Question 1

What are the predictions of the PPP theory with regards to the real exchange rates?

Accepted Answer

The real exchange rate between two count

Question 2

Explain why price levels are lower in poorer countries.

Accepted Answer

One theory explains the difference in pr

Question 3

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 4

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 5

Under the monetary approach to the exchange rate

Accepted Answer

A) an interest rate decrease is associated with higher expected inflation and a currency that will be weaker on all future dates. 
B) an interest rate increase is associated with higher expected deflation and a currency that will be weaker on all future dates. 
C) an interest rate increase is associated with higher expected inflation and a currency that will be strengthened on all future dates. 
D) an interest rate increase is associated with higher expected deflation and a currency that will be strengthened on all future dates. 
E) an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all future dates. 
A) an interest rate decrease is associated with higher expected inflation and a currency that will be weaker on all future dates. 
B) an interest rate increase is associated with higher expected deflation and a currency that will be weaker on all future dates. 
C) an interest rate increase is associated with higher expected inflation and a currency that will be strengthened on all future dates. 
D) an interest rate increase is associated with higher expected deflation and a currency that will be strengthened on all future dates. 
E) an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all future dates.

Question 6

What is the real interest rate parity condition?

Accepted Answer

The nominal interest rates are

Question 7

Explain why an exchange rate model based on PPP is a long run theory.

Accepted Answer

PPP theory is a monetary approach to the

Question 8

Assuming relative PPP,fill in the table below:

Accepted Answer

Using ( @#IMG-DLM& -

Question 9

Which of the following statements is MOST accurate?

Accepted Answer

A) The United States price level will place a relatively light weight on commodities produced and consumed in America,while the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. 
B) The United States price level will place a relatively light weight on commodities produced and consumed in America,and the European price level will place a relatively light weight on commodities produced and consumed in Europe. 
C) The United States price level will place a relatively heavy weight on commodities produced and consumed in America,and the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. 
D) The United States price level will place a relatively heavy weight on commodities produced and consumed in Europe,and the European price level will place a relatively heavy weight on commodities produced and consumed in America. 
E) The United States price level will place a relatively light weight on commodities produced and consumed in Europe,and the European price level will place a relatively heavy weight on commodities produced and consumed in America. 
A) The United States price level will place a relatively light weight on commodities produced and consumed in America,while the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. 
B) The United States price level will place a relatively light weight on commodities produced and consumed in America,and the European price level will place a relatively light weight on commodities produced and consumed in Europe. 
C) The United States price level will place a relatively heavy weight on commodities produced and consumed in America,and the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. 
D) The United States price level will place a relatively heavy weight on commodities produced and consumed in Europe,and the European price level will place a relatively heavy weight on commodities produced and consumed in America. 
E) The United States price level will place a relatively light weight on commodities produced and consumed in Europe,and the European price level will place a relatively heavy weight on commodities produced and consumed in America.

Question 10

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 11

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 rise

Question 12

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 t

Question 13

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

Accepted Answer

Other things equal,money supply growth a

Question 14

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 15

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 16

In order for the condition E$/HK$ = PUS/PHK to hold,what assumptions does the principle of purchasing power parity make?

Accepted Answer

A) Only that there are no transportation costs and restrictions on trade. 
B) Only that the markets are perfectly competitive,i.e. ,P = MC. 
C) The factors of production are identical between countries. 
D) No arbitrage exists. 
E) HK and the U.S.are perfectly competitive and there are no transportation costs or restrictions on trade. 
A) Only that there are no transportation costs and restrictions on trade. 
B) Only that the markets are perfectly competitive,i.e. ,P = MC. 
C) The factors of production are identical between countries. 
D) No arbitrage exists. 
E) HK and the U.S.are perfectly competitive and there are no transportation costs or restrictions on trade.

Question 17

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 18

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 19

What is the real exchange rate between the dollar and the euro equal to?

Accepted Answer

Let
∙ Real dollar/euro exchange rate = @#IMG-DLM&

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

What are the predictions of the PPP theory with regards to the real exchange rates?

Explain why price levels are lower in poorer countries.

Under a flexible-price monetary approach to the exchange rate

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.

Under the monetary approach to the exchange rate

What is the real interest rate parity condition?

Explain why an exchange rate model based on PPP is a long run theory.

Assuming relative PPP,fill in the table below:

Which of the following statements is MOST accurate?

Which of the following statements is the MOST accurate?

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

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

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

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.

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

In order for the condition E$/HK$ = PUS/PHK to hold,what assumptions does the principle of purchasing power parity make?

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

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

What is the real exchange rate between the dollar and the euro equal to?

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

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.

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.

In order for the condition E_$/HK$ = P_US/P_HK to hold,what assumptions does the principle of purchasing power parity make?

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