The Table Below Shows Units of Wheat and Cloth Produced

question 16

Multiple Choice

The table below shows units of wheat and cloth produced by each worker per day in both the countries.
Table 20.1

-Refer to Table 20.1. Assume that the U.S. has only two workers and the terms of trade are 2 bushels of wheat per rack of clothing. What would be the gains from trade for the U.S. if it is producing according to its comparative advantage?

• A) 2 racks of clothing
• B) 2.5 racks of clothing
• C) 1.5 racks of clothing
• D) 3 racks of clothing
• E) 1 rack of clothing

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Definitions:

Potential Output

The peak level of real GDP that can be maintained in the long run without causing inflation to rise.

Discretionary Fiscal Policy

Government policy involving changes in taxation and spending that are undertaken explicitly to influence economic activity.

Price Level

The econ-wide median price across the complete array of produced goods and services.

Potential Level

The potential level refers to the maximum output that an economy can produce without leading to inflation, considering all factors of production are fully utilized.