Part I. Essay - Provide an answer in the space in between the questions.
Question 1. Suppose that the Bank of China wishes to peg the rate of exchange of its currency, the yuan, in terms of the US dollar. In each of the following situations, should it add or subtract from its dollar foreign exchange reserves? Why?
a) US parents begin buying fewer Chinese made toys for their children.
b) US interest rates rise relative to interest rates in China, so Chinese residents seek to purchase additional US financial assets. c) Chinese furniture manufacturers produce high quality early American furniture and successfully export large quantities
Question 2. Suppose that Congress is considering imposing a 30% tariff on imported automobiles. Who would be the gainers and who would be the losers from such a move?
Question 3. Production Possibilities Tables for Germany and Canada (note that we are assuming that opportunity costs remain constant along the production possibilities frontier), and that each country produces only these two products).
Germany's Production Possibilities Table
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Production Alternatives
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Product
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A
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B
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C
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D
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Autos
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0
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40
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80
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120
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Computers
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60
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40
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20
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0
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Canada's Production Possibilities Table
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Production Alternatives
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Product
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A'
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B'
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C'
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D'
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Autos
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0
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60
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120
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180
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Computers
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120
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80
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40
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0
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a.) Since Canada can produce more of either product than Germany can, is there any reason for Canada and Germany to engage in trade? Explain.
b.) If they trade, which country should specialize in which product and why?
c.) If the Germans are consuming and producing 40 autos and 40 computers before trade and the Canadians are producing and consuming 60 autos and 80 computers before trade, what are the potential gains from trade (if any) in terms of additional production of autos and computers for both countries combined?
Part II. Multiple Choice Questions - Please bold and underline the correct answer. Only one answer is correct for each question. Explain.
Problem 1. Which of the following is an indication of a strong dollar?
a. imported goods becoming cheaper for American consumers.
b. an increase in the supply of dollars.
c. a decrease in the demand for dollars.
d. accelerating inflation in the U. S. relative to the rest of the world.
e. imported goods becoming more expensive for Americans consumers.
Problem 2. If a country under a floating exchange rate system has a net capital outflow, it must also have
a. current account deficit. c. short-term capital inflow.
b. balance of payments deficit. d. current account surplus.
Problem 3. Which of the following would result in a smaller current account deficit for the US?
a. Americans import more German automobiles.
b. Americans earn more income on their investments in foreign countries.
c. Foreigners buy fewer American goods.
d. U.S. foreign aid to underdeveloped nations is increased.
Problem 4. According to the principal of comparative advantage, specialization and exchange increase the world’s total output because
a. countries are able to produce at a point outside their production possibilities frontier.
b. the problem of unemployment is eliminated worldwide.
c. resources are used more efficiently worldwide.
d. all of the above.
Problem 5. If costs of production in the US fall relative to costs in the rest of the world, we would expect which of the following to occur on the foreign exchange market?
a. decrease in the demand for dollars
b. increase in the supply of dollars
c. increase in the demand for dollars
d. no change in demand or supply of dollars