Chapter 1:

International Economics is Different

Multiple Choice Questions

1. What is the effect on trade deficits of a country’s saving rate?

a. A low savings rate means that consumers are buying more, and more buying leads to
an increase in a country’s trade deficit.
b. A low savings rate means that people are spending more than they earn and that results
in increased financial difficulties for consumers, higher interest rate, and fewer
international sales, resulting in a decrease in a country’s trade deficit.
c. A high savings rate means that there is more money available for investment which
results in greater production and increased international sales which lead to lower trade
deficits.
d. A country’s savings rate has no effect on the country’s trade deficit.

2. “Job-seeking immigration brings net economic benefits not only to the immigrants, but also to
the receiving country overall.” But there are winners and losers within the receiving country.
Who among the following can be considered as a winner within the receiving country?
a. The workers who compete with the immigrants for jobs
b. The government of the receiving country
c. The consumers who buy the products that the immigrants help to produce
d. None of these options are correct.

3. Which of the following is an impact of increased illegal immigration on an economy?

a. The rate of inflation in the receiving country increases.
b. The demand for labor in the receiving country declines.
c. The demand for public goods like education and health care increases.
d. The real wage rate of workers increases.

4. The unskilled wage rate in a country may decline if

a. the corporate taxes are lowered by the government.
b. there’s increased immigration of low-skilled workers.
c. the aggregate demand for goods and services increases in the country.
d. the demand for unskilled workers increases.

5. The value of a country’s currency in terms of some other country’s currency is called _____.
a. the stock exchange
b. the exchange rate
c. the nominal interest rate
d. dollarization

6. Which of the following exchange rate policies was undertaken by the Chinese government in
1994?
a. The Chinese yuan was revalued against the U.S. dollar.
b. A free floating exchange rate regime was adopted.
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 c. The Chinese yuan was revalued against the euro.
d. The Chinese yuan was pegged to the U.S. dollar.

7. In 2004, China had a substantial trade surplus with

a. Russia
b. Japan
c. the United States
d. Brazil

8. “China is not a typical developing nation.” Which of the following economic features is most
likely to justify this claim?
a. China has a large trade deficit with the United States.
b. The Chinese government favors a freely floating exchange rate policy.
c. China has a high national saving rate.
d. The government of China spends a significant portion of its revenue on national defense.

9. Which of following is most likely to happen when the dollar appreciates against the euro?
a. There will be a huge inflow of “hot money” to the European nations.
b. The prices of American goods in the European countries will decline.
c. The prices of European goods in the U.S. markets will decline.
d. The rate of inflation in the United States will increase.

10. The Chinese government’s intervention in the foreign exchange market by buying U.S.
dollars and selling yuan had the effect of
a. weakening the U.S dollar to increase the U.S. trade deficit with China.
b. strengthening the U.S dollar to increase the U.S. trade deficit with China.
c. strengthening the yuan to increase the U.S. trade deficit with China.
d. weakening the yuan to decrease the U.S. trade deficit with China.

11. On July 21st, 2005, the Chinese government changed the value of the yuan from 8.28 yuan
per U.S. dollar to 8.11 yuan per U.S. dollar. One effect of this change should have been
a. an increase in the prices of American goods in the Chinese market.
b. an increase in the dollar price of the Chinese goods.
c. a decline in the average price level in the United States
d. market pressure to return the rate to 8.28 yuan per dollar.

12. Since the late 1990s, to prevent the yuan from appreciating against the U.S. dollar, the
Chinese central bank
a. has been trying to hold euros and British pounds as foreign assets.
b. has been buying dollars and selling yuan in the foreign exchange market.
c. has purchased Chinese government bonds.
d. has been selling foreign assets to replenish it dollar reserves.

13. The exchange rate policy of a “crawling peg” adopted by the Chinese government in 2005
means that the government
a. allowed small and controlled changes in the exchange-rate value over time.

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 b. pegged the Yuan to the U.S. dollar at the equilibrium exchange rate.
c. held a balanced portfolio of assets including a variety of foreign currencies.
d. caved in to pressures from foreign governments.

14. The Hong Kong dollar is pegged to the U.S. dollar at a rate of 7.8 Hong Kong dollars to 1
U.S. dollar. Suppose the central bank of Hong Kong changes the exchange value to 7.3 Hong
Kong dollars to 1 U.S. dollar. Which of the following is most likely to be true in this context?
a. The Hong Kong dollar has been revalued by 0.5 percent.
b. The Hong Kong dollar has been devalued by 0.5 percent.
c. The Hong Kong dollar has been revalued by 6.4 percent.
d. The Hong Kong dollar has been devalued by 6.2 percent.

15. The central bank of Alanza, a developing economy, persistently intervenes in the foreign
exchange market to prevent its currency from appreciating against the dollar. Which of the
following is the most probable consequence of this intervention by the central bank?
a. The money supply in Alanza will decline.
b. Alanza’s exports will decline in the near future.
c. The rate of inflation in Alanza will increase.
d. Alanza is most likely to have a trade deficit with the United States.

16. Which of the following factors is most likely to lead to a decline in a country’s exports?
a. An decrease in corporate taxes
b. A decline in the nominal interest rate
c. A decline in the input prices
d. An appreciation of the domestic currency vis-à-vis foreign currencies

17. Which of the following is a relevant monetary policy during an acute financial crisis in an
economy?
a. Investment in foreign government bonds should be increased.
b. The domestic currency should be revalued.
c. The reserve requirements for the commercial banks should be increased.
d. The nominal interest rates should be lowered.

18. What is the proper characterization of the European Union (EU), and what is its primary
accomplishment?
a. The EU is a regional trade bloc which controls the money supply in each member
country.
b. The EU is a regional trade agreement that has eliminated most trade barriers between
member countries.
c. The EU is a trade treaty that provides a forum where member countries can resolve
their trade disputes.
d. The EU is a trading cooperative that protects member countries from unfair trade tactics
by non-member countries.

19. A computer programmer working in India relocates to the United States. This is an example
of

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 a. international outsourcing.
b. factor mobility.
c. cross-border trade.
d. factor intensity reversal.

20. _____ is considered to be the least mobile factor internationally.

a. Labor
b. Capital
c. Entrepreneurship
d. Land

21. Which of the following is NOT a fiscal policy?

a. Increasing tariffs to reduce imports
b. Offering subsidies to export firms
c. Increasing the money supply to expand aggregate demand
d. Lowering personal tax rates to influence labor supply

22. The supply of money in a country like the United States is controlled by the
a. central bank of the country.
b. political party in charge of the government of the country.
c. International Monetary Fund.
d. commercial banks in the country.

True/False Questions

1. National sovereignty means that no one person or group is in charge of the international
economy.
Answer: TRUE

2. Evidence shows that the Chinese Yuan was substantially overvalued against the U.S. dollar in
mid-2005.
Answer: FALSE

3. During 2001-2004 the European Union had a large trade surplus with China.
Answer: FALSE

4. If the dollar per pound exchange rate changes from $1.50 per pound to $2 per pound, it
implies that the dollar has appreciated against the pound.
Answer: FALSE

5. Under a fixed exchange rate system, the revaluation of the local currency against the dollar
would result in an improvement in the country’s trade balance with the United States.
Answer: FALSE

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6. A country cannot set its own policies toward the international movement of productive
resources.
Answer: FALSE

7. Although financial capital is relatively mobile as an input, it is subject to a “home bias” in

which people prefer to invest within their own country.
Answer: TRUE

8. Banks open branches in countries where profits are taxed less and their books of accounts are
less scrutinized.
Answer: TRUE

9. Monetary policies adopted by a country do not affect its trading partners as long as the partner
countries use different currencies.
Answer: FALSE

Essay Questions

10. “Job-seeking immigration brings net economic benefits not only to the immigrants, but also
to the receiving country overall.” Justify the statement.

11. In mid-2010, the Chinese government ended its fixed exchange rate to the U.S. dollar and
began to allow the yuan to appreciate gradually. How would this shift affect the Chinese
economy?

12. How to evaluate the trade war launched by President Trump ?

13. What will be the impact of Brexit on the UK?

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© 2016 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner.  This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.