Question 1

Suppose the United States can produce either 100 units of wheat or 50 units of steel with its available resources, while Canada can produce either 80 units of wheat or 40 units of steel. Which country has the comparative advantage in producing steel, and why?

Accepted Answer

Canada, because its opportunity cost of producing steel is lower.

Question 2

A country is operating on its production possibilities frontier (PPF). What does this imply about its resource use and opportunity cost?

Accepted Answer

The country is using all resources efficiently, and producing more of one good requires sacrificing some of another.

Question 3

Which of the following best describes the difference between absolute advantage and comparative advantage?

Accepted Answer

Absolute advantage is about producing more with fewer resources, while comparative advantage is about having the lowest opportunity cost.

Question 4

If the U.S. government imposes a tariff on imported steel, what is the most likely short-run effect on the domestic steel industry and consumers?

Accepted Answer

Domestic steel producers benefit from higher prices, while consumers face higher costs.

Question 5

Which of the following equations correctly represents the national saving and investment identity in an open economy?

Accepted Answer

$$S = I + NX$$

Question 6

Suppose the U.S. dollar appreciates relative to the euro. What is the likely effect on U.S. exports and imports?

Accepted Answer

U.S. exports decrease and imports increase.

Question 7

The Phillips curve illustrates the relationship between which two economic variables in the short run?

Accepted Answer

Unemployment and inflation

Question 8

If people expect higher inflation in the future, what is the likely effect on the short-run Phillips curve?

Accepted Answer

The short-run Phillips curve shifts upward.

Question 9

Which of the following best describes the long-run Phillips curve?

Accepted Answer

It is vertical at the natural rate of unemployment.

Question 10

A government budget deficit in an open economy is most likely to result in which of the following?

Accepted Answer

A decrease in national saving and an increase in the trade deficit.

Question 11

Which of the following is NOT included in the current account of the balance of payments?

Accepted Answer

Foreign direct investment

Question 12

If the U.S. has a current account deficit, what must be true about its capital and financial account?

Accepted Answer

It must have a surplus of equal magnitude.

Question 13

Which of the following is a key feature of the current international exchange rate system?

Accepted Answer

Most major currencies are determined by flexible exchange rates.

Question 14

Suppose the Federal Reserve increases the money supply unexpectedly. According to the short-run Phillips curve, what is the likely effect on unemployment and inflation?

Accepted Answer

Unemployment decreases and inflation increases.

Question 15

Which of the following best explains why countries engage in international trade?

Accepted Answer

To benefit from comparative advantage and increase overall welfare.

Question 16

If a country moves from a point inside its PPF to a point on the PPF, what does this indicate?

Accepted Answer

The country is improving its efficiency in resource use.

Question 17

Which of the following is a common argument against globalization and free trade?

Accepted Answer

It can lead to job losses in industries facing foreign competition.

Question 18

Suppose the exchange rate changes from $$1 = 0.9$$ euros to $$1 = 1.1$$ euros. What has happened to the value of the dollar, and what is the likely effect on U.S. imports from Europe?

Accepted Answer

The dollar has appreciated, making U.S. imports from Europe cheaper.

Question 19

Which of the following best describes the change in Federal Reserve policy since the 1970s?

Accepted Answer

The Fed has increasingly focused on controlling inflation through monetary policy.

Question 20

If the U.S. government increases its budget deficit, what is the likely effect on the real interest rate and investment in the open economy?

Accepted Answer

The real interest rate rises and investment falls.

Production Possibilities, International Trade, and Macroeconomic Policy: Key Concepts in Macroeconomics

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