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标题: [CFA L2]Economics 【Reading 16】Sample [打印本页]

作者: JonnyKay 时间: 2012-3-27 16:25 标题: [2012 L2]Economics 【Session 4 - Reading 16】Sample

This table below outlines the possible tradeoffs of producing milk and bread for Country A and Country B.

Country A Country B
Milk Bread Milk Bread
0 5 0 8
10 0 12 0

A)	Neither country would gain from trade.

B)	Both countries would gain if Country A traded bread for B's milk.

C)	Both countries would gain if Country A traded milk for B's bread.

Country A gives up 1 bread to produce 2 milk. Country B gives up 1 bread to produce 1.5 milk. Country A should make milk and Country B should make bread.

作者: JonnyKay 时间: 2012-3-27 16:25

Suppose labor in Venezuela is less productive than labor in the United States in all areas of production. Which of the following statements about trading between Venezuela and the U.S. is most accurate?

A)	Venezuela will not have a comparative advantage in any good.

B)	Both nations can benefit from trade.

C)	Venezuela can benefit from trade but the U.S. cannot.

Although one country may have an absolute advantage in all areas, trade is based on differences in opportunity costs, or comparative advantage. Any country will always have a comparative advantage in the production of some goods; thus, all countries can benefit from trade.

作者: JonnyKay 时间: 2012-3-27 16:26

The table below outlines the possible tradeoffs of producing units of cloth and corn for both Country A and Country B.

Country A
Country B
Units of Cloth
Units of Corn
Units of Cloth
Units of Corn
0
4
0
8
6
3
8
6
14
0
16
0

Which scenario best describes the effects of trade between the countries?

A)	Both countries would gain if Country A traded cloth for Country B’s corn.

B)	Both countries would gain if Country A traded corn for Country B’s cloth.

C)	Country B would not gain from trade, because it has an absolute advantage in the production of both goods.

If Country B devotes all of its resources to producing corn, it will make 8 units while, under the same circumstances, Country A will make 4 units. Therefore, Country B is twice as productive with respect to corn as Country A. Country B can also produce more cloth (16 units) in relation to Country A (14 units) supposing all resources are used for cloth. However, rather than being twice as productive as was the case for corn, it is only slightly more productive. Therefore, Country B has a comparative advantage in corn, and thus should specialize in its production, while Country A should specialize in the production of cloth.

作者: JonnyKay 时间: 2012-3-27 16:27

Calvin Gooden, an assistant economist with the World Bank, is a member of a Level I CFA study group. Most of the members of his group do not have an economics background and are frustrated with the material on comparative advantage. Gooden devises the following question to help them study. The table below gives the prices of four goods (jeans, wine, cheese, and LCD screens) in France and the United Kingdom (U.K.). Gooden tells the group to assume that the current exchange rate is 1.5 EUR/ 1.0 GBP.

Good
France (in EUR)
United Kingdom (in GBP)

Jeans
42
26

Wine
18
14

Cheese
5
3

LCD Screens
85
50

Acting to minimize costs, French consumers will purchase:

A)	French wine and cheese and British jeans and LCD screens.

B)	British wine and French jeans, cheese, and LCD screens.

C)	French wine and British jeans, cheese, and LCD screens.

First, convert to one currency (we will convert to EUR), then assume that consumers will purchase from the cheapest suppliers. The cheapest country appears in bold.

Good
France (in EUR)
United Kingdom (in EUR)

Jeans
42
26 × 1.5 = 39

Wine
18
14 × 1.5 = 21

Cheese
5
3 × 1.5 = 4.5

LCD Screens
85
50 × 1.5 = 75

Thus, French consumers will minimize cost by purchasing French wine and British jeans, cheese, and LCD screens.

Good
France (in EUR)
United Kingdom (in GBP)

Jeans
42
26

Wine
18
14

Cheese
5
3

LCD Screens
85
50

Acting to minimize costs, French consumers will purchase:

A)	French wine and cheese and British jeans and LCD screens.

B)	British wine and French jeans, cheese, and LCD screens.

C)	French wine and British jeans, cheese, and LCD screens.

First, convert to one currency (we will convert to EUR), then assume that consumers will purchase from the cheapest suppliers. The cheapest country appears in bold.

Good
France (in EUR)
United Kingdom (in EUR)

Jeans
42
26 × 1.5 = 39

Wine
18
14 × 1.5 = 21

Cheese
5
3 × 1.5 = 4.5

LCD Screens
85
50 × 1.5 = 75

Thus, French consumers will minimize cost by purchasing French wine and British jeans, cheese, and LCD screens.

作者: JonnyKay 时间: 2012-3-27 16:28

Mike Harris in a research paper on free trade between high-wage countries and low-wage countries concluded free trade between low-wage countries such as China, India, and Pakistan and high-wage countries such as the U.S., Japan, and Germany would depress wages in high-wage countries. His conclusion was based on the following:

Point 1: U.S., Japanese, and German workers are unable to compete with cheap foreign labor from countries such as China, India, and Pakistan.

Point 2: U.S., Japanese, and German workers are less productive than workers in China, Pakistan, and India.
Point 3: Free-trade between high-wage countries and low-wage countries will reduce the consumption possibilities of people in high-wage countries.

Are Points 1, 2, and 3, as raised by Harris correct?

Point 1

Point 2

Point 3

Incorrect

Correct

Incorrect

Correct

Incorrect

Points 1 and 3 are incorrect because due to the law of comparative advantage which states in part that when two countries trade products in which they both have a comparative advantage both countries will be better off because they will both be able to consume outside their respective production possibility frontiers.
Point 2 is incorrect because as labor becomes more expensive as in industrialized countries, capital (technology) is substituted for labor increasing the productivity of each worker.

作者: JonnyKay 时间: 2012-3-27 16:29

The law of comparative advantage explains why a nation will benefit from trade when it:

A)	exports goods for which it is a low-cost producer, while importing those for which it is a high-cost producer.

B)	exports more than it imports.

C)	exports goods for which it is a high-cost producer, while importing those for which it is a low-cost producer.

Comparative advantage is the ability to produce a good at a lower opportunity cost than others can produce it. When trading partners specialize in producing products for which they have a comparative advantage; costs are minimized, output is greater, and both trading partners benefit.

作者: JonnyKay 时间: 2012-3-27 16:29

According to the law of comparative advantage:

A)	a nation will benefit from trade when it imports goods for which it is the high cost producer and exports goods for which it is the low-cost producer.

B)	if a foreign government subsidizes the textile industry, the domestic government should impose a tariff.

C)	Mexico is considered to have a comparative advantage in plastics if Mexico can produce plastic using fewer resources than the U.S.

This statement is the law of comparative advantage.
The other choices are incorrect. The law of comparative advantage supports international trade. According to the law of comparative advantage, both trading partners are better off if they specialize in the production of goods for which they are the low-opportunity cost producer and trade for those goods for which they are the high-opportunity cost producer. Mexico is considered to have an absolute advantage in plastics if Mexico can produce plastic using fewer resources than the U.S.

作者: JonnyKay 时间: 2012-3-27 16:30

A country has a comparative advantage over another when:

A)	a nation has the ability to produce a good with a lower opportunity cost than another nation.

B)	a nation can produce more output with a given amount of input than another nation.

C)	it can produce a product with the fewest resources.

A nation will have a comparative advantage in the production of good A when the number of units of B, given up to produce one unit of A, is lower than that for any other country.

作者: JonnyKay 时间: 2012-3-27 16:30

Which type of advantage determines the pattern of trade in the world?

A)	Comparative advantage.

B)	Absolute advantage.

C)	Advantages due to tariffs and quotas.

Comparative advantage is the ability to produce a good at a lower opportunity cost than others can produce it. According to the law of comparative advantage, trading partners are both better off if they specialize in the production of goods for which they are the low-opportunity cost producer and trade for goods for which they are the high-opportunity cost producer.

作者: torontoanalyst 时间: 2012-3-27 16:34

The following chart indicates the production possibilities of food and drink per day in Country A and Country B.

Units of Output Per Day
Country A Country B
Food 9 5
Drink 7 5

Which of the following statements is most accurate?

A)	Mutual gains could be realized from trade if A specialized in drink production and B specialized in the food production.

B)	Since B workers can produce more of food and drink than A workers, no gains from trade are possible.

C)	Mutual gains could be realized from trade if A specialized in food production and B specialized in drink production.

Mutual gains could be realized from trade if A specialized in food production and B specialized in drink production. The reason centers on comparative advantage. Country A must give up 7/9th unit of drink to produce one unit of food. Country B must give up 1 unit of drink to produce one unit of food. Therefore, the opportunity cost of producing food is greater for B than for A. If B produces 5 units of drink and A produces 9 units of food, total production will be greater than it would be if both countries produced both goods. By trading, both countries benefit.

作者: torontoanalyst 时间: 2012-3-27 16:35

The following chart indicates the production possibilities of food and drink per day in Country A and Country B.

Units of Output Per Day
Country A Country B
Food 4 8
Drink 6 7

Which of the following statements about the chart is most accurate?

A)	Since B workers can produce more of food and drink than A workers, no gains from trade are possible.

B)	Mutual gains could be realized from trade if A specialized in food production and B specialized in drink production.

C)	Mutual gains could be realized from trade if A specialized in drink production and B specialized in the food production.

Mutual gains could be realized from trade if A specialized in drink production and B specialized in food production. The reason centers on comparative advantage. Country A must give up 1.5 units of drink to produce one unit of food. Country B must give up 0.875 units of drink to produce one unit of food. Therefore, the opportunity cost of producing food is greater for A than for B. If B produces 8 units of food and A produces 6 units of drink, total production will be greater than it would be if both countries produced both goods. By trading, both countries benefit.

作者: torontoanalyst 时间: 2012-3-27 16:36

Globeconotrade, AG is a European based global producer of transportation, mining and infrastructure equipment, consumer durables, and manufacturing technology. Globeconotrade has subsidiaries in 47 countries on 5 continents, producing a variety of subparts and components used in the assembly and manufacturing of the firm’s final products.
The Chief Executive Officer of Globeconotrade, Aldo Frankl, has been asked by the company’s board to make a presentation regarding international trade among the various subsidiaries of the firm. The board has become concerned that global trade restrictions are hampering Globeconotrade’s ability to source its components in the most economically efficient locations. The board is considering the potential need for Globeconotrade to hire a political lobbying firm to present its views to various national governments and work to ease trade restrictions that are of concern to Globeconotrade.
Frankl has asked the firm’s Chief Operating Officer, Victoria Dion, to provide information about both the current level of international trade among Globeconotrade’s various divisions, and the types of international trade that would be desirable if trade barriers were reduced or eliminated.
Dion understands the board’s desire to open various countries to freer trade, but she also has concerns in the opposite direction. Dion tells Frankl that there are several subsidiaries of Globeconotrade that sell final products which are locally made. These subsidiaries are suffering from competition by low-cost imports. Dion would like to see Globeconotrade lobby to impose trade barriers in these countries to protect Globeconotrade’s local subsidiaries.
Dion offers the example of Minidonia, where Globeconotrade has a locally based transportation company. Globeconotrade’s current operations in Minidonia are summarized in Table 1:
Table 1
Minidonia Trade Statistics

Minidonian peso	45/euro
Total imports	100 million
Total exports	85 million
Principal imports	transportation equipment, machinery
Principal exports	minerals, agricultural products

Dion advises Frankl, “In Minidonia, we should lobby the government for tariff protection from imported transportation equipment. We should point out to them that protecting the domestic transportation industry from foreign competition protects Minidonian jobs and will play a key role in keeping Minidonian unemployment rates low for the long term.” Frankl replies, “We could also remind them that reducing the import of transportation equipment would have a direct impact in reducing the country’s capital account deficit, since trade in goods and services is a major component of the capital account.”
To help them prepare their lobbying arguments, Frankl and Dion ask the firm’s Chief Economist, Neema Landseer, to provide background information regarding expected changes in Minidonia’s currency due to the export effect and relative differences between the Euro and Minidonia’s interest rates. She makes the following statements:

Statement 1:	"The export effect suggests that, all else being equal, if a currency falls in value, the demand for exports denominated in that currency should increase." [/td]
Statement 2:	"Interest rate parity holds when any forward premium or discount just offsets differences in interest rates so that an investor will earn the same return investing in either currency."

Frankl suggests that they should also focus on the benefits of tariffs to the national government. Frankl points out, “When a country imposes a tariff instead of a quota, gain in tariff revenue partially offsets the loss to the economy because of the trade restriction. The total deadweight loss to consumers is the same under a quota or tariff.” Landseer suggests that they need to be careful in their suggestions about how to set up the quotas because “the way in which export amounts are allocated among domestic producers will determine who gets the gain in producer surplus.”The law of comparative advantage holds that trading partners can be made better off if they:

A)	specialize in production of goods for which they are the low exchange rate adjusted producer.

B)	import those goods for which they have a comparative advantage.

C)	specialize in production of goods for which they are the low opportunity cost producer.

The law of comparative advantage holds that trading partners can be made better off if they specialize in production of goods for which they are the low opportunity cost producer. They should export, not import, goods for which they have a comparative advantage. Absolute and exchange rate adjusted costs are not relevant to the concept of comparative advantage.

Which of the following arguments in favor of trade restrictions is least likely to be supported by economists?

A)	Infant industries should be protected.

B)	National defense industries should be protected.

C)	Trade with low-wage countries depresses wage rates in high-wage countries.

Trade with low-wage countries does not in itself depress wage rates since productivity must be considered. The other arguments all have some support among economists.

Are Dion and Frankl correct in their assessment of the impact that restricting imports of transportation equipment would have on Minidonia’s economy?

Dion

Frankl

Yes

Dion and Frankl are both incorrect. Dion is incorrect because trade barriers do not protect jobs in the long run. The jobs protected by import restrictions will be offset by jobs lost in other industries, so that the net number of jobs in the country is not protected in the long run. Frankl is incorrect because trade in goods and services is a major component of the current, not capital, account deficit. In addition, Minidonia has a current account deficit, which implies that it would have a capital account surplus, not a capital account deficit.

Which of the following groups in Minidonia is least likely to be helped by the imposition of tariffs on Minidonian imports of transportation equipment?

A)	Automotive manufacturers.

B)	Trucking companies.

C)	Automotive manufacturers administrative employees.

Tariffs on transportation equipment benefit the government in the form of tariff revenue, and benefit domestic producers and industry workers in the form of higher prices for transportation equipment. The users of transportation equipment, such as trucking companies, suffer from higher costs due to the higher prices of transportation equipment.

Is Landseer correct in her statements regarding the Minidonian peso and:

the export effect?

interest rate parity?

Yes

Landseer is correct in both of her statements. The export effect suggests that, all else being equal, if a currency falls in value, the demand for exports denominated in that currency should increase. Interest rate parity holds when any forward premium or discount just offsets differences in interest rates so that an investor will earn the same return investing in either currency.

Which most accurately describes the statements made by Frankl and Landseer about tariffs and quotas?

Frankl

Landseer

Incorrect

Correct

Incorrect

Frankl is correct that the increase in revenue to the domestic government under a tariff system partially offsets the lost gains from trade, even though there is still a deadweight loss to the economy. Landseer is incorrect because the producers who gain producer surplus are the foreign, not domestic, producers.

作者: invic 时间: 2012-3-28 09:13

The primary benefits derived from tariffs usually accrue to:

A)	domestic suppliers of goods protected by tariffs.

B)	foreign producers of goods protected by tariffs.

C)	domestic producers of export goods.

Tariffs raise domestic prices, benefiting domestic suppliers.

作者: invic 时间: 2012-3-28 09:32

What is the difference between a tariff and a quota?

A)	A tariff is a tax imposed on imports whereas a quota sets a limit on the amount of imports.

B)	A tariff is a tax imposed on imports whereas a quota is a target goal for exports.

C)	A quota is a tax imposed on imports whereas a tariff sets a limit on the amount of imports.

Tariffs are taxes imposed on imports that benefit domestic producers because the higher import price due to the tax allows domestic producers to be more competitive in the local market. Governments also benefit because they collect the tax. Governments do not benefit from quotas because there is no tax involved just the supply of imports is reduced, which benefits domestic producers.

作者: invic 时间: 2012-3-28 09:33

Who benefits least from tariffs?

A)	Foreign consumers.

B)	Domestic consumers.

C)	Domestic producers.

A tax imposed on imports is called a tariff, which benefits domestic producers and domestic governments. Domestic consumers lose through higher prices, less choice of products, and lower quality products.

作者: invic 时间: 2012-3-28 09:34

Who benefits the most from a quota?

A)	Domestic producers.

B)	Foreign consumers.

C)	Foreign producers.

Quotas restrict the supply of imported goods, which increases the price domestically benefiting domestic producers. Some foreign producers also benefit from the higher prices created by the quota if they receive the revenue transfer (due to higher prices received for all goods sold under the import license). However, overall the foreign producers do not sell as much of their product and have lost revenues.

作者: invic 时间: 2012-3-28 09:34

Suppose the world price of Mercury tennis shoes is $60, but they sell in the U.S. for $75 due to a $15 import tariff. Who will most likely be negatively affected by the tariff?

A)	Producers.

B)	Foreign consumers.

C)	U.S. consumers.

Tariffs benefit domestic producers of products because the level of imports will be reduced due to an effective increase in the price of the goods. Consumers in the country lose due to higher prices

作者: invic 时间: 2012-3-28 09:35

Prior to the beginning of summer, the government of Japan places a 150 percent tariff on imported chain saws. Assume for this example that this tariff has a significant impact on the supply of chain saws. The government’s action:

A)	benefits the Japanese government and domestic producers.

B)	will protect the jobs and high wages of Japanese chain saw industry workers.

C)	is more harmful than if the government had limited the amount of chain saws imported.

The Japanese government’s action is an example of a tariff. A tariff is a tax imposed on imports and benefits the Japanese government because it collects the tariff. Domestic producers benefit because the reduction in the supply of imported goods means a higher domestic price.
The other choices are incorrect. A tariff is considered less harmful than a quota (an import quantity limitation) because under a quota, the domestic government does not receive any funds as it would under a tariff (the foreign producers receive the revenue transfer). In the long run, trade restrictions do not protect the net number of jobs in the country. The number of jobs protected by import restrictions will be offset by jobs lost in the import/export industry. Import/export firms will be unable to sell the overpriced domestic products abroad or import and sell the lower priced restricted foreign-made product.

作者: invic 时间: 2012-3-28 09:38

Trade agreements like the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT) that lower trade barriers are least likely to:

A)	increase competition worldwide.

B)	cause a recession in the United States.

C)	lead to economic growth.

The lowering of trade barriers is hoped to lead to economic growth opportunities and increased competition worldwide.

作者: invic 时间: 2012-3-28 09:39

Prior to the beginning of the baseball season, the United States government places a tariff on imported bubble gum. Assume for this example that this tariff has a significant impact on the supply of bubble gum. Which of the following statements about the impact of this tariff is least valid? The tariff:

A)	will prohibit foreign firms from dumping bubble gum on the U.S. market at below cost.

B)	will protect the jobs of domestic bubble gum industry workers in the long run.

C)	is not necessary to maintain the high wages of the U.S. bubble gum industry workers.

In the long run, trade restrictions do not protect the net number of jobs in the country. The number of jobs protected by import restrictions will be offset by jobs lost in the import/export industry. Import/export firms will be unable to sell the overpriced domestic products abroad or import and sell the lower priced restricted foreign-made product.
The other statements are at least partially valid. Some reasons for trade restrictions that have some or partial validity are: national defense argument, infant industries argument, and anti-dumping argument. The assertion that trade with low-wage countries depresses wage rates in high-wage countries stems from a misunderstanding of comparative advantage. When each country produces goods for which it has a comparative advantage, both countries will benefit. High-wage countries likely have a comparative advantage in high tech manufacturing and low wage countries will have an advantage in labor-intensive goods.

作者: invic 时间: 2012-3-28 09:39

"Import quotas will create jobs, increasing the employment level of a nation." Economic analysis indicates that this statement is incorrect in:

A)	the short run only.

B)	the long run only.

C)	both the long and short run.

The argument that trade restrictions protect jobs is of questionable validity. First, trade restrictions prevent trading partners from developing the purchasing power needed to buy import goods from the protected country, thus depressing the country's own export industry. Second, the higher price of the protected domestic goods dampens domestic purchasing power, taking sales away from other domestic products. Third, the jobs that would have been created in the import industry are never created.

The number of jobs protected by import restrictions will be offset by jobs lost in the import/export industry.

作者: invic 时间: 2012-3-28 09:40

The anti-dumping argument in favor of trade restrictions is the argument that restrictions should be imposed to:

A)	discourage foreign firms from engaging in price competition.

B)	prevent foreign firms from dumping unwanted products in domestic markets.

C)	prevent foreign firms from selling their product below cost.

The anti-dumping argument is that restrictions should be used to prohibit foreign firms from increasing market share by selling products below cost.

作者: invic 时间: 2012-3-28 09:40

Which of the following is a reason why trade with low-wage countries does NOT depress wage rates in high-wage countries?

A)	High hourly wage rates mean high per unit labor costs.

B)	High-wage countries have an advantage in labor-intensive goods.

C)	When each country produces goods for which it has a comparative advantage, both countries benefit.

When both countries produce the goods in which they have an advantage, total output and the availability of goods will increase.

作者: invic 时间: 2012-3-28 09:41

An anti-dumping restriction on trade:

A)	prohibits foreign firms from selling products below cost to gain market share.

B)	keeps some highly sensitive products in the country.

C)	protects infant industries.

Firms dump their goods at a price lower than cost in order to drive out the competition. Once this is complete, they will be able to raise prices to much higher levels in order to gain abnormal profits. Of course, once prices are increased, new competitors may arise.

作者: invic 时间: 2012-3-28 09:41

Which of the items below is NOT a valid reason why nations adopt trade restrictions? To:

A)	protect industries in which they have a comparative advantage.

B)	prohibit foreign firms from increasing market share by selling products below cost.

C)	protect industries that are highly sensitive to national security.

If a particular country enjoys a comparative advantage in a particular industry, no protection is needed.

作者: invic 时间: 2012-3-28 09:42

Which of the following arguments for trade restrictions is least valid?

A)	Trade restrictions create domestic jobs.

B)	Some industries are highly sensitive to national security, and their products should therefore remain in the country.

C)	Tariffs are used to prohibit foreign firms from selling products in the country at below cost in an attempt to gain market share.

While the other explanations have some support among economists, the argument that trade restrictions create domestic jobs has very little support. Part of the popularity of trade restrictions stems from their ability to protect easily identifiable jobs and the high wage levels in these jobs. However, in the long run, trade restrictions cannot protect the net number of jobs in the country.

作者: invic 时间: 2012-3-28 09:42

David Forsythe and Linda Novak are discussing the advantages and disadvantages of import restrictions. They state the following:

Forsythe: One of the groups that benefits from import restrictions is often the government that imposes them.

Novak: Import restrictions impose costs on specific groups, such as the country’s import industries, but these costs are more than offset by the benefits to other groups and to the economy as a whole.

With respect to these statements:

A)	only one is correct.

B)	both are correct.

C)	both are incorrect.

Forsythe is correct. A primary reason why trade restrictions remain widespread is the revenue that governments receive from tariffs. Novak is incorrect. Trade restrictions benefit specific groups, such as workers in the protected industries, but those benefits are most often less than the costs imposed on consumers and other industries as a whole.

作者: invic 时间: 2012-3-28 09:43

David Forsythe and Linda Novak are discussing the advantages and disadvantages of import restrictions. They state the following:

Forsythe: One of the groups that benefits from import restrictions is often the government that imposes them.

Novak: Import restrictions impose costs on specific groups, such as the country’s import industries, but these costs are more than offset by the benefits to other groups and to the economy as a whole.

With respect to these statements:

A)	only one is correct.

B)	both are correct.

C)	both are incorrect.

作者: invic 时间: 2012-3-28 09:44

David Kirk, CFA, is an analyst on the global equities desk for a large investment banking company in New York. Kirk is searching for investment opportunities in companies that operate in relatively economically undeveloped countries. He is currently researching possible investments in businesses located in Wayland, a small emerging country located in Eastern Europe. Wayland has significant coal deposits within its borders, and is a leading producer in the region. Kirk’s interest in the country stems from the fact that Wayland has recently emerged an as independent nation after centuries of rule by a larger country. Wayland is in the early stages of government formation, although many of its elected leaders are experienced, having served under the previous government.
Kirk is not a risk-averse investor, but realizes that opportunities in Wayland may have some unique features. For example, the government of Wayland is considering putting some type of trade restrictions in place to protect the country’s leading industry, the production of coal. Government officials want to ensure that the industry, which is quasi-governmental, is shielded from lower cost importers from surrounding countries. At the same time, the government wants to encourage growth and development in other industries so that in the future, the country’s economy is not dependent upon one industry. Kirk wants to explore the short- and long-term implications of any trade restrictions the government may enact.
Also, Kirk plans on performing a thorough analysis of the government of Wayland’s anticipated approach toward monetary policy. With an expected increase in international trade, the country’s central bank must more carefully manage the country’s balance of payments accounts. The current exchange rate for W$, the national currency of Wayland, is W$125/€. Exactly one year ago, the same exchange rate was W$115/€. In addition, over the same time period, real interest rates in Wayland have declined relative to comparable interest rates in the European Union. Kirk will project the expected returns on an investment in a Wayland-based company, based upon several likely interest rate and exchange rate scenarios.The government of Wayland argues that its policy of placing trade restrictions on the import of coal into the country will serve to protect the entire country by providing both job security and lower fuel prices to its citizens. Which of the following statements regarding Wayland’s policy is most accurate?

A)	The effect of the trade restrictions cannot be predicted, but will encourage growth in other industries that do not have the same governmental protection.

B)	The trade restrictions will protect Wayland’s core industry, which in turn will lead to growth in the country’s per capita income.

C)	The trade restrictions will be to the benefit of the coal producers at the expense of the entire country’s economy and its citizens.

In general, economists agree that trade restrictions are to the benefit of the protected industry at the expense of the rest of the general economy and the citizens. (Study Session 4, LOS 16.c)

Assume that Wayland has a comparative advantage in the production of coal, while Country X has a comparative advantage in the production of paper goods. Which of the following statements regarding the law of comparative advantage is most accurate?

A)	Wayland should impose a quota on the import of coal and Country X should impose a similar quota on the import of paper goods in order to preserve their respective comparative advantages.

B)	When each country specializes in the good for which they have the comparative advantage and trades with the other, both countries will benefit from the alliance.

C)	Wayland should impose a tariff on the import of coal and Country X should impose a similar tariff on the import of paper goods in order to preserve their respective comparative advantages.

The law of comparative advantage holds that trading partners are better off if they specialize in the production of those goods for which they are the low-opportunity cost producers. In this example, Wayland and Country X should each specialize in the production of their respective specialized goods and then trade with each other, resulting in an arrangement that is beneficial to both sides. (Study Session 4, LOS 16.a)

Recent financial information released by the government of Wayland for the year ending 2006 includes the following information (in millions of W$):

Current account W$ 550,000
Capital account −285,000

Calculate the official reserve account (in millions of W$) for Wayland as of the end of 2006:

A)	W$−265,000.

B)	W$265,000.

C)	W$835,000.

The Balance of Payments equation is:

Current account + capital account + official reserve account = 0

Therefore, solving for the official reserve account, W$550,000 + (−285,000) − 0 = W$−265,000. (Study Session 4, LOS 18.b)

With regard to the performance of Wayland’s currency over the past year, which of the following statements is most accurate? The W$ has:

A)	depreciated relative to the Euro, in part due to the decline in Wayland’s real interest rates relative to the EU.

B)	appreciated relative to the Euro, in part due to the decline in Wayland’s real interest rates relative to the EU.

C)	depreciated relative to the Euro, in part due to investor expectations that trade restrictions will soon be enacted by Wayland’s government.

The real interest rates in Wayland have declined over the past year relative to rates in the EU, so investors will find Euro-denominated investments more attractive than W$-denominated investments. As a result, the W$ has depreciated in value relative to the Euro as demand for investments in the W$ currency have decreased. (Study Session 4, LOS 18.d)

Assume that Wayland's central bank states that its goal is to maintain the long-term W$ exchange rate relative to the Euro at W$110/€. Which of the following statements regarding the possible strategies that the central bank of Wayland can pursue is most correct? The bank is signaling a:

A)	crawling peg policy which will help to reduce foreign exchange risk for importers and exporters.

B)	fixed rate policy that will be periodically reset to avoid having the bank either run out of reserves or accumulate too many reserves of foreign currency.

C)	fixed rate policy, but the effectiveness of the policy will hinge on the adequacy of the central bank's reserves.

The central bank is signaling a commitment to a fixed rate policy. The policy is sustainable only if the bank has sufficient foreign exchange reserves to support the value of the W$. If not, the typical scenario is that attempts to support the currency (maintain the fixed rate) will exhaust the bank's reserves, leading to a currency devaluation in the long-run. (Study Session 4, LOS 18.f)

The current spot rate for the US dollar per Euro is US$1.42/€. Calculate the current cross rate for W$ per US$.

A)	W$88.03/US$.

B)	W$177.50/US$.

C)	W$80.99/US$.

In Wayland, the direct exchange rate is:

(W$125/€) / (US$1.42/€) = W$88.03/US$

(Study Session 4, LOS 17.a)

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Country A		Country B
Units of Cloth	Units of Corn	Units of Cloth	Units of Corn
0	4	0	8
6	3	8	6
14	0	16	0

Good	France (in EUR)	United Kingdom (in GBP)
Jeans	42	26
Wine	18	14
Cheese	5	3
LCD Screens	85	50

Good	France (in EUR)	United Kingdom (in EUR)
Jeans	42	26 × 1.5 = 39
Wine	18	14 × 1.5 = 21
Cheese	5	3 × 1.5 = 4.5
LCD Screens	85	50 × 1.5 = 75

	Units of Output Per Day
	Country A	Country B
Food	9	5
Drink	7	5