Question 1

Running trade deficits in some periods and trade surpluses in others allows countries to _____ .

increase consumption in every period

smooth consumption

increase interest rates

increase the value of their currency

Question 2

Please refer to the chart below to answer questions 2 and 3, and make the following assumptions:

1. Workers in both countries spend half of their income on each good
2. Each worker supplies one unit of labor

Iceland

United Kingdom

Labor Force

100

200

Per person fish production

20

10

Per person chip production

40

30

In autarky, the price of fish in terms of chips is _____ in Iceland and _____ in United Kingdom. Therefore, Iceland has a comparative advantage in _____ .

1/2; 1/3; fish

2; 3; chips

2; 3; fish

1/2; 1/3; chips

Question 3

Under free trade, the global price of fish in terms of chips is _____ .

3

2

6

3/2

Question 4

Use thefollowing scenarioto answerquestions 4-7.Consider a small open economy that faces a constant world real interest raterof 4 percent per year.OutputYtin the current year is fixed at 500applesper year. The government purchasesGt=120 apples in the current year and collectTt=80apples in taxesfrom consumers.Total consumptionof apples isCt=125+0.5(Yt-Tt)-100r. The expected future marginal product of capital is4.2Kt+1-0.5. The capital stock at the beginning of the current year is 910 units of capital. Capital depreciates at a rate of d=10 percent and the price of new capital is 1 apple per unit of capital.

What is the optimal amount of gross investmentItthis period?

-10 units of capita

81 units of capital

10 units of capital

819 units of capital

Question 5

What is the value of consumptionCtthis period?

81 apples

500 apples

331 apples

339 apples

Question 6

What isthe value of absorptionin the current year?

532 apples

500 apples

120 apples

331 apples

Question 7

What is the current account balance in the current year?

0 apple

32 apples

-32 apples

532 apples

Question 8

If inflation is higher in the U.S. than in the U.K., _____ .

U.K. imports from the U.S. should fall.

U.S. exports to the U.K. should fall.

the dollar should appreciate relative to the pound.

the dollar should depreciate relative to the pound.

Question 9

Define the real exchange rate as the number of foreign goods required to purchase a single unit of the same U.S. good. Following an appreciation of the U.S. real exchange rate, _____ .

U.S. exports should rise.

U.S. net exports should fall.

U.S. imports should fall.

all of these answers.

Question 10

Whichof the following statementsis truefollowing an appreciation of the U.S. dollar?

The U.S. inflation rate goes down.

Foreign investors get lower returns from their U.S. investment.

All of these statements are true.

U.S. net exports go up.