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Chapter 1:
International Economics is Different
Multiple Choice Questions
1. Sovereign nations:
a. Are subject to laws passed by the United Nations.
b. Must be concerned with the interests of foreigners when developing economic
policy.
c. Often ignore the interests of foreigners.
d. Must coordinate their monetary policy with the World Bank.
ANSWER:
C
2. Outsourcing of services to foreign countries:
a. Cost the U.S. economy an estimated 5 million jobs by 2005.
b. Mainly impacts workers in business services such as data entry and software
development.
c. Is a serious concern for workers in high-wage manufacturing industries.
d. Will have a serious negative impact on all service sector jobs in the United
States.
ANSWER:
B
3. Globalization:
a. Is the process of intensifying the connections between national economies
through international trade, foreign direct investments by multinational firms,
and international financial investments.
b. Has been proven to worsen working conditions and increase poverty in poor
countries.
c. Requires governments to weaken labor and environmental regulations in order
to remain competitive.
d. Is coordinated by the International Labor Organization to ensure respect for
the four core labor standards.

ANSWER:
A
4. The long-run solution to eliminating child labor is to:
a. Boycott companies whose products are produced using child labor.
b. Impose trade sanctions against countries that violate child labor standards.
c. Stimulate economic growth and rising incomes in poor countries.
d. There is no long-run solution as demand for cheap labor will always exist.
ANSWER:
C
5. In early 2002, the national moneys of 12 European countries disappeared. They were
replaced by one new money, the euro. The benefits to those countries included all of
the following EXCEPT:
a. It is convenient – there is no need to change money when crossing national
borders.
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b. It is less risky – there is no need to worry about the changing value of one
country’s money relative to another country’s money.
c. It is economical – travel and trade are made easier due to a decrease in
transaction costs.
d. It strengthens domestic policy – using an international money gives a
country’s Central Bank a greater ability to influence national prices,
production, and jobs.
ANSWER:
D
6. The Chinese government’s intervention in the foreign exchange market - buying U.S.
dollars and selling yuan – had the effect of:
a. Weakening the U.S dollar and increasing the U.S. trade deficit with China.

b. Strengthening the U.S dollar and increasing the U.S. trade deficit with China.
c. Strengthening the yuan and increasing the U.S. trade deficit with China.
d. Strengthening the yuan and decreasing the U.S. trade deficit with China.
ANSWER:
B
7. On July 21st, 2005, the Chinese government changed the value of the yuan from 8.28
yuan per U.S. dollar to 8.11 yuan per U.S. dollar. This implies a __________ dollar
and a __________ yuan.
a. Weaker; weaker
b. Weaker; stronger
c. Stronger; stronger
d. Stronger; weaker
ANSWER:
B
8. Since the early 2000s, a variety of services has been subject to outsourcing in the
United States EXCEPT for:
a. Data entry.
b. Telephone call centers.
c. Software development.
d. Haircuts.
ANSWER:
D
9. Since the late nineties, to keep the exchange rate of the yuan to the U.S. dollar fixed,
the Chinese government:
a. Has been trying to hold predominantly euros and British pounds as foreign
assets.
b. Has been buying dollars and selling Yuan.
c. Has been trying not to sell its domestic currency (Yuan).
d. Has been keeping a trade deficit with many countries including Australia,
Russia, Japan, and Brazil.

ANSWER:
B
10. The exchange rate policy of a “crawling peg” adopted by the Chinese government
since 2005 means that the government:

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a. Allowed small daily changes which over time resulted in a slow, tightly
controlled trend.
b. Vehemently defended the yuan by selling U.S. dollars.
c. Held a balanced portfolio of assets including a variety of foreign currencies.
d. Tried to unwind the trade surplus with the U.S.
ANSWER:
A
11. Outsourcing is the process of:
a. Shifting business activities abroad.
b. Allowing foreign workers on temporary visas.
c. Eliminating business activities that require foreign labor.
d. Paying foreign workers lower wages compared to domestic workers.
ANSWER:
A
12. In recent years, the European Union:
a. Attempted a geographic expansion to include Turkey.
b. Adopted a formal constitution in which was decided that all countries should
pay their debt in their own currencies.
c. Made progress on the formation of a monetary union, and on an expansion of
the European Union, but could not adopt a formal constitution due to the
negative vote of France in 2005.

d. Made significant progress on the formation of a monetary union, a formal
constitution, and on accepting some eastern European countries as members.
ANSWER:
C

True/False Questions
13. Child labor virtually vanishes in a developing economy when income per capita
reaches about $8,400.
ANSWER:
TRUE
14. It has been estimated that worldwide approximately 100 million children under the
age of 15 work full-time and at least that number work part-time.
ANSWER:
TRUE
15. While Britain, Denmark, and Sweden do not use the euro, the European Central Bank
makes monetary policy for the entire EU.
ANSWER:
FALSE
16. While there are many countries interested in joining the EU, it is unlikely that the EU
will be enlarged because there seems little desire on the part of member countries to
have a larger union.
ANSWER:
FALSE

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17. The World Trade Organization, the International Monetary Fund, the United Nations,
and the World Bank control the international economy by imposing binding rules that

control international trade and exchange markets.
ANSWER:
FALSE
18. The four core labor standards agreed upon in the International Labor Organization
were that all countries should: respect collective bargaining, ban forced labor, ban
child labor, and ban discrimination in the workplace.
ANSWER: TRUE
19. Labor may be internationally mobile, but capital and land do not migrate from one
country to another.
ANSWER:
FALSE
20. Politicians do not erect barriers to trade with other countries because they are also
concerned with the well-being of foreigners.
ANSWER:
FALSE
21. Firms are always trying to lower the costs they incur in their production activities,
and that is the main reason for them to shift jobs abroad.
ANSWER:
TRUE
22. India and China are among the main providers of outsourcing services.
ANSWER:
TRUE
23. Turkey is scheduled to join the European Union in 2009.
ANSWER:
FALSE
24. Each country has to abide by the decisions of the International Monetary Fund and
the World Bank because they are the only recognized international organizations who
manage the global economy.
ANSWER:
FALSE


Essay Questions
25. One of the basic requirements for a country to join the European Union is the
capacity and willingness to adopt and to implement EU rules and standards. Why
would a country agree to make changes to its national laws and regulations to
conform to outside requirements?
POSSIBLE RESPONSE: It is true that being a member of the European Union comes
at a cost: every member has in some respect to cede national sovereignty and to abide
by the laws and regulations of the European Union. However, for these countries
there are benefits to being members of this Union that significantly exceed this cost.

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First, these rules and regulations are not imposed by a third party, but designed by the
members of the Union themselves. So, each country has the opportunity, to a greater
or lesser extent, to take part in the design of these laws and regulations.
Second, giving up national sovereignty might be popular in countries where national
policies have been disastrous. This is particularly true for countries which did not
have a well controlled monetary policy and oversupplied their own currencies until
inflation made these national currencies nearly worthless. These countries might
indeed be gaining by ceding their monetary sovereignty to the European Central
Bank.
Finally, even though each member is subjected to the same rules and regulations, each
country is gaining because all other members abide by those laws and policies.
Probably most importantly, this ensures a free trade among members, and free
movement of factors of production (labor and capital). This openness gives a chance
for a greater economic prosperity for all members of the Union.
26. Discuss the economic consequences of outsourcing or offshoring of services, and

explain who is gaining and who is losing from the process of outsourcing. Why is
outsourcing such a debatable issue?
POSSIBLE RESPONSE: Outsourcing is the process of shifting economic activities
abroad. This process is triggered by the desire of firms to lower the cost of labor in
the production process. Overall, it is believed that outsourcing, similarly to
international trade, promotes global economic efficiency. It helps firms lower their
cost of production, and allows them to bring goods to the final consumer at lower
prices. The main fear from outsourcing comes from workers in occupations that are
subject to outsourcing: call centers, data entry, and software development.

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