Sample Test Questions for International Economics 300

Below are a set of sample test questions taken from previous exams in International
Economics 300. The answers are indicated by the *. Please note that it is possible that
questions may have the * in the wrong place. You should think through 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 here does not represent a commitment
that questions on your exam will be like these or on the same subject matter. This is
especially so because the subject matter 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 only.

*C) both supply and demand conditions.

D) neither supply and/or demand conditions.

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 supply of capital.

E) (A) and (C).

*D) (A) and (B).

3. Suppose an economy is characterized by the relationships specified in the specific
factors model. Assume that there are three factors of production, where labor 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 increase in the real income of landowners, a decrease in the real income of
capitalists, 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 real income of workers.

C) an increase in the real income of landowners and a decrease in the real income of
workers and capitalists.

D) an increase in the real income 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 scale.

B) diminishing returns to capital.

*C) diminishing returns to labor.

D) increasing returns to scale.

E) increasing returns to labor.

5. The optimal tariff of a small country is:

A) positive and smaller than that of 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 be protected
if

*A) the number of firms in the industry is small.

B) the number of firms in the industry is large.

C) many jobs are at stake.

D) many low-wage workers face unemployment.

7. Economists argue that

A) countries with export surpluses will have a comparative advantage in the production
of all goods.

*B) efficiency in international trade requires countries to produce those goods in which
they have a comparative advantage.

C) efficiency in international trade requires countries to produce those goods in which

they have an absolute advantage.

D) efficiency in international 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
importers.

B) countries would specialize production along lines of absolute advantage.

C) every country would be self sufficient in all goods.

D) all countries would 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 produced 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 following?

A) a lower volume of steel imports.

B) higher domestic steel prices.

C) reduced domestic demand for steel.

*D) reduced domestic production of steel as higher 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 country 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 advantage.

12. Refer to the diagram 1 above. Country A has an ______________ advantage in the
production of both good X and good Y and Country B has a ______________ advantage
in the production of good X.

A) comparative; absolute.

B) comparative; comparative.

*C) absolute; comparative.

D) absolute; absolute.

13. Refer to the diagram above. Equilibrium for these two countries is characterized by

A) autarky, trade would not be mutually beneficial.

*B) Country A exporting good Y to country B.

C) Country A exporting both goods X and Y to country B.

D) Country A exporting good 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 of one factor, holding relative goods prices constant,
leads to a biased expansion of production possibilities favoring the relative supply of the
good which uses that factor intensively.

*B) countries tend to export goods whose production is intensive in factors with which
they are relatively abundantly endowed.

C) countries tend to specialize in the production of the good in which they have the
greatest 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 equipment (which
is capital intensive). Assume that capital is immobile in the short run and that labor is
mobile between both industries within each country in the short and long run.

If Zanzibar and Omnibar begin to trade, we would expect that 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 be 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 owners of
carpet capital.

17. In trade between a small and a large nation

A) the gains from trade are likely 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) country 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 of X than at equilibrium.

*C) the country exporting commodity X will want to export 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/Pexports for the
country _______________ and trade volume _________________.

A) decreases; increases.

B) decreases; decreases.
C) increases; increases.

*D) increases; decreases.

21. In the Heckscher-Ohlin model of trade, international trade is based mostly on a

difference in

A) economies of scale.

*B) factor endowments.

C) tastes.

D) technology.

22. If a small nation increases the tariff on its import commodity then

A) the protection cost of the tariff decreases.

B) the deadweight loss decreases.

*C) the rent to domestic producers of the commodity increases.

D) all of the above.

23. According to the Heckscher-Ohlin (factor proportions model), international trade will

*A) reduce international differences in per capita incomes.

B) increase international differences in per capita incomes.

C) possibly increase or reduce international differences in per capita incomes.

D) lead to complete specialization.

24. Intra-industry trade takes place

A) because perfect competition is the prevalent form of market organization.

B) because products are homogeneous.

*C) in order 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 are more K-intensive than import substitutes.

*B) imports substitutes are more K-intensive 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 capital is
likely to result in a decrease in Pimports/Pexports if the nation exports

*A) the L-intensive commodity.

B) the K-intensive commodity.

C) both commodities.

D) either commodity.

27. The imposition of an import tariff by a small nation

A) increases the relative 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 commodity 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 return of the nation's abundant factor unchanged.

29. An increase in the demand of the imported commodity subject to a given import
quota

A) reduces the domestic quantity demanded of the commodity.

*B) increases the domestic production of the commodity.

C) reduces the domestic price of the commodity.

D) reduces the producer surplus.

30. The expression "gains from trade" refers to

*A) the increase in a nation's standard of living derived from specialization and trade
based on comparative advantage.

B) the foreign currencies earned by exporting goods and services.

C) a nation's 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 free-trade
situation in which the country exports wine and imports wheat. The expected 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) self-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 we are in the
Ricardian model with labor as the only factor of production.

Wheat (bushels) Rice (bushels) Number of Laborers

India 6 13 100
Canada 13 5 10

33. Referring to the chart above: India has an absolute advantage in the production 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 free 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 rice and 1300 bushels of wheat.

35. Under a regime of managed floating exchange rates, the balance of the official
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 one 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 positive if domestic prices in one country are climbing relative to those in the rest
of the world.

D) can be caused by changes in either the domestic price index or 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 set across the world by international agreement.

B) extremely flexible exchange rates monitored across the world by international

agencies.

C) actively managed, floating exchange rates dominated by the major currency markets
around the world.
D) laissez-faire exchange rate policy that allowed countries to focus entirely on domestic
policy issues.

38. If the German mark appreciates relative to the British pound, then a mark will buy

A) fewer pounds than before.

B) *more pounds than before.

C) the same number of pounds as before.

D) zero pounds since only the mark has value.

39. The relative purchasing power-parity theory postulates that:

A) the equilibrium 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 proportional to the

absolute change in the price level in the two nations over the same time period.

D) the exchange rate at a period of time should be proportional to 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 its 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 expansionary 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) appreciation 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 than under a flexible exchange rate system.

C) equal under a flexible and fixed exchange 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) flexible 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 specialization.

C) eliminate the danger of retaliation from other nations.

D) improve political 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 tariff.

C) can be accomplished also by an export subsidy.

D) can be accomplished also by negotiations within GATT.

49. The infant-industry argument is valid when

A) a new industry is suffering financial 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
incurred while it is being protected.

D) the industry is not likely to be profitable in the future.

50. The anti-dumping argument

A) calls for protectionist measures when foreigners charge unconscionable high

prices for products dumped on our markets.

B) *calls for protectionist measures against countries that subsidize exports and

dump their 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 interest 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 rest of the world; rapid growth in aggregate demand; or
low interest rates.

D) higher inflation rates than the rest of the world; slower growth in aggregate demand;
or low interest rates.

52. Other things equal, a rise in the interest rates in the U.S. often will

A) lead 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 purchases.

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 economy if the change is autonomous and not induced.

54. For John to have a comparative advantage in the production of pins means that,
relative to Jack, with the same resources:

A) *John is better at producing pins than at producing needles.

B) John is better at producing both pins and needles.

C) John can produce pins more efficiently than Jack.

D) John can produce more pins than Jack.

55. The Heckscher-Ohlin theorem sates that a country will have a(n) ________________
advantage in the production of a good which uses its relatively
___________________________.

A) absolute, scare input intensively.

B) absolute, abundant input intensively.

C) *comparative, abundant input intensively.

D) comparative, scarce input intensively.

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 equal 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 abroad 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 the inflation rate in England

C) U.S. companies decide to increase their investment 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 slope than, the production possibilities curve

D) inside of, but parallel to, the production 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) Americans demand more foreign goods because these goods have become less
expensive to American consumers.

* B) Americans demand fewer goods because these goods have become more expensive
to American consumers

C) foreigners demand more American goods because these goods have become less
expensive to foreign consumers.

D) foreigners 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 import television sets from the U.S.

B) the exchange value of the yen will depreciate

* 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 covered 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 hedge
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 three 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 spot rate will
be $2.03/£1 in three months, he can earn a profit by:

A) selling pounds forward.

* B) purchasing pounds forward.

C) selling dollars forward.

D) purchasing dollars forward.

75. A capital outflow from New York to London under covered interest arbitrage can
take place if the positive interest differential in favor of London is:

A) smaller than the forward discount on the pound.

B) equal to the forward discount on 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 imports 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) capital 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 should 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 rates of
10% in France and 5% in the US will result in:

A) 15% increase in the franc price of the dollar

B) 5% increase in the dollar price of franc

* C) 5% increase in the franc price of the dollar

D) 15% decrease in the dollar price of franc

79. Which of the following would be a credit item in the U.S. balance of payments?

A) a U.S. citizen travels to England for a two-week vacation

B) a U.S. firm hires 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, and foreign debts to the U.S. decrease

B) borrowing money, and foreign debts to the 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 economy 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 covering of a foreign exchange risk.

C) foreign exchange speculation.

D) foreign exchange 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 expansionary 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) reduce 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 supply curve for that country's currency in the foreign exchange
market to the left

D) make the country's exports cheaper in foreign countries than at the

equilibrium exchange rate

85. A country's balance of payments deficit can be elimated if:

A) imports increase

B) the deficit country's government adds to its liabilities to foreign governments

C) the deficit country reduces its stocks of official reserves

* D) exchange rates are allowed to fluctuate freely

86. If country A has a budget deficit that is being funded by the purchases of bonds by
individuals in country B, it can be expected that:

* A) the value of currency of country A should increase relative to that of country B

B) there will be an increased demand for country B's currency by those in country A

C) there should 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 intervene to halt the purchase of the country's

domestic bonds

87. With fixed exchange rates and zero capital mobility, national income and trade
surplus move:

* A) in opposite directions

B) in the same direction

C) sometime in opposite directions and sometime in the same direction

D) in the same direction as imports

88. Labor in developing countries generally:

A) opposes an inflow of foreign direct 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 of foreign direct investments from abroad.

B) favor an inflow of foreign direct investments from abroad.

C) are indifferent to foreign direct investments from abroad.

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 protection once it develops economies of scale

* D) must be protected temporarily until it can develop economies of scale

91. A fixed exchange rate system without a band of allowed fluctuation would require the
nation's monetary authorities to intervene in the foreign exchange market:

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 tradeoff.

B) it is more difficult for a nation to achieve its desired inflation-unemployment tradeoff.

C) it is more difficult for a nation to achieve internal balance.

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 economy is a market economy, while a closed economy relies on planning.
+ c. open economy interacts with the rest of the world, while a closed economy does not.
d. closed economy keeps political affairs secret, while an open economy does not.
2. A rise in net exports shifts the aggregate
a. demand curve inward.
+ b. demand curve outward.
c. supply curve outward.
d. supply curve inward.
3. A recession abroad 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 reduce aggregate demand.
d. reduce U.S. net exports and increase aggregate demand.
4. 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 reduce aggregate demand.
d. reduce U.S. net exports and increase aggregate demand.
.
Figure 18-1

5. 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
6. A closed economy is one that
a. uses tariffs.
b. uses quotas to restrict trade.
c. uses exchange controls.
+ d. does not trade with other nations.
7. 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.
8. An appreciation of the Japanese yen relative to the U.S. dollar 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.
9. If a currency depreciates, a country’s net exports
a. fall and AD increases.
+ b. rise and AD increases.
c. fall and AD decreases.
d. rise and AD decreases.
10. An increase in the price level in the economies of U.S. trading partners will cause the
aggregate expenditures function in the United States to
+ a. shift up.
b. shift down.
c. get flatter.
d. get steeper.
11. An increase in the U.S. price level relative to the price level of U.S. trading partners will
cause the aggregate expenditures function in the United States to
a. shift up.
+ b. shift down.
c. get flatter.
d. get steeper.
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
13. Which of the following explains the movements in Figure 18-2?
a. an increase in U.S. imports
b. a decrease in U.S. exports
+ c. an increase in U.S. exports
d. a decrease in U.S. net exports
14. If Mexico experiences a period of stable prices while the United States experiences rapid
inflation, what will happen in Mexico?
a. an increase in aggregate supply
b. a decrease in aggregate supply
c. a decrease in aggregate demand
+ d. an increase in aggregate demand

Figure 18-3
15. Which of the situations illustrated in Figure 18-3 shows the effects of a currency
appreciation leading to a recession?
+ a. 1
b. 2
c. 3
d. 4
16. Which of the situations illustrated in Figure 18-3 shows the effects of a currency
appreciation leading to real GDP growth?
a. 1
+ b. 2
c. 3
d. 4
17. 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.
18. What effect 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 trade deficit as U.S. investors bought more domestic financial assets.
+ d. It increased the trade deficit as Americans bought more imports and foreigners bought
fewer U.S. products.

AGGREGATE SUPPLY IN AN OPEN ECONOMY

19. In an open economy, aggregate supply consists of domestic production

+ a. plus imports.
b. plus exports.
c. minus imports.
d. minus exports.
20. If the dollar rises in 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
21. When the dollar depreciates, 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.
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.
23. The main input into the production of Starbuck’s coffee is imported coffee beans. If the
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 supply will increase.
+ c. Input prices will rise and supply will decrease.
d. Input prices will rise and supply will increase.

THE MACROECONOMIC EFFECTS OF EXCHANGE RATES

24. A currency appreciation should

a. reduce net exports and therefore increase aggregate demand.
b. raise net exports and therefore decrease aggregate demand.
+ c. reduce net exports and therefore decrease aggregate demand.
d. raise net exports and therefore increase aggregate demand.
25. What are the economic effects of a currency 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 increase aggregate demand and aggregate supply, so that output will certainly
rise, and prices may rise as well.
+ c. It will increase aggregate demand and decrease aggregate 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 prices will
certainly fall and output may fall as well.

26. Following the economic crisis in 1994-1995, the Mexican peso fell sharply in value. What
will be the main economic effects in Mexico of such an exchange rate change?
a. It will decrease aggregate demand and aggregate supply, so that output will certainly
fall, and prices 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 increase aggregate demand and decrease aggregate 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 prices will
certainly fall and output may fall as well.
27. 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. decrease aggregate demand and make the recession worse.
c. decrease aggregate demand and make inflation worse.
d. increase aggregate demand and make the recession worse.
28. If U.S. interest rates rise while foreign interest rates remain unchanged,
a. GDP will not change since the shift in aggregate supply cancels the positive effects 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 dollar will appreciate.
d. net exports will increase and the economy will expand.

Figure 18-5

29. 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
30. Which of the graphs in Figure 18-5 are consistent with a depreciation of the U.S. dollar 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. A rise in the domestic interest rate leads to capital

a. outflows and exchange rate appreciation.
b. outflows and exchange rate depreciation.
c. inflows and exchange rate depreciation.
+ d. inflows and exchange rate appreciation.
32. A currency appreciation
+ a. reduces aggregate demand and increases aggregate supply.
b. reduces aggregate demand and aggregate supply.
c. increases aggregate demand and reduces aggregate supply.
d. increases aggregate demand and aggregate supply.
33. Expansionary fiscal policy in an open economy
a. leads to a balance of trade surplus.
b. decreases America’s capital account surplus and the current account deficit by the
same amount.
+ c. increases both America’s capital account surplus and current account deficit by equal
amounts.
d. increases America’s capital account surplus more than it increases the current account
deficit.
34. International trade tends to lower the value of the multiplier because
a. imports fall as GDP increases.
+ b. net exports fall as GDP increases.
c. net exports tend to rise as GDP increases.
d. exports fall as GDP increases.
35. In an open economy, an increase in (G – T) will
+ a. decrease (X – IM).
b. increase (X – IM).
c. leave (X – IM) unchanged.
d. have an unpredictable effect on (X – IM).
37. An expansionary fiscal policy will lead to
+ a. higher interest rates, an appreciated dollar, and reduced net exports.
b. higher interest rates, an appreciated dollar, and increased net exports.
c. reduced interest rates, an appreciated dollar, and reduced net exports.
d. reduced interest rates, an appreciated dollar, and increased net exports.
38. International capital flows in an open economy have the effect of
a. increasing the power of fiscal policy.
+ b. reducing the power of fiscal policy.
c. reducing the power of fiscal 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.
39. If a country tries to stimulate the economy with fiscal policy, the effects will be exchange
rate
a. depreciation, lower interest rates, and a small increase in aggregate demand.
b. depreciation, higher interest rates, and a small decrease in aggregate demand.
c. appreciation, lower interest rates, and a small increase in aggregate demand.
+ d. appreciation, higher interest rates, and a small increase in aggregate demand.
40. Why is fiscal policy less effective in an open economy than in a closed economy?
a. Expansionary fiscal policy raises demand for imports, which reduces aggregate
demand.
b. Expansionary fiscal policy raises interest rates, which raises the value of the currency,
and reduces aggregate demand.
c. Expansionary fiscal policy raises the value of the currency, which reduces demand for
exports.
+ d. Expansionary fiscal policy has all the above effects.
41. 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.
42. The sequence of events following a contractionary monetary policy would be higher interest
rates followed by dollar
a. depreciation, higher exports, and lower imports.
b. depreciation, lower exports, and higher imports.
+ c. appreciation, lower exports, and higher imports.
d. appreciation, higher exports, and lower imports.
43. 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 points)

Each question has only one answer that is most appropriate. Choose the most appropriate
answer and bubble it in in the scantron. Each question carries the 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. A
b. less than 1.
c. equal to 1.
d. equal to 0.

2. Demand for a good would tend to be more inelastic the

a. fewer the available substitutes. A
b. longer the time period considered.
c. more the good is considered a luxury good.
d. more narrowly defined the market is.

3. Suppose the price of Twinkies is reduced from $1.50 to $1.25 and, as a result, the quantity
of Twinkies demanded increases from 2,000 to 2,200. The price elasticity 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 would be
a. 1.
b. 1.5.
c. 1.33. C
d. 2.5.
5. According to the graph, the price elasticity of demand from point C to point B would be
a. 0.5.
b. 0.40. B
c. 1.33.
d. 1.45.
6. 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 would be elastic.
b. Total revenue would increase by $1800 and demand would be elastic. 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.

7. A producer is currently charging a price of $12. If he wants to raise the price

a. his revenue will decrease, since he is operating in the low-elasticity zone.
b. his revenue will increase, since he is operation in the low-elasticity zone.
c. his revenue will decrease, since he is operating in the high-elasticity zone. C
d. his revenue will increase, since he is operating in the high-elasticity zone.

2
The next three questions are based on the following table:

Income Quantity of Quantity of

Good X Good Y
Purchased Purchased
$30,000 (old) 2 20
$40,000 (new) 5 10

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
9. According to the table, Good X is
a. a luxury good. A
b. an inferior good.
c. underpriced.
d. a normal good.
10. According to the table, Good Y is
a. not related to income.
b. an inferior good. B
c. price inelastic.
d. a normal good.

11. A minimum wage imposed above a market’s equilibrium wage will result in the quantity
a. supplied of labor being greater than the quantity demanded of labor and unemployment
will occur. A
b. demanded of labor being greater than the quantity supplied of labor and unemployment
will occur.
c. supplied of labor being greater 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 shortage 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 is
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, before the tax is imposed, pick the most appropriate answer from
below:
a. A price ceiling 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 in the
market. B
c. A price ceiling of $7 is binding in this market and that price 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 result of government imposed rent controls?
a. fewer new apartments offered for rent
b. less maintenance provided by landlords
c. bribery
d. higher quality housing D

4
Following is Andy’s maximum valuation of burgers:

First burger: $6.00 Second burger: $4.00

Third burger: $2.00 Fourth burger: $0.00

Following is Barbara’s minimum cost of producing burgers:

First burger: $1.00 Second burger: $2.00

Third burger: $3.50 Fourth burger: $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 burger in this
market are, respectively,
a. Three burgers at the price of $4.00.
b. Four burgers at the price of $2.00.
c. Two burgers at the price of $3.00. C
d. Three burgers at the price of $3.00.

19. At the market clearing price the TOTAL surplus would be

a. $5.00
b. $6.00
c. $7.00 C
d. $8.00

20. Barbara has a strong lobby in the government circle and manages to get a price floor
established at $4.00. Pick the most appropriate answers from the following:
a. The price floor is not binding and the market clearing price and quantity still prevail.
b. The price floor is binding but Andy will demand 3 burgers, while 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 market. C
d. The price floor is binding but Andy will demand 3 burgers, while Barbara 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 failure 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 consumer rights laws.

22. Private markets fail to reach a socially optimal level when negative externalities are present
because.
a. private benefit equals social benefit at the private market solution.
b. private costs exceed private benefits at the private market solution.
c. social cost exceeds private cost at the private market solution. C
d. private costs exceed social cost at the private market solution.

23. According to the Coase theorem, private parties can solve the problem of externalities if
a. the cost of bargaining is small. A
b. the initial distribution 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 are 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 supplying them. C
d. everyone can have all they want and the good will have a zero price.

25. Basic research is a public good because it

a. is difficult to exclude those who might benefit from it. A
b. is used to develop public goods.
c. always benefits developed countries at the expense of developing countries.
d. is a rival good.

6
Section II: Short Answer Type Questions (25 points)

1. Consider the market for gasoline. Suppose crude oil, which is an input to gasoline, 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 effect by shifting the appropriate curve after the crude oil price rise.
c. Show the appropriate triangle representing consumer surplus before tax by labeling the
three corners of the triangle, for example the triangle ABC.
d.Show the appropriate 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 triangle, for example the triangle ABC.
f. Show the appropriate triangle representing producer surplus after tax by labeling the three
corners of the triangle, for example the triangle ABC.

ANSWER NEXT PAGE

7
 $ S-after
S-before

P- after
B
P-before D E
C F
G

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 answered.

• DO NOT START UNTIL YOU ARE INSTRUCTED TO BEGIN.

• Enter your registration number 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 textual information) are permit-

ted.

• Only the answer sheet is to be returned. You should keep the question
paper (this document).

• The purpose of the test is solely formative for students to gauge their
understanding of the course material. The mark 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 time the
holder will receive the face value plus a coupon of $32.

A. If today’s market price for the bond equals $120, the bond’s spot yield is 5%.
B. If today’s market price for the bond equals $115, the bond’s spot yield is 15%.
C. If today’s market price for the bond equals $120, the spot bond’s yield is 10%.
D. If today’s market price 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 until it matures.
B. The net present value of the bond’s stream of coupons and its face value.
C. The net present value of the bond’s stream of coupons excluding its face value.
D. The net present value of the bond’s face value excluding the coupons.

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
bond’s 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 yield to maturity (5%).

4. Two zero-coupon bonds each have face value $100 but one matures three years from
today and the other four years from today. The current 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 yield on three-year bonds equals 8%.
C. The implicit forward rate between years three and four equals 8%.
D. The implicit forward rate between years three and four 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 observation implies that interest rates will decrease over the next few years.
C. The observation is compatible with the pure expectations hypothesis of the term
structure.
D. The observation is incompatible with the liquidity preference (risk premium)
theory of the term structure.

6. A forward contract is made for the delivery of a commodity 10 months from today
at a forward price of $200 per unit of the commodity. Futures contracts for the same
commodity and delivery date are also available.

A. The purchaser of the forward contract pays the forward price, $200, immediately
but must wait for 10 months to receive the commodity.
B. The holder of a forward contract always has the right to exchange it for an iden-
tical futures contract at any time before the delivery date.
C. The seller of the forward contract has an obligation to deliver the commodity 10
months from today in return for the spot (cash) price on the delivery date (i.e., a
price that may differ from $200).
D. The seller of the forward contract has an obligation to deliver the commodity 10
months from today in return for $200 per unit, payable on delivery.

7. The main difference between forward and futures contracts is:

A. Futures contracts are traded every day (i.e., frequently) in organised exchanges
prior to the delivery date specified in the contract.
B. For a futures contract there is never any obligation to deliver, or to receive, the
underlying asset.
C. Forward contracts always have delivery dates further from the present than fu-
tures contracts.
D. The underlying assets in forward contracts are always physical commodities
(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 credited (or debited) to the investor’s margin account
B. Implies that the futures price can change (increase or decrease) at most once
each trading day.
C. Refers to the gain or loss that an investor makes on the day that a futures position
is offset (i.e. closed-out), rather than being kept open to the next trading day (or
longer).
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 futures with delivery in July 2006 (at the Chicago Board of Trade).

A. The open interest refers to the volume of wheat stocks held in warehouses on
9th February intended for delivery in July.
B. The open interest refers to market’s expectation of the volume of wheat stocks
that will be held in warehouses immediately before delivery 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 futures contracts at a price of $500 per
contract.

A. If the futures contract price rises from $500 to $510 per contract, marking-to-
market increases by $200 the funds in the XYZ’s 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 commodity (asset) in return for the spot
(cash) price of the commodity at the delivery date.
C. If XYZ offsets the position when the contract price has increased to $530, XYZ
will make a profit of $600 (ignoring transaction costs).
D. If XYZ offsets the position when the contract price has fallen to $480, the result
will be 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 con-
tract. The initial margin is $100 per contract, the maintenance margin is $80 per
contract, and, if a margin call is made, the margin must be restored to 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 balance
by $50.
B. If NPQ offsets the position when the contract price equals $260 per contract, the
margin account will reflect a loss of $200 (ignoring transaction costs).
C. If NPQ offsets the position when the contract price equals $320 per contract, the
margin account will reflect 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
opportunities are absent.

A. The forward price for wheat will be equal to $11.00 if wheat is available for
storage at zero cost.
B. The forward price for wheat will be less than $10.00 if wheat is available for
storage at zero cost.
C. The forward price for wheat will equal $10.90 if wheat is available for storage
at $0.90 per 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 settle each Exchange of
Futures for Physicals (EFP) prior to (i.e., before) the delivery 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 that 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 ‘marked-to-market’.
D. The EDSP is the price of the asset underlying the futures contract as at the de-
livery date specified in the contract.

4
14. An investor chooses a short-hedging strategy using a futures contract.

A. The purpose of the strategy to profit from an expected increase in the futures
price between today and the date when the contract is sold (i.e., offset).
B. The purpose of the strategy to profit from an expected decrease in the futures
price between today and the date when the contract is purchased (i.e., offset).
C. The investor seeks to reduce the uncertainty about the price at which an asset
(e.g. a commodity 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 or 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 price, f (t, T ),
tends to be lower than E[p(T ), | Ωt )] (today’s expectation of the spot price that
will be observed on the futures’ delivery date).
B. Normal backwardation refers to the prediction that futures prices usually fall as
the delivery date approaches, so that f (T, T ) ≤ f (t, T ) for t < T .
C. A normal backwardation is said to occur when today’s futures price exceeds
today’s spot price for the asset underlying the futures contract i.e., f (t, T ) >
p(t).
D. Normal backwardation is a type of market manipulation in which an investor
(or small group of investors) conspire to purchase a large proportion of all the
futures contracts corresponding to a particular delivery date.

16. A European call option on Intel ordinary 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 option writer to buy Intel shares for $10.50 any time before or on
30 June, at the discretion of the option holder.
C. Permits the option holder to buy Intel shares 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 exercise price $10.50 per share
expires on 30 June:
A. Permits the option holder holder to sell Intel shares for $10.50 any time before
or on 30 June.
B. Permits the 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 dis-
cretion 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 markets
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 exceeds the premium for
the European options.
B. The option premium for the American options will be greater than or equal to
the premium for the European options.
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 options will be lower than the premium
for the European options.

19. Today’s price for a share in XYZ Inc. equals $14.00. Today’s 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: buy 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 opportunity: write one option and exercise it at the expiry
date.
D. Abitrage opportunities are absent, because the price of XYZ shares may fall be-
low $10.00 between 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 $12.00. Assume that markets are fric-
tionless.

A. An investor who had purchased the option when the premium was $6.00 would
allow it to die, unexercised, because there is a net loss of $2.00 per option.
B. An investor who had purchased the option when the premium was $3.00 would
find 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 what 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 understand more deeply the material taught. In
no way should you assume that the level 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 unemployment rate
rises. Which of the following statements would be the best explanation for this?
(a) The unemployment rate would rise because as the economy initially recovers 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, workers 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 begins to recover from a recession
because of errors in the way the data are collected.
(d) As the economy initially recovers from a recession, firms do not immediately increase the
number of workers they hire. Firms wait to hire more individuals 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) cyclical unemployment.
(d) seasonal unemployment.

5. The natural rate of unemployment is generally thought of as the

(a) ratio of the frictional unemployment rate to the cyclical unemployment rate.
(b) sum of structural unemployment and cyclical 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 output.
(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) automatic 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 additional 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) have no effect on
(d) double

10. Which of the following represents an action by the 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 Canada 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 quantity 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 excess demand.
(b) increase.
(c) decrease.
(d) not change.

13. Which of the following 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 government 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 by the Bank of Canada

14. If the Bank of Canada reduces the money supply to reduce inflation, a flexible exchange rate
will aid the Bank of Canada in fighting inflation because
(a) as the money supply 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 money supply is decreased, the interest rate will increase, and the exchange rate will
rise, causing Canadian exports to rise and Canadian imports to fall.
(c) as the 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 exchange 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 Bank 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 supply of money

16. An increase in total production (real GDP) causes the demand for money to ___________
and the interest rate to _________.
(a) increase; increase
(b) increase; decrease
(c) decrease; decrease
(d) decrease; increase

17. Which of the following actions is an example of expansionary fiscal policy?

(a) a decrease 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 tax 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 individuals do not have marketable job skills.
(c) the level of overall economic activity 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) becomes steeper.
(c) shifts to the right.
(d) shifts to the left.

21. If the economy is operating at potential GDP, an increase in the money supply will lead to
(a) stagflation.
(b) structural inflation.
(c) demand-side inflation.
(d) supply-side inflation.

22. The sale of government securities by the Bank of Canada is predicted 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, and eventually cause a contraction of the money
supply.
c. increase reserves of the chartered banks, and eventually cause a contraction of the money
supply.
d. increase reserves of the chartered banks, and eventually cause an expansion of the money
supply. e. none of the above.

23. To lower interest rates, the Bank of Canada could

a. buy securities.
b. decrease the chartered banks' reserves.
c. decrease the money supply.
d. raise the treasury bill rate.
e. raise the reserve requirement.

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 increase the value of GDP by $1,000.
e. no effect on GDP since the bananas were produced outside Canada.

25. An increase in the MPS will cause, other factors remaining constant:

(a) a parallel shift up in the AE-function and a parallel shift up in the L-function;
(b) a rotational shift up in the AE-function and a rotational shift up in the L-function;
(c) a parallel shift down in the AE-function and a rotational shift up in the L-function;
(d) a rotational shift down in the AE-function and a rotational shift up in the L-function;
(e) a rotational shift down in the AS-function and a rotational shift up in the L-function.

ANSERS TO QUESTIONS:

1. d
2. a
3. b
4. b
5. d
6. a
7. b
8. c
9. a
10. b
11. b
12. c
13. d
14. a
15. d
16. a
17. d
18. c
19. b
20. b
21. c
22. b
23. a
24. d
25. 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
earn 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 opportunity 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 studying 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 Russell chose to study rather than to play tennis, the value of studying must have
been greater than the value of playing tennis.

4. A rational decisionmaker
a. ignores 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
action.
d. takes an action only if the combined benefits of that action and previous actions exceed the
combined costs of that action and previous actions.

5. Teresa 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 enjoys by eating three oranges minus the total
benefit she would have enjoyed by eating just the first two oranges.
b. determines Teresa’s willingness to pay for the first, second, and third oranges.
c. does not depend on how many oranges Teresa 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 because
a. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing
an extra bottle of water.
b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle
of water.
c. producers of diamonds have a much greater ability to manipulate diamond prices than
producers of water have to manipulate water prices.
d. water prices are held artificially low by governments, since water is necessary for life.

7. The principle that "trade can make everyone better off" applies to interactions and trade between
a. families.
b. states within the United States.
c. nations.
d. All of the above 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 which firms to work for and what to buy with their incomes.
d. Government policies are 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 economics 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 countries is involved.
c. government should become involved in markets when those markets 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 helping economists understand the complex world of international trade
involving many countries and many goods.
b. is useless, since the real world has many countries trading many goods.
c. can be useful only in situations involving two countries and two goods.
d. can be useful in the classroom, but is useless in the real 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 created it.
c. realistic and carefully constructed theory.
d. simplification of reality.

3. The two loops in the circular-flow diagram represent

a. (i) the flow of goods and (ii) the flow of services.
b. (i) the flow of dollars and (ii) other financial flows.
c. (i) inputs into production processes and (ii) outputs from production processes.
d. (i) the flows of inputs and outputs and (ii) the flow of dollars.

4. In the circular-flow diagram,

a. factors of production flow from government to firms.
b. goods and services flow from households to firms.
c. income paid 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 producing less of another good.
b. it is possible to produce more of both goods without 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 possible to produce more of any good at any cost.

6. The bowed-out shape of the production 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 possibilities 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 would be considered a topic of study in macroeconomics?

a. the effect of agricultural price support programs on the cotton industry
b. the effect on U.S. steel producers 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 following 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 better place.
c. Inflation is more harmful to the economy than is unemployment.
d. When public policies are evaluated, the benefits to the economy of improved equity 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. applies to most goods in the economy.
b. is represented by a downward-sloping demand curve.
c. is referred to as the law of demand.
d. All of the above are correct.

2. Which of the following would not be a determinant of the demand for a particular good?
a. prices of related goods
b. income
c. tastes
d. the prices of the inputs used to produce the good

3. If a good is normal, then an increase in income 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 curve for the good.
d. a movement up and to the left along the demand curve for the good.

4. Currently you purchase 6 packages of hot dogs a month. You will graduate from college in
December and you will start a new job in January. You have no plans to purchase hot dogs in
January. For you, hot dogs are
a. a substitute good.
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 pudding. You
notice that the price of bananas has increased. How would this price increase affect your demand
for vanilla pudding?
a. It would decrease.
b. It would increase.
c. It would be unaffected.
d. There is insufficient information given to answer the question.

6. What will happen in the rice market if buyers are expecting higher rice prices in the near future?
a. The demand for rice will increase.
b. The demand for rice will decrease.
c. The demand for rice will be unaffected.
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 increases.
b. There is an advance in technology that reduces the cost of producing tomatoes.
c. The price of fertilizer decreases, and fertilizer is an input in the production of tomatoes.
d. The price of tomatoes rises.

8. Suppose there is an increase 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 unchanged.

9. When the price of a good is higher than the equilibrium price,

a. a shortage 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 demanded exceeds quantity supplied.

10. Good X and good Y are substitutes. If the price of good Y increases, then the
a. demand for good X will decrease.
b. market price of good X will decrease.
c. demand for good X will increase.
d. quantity demanded 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. Consumers have experienced an increase in income and beef-production technology has
improved.
b. The price of chicken has risen and the price of steak sauce has fallen.
c. New medical evidence has been released that indicates a negative correlation between a
person’s beef consumption and his or her longevity.
d. The demand curve for beef must be positively sloped.

12. Which of the following events would cause the price of oranges to fall?
a. There is a shortage of oranges.
b. An article 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 Florida decreases, and Florida produces a significant proportion
of the nation’s oranges.
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 respond substantially to a change in price.
b. demand tends to be inelastic.
c. the law of demand often does not apply.
d. All of the above are correct.

2. If the price 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 demanded.
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 price 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. greater 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 the slope of the curve.
d. greater the absolute value of the change in total revenue when there is a movement from that
point upward and to the left along the demand curve.

6. In the case of perfectly inelastic demand,

a. the change in quantity demanded equals the change in price.
b. the percentage change in quantity demanded equals the percentage change in price.
c. infinitely-large changes in quantity 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 decrease in price from $61 to $59 will leave total revenue unchanged.
c. the maximum value of total revenue is $120,000.
d. All of the above are correct.

8. If the price elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of tuna will
decrease the quantity demanded of tuna by
a. 1.05% and tuna sellers' total 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 increase as a result.
d. 2.14% and tuna sellers' total revenue will decrease as a result.

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. positive and therefore pizza is a normal good.

10. Which of the following expressions represents a cross-price elasticity of demand?

a. percentage change in quantity demanded of apples divided by percentage change in quantity
supplied of apples
b. percentage change in quantity demanded of apples divided by percentage change in price of
pears
c. percentage change in price of apples divided by percentage change in quantity demanded of
apples
d. percentage change in quantity demanded of apples divided by percentage change in income

ANSWERS: BCBAA DDADB