Mr. Weiss

1. Mr. Weiss APE/Honors Economics – Test Study Questions – Macro – Unit 6 • 2. According to the principle of comparative advantage, worldwide output and consumption levels will be highest when goods are produced in nations where which of the following are true? • Opportunity costs are lowest • Absolute advantages are highest • The balance of trade is in a surplus • The exchange rate is falling • The exchange rate is rising

2. Mr. Weiss APE/Honors Economics – Test Study Questions – Macro – Unit 6 • 3. What does a balance of trade deficit imply? • Exports of goods and services exceed imports of goods and services • Imports of goods and services exceed exports of goods and services • Investment income received from abroad exceeds investment income paid to foreigners • Investment income paid to foreigners exceeds investment income received from abroad • Investment by foreigners exceeds domestic investment in other countries

3. Mr. Weiss APE/Honors Economics – Test Study Questions – Macro – Unit 6 17. Suppose that the price level in Country A increases relative to the price level in other countries. In which of the following ways are Country A’s imports and exports most likely to change?

4. Mr. Weiss APE/Honors Economics – Test Study Questions – Macro – Unit 6 18. In the short run, in which of the following ways is an expansionary monetary policy most likely to cause the interest rate and the value of the domestic currency to change?

5. Mr. Weiss APE/Honors Economics – Test Study Questions – Macro – Unit 6 • 7. If the rate of inflation is higher in the United States than in other countries, analyze what will happen to • Exports • Imports • The international value of the dollar

6. Mr. Weiss APE/Honors Economics – Test Study Questions – Macro – Unit 6 8. Consider a simple model of the world economy in which there are two countries: the United States and Korea. Both produce cars and computers. The labor requirement for producing each good are given in the following table.

7. Mr. Weiss APE/Honors Economics – Test Study Questions – Macro – Unit 6 8. Consider a simple model of the world economy in which there are two countries: the United States and Korea. Both produce cars and computers. The labor requirement for producing each good are given in the following table. • Which nation has an absolute advantage in producing cars? Explain why. • Which nation has a comparative advantage in producing cars? Explain why. • Show that the nation with the comparative advantage in producing cars can gain from specialization and trade with the other.

8. Mr. Weiss APE/Honors Economics – Test Study Questions – Macro – Unit 6 • 4. Suppose the European (EU) has decided to impose trade restrictions on agriculture and some specific manufacturing industries. In fact, the EU has decided to subsidize some agricultural products from small farmers and to increase tariffs and quotas on the following key industries: steel, telecommunications, electronics, machine tools, computers and aerospace. The EU hopes these actions will make Europe less dependent on foreign producers for these essential goods. • Which groups will gain and which will lose from these proposed restrictions? • What goals do governments intend to accomplish by imposing trade restrictions? • What are some of the costs that result from trade restrictions? • What would be the likely impact of restrictive trade policies on the total amount of trade between EU and the rest of the world? • Show graphically how quotas, tariffs and subsidies affect trade.

9. Mr. Weiss APE/Honors Economics – Test Study Questions – Macro – Unit 6 • 5. Consider a simple model of the world economy in which there are two nations. The United States produces computers and Mexico produces oil. • Suppose now that the Mexican demand for computers increases while the United States’ demand for oil remains unchanged. Use a graph to show that would happen to the value of the Mexican peso. • Explain how the exchange rate changes in a flexible exchange rate system. • Explain how this change in the value of the peso affects Mexico’s imports and exports.