ECON ANSWERS
If a person drives with less care after purchasing auto insurance, this situation would be an example of a(n)
reverse wealth problem.
negative externality problem.
adverse selection problem.
D. moral hazard problem.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
Which of the following would be an example of a moral hazard problem?
a person in poor health who purchases life insurance
a person who is taxed on the purchase of a carton of cigarettes
C. a person who purchases auto insurance and then drives more recklessly
D. a person who receives a subsidy from the Federal government to insulate a home
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
Which of the following would be considered an example of adverse selection?
Malpractice insurance may increase the amount of malpractice.
Drivers may be less cautious because they have airbags installed in a car.
C. Those individuals who most need insurance are the ones most likely to buy it.
D. Work contracts that give a set number of sick-days may encourage more workers to call in sick.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
The franchising of fast-food restaurants would be an example of how a private business
overcomes market information problems.
solves the moral hazard problem in insurance.
expands the limits of the Coase theorem.
corrects the problem of externalities.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
Insurance policies typically stipulate a deductible amount which the insured must shoulder; this is to address the problem of
adverse selection.
externalities.
C. moral hazard.
D. public goods.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
Depositors do not check their banks carefully for stability anymore, because of the Federal deposit insurance program. This illustrates the problem of
adverse selection.
externalities.
C. moral hazard.
D. public goods.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
eBay, Amazon, and other Internet shopping sites provide "seller ratings" done by previous buyers, in order to help deal with the problem of
adverse selection.
externalities.
moral hazard.
public goods.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
Credit bureaus provide credit histories to banks and insurance companies, in order to help deal with the problem of
public goods.
externalities.
moral hazard.
D. adverse selection.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
There is an adverse selection problem in the market for used cars because
owners of poor-quality cars have a strong incentive to sell their cars, while owners of high-quality used cars have more incentive to keep their cars.
owners of high-quality cars will have a strong incentive to sell their cars to obtain the higher prices, while owners of poor-quality cars will have more incentive to keep theirs.
most people prefer new cars, but the high prices for new cars force most of them to buy used cars.
government actions to pass "lemon" laws have reduced information on used cars.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
One consequence of the asymmetric-information problem in the used car market, if left unresolved, is the higher probability of
new cars declining in quality because of competition from used cars.
B. a declining quality of used cars for sale in the market.
a rising quality of used cars for sale in the market.
used-car buyers willing to pay higher prices in the market.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
True / False Questions
Asymmetric information occurs when the two parties in a market transaction do not have the same amount of information regarding the product or process involved in the transaction.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
The licensing and regulation of financial advisers is one way by which the government tries to deal with the problem of inadequate information that financial firms have about their customers.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
Better Business Bureaus in various cities exist partly in order to try to deal with inadequate buyer information about sellers.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
A moral hazard problem occurs before a transaction-when people alter their behavior before they sign a contract, imposing costs on the other party.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
Adverse selection is when someone with home insurance decides to take the chance that a dying tree would fall on the garage, rather than spend the money to have the tree cut down.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
When the government bails out large banks when the banks become unstable, it could lead to a moral hazard problem in banking.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
When the government bails out failing banks, it creates a moral hazard problem; but when the government bails out homeowners who are defaulting on their mortgages, there is no moral hazard problem.
FA LSE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
When critics of unemployment insurance claim that some of the unemployed are not exerting much effort to find jobs because of the unemployment benefits, they are referring to the moral hazard problem.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
eBay and Amazon provide "sellers' ratings" information based on the experiences of past buyers. This is to help resolve the adverse selection problem faced by potential buyers.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
An example of an adverse selection problem is in insurance, where the people most likely to claim insurance payouts are the people who will seek to buy the most generous policies.
TRUE
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 04-06 Appendix: Describe how information failures may justify government intervention in some markets.
Test Bank: II Topic: Appendix: Information Failures
Chapter 27 The Balance of Payments, Exchange Rates, and Trade Deficits Answer Key
Multiple Choice Questions
International transactions fall into what two broad categories?
manufacturing trade and services trade
B. international trade and international asset transactions
currency transactions and services trade
newly created assets and preexisting assets
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 27-01 Explain how currencies of different nations are exchanged when international transactions take place.
Test Bank: I Topic: International Financial Transactions
"International trade" refers to
purchasing or selling currently produced goods or services across an international border.
any transaction across an international border.
any financial transaction across an international border.
buying or selling of preexisting assets across an international border.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 27-01 Explain how currencies of different nations are exchanged when international transactions take place.
Test Bank: I Topic: International Financial Transactions
If a U.S. importer can purchase 10,000 British pounds for $20,000, the rate of exchange is
$1 = 2 British pounds in the United States.
B. $2 = 1 British pound in the United States.
$1 = 2 British pounds in Great Britain.
$0.5 = 1 British pound in Great Britain.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 27-01 Explain how currencies of different nations are exchanged when international transactions take place.
Test Bank: I Topic: International Financial Transactions
In international financial transactions, what are the only two things that individuals and firms can exchange?
currency and real assets
services and manufactured goods
C. assets and currently produced goods and services
D. currency and currently produced goods and services
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 27-01 Explain how currencies of different nations are exchanged when international transactions take place.
Test Bank: I Topic: International Financial Transactions
Which of the following would call for inpayments to the United States?
Gold flows into the United States.
B. U.S. firms sell insurance to Brazilian shippers.
The United States sends foreign aid to developing countries.
The United States imports German automobiles.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Which of the following would call for outpayments from the United States?
The United States exports computer software.
B. The United States purchases assets abroad.
Foreigners purchase assets in the United States.
Foreign tourists spend money in the United States.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
The current account section in a nation's balance of payments includes
its goods exports and imports and its services exports and imports.
foreign purchases of domestic assets.
purchases of foreign assets.
all of these.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
A nation's capital and financial account
contains inpayment items but not outpayment items.
includes service exports and service imports.
C. includes both inpayments and outpayments.
D. includes net investment income and net transfers.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
In 2015, the capital account in the U.S. balance of payments was in
deficit, and larger than the current account deficit.
surplus, and larger than the current account surplus.
deficit, and smaller than the current account deficit.
D. balance, with no deficit or surplus.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
In 2015, the capital and financial account in the U.S. balance of payments was in
deficit, and smaller than the current account deficit.
B. surplus, and equal to the current account deficit.
balance, with no deficit or surplus.
surplus, and smaller than the current account deficit.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
The financial account balance is a nation's
net investment income minus its net transfers.
exports of goods and services minus its imports of goods and services.
C. sale of real and financial assets to people living abroad minus its purchases of real and financial assets from foreigners.
D. domestic investment spending minus domestic saving.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
In the U.S. balance of payments, foreign purchases of assets in the United States are a
foreign currency outflow.
B. foreign currency inflow.
current account item.
debit, or outpayment.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
In the U.S. balance of payments, U.S. purchases of assets abroad are a(n)
U.S. dollar outflow.
U.S. dollar inflow.
current account item.
inpayment.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Which of the following combinations is plausible, as it relates to a nation's balance of payments?
Current account = +$40 billion; capital account = −$10 billion; financial account = −$50 billion.
Current account = +$50 billion; capital account = −$20 billion; financial account = +$30 billion.
Current account = +$10 billion; capital account = +$40 billion; financial account = +$50 billion.
D. Current account = +$30 billion; capital account = −$20 billion; financial account = −$10 billion.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Which of the following combinations is plausible, as it relates to a nation's balance of payments?
Current account = +$40 billion; capital account = +$20 billion; financial account = −$50 billion.
B. Current account = −$50 billion; capital account = +$20 billion; financial account = +$30 billion.
Current account = +$10 billion; capital account = +$40 billion; financial account = +$50 billion.
Current account = +$30 billion; capital account = −$20 billion; financial account = −$50 billion.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
There must always be a balance of a nation's
goods exports and gold imports.
B. total international payments.
imports and exports of goods and services.
net transfers and net investment income.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
17.
The table contains hypothetical data for the 2016 U.S. balance of payments. All figures are in billions of dollars. The United States has a balance of goods
deficit of $10 billion.
surplus of $30 billion.
deficit of $30 billion.
D. surplus of $20 billion.
AACSB: Analytical Thinking
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Type: Table
18.
The table contains hypothetical data for the 2016 U.S. balance of payments. All figures are in billions of dollars. The U.S. balance on goods and services is a
$10 billion deficit.
$20 billion deficit.
$30 billion surplus.
D. $30 billion deficit.
AACSB: Analytical Thinking
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Type: Table
19.
The table contains hypothetical data for the 2016 U.S. balance of payments. All figures are in billions of dollars. The U.S. balance on current account is a
A. $40 billion surplus.
B. $25 billion deficit.
$25 billion surplus.
$30 billion deficit.
AACSB: Analytical Thinking
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Type: Table
20.
The table contains hypothetical data for the 2016 U.S. balance of payments. All figures are in billions of dollars. Item 6 indicates that
the United States used $15 billion of its international monetary reserves to balance its international payments.
the United States provided $15 billion of foreign aid to developing nations.
C. Americans provided a net amount of $15 billion in remittances to the rest of the world.
D. Americans received a net amount of $15 billion in remittances from the rest of the world.
AACSB: Analytical Thinking
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Type: Table
21.
The table contains hypothetical data for the 2016 U.S. balance of payments. All figures are in billions of dollars. Item 5 indicates
that the United States' current account was in surplus.
the size of the net inflow of foreign investment to the United States that occurred in 2012.
C. the net amount Americans received as interest and dividends on existing U.S. investments abroad.
D. the net amount Americans paid as interest and dividends on existing foreign investments in the United States.
AACSB: Analytical Thinking
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Type: Table
22.
The table contains hypothetical data for the 2016 U.S. balance of payments. All figures are in billions of dollars. The United States' balance on financial account is a
A. $20 billion surplus.
$15 billion surplus.
$30 billion deficit.
$20 billion deficit.
AACSB: Analytical Thinking
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Type: Table
23.
The table contains hypothetical data for the 2016 U.S. balance of payments. All figures are in billions of dollars. The United States' balance of capital and financial account is a
surplus of $5.
deficit of $10.
C. surplus of $25.
D. deficit of $5.
AACSB: Analytical Thinking
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Type: Table
If a nation's goods exports are $55 billion, while its goods imports are $50 billion, we can conclude with certainty that this nation has a
balance of trade (goods) surplus.
balance of payments surplus.
positive balance on its current account.
positive balance on goods and services.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
It may be misleading to label a trade deficit as unfavorable or adverse, because
the multiplier does not apply to a trade deficit.
a trade deficit increases a nation's aggregate output and employment.
C. a nation's consumers benefit from a trade deficit during the period it occurs.
D. a trade deficit precludes inflation.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Which of the following is not included in the current account of a nation's balance of payments?
its goods exports
its goods imports
its net investment income
D. its purchases of real assets abroad.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
A deficit on the current account
normally causes a surplus on the capital and financial account.
normally causes a deficit on the capital and financial account.
has no relationship to the capital and financial account.
means that a nation is making international transfers.
AACSB: Analytical Thinking Accessibility: Keyboard Navigation
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
28.
The table contains 2016 balance of payments data (+ and −) for the hypothetical nation of Zabella. All figures are in billions of dollars. Zabella has a balance of trade (goods)
deficit of $10 billion.
surplus of $5 billion.
C. surplus of $10 billion.
D. deficit of $5 billion.
AACSB: Analytical Thinking
Blooms: Analyze Difficulty: 03 Hard
Learning Objective: 27-02 Analyze the balance sheet the United States uses to account for the international payments it makes and receives.
Test Bank: I Topic: The Balance of Payments
Type: Table
29.