Comprehensive Economics Excersises
Exam International Economics
Academic Year 2011 -2012
Questions and Answers
Question 1 Chapter 5 Suppose, as a result of various dynamic factors associated with exposure to international competition, Albania's economy grew, and is now represented by the rightmost product ion possibility frontier in the figure above. a) If its point of production with trade was point c, would you consider this growth to be export -biased or import biased? b) If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania's terms of trade and its real income? Answer Question 1: a) If point c is the production point with trade, then Albania has a comparative advantage in good B. Therefore, from the shape of the new production possibility frontier (as compared to the original one), this is clearly an export-biased growth. 5 points b) This ceteris paribus would tend to worsen Albania's terms of trade. The terms of trade effect would, again ceteris paribus, worsen its real income. However, the growth itself acts in the opposite direction. 5 points
Question 2 Chapter 17 Use a figure to explain the potential effectiveness of fiscal policy to spur on the economy under a fixed exchange rate. Answer Question 2:
With an aim toward increasing output, the government could use fiscal policy to shift the DD curve outward. The central bank will have to take steps to maintain a fixed exchange rate , among the options is buying foreign assets with money, to shift the AA schedule outward until the equilibrium at point 3 is reached. 5 points
10 points
1
Exam International Economics
Academic Year 2011 -2012
Question 3 Chapter 6 Why are increasing returns to scale and fixed costs important in models of international trade and imperfect competition? Answer Question 3: There are many answers. Three of these are a) Increasing returns to scale and high fixed costs may be inconsistent with perfect competition. In such a case, the
Academic Year 2011 -2012
Questions and Answers
Question 1 Chapter 5 Suppose, as a result of various dynamic factors associated with exposure to international competition, Albania's economy grew, and is now represented by the rightmost product ion possibility frontier in the figure above. a) If its point of production with trade was point c, would you consider this growth to be export -biased or import biased? b) If Albania were a large country with respect to the world trade of A and B, how would this growth affect Albania's terms of trade and its real income? Answer Question 1: a) If point c is the production point with trade, then Albania has a comparative advantage in good B. Therefore, from the shape of the new production possibility frontier (as compared to the original one), this is clearly an export-biased growth. 5 points b) This ceteris paribus would tend to worsen Albania's terms of trade. The terms of trade effect would, again ceteris paribus, worsen its real income. However, the growth itself acts in the opposite direction. 5 points
Question 2 Chapter 17 Use a figure to explain the potential effectiveness of fiscal policy to spur on the economy under a fixed exchange rate. Answer Question 2:
With an aim toward increasing output, the government could use fiscal policy to shift the DD curve outward. The central bank will have to take steps to maintain a fixed exchange rate , among the options is buying foreign assets with money, to shift the AA schedule outward until the equilibrium at point 3 is reached. 5 points
10 points
1
Exam International Economics
Academic Year 2011 -2012
Question 3 Chapter 6 Why are increasing returns to scale and fixed costs important in models of international trade and imperfect competition? Answer Question 3: There are many answers. Three of these are a) Increasing returns to scale and high fixed costs may be inconsistent with perfect competition. In such a case, the