Question 1
Consider the Ricardian model with two countries and two goods. Which one of the following
statements is correct?
a. As long as relative prices in free trade differ from relative prices under autarky, free trade
leads to an improvement in welfare in each of the two countries.
b. Free trade always leads to an improvement in welfare in the two trading countries,
independently on whether relative prices change or not.
c. Free trade improves the welfare only for the country that has a comparative advantage in the
production of the exported good.
d. All of the above.
Question 2
In the light of the Ricardian model with two countries and two goods, consider the following
statement: “Foreign competition is unfair and hurts other countries when it is based on low wages”.
What do you think about it?
a. It is true, as low wage are typically the result of poor labor standards in those countries and
workers are more likely to be hurt there.
b. It is true, especially if low wages abroad lead to a reduction in domestic wages.
c. It is false, as the fact that wages are low in the Foreign country is irrelevant from the point of
view of welfare in the Home country.
d. None of the above.
Question 3
Consider a standard Ricardian model with two countries and two goods being produced, apples and
potatoes. Assume that in the Home country labor is three times as productive as in Foreign in the
production of apples, whereas it is only one and a half times as productive when it comes to
potatoes. Which of the following statements is true?
a. Trade liberalization will equalize wages in the two countries. This is the factor price
equalization theorem.
b. Trade liberalization will lead to ambiguous results as far as wages are concerned, i.e. we will
not be able to know whether wages will be higher in Home or in Foreign.
c. Trade liberalization leads to wages being higher in Home, and since the country has an
absolute advantage in both sectors, wages will be at least three times as high in Home than
in foreign.
d. Trade liberalization will lead wages to be higher in Home than in Foreign, and the relative
wage between the two countries will be comprised between one and a half and three.
Question 4
In the specific factors model, a country produces two goods, using three factors as inputs. What is
the effect of an increase in the supply of the mobile factor on output levels and income distribution?
a. The output level of the good using intensively the mobile factor increases, whereas the
output of the other good decreases. As for income distribution, the income of the fixed
factor employed in the production of the good using intensively the mobile factor will
increase, whereas all other factor owners will see their income decline.
b. The output level of both goods will increase, but the effect on factor income is in general
ambiguous.
c. The output level of both goods will increase, and similarly the income of the specific factors
will also increase. On the other hand, the effect on the income of the mobile factor is
ambiguous.
d. The output level of both goods will increase, and similarly the income of the specific factors
will also increase. The income of the mobile factor will instead decline.
Question 5
In the light of the specific factors model, consider the following statement: “New Zealand’s sheep
farmers and yacht builders are in favour of a policy that welcomes the arrival of hard working
foreign immigrants”. In your opinion does this policy reflect their economic interests?
a. No, this is a statement which is just inspired by the long standing tradition of open
immigration policy which has been followed by New Zealand for centuries.
b. No, this statement is economic non–sense. Sheep farmers should fear the arrival of
competitors in their industry, and the same is true for yacht builders.
c. No, as hard working immigrants will be beneficial only for sheep farmers. Yacht builders
don’t need immigrants to build nice boats!
d. Yes. Both sheep farmers and yacht builders will see their wage bill decline if hard working
immigrants come to New Zealand and supply cheap labor.
Question 6
Within the context of the two–good, two–factor Heckscher–Ohlin model, the Rybczynski theorem
states that if an economy produces both goods:
a. Holding goods prices fixed, an increase in the endowment of one input will lead to an
increase in the output of both goods.
b. Holding factor prices fixed, an increase in the endowment of one input will lead to an
increase in the output of both goods.
c. Holding goods prices fixed, an increase in the endowment of one input will lead to an
increase in the output of both goods. The output of the good that uses that factor intensively
will increase more than that of the other good.
d. None of the above.
Question 7
Mexico and the United States have started to trade freely. In the context of the Heckscher–Ohlin
model with two goods and two inputs (skilled and unskilled labor), what are the patterns of
trade/effects of trade liberalization you expect to see?
a. Mexico exports the unskilled labor intensive good. Income inequality will increase both in
Mexico and the United States.
b. Mexico exports the skilled labor intensive good. Income inequality will decrease both in
Mexico and the United States.
c. Mexico exports the skilled labor intensive good. Income inequality will increase in Mexico,
and decrease in the United States.
d. Mexico exports the unskilled labor intensive good. Income inequality will decrease in
Mexico, whereas it will increase in the United States.
Question 8
According to the two–country, two–factor Heckscher–Ohlin model, what are the welfare effects of
trade liberalization?
a. Both countries gain from trade, and all individuals in each country are better off after trade
liberalization.
b. Only the Home country gains from trade, whereas the other country loses. International
trade is a zero sum game.
c. Both countries gain from trade, but within each country only the owners of the factor used
intensively in the exporting sector will be better off.
d. None of the above.
Question 9
Consider a two–good (computers and textiles), two–factor (capital and labor) Heckscher–Ohlin
model, and assume that computers are capital intensive. What is the implication of this assumption?
a. An increase in the relative price of computers leads to a decline in the relative price of labor.
b. An increase in the relative price of computers leads to an increase in the relative price of
capital.
c. A decrease in the relative price of computers leads to an increase in the relative price of
labor.
d. All of the above.
Question 10
What is the Leontiev Paradox?
a. In an empirical test of the Ricardian model, Leontiev found that countries do not export
based on their comparative advantage.
b. In an empirical test of the Ricardian model, Leontiev discovered that countries do not export
goods for which transportation costs are very low.
c. In an empirical test of the Heckscher–Ohlin model, Leontiev discovered that the capital
content of exports of the rest of the world to the United States was lower than in its imports.
d. In an empirical test of the Heckscher–Ohlin model, Leontiev discovered that the capital
content of exports of the rest of the world to the United States was higher than in its imports.
Question 11
In a two–good, two–country model with a representative consumer, what are the welfare effects of
an increase in the relative price of the Home’s exported good in the international market?
a. The foreign economy is made better off.
b. The effect on the domestic economy is ambiguous.
c. The domestic economy is made better off.
d. None of the above.
Question 12
“Growth for a trading economy is desirable. It will always lead to an improvement in the standard
of living of the country.” Do you agree with this statement?
a.
b.
c.
d.
Yes, obviously economic growth is always desirable for an economy.
Yes, but only if growth takes place in the foreign country.
No, this is true only if growth takes place in the home country.
No, growth in a trading economy might have negative effects.
Question 13
Economists John Maynard Keynes and Bertil Ohlin had different views on the so called “transfer
problem.” Which of the following statements is true?
a. Keynes thought that the monetary transfers required by the Allied powers at the end of the
first world war were an understatement of the true burden on Germany.
b. Ohlin disagreed with Keynes because in his opinion Germany’s terms of trade as a result of
the repatriation could actually improve.
c. Ohlin disagreed with Keynes, because in his opinion the reparation payments would lead to
an increase in the demand for German products.
d. All of the above.
Question 14
What is the role of the free entry assumption in the monopolistic competition model of international
trade?
a. It guarantees that firms act as monopolists, i.e. they choose the level of output that equalizes
marginal costs and marginal revenues.
b. It establishes that firms will behave as price takers.
c. It guarantees that firms will make zero profits in equilibrium.
d. None of the above.
Question 15
What is the effect of an increase in market size in the symmetric firms monopolistic competition
model of international trade?
a. It will lead to an increase in the number of products available, and an increase in the average
production cost.
b. It will lead to a decrease in the number of products available, and an increase in the size of
each firm.
c. It will lead to an increase in the number of products available and to a decrease in the
average cost.
d. It will lead to a decrease in the number of products available and an increase in the average
cost.
Question 16
In international trade, what is commonly meant by “dumping”?
a. It is the practice of moving the production of older goods away from developed countries
and to developing countries.
b. It is the practice of charging higher prices in the country were a product is manufactured
than abroad.
c. It is the practice of donating second hand products to developing countries.
d. None of the above.
Question 17
In a simple model of international migration with one good and two factors (labor and land), what is
the effect of an inflow of foreign workers on the welfare of domestic agents?
a. It increases the welfare of both domestic workers and land owners.
b. It decreases the welfare of both domestic workers and land owners.
c. It increases the welfare of domestic landowners, but it decreases the welfare of domestic
workers.
d. It increases the welfare of domestic workers, but it decreases the welfare of domestic
landowners.
Question 18
What are the welfare effects of a tariff for the country that uses it?
a. It increases domestic welfare, since it decreases the international price of the imported good.
b. It decreases domestic welfare, since it increases the international price of the imported good.
c. It increases domestic welfare if the country is large.
d. It decreases domestic welfare if the country is small.
Question 19
What is the main difference between a tariff and a quota?
a. A quota can never replicate the equilibrium outcome (domestic price, quantities produced
and consumed domestically) generated by a tariff.
b. A quota is always less efficient than a tariff.
c. The revenues associated to a tariff are captured by the government that imposes it, whereas
for a quota this might not be the case.
d. None of the above.
Question 20
In a small economy, the introduction of an export subsidy:
a. Improves domestic welfare, as exporters have now an easier time selling their goods abroad.
b. Improves domestic welfare, as the domestic price for the good declines after the introduction
of the subsidy.
c. Decreases domestic welfare, as the loss in consumer surplus is bigger than the gain in
producer surplus associated to the subsidy.
d. None of the above.
Question 21
Suppose you are a European investor who wants to invest € 50,000 and who has exchange rate
expectations as given in the table below.
Current exchange rate
Expected future exchange rate
(price in euro)
(price in euro)
British pound
€ 1,51
€ 1,48
Canadian dollar
€ 0,65
€ 0,67
American dollar
€ 0,77
€ 0,80
Chinese yuan
€ 0,099
€ 0,104
Given these expectations, in which currency can the European investor hold his money best?
a. British pound
b. Canadian dollar
c. American dollar
d. Chinese yuan
Question 22
Evaluate the statements below and determine whether they are true or false.
Statement I: A country can permanently improve its competitive position on world markets by once
adjusting the exchange rate.
Statement II: Assume that the EU and China are trading different goods and that PPP holds. When
the European Central Bank limits money supply in this case, the euro will appreciate against the
yuan.
a. Statement I is true Statement II is true
b. Statement I is false Statement II is true
c. Statement I is true Statement II is false
d. Statement I is false Statement II is false
Question 23
Evaluate the statements below and determine whether they are true or false.
Statement I: Investors that are risk neutral, demand a risk premium when investing in risky equity.
Statement II: The interest rate parity condition states that the interest rate at home minus the interest
rate abroad is equal to the expected appreciation of the foreign currency.
a. Statement I is true Statement II is true
b. Statement I is false Statement II is true
c. Statement I is true Statement II is false
d. Statement I is false Statement II is false
Question 24
What is the correct order of the different exchange rate regimes in time (starting with the oldest
regime)?
a. Bretton Woods, world wars and recession, Gold Standard, floating rates
b. Gold Standard, Bretton Woods, world wars and recession, floating rates
c. floating rates, Gold Standard, world wars and recession, Bretton Woods
d. Gold Standard, world wars and recession, Bretton Woods, floating rates
Question 25
Which quadrant of the so–called Swan diagram below shows a situation of inflation and current
account surplus?
E
domestic equilibrium
external equilibrium
A
B
D
C
0
G
E stands for the real exchange rate and G for government consumption.
a. A
b. B
c. C
d. D
Question 26
In the so–called monetary approach with flexible exchange rates, the exchange rate is given by the
following equation:
s m mf i if
y yf ,
with s, m, i and y denoting the natural logarithm of the exchange rate, money supply, interest rate
and real income. The subscript f denotes foreign variables. Which of the statements below is true?
Notice: s is defined as domestic currency / foreign currency.
a. A more rapid decrease in the Home money supply than in the Foreign money supply
leads to a depreciation of the Home currency. An increase in the domestic income level
leads to an appreciation of the Home currency.
b. A more rapid increase in the Home money supply than in the Foreign money supply
leads to a depreciation of the Home currency. A decrease in the domestic income level
leads to an appreciation of the Home currency.
c. A more rapid increase in the Home money supply than in the Foreign money supply
leads to a depreciation of the Home currency. An increase in the domestic income level
leads to an appreciation of the Home currency.
d. A more rapid increase in the Home money supply than in the Foreign money supply
leads to an appreciation of the Home currency. An increase in the domestic income level
leads to an appreciation of the Home currency.
Question 27
Fill in the correct words in the sentences below.
One of the problems of having one currency in a large area is the phenomenon of [1]. There are a
number of ways to mitigate this problem. Currently in the European Monetary Union [2] is a way
that does not work very well, but [3] in fact is.
a. [1] = optimal Currency Area; [2] = labour mobility; [3] fiscal transfers
b. [1] = asymmetric shocks; [2] = wage flexibility; [3] fiscal transfers
c. [1] = currency speculation; [2] = wage flexibility; [3] free trade
d. [1] = asymmetric shocks; [2] = labour mobility; [3] free trade
Question 28
Consider an EU investor who invests in a car production plant in China. The investor receives
shares and in return supplies the production plant with equipment used in the assembly lines. How
does this transaction affect the current and capital account of China?
a. current account increases; capital account decreases
b. current account decreases; capital account decreases
c. no change in the current and capital account
d. current account decreases; capital account increases
Question 29
Consider the following figure (p denotes prices, s the exchange rate (currency of country j / US–$)):
Complete the following sentences:
The figure illustrates that the … version of “purchasing power parity” (PPP) is empirically validated
in the long–run. This … imply that the “Law of one price” is valid in the long–run.
a. relative; does not
b. absolute; does not
c. relative; does
d. absolute; does
Question 30
Evaluate the two statements below and determine whether they are true or false.
Statement I: When the euro appreciates against the dollar, the dollar always depreciates against the
euro.
Statement II: It follows from the so–called triangular arbitrage, that when you know the exchange
rates between your home currency and foreign currencies, you can derive the exchange rates
between foreign currencies.
a. statement I is true, statement II is true
b. statement I is true, statement II is false
c. statement I is false, statement II is true
d. statement I is false, statement II is false
Question 31
How is the following effect called:
“An increase in the expected domestic inflation rate ceteris paribus leads to an equal increase in
the interest rate on domestic assets.”
a. Rotterdam effect
b. Heckscher–Ohlin effect
c. Fisher effect
d. Marshall effect
Question 32
A Russian car producer reassembles cars from old cars imported from the US. After assembly the
producers sells the cars back to the US, where the producer is a price taker. Assume that the dollar
depreciates against the Russian ruble. How does this affect the cost of production and the profits
(measured in rubles) of the Russian producer?
production costs
profits
a.
increase
decrease
b.
decrease
decrease
c.
increase
increase
d.
decrease
increase
Question 33
Suppose you are an investor who is specialized in trading in euros and dollars. You have received
the following information: inflation in Europe is higher than expected, while the USA economy is
growing faster than expected. In which currency would you invest?
a. Dollar, because the dollar is likely to appreciate.
b. Euros, because the dollar is likely to appreciate.
c. Dollar, because the dollar is likely to depreciate.
d. Euros, because the dollar is likely to depreciate.
Question 34
Consider an equilibrium on the money market. If the level of output increases what happens with
the equilibrium interest rate?
a.
b.
c.
d.
It increases.
It decreases.
It remains constant.
It increases, decreases or remains constant.
Question 35
The Bretton Woods agreement collapsed because of
a. the n–1 problem.
b. the policy trilemma.
c. the Taylor rule.
d. the J–curve effect.
Question 36
What are the long–run effects of a change in the money supply?
a. Ambiguous effect on the long–run values of the interest rate and real output, a
disproportional change in the long–run value of the price level in the same direction.
b. Ambiguous effect on the long–run values of the interest rate and real output, a
proportional change in the long–run value of the price level in the opposite direction.
c. Proportional effect on the long–run values of the interest rate and real output in the same
direction, a proportional change in the long–run value of the price level in the same
direction.
d. No effect on the long–run values of the interest rate and real output, a proportional
change in the long–run value of the price level in the same direction.
Question 37
Which one of the following statements is the most accurate?
a. A permanent increase in a country's money supply
appreciation of its currency against foreign currencies.
b. A temporary increase in a country's money supply
depreciation of its currency against foreign currencies.
c. A permanent increase in a country's money supply
depreciation of its currency against foreign currencies.
d. A permanent increase in a country's money supply
appreciation of its currency against foreign currencies.
causes a proportional long–run
causes a proportional long–run
causes a proportional long–run
causes a proportional short–run
Question 38
After a permanent increase in the money supply,
a. the exchange rate overshoots in the short–run.
b. the exchange rate smoothly appreciates in the short–run.
c. the exchange rate overshoots in the long–run.
d. the exchange rate smoothly depreciates in the short–run.
Question 39
What is a main purpose of the European Stability and Growth Pact?
a. To prevent beggar–thy–neighbor policies.
b. To establish equal rates of economic growth in the Euro–zone.
c. To prevent inflationary pressure on European Central Bank.
d. To centralize and coordinate European fiscal policy.
Question 40
Consider a system of fixed exchange rates. Which one of the following statements is the most
accurate?
a. Fiscal policy affects only international reserves.
b. Fiscal policy affects only output and employment.
c. Fiscal policy affects only employment.
d. Fiscal policy affects output, employment and international reserves at the same time.