ECO201 International economics

Quiz 3 - Vinh Pham

Fall 2022
Instructions: Please identify the choice that best completes the statement or answers the
questions.
You have exactly 90 minutes to finish the test. There will be 90 questions, each is worth of 1
points.

• In the Brander-Spencer model the subsidy raises profits by more than the
subsidy because of
A) the military-industrial complex.
B) the "multiplier" effect of government expenditures.
C) the economies of scale once the company enters the market.
D) the forward and backward linkage effects of certain industries..
E) the deterrent effect of the subsidy on foreign competition.

• Japan's protection of its semiconductor (RAM) producers is today seen as

an object lesson in
A) how externalities may be successfully exploited by protectionist policies.
B) how strategic planning may backfire and cause a large waste of resources..
C) how government intervention may create a meaningful comparative advantage.
D) how excess returns may be successfully exploited by protectionist policies.
E) how monopolies can outlast government intervention.

• The Heckscher-Ohlin, factor-proportions model lends support to the

argument that
A) trade tends to worsen the conditions of owners of capital in rich countries.
B) trade tends to worsen the conditions of workers in poor countries.
C) trade tends to worsen the conditions of unskilled labor in rich countries..
D) trade tends to worsen the conditions of workers in rich countries.
E) trade tends to worsen the conditions of highly skilled workers in rich countries.

• If firms in an industry are generating knowledge that other firms can use
without paying for it, this industry is characterized by
A) social benefits that exceed private benefits..
B) social benefits that undermine private benefits.
C) social costs that exceed social benefits.
D) social costs that exceed private costs.
E) private benefits that exceed social benefits.

• It is argued that high-tech industries typically generate new technologies

but cannot fully appropriate the commercial benefits associated with their inventions or
discoveries. If this is true then in order to maximize a country's real income, the
government should
A) subsidize the high-tech firms..
B) discourage high-tech investments.
C) protect the high-tech firms.
D) outsource high-tech production.
E) tax the high-tech firms.
• Spencer and Brander's model highlights the conventional assumption that
A) government subsidies can produce profits that exceed the subsidy's value..
B) government subsidies tend to waste taxpayer's money.
C) government tends to distort when it displaces Adam Smith's Invisible Hand.
D) government subsidies cannot create a successfully competing export.
E) government involvement in business or in the economy tends to fail.

• When one applies the Heckscher-Ohlin model of trade to the issue of

trade-related income redistributions, one must conclude that North South trade, such as
U.S.-Mexico trade
A) is likely to help highly skilled workers in Mexico.
B) must help low skill workers on both sides of the border.
C) is likely to hurt high-skilled workers in the U.S.
D) is likely to hurt low-skilled workers in the U.S..
E) is likely to hurt low-skilled workers in Mexico.

• The highest component of GNP is

A) investment.
B) government purchases.
C) consumption..
D) trade.
E) the current account.

• Which one of the following statements is the MOST accurate?

A) GNP plus depreciation is called net national product (NNP).
B) GNP less depreciation is called net national product (NNP)..
C) GDP plus depreciation is called net national product (NNP).
D) GDP less depreciation is called net national product (NNP).
E) GNP less depreciation is called net factor product (NFP).

• GDP is different than GNP in that

A) it does not account for a country's production using services with foreign-owned
capital..
B) it does not account for indirect business taxes.
C) it is unhelpful when tracking national income.
D) it accounts for net unilateral transfers.
E) it accounts for depreciation.

• Which one of the following expressions is the MOST accurate?

A) CA = EX - IM.
B) CA = EX + IM
C) CA = IM - EX
D) CA = EX = IM
E) CA - IM = EX

• For open economies,

A) S = I + CA..
B) S = I - CA.
C) S = I.
D) S < I + CA.
E) S > I + CA.

• In an open economy, private saving is equal to

A) I + CA - (G - T).
B) I - CA + (G - T).
C) I - CA - (G - T).
D) I + CA + (G - T)..
E) I + CA + (G + T).

• Every international transaction automatically enters the balance of

payments
A) twice, both times as debit.
B) once as a credit.
C) once either as a credit or as a debit.
D) the times, once as a credit, onces as a debit, and once as an exchange.
E) twice, once as a credit and once as a debit..

• An American buys a Japanese car, paying by writing a check on an account

with a bank in New York. How would this be accounted for in the balance of payments?
A) current account, a Japanese good import
B) financial account, a U.S. asset export
C) current account, a U.S. good import
D) financial account, a U.S. asset import
E) a current account as a U.S. good import and a financial account, a U.S. asset export.

• The German government carries out an official foreign exchange

intervention in which it uses dollars held in an American bank to buy French currency
from its citizens. How is this accounted for in the balance of payments?
A) financial account, German asset import
B) financial account, German asset export
C) current account, French good export
D) current account, German good import
E) financial account, French asset export .

• How many dollars would it cost to buy an Edinburgh Woolen Mill sweater
costing 50 British pounds if the exchange rate is 1.2 dollars per one British pound?
A) 62.5 dollars
B) 50 dollars
C) 60 dollars.
D) 70 dollars
E) 40 British pounds

• What is the exchange rate between the dollar and the British pound if a
pair of American jeans costs 50 dollars in New York and 20 Pounds in London?
A) 0.5 dollars per British pound
B) 2.5 dollars per British pound.
C) 2 dollars per British pound
D) 3.5 dollars per British pound
E) 1.5 dollars per British pound

• When a country's currency appreciates

A) foreigners are not affected, but domestic residents find that imports from abroad are
more expensive.
B) foreigners find that its exports are more expensive, and domestic residents find that
imports from abroad are more expensive.
C) foreigners find that its exports are cheaper and domestic residents find that imports
from abroad are more expensive.
D) foreigners find that its exports are cheaper; however, domestic residents are not
affected.
E) foreigners find that its exports are more expensive, and domestic residents find that
imports from abroad are cheaper..

• If the goods' money prices do not change, an appreciation of the dollar

against the pound
A) makes British jeans more expensive in Britain.
B) makes British sweaters cheaper in terms of American jeans..
C) makes American jeans cheaper in terms of British sweaters.
D) doesn't change the relative price of sweaters and jeans.
E) makes British sweaters more expensive in terms of American jeans.

• The future date on which the currencies are actually exchanged is called
what?
A) the two-day window
B) the spot exchange date
C) the commitment date
D) the forward exchange rate
E) the value date.

• Which one of the following statements is the MOST accurate?

A) Spot exchange rates and forward exchanges rates are equal when the value date and
the date of the spot transaction are the same. .
B) Spot exchange rates and forward exchange rates never move closely together.
C) Spot exchange rates are always higher than forward exchange rates.
D) Spot exchange rates are always lower than forward exchange rates.
E) Spot exchange rates and forward exchanges rates are always equal.
 • A foreign exchange swap
A) is a spot sale of a currency.
B) make up a negligible proportion of all foreign exchange trading.
C) is a forward repurchase of the currency.
D) is a spot sale of a currency combined with a forward repurchase of the currency..
E) is a spot sale of a currency combined with a forward sale of the currency.

• The following is an example of Radio Shack hedging its foreign currency

risk
A) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a
forward-exchange deal to sell yen.
B) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen
in a forward-exchange deal.
C) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen
at a spot-exchange 1 month from now.
D) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a
forward-exchange deal to buy yen..
E) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack buys yen
at a spot-exchange 1 month from now.

• Which of the following is NOT an example of a financial derivative?

A) swaps
B) forwards
C) bonds.
D) futures
E) options

• Which major actor is at the center of the foreign exchange market?

A) non-bank financial institutions
B) individual firms
C) commercial banks.
D) corporations
E) central banks

• What is the expected dollar rate of return on euro deposits if today's

exchange rate is $1.10 per euro, next year's expected exchange rate is $1.166 per euro,
the dollar interest rate is 12%, and the euro interest rate is 4%?
A) -1%
B) 12%
C) 11%
D) 10%
E) 0%

• What is the expected dollar rate of return on dollar deposits if today's

exchange rate is $1.10 per euro, next year's expected exchange rate is $1.166 per euro,
the dollar interest rate is 12%, and the euro interest rate is 5%?
A) -1%
B) 12%
C) 11%
D) 10%
E) 0%

• If the dollar interest rate is 10 percent and the euro interest rate is 6
percent, then an investor should
A) invest only in dollars.
B) invest only in euros if the exchange rate is expected to remain constant.
C) invest only in dollars if the exchange rate is expected to remain constant..
D) be indifferent between dollars and euros.
E) invest only in euros.

• A the beginning of 2012, you pay $100 for a share of stock that then pays
you a dividend of $1 at the beginning of 2013. If the stock price rises from $100 to $108
per share over the year, then you have earned an annual rate of return of
A) 1 percent.
B) 5 percent.
C) 9 percent.
D) 10 percent.
E) 4 percent.

• Suppose that the one-year forward price of euros in terms of dollars is

equal to $1.113 per euro. Further, assume that the spot exchange rate is $1.05 per euro,
and the interest rate on dollar deposits is 11 percent and on euro it is 5 percent. Under
these assumptions
A) it is hard to tell whether interest parity does or does not hold.
B) interest parity does not hold.
C) interest parity does hold..
D) Not enough information is given to answer the question.
E) interest parity fluctuates.

• Which one of the following statements is the MOST accurate?

A) A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar.
B) A rise in the interest rate offered by the dollar causes the euro to appreciate.
C) A rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
D) A rise in the interest rate offered by dollar deposits causes the dollar to depreciate.
E) For a given euro interest rate and constant expected exchange rate, a rise in the interest
rate offered by dollar deposits causes the dollar to appreciate..

• Which one of the following statements is the MOST accurate?

A) For a given dollar interest rate and a constant expected exchange rate, a rise in the
interest rate of the euro causes the dollar to depreciate.
B) For a fixed interest rate, a rise in the expected future exchange rate causes a rise in the
current exchange rate..
C) For a fixed interest rate, a rise in the expected future exchange rate causes a fall in the
current exchange rate.
D) For a fixed interest rate, a fall in the expected future exchange rate causes a rise in the
current exchange rate.
E) For a fixed interest rate, a rise in the expected future exchange rate does not cause a
change in the current exchange rate.

• The European Economic and Monetary Union

A) produced a single government for handling European affairs.
B) set up a single currency and sole bank for European economic monetary policy..
C) created the Common Agricultural Pact.
D) eliminated all barriers to trade such as tax differentials between borders.
E) eliminated all local currencies in Western Europe.

• The birth of the Euro

A) resulted in floating exchange rates between all EMU member countries.
B) resulted in non currency board exchange rates between all EMU member countries.
C) resulted in flexible exchange rates between all EMU member countries.
D) resulted in crawling-peg exchange rates between all EMU member countries.
E) resulted in fixed exchange rates between all EMU member countries..

• Under the EMS, Germany set the system's

A) fiscal policy while the other European countries kept their currencies fluctuating
relative to the DM.
B) monetary policy while the other European countries kept their currencies fluctuating
relative to the DM.
C) monetary policy, while other European countries maintained their traditional policies.
D) monetary policy while the other European countries pegged their currencies to the
DM..
E) fiscal policy while the other European countries pegged their currencies to the DM.

• The 1991 Maastricht Treaty can be best described as

A) the beginning of a floating exchange rate European monetary system..
B) a peace treaty between Europe and the United States.
C) a provision for the introduction of a single European currency and European central
bank.
D) an agreement for the creation of a free trade area.
E) an agreement for the accession of the Netherlands into the EU.

• The German central bank in the European Monetary System, 1979-1998

A) lacked control over inflation since it had fixed its exchange rate.
B) was very inflation-averse..
C) lacked sufficient reserves.
D) was moderately inflation-averse.
E) was willing to accept inflation.

• The result of the reunification of eastern and western Germany in 1990

A) was a recession in Germany and lower inflation, causing a boom in nearby countries.
B) was a recession in Germany and lower inflation, with no effect on nearby countries.
C) was a boom in Germany and higher inflation, with no effect on nearby countries.
D) was a recession in Germany and lower inflation, and, with other EMS countries'
commitment to fixed exchange rates, a deep recession in nearby countries.
E) was a boom in Germany and higher inflation, and, with other EMS countries'
commitment to fixed exchange rates, a deep recession in nearby countries..

• To join the EMU, a country should have no more than

A) 4 percent inflation rate above the average of the three EU member states with the
lowest inflation.
B) 3 percent inflation rate above the average of the three EU member states with the
lowest inflation.
C) 1.5 percent inflation rate above the average of the three EU member states with the
highest inflation.
D) 1.5 percent inflation rate above the average of the three EU member states with the
lowest inflation..
E) 2 percent inflation rate above the average of the three EU member states with the
lowest inflation.

• To join the EMU, a country must have

A) a zero public-sector deficit.
B) a public-sector deficit no higher than 1 percent of its GDP in general.
C) a public-sector deficit no higher than 4 percent of its GDP in general.
D) a public-sector deficit no higher than 2 percent of its GDP in general.
E) a public-sector deficit no higher than 3 percent of its GDP in general..

• What are the biggest advantages the U.S. has over the EU in terms of
being an Optimum Currency Area?
A) low mobility of labor, higher labor productivity, lower level of intra-regional trade
B) high unionization of U.S. Labor force
C) more specialized labor force and natural resource advantages
D) higher uniformity of population's taste in consumption
E) high mobility of labor force, more transfer payments between regions.

• When the exchange rate is

A) flexible, purposeful stabilization is more difficult because monetary policy has no
power at all to affect domestic output and employment..
B) fixed, purposeful stabilization is less difficult because monetary policy has no power
at all to affect domestic output and employment.
C) a crawling peg, rather than fixed, purposeful stabilization is more difficult because
monetary policy has no power at all to affect domestic output and employment.
D) fixed rather than crawling peg purposeful stabilization is more difficult because fiscal
policy has no power at all to affect domestic output and employment.
E) fixed, purposeful stabilization is more difficult because monetary policy has no power
at all to affect domestic output and employment.

• The intersection of GG and LL determines

A) the maximum level of integration that will cause Norway to join the fixed exchange
rate regime.
B) the maximum integration level desired by Norway.
C) the minimum level of integration that will cause Norway to join the fixed exchange
rate regime..
D) the optimal level of integration desired by Norway.
E) the maximum level of integration that can aid Norway if it joins the fixed exchange
rate regime.

• Which of the following statements is MOST accurate?

A) The countries of eastern Europe are better endowed with capital and skilled labor than
the countries of western Europe.
B) EU products that make intensive use of high-skill labor are most likely to come from
Portugal.
C) The countries of southern Europe are better endowed with capital and skilled labor
than the countries of northern Europe.
D) EU products that make intensive use of low-skill labor are most likely to come from
Great Britain.
E) The countries of northern Europe are better endowed with capital and skilled labor
than the countries of southern Europe..

• Why does the GG schedule have a positive slope?

A) The monetary efficiency gain a country gets by joining a floating exchange rate area
rises as its economic integration with the area increases.
B) The monetary efficiency gain a country gets by joining a fixed exchange rate area is
constant after their integration into the area.
C) The monetary efficiency gain a country gets by joining a fixed exchange rate area falls
as its economic integration with the area increases.
D) The monetary efficiency gain a country gets by joining a fixed exchange rate area
rises as its economic integration with the area increases..
E) The monetary efficiency gain a country gets by joining a fixed exchange rate area rises
as its economic integration with the area decreases.

• Why does the LL schedule have a negative slope?

A) The economic stability loss from pegging to the area's currencies is constant, even as
the degree of economic activity increases.
B) The economic stability loss from pegging to the area's currencies rises as the degree of
economic interdependence rises.
C) The economic stability loss from pegging to the area's currencies rises as the degree of
economic activity increases.
D) The economic stability loss from pegging to the area's currencies falls as the degree of
economic interdependence falls.
E) The economic stability loss from pegging to the area's currencies falls as the degree of
economic interdependence rises..
• Compared with inter-regional trade in the United States, intra-EU trade
A) is greater.
B) is far greater.
C) is about the same.
D) is less.
E) is equal.

• When did the UK decide to adopt the Euro?

A) 2008
B) 2010
C) The UK has not adopted the Euro..
D) 2001
E) 1999

• Which one of the following countries was the "spark" that ignited the 2009
euro crisis?
A) Spain
B) Germany
C) Greece.
D) China
E) England

• Which one of the following unexpected events ignited the 2009 euro
crisis?
A) Revolutions in Switzerland and Belgium.
B) Rising oil prices.
C) The prospect of a sovereign default by one or more euro zone countries..
D) A Chinese boycott of European products.
E) Accelerating hyperinflation and political upheaval.

• People who are risk averse

A) are less likely to have a diverse portfolio.
B) value a collection of assets only on the basis of the risk of that return.
C) value a collection of assets only on the basis of its expected returns.
D) value a collection of assets not only on the basis of its expected returns but also on the
basis of the risk of that return..
E) are less likely to invest in life insurance.

• Suppose one is offered a gamble in which you win $1,000 half the time but
lose $1,000 half the time. Since in this case one is as likely to win as to lose the $1,000,
the average payoff on this gamble (its expected value) is:
0.5 ∗ $1,000 + 0.5 ∗ (-$1,000) = 0.
Under such circumstances:
A) risk averse individuals will take the gamble.
B) no one will take the gamble.
C) risk lovers individuals will not take the gamble.
D) risk lovers and risk neutral individuals may take the gamble..
E) risk neutral individuals will not take the gamble.

• Equity Instruments include

A) bonds.
B) bank statements.
C) banks deposits.
D) stocks..
E) receipts.

• Intertemporal trade is
A) the exchange of services but not goods for claims to future services.
B) the exchange of good and services for claims to future goods and services..
C) the exchange of goods but not services for claims to future goods.
D) the exchange of domestic goods and services for foreign goods and services.
E) the type of trade that the U.S. government focuses most upon.

• Investment banks in the U.S. are

A) regular banks specializing in investment projects.
B) special arm of the U.S. government for U.S. banks operating outside the U.S.
C) regular banks specializing in investment projects, but allowed to offer limited
domestic transactions.
D) not banks at all but institutions which specialize in underwriting sales of stocks and
bonds..
E) international banks that are heavily invest in the U.S.

• Eurodollars are
A) dollar deposits located outside the United States..
B) dollar deposits located outside both Europe and the United States.
C) dollar deposits located outside Europe.
D) dollar deposits located in the United States.
E) dollar deposits located in Europe.

• Eurobanks are
A) banks that accept deposits denominated in Eurocurrencies excluding Eurodollars.
B) banks that do not take U.S. dollars.
C) all European Banks.
D) banks that accept deposits denominated in Eurocurrencies including Eurodollars..
E) all non American banks.

• What are the types of institution banks used to conduct foreign business?
A) state-owned enterprises
B) central banks
C) corporations
D) commercial banks
E) agency offices, subsidiary banks, and foreign branches.

• A business's use of a bank located outside of the home country is called

A) domestic banking.
B) international swapping.
C) international banking.
D) Swiss banking.
E) offshore banking..

• For the following question, assume the following facts:

(1) Chase (which is located in the United States) has a 20% reserve requirement
imposed by the government.
(2) Bank of Germany has no reserve requirements.
(3) Both banks may invest at an 8% interest rate.
(4) Both banks have fixed costs of $3 per deposit made.
What is the difference between the minimum interest rates each bank can offer and still
make a profit if the deposit is $500 for 1 year?
A) 0 - Both banks can offer the same rate.
B) 20%
C) 1%
D) 0.4%
E) 1.6%.

• The purpose of the Basel Committee was to

A) achieve a better coordination between bond holder and bon issuers.
B) achieve a better coordination of domestic banking systems.
C) manipulate bank rates for more leverage profits.
D) achieve a better coordination of the surveillance exercised by national authorities over
the international banking system..
E) achieve a better coordination between brokers and investment bankers.

• The case where people purposely act in a careless way, for example,
driving recklessly because they are insured, is called
A) thrill-seeking.
B) moral hazard..
C) bounded rationality.
D) asymmetric information.
E) risk aversion.
------------------------------------------ Good luck! ----------------------------------------------