Chapter 10

Question 1

the advantage that comes from producing something at a lower opportunity cost than others are able to do

Answer 1

comparative advantage

Question 2

the average price of a country’s exports compared with the price of its imports

Answer 2

terms of trade

Question 3

the economic policy of protecting domestic producers by restricting the importation of foreign products

Answer 3

protectionism

Question 4

a limit imposed on the production or sale of a product

Answer 4

quota

Question 5

a tax (duty) levied on imports

Answer 5

tariff

Question 6

government restrictions limiting the amount of foreign currencies that can be obtained

Answer 6

currency exchange controls

Question 7

an agreement by an exporting country to restrict the amount of its exports to another country

Answer 7

voluntary export restriction

Question 8

the rate at which one currency is exchanged for another

Answer 8

exchange rate

Question 9

the rise in the exchange rate of one currency for another

Answer 9

currency appreciation

Question 10

the fall in the exchange rate of one currency for another

Answer 10

currency depreciation

Question 11

a currency exchange rate determined by the market forces of supply and demand and not interfered with by government actions

Answer 11

flexible exchange rate

Question 12

a currency exchange rate pegged by government and therefore prevented from raising or falling

Answer 12

fixed exchange rate

Question 13

a theory suggesting that exchange rates will change so as to equate the purchasing power of each currency

Answer 13

purchasing power parity theory

Question 14

the process of buying a commodity in one market, where the price is low, and immediately selling it in a second market where the price is higher

Answer 14

arbitrage

Question 15

the purchase of real assets

Answer 15

direct investment

Question 16

the purchase of shares or bonds representing less than 50 percent ownership

Answer 16

portfolio investment

Question 17

a payment by government for the purpose of increasing some particular activity or increasing the output of a particular good

Answer 17

subsidy

Question 18

the refixing by government of an exchange rate at a lower lever

Answer 18

devaluation

Question 19

an exchange rate that is not officially fixed by government but is managed by the central banks ongoing intervention in the market

Answer 19

dirty float

Question 20

an accounting of a country’s international transactions that involves the payment and receipt of foreign currencies

Answer 20

balance of payment

Question 21

a subcategory of the balance of payment that shows the income or expenditure related to exports and imports

Answer 21

current account

Question 22

a subcategory of the balance of payment that reflects changes in ownership of assets associated with foreign investment

Answer 22

capital account

Question 23

a subcategory of the balance of payments that shows the change in a country’s official foreign exchange reserve

Answer 23

official settlements account

Question 24

the value of a country’s exports of goods and services less the value of its imports

Answer 24

balance of trade

Question 25

income (wages, interest, dividend) that nationals receive from providing their services to another country

Answer 25

foreign factor income

Question 26

the idea that when a government borrows to finance a deficit, it crowds out private investment because it causes interest rates to rise

Answer 26

crowding-out effect

Question 27

a curve that illustrates the inverse relationship between unemployment and inflation rates

Answer 27

phillips curve

Question 28

the simultaneous occurrence of high inflation and unemplyment

Answer 28

stagflation

Question 29

the graphical representation of the idea that in terms of tax revenue, there is an optimal tax rate; above or below this rate, tax revenue would be lower

Answer 29

laffer curve

Question 30

a decrease in the overall price level

Answer 30

deflation

Question 31

the proposition that “supply creates its own demand” that is, production (supply) creates sufficient income and thus spending (demand) to purchase the production (attributed to french economist Jean-Baptiste

Answer 31

Say’s law

Question 32

a financial instrument whose value is derived from some other fixed-return asset

Answer 32

derivative

Question 33

a financial institution that assists corporations and governments in raising money by acting as their agent in selling new bonds to the public

Answer 33

investment bonds

Question 34

an unregulated investment fund that is open only to a limited range of investors who pay a performance fee to the funds managers

Answer 34

hedge fund

Question 35

a mortgage made to a borrower with a low credit rating that carries a higher interest rate than that charged to a conventional borrower

Answer 35

sub-prime mortgage