International Trade and the Global Economy — High School Economics practice questions

Stocks vs. bonds:

1. Stocks = ownership shares in company (higher risk, higher return); Bonds = loans to issuer (lower risk, fixed interest payments)
2. Same thing
3. Both equally risky
4. Both pay dividends
5. Bonds give voting rights

Answer: A — Stocks = ownership shares in company (higher risk, higher return); Bonds = loans to issuer (lower risk, fixed interest payments)

Equities (stocks): claim on residual profits/assets. Bonds: debt instrument with periodic coupon payments + principal at maturity. Risk-return tradeoff. Personal-finance basics: diversify across asset classes per risk tolerance and horizon.

If the U.S. dollar APPRECIATES against the euro, the most likely SHORT-RUN effect is:

1. U.S. exports rise and imports fall
2. Both exports and imports rise
3. U.S. exports become more EXPENSIVE for European buyers (tending to fall) and imports from Europe become CHEAPER for U.S. buyers (tending to rise)
4. No effect on trade

Answer: C — U.S. exports become more EXPENSIVE for European buyers (tending to fall) and imports from Europe become CHEAPER for U.S. buyers (tending to rise)

C) Appreciation makes domestic goods relatively expensive abroad and foreign goods cheaper at home. A) Depreciation would do that (classic reversal trap). B) Ignores relative-price mechanics. D) Trade flows respond to exchange rates.

Country A can produce 10 cars or 100 phones per worker; Country B can produce 4 cars or 60 phones per worker. By comparative advantage, Country A should specialize in:

1. Phones, because it produces more total phones
2. Both goods because it has absolute advantage in both
3. Cars, because its opportunity cost of a car (10 phones) is lower than B's (15 phones)
4. Neither, because A is better at everything

Answer: C — Cars, because its opportunity cost of a car (10 phones) is lower than B's (15 phones)

C) A's opp cost per car = 100/10 = 10 phones; B's = 60/4 = 15 phones. A has lower opp cost in cars → specialize in cars. A) Confuses absolute with comparative. B) Absolute advantage in both doesn't preclude trade. D) Comparative advantage always exists.

An import tariff on steel will typically:

1. Lower domestic steel prices and raise consumer surplus
2. Raise the domestic price of steel, help domestic steel producers, hurt steel-using industries and consumers, and risk retaliation by trading partners
3. Have no effect on domestic prices
4. Always increase total economic welfare in the importing country

Answer: B — Raise the domestic price of steel, help domestic steel producers, hurt steel-using industries and consumers, and risk retaliation by trading partners

B) Standard trade-policy analysis: tariffs raise domestic prices, redistribute welfare from consumers to producers and government, create deadweight loss, and invite retaliation. A) Reverses prices. C) Tariffs change relative prices. D) Net welfare usually falls in the importing country.

Expansionary fiscal policy typically involves:

1. The central bank raising interest rates
2. Decreasing government spending and raising taxes to cool the economy
3. Increasing government spending and/or cutting taxes to stimulate aggregate demand
4. Imposing import bans

Answer: C — Increasing government spending and/or cutting taxes to stimulate aggregate demand

C) Demand-side push by fiscal authorities. B) Contractionary fiscal policy. A) Monetary policy. D) Trade policy.

The Federal Reserve influences the US economy primarily by:

1. Setting individual income-tax rates
2. Issuing passports
3. Drafting the federal budget
4. Adjusting short-term interest rates, conducting open-market operations, and using reserve / capital requirements

Answer: D — Adjusting short-term interest rates, conducting open-market operations, and using reserve / capital requirements

D) Standard monetary-policy toolkit. A) Congressional power. C) Executive proposes, Congress passes. B) State Department function.

A per-unit TARIFF on imported steel typically:

1. Lowers the domestic price of steel
2. Has no effect on domestic markets
3. RAISES the domestic price of steel, HELPS domestic steel producers, HURTS steel-using industries and consumers, and may INVITE RETALIATION from trading partners
4. Increases total welfare

Answer: C — RAISES the domestic price of steel, HELPS domestic steel producers, HURTS steel-using industries and consumers, and may INVITE RETALIATION from trading partners

C) Standard tariff analysis: producers gain, consumers/downstream users lose, deadweight loss + retaliation risk. A) Reverses direction (a common trap). B) Understates. D) Net welfare typically falls in the importing country.

Tariffs are:

1. Subsidies
2. Exports
3. Free trade
4. Taxes on imported goods — protect domestic industries but raise prices for consumers and provoke retaliation, reducing trade benefits
5. Currency

Answer: D — Taxes on imported goods — protect domestic industries but raise prices for consumers and provoke retaliation, reducing trade benefits

Tariffs: import taxes. Protectionist tool. Effects: domestic producers gain, consumers lose (higher prices), government gains revenue, trading partners often retaliate. Examples: Smoot-Hawley (1930) deepened Great Depression by retaliatory tariffs.

What is free trade?

International trade with minimal barriers (no tariffs, quotas, etc.).

What is comparative advantage?

A country (or person) can produce a good at a lower opportunity cost than another. Basis for gains from trade.

What is the WTO?

World Trade Organization — sets rules for international trade and resolves disputes among member nations.

What was NAFTA, and what replaced it?

North American Free Trade Agreement (1994) among U.S., Canada, Mexico. Replaced by USMCA in 2020.