I. Multiple Choice (30%, 1.520) 1.

The movement to free international trade is most likely to generate short-term unemployment in which industries? a. Industries in which there are neither imports nor exports b. Import-competing industries c. Industries that sell to domestic and foreign buyers d. Industries that sell to only foreign buyers 2. __________ is the ability of a firm/industry, under free and fair market conditions, to design, produce, and market goods and services that are better and/or cheaper than those of other firms/industries. a. Competitiveness b. Protectionism c. Comparative advantage d. Absolute advantage 3. According to the principle of comparative advantage, specialization and trade increase a nations total output since: a. Resources are directed to their highest productivity b. The output of the nations trading partner declines c. The nation can produce outside of its production possibilities curve d. The problem of unemployment is eliminated 4. The gains from international trade increase as: a. A nation consumes inside of its production possibilities schedule b. A nation consumes along its production possibilities schedule c. The international terms of trade rises above the nations autarky price d. The international terms of trade approaches the nations autarky price 5. If a production possibilities curve is bowed out (i.e., concave) in appearance, production occurs under conditions of: a. Constant opportunity costs b. Increasing opportunity costs c. Decreasing opportunity costs d. Zero opportunity costs 6. The imposition of tariffs on imports results in deadweight welfare losses for the home economy. These losses consist of the: a. Protective effect plus consumption effect b. Redistribution effect plus revenue effect c. Revenue effect plus protective effect d. Consumption effect plus redistribution effect 7. The terms of trade is given by: a. (Price of exports / price of imports) 100 b. (Price of exports / price of imports) + 100

c. (Price of exports / price of imports) 100 d. (Price of exports / price of imports) 100 8. According to the J-curve effect, when the exchange value of a countrys currency appreciates, the countrys trade balance: a. First moves toward deficit, then later toward surplus b. First moves toward surplus, then later toward deficit c. Moves into deficit and stays there d. Moves into surplus and stays there 9. Compared to an import quota, an equivalent tariff may provide a less certain amount of protection for home producers since: a. A tariff has no deadweight loss in terms of production and consumption b. Foreign firms may absorb the tariff by offering exports at lower prices c. Tariffs are effective only if home demand is perfectly elastic d. Quotas do not result in increases in the price of the imported good 10. On the balance-of-payments statements, merchandise imports are classified in: a. Current account b. Capital account c. Unilateral transfer account d. Official settlements account 11. Which of the following is classified as a credit in the U.S. balance of payments? a. U.S. exports b. U.S. gifts to other countries c. A flow of gold out of the U.S. d. Foreign loans made by U.S. companies 12. If Canadian speculators believed the Swiss franc was going to appreciate against the U.S. dollar, they would: a. Purchase Canadian dollars b. Purchase U.S. dollars c. Purchase Swiss francs d. Sell Swiss francs 13. Under a system of floating exchange rates, the Swiss franc would depreciate in value if which of the following occurs? a. Price inflation in France b. An increase in U.S. real income c. A decrease in the Swiss money supply d. Falling interest rates in Switzerland 14. An exchange rate is said to __________ when its short-run response to a change in market fundamentals is greater than its long-run response. a. Overshoot b. Undershoot c. Depreciate d. Appreciate 15. In the short run, exchange rates respond to market forces such as: a. Inflation rates

b. Expectations of future exchange rates c. Investment profitability d. Government trade policy 16. Which method of trading currencies involves the conversion of one currency into another at one point in time with an agreement to reconvert it back to the original currency at some point in the future? a. Forward transaction b. Futures transaction c. Spot transaction d. Swap transaction 17. According to the absorption approach, the economic circumstances that best warrant a currency devaluation is where the domestic economy faces: a. Unemployment coupled with a payments deficit b. Unemployment coupled with a payments surplus c. Full employment coupled with a payments deficit d. Full employment coupled with a payments surplus 18. The Marshall-Lerner condition deals with the impact of currency depreciation on: a. Domestic income b. Domestic absorption c. Purchasing power of money balances d. Relative prices 19. An expenditure-increasing policy would consist of an increase in: a. Import tariffs b. Import quotas c. Governmental taxes d. The money supply 20. Under a fixed exchange-rate system, an expansionary fiscal policy leads to a: a. Trade-account deficit and a capital-account surplus b. Trade-account deficit and a capital-account deficit c. Trade-account surplus and a capital-account surplus d. Trade-account surplus and a capital-account deficit II. True or False (15%, 115) 1. In an open trading system, a country will import those commodities that it produces at relatively low cost while exporting commodities that can be produced at relatively high cost. 2. In the short run, exchange rates respond to market forces such as investment profitablility. 3. The marginal rate of substitution is measured by the absolute value of the slope of a production possibilities curve. 4. According to the principle of comparative advantage, specialization and trade increase a nations total output since the nation can produce outside of its production possibilities curve. 5. The use of indifference curves helps us determine the point where a country

maximizes its resource productivity. 6. If a tariff and an import quota lead to equivalent increases in the domestic price of steel, then they have different impacts on how much is produced and consumed. 7. According to absorption approach, currency devaluation improves a nations trade balance if income decrases and absorption decreases. 8. A depreciation of RMB refers to an increase in RMB price of foreign currency. 9. A nations offer curve shows the relations between its production and consumption. 10. Long-run exchange rate movements can be governed by interest rate levels. 11. Low real interest rates in China tend to increase the supply of dollars, causing RMB to appreciate. 12. A major difference between the forward contract and the future is that the future deals with any amount of major currencies. 13. That identical goods should cost the same in all nations, assuming it is costless to ship goods between nations and there are no barriers to trade, is a reflection of the Law of one price. 14. Monetary and fiscal policy are expenditure-changing policies. 15. Under a fixed exchange-rate system, a contractionary fiscal policy leads to a trade-account surplus and a capital-account deficit. III. Table & Figure Analysis (35%) 1. Read the following table and answer questions based on analysis. (10%) Table Output Possibilities for China and the U.S. Output per Worker per Day Country Tons of Steel Televisions United States 15 45 China 10 20

(1) In which products does the United States have the absolute advantage? (2) In which product does the United States have the comparative advantage? (3) In Which product does China have the comparative advantage? (4) What product should Chinese firms specialize in, if trade opens up between the United States and China? (5) What is the opportunity cost of producing one ton of steel in the United States?

2. The following figure is about effects of tariff. Read it and answer questions. (15%)

Figure Effects of Tariff Price of Autos Sd

1400 1000 A B C D

Sd+w+t Sd+w Dd

60

90

130

150 Quantity of Autos

(1) Sd+w is the supply line for the nation in free trade. Sd+w+t is the supply line for the nation after government imposes tariff. What is the quantity of tariff imposed on each auto? (2) Is the nation in the figure a small nation or a large nation? Why? (3) What is the quantity of auto imports in free trade? After tariff, what is the quantity of auto imports then? (4) Among Area A, Area B, Area C and Area D, point out revenue effect, consumption effect, redistributive effect and protective effect. (5) Which areas are deadweight losses for the nation and what is its value? 3. Suppose China exports 100 units of clothes and imports 50 units of computers; U.S. exports 50 units of computers and imports 100 units of clothes. (10%) (1) Draw the offer curves of both nations in one figure and show the equilibrium point. (2) What is the terms of trade for China? And what is the terms of trade for U.S.? (3) Suppose China faces better terms of trade now. Show the new terms of trade on the figure. (4) Given the two nations offer curves unchanged, what will happen to the trade of clothes, excess demand or excess supply? IV. Answer Questions (10%) 1. In a country with a fixed exchange rate and totally open capital market, which policy you think is more effective toward internal balance, fiscal policy or monetary policy? Give your explanation. 2. Why is a depreciation (e) policy unlikely to improve a nations balance of payments immediately? Use Marshell-Lerner condition and J-Curve effect to explain

it. V. Case Discussion10% From July 21st 2005, China changed its exchange rate policy. RMB is now pegged to a basket of currencies, not only to the US$. Since then, RMB has kept appreciating, from previous 8.27 to roughly 7.84 on December 2006. Discuss the reasons for RMB appreciation (draw a figure to help explain) and its influence on Chinas economic performance.


I. Multiple Choice (30%) 1 B 11 A 2 A 12 C 3 A 13 D 4 C 14 A 5 B 15 B 6 A 16 D 7 D 17 A 8 B 18 D

9 B 19 D

10 A 20 A

II. True or False (15%) 1 F 2 F 3 F 4 F 5 F 6 F 7 F 8 T 9 F 10 F 11 F 12 F 13 T 14 T 15 T

III. Table & Figure Analysis (35%) 1. (1) Both; (2) TV; (3) Steel; (4) Steel; (5) 3 TVs 2. (1) 400; (2) small nation; (3) 90,40; (4) A, B, C, D; (4) B+D: 1000 3. (1) Omitted; (2) TTCN: 0.5; TTUS: 2; (3) Omitted; (4) excess supply IV. Answer Questions (10%) 1. fiscal policy 2. Marshell-Lerner condition and J-Curve effect V. Case Discussion10% Omitted