The global economy practice questions.

The imposition of a tariff on an imported good will typically

• lower the domestic price and increase imports
• raise the domestic price and reduce imports
• leave domestic producers unaffected
• increase consumer surplus

Answer: raise the domestic price and reduce imports

A tariff raises the price of imports, so domestic price rises, imports fall, domestic production rises, and consumer surplus falls.

A depreciation of a country's currency will tend to

• make exports dearer and imports cheaper abroad
• make exports cheaper and imports dearer
• have no effect on the trade balance
• reduce the competitiveness of exports

Answer: make exports cheaper and imports dearer

A weaker currency lowers foreign-currency export prices (boosting exports) and raises the price of imports, which can improve the current account (subject to the Marshall-Lerner condition).

A customs union is best described as

• a free trade area with a common external tariff
• a group of countries sharing a single currency
• an agreement between only two countries to remove tariffs
• complete political and fiscal union

Answer: a free trade area with a common external tariff

A customs union removes internal trade barriers AND adopts a common external tariff, going a step further than a free trade area.

A tariff imposed on imported steel is most likely to

• lower the domestic price of steel
• increase the quantity of steel imported
• raise government revenue and reduce imports
• increase consumer surplus for steel buyers

Answer: raise government revenue and reduce imports

A tariff raises the price of imports, reducing the quantity imported and generating revenue on the imports that still enter. Domestic consumers pay more, so consumer surplus falls.

Which of the following is a protectionist measure?

• Signing a free trade agreement
• Imposing an import quota
• Allowing the exchange rate to float freely
• Removing a domestic production subsidy

Answer: Imposing an import quota

An import quota is a physical limit on the quantity of a good that may be imported, restricting trade to protect domestic producers.

A domestic furniture producer begins exporting to a much larger foreign market. Which benefit of international trade does this best illustrate?

• Access to resources that are unavailable domestically
• Higher tariff revenue for the government
• Economies of scale from producing for a larger market
• Reduced competition in the home market

Answer: Economies of scale from producing for a larger market

Exporting enlarges the firm's market, allowing higher output levels at which average costs fall — economies of scale are a key gain from trade.