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international economics theory

Questions and Answers of International Economics Theory

a. In 2010 there was a bumper crop of wine grapes.
2. In the following three situations, the market is initially in equilibrium. After each event described below, does a surplus or shortage exist at the original equilibrium price? What will happen to
e. Since new technologies have made it possible to build larger cruise ships (which are cheaper to run per passenger), Caribbean cruise lines have offered more cabins, at lower prices, than before.
d. Many construction workers temporarily move to areas that have suffered hurricane damage, lured by higher wages.
c. Immediately after the school year begins, fewer young people are available to work. Fast-food chains must raise wages, which represent the price of labor, to attract workers.
b. Many strawberry farmers open temporary roadside stands during harvest season, even though prices are usually low at that time.
a. During a real estate boom that causes house prices to rise, more homeowners put their houses up for sale.
1. Explain whether each of the following events represents (i) a change in supply or (ii) a movement along the supply curve.
5. Which of the following will increase the demand for disposable diapers?a. a new “baby boom”b. concern over the environmental effect of landfillsc. a decrease in the price of cloth diapersd. a
4. Which of the following will occur if consumers expect the price of a good to fall in the coming months?a. The quantity demanded will rise today.b. The quantity demanded will remain the same
3. If an increase in income leads to a decrease in demand, the good isa. a complement.b. a substitute.c. inferior.d. abnormal.e. normal.
2. A decrease in the price of butter would most likely decrease the demand fora. margarine.b. bagels.c. jelly.d. milk.e. syrup.
1. Which of the following would increase demand for a normal good? A decrease ina. price.b. income.c. the price of a substitute.d. consumer taste for a good.e. the price of a complement.
d. A sharp rise in the price of gasoline leads many commuters to join carpools in order to reduce their gasoline purchases.
c. People buy more long-stem roses the week of Valentine’s Day, even though the prices are higher than at other times during the year.
b. When XYZ Telecom, a long-distance telephone service provider, offered reduced rates on weekends, its volume of weekend calling increased sharply.Solutions appear at the back of the book.
a. A store owner finds that customers are willing to pay more for umbrellas on rainy days.
1. Explain whether each of the following events represents (i) a change in demand (a shift of the demand curve) or (ii) a movement along the demand curve (a change in the quantity demanded).
The factors that shift the demand curve
The difference between movements along the demand curve and changes in demand
What the demand curve is
What a competitive market is and how it is described by the supply and demand model
d. Estimates now show that the maximum point on the Laffer curve is (approximately) at a tax rate of 80%. For tax rates less than 80%, how would you describe the relationship between the tax rate and
c. The maximum possible income tax rate is 100%. What would tax revenue be at a 100% income tax rate?
b. What would tax revenue be at a 0% income tax rate?
a. Which is the independent variable? Which is the dependent variable? On which axis do you therefore measure the income tax rate? On which axis do you measure income tax revenue?
2. During the Reagan administration, economist Arthur Laffer argued in favor of lowering income tax rates in order to increase tax revenues. Like most economists, he believed that at tax rates above
f. Regardless of its price, there is no change in the quantity of salt that Americans buy.
e. Research finds no relationship between the number of diet books purchased and the number of pounds lost by the average dieter.
d. Consumers buy more frozen yogurt when the price of ice cream goes up.
c. Regardless of the temperature outside, Americans consume the same number of hot dogs per day.
b. Workers with more experience typically have higher incomes than less experienced workers.
a. If the price of movies increases, fewer consumers go to see movies.
1. Study the four accompanying diagrams. Consider the following statements and indicate which diagram matches each statement. For each statement, tell which variable would appear on the horizontal
b. If the EU and the United States continue to trade, what do you think will characterize the goods that the EU exports to the United States and the goods that the United States exports to the EU?
a. Do you think Peter Pundit is correct or not? If not, what do you think is the source of his mistake?
14. Peter Pundit, an economics reporter, states that the European Union (EU) is increasing its productivity very rapidly in all industries.He claims that this productivity advance is so rapid that
a. Which country has the comparative advantage in aircraft production? In production of trousers, slacks, and jeans?b. Can you determine which country has the absolute advantage in aircraft
13. According to the U.S. Census Bureau, in July 2006 the United States exported aircraft worth $1 billion to China and imported aircraft worth only $19,000 from China. During the same month,
b. The two families are made better off when the McCoys specialize in raising chickens, the Hatfields specialize in growing corn, and the two families trade.
a. The two families are made better off when the Hatfields specialize in raising chickens, the McCoys specialize in growing corn, and the two families trade.
12. The Hatfield family lives on the east side of the Hatatoochie River, and the McCoy family lives on the west side. Each family’s diet consists of fried chicken and corn-on-the-cob, and each is
c. From their original production point, farmers reduce their production of wheat to 2 billion bushels and increase their production of corn to 12.044 billion bushels. Along the production
b. From their original production point, farmers transfer 40 million acres of land from corn to wheat production.They now produce 3.158 billion bushels of wheat and 10.107 billion bushels of corn.
a. From their original production point, farmers use 40 million acres of land to produce 1.8 billion bushels of wheat, and they use 60 million acres of land to produce 9 billion bushels of corn. The
11. According to data from the U.S. Department of Agriculture’s National Agricultural Statistics Service, 124 million acres of land in the United States were used for wheat or corn farming in 2004.
d. After the innovation, which tribe had an absolute advantage in producing meatballs? In producing spaghetti? Which had the comparative advantage in meatball production? In spaghetti production?
c. Draw the new monthly production possibilities curve for the Frivoli.
b. Which tribe has the comparative advantage in spaghetti production? In meatball production?In A.D. 100, the Frivoli discovered a new technique for making meatballs that doubled the quantity of
a. Assume that all production possibilities curves are straight lines. Draw one diagram showing the monthly production possibilities curve for the Tivoli and another showing the monthly production
10. In the ancient country of Roma, only two goods, spaghetti and meatballs, are produced. There are two tribes in Roma, the Tivoli and the Frivoli. By themselves, the Tivoli each month can produce
c. Draw a production possibilities curve for Bermuda, with fish on the horizontal axis and hotel stays on the vertical axis, and label Bermuda’s actual production point for the year 2000.
b. If all 3,409 hotel employees were to become fishermen (in addition to the 307 fishermen already working in the fishing industry), how many metric tons of fish could Bermuda produce?
a. If all 307 registered fishermen were to be employed by hotels(in addition to the 3,409 people already working in hotels), how many hotel stays could Bermuda produce?
9. Two important industries on the island of Bermuda are fishing and tourism. According to data from the World Resources Institute and the Bermuda Department of Statistics, in the year 2000 the 307
What does this imply about the slope of the production possibilities curve?
e. Explain why the answers to parts c and d are not the same.
d. What is the opportunity cost of increasing the annual output of potatoes from 200 to 400 pounds?
c. What is the opportunity cost of increasing the annual output of potatoes from 600 to 800 pounds?
b. Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes? Explain. Where would this point lie relative to the production possibilities curve?
a. Draw a production possibilities curve with potatoes on the horizontal axis and fish on the vertical axis, and illustrate these options, showing points A–F.
8. Suppose Atlantis is a small, isolated island in the South Atlantic.The inhabitants grow potatoes and catch fish. The accompanying table shows the maximum annual output combinations of potatoes and
7. Evaluate this statement: “It is easier to build an economic model that accurately reflects events that have already occurred than to build an economic model to forecast future events.” Do you
6. Why do we consider a business-cycle expansion to be different from economic growth?
e. All disagreements among economists are generated by the media.
d. “The system of public education in this country generates greater benefits to society than the cost of running the system”is a normative statement.
c. Economics cannot always be used to determine what society ought to do.
b. “We should lower taxes to encourage more work” is a positive statement.
a. “When people must pay higher taxes on their wage earnings, it reduces their incentive to work” is a positive statement.
5. Are the following statements true or false? Explain your answers.
d.Would low-wage Asian workers benefit from or be hurt by such a policy?
c. Would such a policy make some Americans better off without making any other Americans worse off? That is, would this policy be efficient from the viewpoint of all Americans?
b. Is the policy that is being advocated consistent with the statement about the wages and productivities of American and Asian workers?
a. Which parts of this quotation are positive statements?Which parts are normative statements?
4. A representative of the U.S. clothing industry recently made this statement: “Workers in Asia often work in sweatshop conditions earning only pennies an hour. American workers are more
3. Use the concept of opportunity cost to explain the following situations.a. More people choose to get graduate degrees when the job market is poor.b. More people choose to do their own home repairs
2. Describe some of the opportunity costs of the following choices.a. Attend college instead of taking a job.b.Watch a movie instead of studying for an exam.c. Ride the bus instead of driving your
1. Imagine a firm that manufactures textiles (pants and shirts).List the four categories of resources, and for each category, give an example of a specific resource that the firm might use to
3. The country of Boldovia has no unemployment insurance benefits and a tax system using only lump-sum taxes. The neighboring country of Moldovia has generous unemployment benefits and a tax system
2. Explain why a $500 million reduction in government purchases of goods and services will generate a larger fall in real GDP than a $500 million tax increase.
1. Explain why a $500 million increase in government purchases of goods and services will generate a larger rise in real GDP than a $500 million increase in government transfers.
. An income tax rebate is an example ofa. an expansionary fiscal policy.b. a contractionary fiscal policy.c. an expansionary monetary policy.d. a contractionary monetary policy.e. none of the above.
4. Which of the following is a fiscal policy that is appropriate to combat inflation?a. decreasing taxesb. decreasing government spendingc. increasing government transfersd. increasing interest
3. Which of the following is an example of expansionary fiscal policy?a. increasing taxesb. increasing government spendingc. decreasing government transfersd. decreasing interest ratese. increasing
2. Which of the following is a government transfer program?a. Social Securityb. Medicare/Medicaidc. unemployment insuranced. food stampse. all of the above
1. Which of the following contributes to the lag in implementing fiscal policy?I. It takes time for Congress and the President to pass spending and tax changes.II. Current economic data take time to
b. Is this a valid argument against stabilization policy? Why or why not?Solutions appear at the back of the book.Tackle the Test: Multiple-Choice Questions
a. Explain what this means in terms of the AD–AS model.
3. Suppose someone says, “Using monetary or fiscal policy to pump up the economy is counterproductive—you get a brief high, but then you have the pain of inflation.”
2. Explain why federal disaster relief, which quickly disburses funds to victims of natural disasters such as hurricanes, floods, and large -scale crop failures, will stabilize the economy more
1. In each of the following cases, determine whether the policy is an expansionary or contractionary fiscal policy.a. Several military bases around the country, which together employ tens of
e. What will happen to the size of the output gap in the long run?
d. Calculate the size of the output gap.
c. What type of gap exists in this economy?
5. The economy depicted in the graph is experiencing a(n)a. contractionary gap.b. recessionary gap.c. inflationary gap.d. demand gap.e. supply gap.Real GDP Aggregate price level Y1 LRAS SRAS AD EP1
4. Which of the following statements is true if this economy is operating at P1 and Y1?I. The level of aggregate output equals potential output.II. It is in short-run macroeconomic equilibrium.III.
3. During stagflation, what happens to the aggregate price level and real GDP?Aggregate price level Real GDPa. decreases increasesb. decreases decreasesc. increases increasesd. increases decreasese.
2. Which of the following causes a positive demand shock?a. an increase in wealthb. pessimistic consumer expectationsc. a decrease in government spendingd. an increase in taxese. an increase in the
1. Which of the following causes a negative supply shock?I. a technological advance II. increasing productivity III. an increase in oil pricesa. I onlyb. II onlyc. III onlyd. I and III onlye. I, II,
2. A rise in productivity increases potential output, but some worry that demand for the additional output will be insufficient even in the long run. How would you respond?

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