WGU C211 OA Global Economics Exam - Latest
Questions with Verified Answers (2025-2026)
1. In the context of the Rybczynski theorem, if a small open economy experiences a
significant increase in its labor force due to immigration, and the economy produces two
goods (labor-intensive textiles and capital-intensive machinery) at constant world prices,
what is the predicted impact on the output of machinery?
A. Output of machinery increases proportionally to the labor force increase.
B. Output of machinery decreases absolutely.
C. Output of machinery remains unchanged due to factor price equalization.
D. Output of machinery increases, but by less than the increase in textiles.
Answer: B
Rationale: The Rybczynski theorem states that at constant prices, an increase in the endowment
of one factor (labor) leads to a more than proportional increase in the output of the good using
that factor intensively (textiles) and an absolute decrease in the output of the other good
(machinery). This occurs because resources are reallocated to the expanding sector.
2. Suppose a country imposes a tariff on imported steel. Using a partial equilibrium
framework, which of the following best describes the net welfare effect for a large country
that can influence world prices?
A. Net welfare always decreases because the deadweight loss exceeds the terms-of-trade gain.
B. Net welfare may increase if the terms-of-trade gain outweighs the sum of production and
consumption distortions.
C. Net welfare is unchanged because the tariff revenue exactly offsets consumer losses.
D. Net welfare increases because the tariff improves the trade balance.
Answer: B
Rationale: For a large country, a tariff reduces the world price of the imported good, generating
a terms-of-trade gain. The net welfare effect is ambiguous: it can be positive if the
terms-of-trade gain exceeds the deadweight losses from production and consumption distortions.
An optimal tariff exploits this possibility.
3. Under a fixed exchange rate regime with perfect capital mobility, if the central bank
engages in an expansionary open market operation (purchasing government bonds), what
is the immediate effect on the money supply and the exchange rate?
A. Money supply increases permanently; exchange rate remains fixed.
B. Money supply initially increases but then contracts back to its original level; exchange rate remains
fixed.
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, C. Money supply increases; exchange rate depreciates.
D. Money supply decreases; exchange rate appreciates.
Answer: B
Rationale: With perfect capital mobility and a fixed exchange rate, an open market purchase
increases the money supply, putting downward pressure on the domestic interest rate. Capital
outflows ensue, forcing the central bank to sell foreign reserves to defend the peg, which reduces
the money supply back to its original level. The exchange rate remains fixed throughout.
4. In the specific factors model, consider a country that produces manufacturing goods
(using capital and labor) and agricultural goods (using land and labor). If the world price
of manufactured goods increases, what is the impact on the real wage of labor measured in
terms of agricultural goods?
A. Real wage in terms of agricultural goods increases unambiguously.
B. Real wage in terms of agricultural goods decreases unambiguously.
C. Real wage in terms of agricultural goods remains unchanged because labor is mobile.
D. Real wage in terms of agricultural goods may increase or decrease depending on the elasticity of
substitution.
Answer: A
Rationale: The increase in the price of manufactured goods raises the value of marginal product
of labor in manufacturing, attracting labor from agriculture. As labor leaves agriculture, the
marginal product of labor in agriculture rises, increasing the real wage in terms of agricultural
goods. Since labor is mobile, the nominal wage rises, and because the price of agricultural
goods is unchanged, the real wage in terms of agricultural goods increases.
5. Which of the following best explains the concept of "immiserizing growth" in the context
of international trade?
A. Economic growth that reduces the country's terms of trade so severely that national welfare
declines.
B. Growth that benefits only the rich, leaving the poor worse off.
C. Growth that leads to environmental degradation and long-term welfare loss.
D. Growth that is accompanied by a decline in the country's capital stock.
Answer: A
Rationale: Immiserizing growth, identified by Jagdish Bhagwati, occurs when a country's
economic growth (typically in a developing country exporting primary products) causes a
sufficiently large deterioration in its terms of trade that the net effect on welfare is negative. This
is more likely when the country is large in world markets and growth is biased toward the export
sector.
6. In the context of the Trilemma (Impossible Trinity), if a country chooses to maintain
monetary independence and a fixed exchange rate, which of the following must it sacrifice?
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Questions with Verified Answers (2025-2026)
1. In the context of the Rybczynski theorem, if a small open economy experiences a
significant increase in its labor force due to immigration, and the economy produces two
goods (labor-intensive textiles and capital-intensive machinery) at constant world prices,
what is the predicted impact on the output of machinery?
A. Output of machinery increases proportionally to the labor force increase.
B. Output of machinery decreases absolutely.
C. Output of machinery remains unchanged due to factor price equalization.
D. Output of machinery increases, but by less than the increase in textiles.
Answer: B
Rationale: The Rybczynski theorem states that at constant prices, an increase in the endowment
of one factor (labor) leads to a more than proportional increase in the output of the good using
that factor intensively (textiles) and an absolute decrease in the output of the other good
(machinery). This occurs because resources are reallocated to the expanding sector.
2. Suppose a country imposes a tariff on imported steel. Using a partial equilibrium
framework, which of the following best describes the net welfare effect for a large country
that can influence world prices?
A. Net welfare always decreases because the deadweight loss exceeds the terms-of-trade gain.
B. Net welfare may increase if the terms-of-trade gain outweighs the sum of production and
consumption distortions.
C. Net welfare is unchanged because the tariff revenue exactly offsets consumer losses.
D. Net welfare increases because the tariff improves the trade balance.
Answer: B
Rationale: For a large country, a tariff reduces the world price of the imported good, generating
a terms-of-trade gain. The net welfare effect is ambiguous: it can be positive if the
terms-of-trade gain exceeds the deadweight losses from production and consumption distortions.
An optimal tariff exploits this possibility.
3. Under a fixed exchange rate regime with perfect capital mobility, if the central bank
engages in an expansionary open market operation (purchasing government bonds), what
is the immediate effect on the money supply and the exchange rate?
A. Money supply increases permanently; exchange rate remains fixed.
B. Money supply initially increases but then contracts back to its original level; exchange rate remains
fixed.
Page 1
, C. Money supply increases; exchange rate depreciates.
D. Money supply decreases; exchange rate appreciates.
Answer: B
Rationale: With perfect capital mobility and a fixed exchange rate, an open market purchase
increases the money supply, putting downward pressure on the domestic interest rate. Capital
outflows ensue, forcing the central bank to sell foreign reserves to defend the peg, which reduces
the money supply back to its original level. The exchange rate remains fixed throughout.
4. In the specific factors model, consider a country that produces manufacturing goods
(using capital and labor) and agricultural goods (using land and labor). If the world price
of manufactured goods increases, what is the impact on the real wage of labor measured in
terms of agricultural goods?
A. Real wage in terms of agricultural goods increases unambiguously.
B. Real wage in terms of agricultural goods decreases unambiguously.
C. Real wage in terms of agricultural goods remains unchanged because labor is mobile.
D. Real wage in terms of agricultural goods may increase or decrease depending on the elasticity of
substitution.
Answer: A
Rationale: The increase in the price of manufactured goods raises the value of marginal product
of labor in manufacturing, attracting labor from agriculture. As labor leaves agriculture, the
marginal product of labor in agriculture rises, increasing the real wage in terms of agricultural
goods. Since labor is mobile, the nominal wage rises, and because the price of agricultural
goods is unchanged, the real wage in terms of agricultural goods increases.
5. Which of the following best explains the concept of "immiserizing growth" in the context
of international trade?
A. Economic growth that reduces the country's terms of trade so severely that national welfare
declines.
B. Growth that benefits only the rich, leaving the poor worse off.
C. Growth that leads to environmental degradation and long-term welfare loss.
D. Growth that is accompanied by a decline in the country's capital stock.
Answer: A
Rationale: Immiserizing growth, identified by Jagdish Bhagwati, occurs when a country's
economic growth (typically in a developing country exporting primary products) causes a
sufficiently large deterioration in its terms of trade that the net effect on welfare is negative. This
is more likely when the country is large in world markets and growth is biased toward the export
sector.
6. In the context of the Trilemma (Impossible Trinity), if a country chooses to maintain
monetary independence and a fixed exchange rate, which of the following must it sacrifice?
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