MACRO: International Economics Flashcards

Which of the following would cause a leftward shift in a country's import demand curve?

Answer: A fall in domestic income reducing demand for all goods including imports

Lower domestic income reduces consumer purchasing power, decreasing demand for all goods including imports, shifting the import demand curve leftward.

Purchasing Power Parity (PPP) theory predicts that in the long run, exchange rates will adjust so that:

Answer: The same basket of goods costs the same in all countries when measured in a common currency

PPP holds that exchange rates adjust to equalize the price of identical goods across countries, eliminating arbitrage opportunities in goods markets.

Country C imposes a tariff on imported automobiles. Which group in Country C is MOST harmed by this policy?

Answer: Domestic consumers who purchase automobiles

Tariffs raise the domestic price of the imported good, reducing consumer surplus and making domestic consumers pay more for automobiles.

If uncovered interest rate parity holds and the U.S. interest rate rises above Japan's interest rate, investors will expect:

Answer: The dollar to depreciate in the future to offset the interest rate advantage

Uncovered interest rate parity implies that higher U.S. interest rates attract capital initially, but the expected future depreciation of the dollar offsets the interest advantage.

Which of the following best describes a 'beggar-thy-neighbor' policy?

Answer: A country deliberately depreciates its currency or raises tariffs to gain trade advantages at other nations' expense

Beggar-thy-neighbor policies, like competitive devaluations or tariffs, attempt to improve one country's trade position by shifting the cost of adjustment onto trading partners.

In a country with a fixed exchange rate that is overvalued, which of the following best describes the central bank's required intervention?

Answer: Buy domestic currency using foreign reserves to support its value

An overvalued currency faces excess supply on forex markets, so the central bank must buy domestic currency (selling foreign reserves) to prevent it from falling to its equilibrium level.

Which of the following outcomes is most consistent with the theory of factor price equalization resulting from free trade?

Answer: Wages for unskilled labor in labor-abundant countries rise toward those in richer countries

The Heckscher-Ohlin and Stolper-Samuelson theorems predict that trade raises returns to abundant factors; in labor-abundant poor countries, unskilled wages rise toward rich-country levels.