INT ECON - Externalities and market failure; Intro to International Macroeconomics

In 2015, nearly 200 countries adopted a resolution to limit the increase in global temperature. What was that called?

a) the Doha Round

b) the Paris Accord

c) "Skolstrejk för Klimatet"

d) the Kyoto protocol

b) the Paris Accord

The main goal of the Paris Agreement was to:

a) increase French exports to the world through tariff reduction.

b) force industrialized countries to adopt better practices.

c) limit increases in the earth's average temperature to 2 degrees Centigrade.

d) increase emissions.

c) limit increases in the earth's average temperature to 2 degrees Centigrade.

What is the Kyoto Protocol?

a) It is based on the 1992 UN climate treaty that set specific air pollution reduction targets for each nation.

b) It is a guideline for using "force" when interrogating prisoners.

c) It is a treaty on abolishing child labor and forced labor camps.

d) It is a set of rules for shipping dangerous chemicals to avoid harm and to lower the risk of a terrorist attack.

a) It is based on the 1992 UN climate treaty that set specific air pollution reduction targets for each nation.

When there is no incentive to cut pollution because it will make domestic firms less competitive, world welfare will improve if:

a) nations impose tariffs on polluters.

b) there is an international agreement so that every nation regulates global pollutants and no firms have competitive advantages because of lax pollution laws.

c) there is a ban on production until we can scientifically solve our pollution problems.

d) we allow the market to work in this case.

b) there is an international agreement so that every nation regulates global pollutants and no firms have competitive advantages because of lax pollution laws.

Why do the United States and the European Union governments apply tariffs to solar panel imports, even though solar panels generate positive consumption externalities?

a) They believe that domestic production of solar panels generates negative production externalities that outweigh the positive consumption externalities from imports.

b) They believe that imported solar panels' negative consumption externalities outweigh their positive consumption externalities.

c) They believe that imported solar panels' negative production externalities outweigh their positive consumption externalities.

d) They believe that domestic production of solar panels generates positive production externalities that outweigh the positive consumption externalities of imports.

d) They believe that domestic production of solar panels generates positive production externalities that outweigh the positive consumption externalities of imports.

Which of the following is associated with increased use of solar panels?

a) negative consumption externalities

b) negative production externalities

c) positive consumption externalities

d) positive production externalities

c) positive consumption externalities

The phenomenon known as the tragedy of the commons occurs whenever:

a) there is no ownership of resources, so they become depleted due to lack of management.

b) the government owns resources and manages them tragically.

c) the private sector owns resources and manages them tragically.

d) two countries own the same resource and cannot agree on its management.

a) there is no ownership of resources, so they become depleted due to lack of management.

Suppose that there is a negative externality associated with alcohol consumption in the United States (e.g., the costs of publicly funded alcoholism treatment centers). What will happen to the social costs of this externality if the United States eliminates all tariffs on alcohol imports?

a) The social costs will increase.

b) Total social costs will decrease.

c) The social costs will increase but will be offset by the private losses associated with increased imports as the tariffs are eliminated.

d) Total social costs will not change.

a) The social costs will increase.

Key elements of the international macroeconomy are:

a) political alliances, capital accumulation, and monopoly power.

b) waste and overuse of natural resources, disregard for the environment, and unfair competition.

c) many currencies, financial integration, and economic policy choices made in context.

d) competition, efficiency, and openness.

c) many currencies, financial integration, and economic policy choices made in context.

Which one of the following reasons does not explain why exchange rates are important?

a) They make exports either more or less expensive for foreign buyers.

b) They affect the profits of all domestic producers.

c) They affect the value of foreign assets and their returns.

d) They affect the affordability of imports.

b) They affect the profits of all domestic producers.

European residents who hold U.S. dollar assets experience a _______ in their value when the dollar exchanges for fewer units of foreign currency.

a) decline

b) stagnation

c) rise

d) rise in instability

a) decline

A nation's current account is:

a) the difference between its total wealth and its total debt.

b) the previous year's budget deficit.

c) its current budget deficit.

d) a record of a nation's income, expenditure, deficit, and surplus during a particular period.

d) a record of a nation's income, expenditure, deficit, and surplus during a particular period.

A country's external wealth is equal to:

a) the amount the country's citizens have invested abroad.

b) its overall debt.

c) its exports minus imports.

d) its foreign assets minus its foreign liabilities.

d) its foreign assets minus its foreign liabilities.

International lenders want to know the likelihood that a nation will repay its debt. Therefore, they rely on:

a) advice from the International Monetary Fund (IMF).

b) international ratings of country risk.

c) collateral.

d) the faith and credit of the sovereign nation.

b) international ratings of country risk.

What is the difference between an open economy and a closed economy?

a) An open economy has very few restrictions on trade or financial flows.

b) An open economy has lax restrictions on drugs or other illegal activities.

c) A closed economy has very tough wage and hour laws and will not tolerate labor unions.

d) A closed economy has sealed borders and allows no tourism or migration.

a) An open economy has very few restrictions on trade or financial flows.

Among the following countries, which one has experienced a severe drop in its currency value during the last couple of decades?

a) Japan

b) Zimbabwe

c) New Zealand

d) Canada

b) Zimbabwe

Under a floating exchange rate regime, U.S. residents who hold European assets benefit when the dollar _______ in value against the euro.

a) does not change

b) rises

c) becomes more stable

d) declines

d) declines

In general, the percentage of appreciation of one nation's currency is equal to:

a) its purchasing power.

b) the percentage of depreciation of the foreign nation's currency.

c) its population growth.

d) its growth rate of real GDP.

b) the percentage of depreciation of the foreign nation's currency.

Suppose 80% of U.S. trade is with the UK and the rest is with Japan. If the dollar appreciates by 10% against the pound and appreciates by 20% against the yen, what is the percentage change in the effective exchange rate of the United States?

a) -12%

b) -16%

c) -8%

d) -4%

a) -12%

Which of the following exchange rate systems is in the right order, from most control to least control?

a) fixed, floating, managed float

b) floating, fixed, managed float

c) fixed, managed float, floating

d) managed float, floating, fixed

c) fixed, managed float, floating

When we look at exchange rates between two countries, what is the relationship between the exchange rate expressed in units of the domestic currency and the exchange rate expressed in units of the foreign currency?

a) One is always the reciprocal of the other.

b) They can never coexist.

c) They cancel each other out.

d) They are both equal to one.

a) One is always the reciprocal of the other.

A dining table costs $3,000 in New York and the same table costs 5,000 euros in Rome. Thus, you expect $1 to be equal to:

a) 1.67 euros.

b) 0.6 euro.

c) 1 euro.

d) 2 euros.

a) 1.67 euros.

Which of the following statements is equivalent to an appreciation of the dollar relative to the euro?

a) The dollar costs less.

b) The euro buys more dollars now.

c) The dollar buys fewer euros now.

d) The euro buys fewer dollars now.

d) The euro buys fewer dollars now.

A crawling peg refers to:

a) a managed or dirty float, depending on the business cycle.

b) a large and sudden currency depreciation.

c) a fixed exchange rate regime in which the currency is adjusted very frequently to reflect market conditions.

d) a drag on exchange rate adjustment caused by imperfect markets.

c) a fixed exchange rate regime in which the currency is adjusted very frequently to reflect market conditions.

If today €1 exchanges for ¥135, and tomorrow €1 exchanges for ¥150, we say the euro has:

a) become inverted.

b) stagnated.

c) appreciated.

d) depreciated.

c) appreciated.

Why are international trade agreements needed?

1) To limit the prisoner's dilemma, where countries choose to enact tariffs or pollute for their own benefit. But in the Nash equilibrium, the result is a poor outcome.

2) "Halfway" agreements can make countries worse off

Fixed (pegged) vs. floating (flexible) exchange rates

Fixed exchanged rates are pegged

How do changes in exchange rates affect an economy?

1) They can cause a change (more or less expensive) in the international relative prices of goods.

2) They can cause a change in the international relative prices of assets (fluctuations in wealth)

Appreciation

A currency rises in value in respect to another. In this case, it would be able to buy more of the other currency.

Depreciaton

A currency falls in value in respect to another. In this case, it is now only able to buy less of the other currency.

How do you calculate an effective exchange rate?

It is a weighted average: ∑​wi​⋅Δei​

Where:

wi = % of trade to a particular country

Δei​ = % change in exchange rate between a particular country

Difference between floating currency regimes and dirty (or managed) floats?

Floating currency regimes are used by most major currencies, and it is when the currency's value is determined by supply and demand

Dirty floats are mostly floating, but are controlled by a central bank when it surpasses certain bands of appreciation/depreciation

Currency board

Maintains a strict and unchangeable exchange rate, but very difficult to achieve in reality

Bands

Permit some small fluctuation in the exchange rate to keep it reasonably stable

Crawling pegs and bands

The peg or band for the exchange rate is adjusted periodically, but not too often