International Trade & Finance

1. International Trade & Finance Macroeconomics – Unit 6 Part 2

2. The College Board put out a sample test in 2008. These are all the questions from the sample test that deal with international econ issues. Number your paper from 1 – 11 You have 1 min 10 sec to answer each question.

3. 1. If a certain combination of goods or services lies outside the production possibilities curve of an economy, which of the following is true. (a) Effective trade barriers have reduced foreign imports into the economy. (b) New technology is being used in production. (c) Resources are not available to achieve that combination of goods/services. (d) resources are not being used efficiently to achieve that combination of goods or services. (e) Resources are being used at a more rapid rate then they were in the past. sugar_research_trade_barriers_2.doc 5 sec

4. 2. An appreciation of the U.S. dollar on the foreign exchange market could be caused by a decrease in which of the following? (a) U.S. interest rates (b) The U.S. consumer price index (c) Demand for the dollar by U.S. residents (d) Exports from the U.S. (e) The tariff on goods imported into the U.S. Lower prices increase demand for U.S. exports and appreciate the dollar.

5. For questions 3-5 30 Alpha Grain in tons Beta 10 Steel in tons 20 30 3. Before specialization & trade, the domestic opportunity cost of producing 1 ton of grain in Alpha and in Beta is which of the following? AlphaBeta a. 1 ton of steel 1 ton of steel b. 1 ton of steel 2 tons of steel c. 2 tons of steel 1 ton of steel d. 1 ton of steel 0.5 tons of steel e. 0.33 tons of steel 1.5 tons of steel

6. For questions 3-5 30 Alpha Grain in tons Beta 10 Steel in tons 20 30 4. The theory of comparative advantage implies that Alpha would find it advantageous to a. export grain and import steel b. export steel and import grain c. export both grain and steel and import nothing d. import both grain and steel and export nothing e. trade 1 ton of grain for 0.5 ton of steel

7. For questions 3-5 30 Alpha Grain in tons Beta 10 Steel in tons 20 30 5. At what real exchange ratio, also referred to as the terms of trade, between grain (G) and steel (S) would both Alpha and Beta find it mutually advantageous to specialize and trade. a. 1 G = 3.0 S b. 1 G = 1.5 S c. 1 G = 1.0 S d. 1 G = 0.5 S e. There is no real exchange ratio that would enable both countries to benefit, since Alpha has an absolute advantage in both goods.

8. 6. If the real interest rate in the U.S. increases relative to that of the rest of the world, capital should flow (a) into the U.S. and the dollar will depreciate (b) into the U.S. and the dollar will appreciate (c) out of the U.S. and the dollar will depreciate (d) out of the U.S. and the dollar will appreciate (e) out of the U.S. and the value of the dollar will not change Higher U.S. interest rates attract more demand for our financial capital [CDs and bonds] & financial flows of foreign money will flow in to the U.S. to purchase these.

9. 7. Assuming fixed exchange rates, if Mexico’s rate of inflation increases relative to its trading partners, Mexico’s imports and exports will most likely change in which of the following ways? ImportsExports a. Decrease Decrease b. Decrease Increase c. Increase Decrease d. Increase Increase e. No change No change A higher price level in Mexico will decrease demand for their products, depreciating the peso. However, theincrease in the peso currency price relative to other countries makes their goods cheaper so their importsincrease while their exports decrease as they have to pay more pesos .

10. 8. Assume that the world operates under a flexible exchange rate system. If the central bank of Mexico increases its MS but other countries do not change theirs, Mexico’s inflation rate and the international value of the Mexican peso will most likely change in which of the following ways? International Inflation RateValue of the Peso a. Increase Appreciate b. Increase Depreciate c. Increase No change d. Decrease Appreciate e. Decrease Depreciate An increase in Mexico’s MS means “more pesos chasing the same goods” as before, bringing on higher prices. This would decrease demand for Mexico’s exports, depreciating the peso.

11. 9. Which of the following will cause the U.S. dollar to depreciate relative to the Euro? (a) An increase in household income in the U.S. (b) An increase in interest rates in the U.S. (c) An increase in household income in Europe (d) A decrease in interest rates in Europe (e) A decrease in price level in the U.S. Increasing HH income in the U.S. results in more demand for foreign goods which appreciates that currency and depreciates the dollar.

12. 10. In an open economy, an increase in government budget deficit tends to cause the international value of a country’s currency and its trade deficit to change in which of the following ways? Value of CurrencyTrade Deficit a. Appreciate Become smaller b. Appreciate Become larger c. Depreciate Become smaller d. Depreciate Become larger e. Not change Not change The budget deficit means the government is borrowing more, which pushes up the interest rate. The higher interest rate attracts more foreign investors, increasing demand for the dollar and appreciating the dollar. The stronger dollar makes our exports more expensive and imports cheaper, therefore increasing the trade deficit.

13. 11. If the exchange rate between the U.S. dollar and the British pound changed from $2 per one pound to $3 per one pound, and domestic prices in both countries stayed the same, then the U.S. dollar would (a) depreciate, making U.S. imports from Britain more expensive (b) depreciate, making U.S. imports from Britain cheaper (c) appreciate, making U.S. imports from Britain more expensive (d) appreciate, making U.S. imports from Britain cheaper (e) purchase 3 times more British goods than before the change occurred