IR 213 Short Answer Questions

1. Name two things that would cause the demand curve for apples to shift (specify the cause and the direction of the shift).

A) If the price of pears (a substitute for apples) increases, the demand curve for apples shifts right because consumers switch to apples.
B) If consumer income decreases (assuming apples are a normal good), the demand curve shifts left as people buy fewer apples.

2. Name two things that would cause the quantity of apples demanded to shift (specify the cause and direction of the shift).

A) If the price of apples decreases, the quantity demanded will move up along the demand curve, increasing.
B) If the price of apples increases, the quantity demanded will move down along the demand curve, decreasing.
(Note: Quantity demanded changes due to price, demand shifts due to external factors.)

3. Why do demand curves slope downward?

Because as price decreases, consumers are willing and able to buy more of the good, due to the substitution effect and income effect.

4. Why do supply curves slope upward?

Because as the price of a good increases, producers are more willing to supply more of it to maximize profit, since marginal cost increases with greater production.

5. Give two examples of economic activities that generate negative (or positive) externalities. For each example, list A) the externality and B) to whom it accrues.

A) Negative: A factory emitting pollution → Externality: air pollution → Affects: nearby residents.
B) Positive: A homeowner plants a garden → Externality: beautification and increased home values → Affects: neighbors and community.

6. What are two tools governments use to discourage or limit negative externalities? What are two tools used to encourage positive externalities?

To discourage negative externalities:
A) Pigouvian taxes (e.g., carbon tax),
B) Regulation (e.g., emission caps).
To encourage positive externalities:
A) Subsidies (e.g., for education),
B) Public provision (e.g., free vaccinations).

7. For each of the following, who wins and who loses from a tariff on lumber from Canada to the U.S.?

A) Owner of timberland in Canada
B) Owner of timberland in the U.S.
C) Loggers in Canada
D) Loggers in the U.S.
E) Furniture manufacturers in the U.S.
F) Consumers in the U.S.
G) Manufacturers of faux-wood flooring in the U.S.

A) Owner of timberland in Canada – Loses (less export demand).
B) Owner of timberland in the U.S. – Wins (faces less competition).
C) Loggers in Canada – Lose (fewer jobs/export income).
D) Loggers in the U.S. – Win (increased domestic production).
E) Furniture manufacturers in the U.S. – Lose (higher input costs).
F) Consumers in the U.S. – Lose (higher prices).
G) Manufacturers of faux-wood flooring in the U.S. – Win (more competitive relative to real wood).

8. What type of countries tend to export commodities—poor countries or rich countries? What’s the problem with being dependent on them?

Poor countries tend to export commodities. The problem is that commodity prices are volatile, which leads to economic instability and “resource curse” risks like corruption and underdevelopment.

9. Who loses from the imposition of a subsidy? Who loses from the imposition of a tariff?

Subsidy: Taxpayers lose because public money supports an industry that may be inefficient.
Tariff: Consumers lose because prices rise and choices are limited.

10. List one benefit and one cost for each strategy:

A) Total trade openness

B) Subsidizing/protecting key industries

C) Big government safety net

A) Total trade openness

Benefit: Lower prices and more choices for consumers.

Cost: Job losses in industries exposed to foreign competition.

B) Subsidizing/protecting key industries

Benefit: Preserves domestic jobs and strategic capabilities.

Cost: Inefficiency and misallocation of resources.

C) Big government safety net

Benefit: Protects vulnerable populations and stabilizes consumption.

Cost: Higher taxes and potential for reduced work incentives.

11. What was the purpose of the GATT?

To reduce trade barriers and promote free trade through multilateral agreements. It later evolved into the World Trade Organization (WTO).

12. Who supported the Corn Laws in Britain? Who opposed them?

Supported: Landowners who benefited from high grain prices.
Opposed: Urban workers and industrialists who wanted cheaper food and input costs.

13. In 2023, what types of products have higher tariffs globally: agricultural or manufactured goods?

Agricultural products have higher tariffs globally due to domestic protectionism and food security concerns.

14. Did global tariff levels increase or decrease during the Great Depression? What was the effect?

Tariff levels increased (e.g., Smoot-Hawley Tariff), worsening the Great Depression by reducing global trade.

15. Is it more common for countries to restrict imports or exports?

Imports are more commonly restricted to protect domestic industries.

16. Why didn’t tariffs increase dramatically during/following the 2008 Global Financial Crisis?

Strong international institutions like the WTO discouraged protectionism, and countries coordinated policies to support global trade recovery.

17. List three factors that contributed to the first wave of globalization (1870–1914):

A) Advances in transportation (steamships, railroads),
B) Pax Britannica
C) Gold standard and stable exchange rates.

18. List three factors that contributed to the second wave of globalization (1945–1990):

A) Telephones and Worldwide Communication
B) Pax Americana
C) Containerization

19. Why do former colonies with high European settler populations have better political institutions today?

Settlers established institutions to benefit themselves long-term (courts, property rights), unlike extractive systems set up in colonies with few settlers.

20. List two policies associated with the Washington Consensus:

A) Trade liberalization (opening up to international trade),
B) Privatization of state-owned enterprises.

21. What is the real interest rate if nominal interest rate = 4% and inflation = 5%?

Real interest rate = Nominal - Inflation = 4% - 5% = -1%

22. If the Fed raises interest rates, what happens to money supply, inflation, employment, and growth?

Money supply decreases → Inflation falls → Employment and economic growth may slow due to reduced borrowing and spending.

23. What is the Federal Reserve’s dual mandate?

To maintain price stability (low inflation) and maximum sustainable employment.

24. What is the Fed’s target inflation rate? Why not zero?

Around 2%. Not zero because mild inflation encourages spending and investment and reduces the risk of deflation.

25. How does exchange rate depreciation (i.e. inflation) affect exports and imports?

Exports become cheaper and more competitive abroad.
Imports become more expensive, reducing import demand.

26. What are the four functions of money?

A) Medium of exchange
B) Store of value
C) Unit of account
D) Method of deferred payment

27. Why does the U.S. restrict semiconductor exports to China? Will this help or hurt global growth?

A) To limit China's access to sensitive tech for national security reasons.
B) It will slow global economic growth by disrupting supply chains and increasing geopolitical tension.

43. How do tariffs affect inflation?

Tariffs increase prices of imported goods, leading to higher consumer prices (inflationary pressure)

28. How long can a country keep borrowing from abroad to cover a current account deficit?

Only as long as investors believe the country can repay. If confidence is lost, borrowing becomes expensive or unavailable, risking a financial crisis.

29. What is the goal of the IMF?

To maintain international financial stability by helping countries in balance-of-payments crises and supporting stable exchange rates and global trade.

30. What is the goal of the World Bank?

To reduce poverty and support economic development by funding long-term projects in infrastructure, education, and health in developing countries.

31. What are the three functions of the IMF?

1. Lending to countries in financial crisis

2. Monitoring member economies and global markets

3. Providing technical assistance and policy advice

32. How can governments use large foreign currency reserves to keep the value of their currency high?

By using reserves to buy their own currency on foreign exchange markets, increasing demand and supporting the currency’s value.

33. What percentage of U.S. government expenditures go to foreign aid?

Less than 1% (any answer between 0% and 3% is acceptable).

34. How is foreign aid like dumping?

It can undercut local producers by flooding markets with free or cheap goods, reducing demand for domestic production and harming local economies.

35. Give two pros and two cons for the World Bank choosing to deliver aid through host country governments instead of providing services directly to the poor.

Pros:

Builds state capacity and strengthens institutions

Aligns aid with national development plans

Cons:

Aid may be misused by corrupt governments

Services may not reach the poorest citizens directly

36. Name two groups that would benefit from increased migration of unskilled labor from poor country A to rich country B.

Employers (get access to cheap labor)

Consumers (benefit from lower prices on labor-intensive goods and services)

37. List three benefits of free outward migration for low-income poor countries.

Remittances from workers abroad

Reduced unemployment pressure at home

Return migration brings skills and savings

38. Which of the following account for the majority of permanent, legal, immigrants to the U.S. each year?

✅ A. Family Reunification, B. Refugees and Asylees, C. Employment-based (i.e. skill-based) visas. D. Diversity lottery winners

39. What group in the migrant-receiving country is harmed (a little) by an increase in inward migration of unskilled migrants? Name two groups in the migrant-receiving country who benefit.

Harmed: Low-skilled native workers (more competition)

Benefited:

Employers (cheaper labor)

Consumers (lower prices)

40. Which is larger, inequality between countries or inequality within countries?

Inequality within countries is now larger than inequality between countries.

41. How does the share of the world’s population living on less than $2 per day in 1990 compare to today?

A). A much higher share living in poverty today B). A slightly higher share living in poverty today C). A slightly lower share living in poverty today ✅ D). A much lower share living in poverty today (a decrease of more than 10 percentage points)

42. Compared to the 20th Century, around the globe are more or less people dying in wars each year during the 21st century?

Less — global war deaths per year are significantly lower than during the 20th century.