Practice 7a Money1. If inflation is running at 23% per month, what is the annual rate?a. 276%b. 400%c. 800%d. 1600%2. Which of the following is NOT one of three defining characteristics of money?a. it

Practice 7a Money

1. If inflation is running at 23% per month, what is the annual rate?

a. 276%

b. 400%

c. 800%

d. 1600%

2. Which of the following is NOT one of three defining characteristics of money?

a. it is backed by gold

b. it is a unit of account

c. it is a store of value

d. it is a medium of exchange

5. Fiscal deficits normally cause the money supply to increase

a. true

b. false

6. Fiscal deficits should be avoided because they generally lead to inflation

a. true

b. false

7. Inflation is harmful to development because

a. a 15% inflation reduces real incomes by 15%

b. inflation produces arbitrary redistributions of income and increases social tensions

c. both a and b

d. neither a nor b

8. Inflation is harmful to development because

a. chronic inflation often leads to acute or runaway inflation

b. inflation distorts the signals of the price system 

c. both a and b

d. neither a nor b

Practice 8 Ricardo model 

I strongly suggest that you form a 2x2 table with Home and Foreign across the top and Goods A and B down the side. Then you should draw the PPC’s for the two countries. I suggest that you put Good A on the horizontal axis and Good B on the vertical axis.

1. In the Ricardian model, labor is the only factor of production and we assume that labor inputs per unit of output are constant. Assume there are two goods, A and B, and two countries, United States and Mexico. The labor inputs per unit of output are as follows.

In the United States, it takes 6 hours to produce a unit of A and 3 hours to produce a unit of B. In Mexico, it takes 12 hours to produce a unit of A and 9 hours to produce a unit of B. In the United States, the opportunity cost of a unit of A is

a. half a unit of B

b. one unit of B

c. two units of B

d. three units of B

2. In Mexico, it takes 12 hours to produce a unit of A and 9 hours to produce a unit of B. In Mexico, the opportunity cost of a unit of A is

a. 0.75 units of B

b. one unit of B

c. 1.333 units of B

d. two units of B

3. In the United States, it takes 6 hours to produce a unit of A and 3 hours to produce a unit of B. In Mexico, it takes 12 hours to produce a unit of A and 9 hours to produce a unit of B. The United States has an absolute advantage in

a. A

b. B

c. both A and B

d. neither A nor B

4. In the United States, it takes 6 hours to produce a unit of A and 3 hours to produce a unit of B. In Mexico, it takes 12 hours to produce a unit of A and 9 hours to produce a unit of B. The United States has a comparative advantage in

a. A

b. B

c. both A and B

d. neither A nor B

5. In general, a country has a comparative advantage in a product if the autarky price of that product (relative to the other product) is

a. lower than in the other country

b. higher than in the other country 

(The autarky price of A is just the opportunity cost of A in terms of B.)

6. The gains from trade for a country are greater,

a. the greater the difference between the country’s autarky price and the international terms of trade

b. the smaller the difference between the country’s autarky price and the international terms of trade

7. Assume the autarky price of A is 4 in Argentina and 6 in Brazil. An acceptable terms of trade (Pa/Pb) is

a. one half

b. two thirds

c. three halves (3/2)

d. five

8. In question 7, in which product will Argentina specialize? 

9. For the data in question 7, explain why Argentina benefits from trade. Then explain why Brazil benefits from trade. 

Practice 9 Ricardo2 

1. In the Ricardian theory of comparative advantage, international trade benefits all workers

a. true

b. false

2. According to the Heckscher-Ohlin theory of comparative advantage,

a. a country will export the commodity in which it has the highest output per worker

b. a country will export the commodity that is intensive in its abundant factor

c. both a and b

d. none of the above

4. The gains from trade are greater,

a. the greater the difference between the autarky price and the terms of trade

b. the smaller the difference between the autarky price and the terms of trade

c. neither a nor b; no general statement can be made

6. In the Ricardian model, the labor requirements are as follows; in Chile; 4 hours for A, and 6 hours for B. In Peru, 5 hours for A, and 10 hours for B. The opportunity cost of A in Peru is

a. 0.50

b. 0.67

c. 1.5

d. 2.0

Practice 10 Primary Trade

1. Smaller nations generally have more to gain from international trade than larger nations because (more than one may apply)

a. their markets are more likely to be too small to take advantage of economies of scale if they don’t engage in trade

b. their markets are more likely to be too small to take advantage of learning by doing if they don’t engage in trade

c. small nations are more likely to suffer from domestic monopoly power if they don’t engage in trade

2. Which of the following goods are primary products?

a. timber b. rice c. shrimp d. copper e. natural gas f. petroleum g. cotton h. beef 

i. cell phones j. bicycles k. athletic shoes l. automobiles m. aircraft n. steel

3. Less-developed countries generally have comparative advantage in primary products rather than manufactured products for the following reasons (more than one may apply)

a. many LDCs have abundant natural resources and scarce labor and human capital

b. manufactured products require good transportation and communication infrastructure to a greater extent than primary products do

c. manufactured products require good property rights and contract enforcement to a greater extent than primary products do

d. manufactured products are generally more skill intensive than primary products

5. The Resource Curse. This term refers to the generally disappointing development experiences of resource-rich countries. In this discussion we have in mind countries rich in “non-renewable resources”, which amounts to mineral resources: copper, tin, gold, coal, iron ore, lead, zinc, and other hard minerals, and another category: oil and natural gas. We don’t have in mind countries that are rich in land, forests, and fisheries. 

a. Which countries? We look at the share in GDP of exports based on non-renewable resources, or share of fiscal revenue from such resources. When these shares are greater than 20%, we have “resource-rich countries.”

b. These non-renewable resources generate large “resource rents.” There may be substantial costs in developing these resources, but once the resource is developed and production begins, the marginal cost curve is far below the world price up to point of full capacity production.

c. Mineral and oil and gas industries typically have high ratios of physical capital to labor; in other words, these industries provide little employment per unit of output; moreover, they require some highly skilled labor, which is typically provided (initially at least) by foreigners. Thus direct employment of domestic workers is typically limited.

d. These industries have limited backward and forward linkages; the equipment is supplied from abroad, and the product is typically exported in relatively crude form.

e. The implication of the points made above is that government has a vital role to play in successful development based on non-renewable resource industries. We think government is important for development generally, but the difference is that other kinds of exports (those based on abundant labor, abundant land, high levels of skill) generate incomes in the private sector and generate linkages to the rest of the economy, so that development can take place if the government doesn’t get in the way. In the case of non-renewable resource-based exports, the revenues flow mainly through the government; government performance, therefore, is vital for development of such countries.

6. The empirical evidence shows that “resource-rich countries” (see 14a above) tend to grow more slowly than other countries.

a. true

b. false

7. Countries abundantly endowed with non-renewable natural resources tend to be poorer than other countries.

a. true

b. false

8. Which of the following linkages is (are) likely to be small in the case of a petroleum export industry?

a. forward linkage

b. backward linkage

c. consumption linkage

d. all of the above

e. none of the above

Practice 11 FE Mkt

1. Consider the supply-demand graph of an imported commodity, say textiles. Assume there is free trade. An increase in domestic income, which shifts the domestic demand for textiles to the right, will cause the domestic price to

a. rise

b. fall

c. remain the same

2. Consider the supply-demand graph of an imported commodity, say textiles. Assume there is free trade. A rise in the domestic wage rate, which shifts the domestic supply curve up, will cause the domestic price to

a. rise

b. fall

c. remain the same

3. Consider the supply-demand graph of an imported commodity, say textiles. Assume there is free trade. A rise in the domestic wage will cause the quantity of imports to

a. rise

b. fall

c. remain the same

4. Consider the supply-demand graph of an imported commodity, say textiles. Assume there is free trade. A technological improvement in the domestic textile industry, which will shift the supply curve down, will cause the level of imports to

a. rise

b. fall

c. remain the same

5. Consider the supply-demand graph of an imported commodity, say textiles. Assume there is free trade. A rise in the import price will cause domestic production of textiles to

a. rise

b. fall

c. remain the same

6. Consider the supply-demand graph of an export commodity, say copper. Assume free trade. The world price of copper is represented by a horizontal price line. A technological improvement in the copper industry, which will shift the supply curve down, will cause the domestic price of copper to

a. rise

b. fall

c. remain the same

7. Consider the supply-demand graph of an export commodity, say copper. Assume free trade. The world price of copper is represented by a horizontal price line. A technological improvement in the copper industry will cause the level of domestic production to

a. rise

b. fall

c. remain the same

8. Consider the supply-demand graph of an export commodity, say copper. Assume free trade. An increase in the world price of copper will cause the level of exports to

a. rise

b. fall

c. remain the same

9. Consider the supply-demand graph of an export commodity, say copper. Assume free trade. An increase in the world price of copper will cause the domestic consumption of copper to

a. rise

b. fall

c. remain the same

10. Let the exchange rate be 20 pesos per dollar and the world price of copper be $3 per pound. Then the domestic price of copper is

a. 20 pesos

b. 60 pesos

c. 6.67 pesos

11. Let p1* be the world price of copper in dollars. Let p1 be the domestic price of copper in pesos. Let ER be the exchange rate (pesos per dollar). The relationship between the domestic price and world price can be written

a. p1= (p1*) times ER

b. p1 = (p1*) + ER

c. p1= p1*

12. In the supply-demand graph of an import commodity, a rise in the exchange rate will cause the horizontal price line to

a. shift up

b. shift down

c. remain the same

13. In the supply-demand graph of an import commodity, a rise in the exchange rate will cause the quantity of imports to 

a. rise

b. fall

c. remain the same

14. In the supply-demand graph of an export commodity, a rise in the exchange rate will cause the quantity of exports to

a. rise

b. fall

c. remain the same

15. Consider a graph of the foreign exchange market. The exchange rate (ER) is on the vertical axis and the quantity of foreign exchange (dollars) is on the horizontal axis. The supply curve of foreign exchange is given by export earnings, or E1 times p1*. The demand curve for foreign exchange is given by import expenditures, or M2 times p2*. A technological improvement in the export industry will cause

a. exports to increase and the supply curve of foreign exchange to shift to the right

b. exports to increase and the demand curve of foreign exchange to shift to the right

c. exports to fall and the supply curve of foreign exchange to shift to the left

d. none of the above

16. Consider a graph of the foreign exchange market. The exchange rate (ER) is on the vertical axis and the quantity of foreign exchange (dollars) is on the horizontal axis. The supply curve of foreign exchange is given by export earnings, or E1 times p1*. The demand curve for foreign exchange is given by import expenditures, or M2 times p2*. An import tariff will cause

a. the quantity of imports to fall and the demand curve for foreign exchange to shift to the left

b. the quantity of imports to fall and the supply curve of foreign exchange to shift to the left

c. the quantity of imports to fall and the demand curve of foreign exchange to shift to the right

d. none of the above

17. Consider a graph of the foreign exchange market. The exchange rate (ER) is on the vertical axis and the quantity of foreign exchange (dollars) is on the horizontal axis. The supply curve of foreign exchange is given by export earnings, or E1 times p1*. The demand curve for foreign exchange is given by import expenditures, or M2 times p2*. An import tariff will cause the exchange rate to

a. rise

b. fall

c. remain the same

18. Consider a graph of the foreign exchange market. The exchange rate (ER) is on the vertical axis and the quantity of foreign exchange (dollars) is on the horizontal axis. The supply curve of foreign exchange is given by export earnings, or E1 times p1*. The demand curve for foreign exchange is given by import expenditures, or M2 times p2*. A rise in p1* will cause

a. the demand curve for foreign exchange to shift to the right

b. the supply curve of foreign exchange to shift to the right

19. Consider a graph of the foreign exchange market. The exchange rate (ER) is on the vertical axis and the quantity of foreign exchange (dollars) is on the horizontal axis. The supply curve of foreign exchange is given by export earnings, or E1 times p1*. The demand curve for foreign exchange is given by import expenditures, or M2 times p2*. A technological improvement in the textile industry (the import=competing industry) will cause

a. the demand curve for foreign exchange to shift to the right

b. the demand curve for foreign exchange to shift to the left

Practice 12 FE Mkt2

1. There is no valid argument for protection (i.e. protection of domestic industry against imports).

a. true

b. false

4. In the 1960s import substitution was the dominant strategy for economic development.

a. true

b. false 

5. An overvalued domestic currency decreases the domestic currency cost of imported goods.

a. true

b. false

6. To promote efficient domestic industrialization, protectionist policies for import substitution should

a. use import quotas rather than tariffs

b. be temporary

c. focus on manufactured consumer goods

d. maximize the effective rate of protection

7. Which of the following terms does not belong in the same group with the others?

a. exchange control

b. black market exchange rate

c. flourishing exports

d. corruption

8. Under a fixed-exchange-rate regime, all transactions in foreign exchange must go through the Central Bank.

a. true

b. false

9. An inflow of foreign capital to our country causes

a. the supply curve of foreign exchange to the shift to the left

b. the supply curve of foreign exchange to shift to the right

c. the demand curve of foreign exchange to shift to the left

d. the demand curve of foreign exchange to shift to the right

10. An inflow of foreign capital to our country causes

a. the exchange rate to rise

b. the exchange rate to fall

11. A poor harvest in our main export industry (coffee) causes

a. the supply curve of foreign exchange to the shift to the left

b. the supply curve of foreign exchange to shift to the right

c. the demand curve of foreign exchange to shift to the left

d. the demand curve of foreign exchange to shift to the right

12. A poor harvest in our main export industry (coffee) causes

a. the exchange rate to rise

b. the exchange rate to fall

13. A productivity increase in our import-competing industry causes

a. the supply curve of foreign exchange to the shift to the left

b. the supply curve of foreign exchange to shift to the right

c. the demand curve of foreign exchange to shift to the left

d. the demand curve of foreign exchange to shift to the right

14. A productivity increase in our import-competing industry causes

a. the exchange rate to rise

b. the exchange rate to fall