international_mock_1_a (1)

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2 INTERNATIONAL ECONOMICS MOCK 1A MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If a good or service does not get used up as it is consumed, then it is said to be 1) _______ A) nonconsumable. B) nondiscrimination. C) nonexcludable. D) nonrival. 2) Which of the following is NOT correct about the effects of a tariff on an imported product? 2) _______ A) Tariffs increase the efficiency of how resources are allocated. B) Tariffs mean higher prices and less consumption for consumers of the product. C) Tariffs benefit domestic producers by raising price and domestic output. D) Tariffs increase government revenue. 3) In economic terms, tariffs are preferred to quotas because 3) _______ A) there is less loss of consumer surplus. B) quotas create a greater production inefficiency. C) domestic manufacturers gain more producer surplus. D) given the way quotas are usually administered, tariffs cause a smaller net national welfare loss. 4) The production side efficiency loss of a tariff is caused by 4) _______ A) higher profits gained by foreign producers. B) the increase in government revenue. C) the contraction of domestic consumption. D) the expansion of relative inefficient domestic production. 5) Suppose a manufacturer of software develops a new computer program that sells for $50. The $50 cost includes $0.25 for the CD it is stored on, $5 for the labor of the company software programmers, and $1.75 for packaging materials and transportation costs. Value added by the software company is 5) _______ A) $49.75. B) $44.75. C) $48. D) $48.25. 6) Which of the following is FALSE? 6) _______ A) Taxes on income, sales, and property require more complex accounting systems than do tariffs. B) Tariffs are not an attractive tax option for most low-income countries, so they mostly rely on quota licenses for revenue. C) Tariffs are a relatively easy tax to administer and often form an important part of revenue for low- income countries. D) Low-income countries often have large informal markets with the sales of many goods and services not being recorded, which makes it difficult to apply many kinds of taxes. 7) In the case of a small country, producer surplus 7) _______ A) is not changed by tariffs or quotas. B) increases more with a quota than with an equivalent tariff. C) increases the same amount with tariffs and equivalent quotas. D) increases more with a tariff than with an equivalent quota.

2 INTERNATIONAL ECONOMICS MOCK 1A 8) Consumer surplus is equal to the area 8) _______ A) under the demand curve. B) above the supply curve and below the price line. C) under the demand curve and above the supply curve. D) under the demand curve and above the price line. 9) Which of the following is an example of an institution whose primary concern is global stability? 9) _______ A) OPEC (Oil Producing and Exporting Countries) B) IMF (International Monetary Fund) C) NAFTA (North American Free Trade Agreement) D) Asian Development Bank 10) Which of the following criticisms is NOT directed at the IMF? 10) ______ A) It violates national sovereignty. B) It creates a free-riding problem. C) It lacks openness in its decision-making process. D) It serves the interests of wealthier countries. 11) Which of the following was NOT a creation of the Bretton Woods conference? 11) ______ A) WTO B) IBRD C) World Bank D) IMF 12) Which of the following is NOT an example of an international public good? 12) ______ A) Last-resort lending B) Open markets during a recession C) Capital flows to less-developed countries D) Regional trade agreements 13) Which of the following is FALSE? 13) ______ A) Foreign investors may not have a legal right to impose policies on a nation state, but the nation state may still experience consequences of poor policies. B) National sovereignty limits outsiders' ability to change the trade laws and practices of individual nation states. C) Because trade policies are laws of individual nations, it is difficult for other nations and international organizations to force changes on unwilling nation states. D) Because of international recognition of national sovereignty, individual nations are unaffected by global trade and capital flows. 14) IMF conditionality refers to the 14) ______ A) minimum-sized loan the IMF will make. B) maximum-sized loan the IMF will make. C) technical assistance the IMF gives. D) changes a country must make in order to receive IMF financial assistance. 15) The international organization that serves as a forum for trade discussions and the development of trade rules is called 15) ______ A) the IMF. B) the United Nations. C) the World Bank. D) the WTO.

2 INTERNATIONAL ECONOMICS MOCK 1A 16) One reason markets may fail to provide the optimal quantity of public goods is the problem of 16) ______ A) free riders. B) economic integration. C) determining what the public wants. D) nondiscrimination. 17) A country will gain relatively more from trade when 17) ______ A) the world price is close to the country's opportunity cost of the good. B) the world price is below the country's opportunity cost of the good. C) the world price is much greater than the country's opportunity cost for the good. D) trade is regulated. 18) The graphs above show the production possibilities curves for the U.S. and Canada, which both produce cars and wheat. Based on the graphs above, which of the following is true? 18) ______ A) The U.S. has an absolute advantage in both goods. B) The U.S. has a comparative advantage in wheat. C) The U.S. has a comparative advantage in cars. D) Canada has an absolute advantage in cars.

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2 INTERNATIONAL ECONOMICS MOCK 1A 19) Based on the theory of comparative advantage, nations maximize their well-being when they 19) ______ A) increase trade surpluses. B) increase exports. C) allocate resources more efficiently. D) create more jobs. 20) Competition between the United States and Mexico is 20) ______ A) a struggle over which country will get the best jobs. B) unfair if wages in Mexico are lower than in the United States. C) not a meaningful way to analyze trade. D) equivalent to the competition between two giant corporations. 21) When economists talk about the gains from trade they mean that 21) ______ A) no one ever gets hurt by trade. B) economic restructuring is usually quick and painless. C) trade increases government revenue through taxes on imports. D) the benefits of trade outweigh the losses. E) business firms benefit from trade but not necessarily individuals. 22) Suppose Paraguay can produce 12 wheat or 3 corn. Suppose Bolivia can produce 4 wheat or 2 corn. Suppose opportunity costs are constant. Given these production possibilities, 22) ______ A) Paraguay has an absolute advantage in neither good. B) Paraguay has a comparative advantage in corn. C) Paraguay has a comparative advantage in both goods. D) Paraguay has a comparative advantage in wheat. 23) U.S. U.K Wheat 12 6 Cloth 6 18 The table above shows United States and United Kingdom production of wheat (bushels per hour) and cloth (yards per hour). In order for both countries to gain from trade, one bushel of wheat must trade for 23) ______ A) between 1/3 and 3 yards of cloth. B) between 1/2 and 2 yards of cloth. C) between 6 and 18 yards of cloth. D) between 1/2 and 1/3 yards of cloth. Scenario 6.1 Suppose that United States furniture makers import $100 of wood and parts in order to make a dining room table selling for $500. The imports have no tariff or quota restrictions. 24) Based on Scenario 6.1 above, if a tariff of 20 percent is placed on imports of dining room tables, and another tariff of 50 percent is placed on imports of wood and parts, then the effective rate of protection on tables made in the United States is 24) ______ A) 20 percent. B) 70 percent. C) 12.5 percent. D) 50 percent.

2 INTERNATIONAL ECONOMICS MOCK 1A Use the data in the table below to answer the following question(s): Table 3.1 Output per Hour Worked 25) Based on Table 3.1, which country or countries has an absolute advantage and a comparative advantage in shoes? 25) ______ A) The United States has an absolute and comparative advantage in shoes. B) The United States has a comparative advantage, and Mexico has an absolute advantage in shoes. C) Mexico has an absolute and comparative advantage in shoes. D) Mexico has a comparative advantage, and the United States has an absolute advantage in shoes. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 26) Nontariff barriers to trade are less transparent than tariffs. 26) ______ 27) Since the mid-1980s, tariff rates in most nations have risen. 27) ______ 28) Because of the recognition internationally of the principles of national sovereignty, nations cannot be affected by the policies of other nations and international governmental organizations. 28) ______ 29) A nation must have an absolute advantage in order to have a comparative advantage in producing a good or service. 29) ______ 30) All individuals and firms in a country must gain from trade in order for it to be beneficial to the nation. 30) ______ SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 31) What are some of the long-run costs of tariffs? 31) _____________ 32) Which round of GATT led to the formation of the WTO? 32) _____________ 33) The International Bank for Reconstruction and Development (IBRD) part of the World Bank is set up to lend to whom and for what types of projects? 33) _____________ 34) What result of the Uruguay Round was the most significant for global trade? 34) _____________ 35) How is the IMF funded? 35) _____________ 36) In the simple trade model, what is assumed about labor? 36) _____________

2 INTERNATIONAL ECONOMICS MOCK 1A ESSAY. Write your answer in the space provided or on a separate sheet of paper. 37) If politicians decide to proceed with protection, why might economists prefer tariffs to quotas? Explain at least three reasons. 38) Carefully explain why tariffs create deadweight losses. 39) Use a graph to demonstrate why quotas are likely to cause increased deadweight losses over time. 40) Explain how a country with no absolute advantage can gain from trade. 41) The graphs above show the production possibilities curves for the U.S. and Canada, which both produce cars and wheat. Determine comparative advantage for each country, and then draw the CPC for each country, assuming that the world price of cars is 1.5 wheat. (Assume that wheat is measured in thousands of bushels.) How would the gains from trade change if the price of cars rose to 1.75 wheat? 42) Free trade may be good for a nation, but not for everyone in the nation. Explain why free trade is controversial and the list the justifications that proponents of trade adjustment assistance offer in support of those policies.

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2 INTERNATIONAL ECONOMICS MOCK 1A 1) D 2) A 3) D 4) D 5) C 6) B 7) C 8) D 9) B 10) B 11) A 12) D 13) D 14) D 15) D 16) A 17) C 18) C 19) C 20) C 21) D 22) D 23) D 24) C 25) D 26) TRUE 27) FALSE 28) FALSE 29) FALSE 30) FALSE 31) Increased rent seeking, slower innovation, possible loss of exports due to retaliation 32) The Uruguay Round 33) Developing nations' governments for specific development projects or major government economic policy adjustments 34) The creation of the WTO 35) It collects fees called quotas from it members. 36) It is perfectly mobile between the two industries within a nation. 37) • The greater welfare loss from quotas since quota permits are not generally sold • The inability of quotas to respond to increases in domestic demand except through higher prices and increased producer surplus. With tariffs, the volume of imports simply adjusts to changing market conditions and market prices are less volatile. • Tariffs are more transparent and probably less costly to administer. • Tariffs favor the most efficient foreign producers. They don't arbitrarily limit entry or discourage innovation by foreign firms (but they do for domestic firms, meaning we are creating a situation that rewards foreigners for being innovative and efficient, something not in the long run best interests of domestic firms). 38) Tariffs reduce domestic consumption and increase domestic production. This means that some consumers that value this good more than its cost are not able to purchase it, which reduces consumer surplus without benefitting anyone. Likewise, domestic producers increase their production, but their costs are higher than world costs. Thus that additional cost of production does not benefit

2 INTERNATIONAL ECONOMICS MOCK 1A the producers; it is simply a waste of resources. 39) Over time, demand for most goods rises, as populations increase (as well as for other reasons). The graph should show an increase in demand, given a constant quota amount. Since the quota does not change, the effect of the quota will be to raise price even more than previously. This increases the size of the deadweight loss due to underconsumption of the good and increase the deadweight loss due to domestic overproduction. 40) Even if a country cannot produce absolutely more of a good, it can still have a comparative advantage. This means that it is relatively better at producing a given good. Thus if it specializes in producing the good that it produces at a relatively lower cost and trades for goods that it can only produce at a relatively higher cost, it will gain from trade. 41) In the U.S., the opportunity cost of a car is 1 wheat. The opportunity cost of wheat is 1 car. In Canada, the opportunity cost of a car is 2 wheat. The opportunity cost of wheat is 1/2 car. The U.S. has a comparative advantage in cars, and likewise, Canada has a comparative advantage in wheat. With trade, the U.S. CPC begins at the horizontal intercept and has a slope of -1.5. The Canadian CPC begins at the vertical intercept and has a slope of -1.5. A rise in the price of cars rotates the Canadian CPC inward and the U.S. CPC outward. The gains from trade increase in the U.S. and decrease in Canada. 42) The nation as a whole is better off as long as the gains from the winners exceed the losses from the losers. Restructuring means that some industries are dying and workers and producers have to find other opportunities. This may be difficult for not only those directly involved in the industry, but also for the surrounding communities. Adjustment assistance states that since the nation as a whole benefits from trade, there are newly added resources that can be used for compensation. Second, there is a potential ethical obligation to assist those hurt by economic change. Third, compensation reduces the incentives for those hurt by trade to fight against free trade policies.

international_mock_1_a (1)

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