If an Economist Develops a Theory About International Trade Based

question 118

Multiple Choice

If an economist develops a theory about international trade based on the assumption that there are only two countries and two goods:

• A)the theory can be useful only in situations involving two countries and two goods
• B)it is a total waste of time, since the actual world has many countries trading many goods
• C)the theory can be useful in helping economists understand the complex world of international trade involving many countries and many goods
• D)the theory can be useful in the classroom, but has no use in the real world

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Definitions:

Systematic Risk

The danger that affects all investments within an entire market or a specific sector, commonly referred to as market risk or non-diversifiable risk.

Treasury Bills

Short-term government securities issued at a discount from the par value and pay no interest.

Market Portfolio

A theoretical portfolio that contains every asset in the market, weighted by market capitalization.

Security Market Line

A graphical representation of the expected return of investments as a function of their risk, specifically their beta.