Question 1

If purchasing-power parity holds,then the value of the

Accepted Answer

A)  real exchange rate is equal to one.
B)  nominal exchange rate is equal to one.
C)  real exchange rate is equal to the nominal exchange rate.
D)  real exchange rate is equal to the difference in inflation rates between the two countries.E) B) and C)
F) A) and D)

Question 2

If purchasing-power parity holds,the price level in the U.S.is 140,and the price level in Canada is 120,which of the following is true?

Accepted Answer

A)  the real exchange rate is 120/140.
B)  the real exchange rate is 140/120.
C)  the nominal exchange rate is 120/140
D)  the nominal exchange rate is 140/120E) B) and C)
F) B) and D)

Question 3

According to purchasing-power parity,if the Federal Reserve increased the money supply

Accepted Answer

A)  U.S.prices would rise and the nominal exchange rate would rise.
B)  U.S.prices would rise and the nominal exchange rate would fall.
C)  U.S.prices would fall and the nominal exchange rate would rise.
D)  U.S.prices and the nominal exchange rate would fall.E) A) and B)
F) A) and D)

Question 4

If over the next six months inflation is higher in the U.S.than in foreign countries,then according to purchasing-power parity

Accepted Answer

A)  only the nominal exchange rate depreciates.
B)  both the real and nominal exchange rate appreciate.
C)  both the real and nominal exchange rate depreciate.
D)  only the real exchange rate appreciates.E) A) and D)
F) A) and C)

Question 5

Which of the following does purchasing-power parity imply?

Accepted Answer

A)  The purchasing power of the dollar is the same in the U.S.as in foreign countries.
B)  The price of domestic goods relative to foreign goods cannot change.
C)  The nominal exchange rate is the ratio of U.S.prices to foreign prices.
D)  All of the above are correct.E) A) and C)
F) B) and C)

Question 6

If purchasing-power parity between France and the U.S.holds,but then U.S.prices rise,

Accepted Answer

A)  the real exchange rate is above its purchasing-power parity value.An increase in the nominal exchange rate can move it back.
B)  the real exchange rate is above its purchasing-power parity value.A decrease in the nominal exchange rate can move it back.
C)  the real exchange rate is below its purchasing-power parity value.An increase in the nominal exchange rate can move it back.
D)  the real exchange rate is below its purchasing-power parity value.A decrease in the nominal exchange rate can move it back.E) None of the above
F) A) and D)

Question 7

Which of the following does purchasing-power parity imply?

Accepted Answer

A)  the foreign price level times the nominal exchange rate (given as amount of foreign currency per dollar) equals the U.S.price level.
B)  The price of domestic goods relative to foreign goods cannot change.
C)  The nominal exchange rate is the ratio of foreign prices to U.S.prices.
D)  All of the above are correct.E) A) and C)
F) All of the above

Question 8

If purchasing-power parity holds,when a country's central bank increases the money supply,its

Accepted Answer

A)  price level rises and its currency appreciates relative to other currencies in the world.
B)  price level rises and its currency depreciates relative to other currencies in the world.
C)  price level falls and its currency appreciates relative to other currencies in the world.
D)  price level falls and its currency depreciates relative to other currencies in the world.E) C) and D)
F) All of the above

Question 9

Suppose a Starbucks tall latte costs $4.00 in the United States,5.00 euros in the euro area and $2.50 Australian dollars in Australia.Nominal exchange rates are .80 euros per dollar and 1.4 Australian dollars per U.S.dollar.Where does purchasing-power parity hold?

Accepted Answer

A)  both the euro area and Australia
B)  the euro area but not Australia
C)  Australia but not the euro area
D)  neither the euro area or AustraliaE) A) and B)
F) A) and C)

Question 10

According to purchasing-power parity,if over the course of a year the price level in the U.S.rises more than in Japan,then which of the following falls?

Accepted Answer

A)  the U.S.real exchange rate,but not the U.S.nominal exchange rate
B)  the U.S.nominal exchange rate,but not the U.S.real exchange rate
C)  the U.S.nominal exchange rate and the U.S.real exchange rate
D)  neither the real exchange rate nor the nominal exchange rateE) B) and C)
F) A) and B)

Question 11

Which of the following does purchasing-power parity conclude should equal 1?

Accepted Answer

A)  both the nominal and the real exchange rate.
B)  the nominal exchange rate but not the real exchange rate
C)  the real exchange rate but not the nominal exchange rate
D)  neither the nominal exchange rate nor the real exchange rateE) A) and D)
F) A) and C)

Question 12

Prices in both the U.S.and India rise,but prices in India increase by a smaller percentage.According to purchasing-power parity the U.S.dollar

Accepted Answer

A)  gains value both in terms of the domestic goods and services it can buy and in terms of the Indian currency it can buy.
B)  gains value in terms of the domestic goods and services it can buy,but loses value in terms of the Indian currency it can buy.
C)  loses value in terms of the domestic goods and services it can buy,but gains value in terms of the Indian currency it can buy.
D)  loses value both in terms of the domestic goods and services it can buy and in terms of the Indian currency it can buy.E) B) and C)
F) A) and B)

Question 13

The theory of purchasing-power parity primarily explains

Accepted Answer

A)  why trade deficits tend to move to zero over time.
B)  how foreign prices affect domestic prices.
C)  the determination of the real exchange rate.
D)  why a change in the real exchange rate changes a country's net exports.E) A) and D)
F) C) and D)

Question 14

From 1970 to 1998 the U.S.dollar

Accepted Answer

A)  gained value compared to the Italian lira because inflation was higher in Italy.
B)  gained value compared to the Italian lira because inflation was lower in Italy.
C)  lost value compared to the Italian lira because inflation was higher in Italy.
D)  lost value compared to the Italian lira because inflation was lower in Italy.E) A) and D)
F) A) and C)

Question 15

According to purchasing-power parity,if it took 1,100 Korean Won to buy a dollar this year,but it took 1,000 to buy it last year,then the dollar has

Accepted Answer

A)  appreciated,indicating inflation was higher in the U.S.than in Korea.
B)  appreciated indicating inflation was lower in the U.S.than in Korea.
C)  depreciated indicating inflation was higher in the U.S.than in Korea.
D)  depreciated indicating inflation was lower in the U.S.than in Korea.E) All of the above
F) C) and D)

Question 16

According to purchasing-power parity which of the following would happen if a country raised its money supply growth rate?

Accepted Answer

A)  its nominal exchange rate would fall
B)  its real exchange rate would fall
C)  its real net exports would rise
D)  All of the above would happen.E) None of the above
F) A) and C)

Question 17

According to purchasing-power parity,if prices in the United States increase by a larger percentage than prices in the United Kingdom,then the

Accepted Answer

A)  real exchange rate rises.
B)  nominal exchange rate rises.
C)  real exchange rate falls.
D)  nominal exchange rate falls.E) A) and B)
F) All of the above

Question 18

If the exchange rate is 60 Indian rupees per dollar and a bushel of rice costs 200 rupees in India and $3 in the U.S. ,then the real exchange rate is

Accepted Answer

A)  greater than one and arbitrageurs could profit by buying rice in the U.S.and selling it in India.
B)  greater than one and arbitrageurs could profit by buying rice in India and selling it in the U.S..
C)  less than one and arbitrageurs could profit by buying rice in the U.S.and selling it in India.
D)  less than one and arbitrageurs could profit by buying rice in India and selling it in the U.S..E) B) and D)
F) A) and D)

Question 19

You hold currency from a foreign country.If that country has a higher rate of inflation than the United States,then over time the foreign currency will buy

Accepted Answer

A)  more goods in that country and buy more dollars.
B)  more goods in that country but buy fewer dollars.
C)  fewer goods in that country but buy more dollars.
D)  fewer goods in that country and buy fewer dollars.E) None of the above
F) All of the above

Question 20

During 2011,the price level in the U.S.rose at a faster rate than the price level in Japan.Other things the same,according to purchasing-power parity,this difference in inflation rates should have caused

Accepted Answer

A)  the nominal exchange rate of the dollar to appreciate relative to the yen.
B)  the real exchange rate of the dollar to appreciate relative to the yen.
C)  the nominal exchange rate of the dollar to depreciate relative to the yen.
D)  the real exchange rate of the dollar to depreciate relative to the yen.E) B) and D)
F) C) and D)

Exam 18: Open Economy Macroeconomics Basic Concepts: A First Theory of Exchange-Rate Determination Purchasing-Power Parity

From 1970 to 1998 the U.S.dollar

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Prices in both the U.S.and India rise,but prices in India increase by a smaller percentage.According to purchasing-power parity the U.S.dollar

Correct AnswerverifiedShow Answer

According to purchasing-power parity,if it took 1,100 Korean Won to buy a dollar this year,but it took 1,000 to buy it last year,then the dollar has

Correct AnswerverifiedShow Answer

According to purchasing-power parity,if prices in the United States increase by a larger percentage than prices in the United Kingdom,then the

Correct AnswerverifiedShow Answer

According to purchasing-power parity,if the Federal Reserve increased the money supply

Correct AnswerverifiedShow Answer

If purchasing-power parity holds,the price level in the U.S.is 140,and the price level in Canada is 120,which of the following is true?

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If over the next six months inflation is higher in the U.S.than in foreign countries,then according to purchasing-power parity

Correct AnswerverifiedShow Answer

According to purchasing-power parity which of the following would happen if a country raised its money supply growth rate?

Correct AnswerverifiedShow Answer

The theory of purchasing-power parity primarily explains

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If purchasing-power parity between France and the U.S.holds,but then U.S.prices rise,

Correct AnswerverifiedShow Answer

If the exchange rate is 60 Indian rupees per dollar and a bushel of rice costs 200 rupees in India and $3 in the U.S. ,then the real exchange rate is

Correct AnswerverifiedShow Answer

Which of the following does purchasing-power parity conclude should equal 1?

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You hold currency from a foreign country.If that country has a higher rate of inflation than the United States,then over time the foreign currency will buy

Correct AnswerverifiedShow Answer

Which of the following does purchasing-power parity imply?

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If purchasing-power parity holds,when a country's central bank increases the money supply,its

Correct AnswerverifiedShow Answer

Which of the following does purchasing-power parity imply?

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Suppose a Starbucks tall latte costs $4.00 in the United States,5.00 euros in the euro area and $2.50 Australian dollars in Australia.Nominal exchange rates are .80 euros per dollar and 1.4 Australian dollars per U.S.dollar.Where does purchasing-power parity hold?

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During 2011,the price level in the U.S.rose at a faster rate than the price level in Japan.Other things the same,according to purchasing-power parity,this difference in inflation rates should have caused

Correct AnswerverifiedShow Answer

According to purchasing-power parity,if over the course of a year the price level in the U.S.rises more than in Japan,then which of the following falls?

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If purchasing-power parity holds,then the value of the

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