1. B, nations will engage in voluntary exchange only if each nation expects to gain from the exchange. Trade allows each nation to become more efficient by specializing in the area that they have a comparative advantage over other nations and then trade with other nations.

2. C, trade allows nations to acquire goods that they want and are inefficient at producing.

3. B, this is a simple application of comparative advantage. When a nation has an absolute advantage over another nation in the production of goods and services, gains from trade will still result if the nation specialize in the production of goods and services for which it is a low opportunity cost producer and trade for goods for which it is a high opportunity cost producer.

4. C, protectionist measures protect domestic workers and producers in protected industries and injures domestic consumers due to higher prices. Reducing a tariff lowers prices for domestic consumers and allows foreign producers to sells more of their products in the US.

5. B, by definition, a tariff is a tax on imported items

6. C, if for one US dollar you receive 2DM then each DM must have cost you 50 cents.

7. C, given an exchange rate of 60 cents equals 1 US dollar, the cost of a 50,000 DM auto in US dollars is $30,000.

8. C, if an English pound costs you $1.80 and suddenly the price of a pound falls to $1.60, it means that the pound is less expensive for you. In other words the pound has depreciated in value while the dollar has appreciated. Given a depreciated pound the English will find American goods more expensive, and we will find their goods relative less expensive.

9 E, Canada is our largest trading partner.

10. A, during the early 1980's US real interest rates increased and foreign investors found that the rate of return on US investments was more attractive than investing in their own country or somewhere in the rest of the world. To buy US assets foreign investors needed to purchase US dollars, which increased the exchange value of the US dollar.

11. B, if Mexico experiences a major recession they will purchase less of their own and our goods. Aggregate demand equals consumption plus investment plus government spending plus exports minus imports [AD=C+I+G+(X-M)]. A decrease in imports by Mexico means that the US will export less and it will have a negative impact on US aggregate demand.

12. D, in the balance of payment a deficit in the current account must be offset by a surplus in the capital account. Expansionary fiscal policy in the form of a tax cut will increase personal income in the US. Some of the income will be spent on foreign goods. Increased spending on foreign goods and no change in foreign purchases of US goods will increase the US merchandise trade deficit. Money outflow from the US to purchase foreign goods will be greater that the inflow to purchase US goods. The imbalance on the current account will be offset in the capital account.

13. D, factual question.

14. B, in a no trade situation prices for goods that the country can produce efficiently will be low and goods produced by inefficient firms and industries will be high. The country will have a comparative advantage in producing goods and services where it is very efficient. The country specializes in the items where it has a comparative advantage and trades with the rest of the world. Opening the nation to trade results in higher prices for products where it has a comparative advantage because of increased demand from the rest of the world. Domestic consumers pay a higher price while domestic producers receive a higher price, and there is a net gain for the country and world. Remember that with trade some groups gain, others lose, but overall the country gains.