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international economics theory

Questions and Answers of International Economics Theory

2. In what type of economic analysis do questions have a “right”or “wrong” answer? In what type of economic analysis do questions not necessarily have a “right” answer? On what type of
1. Define resources, and list the four categories of resources. What characteristic of resources results in the need to make choices?Answer (6 points)
5. Which of the following questions is studied in microeconomics?a. Should I go to college or get a job after I graduate?b. What government policies should be adopted to promote employment in the
4. Which of the following statements is/are normative?I. The price of gasoline is rising.II. The price of gasoline is too high.III. Gas prices are expected to fall in the near future.a. I onlyb. II
3. Suppose that you prefer reading a book you already own to watching TV and that you prefer watching TV to listening to music. If these are your only three choices, what is the opportunity cost of
2. Which of the following situations represent(s) resource scarcity?I. Rapidly growing economies experience increasing levels of water pollution.II. There is a finite amount of petroleum in the
1. Which of the following is an example of a resource?I. petroleum II. a factory III. a cheeseburger dinnera. I onlyb. II onlyc. III onlyd. I and II onlye. I, II, and III
b. People who engage in dangerous personal behavior impose higher costs on society through higher medical costs.
a. Society should take measures to prevent people from engaging in dangerous personal behavior.
4. Identify each of the following statements as positive or normative, and explain your answer.
3. You make $45,000 per year at your current job with Whiz Kids Consultants. You are considering a job offer from Brainiacs, Inc., which would pay you $50,000 per year. Which of the following are
1. What are the four categories of resources? Give an example of a resource from each category.2. What type of resource is each of the following?a. time spent flipping hamburgers at a restaurantb. a
1.7. Go to http://fx.sauder.ubc.ca. Using the table labeled “The Most Recent Cross-Rates of Major Currencies,” determine whether the British pound (GBP), the Canadian dollar(CAD), the Japanese
1.6. Based on the exchange rates for the first trading days of 2007 and 2008 shown in the accompanying table, did the U.S. dollar appreciate or depreciate during 2007? Did the movement in the value
1.5. Suppose that Northlandia and Southlandia are the only two trading countries in the world, that each nation runs a balance of payments on both current and financial accounts equal to zero, and
1.4. In the economy of Popania in 2008, total Popanian purchases of assets in the rest of the world equaled $300 billion, purchases of Popanian assets by the rest of the world equaled$400 billion,
1.3. In the economy of Scottopia in 2008, exports equaled $400 billion of goods and $300 billion of services, imports equaled$500 billion of goods and $350 billion of services, and the rest of the
1.1. How would the following transactions be categorized in the U.S. balance of payments accounts? Would they be entered in the current account (as a payment to or from a foreigner) or the financial
1.1. Draw a diagram, similar to Figure 34-10, representing the foreign exchange situation of China when it kept the exchange rate fixed. (Hint: Express the exchange rate as U.S. dollars per yuan.)
1.2. A basket of goods and services that costs $100 in the United States costs 800 pesos in Mexico, and the current nominal exchange rate is 10 pesos per U.S. dollar. Over the next five years, the
1.1. Mexico discovers huge reserves of oil and starts exporting oil to the United States. Describe how this would affect the following:a. The nominal peso–U.S. dollar exchange rateb. Mexican
1.2. Suppose China decides that it needs a huge program of infrastructure spending, which it will finance by borrowing. How would this program affect the U.S. balance of payments?
1.1. Which of the balance of payments accounts do the following events affect?a. Boeing, a U.S.-based company, sells a newly built airplane to China.b. Chinese investors buy stock in Boeing from
1.Why open-economy considerations affect macroeconomic policy under floating exchange rates
1.9. Using a graph like Figure 33-4, show how a monetarist can argue that a contractionary fiscal policy need not lead to a fall in real GDP given a fixed money supply. Explain
1.8. Which of the following policy recommendations are consistent with the classical, Keynesian, monetarist, and/or modern consensus views of the macroeconomy?a. Since the long -run growth of GDP is
1.1. What debates has the modern consensus resolved? What debates has it not resolved?
1.1. In early 2001, as it became clear that the United States was experiencing a recession, the Fed stated that it would fight the recession with an aggressive monetary policy. By 2004, most
1.3. What are the limits of macroeconomic policy activism?
1.2. Now look at Figure 33-5. What problems do you think the United States would have had since 1996 if the Fed had followed a monetarist policy?
1.1. What would panel (a) of the figure on the first page of this chapter have looked like if the Fed had been following a monetarist policy since 1996?
1.1. Panel (a) of the figure on the first page of this chapter shows the behavior of M1 before, during, and after the 2001 recession.a. How do these data tie in with the quotation from the 2004
1.➤ How challenges led to a revision of Keynesian ideas and the emergence of the new classical macroeconomics
1.➤ What monetarism is and its views about the limits of discretionary monetary policy
1.➤ How Keynes and the experience of the Great Depression legitimized macroeconomic policy activism
1.➤ Why classical macroeconomics wasn’t adequate for the problems posed by the Great Depression
Early studies of the economic convergence hypothesis, looking at data for a group of currently industrialized countries, found that those that were relatively poor a century ago subsequently grew
Why would Argentina have to give the United States seigniorage if it gave up its peso and completely dollarized its economy? How would you measure the size of Argentina's sac- rifice of seigniorage?
Movements in the euro's external exchange rate can be seen as goods-market shocks that have asymmetric effects on different euro zone members. When the euro appreciated against China's currency in
Imagine that the EMS had become a monetary union with a single currency but that it created no European Central Bank to manage this currency. Instead, imagine that the task had been left to the
Look again at the shift in money demand in Figure 19-2, and imagine that the exchange rate is held fixed, so that the money supply automatically expands. How would this affect lending by domestic
The second Case Study (pp. 545) discussed the big global imbalances of the 2000s and suggested and that one can analyze factors determining world real interest rates in terms of the balance between
Suppose the U.S. and Japanese governments both want to depreciate their currencies to help their tradables industries but fear the resulting inflation. The two policy choices available to each of
What data might allow you to tell whether a large portion of Japan's recent foreign exchange intervention was sterilized? Try to find the relevant data for Japan in the IMF's International Financial
After 1985 the United States asked Germany and Japan to adopt fiscal and monetary expansion as ways of increasing foreign demand for U.S. output and reducing the American current account deficit.
The chapter described how the United States tried after 1985 to reduce its current account deficit by accelerating monetary growth and depreciating the dollar. Assume that the United States was in
Suppose now that R* rises permanently. What happens to the economy, and how does your answer depend on whether the change reflects a rise in the foreign real interest rate or in foreign inflation
Use the DD-AA model to examine the effects of a one-time rise in the foreign price level, P*. If the expected future exchange rate E' rises immediately in proportion to P* (in line with PPP), show
1.3. The Federal Reserve regularly releases data on the U.S. monetary base. You can access that data at various websites, including the website for the Federal Reserve Bank of St. Louis. Go to
1.1. Why is there no long-run trade-off between unemployment and inflation?
1.2. Suppose that all wages and prices in an economy are indexed to inflation. Can there still be an inflation tax?
1.➤ Why expansionary policies are limited due to the effects of expected inflation
1.➤ Why there is no long-run trade-off between inflation and unemployment
1.➤ What the Phillips curve is and the nature of the short-run trade-off between inflation and unemployment
1.➤ Why efforts to collect an inflation tax by printing money can lead to high rates of inflation and hyperinflation
1.1. Using a figure similar to Figure 31A-1, explain how the money market and the loanable funds market react to a reduction in the money supply in the short run.
1.13. Because of an economic slowdown, the Federal Reserve Bank of the United States lowered the federal funds rate from 4.25% on January 1, 2008, to 2.00% on May 1, 2008. The idea was to provide a
1.1. Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. Describe the effects, in the short
1.2. Which of the following will increase the opportunity cost of holding cash? Reduce it? Have no effect? Explain.a. Merchants charge a 1% fee on debit/credit card transactions for purchases of less
1.1. Explain how each of the following would affect the quantity of money demanded. Does the change cause a movement along the money demand curve or a shift of the money demand curve?a. Short-term
1.Why economists believe in monetary neutrality—that monetary policy affects only the price level, not aggregate output, in the long run
1.Why monetary policy is the main tool for stabilizing the economy
1.How the Federal Reserve implements monetary policy, moving the interest rate to affect aggregate output
1.Why the liquidity preference model determines the interest rate in the short run
1.What the money demand curve is
1.16. The accompanying figure shows new U.S. housing starts, in thousands of units per month, between January 1980 and September 2008. The graph shows a large drop in new housing starts in
1.15. As shown in Figure 30-9, on September 5, 2007, about 90% of the Federal Reserve’s assets were made up of U.S. Treasury bills. However, on September 3, 2008, only 53% of the Federal
1.14. The Congressional Research Service estimates that at least $45 million of counterfeit U.S. $100 notes produced by the North Korean government are in circulation.a. Why do U.S. taxpayers lose
1.10. Although the U.S. Federal Reserve doesn’t use changes in reserve requirements to manage the money supply, the central bank of Albernia does. The commercial banks of Albernia have $100 million
1.9. What will happen to the money supply under the following circumstances in a checkable-deposits-only system?a. The required reserve ratio is 25%, and a depositor withdraws$700 from his checkable
1.8. In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%. Estimate how much the money supply will increase in response to a new cash deposit of
1.7. The government of Eastlandia uses measures of monetary aggregates similar to those used by the United States, and the central bank of Eastlandia imposes a required reserve ratio of 10%.Given the
1.3. The table below shows the components of M1 and M2 in billions of dollars for the month of December in the years 1998 to 2007 as published in the 2008 Economic Report of the President. Complete
1.1. For each of the following transactions, what is the initial effect (increase or decrease) on M1? or M2?a. You sell a few shares of stock and put the proceeds into your savings account.b. You
1.2. Why did the creation of the Federal Reserve fail to prevent the bank runs of the Great Depression?What measures did stop the bank runs?
1.1. Assume that any money lent by a bank is always deposited back in the banking system as a checkable deposit and that the reserve ratio is 10%. Trace out the effects of a $100 million open-market
1.2. A con artist has a great idea: he’ll open a bank without investing any capital and lend all the deposits at high interest rates to real estate developers. If the real estate market booms, the
1.3. Explain why a system of commodity-backed money uses resources more efficiently than a system of commodity money.
1.1. Suppose you hold a gift certificate, good for certain products at participating stores. Is this gift certificate money? Why or why not?
1.How the Federal Reserve uses openmarket operations to change the monetary base
1.How the actions of private banks and the Federal Reserve determine the money supply
You observe that a country's currency depreciates but its current account worsens at the same time. What data might you look at to decide whether you are witnessing a J-curve effect? What other
Imagine that Congress passes a constitutional amendment requiring the U.S. government to maintain a balanced budget at all times. Thus, if the government wishes to change government spending, it must
Can you think of any forces that might help bring about long-run PPP for nontradable goods? (It will help a bit here if you have understood the discussion in Chapter 4 of factor-price equalization.)
Why might it be that relative PPP holds better in the long run than the short run? (Think about how international trading firms might react to large and persistent cross- border differences in the
Continuing with the preceding problem, we can define short- and long-term real rates of interest. In all cases, the relevant real interest rate (annualized, that is, expressed in percent per year) is
Nominal interest rates are quoted at a variety of maturities, corresponding to different lengths of loans. For example, in late 2004 the U.S. government could take out 10-year loans at an annual
Discuss the following statement: "When a change in a country's nominal interest rate is caused by a rise in the expected real interest rate, the domestic currency appreciates. When the change is
In the short run of a model with sticky prices, a reduction in the money supply raises the nominal interest rate and appreciates the currency (see Chapter 14). What happens to the expected real
Imagine that two identical countries have restricted imports to identical levels, but one has done so using tariffs while the other has done so using quotas. After these policies are in place, both
A country imposes a tariff on imports from abroad. How does its action change the long-run real exchange rate between home and foreign currency? How is the long-run nominal exchange rate affected?
In Chapter 5, we discussed the effect of transfers between countries, such as the indemnity imposed on Germany after World War I. Use the theory developed in this chapter to discuss the mechanisms
In the late 1970s, Britain seemed to have struck it rich. Having developed its North Sea oil-producing fields in earlier years, Britain suddenly found its real income higher as a result of a dramatic
Large-scale wars typically bring a suspension of international trading and financial activities. Exchange rates lose much of their relevance under these conditions, but once the war is over
As we observed in the chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or
How might a zero interest rate complicate the task of monetary policy? (We will have more to say about this in Online Appendix A to Chapter 17.)
Figure 13-2 shows that Japan's short-term interest rates have had periods during which they are near or equal to zero. Is the fact that the yen interest rates shown never drop below zero a
In our discussion of short-run exchange rate overshooting, we assumed that real output was given. Assume instead that an increase in the money supply raises real output in the short run (an
Continuing with the preceding question, note that the monetary value of output in 1985 was $4,010 billion in the United States, 1,418 billion cruzados in Brazil. Refer back to question 3 and
Calculate the 1984-1985 rates of money supply growth and inflation for the United States and Brazil, respectively. Assuming that other factors affecting the money markets did not change too

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