SS 6: Economics in a Global Context

Question 1

A common market structure incorporates all aspects of the customs union and extends it by:

Answer 1

allowing free movement of factors of production among members.

Question 2

Autarky is best described as a state in which a country::

Answer 2

Does not trade with other countries

Question 3

In an effort to influence the economy, a central bank conducted open market activities by selling
government bonds. This action implies that the central bank is most likely attempting to:

Answer 3

contract the economy by reducing bank reserves.

Question 4

The Ricardian trade model supports the idea that comparative advantage and the pattern of trade are determined by:

Answer 4

Differences in technology between countries

Question 5

Assuming its trading partner does not retaliate, which condition must hold in order for a large country to increase its national welfare by imposing a tariff?

Answer 5

The deadweight loss must be smaller than the benefit of its improving terms of trade.

Question 6

Quota rents are best described as:

Answer 6

The extra profits foreign producers can earn when a quota is imposed

Question 7

Forward/Spot formula:

Answer 7

Discount/Premium = (forward/spot) - 1

Question 8

A form of trading bloc which imposes trade restrictions on non-member countries is usually referred to as a:

Answer 8

Customs union

Question 9

The fiscal multiplier is:

Answer 9

1
/
1 - c(1 - T)

where:
c = marginal propensity to consume = consumption / disposable income

T = the tax rate

Question 10

Which international organization has an objective of creating the basic economic infrastructure essential for creation and maintenance of domestic financial markets and a well functioning financial industry in developing countries?

Answer 10

World Bank

Question 11

The country with the higher interest rate will always trade at a _______ in the forward market

Answer 11

Discount

Question 12

A crawling peg currency regime which is regularly adjusted to keep pace with inflation is best known as a:

Answer 12

Passive crawling peg

Question 13

The ______ account measures the flow of goods and services in to and out of the country.

Answer 13

Current

Question 14

Foreign direct aid would most likely be captured in which of the following balance of payment components?

Answer 14

Current Account

Question 15

Forward points =

Answer 15

(Forward rate - Spot rate) x 10,000

Question 16

The ______ account measures the transfer of capital.

Answer 16

Capital

Question 17

Name the 4 sub-accounts of the Current Account:

Answer 17

I: Merchandise trade e.g. commodities bought and sold or given away

II: Services e.g. tourism

III: Income receipts e.g. income on foreign investment

IV: Unilateral transfers e.g. one-way transfers of assets such as foreign direct aid

Question 18

Central banks have three primary tools available to them:

Answer 18

open market operations

setting the official policy rate

reserve requirements

Question 19

As a country opens up to trade, the benefit accrues to the:

Answer 19

Abundant factor

Question 20

The _______ account measures the flow of financial assets abroad and foreign owned financial assets within the reporting country.

Answer 20

Financial

Question 21

In the context of the balance of payments (BOP) accounts, tourism, transportation and business services are likely to be captured in which component of the BOP?

Answer 21

Current Account

Question 22

Which organization attempts to limit global systemic risk by preventing contagion in scenarios such as the 2010/11 Greek sovereign debt crisis?

Answer 22

International Monetary Fund (IMF)

Question 23

A direct exchange rate quote is where the _______ currency is the price (variable) currency, and the ______ currency is the base currency.

Answer 23

Domestic, Foreign

Question 24

In the classification of currency regimes, a currency board system (CBS) most likely differs from a fixed-rate parity system in that:

Answer 24

the monetary authority within a CBS does not act as a traditional lender of last resort.

In a CBS, the monetary authority has an obligation to maintain 100% foreign currency reserves against the monetary base. It therefore cannot lend to troubled financial institutions. As long as the country under a fixed parity regime maintains its exchange peg, the central bank can serve as a lender of last resort.

Question 25

In the context of the balance of payments (BOP) accounts, the sale of mineral rights is likely to be captured in which of the following components of the BOP?

Answer 25

Capital Account

(The capital account records the transfers of capital and the sale and purchase of non-produced, non-financial assets such as intangible assets and mineral rights)

Question 26

The Heckscher-Ohlin trade model suggests that:

Answer 26

Both capital and labor are variable factors of production

Question 27

‘A country uses the currency of another nation as it medium of exchange and unit of account’ describes:

Answer 27

Dollarization

Question 28

Government issued bonds that are owned by foreign countries would most likely be captured in which of the following balance of payment components?

Answer 28

Financial Account

Question 29

If a government places a limit on investments made by its citizens in foreign stocks, it is called:

Answer 29

Capital Restriction

Question 30

Trade restrictions involve:

Answer 30

The selling and buying of products from other countries

Question 31

How can a country reduce its trade deficits?

Answer 31

Increase private savings

Reduce investments

Increase budget surpluses

(X-M) = (S-I) + (T-G)

Question 32

‘The depreciation of a currency is more likely to narrow the country’s trade deficit if national savings increase relative to domestic investment in physical capital’ is a tenet of:

Answer 32

The absorption approach

Question 33

Which model suggests that the source of comparative advantage is labor productivity?

Answer 33

Ricardian model

Question 34

Real exchange rate =

Answer 34

Nominal spot exchange rate * CPI of foreign country / CPI of domestic country