OT 3

Question 1

What economic concept is the most relevant when defining comparative advantage?

a. sunk cost
b. efficiency
c. scarcity
d. opportunity cost

Answer 1

d. opportunity cost

Question 2

A firm in India sells jackets to a Canadian department store chain. Which of the following correctly identifies the effects of this transaction?

a. It decreases Canadian net exports and increases Indian net exports.
b. It increases Canadian net exports and decreases Indian net exports.
c. It decreases Canadian and Indian net exports.
d. It increases Canadian and Indian net exports.

Answer 2

a. It decreases Canadian net exports and increases Indian net exports.

Question 3

Which of the following best defines the nominal exchange rate?

a. It is the rate at which a person can trade the currency of one country for the currency of another.
b. It is the nominal interest rate in one country divided by the nominal interest rate in the other country.
c. It is the number of goods a person can trade for a similar good in another country.
d. It is the price of a good in one country divided by the price of the same good in another.

Answer 3

a. It is the rate at which a person can trade the currency of one country for the currency of another.

Question 4

What does net capital outflow measure?

a. the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners
b. the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic goods and services sold to foreigners
c. domestic assets held by foreigners minus foreign assets held by domestic residents
d. foreign assets held by domestic residents minus domestic assets held by foreign residents

Answer 4

a. the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners

Question 5

Which of the following would be Canadian foreign direct investment?

a. A Canadian citizen opens a guitar store in Hong Kong.
b. A Swiss bank buys a Canadian government bond.
c. A German tractor factory opens a plant in Victoria, British Colimbia.
d. Your Canadian-based mutual fund buys shares of stock in Eastern European companies.

Answer 5

a. A Canadian citizen opens a guitar store in Hong Kong.

Question 6

If a Canadian shirt-maker purchases cotton from Egypt, which of the following correctly identifies the effects of this transaction?

a. Canadian net exports increase, and Canadian net capital outflow decreases.
b. Canadian net exports decrease, and Canadian net capital outflow decreases.
c. Canadian net exports increase, and Canadian net capital outflow increases.
d. Canadian net exports decrease, and Canadian net capital outflow increases.

Answer 6

b. Canadian net exports decrease, and Canadian net capital outflow decreases.

Question 7

If goods in Canada cost the same number of dollars as German goods cost in euros, the real exchange rate would be computed as how many German goods per Canadian goods?

a. the amount of Canadian currency that can be bought with one unit of German currency
b. the amount of German currency that can be bought with one unit of Canadian currency
c. the price of the Canadian goods
d. one

Answer 7

b. the amount of German currency that can be bought with one unit of Canadian currency

Question 8

If the world real interest rate exceeds the Canadian real interest rate, what would Canadian savers most likely do?

a. Canadian savers will prefer to wait until the two real interest rates are again equal.
b. Canadian savers would prefer to buy foreign assets.
c. Canadian savers would prefer to buy Canadian assets.
d. Canadian savers will sell their foreign assets and buy Canadian assets instead.

Answer 8

b. Canadian savers would prefer to buy foreign assets.

Question 9

Which of the following do economists generally support?

a. export subsidies
b. free international trade
c. government management of trade
d. trade restrictions

Answer 9

b. free international trade

Question 10

What does purchasing-power parity imply?

a. that the nominal exchange rates should be equal to 1 for all currencies
b. that the rent for an apartment should be the same everywhere
c. that the price of a standard hamburger should be the same everywhere
d. that real incomes should be the same in all countries

Answer 10

c. that the price of a standard hamburger should be the same everywhere

Question 11

What does comparative advantage reflect?

a. terms of trade advantage
b. productivity
c. efficiency
d. relative opportunity cost

Answer 11

d. relative opportunity cost

Question 12

Which of the following is the most likely effect of an appreciation of the Canadian real exchange rate on the quantity of Alberta beef demanded by French citizens?

a. The quantity of Alberta beef demanded by French citizens will not change because the nominal exchange rate has not changed.
b. French citizens will buy more of Alberta beef.
c. French citizens will buy less of Alberta beef.
d. The quantity of Alberta beef demanded by French citizens will not change because it is the French real interest rate that matters for French citizens.

Answer 12

c. French citizens will buy less of Alberta beef.

Question 13

Roger lives in Iceland and purchases a snowmobile manufactured in Canada. Which of the following is this purchase?

a. both a Canadian and an Icelandic import
b. both a Canadian and an Icelandic export
c. a Canadian export and an Icelandic import
d. a Canadian import and an Icelandic export

Answer 13

c. a Canadian export and an Icelandic import

Question 14

What is the formula for an open economy’s GDP?

a. Y = C + I + G + S
b. Y = C + I + G + NX
c. Y = C + I + G + T
d. Y = C + I + G

Answer 14

b. Y = C + I + G + NX

Question 15

How does trade benefit the two parties involved?

a. Trade benefits the seller more than the buyer.
b. Trade benefits both parties, but not always equally.
c. Trade benefits the buyer more than the seller.
d. Trade benefits both parties equally.

Answer 15

b. Trade benefits both parties, but not always equally

Question 16

Suppose Judy, a Canadian citizen, opens an ice cream store in Bermuda. Which of the following would her expenditures be?

a. Canadian foreign portfolio investment that would decrease Canadian net capital outflow
b. Canadian foreign direct investment that would decrease Canadian net capital outflow
c. Canadian foreign direct investment that would increase Canadian net capital outflow
d. Canadian foreign portfolio investment that would increase Canadian net capital outflow

Answer 16

c. Canadian foreign direct investment that would increase Canadian net capital outflow

Question 17

What is the opportunity cost of an item?

a. always equal to the dollar value of the item
b. always less than the dollar value of the item
c. what you give up to get that item
d. the number of hours needed to earn money to buy it

Answer 17

c. what you give up to get that item

Question 18

What did Adam Smith believe about trade?

a. that people are better off if they specialize in what they can do best
b. that trade with other countries was not necessary
c. that trade would hurt the British people
d. that trade should be based on comparative advantage

Answer 18

a. that people are better off if they specialize in what they can do best

Question 19

What is the value of Peru’s exports minus the value of Peru’s imports called?

a. Peru’s net capital inflow
b. Peru’s net imports
c. Peru’s net exports
d. Peru’s foreign direct investment

Answer 19

c. Peru’s net exports

Question 20

How are net exports of a country determined?

a. the value of goods and services imported minus the value of goods and services exported
b. the value of goods imported minus the value of goods exported
c. the value of goods and services exported minus the value of goods and services imported
d. the value of goods exported minus the value of goods imported

Answer 20

c. the value of goods and services exported minus the value of goods and services imported

Question 21

A Canadian computer maker sells computers to a German firm. This company uses all of the revenues from this sale to purchase stock in a German company. What happens to Canadian net exports and net foreign investment due to these transactions?

a. They will increase both Canadian net exports and Canadian net foreign investment.
b. They will decrease both Canadian net exports and Canadian net foreign investment.
c. They will increase Canadian net exports and will decrease Canadian net foreign investment.
d. They will decrease Canadian net exports and will increase Canadian net foreign investment.

Answer 21

a. They will increase both Canadian net exports and Canadian net foreign investment.

Question 22

What should a country do if it has a comparative advantage in a product?

a. It should keep the product for domestic use since it is relatively inexpensive to produce.
b. It should export that product.
c. It should import that product.
d. It should lower the costs of production until realizing an absolute advantage.

Answer 22

b. It should export that product.

Question 23

Tony, a Canadian citizen, uses some previously obtained Portuguese currency (escudo) to purchase a bond issued by a Portuguese company. How does this transaction affect Canadian net capital outflow?

a. It increases Canadian net capital outflow by the value of the bond.
b. It increases Canadian net capital outflow by more than the value of the bond.
c. It decreases Canadian net capital outflow.
d. It does not change Canadian net capital outflow.

Answer 23

d. It does not change Canadian net capital outflow.

Question 24

If the Canadian real exchange rate appreciates, which of the following will most likely happen?

a. Exports increase and imports decrease.
b. Exports decrease and imports increase.
c. Exports and imports both increase.
d. Exports and imports both decrease.

Answer 24

b. Exports decrease and imports increase.

Question 25

Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage in cars. What will happen if these two countries specialize and trade according to their comparative advantage?

a. Germany will produce more cars than in the absence of trade.
b. All individuals in both countries will benefit.
c. Germany will produce more fish than in the absence of trade.
d. Greece will specialize in and export cars.

Answer 25

a. Germany will produce more cars than in the absence of trade.

Question 26

According to Adam Smith, what should a person never attempt to make at home?

a. any necessity of life
b. everything one person needs to live
c. what one doesn’t know how to make
d. whatever will cost one more to make than to buy

Answer 26

d. whatever will cost one more to make than to buy

Question 27

In which situation must domestic saving equal investment?

a. when NX is zero
b. when NX is negative
c. when imports are zero
d. when NCO is negative

Answer 27

a. when NX is zero

Question 28

If there is no trade, which of the following is most likely?

a. A country has more product variety available.
b. A country’s production possibilities frontier is also its consumption possibilities frontier.
c. A country can still benefit from international specialization.
d. A country is better off because it will become self-sufficient.

Answer 28

b. A country’s production possibilities frontier is also its consumption possibilities frontier.

Question 29

If the Canadian real exchange rate appreciates relative to the euro, which of the following best describes the consequences?

a. Canadian exports to Europe and European exports to Canada both rise.
b. Canadian exports to Europe rise, and European exports to Canada fall.
c. Canadian exports to Europe and European exports to Canada both fall.
d. Canadian exports to Europe fall, and European exports to Canada rise.

Answer 29

d. Canadian exports to Europe fall, and European exports to Canada rise.

Question 30

For two people who are planning to trade two different goods, when will there NOT be a comparative advantage for either?

a. if they have agreed in advance on who will produce what and how much each will produce
b. if they have exactly the same opportunity cost
c. if the terms of trade are such that neither can gain from trade
d. if one person has an absolute advantage in both products

Answer 30

b. if they have exactly the same opportunity cost