IS and Econ 13 - Final Examination Answers 5. In terms of Purchasing Power Parity, the
(correct answers starred “*”) United States' GDP/capita is around the
S. Skaperdas – March 19, 2013 following percentage of China's GDP/capita.
Version A a. 50%
1. The Democratic Republic of the Congo c. 200%
(former Zaire) d. 650%*
a. has few natural resources and is one of the e. 10,000%
poorest countries on earth.
b. has a large amount of natural resources but 6. The Industrial Revolution began in
is one of the poorest countries on earth.* a. Great Britain.*
c. has few natural resources and is one of the b. The United States.
richest countries in sub-Saharan Africa. c. France.
d. has a large amount of natural resources d. Japan.
and is one of the richest countries in sub-Saharan e. Scandinavia
e. is smaller but richer than South Africa. 7. John can solve 20 math problems per hour
while Frank can only solve 17 math problems in
2. Corporations the same time period. Which of the following
a. were the main form of firm organization are true?
since the beginning of the industrial revolution. a. John has a comparative advantage in
b. have always been the most efficient form solving math problems.
of firm organization. b. John has an absolute advantage in solving
c. arose in the late Middle ages and have math problems.*
been dominant since then. c. Frank has an absolute advantage in
d. became the dominant form of firm solving math problems
organization in the US in the late 19th century.* d. both a and b.
e. a and c. e. none of the above
3. According to the 2009 data on Gross 8. Joe and Drew can both produce hats and
National Income (“GNI”) we examined shoes (and no other goods) and there is no else
a. Bangladesh has a higher GNI per capita around. If Joe has a comparative advantage in
than China. producing shoes, what else do we know for
b. Nigeria has a higher GNI per capita certain?
than India and China. a. Joe has an absolute advantage in
c. India and China have a higher GNI per producing shoes.
capita than Mexico. b. Drew has an absolute advantage in
d. China had a higher GNI per capita than producing shoes.
Nigeria.* c. Drew has a comparative advantage in
e. a and b. producing hats.*
d. Joe has a comparative advantage in
4. Which of these attributes is NOT associated producing hats.
with the rise of agriculture? e. None of the above.
a. less protein, more carbs consumption.
b. nomadic lifestyle* 9. Restrictions on international trade
c. more generalized trade a. have increased since WWII.
d. emergence of states b. include taxes on imported goods.*
e. increasing specialization in production c. were uncommon before WWII.
d. a and b.
e. All of the above. Suppose each of two countries, say China and 13. Then, if the U.S. and China were to choose
the U.S., can either pursue free trade or engage their policies independently of one another so as
in trade protection. If both countries were to to maximize their own growth, we would expect
engage in free trade, they would each see their a. China to choose free trade and the U.S.
income grow by $50 billion. If both were to to choose trade protection.
engage in trade protection, they would each grow b. China to choose trade protection and the
by $10 billion. If China were to choose free U.S. to choose free trade.
trade and the U.S. trade protection, China would c. both to choose free trade.
not grow at all and the U.S. would grow by $60 d. both to choose trade protection.*
billion. Conversely, if the U.S. were to choose e. Either a or b would occur.
free trade and China trade protection, China
would grow by $60 billion and the U.S. would 14. When a quota is imposed on an import,
not grow at all. Please use this information in typically in the importing country
the following four questions. (In answering a. consumers lose.
these questions, you might find helpful to draw b. domestic producers gain
the matrix of different outcomes.) c. foreign exporters lose.
d. b and c.
10. Which of the following combination of e. All of the above.*
policies maximizes the sum of growths for the
U.S and China? 15. The U.S. unemployment rate in January was
a. China chooses free trade and the U.S. a. 10% but total employment decreased.
chooses trade protection. b. below 9 % and total employment
b. China chooses trade protection and the decreased.
U.S. chooses free trade. c. higher than 10% but total employment
c. They both choose free trade.* increased.
d. They both choose trade protection. d. below 9% and total employment
e. Either a or b should occur. increased.*
e. below 8% and total employment
11. It would be in the U.S.’s interest to increased.
a. pursue free trade regardless of what
China does. 16. If United Airlines were to sell one of its used
b. pursue trade protection regardless of jets to Aero Boliviano, the transaction would
what China does.* a. not be included in U.S. GDP.*
c. pursue free trade only if China were to b. be included in Bolivian GDP.
pursue free trade. c. be included in U.S. GDP.
d. pursue trade protection only if China d. lower U.S. GDP.
were to pursue trade protection. e. lower Bolivian GDP.
e. pursue either free trade or protection,
depending on the level of sunspots. 17. In the country of Walachia, a market basket
of goods and services cost $120 in 2009 and
12. It would be in China’s interest to $180 in 2011. Based on this information and
a. pursue free trade regardless of what the considering 2009 as the base year, the price
U.S. does. index in 2011 was:
b. pursue trade protection regardless of a. 66.67
what the U.S. does.* b. 100
c. pursue free trade only if the U.S. were to c. 130
pursue free trade. d. 150*
d. pursue trade protection only if the U.S. e. 180
were to pursue trade protection.
e. pursue either free trade or protection,
depending on the level of sunspots. 18. Every working day at least 1 trillion dollars 23. Suppose that to produce one pound of rice in
are traded in all foreign exchange markets. Most Japan requires 4 hours of labor, whereas in the
of this trading is due to U.S. it requires 2 hours of labor. As a result, we
a. to the currency needs of those who can conclude that
import and export goods and services. a. Japan has a comparative advantage
b. short-term speculation on currency (“CA”) in producing rice.
rates.* b. Japan has the absolute advantage in
c. those who make long-term investments producing rice.
outside their own country. c. The U.S. has a CA in producing rice.
d. the currency needs of tourists. d. The U.S. has the absolute advantage in
e. currency trading by governments. producing rice.*
e. None of the above
19. The Eurozone consists of
a. 17 countries that share a common 24. When a country has a trade surplus,
currency. a. The capital account must necessarily be
b. countries that do not have a common negative.
fiscal policy. b. The current account is positive.
c. countries that do not have common bank c. the value of its exports is higher than
supervision and regulation. the value of its imports.*
d. a and b. d. The capital account is positive.
e. All of the above.* e. a and c.
20. The “party of Davos” refers to 25. A reduction in the U.S. price level can be
a. the participants of the World Business expected to lead to
Forum. a. the depreciation of the dollar and the
b. the participants of the World Social appreciation of other currencies.
Forum. b. the appreciation of the dollar and the
c. the party that takes place every March in appreciation of other strong currencies.
Davos, Switzerland. c. the depreciation of the dollar and the
d. a hypothesized emerging world-wide depreciation of the euro.
elite.* d. the appreciation of the dollar and the
e. a and c. depreciation of other currencies.*
e. the appreciation of the dollar and the
21. A point outside a production possibilities appreciation of the euro.
a. indicates that some resources are 26. In traditional, “old” banking and finance
unemployed. a. the securitization of loans was normal
b. is unattainable for production practice.
purposes.* b. financial institutions depended on rating
c. is worse than points on the production agencies for the management of risk.
possibilities frontier. c. financial institutions depended on loan
d. implies that too much capital and not officers to asses risk.*
enough labor are used. d. a and b.
e. None of the above. e. a and c.
22. Changes in the following variable shift the 27. During the last couple of decades, in “new”
demand curve for a good. banking and finance
a. Marketing and advertising. a. the securitization of loans has been
a. The preferences of the consumers. normal practice.
b. The prices of related goods. b. financial institutions typically keep the
c. The income of consumers. loans they make in their books.
d. All of the above.* c. financial institutions depend on personal
relationships to manage their risk.
d. institutional investors depend on rating
agencies for the management of risk.
e. a and d.* 28. The Great Recession 33. The policy of “Quantitative Easing” refers to
a. officially began in December 2007 and a. the taxation and spending decisions of
ended in mid-2009. the Federal government.
b. has had long-term lingering effects on b. internationally-coordinated exchange-
unemployment. rate policies.
c. was preceded by the largest housing c. the production and spending decisions
bubble in U.S. history. of private firms.
d. a and c. d. the Federal Reserve’s policy of reducing
e. All of the above.* long-term interest rates by buying
29. U.S. national house prices e. the recent lending policies of banks.
a. peaked in 2006.*
b. peaked in 2011. 34. Social Security
c. have been increasing ever since the early a. is already bankrupt.
1990s. b. will be bankrupt within the next ten
d. have been decreasing since 2001. years.
e. have been increasing since 2007. c. has accumulated a significant surplus in
the Social Security trust fund since the 1980s.*
30. Examples of “moral hazard” include the d. has accumulated a significant deficit in
behavior of the Social Security trust fund since the 1980s.
a. all loan officers of banks in the 1950s. e. is a government defense program.
b. many mortgage brokers during the
housing bubble years.* 35. Over the past three decades in the U.S.
c. most bank CEOs during the 1950s. a. median wages for males have increased.
d. most investment bank CEOs during the b. most households moved to rural areas.
1970s. c. most households increased their debts.*
e. all loan officers of bank in the 1970s. d. the cost of housing went down.
e. investment banks became more heavily
31. Recent total U.S. employment is regulated.
a. 1% higher than it was at the beginning
of the Great Recession. 36. Modern economic growth is correlated with
b. 4% lower than it was at the beginning of the following characteristics EXCEPT for
the Great Recession.* a. investment in economic infrastructure.
c. 10% lower than it was at the beginning b. the reduction of government’s share in
of the Great Recession. GDP.*
d. 4% higher than it was at the beginning c. the expansion of social safety nets.
of the Great Recession. d. government investment in sewers and
e. 2% higher than it was at the beginning public health.
of the Great Recession e. an increase in life expectancy.
32. Fiscal policy refers to 37. If output is growing at 7% per year,
a. the taxation and spending decisions of approximately how many years will it take for
governments.* output to double?
b. the international policies of a. 10.*