Question 1

Under the monetary approach to the exchange rate

Accepted Answer

A)  a reduction in the money supply will cause immediate currency depreciation. 
B)  a rise in the money supply will cause currency depreciation. 
C)  a rise in the money supply will cause immediate currency appreciation. 
D)  a rise in the money supply will cause depreciation. 
E)  a rise in the money supply will cause immediate currency depreciation. 
A)  a reduction in the money supply will cause immediate currency depreciation. 
B)  a rise in the money supply will cause currency depreciation. 
C)  a rise in the money supply will cause immediate currency appreciation. 
D)  a rise in the money supply will cause depreciation. 
E)  a rise in the money supply will cause immediate currency depreciation.

Question 2

Which of the following statements is MOST accurate?

Accepted Answer

A)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
B)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
C)  A relative expansion of U.S. output causes a long-run appreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real depreciation of the dollar against the euro. 
D)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro. 
E)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro. 
A)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
B)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
C)  A relative expansion of U.S. output causes a long-run appreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real depreciation of the dollar against the euro. 
D)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro. 
E)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.

Question 3

Which of the following statements is the MOST accurate about the Law of One Price on Scandinavian ferry lines?

Accepted Answer

A)  Due to menu costs, the Law of One Price does not hold. 
B)  To avoid arbitrage opportunities, the Law of One Price must hold. 
C)  Transaction costs of exchanging currency causes the Law of One Price to fail. 
D)  Transportation costs between ferry lines leads to a violation of the Law of One Price. 
E)  The physical distance allowed the Law of One Price to hold. 
A)  Due to menu costs, the Law of One Price does not hold. 
B)  To avoid arbitrage opportunities, the Law of One Price must hold. 
C)  Transaction costs of exchanging currency causes the Law of One Price to fail. 
D)  Transportation costs between ferry lines leads to a violation of the Law of One Price. 
E)  The physical distance allowed the Law of One Price to hold.

Question 4

Explain why Relative PPP is useful when comparing countries that base their price levels on different product baskets.

Accepted Answer

For Example: If the U.S. price level ris

Question 5

When the nominal dollar interest rate ________, money demand will ________, and the general price level will ________.

Accepted Answer

A)  increases; decrease; increase 
B)  increases; increase; increase 
C)  increases; decrease; decrease 
D)  increases; increase; decrease 
E)  decreases; increase; increase 
A)  increases; decrease; increase 
B)  increases; increase; increase 
C)  increases; decrease; decrease 
D)  increases; increase; decrease 
E)  decreases; increase; increase

Question 6

In January 2013, the world's cheapest Big Macs were sold in

Accepted Answer

A)  the Philippines. 
B)  Russia. 
C)  China. 
D)  Malaysia. 
E)  the Czech Republic. 
A)  the Philippines. 
B)  Russia. 
C)  China. 
D)  Malaysia. 
E)  the Czech Republic.

Question 7

Discuss the different effects on the domestic interest rates when prices are assumed flexible and when they are assumed to be sticky.

Accepted Answer

When prices are flexible, a decrease in

Question 8

To answer the following question, please refer to the figure below. Concentrating only at the lower left quadrant, discuss the relationship between the U.S. real money supply and the dollar/euro exchange rate, E$/E.

Accepted Answer

The lower left quadrant in the figure de

Question 9

When the domestic money prices of goods are held constant

Accepted Answer

A)  a nominal dollar appreciation makes U.S. goods cheaper compared with foreign goods. 
B)  a nominal dollar depreciation makes U.S. goods less appealing in foreign markets. 
C)  a nominal dollar appreciation does not affect the prices of U.S. goods. 
D)  a nominal dollar depreciation makes U.S. goods more expensive compared with foreign goods. 
E)  a nominal dollar depreciation makes U.S. goods cheaper compared with foreign goods and a nominal dollar appreciation makes U.S. goods more expensive compared with foreign goods. 
A)  a nominal dollar appreciation makes U.S. goods cheaper compared with foreign goods. 
B)  a nominal dollar depreciation makes U.S. goods less appealing in foreign markets. 
C)  a nominal dollar appreciation does not affect the prices of U.S. goods. 
D)  a nominal dollar depreciation makes U.S. goods more expensive compared with foreign goods. 
E)  a nominal dollar depreciation makes U.S. goods cheaper compared with foreign goods and a nominal dollar appreciation makes U.S. goods more expensive compared with foreign goods.

Question 10

Under a flexible-price monetary approach to the exchange rate

Accepted Answer

A)  when the domestic money supply falls, the price level would eventually fall, increasing the interest rate. 
B)  when the domestic money supply falls, the price level would fall right away, causing a reduction in the interest rate. 
C)  when the domestic money supply falls, the price level would fall right away, causing an increase in the interest rate. 
D)  when the domestic money supply falls, the price level would eventually fall, keeping the interest rate constant. 
E)  when the domestic money supply falls, the price level would fall right away, keeping the interest rate constant. 
A)  when the domestic money supply falls, the price level would eventually fall, increasing the interest rate. 
B)  when the domestic money supply falls, the price level would fall right away, causing a reduction in the interest rate. 
C)  when the domestic money supply falls, the price level would fall right away, causing an increase in the interest rate. 
D)  when the domestic money supply falls, the price level would eventually fall, keeping the interest rate constant. 
E)  when the domestic money supply falls, the price level would fall right away, keeping the interest rate constant.

Question 11

What is the Fisher Effect? Provide an example.

Accepted Answer

All else equal, a rise in a country's ex

Question 12

Explain the Law of One Price. Give an example.

Accepted Answer

The law of one price states that in comp

Question 13

Under sticky prices

Accepted Answer

A)  a fall in the money supply raises the interest rate to preserve money market equilibrium. 
B)  a fall in the money supply reduces the interest rate to preserve money market equilibrium. 
C)  a fall in the money supply keeps the interest rate intact to preserve money market equilibrium. 
D)  a fall in the money supply does not affect the interest rate in the short run, only in the long run. 
E)  a fall in the money supply raises the interest rate to preserve money market equilibrium in the long run. 
A)  a fall in the money supply raises the interest rate to preserve money market equilibrium. 
B)  a fall in the money supply reduces the interest rate to preserve money market equilibrium. 
C)  a fall in the money supply keeps the interest rate intact to preserve money market equilibrium. 
D)  a fall in the money supply does not affect the interest rate in the short run, only in the long run. 
E)  a fall in the money supply raises the interest rate to preserve money market equilibrium in the long run.

Question 14

Which of the following statements is the MOST accurate?

Accepted Answer

A)  The law of one price does fare well in all recent studies. 
B)  The law of one price does fare well in many recent studies. 
C)  The law of one price sometimes fares well in recent studies. 
D)  The law of one price does not fare well in recent studies. 
E)  The law of one price has not been studied recently. 
A)  The law of one price does fare well in all recent studies. 
B)  The law of one price does fare well in many recent studies. 
C)  The law of one price sometimes fares well in recent studies. 
D)  The law of one price does not fare well in recent studies. 
E)  The law of one price has not been studied recently.

Question 15

Which of the following statements is the MOST accurate?

Accepted Answer

A)  Relative PPP is not a reasonable approximation to the data. 
B)  Relative PPP is sometimes a reasonable approximation to the data but often performs poorly. 
C)  Relative PPP is sometimes a reasonable approximation to the data. 
D)  PPP is sometimes a reasonable approximation to the data. 
E)  PPP is sometimes a reasonable approximation to the data but usually performs poorly. 
A)  Relative PPP is not a reasonable approximation to the data. 
B)  Relative PPP is sometimes a reasonable approximation to the data but often performs poorly. 
C)  Relative PPP is sometimes a reasonable approximation to the data. 
D)  PPP is sometimes a reasonable approximation to the data. 
E)  PPP is sometimes a reasonable approximation to the data but usually performs poorly.

Question 16

To answer the following question, please refer to the figure below. Concentrating only at the upper right quadrant, discuss the foreign exchange market equilibrium.

Accepted Answer

The upper right quadrant describes the e

Question 17

Discuss the differences between Absolute PPP and Relative PPP.

Accepted Answer

Absolute PPP states that the exchange ra

Question 18

Discuss why the empirical support for PPP and the law of one price is weak in recent data.

Accepted Answer

The failure of these propositions in the

Question 19

Does the existence of non-tradable goods allow for deviations from Purchasing power Parity?

Accepted Answer

Yes, the existence of nontradables allow

Question 20

Present and explain the Fundamental Equation of the Monetary Approach.

Accepted Answer

Assume @#IMG-DLM& = P_US/P_E and that domestic price le

Exam 16: Price Levels and the Exchange Rate in the Long Run

Under the monetary approach to the exchange rate

Which of the following statements is MOST accurate?

Which of the following statements is the MOST accurate about the Law of One Price on Scandinavian ferry lines?

Explain why Relative PPP is useful when comparing countries that base their price levels on different product baskets.

When the nominal dollar interest rate ________, money demand will ________, and the general price level will ________.

In January 2013, the world's cheapest Big Macs were sold in

Discuss the different effects on the domestic interest rates when prices are assumed flexible and when they are assumed to be sticky.

To answer the following question, please refer to the figure below. Concentrating only at the lower left quadrant, discuss the relationship between the U.S. real money supply and the dollar/euro exchange rate, E$/E.

When the domestic money prices of goods are held constant

Under a flexible-price monetary approach to the exchange rate

What is the Fisher Effect? Provide an example.

Explain the Law of One Price. Give an example.

Under sticky prices

Which of the following statements is the MOST accurate?

Which of the following statements is the MOST accurate?

To answer the following question, please refer to the figure below. Concentrating only at the upper right quadrant, discuss the foreign exchange market equilibrium.

Discuss the differences between Absolute PPP and Relative PPP.

Discuss why the empirical support for PPP and the law of one price is weak in recent data.

Does the existence of non-tradable goods allow for deviations from Purchasing power Parity?

Present and explain the Fundamental Equation of the Monetary Approach.

Introduction

World Trade: an Overview

Labor Productivity and Comparative Advantage: the Ricardian Model

Specific Factors and Income Distribution

Resources and Trade: the Heckscher-Ohlin Model

The Standard Trade Model

External Economies of Scale and the International Location of Production

Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises

The Instruments of Trade Policy

The Political Economy of Trade Policy

Trade Policy in Developing Countries

Controversies in Trade Policy

National Income Accounting and the Balance of Payments

Exchange Rates and the Foreign Exchange Market: an Asset Approach

Money, Interest Rates, and Exchange Rates

Output and the Exchange Rate in the Short Run

Fixed Exchange Rates and Foreign Exchange Intervention

International Monetary Systems: an Historical Overview

Financial Globalization: Opportunity and Crisis

Optimum Currency Areas and the Euro

Developing Countries: Growth, Crisis, and Reform

Filters

When the nominal dollar interest rate , money demand will , and the general price level will .

To answer the following question, please refer to the figure below. Concentrating only at the lower left quadrant, discuss the relationship between the U.S. real money supply and the dollar/euro exchange rate, E_$/E.