Exam 14: Exchange Rates and Their Determination: A Basic Model

Which of the following is not a major problem associated with using a price index to measure PPP?

If the yen price of rice is 400 yen and the dollar price of rice is $5, then the law of one price states that the yen/dollar exchange rate should be 0.125.

If the initial exchange rate is 120 yen per dollar and then falls to 110 yen per dollar, we would say that the dollar has:

The law of one price states that disregarding trade barriers and transportation costs identical goods sold in competitive markets should cost the same everywhere when prices are expressed in the same currency.

If the dollar/pound exchange rate goes from $2/pound to $3/per pound then both the dollar and the pound have depreciated.

The real exchange rate is:

Nontradable goods are usually cheaper in developed countries.

If a U.S. dollar will buy as much in Mexico as in the U.S., then purchasing power parity holds.

If prices in Chile rise more slowly than prices in Brazil, then the Chilean demand for Brazilian goods would tend to increase.

An increase in the demand for foreign exchange will cause an appreciation of the currency.

Suppose that U.S. prices are falling and everything else has remained constant then:

Movements in nominal and real exchange rates are unrelated.

You are planning a vacation in London next summer, you would welcome:

The supply of foreign exchange results from:

Studies of purchasing power parity covering many years are more likely to show evidence of it than studies done on short-run periods of time.

The demand for foreign exchange can shift in response to changes in a country's level of income.

Purchasing Power Parity implies that exchange-rate depreciation is caused by differences in inflation rates across countries.

Countries with a high rate of inflation relative to the rest of the world would tend to experience:

The process of moving goods from lower-priced to higher-priced markets is known as:

The purchase of an American product by residents of a foreign country leads to an increase in the demand for foreign exchange.