File: Ch04; Chapter 4: Demand and Supply, Offer Curves, and the Terms of Trade Multiple Choice 1. Which of the following statements is correct? a. The demand for imports is given by the excess demand for the commodity b. the supply of exports is given by the excess supply of the commodity c. the supply curve of exports is flatter than the total supply curve of the commodity d. all of the above 2. At a relative commodity price above equilibrium a. the excess demand for a commodity exceeds the excess supply of the commodity b. the quantity demanded of imports exceeds the quantity supplied of exports c. the commodity price will fall d. all of the above Ans: c 3. The offer curve of a nation shows: a. the supply of a nation's imports b. the demand for a nation's exports c. the trade partner's demand for imports and supply of exports d. the nation's demand for imports and supply of exports Heading: Offer Curves 4. The offer curve of a nation bulges toward the axis measuring the nations a. import commodity (ch04) 4-1 Copyright 2010 John Wiley & Sons, Inc.
b. export commodity c. export or import commodity d. nontraded commodity Heading: Offer Curves 5. Export prices must rise for a nation to increase its exports because the nation: a. incurs increasing opportunity costs in export production b. faces decreasing opportunity costs in producing import substitutes c. faces decreasing marginal rate of substitution in consumption d. all of the above Heading: Offer Curves 6. Which of the following statements regarding partial equilibrium analysis is false? a. It relies on traditional demand and supply curves b. it isolates for study one market c. it can be used to determine the equilibrium relative commodity price but not the equilibrium quantity with trade d. none of the above Ans: c 7. Which of the following statements regarding partial equilibrium analysis is true? a. The demand and supply curve are derived from the nation's production frontier and indifference map b. It shows the same basic information as offer curves c. It shows the same equilibrium relative commodity prices as with offer curves d. all of the above (ch04) 4-2 Copyright 2010 John Wiley & Sons, Inc.
8. In what way does partial equilibrium analysis differ from general equilibrium analysis? a. The former but not the latter can be used to determine the equilibrium price with trade b. the former but not the latter can be used to determine the equilibrium quantity with trade c. the former but not the latter takes into consideration the interaction among all markets in the economy d. the former gives only an approximation to the answer sought. Heading: Relationship between General and Partial Equilibrium Analysis 9. If the terms of trade of a nation are 1.5 in a two-nation world, those of the trade partner are: a. 3/4 b. 2/3 c. 3/2 d. 4/3 Heading: Relationship between General and Partial Equilibrium Analysis 10. If the terms of trade increase in a two-nation world, those of the trade partner: a. deteriorate b. improve c. remain unchanged d. any of the above Ans: a 11. If a nation does not affect world prices by its trading, its offer curve: a. is a straight line b. bulges toward the axis measuring the import commodity c. intersects the straight-line segment of the world's offer curve d. intersects the positively-sloped portion of the world's offer curve Ans: c (ch04) 4-3 Copyright 2010 John Wiley & Sons, Inc.
Level: Hard 12. If the nation's tastes for its import commodity increases: a. the nation's offer curve rotates toward the axis measuring its import commodity b. the partner's offer curve rotates toward the axis measuring its import commodity c. the partner's offer curve rotates toward the axis measuring its export commodity d. the nation's offer curve rotates toward the axis measuring its export commodity Level: Hard 13. If the nation's tastes for its import commodity increases: a. the nation's terms of trade remain unchanged b. the nation's terms of trade deteriorate c. the partner's terms of trade deteriorate d. any of the above Level: Hard 14. If the tastes for a nation import commodity increases, trade volume: a. increases b. declines c. remains unchanged d. any of the above Ans: a 15. A deterioration of a nation's terms of trade causes the nation's welfare to: a. deteriorate b. improve c. remain unchanged d. any of the above (ch04) 4-4 Copyright 2010 John Wiley & Sons, Inc.
16. Suppose nation 1 has a comparative advantage in good X over nation 2 and the two nations are currently engaged in equilibrium trade for good X. A decrease in the cost of producing good X in nation 2 would cause the international price of good X to and the quantity of good X traded to. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease 17. The index of relative U.S. export prices fell during the first few years of the 21 st century. The primary cause of this was a. the growing U.S. trade deficit b. the rising price of commodities, such as oil c. the persistent appreciation of the U.S. dollar d. the introduction of the Euro as a major world currency 18. The equilibrium price and quantity for a commodity traded between two nations occurs where a. the slopes of the two offer curves are the same. b. the two offer curves intersect c. the slopes of the two offer curves is equal to zero d. the price ratio of good X for good Y is equals one. Heading: The Equilibrium-Relative Commodity Price with Trade General Equilibrium Analysis (ch04) 4-5 Copyright 2010 John Wiley & Sons, Inc.
19. Suppose nation 1 is an importer of good X. In a general equilibrium framework, an increase in the demand for good Y will a. decreased the price of good X and increase the volume of imports of good X b. decreased the price of good X and decrease the volume of imports of good X c. increase the price of good X and increase the volume of imports of good X d. increase the price of good X and decrease the volume of imports of good X Ans: a Heading: The Equilibrium-Relative Commodity Price with Trade General Equilibrium Analysis 20. Suppose nation 1 is an importer of good X. In a general equilibrium framework, an increase in the cost of producing good X in nation 2 will a. decreased the price of good X and increase the volume of imports of good X b. decreased the price of good X and decrease the volume of imports of good X c. increase the price of good X and increase the volume of imports of good X d. increase the price of good X and decrease the volume of imports of good X Heading: The Equilibrium-Relative Commodity Price with Trade General Equilibrium Analysis Short Answer 21. Carefully define an offer curve and explain how it is derived. Ans: An offer curve of a nation shows how much its import commodity the nation demands to be willing to supply various quantities of its export commodity. The offer curve is derived from a nations production function and its utility maximizing production and consumption levels at alternative prices. The offer curve bends towards the axis of the nation s comparative advantage due to rising opportunity cost of specialization. Heading: Offer Curves (ch04) 4-6 Copyright 2010 John Wiley & Sons, Inc.
22. Carefully define and explain the meaning of equilibrium terms of trade Ans: The equilibrium terms of trade occurs at a price ratio where the desired quantity of exports of good X and desired quantity of imports of commodity of good by one nation equals the desired quantity of imports by another nation for. 23. Explain the role of petroleum price have had on the terms of trade and relative export prices for the United States in recent years. Ans: In recent years the price of petroleum has risen dramatically. Because petroleum is a significant import for the United States it has negatively impacted the terms of trade and relative export prices for the United States. 24. Suppose the terms of trade for nation X rises from 100 to 110. Explain how this will impact the terms of trade for nation Y. Ans: Nation Y s terms of trade are the reciprocal of Nation X s terms of trade. Nation Y s terms of trade will deteriorate from 100 to (100/110)*100=91 Essay 25. Draw a figure showing: (1) in Panel A a nation's demand and supply curve for A traded commodity and the nation's excess supply of the commodity, (2) in Panel C the trade partner's demand and supply curve for the same traded commodity and its excess demand for the commodity, and (3) in Panel B the supply and demand for the quantity traded of the commodity, its equilibrium price, and why a price above or below the equilibrium price will not persist. At any other price, QD QS, and P will change to P 2. Ans: See Figure 2. (ch04) 4-7 Copyright 2010 John Wiley & Sons, Inc.
The equilibrium relative commodity price for commodity X (the traded commodity exported by Nation 1 and imported by Nation 2) is P 2 and the equilibrium quantity of commodity X traded is Q 2. Level: Hard (ch04) 4-8 Copyright 2010 John Wiley & Sons, Inc.