Question 1

Present and explain the Fundamental Equation of the Monetary Approach.

Accepted Answer

Assume

= P_US/P_E and that domestic price levels depend on domestic money demands and supplies:
P_US = M_US^S/L(R_$,Y_US)
P_E = M_E^S/L(

,Y_E)
Therefore,the exchange rate is fully determined in the long run by the relative supplies of those monies and the relative real demands for them.Shifts in interest rates and output levels affect the exchange rate only through their influence on money demand.

Question 2

Which of the following statements is the MOST accurate?

Accepted Answer

A) The law of one price applies only to the general price level. 
B) The law of one price applies to the general price level while PPP applies to individual commodities. 
C) The law of one price applies to individual commodities while PPP applies to both the general price level and to individual commodities. 
D) PPP applies only to individual commodities. 
E) The law of one price applies to individual commodities while PPP applies to the general price level. 
A) The law of one price applies only to the general price level. 
B) The law of one price applies to the general price level while PPP applies to individual commodities. 
C) The law of one price applies to individual commodities while PPP applies to both the general price level and to individual commodities. 
D) PPP applies only to individual commodities. 
E) The law of one price applies to individual commodities while PPP applies to the general price level. E

Question 3

Define the concept of the real exchange rate and explain how it differs from the nominal exchange rate.

Accepted Answer

In general,the real exchange rate between two countries' currencies is the price of the second country's commodity basket (in terms of the first country's currency)relative to the price of the first country's commodity basket.For example,in the case of U.S.and Europe,the real dollar/euro exchange rate is the dollar value of Europe's price level divided by the U.S.price level.We can thus denote the real dollar/euro exchange rate (

)as:

= (

× P_E)/P_US
where

is the nominal dollar/euro exchange rate,P_E is Europe's price level,and P_US is the U.S.price level.Unlike the real exchange rate,which is the relative price of two output baskets,the nominal exchange rate is the relative price of two currencies.However,as we can see from the equation above,real exchange rates are defined in terms of nominal exchange rates.

Question 4

Explain the Law of One Price.Give an example.

Accepted Answer

The law of one price states that in comp

Question 5

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 6

Construct a table that will summarize the effects of money market and output market changes on the long-run nominal dollar/euro exchange rate

Accepted Answer

The answer of Construct a table that will summarize the...

Question 7

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 8

What can explain the failure of relative PPP to hold in reality?

Accepted Answer

Government measures of the price level d

Question 9

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 10

Discuss the differences between Absolute PPP and Relative PPP.

Accepted Answer

Absolute PPP states that the exchange ra

Question 11

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 12

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

Accepted Answer

A) the interest rate is not independent of the money supply growth rate in the short run. 
B) the interest rate is independent of the money supply growth rate in the long run. 
C) the interest rate is not independent of the money supply growth rate in the long run,but independent in the short run. 
D) the interest rate is not independent of the money supply growth rate in the long run. 
E) the interest rate is a factor of the money supply growth rate only in the short term. 
A) the interest rate is not independent of the money supply growth rate in the short run. 
B) the interest rate is independent of the money supply growth rate in the long run. 
C) the interest rate is not independent of the money supply growth rate in the long run,but independent in the short run. 
D) the interest rate is not independent of the money supply growth rate in the long run. 
E) the interest rate is a factor of the money supply growth rate only in the short term.

Question 13

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 14

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 15

The PPP theory fails in reality for all of the following reasons EXCEPT

Accepted Answer

A) transport costs. 
B) monopolistic or oligopolistic practices in goods markets. 
C) the inflation data reported in different countries are based on different commodity baskets. 
D) restrictions on trade. 
E) inflation rates are unrelated to money supply growth. 
A) transport costs. 
B) monopolistic or oligopolistic practices in goods markets. 
C) the inflation data reported in different countries are based on different commodity baskets. 
D) restrictions on trade. 
E) inflation rates are unrelated to money supply growth.

Question 16

Fill in the following table,assuming the law of one price prevails.

Accepted Answer

The answer of Fill in the following table,assuming the law...

Question 17

The expected real interest rate (re)in terms of the nominal interest rate (R)and the expected inflation rate (πe)is given by

Accepted Answer

A) re = πe + R. 
B) re = 2πe + R2. 
C) re = πe + R2. 
D) re = R - πe. 
E) re = R2 - πe. 
A) re = πe + R. 
B) re = 2πe + R2. 
C) re = πe + R2. 
D) re = R - πe. 
E) re = R2 - πe.

Question 18

Which of the following statements is MOST accurate?

Accepted Answer

A) In the money market,an increase in U.S.money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
B) In the money market,an increase in European money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
C) In the money market,an increase in U.S.money supply growth rate leads to a decrease in the long-run nominal dollar/euro exchange rate. 
D) In the money market,an increase in European money supply growth leads to an increase in the long-run nominal dollar/euro exchange rate. 
E) In the money market,an increase in U.S.money supply level leads to a proportional decrease in the long-run nominal dollar/euro exchange rate. 
A) In the money market,an increase in U.S.money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
B) In the money market,an increase in European money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
C) In the money market,an increase in U.S.money supply growth rate leads to a decrease in the long-run nominal dollar/euro exchange rate. 
D) In the money market,an increase in European money supply growth leads to an increase in the long-run nominal dollar/euro exchange rate. 
E) In the money market,an increase in U.S.money supply level leads to a proportional decrease in the long-run nominal dollar/euro exchange rate.

Question 19

Which one of the following statements is the MOST accurate?

Accepted Answer

A) Relative price changes could not lead to PPP violations even if trade were free and costless. 
B) Relative price changes could lead to PPP violations only if trade were free and costless. 
C) Relative price changes could lead to PPP violations even if trade were free and costless. 
D) Price changes could lead to PPP violations even if trade were free and costless. 
E) Price changes could not lead to PPP violations even if trade were free and costless. 
A) Relative price changes could not lead to PPP violations even if trade were free and costless. 
B) Relative price changes could lead to PPP violations only if trade were free and costless. 
C) Relative price changes could lead to PPP violations even if trade were free and costless. 
D) Price changes could lead to PPP violations even if trade were free and costless. 
E) Price changes could not lead to PPP violations even if trade were free and costless.

Question 20

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.

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

Present and explain the Fundamental Equation of the Monetary Approach.

Which of the following statements is the MOST accurate?

Define the concept of the real exchange rate and explain how it differs from the nominal exchange rate.

Explain the Law of One Price.Give an example.

Under sticky prices

Construct a table that will summarize the effects of money market and output market changes on the long-run nominal dollar/euro exchange rate

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

What can explain the failure of relative PPP to hold in reality?

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.

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

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

Under the monetary approach to the exchange rate

Which one of the following statements is the MOST accurate?

The PPP theory fails in reality for all of the following reasons EXCEPT

Fill in the following table,assuming the law of one price prevails.

The expected real interest rate (re)in terms of the nominal interest rate (R)and the expected inflation rate (πe)is given by

Which of the following statements is MOST accurate?

Which one of the following statements is the MOST accurate?

Which of the following statements is the MOST accurate?

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 expected real interest rate (r^e)in terms of the nominal interest rate (R)and the expected inflation rate (π^e)is given by