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Free CFA-Level-I Exam Braindumps (page: 310)

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The opportunity cost of producing a good:

  1. generally decreases as the country produces more and more of the good.
  2. is not dependent on the marginal cost of producing the good.
  3. generally increases as the country produces more and more of the good.
  4. is usually uniform across countries.
  5. none of these answers.

Answer(s): C

Explanation:

The opportunity cost of producing a good beyond some level of production will often increase. This is because of rising marginal costs as the level of output increases. Thus, the degree to which a country will specialize in the production of a good is limited.



American textile manufacturers and union members have often lobbied successfully for restrictive quotas limiting the importation of textile products. The major impact of these quotas is

  1. lower prices for American consumers and an improvement in the quality of textile products available.
  2. a permanent reduction in unemployment in the U.S.
  3. higher prices for American consumers, a narrower selection of products and less competition in the U.S.
    textile industry.
  4. long-run profits in the U.S. textile industry that are substantially above market equilibrium.

Answer(s): C

Explanation:

Import quotas cause the market price for the imported good to rise domestically. This hurts consumers but helps domestic producers who in addition to gaining market share also enjoy a higher price.



In a given year, Gondolpha had total imports of 976 and total exports of 734. It also made direct foreign investments of 297. There were no other transactions on the BOP account. The Official Reserves account:

  1. decreases by 1,413
  2. increases by 539
  3. decreases by 539
  4. decreases by 55

Answer(s): C

Explanation:

Remember the convention:
1. Any inflow of domestic currency represents a credit and any outflow of domestic currency represents a debit on the BOP account.
2. Any inflow of foreign currency represents a debit and any outflow of foreign currency represents a credit on the BOP account.
Therefore, the credits on the combined current and capital account equal 734 and the debits equal 976 + 297 = 1,273.
Since debits must equal credits at the end of the accounting period, there must be a credit entry in the amount of (1,273 - 734) = 539 in the Official Reserves account, since the sum of the changes in the current, capital and official reserves accounts equals zero over an accounting period. Thus, the Official Reserves account decreases by 539.
If you do not like the above rule-based treatment of the problem, try the intuition: The total net outflow of cash from the current and capital accounts of Gondolpha equals 976 + 297 - 734 = 539. This amount has to come from somewhere. That "somewhere" is represented by the Official Reserves Account, which loses 539 in order to satisfy the liabilities of the current and capital accounts.
Caution: One of the bizarre quirks in international accounting is that decreases in Official Reserves Account are represented by a "+."



If the U.S. is viewed by foreigners as a great nation in which to invest, generating a large inflow of foreign investment, this will cause the U.S. to run a

  1. deficit on the official reserve account.
  2. deficit on the capital account.
  3. deficit on the current account.
  4. surplus on the current account.

Answer(s): C

Explanation:

If foreigners invest often in the U.S. the U.S. will tend to run a capital account surplus. By definition of the balance of payments, the U.S. must also tend to run a current account deficit since these two accounts must counteract each other and sum to zero.






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