases aggregate demand and redu ces aggregate supply. d. increases aggregate demand and aggregate supply.

33. + Expansionary fiscal policy in an open economy a. leads to a balance of trade sur plus. b. decreases America capital account surplus and the current account defici t by the s same amount. c. increases both America capital account surplus and cur rent account deficit by equal s amounts. d. increases America capital account sur plus more than it increases the current account s deficit. International trade t ends to lower the value of the multiplier because a. imports fall as GDP increas es. b. net exports fall as GDP increases. c. net exports tend to rise as GDP inc reases. d. exports fall as GDP increases. In an open economy, an increase in (G T) will a. decrease (X IM). b. increase (X IM). c. leave (X IM) unchanged. d. ha ve an unpredictable effect on (X IM). An expansionary fiscal policy will lead to a. higher interest rates, an appreciated dollar, and reduced net exports. b. hi gher interest rates, an appreciated dollar, and increased net exports. c. reduce d interest rates, an appreciated dollar, and reduced net exports. d. reduced int erest rates, an appreciated dollar, and increased net exports. International cap ital flows in an open economy have the effect of a. increasing the power of fisc al policy. b. reducing the power of fiscal policy. c. reducing the power of fisc al policy in an expansion, and increasing it in a contraction. d. increasing the power of fiscal policy in an expansion, and reducing it in a contraction. If a country tries to stimulate the economy with fiscal policy, the effects will be e xchange rate a. depreciation, lower interest rates, and a small increase in aggr egate demand. b. depreciation, higher interest rates, and a small decrease in ag gregate demand. c. appreciation, lower interest rates, and a small increase in a ggregate demand. d. appreciation, higher interest rates, and a small increase in aggregate demand. Why is fiscal policy less effective in an open economy than i n a closed economy? a. Expansionary fiscal policy raises demand for imports, whi ch reduces aggregate demand. b. Expansionary fiscal policy raises interest rates , which raises the value of the currency, and reduces aggregate demand. c. Expan sionary fiscal policy raises the value of the currency, which reduces demand for exports. d. Expansionary fiscal policy has all the above effects. International capital flows strengthen a. monetary policy and have no effect on fiscal policy . b. monetary policy but weaken fiscal policy. c. monetary and fiscal policy. d. fiscal policy but weaken monetary policy. 34. + 35. + 37. + 38. + 39. + 40. + 41. +

42. + 43. The sequence of events following a contractionary monetary policy would be highe r interest rates followed by dollar a. depreciation, higher exports, and lower i mports. b. depreciation, lower exports, and higher imports. c. appreciation, low er exports, and higher imports. d. appreciation, higher exports, and lower impor ts. The dramatic rise in the dollar between 1981 and 1986 was the result of a(n) a. a tight monetary and a tight fiscal policy. b. an expansive monetary and an expansive fiscal policy. c. an expansive monetary and a tight fiscal policy. d. a tight monetary and an expansive fiscal policy. +

Economics 101. Second Exam. Fall 2008 Section I: Multiple-Choice Questions (75 p oints) Each question has only one answer that is most appropriate. Choose the mo st appropriate answer and bubble it in in the scantron. Each question carries th e same weight. There is no partial credit to an incorrect answer. 1. The income elasticity of demand for luxuries tends to be a. greater than 1. b. less than 1. c. equal to 1. d. equal to 0. Demand for a good would tend to be more inelastic the a. fewer the available substitutes. b. longer the time period considered. c . more the good is considered a luxury good. d. more narrowly defined the market is. A 2. A 3. Suppose the price of Twinkies is reduced from $1.50 to $1.25 and, as a result, t he quantity of Twinkies demanded increases from 2,000 to 2,200. The price elasti city of demand for Twinkies in the given price range is approximately a. 2.00. b . 0.60. B c. 1.00. d. 1.64.

The next four questions are based on the following diagram: 4. According to the graph, the price elasticity of demand from point B to point A w ould be a. 1. b. 1.5. c. 1.33. C d. 2.5. According to the graph, the price elast icity of demand from point C to point B would be a. 0.5. b. 0.40. B c. 1.33. d. 1.45. According to the graph, if the price decreased from $18 to $12, what would happen to total revenue? a. Total revenue would increase by $1200 and demand wo uld be elastic. b. Total revenue would increase by $1800 and demand would be ela stic. B c. Total revenue would decrease by $1200 and demand would be inelastic. d. Total revenue would decrease by $800 and demand would be inelastic. A produce r is currently charging a price of $12. If he wants to raise the price a. his re venue will decrease, since he is operating in the low-elasticity zone. b. his re venue will increase, since he is operation in the low-elasticity zone. c. his re venue will decrease, since he is operating in the high-elasticity zone. d. his r evenue will increase, since he is operating in the high-elasticity zone. 5. 6. 7. C 2

The next three questions are based on the following table: Income Quantity of Go od X Purchased 2 5 Quantity of Good Y Purchased 20 10 $30,000 (old) $40,000 (new) 8. According to the table, using the midpoint method, what is the income elasticity of good Y? a. 3.33 b. 2.33 B c. -1.50 d. 2.33 According to the table, Good X is a . a luxury good. b. an inferior good. c. underpriced. d. a normal good. A 9. 10. According to the table, Good Y is a. not related to income. b. an inferior g ood. c. price inelastic. d. a normal good. B 11. A minimum wage imposed above a markets equilibrium wage will result in the qu antity a. supplied of labor being greater than the quantity demanded of labor an d unemployment will occur. A b. demanded of labor being greater than the quantit y supplied of labor and unemployment will occur. c. supplied of labor being grea ter than the quantity demanded of labor and a shortage of workers will occur. d. demanded of labor being greater than the quantity supplied of labor and a short age of workers will occur. 3

The next three questions are based on the diagram below: 12. According to the graph, the amount of the TOTAL tax imposed in this market i s a. $50.00. b. $75.00. c. $125.00. d. $150.00. D 13. According to the graph, the amount of the TOTAL tax that buyers and sellers would pay would be, respectively, a. $100.00 and $100.00. b. $100.00 and $50.00. B c. $50.00 and $200.00. d. $100.00 and $300.00. 14. In the above diagram, befo re the tax is imposed, pick the most appropriate answer from below: a. A price c eiling of $7 is binding in this market and that price will create shortage. b. A price floor of $7 is binding in this market and that price will create excess i n the market. B c. A price ceiling of $7 is binding in this market and that pric e will create excess. d. A price floor of $7 is binding in this market and that price will create shortage in the market. 15. Which of the following is NOT a re sult of government imposed rent controls? a. fewer new apartments offered for re nt b. less maintenance provided by landlords c. bribery d. higher quality housin g D 4

Following is Andys maximum valuation of burgers: First burger: $6.00 Second burge r: Third burger: $2.00 Fourth burger: $4.00 $0.00 Following is Barbaras minimum cost of producing burgers: First burger: $1.00 Seco nd burger: Third burger: $3.50 Fourth burger: $2.00 $5.00 Based on the above information, answer the following five questions: 16. If the price of a burger is set at $3.00, the consumer surplus that Andy will have is a . $1.00 b. $2.00 c. $3.00 d. $4.00 D 17. If the price of the burger is set at $2 .00, the producer surplus that Barbara will have is a. $1.00 A b. $2.00 c. $3.00 d. $4.00 18. The market-clearing number of burgers and the market-clearing price per burg er in this market are, respectively, a. Three burgers at the price of $4.00. b. Four burgers at the price of $2.00. C c. Two burgers at the price of $3.00. d. T hree burgers at the price of $3.00. 19. At the market clearing price the TOTAL s urplus would be a. $5.00 b. $6.00 c. $7.00 d. $8.00 C 20. Barbara has a strong lobby in the government circle and manages to get a pri ce floor established at $4.00. Pick the most appropriate answers from the follow ing: a. The price floor is not binding and the market clearing price and quantit y still prevail. b. The price floor is binding but Andy will demand 3 burgers, w hile Barbara will produce 2 burgers, and so there will be shortage of burgers in the market. c. The price floor is binding but Andy will demand 2 burgers, while Barbara will produce 3 burgers, and so there will be excess burgers in the mark et. C d. The price floor is binding but Andy will demand 3 burgers, while Barbar a will produce 3 burgers, and so there will be no shortage or excess of burgers in the market. 5

21. When dealing with externalities, government a. can correct the market failur e only in the case of positive externalities. b. can correct the market failure only in the case of negative externalities. c. can correct the market failure in both the positive and negative externalities by inducing market participants to internalize the externality. C d. cannot correct for externalities due to consu mer rights laws. 22. Private markets fail to reach a socially optimal level when negative externalities are present because. a. private benefit equals social be nefit at the private market solution. b. private costs exceed private benefits a t the private market solution. c. social cost exceeds private cost at the privat e market solution. C d. private costs exceed social cost at the private market s olution. 23. According to the Coase theorem, private parties can solve the probl em of externalities if A a. the cost of bargaining is small. b. the initial dist ribution of rights favors the person being adversely affected by the externality . c. the number of parties involved is sufficiently large. d. All of the above a re correct. 24. When goods are not excludable a. the good will be produced as a private good but not as a public good. b. the good will not be produced since no one values it. c. the free-rider problem prevents the private market from suppl ying them. d. everyone can have all they want and the good will have a zero pric e. 25. Basic research is a public good because it a. is difficult to exclude tho se who might benefit from it. b. is used to develop public goods. c. always bene fits developed countries at the expense of developing countries. d. is a rival g ood. C A 6

Section II: Short Answer Type Questions (25 points) 1. Consider the market for gasoline. Suppose crude oil, which is an input to gas oline, suddenly becomes expensive. a. Draw a diagram showing the gasoline market supply and demand before crude oil price rise. b. Suppose crude oil price rises . Which curve will shift as a result of that? In the same diagram show the effec t by shifting the appropriate curve after the crude oil price rise. c. Show the appropriate triangle representing consumer surplus before tax by labeling the th ree corners of the triangle, for example the triangle ABC. d.Show the appropriat e triangle representing consumer surplus after tax by labeling the three corners of the triangle, for example the triangle ABC. e. Show the appropriate triangle representing producer surplus before tax by labeling the three corners of the t riangle, for example the triangle ABC. f. Show the appropriate triangle represen ting producer surplus after tax by labeling the three corners of the triangle, f or example the triangle ABC. ANSWER NEXT PAGE 7

$ S-after S-before A P- after P-before B C G D E F D Q Q-after Q-before CS (before) = A + B + D + E CS (after) = A PS (before) = C + F + G PS (after) = B + C 8

U NIVERSITY OF E SSEX D EPARTMENT OF E CONOMICS EC372 Economics of Bond and Derivatives Markets Multiple Choice Test May 2006 Time allowed: 40 minutes. There are TWENTY questions, ALL of which should be ans wered. DO NOT START UNTIL YOU ARE INSTRUCTED TO BEGIN. Enter your registration n umber on the answer sheet. For each question, mark the most appropriate option, A, B, C, or D, on the answer sheet. Calculators (hand held, containing no textua l information) are permitted. Only the answer sheet is to be returned. You shoul d keep the question paper (this document). The purpose of the test is solely for mative for students to gauge their understanding of the course material. The mar k will carry no weight in your overall result for the course.

1. A bond with face value $100 will mature one year from the present at which ti me the holder will receive the face value plus a coupon of $32. A. If todays mark et price for the bond equals $120, the bonds spot yield is 5%. B. If todays market price for the bond equals $115, the bonds spot yield is 15%. C. If todays market price for the bond equals $120, the spot bonds yield is 10%. D. If todays market p rice for the bond is less than $132, there must be an arbitrage opportunity. 2. A coupon-paying bond will mature 4 years from the present. Its yield to maturity measures: A. The rate of return guaranteed to an investor who holds the bond un til it matures. B. The net present value of the bonds stream of coupons and its f ace value. C. The net present value of the bonds stream of coupons excluding its face value. D. The net present value of the bonds face value excluding the coupon s. 3. A bond promises to pay a coupon of $20 at the end of each of the next two years, together with payment of its face value of $100 at the end of the second year. The bonds yield to maturity is 5%. The Macaulay duration of the bond is: A. Less than its time to maturity (2 years). B. Greater than its time to maturity (2 years). C. Equal to its coupon rate (20/100 = 20%). D. Always less than its y ield to maturity (5%). 4. Two zero-coupon bonds each have face value $100 but on e matures three years from today and the other four years from today. The curren t market price of each three-year bond equals $84, while that for each four-year bond equals $80. A. The spot yield on four-year bonds equals 4%. B. The spot yi eld on three-year bonds equals 8%. C. The implicit forward rate between years th ree and four equals 8%. D. The implicit forward rate between years three and fou r equals 5%. 1

5. It is observed that the yield curve is positively sloped. A. The observation implies that interest rates will increase over the next few years. B. The observ ation implies that interest rates will decrease over the next few years. C. The observation is compatible with the pure expectations hypothesis of the term stru cture. D. The observation is incompatible with the liquidity preference (risk pr emium) theory of the term structure. 6. A forward contract is made for the deliv ery of a commodity 10 months from today at a forward price of $200 per unit of t he commodity. Futures contracts for the same commodity and delivery date are als o available. A. The purchaser of the forward contract pays the forward price, $2 00, immediately but must wait for 10 months to receive the commodity. B. The hol der of a forward contract always has the right to exchange it for an identical f utures contract at any time before the delivery date. C. The seller of the forwa rd contract has an obligation to deliver the commodity 10 months from today in r eturn for the spot (cash) price on the delivery date (i.e., a price that may dif fer from $200). D. The seller of the forward contract has an obligation to deliv er the commodity 10 months from today in return for $200 per unit, payable on de livery. 7. The main difference between forward and futures contracts is: A. Futu res contracts are traded every day (i.e., frequently) in organised exchanges pri or to the delivery date speci ed in the contract. B. For a futures contract there is never any obligation to deliver, or to receive, the underlying asset. C. Forw ard contracts always have delivery dates further from the present than futures c ontracts. D. The underlying assets in forward contracts are always physical comm odities (e.g., wheat, oil or silver), while for futures contracts the underlying assets could be anything (e.g. weather indices or notional bank deposits). 2

8. The process of marking to market in futures markets: A. Refers to the mechanism by which gains (or losses) resulting from changes in futures prices are credite d (or debited) to the investors margin account B. Implies that the futures price can change (increase or decrease) at most once each trading day. C. Refers to th e gain or loss that an investor makes on the day that a futures position is offs et (i.e. closed-out), rather than being kept open to the next trading day (or lo nger). D. Refers to changes in the spot price of the underlying asset that occur in response to changes in the futures contract price. 9. At the end of trading on 9th February 2006 the open interest equalled 65889 contracts for Wheat future s with delivery in July 2006 (at the Chicago Board of Trade). A. The open intere st refers to the volume of wheat stocks held in warehouses on 9th February inten ded for delivery in July. B. The open interest refers to markets expectation of t he volume of wheat stocks that will be held in warehouses immediately before del ivery in July. C. As of 9th February, there were 65889 contracts in existence (i .e., outstanding) promising to deliver wheat in July 2006. D. During trading on 9th February 65889 contracts were exchanged (i.e., purchased and sold) promising to deliver wheat in July 2006. 10. Investor XYZ takes a short position in 20 fu tures contracts at a price of $500 per contract. A. If the futures contract pric e rises from $500 to $510 per contract, marking-tomarket increases by $200 the f unds in the XYZs margin account. B. If XYZ holds the contracts until the delivery date, XYZ will be required to take delivery of (i.e., receive) the underlying c ommodity (asset) in return for the spot (cash) price of the commodity at the del ivery date. C. If XYZ offsets the position when the contract price has increased to $530, XYZ will make a pro t of $600 (ignoring transaction costs). D. If XYZ of fsets the position when the contract price has fallen to $480, the result will b e a gain of $400 (ignoring transaction costs). 3

11. Investor NPQ takes a long position in 5 futures contracts at a price of $300 per contract. The initial margin is $100 per contract, the maintenance margin i s $80 per contract, and, if a margin call is made, the margin must be restored t o its initial level. Assume that no interest is paid on margin account balances. A. An increase $10 in the contract price of will reduce the margin account bala nce by $50. B. If NPQ offsets the position when the contract price equals $260 p er contract, the margin account will re ect a loss of $200 (ignoring transaction c osts). C. If NPQ offsets the position when the contract price equals $320 per co ntract, the margin account will re ect a loss of $100 (ignoring transaction costs) . D. Suppose that the margin account balance equals $440. An increase of $20 in the contract price will trigger a margin call for $60. 12. Suppose that: (i) the spot price of wheat today is $10.00 per bushel, (ii) markets are frictionless, (iii) the interest factor for borrowing and lending over the next six months is 1.10, and (iv) the convenience yield for holding wheat is zero. Arbitrage opport unities are absent. A. The forward price for wheat will be equal to $11.00 if wh eat is available for storage at zero cost. B. The forward price for wheat will b e less than $10.00 if wheat is available for storage at zero cost. C. The forwar d price for wheat will equal $10.90 if wheat is available for storage at $0.90 p er bushel (payable upon delivery, in six months). D. The forward price for wheat will equal $9.10 if wheat is available for storage at $0.90 per bushel (payable upon delivery, in six months). 13. The Exchange Delivery Settlement Price (EDSP ) in futures markets. A. The EDSP is the price of the underlying asset used to s ettle each Exchange of Futures for Physicals (EFP) prior to (i.e., before) the d elivery date for the futures contract. B. The EDSP is an average of the futures prices calculated each trading day during the life of the futures contract (so t hat the EDSP normally changes from day to day). C. For each day during the life of a futures contract the EDSP is the price that is used when contracts are marke d-to-market. D. The EDSP is the price of the asset underlying the futures contrac t as at the delivery date speci ed in the contract. 4

14. An investor chooses a short-hedging strategy using a futures contract. A. Th e purpose of the strategy to pro t from an expected increase in the futures price between today and the date when the contract is sold (i.e., offset). B. The purp ose of the strategy to pro t from an expected decrease in the futures price betwee n today and the date when the contract is purchased (i.e., offset). C. The inves tor seeks to reduce the uncertainty about the price at which an asset (e.g. a co mmodity or a security) is to be purchased at a later date. D. The investor seeks to reduce the uncertainty about the price at which an asset (e.g. a commodity o r a security) is to be sold at a later date. 15. Normal backwardation in futures markets. A. Normal backwardation refers to the prediction that the futures pric e, f (t, T ), tends to be lower than E[p(T ), t )] (todays expectation of the sp ot price that will be observed on the futures delivery date). B. Normal backwarda tion refers to the prediction that futures prices usually fall as the delivery d ate approaches, so that f (T, T ) f (t, T ) for t < T . C. A normal backwardatio n is said to occur when todays futures price exceeds todays spot price for the ass et underlying the futures contract i.e., f (t, T ) > p(t). D. Normal backwardati on is a type of market manipulation in which an investor (or small group of inve stors) conspire to purchase a large proportion of all the futures contracts corr esponding to a particular delivery date. 16. A European call option on Intel ord inary shares with exercise price $10.50 per share expires on 30 June: A. Permits the option writer to sell Intel shares for $10.50 on 30 June. B. Requires the o ption writer to buy Intel shares for $10.50 any time before or on 30 June, at th e discretion of the option holder. C. Permits the option holder to buy Intel sha res for $10.50 on 30 June. D. Permits the option holder to sell Intel shares for $10.50 on 30 June. 17. An American put option on Intel ordinary shares with exe rcise price $10.50 per share expires on 30 June: A. Permits the option holder ho lder to sell Intel shares for $10.50 any time before or on 30 June. B. Permits t he option writer holder to sell Intel shares for $10.50 on 30 June. C. Requires the option writer to sell Intel shares for $10.50 on 30 June, at the discretion of the option holder. D. Requires the option holder to buy Intel shares for $10. 50 any time before or on 30 June, at the discretion of the option writer. 5

18. Both American and European style call options are traded in frictionless mar kets with the same expiry date for the same underlying asset. In the absence of arbitrage opportunities: A. The option premium for the American options always e xceeds the premium for the European options. B. The option premium for the Ameri can options will be greater than or equal to the premium for the European option s. C. The option premium for the American options will be less than or equal to the premium for the European options. D. The option premium for the American opt ions will be lower than the premium for the European options. 19. Todays price fo r a share in XYZ Inc. equals $14.00. Todays premium is $3.00 for an American call option on XYZ shares expiring three months from now, with exercise price $10.00 . Assume that markets are frictionless. A. There is an arbitrage opportunity: bu y one option and exercise it immediately. B. There is an arbitrage opportunity: buy one option and exercise it at the expiry date. C. There is an arbitrage oppo rtunity: write one option and exercise it at the expiry date. D. Abitrage opport unities are absent, because the price of XYZ shares may fall below $10.00 betwee n today and the expiry date. 20. At the expiry date for a European put option on ABC shares with exercise price $16.00, the price of a share in ABC equals $12.0 0. Assume that markets are frictionless. A. An investor who had purchased the op tion when the premium was $6.00 would allow it to die, unexercised, because ther e is a net loss of $2.00 per option. B. An investor who had purchased the option when the premium was $3.00 would nd it worthwhile to exercise the option. C. An investor who had written the option when the premium was $6.00 makes a gain of $ 10.00 per option. D. The option will be allowed to die, unexercised, no matter w hat premium had been before the expiry date. ***** 6

BUSINESS ECONOMICS CEC2 532-751 & 761 PRACTICE MACROECONOMICS MULTIPLE CHOICE QUESTIONS Warning: These questions have been posted to give you an opportunity to practice with the multiple choice format of questioning and to help you review and under stand more deeply the material taught. In no way should you assume that the leve l of difficulty of the multiple- choice questions shown here is the same as that of the questions to be given in the exam. 1. Expansionary monetary policy (a) tends to lead to an appreciation of a nation s currency. (b) usually has no effect on a currency s exchange value. (c) tends to lead to a depreciation of the currencies of other nations. (d) tends to lead to a depreciation of a nation s currency. 2. If the number of people classified as unemployed is 20,000 and the number of people classified as employed is 230, 000, what is the unemployment rate? (a) 8% (b) 8.7% (c) 9.2% (d) 11.5% 3. It is often true that as the economy begins to recover from a recession the unemployme nt rate rises. Which of the following statements would be the best explanation f or this? (a) The unemployment rate would rise because as the economy initially r ecovers from a recession the demand for goods and services falls, so the demand for workers falls. (b) As the economy begins to recover from a recession, worker s who were previously discouraged about their chances of finding a job begin to look for work again. (c) The unemployment rate seems to rise as the economy begi ns to recover from a recession because of errors in the way the data are collect ed. (d) As the economy initially recovers from a recession, firms do not immedia tely increase the number of workers they hire. Firms wait to hire more individua ls until they are convinced that the recovery is strong. 4. If an individual who cannot find a job because his or her job skills have become obsolete this

is an example of (a) frictional unemployment. (b) structural unemployment. (c) c yclical unemployment. (d) seasonal unemployment. 5. The natural rate of unemploy ment is generally thought of as the (a) ratio of the frictional unemployment rat e to the cyclical unemployment rate. (b) sum of structural unemployment and cycl ical unemployment. (c) sum of frictional unemployment and cyclical unemployment. (d) sum of frictional unemployment and structural unemployment. 6. Firms react to unplanned increases in inventories by (a) reducing output. (b) increasing out put. (c) increasing planned investment. (d) increasing consumption. 7. The ratio of the change in the equilibrium level of income to a change in some autonomous increase in spending is the (a) elasticity coefficient. (b) multiplier. (c) aut omatic stabilizer. (d) marginal propensity of the autonomous variable. 8. Banks can create money (a) only by illegally printing additional dollar bills. (b) by paying interest to their depositors. (c) by making loans that result in addition al deposits. (d) by offering financial services, such as stick market brokerage. 9. A bank has excess reserves to lend but is unable to find anyone to borrow the money. This

will __________ the size of the money multiplier. (a) reduce (b) increase (c) ha ve no effect on (d) double 10. Which of the following represents an action by th e Bank of Canada that is designed to decrease the money supply? (a) an increase in federal tax rates (b) selling government securities in the open market (c) a decrease in the Bank rate (d) a transfer of government funds from the Bank of Ca nada to private banks 11. If the interest rate falls, then (a) bond prices will remain the same (b) bond prices will rise (c) bond prices will fall 12. If the q uantity of money demanded is less than the quantity of money supplied, then the interest rate will (a) either increase or decrease, depending on the amount of e xcess demand. (b) increase. (c) decrease. (d) not change. 13. Which of the follo wing events will definitely lead to an increase in the equilibrium interest rate ? (a) a decrease in the level of output (real GDP) (b) the purchase of governmen t securities by the Bank of Canada (c) an increase in the level of output (real GDP) and an increase in the money supply (d) the sale of government securities b y the Bank of Canada 14. If the Bank of Canada reduces the money supply to reduce inflation, a flexib le exchange rate

will aid the Bank of Canada in fighting inflation because (a) as the money suppl y is decreased, the interest rate will increase, and the exchange rate will rise , causing Canadian exports to fall and Canadian imports to rise. (b) as the mone y supply is decreased, the interest rate will increase, and the exchange rate wi ll rise, causing Canadian exports to rise and Canadian imports to fall. (c) as t he money supply is decreased, the interest rate will increase, and the exchange rate will fall, causing Canadian exports to fall and Canadian imports to rise. ( d) as the money supply is decreased, the interest rate will increase, and the ex change rate will fall, causing Canadian exports to rise and Canadian imports to fall. 15. When economists refer to "tight" monetary policy, they mean that the B ank of Canada is taking actions that will (a) increase the demand for money. (b) decrease the demand for money (c) expand the supply of money (d) contract the s upply of money 16. An increase in total production (real GDP) causes the demand for money to ___________ and the interest rate to _________. (a) increase; incre ase (b) increase; decrease (c) decrease; decrease (d) decrease; increase 17. Whi ch of the following actions is an example of expansionary fiscal policy? (a) a d ecrease in welfare payments (b) a purchase of government securities in the open market (c) a decrease in the Bank rate (d) a decrease in the corporate profits t ax rates 18. The main cause of cyclical unemployment is that (a) firms engage in race, gender and sex discrimination in their hiring practices. (b) some individ uals do not have marketable job skills. (c) the level of overall economic activi ty fluctuates. (d) workers often voluntarily quit a job to look for a better job . 19. The aggregate demand (AE) curve would shift down if

(a) government spending were increased. (b) taxes were increased. (c) the money supply were increased. (d) the interest rate decreased. 20. As the economy nears full capacity, the short-run aggregate supply curve (a) becomes flatter. (b) be comes steeper. (c) shifts to the right. (d) shifts to the left. 21. If the econo my is operating at potential GDP, an increase in the money supply will lead to ( a) stagflation. (b) structural inflation. (c) demand-side inflation. (d) supplyside inflation. 22. The sale of government securities by the Bank of Canada is p redicted to a. decrease reserves of the chartered banks, and eventually lead to an expansion of the money supply. b. decrease reserves of the chartered banks, a nd eventually cause a contraction of the money supply. c. increase reserves of t he chartered banks, and eventually cause a contraction of the money supply. d. i ncrease reserves of the chartered banks, and eventually cause an expansion of th e money supply. e. none of the above. 23. To lower interest rates, the Bank of C anada could a. buy securities. b. decrease the chartered banks reserves. c. dec rease the money supply. d. raise the treasury bill rate. e. raise the reserve re quirement. 24. Suppose a Canadian firm imports $1,000 worth of bananas and sells them for $2,000. The

effect on GDP would be a. to decrease the value of GDP by $3,000. b. to increase the value of GDP by $3,000. c. to increase the value of GDP by $2,000. d. to in crease the value of GDP by $1,000. e. no effect on GDP since the bananas were pr oduced outside Canada. 25. An increase in the MPS will cause, other factors rema ining constant: (a) (b) (c) (d) a parallel shift up in the AE-function and a par allel shift up in the L-function; a rotational shift up in the AE-function and a rotational shift up in the L-function; a parallel shift down in the AE-function and a rotational shift up in the L-function; a rotational shift down in the AEfunction and a rotational shift up in the L-function; (e) a rotational shift dow n in the AS-function and a rotational shift up in the L-function. ANSERS TO QUESTIONS: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 2 3. 24. 25. d a b b d a b c a b b c d a d a d c b b c b a d d

1 Chapter 1. 1. A furniture maker currently produces 100 tables per week and sells them for a profit. She is considering expanding her operation in order to make more tables. Should she expand? a. Yes, because making tables is profitable. b. No, because she may not be able to sell the additional tables. c. It depends on the marginal cost of producing more tables and the marginal revenue she will ear n from selling more tables. d. It depends on the average cost of producing more tables and the average revenue she will earn from selling more tables. 2. The op portunity cost of an item is a. the number of hours needed to earn money to buy the item. b. what you give up to get that item. c. usually less than the dollar value of the item. d. the dollar value of the item. 3. Russell spends an hour st udying instead of playing tennis. The opportunity cost to him of studying is a. the improvement in his grades from studying for the hour. b. the improvement in his grades from studying minus the enjoyment of playing tennis. c. the enjoyment and exercise he would have received had he played tennis. d. zero. Since Russel l chose to study rather than to play tennis, the value of studying must have bee n greater than the value of playing tennis. 4. A rational decisionmaker a. ignor es marginal changes and focuses instead on the big picture. b. ignores the likely effects of government policies when he or she makes choices. c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that ac tion. d. takes an action only if the combined benefits of that action and previo us actions exceed the combined costs of that action and previous actions. 5. Ter esa eats three oranges during a particular day. The marginal benefit she enjoys from eating the third orange a. can be thought of as the total benefit Teresa en joys by eating three oranges minus the total benefit she would have enjoyed by e ating just the first two oranges. b. determines Teresas willingness to pay for th e first, second, and third oranges. c. does not depend on how many oranges Teres a has already eaten. d. All of the above are correct.

2 6. People are willing to pay more for a diamond than for a bottle of water becau se a. the marginal cost of producing an extra diamond far exceeds the marginal c ost of producing an extra bottle of water. b. the marginal benefit of an extra d iamond far exceeds the marginal benefit of an extra bottle of water. c. producer s of diamonds have a much greater ability to manipulate diamond prices than prod ucers of water have to manipulate water prices. d. water prices are held artific ially low by governments, since water is necessary for life. 7. The principle th at "trade can make everyone better off" applies to interactions and trade betwee n a. families. b. states within the United States. c. nations. d. All of the abo ve are correct. 8. Which of the following statements does not apply to a market economy? a. Firms decide whom to hire and what to produce. b. No one is looking out for the economic well-being of society as a whole. c. Households decide whic h firms to work for and what to buy with their incomes. d. Government policies a re the primary forces that guide the decisions of firms and households. 9. The " invisible hand" directs economic activity through a. advertising. b. prices. c. central planning. d. government regulations. 10. The basic principles of economi cs suggest that a. markets are seldom, if ever, a good way to organize economic activity. b. government should become involved in markets when trade between cou ntries is involved. c. government should become involved in markets when those m arkets fail to produce efficient or equitable outcomes. d. All of the above are correct. ANSWERS: CBCCA BDDBC

3 Chapter 2. 1. An economic theory about international trade that is based on the assumption that there are only two countries and two goods a. can be useful in h elping economists understand the complex world of international trade involving many countries and many goods. b. is useless, since the real world has many coun tries trading many goods. c. can be useful only in situations involving two coun tries and two goods. d. can be useful in the classroom, but is useless in the re al world. 2. A model can be accurately described as a a. theoretical abstraction with very little value. b. device that is useful only to the persons who create d it. c. realistic and carefully constructed theory. d. simplification of realit y. 3. The two loops in the circular-flow diagram represent a. (i) the flow of go ods and (ii) the flow of services. b. (i) the flow of dollars and (ii) other fin ancial flows. c. (i) inputs into production processes and (ii) outputs from prod uction processes. d. (i) the flows of inputs and outputs and (ii) the flow of do llars. 4. In the circular-flow diagram, a. factors of production flow from gover nment to firms. b. goods and services flow from households to firms. c. income p aid to the factors of production flows from firms to households. d. spending on goods and services flows from firms to households. 5. If an economy is producing efficiently, then a. there is no way to produce more of one good without produc ing less of another good. b. it is possible to produce more of both goods withou t increasing the quantities of inputs that are being used. c. it is possible to produce more of one good without producing less of the other. d. it is not possi ble to produce more of any good at any cost. 6. The bowed-out shape of the produ ction possibilities frontier can be explained by the fact that a. scarcity is a fact of life. b. economic growth is always occurring. c. the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing. d. an assumption that is made in constructing a production possibilit ies frontier is that tradeoffs are unimportant.

4 7. 1 ) If the economy moves from point A to point D, the opportunity cost is a. 10 toasters. b. 20 toasters. c. 30 toasters. d. 30 toothbrushes. 2) The opportunity cost of obtaining 15 additional toasters by moving from point D to point C is a . 10 toothbrushes. b. 20 toothbrushes. c. 30 toothbrushes. d. none of the above; the economy cannot move from point D to point C. 8. Which of the following woul d be considered a topic of study in macroeconomics? a. the effect of agricultura l price support programs on the cotton industry b. the effect on U.S. steel prod ucers of an import quota imposed on foreign steel c. the effect of an increasing inflation rate on national living standards d. the effect of an increase in the price of imported coffee beans on the U.S. coffee industry 9. Which of the foll owing is an example of a positive statement? a. Prices rise when the government prints too much money. b. If welfare payments increase, the world will be a bett er place. c. Inflation is more harmful to the economy than is unemployment. d. W hen public policies are evaluated, the benefits to the economy of improved equit y should be considered more important than the costs of reduced efficiency. ANSWERS: ADDCA C(BD)CA

5 Chapter 4. 1. The negative relationship between price and quantity demanded a. a pplies to most goods in the economy. b. is represented by a downward-sloping dem and curve. c. is referred to as the law of demand. d. All of the above are corre ct. 2. Which of the following would not be a determinant of the demand for a par ticular good? a. prices of related goods b. income c. tastes d. the prices of th e inputs used to produce the good 3. If a good is normal, then an increase in in come will result in a. an increase in the demand for the good. b. a decrease in the demand for the good. c. a movement down and to the right along the demand cu rve for the good. d. a movement up and to the left along the demand curve for th e good. 4. Currently you purchase 6 packages of hot dogs a month. You will gradu ate from college in December and you will start a new job in January. You have n o plans to purchase hot dogs in January. For you, hot dogs are a. a substitute g ood. b. a normal good. c. an inferior good. d. a law-of-demand good. 5. Suppose you like to make, from scratch, pies filled with banana cream and vanilla puddin g. You notice that the price of bananas has increased. How would this price incr ease affect your demand for vanilla pudding? a. It would decrease. b. It would i ncrease. c. It would be unaffected. d. There is insufficient information given t o answer the question. 6. What will happen in the rice market if buyers are expe cting higher rice prices in the near future? a. The demand for rice will increas e. b. The demand for rice will decrease. c. The demand for rice will be unaffect ed. d. The supply of rice will increase.

6 7. Which of the following events would cause a movement upward and to the right along the supply curve for tomatoes? a. The number of sellers of tomatoes increa ses. b. There is an advance in technology that reduces the cost of producing tom atoes. c. The price of fertilizer decreases, and fertilizer is an input in the p roduction of tomatoes. d. The price of tomatoes rises. 8. Suppose there is an in crease in steel prices. We would expect the supply curve for steel barrels a. to shift rightward. b. to shift leftward. c. to become flatter. d. to remain uncha nged. 9. When the price of a good is higher than the equilibrium price, a. a sho rtage will exist. b. buyers desire to purchase more than is produced. c. sellers desire to produce and sell more than buyers wish to purchase. d. quantity deman ded exceeds quantity supplied. 10. Good X and good Y are substitutes. If the pri ce of good Y increases, then the a. demand for good X will decrease. b. market p rice of good X will decrease. c. demand for good X will increase. d. quantity de manded of good X will increase. 11. Beef is a normal good. You observe that both the equilibrium price and quantity of beef have fallen over time. Which of the following explanations would be most consistent with this observation? a. Consum ers have experienced an increase in income and beef-production technology has im proved. b. The price of chicken has risen and the price of steak sauce has falle n. c. New medical evidence has been released that indicates a negative correlati on between a persons beef consumption and his or her longevity. d. The demand cur ve for beef must be positively sloped. 12. Which of the following events would c ause the price of oranges to fall? a. There is a shortage of oranges. b. An arti cle is published in which it is claimed that tangerines cause a serious disease, and oranges and tangerines are substitutes. c. The price of land throughout Flo rida decreases, and Florida produces a significant proportion of the nations oran ges. d. All of the above are correct. ANSWERS: DDACA ADBCC CC

7 Chapter 5 1. For a good that is a necessity, a. quantity demanded tends to respo nd substantially to a change in price. b. demand tends to be inelastic. c. the l aw of demand often does not apply. d. All of the above are correct. 2. If the pr ice elasticity of demand for a good is 1.65, then a 3 percent decrease in price results in a a. 0.55 percent increase in the quantity demanded. b. 1.82 percent increase in the quantity demanded. c. 4.95 percent increase in the quantity dema nded. d. 5.55 percent increase in the quantity demanded. 3. When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the pric e elasticity of demand is about a. 0.22. b. 0.67. c. 1.33. d. 1.50. 4. Demand is inelastic if elasticity is a. less than 1. b. equal to 1. c. greater than 1. d. equal to 0. 5. The flatter the demand curve through a given point, the a. great er the price elasticity of demand at that point. b. smaller the price elasticity of demand at that point. c. closer the price elasticity of demand will be to th e slope of the curve. d. greater the absolute value of the change in total reven ue when there is a movement from that point upward and to the left along the dem and curve. 6. In the case of perfectly inelastic demand, a. the change in quanti ty demanded equals the change in price. b. the percentage change in quantity dem anded equals the percentage change in price. c. infinitely-large changes in quan tity demanded result from very small changes in the price. d. quantity demanded stays the same whenever price changes. 7. Suppose the point (Q = 2,000, P = $60) is the midpoint on a certain downward-sloping, linear demand curve. Then

8 a. an increase in price from $40 to $42 will increase total revenue. b. a decrea se in price from $61 to $59 will leave total revenue unchanged. c. the maximum v alue of total revenue is $120,000. d. All of the above are correct. 8. If the pr ice elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of t una will decrease the quantity demanded of tuna by a. 1.05% and tuna sellers to tal revenue will increase as a result. b. 1.05% and tuna sellers total revenue will decrease as a result. c. 2.14% and tuna sellers total revenue will increas e as a result. d. 2.14% and tuna sellers total revenue will decrease as a resul t. 9. If a 6 percent increase in income results in a 10 percent increase in the quantity demanded of pizza, then the income elasticity of demand for pizza is a. negative and therefore pizza is an normal good. b. negative and therefore pizza is a inferior good. c. positive and therefore pizza is an inferior good. d. pos itive and therefore pizza is a normal good. 10. Which of the following expressio ns represents a cross-price elasticity of demand? a. percentage change in quanti ty demanded of apples divided by percentage change in quantity supplied of apple s b. percentage change in quantity demanded of apples divided by percentage chan ge in price of pears c. percentage change in price of apples divided by percenta ge change in quantity demanded of apples d. percentage change in quantity demand ed of apples divided by percentage change in income ANSWERS: BCBAA DDADB