Part 11 Test Review Answers
Part 1: Define and Give an Example of the Following Terms
1. Comparative Advantage
2. Tariff
3. Economies of Scale
4. Import Quota
5. Imports
6. Exports
7. Appreciation
8. Depreciation
9. Trade Balance
10. Net Capital Outflow
11. Loanable Funds
12. Market for Foreign Currency Exchange
13. Capital Flight
Part 2: Answer the Following Questions
14. When a country that exported a particular good abandons a free-trade policy and adopts a notrade policy,
Figure 9-13
15. Refer to Figure 9-13. The world price and world quantity demanded after trade are
16. Refer to Figure 9-13. Without trade, domestic production and domestic consumption,
respectively, are
Figure 9-11
17. Refer to Figure 9-11. Producer surplus in this market before trade is
18. Refer to Figure 9-11. Total surplus in this market after trade is
19. Refer to Figure 9-11. Consumer surplus in this market after trade is
20. When a country allows trade and becomes an importer of a good, who wins and who loses?
21. Can a country's trade balance be positive, negative, or 0?
22. When making investment decisions, what do investors compare?
23. What would both make foreigners more willing to engage in U.S. portfolio investment?
Figure 9-1 The figure illustrates the market for wool in New Zealand.
Price
75
70
65
Domestic supply
60
A
55
World
price
50
B
G
D
45
H
F
40
35
C
Domestic demand
30
25
20
15
10
5
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Quantity
24. Refer to Figure 9-1. From the figure it is apparent that New Zealand will ___________ wool if
trade is allowed.
25. What happens when a country's central bank increases the money supply?
26. You hold currency from a foreign country. If that country has a higher rate of inflation than the
United States, then over time the foreign currency will buy ____________ goods in that country
and buy _______________dollars.
27. Domestic saving must equal domestic investment in CLOSED / OPEN / BOTH economies.
28. Catherine, a citizen of Spain, decides to purchase bonds issued by Chile instead of ones issued by
the United States even though the Chilean bonds have a higher risk of default. An economic
reason for her decision might be that
29. An increase in the budget deficit causes domestic interest rates to ____________ investment to
____________ and GDP to ____________
30. If the German beer industry subsidizes the beer that it sells to the United States, what
happen/should happen?
31. What could make both the equilibrium real interest rate and the equilibrium quantity of loanable
funds increase?
32.
Using the graph, assume that the government imposes a $1 tariff on hammers. Answer the
following questions given this information.
a.
What is the domestic price and quantity demanded of hammers after the tariff is
imposed?
b.
What is the quantity of hammers imported before the tariff?
c.
What is the quantity of hammers imported after the tariff?
d.
What would be the amount of consumer surplus before the tariff?
e.
What would be the amount of consumer surplus after the tariff?
f.
What would be the amount of producer surplus before the tariff?
g.
What would be the amount of producer surplus after the tariff?
h.
What would be the amount of government revenue because of the tariff?
i.
What would be the total amount of deadweight loss due to the tariff?
33. List the factors that might influence a country's exports, imports, and trade balance.
34. Explain how an increase in the demand for capital goods in the U.S. can lead to a change in the
U.S. exchange rate.
Part 11 Test Review Answers
Part 1: Define and Give an Example of the Following Terms
1. Comparative Advantage
2. Tariff
3. Economies of Scale
4. Import Quota
5. Imports
6. Exports
7. Appreciation
8. Depreciation
9. Trade Balance
10. Net Capital Outflow
11. Loanable Funds
12. Market for Foreign Currency Exchange
13. Capital Flight
Part 2: Answer the Following Questions
14. When a country that exported a particular good abandons a free-trade policy and adopts a notrade policy,
a. producer surplus decreases and total surplus decreases in the market for that good.
Figure 9-13
15. Refer to Figure 9-13. The world price and world quantity demanded after trade are
a. $8 and 900.
16. Refer to Figure 9-13. Without trade, domestic production and domestic consumption,
respectively, are
a. 600 and 600.
Figure 9-11
17. Refer to Figure 9-11. Producer surplus in this market before trade is
a. B + C.
18. Refer to Figure 9-11. Total surplus in this market after trade is
a. A + B + C + D
19. Refer to Figure 9-11. Consumer surplus in this market after trade is
a. A + B + D.
20. When a country allows trade and becomes an importer of a good, who wins and who loses?
a. domestic producers of that good lose and domestic consumers of that good gain.
21. Can a country's trade balance be positive, negative, or 0?
a. It can be any of those.
22. When making investment decisions, what do investors compare?
a. compare the real interest rates offered on different bonds.
23. What would both make foreigners more willing to engage in U.S. portfolio investment?
a. U.S. interest rates rise, the default risk of U.S. assets fall
Figure 9-1
The figure illustrates the market for wool in New Zealand.
Price
75
70
65
Domestic supply
60
A
55
World
price
50
B
G
D
45
H
F
40
35
C
Domestic demand
30
25
20
15
10
5
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Quantity
24. Refer to Figure 9-1. From the figure it is apparent that New Zealand will ___________ wool if
trade is allowed.
a. New Zealand will export wool if trade is allowed.
25. What happens when a country's central bank increases the money supply?
a. price level rises and its currency depreciates relative to other currencies in the world.
26. You hold currency from a foreign country. If that country has a higher rate of inflation than the
United States, then over time the foreign currency will buy ____________ goods in that country
and buy _______________dollars.
a. fewer goods in that country and buy fewer dollars.
27. Domestic saving must equal domestic investment in CLOSED / OPEN / BOTH economies.
a. closed, but not open economies.
28. Catherine, a citizen of Spain, decides to purchase bonds issued by Chile instead of ones issued by
the United States even though the Chilean bonds have a higher risk of default. An economic
reason for her decision might be that
a. the Chilean bonds pay a higher rate of interest.
29. An increase in the budget deficit causes domestic interest rates to ____________ investment to
____________ and GDP to ____________
a. to rise, investment to fall, and GDP to fall.
30. If the German beer industry subsidizes the beer that it sells to the United States, what
happen/should happen?
a. harm done to U.S. steel producers is less than the benefit that accrues to U.S.
consumers of steel.
31. What could make both the equilibrium real interest rate and the equilibrium quantity of loanable
funds increase?
a. The demand for loanable funds shifts right.
32.
Using the graph, assume that the government imposes a $1 tariff on hammers. Answer the
following questions given this information.
a.
b.
c.
d.
e.
f.
g.
h.
i.
What is the domestic price and quantity demanded of hammers after the tariff is
imposed?
What is the quantity of hammers imported before the tariff?
What is the quantity of hammers imported after the tariff?
What would be the amount of consumer surplus before the tariff?
What would be the amount of consumer surplus after the tariff?
What would be the amount of producer surplus before the tariff?
What would be the amount of producer surplus after the tariff?
What would be the amount of government revenue because of the tariff?
What would be the total amount of deadweight loss due to the tariff?
a.
b.
c.
d.
e.
f.
g.
h.
i.
33.
a.
b.
c.
d.
e.
$6, 84
66
44
$384
$294
$45
$80
$44
$11
List the factors that might influence a country's exports, imports, and trade balance.
the tastes of consumers for domestic and foreign goods
the prices of goods at home and abroad
the exchange rates at which people can use domestic currency to buy foreign currencies
the costs of importing goods from country to country
the policies of the government toward international trade
34. Explain how an increase in the demand for capital goods in the U.S. can lead to a change in the
U.S. exchange rate.
An increase in demand for capital goods is an increase in investment demand. As investment
demand increases, the demand for loanable funds shifts right. This shift leads to an increase in
the real interest rate. The increase in the interest rate reduces net capital outflow. The
reduction in net capital outflow shifts the supply of currency in the foreign exchange market to
the left, raising the real exchange rate