Comprehensive Economics Excersises

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Exam International Economics

Academic Year 2011 -2012

Questions and Answers

Question 1 Chapter 5 Suppose, as a result of various dynamic factors associated with exposure to international competition, Albania's economy grew, and is now represented by the rightmost product ion possibility frontier in the figure above. a) If its point of production with trade was point c, would you consider this growth to be export -biased or import biased? b) If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania's terms of trade and its real income? Answer Question 1: a) If point c is the production point with trade, then Albania has a comparative advantage in good B. Therefore, from the shape of the new production possibility frontier (as compared to the original one), this is clearly an export-biased growth. 5 points b) This ceteris paribus would tend to worsen Albania's terms of trade. The terms of trade effect would, again ceteris paribus, worsen its real income. However, the growth itself acts in the opposite direction. 5 points

Question 2 Chapter 17 Use a figure to explain the potential effectiveness of fiscal policy to spur on the economy under a fixed exchange rate. Answer Question 2:

With an aim toward increasing output, the government could use fiscal policy to shift the DD curve outward. The central bank will have to take steps to maintain a fixed exchange rate , among the options is buying foreign assets with money, to shift the AA schedule outward until the equilibrium at point 3 is reached. 5 points

10 points


Exam International Economics

Academic Year 2011 -2012

Question 3 Chapter 6 Why are increasing returns to scale and fixed costs important in models of international trade and imperfect competition? Answer Question 3: There are many answers. Three of these are a) Increasing returns to scale and high fixed costs may be inconsistent with perfect competition. In such a case, the initial autarkic state may be a suboptimal equilibrium. For example, relative prices may not equal marg inal rates of transformation. It follows from this that a change in output compositions associated with trade may result in a national welfare for one or both trading countries that is inferior to that associated with the initial autarkic conditions. Hence no "gains from trade." 3 points b) In a case of increasing scale economies at the firm or plant level, the determination of which product will be exported by which country is ex - ante indeterminate. Therefore, deriving clear implications concerning th e effects of trade on income distributions such as may be derived from the Samuelson -Stolper Theorem is no longer gen erally possible. 3 points c) Market structures containing positive scale economies and imperfect competition may allow for "two -way trade," or intra-industry trade. As in b. above, the various theorems derivable from the Heckscher -Ohlin model concerning directions of trade and income distributions are no longer gen erally applicable. 3 points

Question 4 Chapter 16 Find the real exchange rate for the following case: Assume that the representative basket of European goods costs 100 euro’s and the representative U.S. basket costs $125, and the dollar/euro exchange rate is $0.75 per euro, then the price of the European basket in terms of U.S. basket is:____________________________________________________________

_____ Answer Question 4: [(0.75 $/euro) (100 euro per a European basket)]/[(125 $/U.S. basket)] = 0.60 U.S. baskets/European basket. 5 points

Question 5 Refer to above figure. The loss of Consumer Surplus due to the tariff equals ________.

Chapter 8


Exam International Economics
Answer Question 5: [(100 x ($14 - $3))/2] – [(80 x ($14 - $6))/2] = $230

Academic Year 2011 -2012
5 points

Question 6 Assuming relative PPP, fill in the table below:

Chapter 15

Answer Question 6 Using ( )/ = ΠUS, t - Π E, t one...
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