Economic Integration and Exchange Rates

The World Trade Organization (WTO) oversees international agreements that attempt to:

• lower tariffs

• liberalize world trade

• increase world trade

• all of the above

A group of countries that agree to reduce or eliminate trade barriers but each can have its own trade policy toward other countries have established a:

• monetary union

• free trade area

• customs union

• common market

A group of countries that allow free movement of labour and capital within the group have a:

• customs union

• free trade area

• common market

• preferential trade agreement

A trading bloc may be a:

• free trade area, customs union or common market

• customs union or common market

• common market or monetary union

• customs union or monetary union

Trade creation and trade diversion may result from the creation of a trading bloc. Trade creation refers to the idea that _____________________ while trade diversion means that _____________________.

• lower cost producers are replaced by higher cost producers / higher cost producers are replaced by lower cost producers

• higher cost producers are replaced by lower cost producers / lower cost producers are replaced by higher cost producers

• trade expands through more exports and imports / trade contracts through fewer exports and imports

• imports from efficient producers are replaced by imports from inefficient producers / imports from inefficient producers are replaced by imports from efficient producers

Each of the following statements describes monetary union except:   

• a group of countries that adopt a common currency

• a group of countries that have a common central bank

• a group of countries that have a common fiscal policy

• a group of countries that have a common monetary policy

The World Trade Organization (WTO) does not:

• monitor national trade policies

• help member countries with technology and training in relation to trade

• administer trade agreements

• monitor the quality of goods traded across borders

Which of the following statements is false?      

• An exchange rate is the price of one currency expressed in terms of another currency.

•   In a freely floating exchange rate system, exchange rates are freely determined by demand and supply for the currency.

• In a fixed exchange rate system, a currency’s exchange rate is fixed against the value of another currency.

• In a managed exchange rate system, the central bank does not intervene as the government manages the exchange rate.

Which of the following will not lead to an appreciation of the currency of country X?

• an increase in demand for exports of country X

• an increase in demand for imports in country X

• an increase in foreign investment in country X

• an increase in interest rates in country X

Which of the following will lead to a depreciation of the currency of country X?       

• expectations of currency appreciation in country X

• a lower inflation rate in country X, which makes its exports more competitive

• a fall in interest rates in country X

• a decrease in demand for imports in country X