2001 Economics Challenge Play-off
INTERNATIONAL ECONOMICS
Round III

1. Although Japan’s GDP has been growing in real terms, on a year-on-year basis, ever since the recession of 1998, nominal GDP has been shrinking, thanks to price deflation. This is a disease more deadly than high inflation. Falling prices keep real interest rates too high; they make consumers delay spending; and they cause the real burden of public and corporate debt to swell.

   Public debt has already reached 120 percent of GDP. The future path of that ratio depends on two factors; the size of the primary budget deficit (i.e., excluding interest payments) and the gap between interest rates and the growth of nominal GDP. Japan’s debt-to-GDP ratio will likely rise if the -- The Economist, January 20, 2001

   1. primary budget deficit falls and nominal GDP grows slower than interest rates.
   2. primary budget deficit increases and nominal GDP grows slower than interest rates.
   3. primary budget deficit falls and nominal GDP grows faster than interest rates.
   4. primary budget deficit increases and nominal GDP grows faster than interest rates.

    

2. If the general level of prices in the United States increases relative to prices in Japan,
   1. the value of the dollar will likely depreciate relative to the yen.
   2. the value of the dollar will likely appreciate relative to the yen.
   3. the value of the dollar will likely remain constant relative to the yen.
   4. not enough information is given.

    

3. The organization responsible for mediating trade disputes is the
   1. International Monetary Fund.
   2. World Trade Organization.
   3. World Bank.
   4. The G-7 Countries.
    
4. In recent weeks, the price of gasoline has jumped to over $2.00 in some areas of the country. While gasoline purchases have decreased slightly during this time, the percent decrease of gasoline purchases has remained lower than the percent increase in price. We can conclude that demand for gasoline
   1. is price elastic.
   2. equals marginal costs.
   3. is price inelastic.
   4. equals average costs.

    

5. The concept of the invisible hand was introduced by
   1. John Maynard Keynes.
   2. Adam Smith.
   3. Thomas Jefferson.
   4. J.S. Mill.
   5. Thomas Malthus.

    

6. A price war is indicated when gasoline companies
   1. raise their prices on holiday weekends.
   2. offer gifts to entice customers.
   3. build opposing stations in the same area.
   4. lower their prices to undercut their competition.

    

7. Economic booms tend to be transmitted across the U.S. border because
   1. as other nations experience a downturn in their economies, the United States must experience an upturn it its economy.
   2. the United States will import more foreign goods in a recession.
   3. a boom abroad gives foreigners rising incomes, which means they will buy more imported goods and U.S. exports will rise.
   4. All of the above are correct.

    

8. The “capital account” in balance of payments data includes
   1. everything in the balance of trade.
   2. U.S. government payments to other countries for military bases.
   3. profits that Nissan of America sends back to Japan.
   4. new U.S. investments abroad.
   5. None of the above.

    

9. Earlier this month, GOP leaders agreed on a __________ tax cut.
   Originally, President Bush had sought a __________ tax cut.
   1. $1.6 trillion; $1.35 trillion.
   2. $1.0 trillion; $1.6 trillion.
   3. $1.6 trillion; 1.0 trillion.
   4. $1.0 trillion; $1.35 trillion.
   5. $1.35 trillion; $1.6 trillion.

    

10. During the first quarter of 2001, company layoffs were ______ frequent compared with last year, the unemployment rate was slightly ______ and the rate of growth in real GDP was _________.
    1. more, higher, positive.
    2. more, lower, positive.
    3. less, lower, positive.
    4. more, lower, negative.
    5. more, higher, negative.

     

11. The ratio of a company’s share price to its profits (i.e., earnings) per share is called the ______________, which is currently ______________ compared with the past 20-year average.
    1. p/e ratio, lower.
    2. e/p ratio, higher.
    3. p/e ratio, higher.
    4. e/p ratio, lower.
    5. p/e ratio, about the same.

     

12. Which of the following statements is true?
    1. The value of a dollar increases when there is inflation.
    2. If the CPI (Consumer Price Index) is 140, consumer prices are 140% higher than they were in the base period.
    3. One measure of the rate of inflation is the percentage change in the CPI
    4. The CPI measures price changes for all goods in the economy.
    5. All the above statements are true.

    Questions 13,14 refer to the table below. Suppose that both Country A and Country B produce maple syrup. Country A farmers can produce one gallon of maple syrup in 10 labor hours; one gallon of cane syrup requires 50 labor hours. Country B farmers can produce one gallon of maple syrup in 80 hours; one gallon of cane syrup requires 60 hours. The following table summarizes these data

    Labor Hours Required to Produce	Country A	Country B
    Maple Syrup	10	80
    Cane Syrup	50	60

     

13. Country A has an absolute advantage in producing
    1. maple syrup.
    2. cane syrup.
    3. neither maple nor cane syrup.
    4. maple syrup and an absolute disadvantage in producing cane syrup.
    5. both maple and cane syrup.

     

14. The Country B opportunity cost of producing one gallon of maple syrup is
    1. 1 1/3 gallons of cane syrup.
    2. 3/4 gallon of cane syrup.
    3. 80 gallons of cane syrup.
    4. 60 gallons of cane syrup
    5. impossible to calculate unless the price of cane syrup is known.

     

15. At the May 15, 2001 FOMC meeting the Federal Reserve decided to
    1. Increase short-term interest rates.
    2. Decrease short-term interest rates.
    3. Leave short-term interest rates unchanged.