Question 1

In the short run

Accepted Answer

A)  the interest rate can rise when the domestic money supply falls. 
B)  the interest rate can decrease when the domestic money supply falls. 
C)  the interest rate stays constant when the domestic money supply falls. 
D)  the interest rate rises in the same proportion as the domestic money supply falls. 
E)  the interest rate never rises when the domestic money supply falls. 
A)  the interest rate can rise when the domestic money supply falls. 
B)  the interest rate can decrease when the domestic money supply falls. 
C)  the interest rate stays constant when the domestic money supply falls. 
D)  the interest rate rises in the same proportion as the domestic money supply falls. 
E)  the interest rate never rises when the domestic money supply falls.

Question 2

The monetary approach to interest rates assumes that the prices of goods are ________, which implies that a country's currency will ________, when nominal interest rates ________ because of ________ expected future inflation.

Accepted Answer

A)  perfectly flexible; depreciate; increase; higher 
B)  perfectly flexible; appreciate; increase; higher 
C)  immutable; depreciate; increase; higher 
D)  immutable; appreciate; decrease; higher 
E)  absolutely inflexible; depreciate; decrease; higher 
A)  perfectly flexible; depreciate; increase; higher 
B)  perfectly flexible; appreciate; increase; higher 
C)  immutable; depreciate; increase; higher 
D)  immutable; appreciate; decrease; higher 
E)  absolutely inflexible; depreciate; decrease; higher

Question 3

Is a depreciation of the dollar/euro exchange rate correlated with a decrease in the dollar return on U.S. deposits?

Accepted Answer

No.
Assume that the Interest Parity is m

Question 4

What is the real interest rate parity condition?

Accepted Answer

The nominal interest rates are

Question 5

Which of the following statements is the MOST accurate?

Accepted Answer

A)  Absolute PPP does not imply relative PPP. 
B)  Relative PPP implies absolute PPP. 
C)  There is no causality relation between the two. 
D)  Absolute PPP implies relative PPP. 
E)  Absolute PPP is inversely related to relative PPP. 
A)  Absolute PPP does not imply relative PPP. 
B)  Relative PPP implies absolute PPP. 
C)  There is no causality relation between the two. 
D)  Absolute PPP implies relative PPP. 
E)  Absolute PPP is inversely related to relative PPP.

Question 6

The expected rate of change in the nominal dollar/euro exchange rate is best described as

Accepted Answer

A)  the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe expected inflation difference. 
B)  the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe real interest rate difference. 
C)  the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe expected inflation difference. 
D)  the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe real interest rate difference. 
E)  the expected rate of change in the real dollar/euro exchange rate plus the European expected inflation. 
A)  the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe expected inflation difference. 
B)  the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe real interest rate difference. 
C)  the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe expected inflation difference. 
D)  the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe real interest rate difference. 
E)  the expected rate of change in the real dollar/euro exchange rate plus the European expected inflation.

Question 7

Which of the following statements is MOST accurate?

Accepted Answer

A)  In the output market, an increase in demand for U.S. output leads to an increase in the long-run nominal dollar/euro exchange rate. 
B)  In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate. 
C)  In the output market, a decrease in demand for U.S. output leads to a decrease in the long-run nominal dollar/euro exchange rate. 
D)  In the output market, an increase in the demand for European output leads to a decrease in the long-run nominal dollar/euro exchange rate. 
E)  In the output market, an increase in the demand for European output leads to an increase in the long-run nominal euro/dollar exchange rate. 
A)  In the output market, an increase in demand for U.S. output leads to an increase in the long-run nominal dollar/euro exchange rate. 
B)  In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate. 
C)  In the output market, a decrease in demand for U.S. output leads to a decrease in the long-run nominal dollar/euro exchange rate. 
D)  In the output market, an increase in the demand for European output leads to a decrease in the long-run nominal dollar/euro exchange rate. 
E)  In the output market, an increase in the demand for European output leads to an increase in the long-run nominal euro/dollar exchange rate.

Question 8

Discuss the relationship between PPP and the Law of One Price.

Accepted Answer

The law of one price applies to individu

Question 9

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  The purchasing power of any given country's currency will increase in countries where the prices of non-tradable goods rise. 
B)  The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods fall. 
C)  The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods rise. 
D)  The purchasing power of any given country's currency will remain constant in countries where the prices of non-tradable goods rise. 
E)  The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods remain constant. 
A)  The purchasing power of any given country's currency will increase in countries where the prices of non-tradable goods rise. 
B)  The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods fall. 
C)  The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods rise. 
D)  The purchasing power of any given country's currency will remain constant in countries where the prices of non-tradable goods rise. 
E)  The purchasing power of any given country's currency will fall in countries where the prices of non-tradable goods remain constant.

Question 10

Which of the following statements is the MOST accurate?

Accepted Answer

A)  In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries' products are traded. 
B)  In the long run, national price levels play a key role only in determining interest rates. 
C)  In the long run, national price levels play a key role only in determining the relative prices at which countries' products are traded. 
D)  In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded. 
E)  In the long run, national price levels play no role in determining interest rates and the relative prices at which countries' products are traded. 
A)  In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries' products are traded. 
B)  In the long run, national price levels play a key role only in determining interest rates. 
C)  In the long run, national price levels play a key role only in determining the relative prices at which countries' products are traded. 
D)  In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded. 
E)  In the long run, national price levels play no role in determining interest rates and the relative prices at which countries' products are traded.

Question 11

Under sticky prices

Accepted Answer

A)  an interest rate rise is associated with lower expected deflation and a long-run currency appreciation, so the currency appreciates immediately. 
B)  an interest rate rise is associated with higher expected inflation and a long-run currency appreciation, so the currency appreciates immediately. 
C)  an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency appreciates immediately. 
D)  an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency depreciates immediately. 
E)  an interest rate rise is associated with lower expected inflation and a long-run currency appreciation, so the currency appreciates immediately. 
A)  an interest rate rise is associated with lower expected deflation and a long-run currency appreciation, so the currency appreciates immediately. 
B)  an interest rate rise is associated with higher expected inflation and a long-run currency appreciation, so the currency appreciates immediately. 
C)  an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency appreciates immediately. 
D)  an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency depreciates immediately. 
E)  an interest rate rise is associated with lower expected inflation and a long-run currency appreciation, so the currency appreciates immediately.

Question 12

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  Departures from PPP are similar in both the short run and long run. 
B)  Departures from PPP are even greater in the long run than in the short run. 
C)  Departures from PPP are always greater in the short run than in the long run. 
D)  It is hard to tell whether departures from PPP are greater in the short run than in the long run. 
E)  Departures from PPP may often be greater in the short run than in the long run. 
A)  Departures from PPP are similar in both the short run and long run. 
B)  Departures from PPP are even greater in the long run than in the short run. 
C)  Departures from PPP are always greater in the short run than in the long run. 
D)  It is hard to tell whether departures from PPP are greater in the short run than in the long run. 
E)  Departures from PPP may often be greater in the short run than in the long run.

Question 13

Under PPP (and by the Fisher Effect), all else equal

Accepted Answer

A)  a rise in a country's expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation. 
B)  a fall in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. 
C)  a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. 
D)  a rise in a country's expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation. 
E)  a fall in a country's expected inflation rate will eventually cause an inversely proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation. 
A)  a rise in a country's expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation. 
B)  a fall in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. 
C)  a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. 
D)  a rise in a country's expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation. 
E)  a fall in a country's expected inflation rate will eventually cause an inversely proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.

Question 14

The monetary approach makes the general prediction that

Accepted Answer

A)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies. 
B)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run by the relative supplies of those monies and the relative demands for them. 
C)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run and long run by the relative supplies of those monies and the relative demands for them. 
D)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them. 
E)  the money supply in the U.S. will adjust to European monetary equilibrium. 
A)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies. 
B)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run by the relative supplies of those monies and the relative demands for them. 
C)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run and long run by the relative supplies of those monies and the relative demands for them. 
D)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them. 
E)  the money supply in the U.S. will adjust to European monetary equilibrium.

Question 15

An increase in the world relative demand for U.S. output causes

Accepted Answer

A)  a short-run real depreciation of the dollar against the euro. 
B)  a long-run real appreciation of the dollar against the euro. 
C)  a long-run real depreciation of the dollar against the euro. 
D)  a short-run real appreciation of the euro against the dollar. 
E)  a long-run real appreciation of the euro against the dollar. 
A)  a short-run real depreciation of the dollar against the euro. 
B)  a long-run real appreciation of the dollar against the euro. 
C)  a long-run real depreciation of the dollar against the euro. 
D)  a short-run real appreciation of the euro against the dollar. 
E)  a long-run real appreciation of the euro against the dollar.

Question 16

To answer the following question, please refer to the figure below. Concentrating only at the lower right quadrant, discuss the effects of a change in U.S. expected inflation.

Accepted Answer

Lower right quadrant shows the equilibri

Question 17

Under the monetary approach to exchange rate theory, money supply growth at a constant rate

Accepted Answer

A)  eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. 
B)  eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do affect the full-employment output level and the long-run relative prices of goods and services. 
C)  eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. 
D)  eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services. 
E)  eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services. 
A)  eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. 
B)  eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do affect the full-employment output level and the long-run relative prices of goods and services. 
C)  eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. 
D)  eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services. 
E)  eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services.

Question 18

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate

Accepted Answer

A)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
B)  while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply does not affect the interest rate. 
C)  while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
D)  the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate. 
E)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate. 
A)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
B)  while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply does not affect the interest rate. 
C)  while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
D)  the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate. 
E)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate.

Question 19

Discuss the effects of ongoing inflation based on the PPP theory.

Accepted Answer

Other things equal, money supply growth

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

In the short run

The monetary approach to interest rates assumes that the prices of goods are ________, which implies that a country's currency will ________, when nominal interest rates ________ because of ________ expected future inflation.

Is a depreciation of the dollar/euro exchange rate correlated with a decrease in the dollar return on U.S. deposits?

What is the real interest rate parity condition?

Which of the following statements is the MOST accurate?

The expected rate of change in the nominal dollar/euro exchange rate is best described as

Which of the following statements is MOST accurate?

Discuss the relationship between PPP and the Law of One Price.

Which one of the following statements is the MOST accurate?

Which of the following statements is the MOST accurate?

Under sticky prices

Which one of the following statements is the MOST accurate?

Under PPP (and by the Fisher Effect), all else equal

The monetary approach makes the general prediction that

An increase in the world relative demand for U.S. output causes

To answer the following question, please refer to the figure below. Concentrating only at the lower right quadrant, discuss the effects of a change in U.S. expected inflation.

Under the monetary approach to exchange rate theory, money supply growth at a constant rate

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate

Discuss the effects of ongoing inflation based on the PPP theory.

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

The monetary approach to interest rates assumes that the prices of goods are , which implies that a country's currency will , when nominal interest rates because of expected future inflation.