Macroeconomics, 3e (Williamson)

Chapter 13

International Trade in Goods and Assets

1)

A small open economy is an economy

A)

in which both imports and exports are less than 5% of GDP.

B)

whose firms and consumers are individually, but not collectively price takers.
C)

whose firms and consumers are collectively, but not individually price takers.
D)

whose firms and consumers are individually and collectively price takers.
Answer:

D
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2)

In an open, two-good economy in a two-good world, the relative price of one good in terms of the other is
called the
A)

relative advantage.
B)

absolute advantage.
C)

terms of trade.
D)
international purchasing price index.
Answer:

C
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3)

Which of the following pairs of terms can be used interchangeably?

A)

the terms of trade and comparative advantage

B)

comparative advantage and purchasing power parity

C)

purchasing power parity and the real exchange rate

D)

the real exchange rate and the terms of trade

Answer:

D
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4)

In a two-good economy, the production possibilities frontier is

A)

concave because the marginal rate of transformation increases as we move down the PPF.
B)

concave because the marginal rate of transformation decreases as we move down the PPF.
C)

convex because the marginal rate of transformation increases as we move down the PPF.
D)
convex because the marginal rate of transformation decreases as we move down the PPF.
Answer:

A
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5)

Comparative advantage is determined by the

A)

slope of the representative consumer's indifference curve.

B)

slope of the country's production possibilities frontier.

C)

curvature of the representative consumer's indifference curve.

D)

curvature of the country's production possibilities frontier.

Answer:

B
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 6)

In a competitive, one-period, two-good economy without trade

A)

the marginal rate of substitution equals the marginal rate of transformation.

B)

the marginal rate of substitution equals the real interest rate.

C)

the marginal rate of transformation equals the real interest rate.

D)

all of the above are true.

Answer:

A
Question Status:

New

7)

Once an economy opens to trade

A)

the production mix stays the same.

B)

the firm obtains monopoly power.

C)

the firm produces more of all goods.

D)

the household consumes a preferred bundle of goods.

Answer:

D
Question Status:

New
 8)

Once an economy opens to trade

A)

both economies lose.

B)

the economy with the higher terms of trade loses.

C)

the economy with the lower terms of trade loses.

D)

no economy loses.
Answer:

D
Question Status:

New

9)

Comparative advantage means that

A)

the economy produces more with trade because it is better at everything.

B)

the terms of trade are invariant to conditions inside the small open economy.
C)

the economy specializes in what it is good at producing.

D)

there is no free lunch.

Answer:

C
Question Status:

New
 10)

The terms of trade move in favor of a country when the

A)

absolute price of imports decreases.

B)

absolute price of exports increases.

C)

relative price of imports increases.

D)

relative price of imports decreases.

Answer:

D
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11)

The real exchange moves in favor of a country when the

A)

absolute price of imports decreases.

B)

absolute price of exports increases.

C)

relative price of exports increases.

D)

relative price of exports decreases.

Answer:

C
Question Status:

New
 12)

In a two-good, one-period model, when the terms of trade move in your favor
A)

exports unambiguously increase and imports unambiguously decrease.

B)

exports unambiguously increase and the effect on imports is uncertain.

C)

the effect on exports is uncertain and imports unambiguously decrease.

D)

the effects on both exports and imports are uncertain.

Answer:

B
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13)

To improve its terms of trade, a small open economy should

A)

produce more of every good.

B)

produce more of the exported good.

C)

produce more of the imported good.

D)

There is nothing it can do about the terms of trade.

Answer:

D
Question Status:

New
 14)

In a two-good, one-period model, when the terms of trade move against you
A)

exports unambiguously decrease and imports unambiguously increase.

B)

exports unambiguously decrease and the effect on imports is uncertain.

C)

the effect on exports is uncertain and imports unambiguously increase.

D)

the effects on both exports and imports are uncertain.

Answer:

B
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15)

In a two-good, one-period model, when the terms of trade move in your favor, the
A)

current account surplus unambiguously increases.

B)

current account balance unambiguously decreases.

C)

effect on the trade balance is uncertain.

D)

trade balance is unchanged.

Answer:

D
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 16)

In a two-good, one-period model, when the terms of trade move in your favor, the welfare of the
representative consumer
A)

unambiguously increases.
B)

unambiguously decreases.
C)

may either increase or decrease.

D)

is unchanged.
Answer:

A
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17)

According to a study by Enrique Mendoza, for all of the economies in the world, on average, terms of
trade shocks account for
A)

an imperceptible amount of the variation in real GDP.

B)

about 10% of the variation in real GDP.

C)

about 50% of the variation in real GDP.

D)

almost all of the variation in real GDP.

Answer:

C
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 18)

The current account surplus is not

A)

the trade balance.

B)

the excess of national savings over investment.

C)

private saving less government deficit.

D)

output less taxes and trade deficit.

Answer:

D
Question Status:

New

19)

In a two-good, two-period model, holding everything else constant, an increase in current-period income
A)

unambiguously increases the current account surplus.

B)

unambiguously decreases the current account surplus.

C)

has an uncertain effect on the current account surplus.

D)

has no effect on the current account surplus.

Answer:

A
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 20)

In a two-good, two-period model, holding everything else constant, an increase in government spending
A)

unambiguously increases the current account surplus.

B)

unambiguously decreases the current account surplus.

C)

has an uncertain effect on the current account surplus.

D)

has no effect on the current account surplus.

Answer:

B
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21)

In a two-good, two-period model, holding everything else constant, an increase in current taxes
A)

unambiguously increases the current account surplus.

B)

unambiguously decreases the current account surplus.

C)

has an uncertain effect on the current account surplus.

D)

has no effect on the current account surplus, as long as Ricardian equivalence holds.
Answer:

D
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 22)

In a two-good, two-period model, holding everything else constant, an increase in future taxes
A)

unambiguously increases the current account surplus.

B)

unambiguously decreases the current account surplus.

C)

has an uncertain effect on the current account surplus.

D)

has no effect on the current account surplus, as long as Ricardian equivalence holds.
Answer:

D
Question Status:

New

23)

In a two-good, two-period model, as long as wealth effects are small, an increase in the world real interest
rate
A)

increases consumption and increases the current account surplus.

B)

increases consumption and decreases the current account surplus.

C)

decreases consumption and increases the current account surplus.

D)

decreases consumption and decreases the current account surplus.

Answer:

C
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 24)

Theory predicts that current account surpluses should be ________; U.S. experience since 1970 suggests
that current account surpluses have been ________.
A)

procyclical; procyclical.
B)

procyclical; countercyclical.
C)

countercyclical; procyclical.
D)

countercyclical; countercyclical.
Answer:

B
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25)

Lack of evidence of a pattern of international consumption smoothing is best explained by

A)

government policies to fight trade deficits.

B)

the failure of consumers in less advanced economies to act rationally.

C)

a tendency for business cycles to be a worldwide phenomenon.

D)

Ricardian equivalence.
Answer:

C
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26)

The behavior of the current account deficit and the government budget deficit in the United States in the
1980s is often referred to as the
A)

interrelated deficits.
B)

Reagan deficits.
C)

twin deficits.
D)

reverse deficits.
Answer:

C
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27)

Twin deficits are

A)

the current account deficit and the trade deficit.

B)

the current account deficit and the government budget deficit.

C)

the current account deficit and the private saving deficit.

D)

the current account deficit and the future account deficit.

Answer:

B
Question Status:
New

28)

In the 1980s in the United States, the current account surplus and the government budget surplus moved
in
A)

the same direction, which is almost always the case.

B)

the same direction, which has not been typical.

C)

opposite directions, which is almost always the case.

D)

opposite directions, which has not been typical.

Answer:

B
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29)

Currently in the United States, there is

A)

a current account surplus and a government budget surplus.

B)

a current account surplus and a government budget deficit.

C)

a current account deficit and a government budget surplus.

D)

a current account deficit and a government budget deficit.

Answer:

D
Question Status:
New
 30)

Ricardian equivalence suggests that government budget deficits generated by decreases in current taxes
A)

increase the current account surplus.

B)

decrease the current account surplus.

C)

have no effect on the current account surplus.

D)

have unpredictable effects on the current account surplus.

Answer:

C
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31)

Including investment and production in the two-good, two-period model with trade
A)

allows the country to equalize absorption and output demand.

B)

renders terms of trade endogenous.

C)

allows the country to react to changes in the interest rate.

D)

allows the government to run budget deficits.

Answer:

C
Question Status:

New
 32)

In a two-good, two-period model with trade, an increase in the world real interest rate
A)

increases domestic output and increases the current account surplus.

B)

increases domestic output and decreases the current account surplus.

C)

decreases domestic output and increases the current account surplus.

D)

decreases domestic output and decreases the current account surplus.

Answer:

A
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33)

In a two-good, two-period model with trade, a temporary increase in domestic government spending
A)

increases domestic output and increases the current account surplus.

B)

increases domestic output and decreases the current account surplus.

C)

decreases domestic output and increases the current account surplus.

D)

decreases domestic output and decreases the current account surplus.

Answer:

B
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 34)

In a two-good, two-period model with trade, a permanent increase in domestic government spending
A)

increases domestic output and increases the current account surplus.

B)

increases domestic output and decreases the current account surplus.

C)

decreases domestic output and increases the current account surplus.

D)

decreases domestic output and decreases the current account surplus.

Answer:

A
Question Status:

New

35)

In a two-good, two-period model with trade, an increase in current domestic total factor productivity
A)

increases domestic output and increases the current account surplus.

B)

increases domestic output and decreases the current account surplus.

C)

decreases domestic output and increases the current account surplus.

D)

decreases domestic output and decreases the current account surplus.

Answer:

A
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 36)

In a two-good, two-period model with trade, an anticipated future increase in domestic total factor
productivity
A)

increases domestic output and increases the current account surplus.

B)

increases domestic output and decreases the current account surplus.

C)

has no effect on domestic output and increases the current account surplus.
D)

has no effect on domestic output and decreases the current account surplus.
Answer:

D
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37)

In the nineteenth century, the United States had a period of significant current account deficits, which
contributed to economic growth. These deficits most notably
A)

financed the Civil War.

B)

allowed for a substantial increase in government spending's share of GDP.

C)

financed construction of railroads.

D)

financed the development of land-grant universities.

Answer:

C
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38)

When current account deficits are used to finance investment spending, such deficits may be self-
correcting because
A)

they promote more responsible government policies.

B)

the resulting increase in the capital stock over time shifts the output supply curve to the right.
C)

the resulting increase in the capital stock over time shifts the output demand curve to the right.
D)

the resulting increase in national indebtedness increases labor demand.

Answer:

B
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