Deck 11: Exchange Rates I: the Monetary Approach in the Long Run

Question 1

(Figure: The Home and World Markets) Using the graphs, the
Amount imported by the home market under free trade is:

A)20.
B)40.
C)60.
D)80.

Answer 1

D

Question 2

Which of the following features is included in the NAFTA
Agreement?
I)a common tariff structure adopted by Canada, Mexico, and the
United States
II)elimination of tariffs on trade among Canada, Mexico, and the
United States
III)free mobility of labor and capital among Canada, Mexico, and
The United States

A)I
B)II
C)III
D)I, II, and III

Answer 2

B

Question 3

When a large nation imposes a tariff, which of the following is
NOT a cost incurred?

A)deadweight efficiency loss
B)reduced consumer surplus
C)deterioration of terms of trade for the trading partners
D)falling government revenues for the nation imposing the tariff

Answer 3

D

Question 4

Which of the following is NOT a regional trade agreement
Currently (2014) being considered?

A)the Trans­Pacific Partnership
B)the Trans­Atlantic Trade and Investment Partnership
C)the North American Free Trade Area
D)the Europe­Japan Free Trade Area

Question 5

Many regional trade agreements include other provisions that are
Not part of the treaty, but they are add­ons that might be
Important to trade issues.These are called:

A)addenda.
B)side agreements.
C)environmental pacts.
D)worker rights documents.

Question 6

What was the result of the Climate Summit held in December
2009?

A)All countries signed binding agreements to reduce their greenhouse gases by 20% during the next 10 years.
B)No country signed binding agreements to reduce their greenhouse gases.
C)Only developed industrialized countries agreed to reduce their greenhouse gases by 20% during the next 10 years.
D)Only China and India agreed to reduce their greenhouse gases by 20% during the next 10 years.

Question 7

The "most favored nation principle" means:

A)that member countries can enter into exclusive favorable agreements with some countries.
B)that member countries are barred from forming agreements outside their geographic vicinity.
C)that member countries must apply the same low tariffs to all WTO member countries.
D)that member countries must apply differential tariffs on imports from non­WTO countries.

Question 8

Which of the following is NOT part of the NAFTA?

A)tariff elimination on trade between member nations
B)an agreement on worker rights in each country
C)an agreement on environmental conditions in each country
D)elimination of restrictions on movement of labor between member countries

Question 9

Figure: The Home and World Market (Figure: The Home and World Markets) The graphs show the case
For a tariff imposed by a large country.According to these graphs, if
The world price of the product is given as $30, then home market
Firms will produce _______ and the total demand for the good will
Be _______.

A)40; 100
B)20; 80
C)20; 100
D)40; 80

Question 10

In a large­country case, an optimal tariff is one for which the
Terms­of­trade gain exceeds the:

A)producer surplus.
B)increased price of the product imported.
C)deadweight loss.
D)consumer surplus.

Question 11

Of the following, which is NOT a regional trade agreement?

A)the World Trade Organization
B)the European Union
C)the North American Free Trade Agreement
D)the Central American Free Trade Agreement

Question 12

In the large­country case, when a tariff is imposed, the country:

A)sees a terms­of­trade gain.
B)is able to reduce world price of the imported good.
C)is going to experience an increase in consumer surplus.
D)sees a terms­of­trade gain and is able to reduce world price of the imported good.

Question 13

A regional trade agreement involves:

A)Most, if not all, the nations in the world.
B)several nations, usually trading partners, with a common agenda or geographically linked.
C)nations that agree to trade only with nations in their region.
D)a region of the world with not only trade issues but also political cohesiveness.

Question 14

The WTO is considered _________, whereas NAFTA and the
European Union are __________.

A)a free­trade area; cartels
B)a cartel; multilateral agreements
C)a free­trade area; multilateral agreements
D)a multilateral agreement; regional trade agreements

Question 15

In a large­country case, an optimal tariff would be:

A)one that increases the producer surplus.
B)one that raises the price of the product imported.
C)one in which the terms­of­trade gain exceeds the deadweight loss.
D)one that easily passes the legislative process.

Question 16

Where was the Climate Summit held in December 2009?

A)Brussels
B)New York
C)Seattle
D)Copenhagen

Question 17

During which round of negotiations did the WTO toughen its
Stance against domestic policies that limit trade?

A)Bretton Woods
B)Uruguay
C)Doha
D)The WTO never toughened its stance against domestic policies.

Question 18

What is the "most favored nation" principle of the WTO?

A)Trading partners may choose a favorite nation to trade with.
B)Any nation can refuse to trade with another that is not its most favored nation.
C)The WTO has the right to choose the nation that has performed best within the WTO guidelines as its most favored
Nation.
D)Every nation must grant the same rights and treatment to other nations in the WTO as its "most favored nation."

Question 19

The World Trade Organization is called _______________
Because it involves many, if not most, of the nations in the world.

A)a bilateral trade organization
B)a trilateral trade organization
C)a multilateral trade agreement
D)a quasi­political trade organization

Question 20

In which type of trade agreement does the WTO allow exclusions
To the most favored nation principle?

A)multilateral trade agreements
B)free­trade areas
C)customs unions
D)free­trade areas and customs unions

Question 21

Which of the following is(are) the effect(s) of an international
Trade agreement that provides an incentive and reward for
Nations NOT to impose tariffs?
I)an increase in world welfare and standard of living
II)an opportunity for low­income nations to exploit the gains
From trade.
III)an opportunity for large countries to improve their terms of
Trade

A)I
B)I and II
C)I and III
D)I, II, and III

Question 22

A "prisoner's dilemma" can arise when:

A)two large countries simultaneously and independently apply tariffs on imports from each other.
B)two large countries simultaneously and independently eliminate tariffs on imports from each other.
C)one large country eliminates tariffs on imports from another large country.
D)one small country eliminates tariffs on imports from a large country.

Question 23

It can be shown that the Nash equilibrium would indicate that
Without any agreements, the best outcome for each large nation
Would be to:

A)not impose a tariff.
B)impose a tariff.
C)find other ways to reward their domestic firms.
D)impose a consumption tax.

Question 24

Which of the following agreements signed in 1989 is the
Precursor to NAFTA?

A)the U.S.­Mexico Free Trade Agreement
B)the Canada­Mexico Free Trade Agreement
C)the Canada­U.S.Free Trade Agreement
D)the Canada­Mexico­U.S.Free Trade Agreement

Question 25

A customs union is a trade agreement:

A)in which member countries are free to set their separate tariffs on other countries.
B)in which members agree to set similar tariffs on nonmembers.
C)in which resources are free to move between member countries.
D)in which member countries have common currency.

Question 26

Which of the following regional trade agreements is a free­trade
Area?

A)NAFTA
B)the European Union
C)Mercosur
D)NATO

Question 27

A free­trade area is:

A)a group of countries that agrees there will be "no rules" about trade-anything goes.
B)a group of countries that agrees to eliminate customs fees and containerized shipping charges on goods traded among
Them.
C)a group of countries that agrees to eliminate barriers to trade between themselves while keeping tariffs in place against the rest
Of the world.
D)a group of countries that eliminates trade barriers among themselves and erects a common tariff against all other nations.

Question 28

Which is a better outcome for income and standard of living
Levels for large nations?

A)no tariffs
B)low tariffs
C)high tariffs
D)equal tariffs for all nations

Question 29

A customs union is:

A)a group of countries that agrees there will be "no rules" about trade-anything goes.
B)a group of countries that agrees to eliminate customs fees and containerized shipping charges on goods traded among
Them.
C)a group of countries agreeing to eliminate barriers to trade between themselves but keeping tariffs in place against the rest
Of the world.
D)a group of countries that eliminates trade barriers among themselves and erects a common tariff against all other nations.

Question 30

What happens when two countries apply tariffs against each
Other in an attempt to capture their terms­of­trade gain?

A)Both countries lose because the terms­of­trade gain for one country is canceled by the tariff in the other country.
B)Both countries gain because the terms­of­trade gain for one country is canceled by the tariff in the other country.
C)Neither country gains nor loses because the terms­of­trade gain for one country is canceled by the tariff in the other country.
D)The country initially applying the tariff gains because it captures the terms­of­trade gain; the other country neither gains
Nor loses.

Question 31

In a prisoner's dilemma:

A)all competing parties gain.
B)one competitor gains at the expense of another.
C)all competing parties lose.
D)one competitor loses.

Question 32

Suppose that a large country imposes optimal tariffs on imports
From another large country.The second country then responds
With optimal tariffs on imports from the first country.For these
Two countries, the Nash equilibrium results in ___________ for
The first country and __________ for the second country.

A)losses; losses
B)gains; gains
C)losses; gains
D)gains; losses

Question 33

Which of the following is often used to describe regional trade
Agreements that discriminate, giving better tariff treatment to
Other nations in the agreement over outside nation?

A)super­regionals
B)preferential trade agreements
C)exclusive trade arrangements
D)equity trade agreements

Question 34

Which of the following statements characterizes NAFTA's
Economic arrangements among its member countries (Canada,
Mexico, and the United States)?

A)There are no restrictions on the movement of labor from one country to another.
B)There are no restrictions on the movement of capital from one country to another.
C)All three countries have adopted the same identical tariff system.
D)There is free trade among the three member countries.

Question 35

Figure: The Home and World Market (Figure: The Home and World Markets) The loss of consumer
Surplus in the home country is:

A)$480.
B)$540.
C)$160.
D)$600.

Question 36

Which of the following statements about the European Union (EU)
Is CORRECT?

A)EU member countries maintain separate tariff schedules.
B)There is free trade among EU member countries.
C)All EU member countries use a common currency (the euro).
D)All EU member countries have eliminated tariffs on imports from non­EU member countries.

Question 37

Figure: The Home and World Market (Figure: The Home and World Markets) The terms­of­trade gain is
_______, and the deadweight loss is _____.

A)$120; $160
B)$160; $160
C)$160; $120
D)$120; $120

Question 38

Figure: The Home and World Market (Figure: The Home and World Markets) If a tariff of $10 is imposed
By the home country, it causes a loss in the world market of:

A)$240.
B)$160.
C)$200.
D)$80.

Question 39

The WTO (under the GATT agreement) provides that nations may
Enter into regional trade agreements as long as they:

A)limit such agreements to one.
B)extend the provisions to all other nations in the WTO.
C)do not jointly increase tariffs against outside countries.
D)make sure they include smaller nations in their regions.

Question 40

Using game theory as an analytical tool, if one large nation
Imposes tariffs, the total cost is small; however, when several
Trading partners do the same:

A)the costs are even smaller.
B)the costs balance out and there is no harm.
C)the costs are the same but the potential gains are much smaller.
D)then all nations gain.

Question 41

Implementing a regional free­trade agreement may have an
Effect in which, due to reduced tariffs, a nation in the agreement
Begins to import a product it had previously produced itself.This
Effect is called:

A)trade creation.
B)trade diversion.
C)reciprocal trade agreements.
D)the employment effect of FTAs.

Question 42

Suppose country X currently produces widgets.Then it
Establishes a preferential trading agreement with country Y.
Following the formation of the PTA, country X no longer produces
Widgets and imports widgets from country Y.What has occurred?

A)There is trade diversion and a welfare gain for both country X and country Y.
B)There is trade diversion, a welfare gain for country Y, and a welfare loss for country X.
C)There is trade creation and a welfare gain for both country X and country Y.
D)There is trade creation, a welfare gain for country Y, and a welfare loss for country X.

Question 43

Automobiles imported from Canada or Mexico must have 60%
North American content to be eligible for tariff elimination under
NAFTA rules.This is an example of:

A)a rules of origin requirement.
B)an environmental standard.
C)a health and safety requirement.
D)a preferential trade agreement.

Question 44

(Table: Demand and Supply for Gloves) The United States can also
Import gloves from China at $4 per pair and from Mexico at $5 per
Pair.Currently, the United States imposes a specific tariff of $2 on its
Glove imports.How much trade in gloves is diverted in the U.S.­
Mexican free­trade area?

A)zero pairs of gloves
B)6 pairs of gloves
C)2 pairs of gloves
D)4 pairs of gloves

Question 45

SCENARIO: ELECTRIC FAN TRADE
U)S.firms can produce and sell electric fans for $25.The United
States can also import electric fans from China at $40 each and
From Canada at $45 each.Electric fans made in the United
States, China, and Canada are identical.Currently, the United
States imposes a 30% tariff on imported electric fans.
Reference: Ref 11­2
(Scenario: Electric Fan Trade) For the United States, are there
Trade diversion losses, trade creation gains, or both as a result of
The formation of NAFTA?

A)There are only trade diversions losses
B)There are only trade creation gains.
C)There are neither trade creation gains nor trade diversion losses.
D)There are both trade creation gains and trade diversion losses.

Question 46

(Table: Demand and Supply for Gloves) The United States can also
Import gloves from China at $4 per pair and from Mexico at $5 per
Pair.Currently, the United States imposes a specific tariff of $2 on its
Glove imports.Suppose that the United States and Mexico form a free­
Trade area.How much trade in gloves is created?

A)zero pairs of gloves
B)6 pairs of gloves
C)2 pairs of gloves
D)4 pairs of gloves

Question 47

When products from a high­cost country within a customs union
Replace imports from a low­cost country that is not a member of
The union, this is called:

A)trade creation.
B)trade diversion.
C)trade deflection.
D)trade development.

Question 48

In which of the following forms of regional trading agreement are
Rules of origin required?

A)a free­trade area
B)a customs union
C)a common market
D)an economic union

Question 49

An example of how trade diversion results in a suboptimal
Situation is auto parts trade between Mexico and the United
States.After NAFTA:

A)Mexico decreased its sales of auto parts to the United States.
B)the United States purchased more auto parts from Mexico due to the elimination of tariffs and reduced purchases from East
Asia, which was the lowest­cost producer.
C)the United States brought a complaint against Mexico for low­ quality auto parts.
D)the United States purchased fewer auto parts from Mexico due to the elimination of tariffs and increased purchases from East
Asia, which was the lowest­cost producer.

Question 50

SCENARIO: ELECTRIC FAN TRADE
U)S.firms can produce and sell electric fans for $25.The United
States can also import electric fans from China at $40 each and
From Canada at $45 each.Electric fans made in the United
States, China, and Canada are identical.Currently, the United
States imposes a 30% tariff on imported electric fans.
Reference: Ref 11­2
(Scenario: Electric Fan Trade) From which of the following
Countries will the United States import fans?

A)China
B)Canada
C)It will import fans from neither China nor Canada.
D)It will import fans from both China and Canada.

Question 51

What complex set of free­trade area regulations prohibits non­
Member country imports to a high­tariff member country via a
Low­tariff member country?

A)environmental certification
B)rules of origin
C)health and safety standards
D)a codified trade agreement

Question 52

SCENARIO: ELECTRIC FAN TRADE
U)S.firms can produce and sell electric fans for $25.The United
States can also import electric fans from China at $40 each and
From Canada at $45 each.Electric fans made in the United
States, China, and Canada are identical.Currently, the United
States imposes a 30% tariff on imported electric fans.
Reference: Ref 11­2
(Scenario: Electric Fan Trade) Now suppose that the United
States forms a free­trade area (NAFTA) with Canada and Mexico.
From which country will the United States import fans?

A)China
B)Canada
C)It will import fans from neither China nor Canada.
D)It will import fans from both China and Canada.

Question 53

Suppose country X currently does not produce widgets.Instead,
It imports widgets from country Z.Then country X establishes a
Preferential trading agreement with country Y.Following the
Formation of the PTA, it imports widgets from country Y.What
Has occurred?

A)There is trade diversion and a welfare loss for country X.
B)There is trade creation and a welfare loss for country Y.
C)There is trade diversion and a welfare gain for country X.
D)There is trade creation and a welfare gain for country Y.

Question 54

A customs union will increase the welfare of its members and the
Rest of the world if:

A)trade creation is greater than trade diversion.
B)trade creation is less than trade diversion.
C)trade creation is positive.
D)trade diversion is positive.

Question 55

To be able to enforce the rules of a free­trade area, goods from
Outside the region imported into the lowest­tariff nation cannot
Be shipped ________ into another nation in the area.

A)with no transportation costs
B)without a labor certificate
C)with no customs inspection
D)duty free

Question 56

Implementing a regional free­trade agreement may have an
Effect in which, due to reduced tariffs, a nation begins to import a
Product from another member country that it had previously
Imported from outside the new trade region.This effect is called:

A)trade creation.
B)trade diversion.
C)reciprocal trade agreements.
D)the employment effect of FTAs.

Question 57

Which of the following represents the stage where economic
Integration is LEAST complete?

A)free­trade area
B)customs union
C)common market
D)economic union

Question 58

SCENARIO: ELECTRIC FAN TRADE
U)S.firms can produce and sell electric fans for $25.The United
States can also import electric fans from China at $40 each and
From Canada at $45 each.Electric fans made in the United
States, China, and Canada are identical.Currently, the United
States imposes a 30% tariff on imported electric fans.
Reference: Ref 11­2
(Scenario: Electric Fan Trade) Suppose that the United States
Levied a 10% tariff on imported electric fans (rather than the
30% tariff described in the scenario).For the United States,
Would there be trade diversion losses, trade creation gains, or
Both as a result of the formation of NAFTA?

A)There would be only trade diversions losses.
B)There would be only trade creation gains.
C)There would be neither trade creation gains nor trade diversion losses.
D)There would be both trade creation gains and trade diversion losses.

Question 59

(Table: Demand and Supply for Gloves) The United States can also
Import gloves from China at $4 per pair and from Mexico at $5 per
Pair.Currently, the United States imposes a specific tariff of $2 on its
Glove imports.Suppose instead that the United States negotiated a
Free­trade agreement with China.Will the United States be better off
Or worse off as a result of its trade in gloves in the free­trade area
With China?

A)It is better off because there are no trade diversion losses.
B)It is worse off because there are no trade creation gains.
C)It is worse off because trade creation gains exceed trade diversion losses.
D)It is better off because trade diversion gains exceed trade creation losses.

Question 60

Why is NAFTA a free­trade area requiring rules of origin rather
Than a customs union?

A)A free­trade agreement allows politically sensitive tariffs of each nation to remain unchanged.
B)A customs union also requires rules of origin.
C)The overall level of U.S.tariffs was much higher than the overall level of tariffs in Mexico and Canada.
D)The overall levels of tariffs in Canada, Mexico, and the United States are similar, making rules of origin irrelevant.

Question 61

The customs union could lead to losses for the home country if:

A)the other country in the customs union is the most efficient producer.
B)the other country in the customs unions is not the most efficient producer.
C)there are other countries outside the customs union that are inefficient.
D)all countries are efficient producers.

Question 62

Professor Daniel Trefler at the University of Toronto concluded
That Canada ________ from free trade with the United States
Because _______________.

A)gained; trade creation exceeded trade diversion with the United States
B)lost; trade diversion exceeded trade creation with the United States
C)first gained, then lost; trade diversion exceeded trade creation after NAFTA was fully implemented
D)neither gained nor lost; trade creation equaled its trade diversion with the United States

Question 63

If a customs union includes the lowest­cost world producer of a
Product, then member countries:

A)will always be better off in trade with that product.
B)will always be worse off in trade with that product.
C)can be better off or worse off depending on the strengths of the trade diversion and trade creation effects for that product.
D)will no longer export or import that product.

Question 64

(Figure: U.S.Imports from Mexico and Asia) With the $100 tariff,
The United States will import ______ from Mexico and _______
From China.

A)400; 100
B)250; 250
C)250; 500
D)400; 200

Question 65

As a result, India fears that some of its:

A)exports to China will be diverted to ASEAN countries.
B)exports to the United States will be diverted to China.
C)exports to China and to ASEAN countries will be diverted to trade among members of the China­ASEAN free­trade area.
D)imports from ASEAN countries will be diverted to China.

Question 66

India is not a member of the China­ASEAN (Association of South

Question 67

Trade diversion may be such that the combined welfare of two
Nations in the agreement actually ____ because of ____, not
Completely offset by the _____.

A)falls; loss of tariff revenue for the importing nation; gain in the exporting nation's producer surplus
B)rises; gains from trade; loss of jobs in the importing industry
C)rises; gain in tariff revenue; gain in jobs
D)remains the same; loss of tariff revenue; gains from product variety

Question 68

Trade diversion is one reason that some economists:

A)believe we should not even bother to promote free trade.
B)recommend we change our focus from regional trade agreements to the WTO, a multilateral trade agreement.
C)recommend we reinstate some tariffs that were actually beneficial to all nations.
D)think we should exclude low­wage nations from trade agreements.

Question 69

(Figure: U.S.Imports from Mexico and Asia) The graph illustrates
A customs union between the United States and Mexico.
According to the graph, under free trade the United States will
Import ________ units of the good from _______ at the price of
_______.

A)600; Mexico; $150
B)600; China; $250
C)350; China; $150
D)500; China; $250

Question 70

Which of the following statements is(are) FALSE?
I)Trade creation is always bad for countries.
II)Trade diversion is always good for countries.
III)Regional trade agreements never cause welfare losses.

A)I
B)II
C)III
D)I, II, and III

Question 71

A case study of NAFTA, with regard to the benefits for Canada
From U.S.trade, found that:

A)Canada was not able to increase its exports due to barriers still remaining.
B)Canada had modest gains but was harmed by immigration into the United States from Mexico.
C)Canada had more trade diversion than trade creation and so was harmed overall.
D)Canada had more trade creation than trade diversion and so benefited overall.

Question 72

Because it is difficult to negotiate multilateral trade agreements,
Some economists argue that preferential trade agreements are
Always beneficial since they represent a movement toward freer
Trade, which is better than no movement at all.Is this argument
Always correct?

A)Yes; any movement toward freer trade is better than no movement at all.
B)No; some preferential trade agreements may have higher trade diversion costs than trade creation gains.
C)Yes; all preferential trade agreements have higher trade creation gains than trade diversion losses.
D)No; all preferential trade agreements have higher trade diversion losses than trade creation gains.

Question 73

Figure U.S.Imports from Mexico and Asia (Figure: U.S.Imports from Mexico and Asia) The $100 tariff by
The United States results in a tariff revenue of:

A)$25,000.
B)$5,000.
C)$50,000.
D)$2,500.

Question 74

If a regional trading agreement causes products from member
Countries to replace imports from nonmember countries, then the
Regional trading agreement will experience:

A)economic gains.
B)trade creation gains.
C)trade diversion losses.
D)trade perversion.

Question 75

The negative effects of trade diversion are reduced when:

A)trade diversion is more than offset by trade creation.
B)consumers in the importing nation have a change in their buying habits.
C)there is a cost increase in nations outside the region.
D)the free­trade agreement includes more members.

Question 76

Figure U.S.Imports from Mexico and Asia (Figure: U.S.Imports from Mexico and Asia) Suppose the United
States imposes a tariff of $100; then the total imports will be:

A)600.
B)250.
C)400.
D)500.

Question 77

(Figure: U.S.Imports from Mexico and Asia) If the United States
Forms a customs union with Mexico, it will result in a(n) _______
In producer surplus of ______ for Mexico.

A)increase; $25,000
B)increase; $50,000
C)increase; $32,500
D)decrease; $50,000

Question 78

Indian exporters are concerned about trade diversion because
_________ made an agreement with the ASEAN free­trade area.

A)India
B)China
C)the United States
D)Mexico

Question 79

Figure U.S.Imports from Mexico and Asia (Figure: U.S.Imports from Mexico and Asia) The combined
Welfare of the United States and Mexico is _______ by ______.

A)lower; $7,500
B)higher; $10,000
C)lower; $25,000
D)higher; $25,000

Question 80

Suppose initially there is no customs union and that the $100
Tariff is imposed by the United States.Now, Mexico invests in
Productive technology and it shifts the Mexican supply curve to
SMex.The United States now forms a customs union with Mexico.
This will result in a price of _______ and imports of _______.

A)$250; 500
B)$250; 400
C)$150; 600
D)$150; 500