Chapter 19 Reflection

Pretend for  moment you are teaching this class and you need to write questions for an exam covering this chapter.  Write three short answer questions and give 2 answers for each — an adequate response and a very good response.  You questions should cover highlights from the chapter.  Don’t choose identification or list questions, require some analysis.  A answers are generally longish.

Question 1: What is the similarity and the difference between tariffs and import quota? How would someone analyze trade policy?

Answer A: Tariffs and import quotas are both related to trade policy. Both directly influence the quantity of goods and services that a country imports or exports. Tariffs are a tax imposed on imported goods and and import quota is a total limit on the quantity of a good produced abroad that can be sold domestically. First, you must determine which curve shifts. Second, you must the direction that the demand curve shifts. Third, make a comparison. In conclusion, policies that directly influence exports or imports do not alter net exports.

Answer B: Tariffs and import quotas are both related to trade policy. Tariffs are a tax imposed on imported goods and and import quota is a total limit on the quantity of a good produced abroad that can be sold domestically. First, you must determine which curve shifts. Second, you must the direction that the demand curve shifts. Third, make a comparison.

Question 2: Define capital flight and explain how political instability can effect this?

Answer A: Capital flight is a large and sudden reduction in the demand for assets located in a country. If a country has something happen in the political system that makes the rest of the world weary of their stability, other countries might choose to pull their money out of that country. This in turn increases the troubled countries net capital outflow and, therefore, affects the market as a whole. Due to an increase in supply, the troubled country has a depreciation of the peso. The result of the depreciation, exports become cheaper and imports more expensive, effecting the trade balance.

Answer B: Capital flight is a large and sudden reduction in the demand for assets located in a country. If a country has something happen in the political system that makes the rest of the world weary of their stability, other countries might choose to pull their money out of that country.

Question 3: What are the two markets that are connected by net capital outflow? Please respond in detail.

Answer A: The market for loanable funds, and the market for foreign-currency. The market for loanable able funds utilizes national savings, domestic investment, net capital outflow, and net exports. The market for foreign-currency aides in the exchange of domestic currency for the currency of other countries.

Answer B: The market for loanable funds and the market for foreign-currency exchange.