Question 1

Describe how it would be possible for the nominal exchange rate to depreciate and the real exchange rate to appreciate.

Accepted Answer

There are several ways in which the nomi

Question 2

Goods prices tend to adjust more quickly than exchange rates.

Accepted Answer

A) True 
 B)False

Question 3

If the dollar depreciates then foreign stocks and bonds will become more expensive.

Accepted Answer

A) True 
 B)False

Question 4

The equilibrium exchange rate occurs when the demand for foreign exchange equals the supply of foreign exchange.

Accepted Answer

A) True 
 B)False

Question 5

Short-run changes in the exchange rate are less volatile than inflation differentials between countries.

Accepted Answer

A) True 
 B)False

Question 6

Discuss why the concept of PPP tends to fail empirical tests.

Accepted Answer

The concept of Purchasing Power Parity (

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

One of the major problems associated with using a price index to measure PPP is that:

Accepted Answer

A)  the indexes include tradeable goods. 
B)  the indexes include nontradable goods. 
C)  the indexes include goods that are exported. 
D)  the indexes include goods that compete with imports. 
E)  All of the above 
A)  the indexes include tradeable goods. 
B)  the indexes include nontradable goods. 
C)  the indexes include goods that are exported. 
D)  the indexes include goods that compete with imports. 
E)  All of the above

Question 9

An increase in a country's price level generally causes an appreciation of the country's exchange rate.

Accepted Answer

A) True 
 B)False

Question 10

As the dollar appreciates:

Accepted Answer

A)  U.S. exports become more expensive for foreigners. 
B)  U.S. exports become less expensive for foreigners. 
C)  U.S. exports are not affected. 
D)  U.S. exports will stop. 
E)  U.S. imports will fall. 
A)  U.S. exports become more expensive for foreigners. 
B)  U.S. exports become less expensive for foreigners. 
C)  U.S. exports are not affected. 
D)  U.S. exports will stop. 
E)  U.S. imports will fall.

Question 11

As the dollar/Euro exchange rate increases:

Accepted Answer

A)  the demand for Euros increases. 
B)  the demand for Euros decreases. 
C)  the quantity demanded of Euros increases. 
D)  the quantity demanded of Euros decreases. 
E)  the demand for Euros does not change. 
A)  the demand for Euros increases. 
B)  the demand for Euros decreases. 
C)  the quantity demanded of Euros increases. 
D)  the quantity demanded of Euros decreases. 
E)  the demand for Euros does not change.

Question 12

If U.S. prices increase with no change in Japanese prices, the demand for yen would:

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  decrease at an increasing rate. 
E)  decrease at a decreasing rate. 
A)  increase. 
B)  decrease. 
C)  remain the same. 
D)  decrease at an increasing rate. 
E)  decrease at a decreasing rate.

Question 13

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

Accepted Answer

A)  appreciated against the dollar. 
B)  depreciated against the dollar. 
C)  appreciated against the yen. 
D)  depreciated against the yen. 
E)  rapidly depreciated. 
A)  appreciated against the dollar. 
B)  depreciated against the dollar. 
C)  appreciated against the yen. 
D)  depreciated against the yen. 
E)  rapidly depreciated.

Question 14

The theory that the exchange rate reflects the relative purchasing power in each country is known as:

Accepted Answer

A)  exchange rate parity. 
B)  purchasing power parity. 
C)  consumer price parity. 
D)  inflation-adjusted foreign exchange. 
E)  inflation adjusted parity. 
A)  exchange rate parity. 
B)  purchasing power parity. 
C)  consumer price parity. 
D)  inflation-adjusted foreign exchange. 
E)  inflation adjusted parity.

Question 15

The price in the foreign exchange market is called:

Accepted Answer

A)  the trade surplus. 
B)  the money price. 
C)  the exchange rate. 
D)  the currency rate. 
E)  misalignment rate. 
A)  the trade surplus. 
B)  the money price. 
C)  the exchange rate. 
D)  the currency rate. 
E)  misalignment rate.

Question 16

An individual price that is adjusted by the overall level of prices is called:

Accepted Answer

A)  a nominal price. 
B)  a prime price. 
C)  a real price. 
D)  a base price. 
E)  a core price. 
A)  a nominal price. 
B)  a prime price. 
C)  a real price. 
D)  a base price. 
E)  a core price.

Question 17

Which of the following price indexes is the best one to use when calculating PPP?

Accepted Answer

A)  The Consumer Price Index 
B)  The Producer Price Index 
C)  The GDP deflator 
D)  The core CPI 
E)  The core PPI 
A)  The Consumer Price Index 
B)  The Producer Price Index 
C)  The GDP deflator 
D)  The core CPI 
E)  The core PPI

Question 18

If the nominal exchange rate changes then the real exchange rate must also change.

Accepted Answer

A) True 
 B)False

Question 19

If absolute PPP holds, then relative PPP will not hold.

Accepted Answer

A) True 
 B)False

Question 20

The more products are differentiated, the more we expect the law of one price to hold.

Accepted Answer

A) True 
 B)False

Describe how it would be possible for the nominal exchange rate to depreciate and the real exchange rate to appreciate.

Goods prices tend to adjust more quickly than exchange rates.

If the dollar depreciates then foreign stocks and bonds will become more expensive.

The equilibrium exchange rate occurs when the demand for foreign exchange equals the supply of foreign exchange.

Short-run changes in the exchange rate are less volatile than inflation differentials between countries.

Discuss why the concept of PPP tends to fail empirical tests.

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

One of the major problems associated with using a price index to measure PPP is that:

An increase in a country's price level generally causes an appreciation of the country's exchange rate.

As the dollar appreciates:

As the dollar/Euro exchange rate increases:

If U.S. prices increase with no change in Japanese prices, the demand for yen would:

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

The theory that the exchange rate reflects the relative purchasing power in each country is known as:

The price in the foreign exchange market is called:

An individual price that is adjusted by the overall level of prices is called:

Which of the following price indexes is the best one to use when calculating PPP?

If the nominal exchange rate changes then the real exchange rate must also change.

If absolute PPP holds, then relative PPP will not hold.

The more products are differentiated, the more we expect the law of one price to hold.

Introduction: An Overview of the World Economy

Why Countries Trade

Comparative Advantage and the Production Possibilities Frontier

Factor Endowments and the Commodity Composition of Trade

Intra-Industry Trade

The Firm in the World Economy

International Factor Movements

Tariffs

Nontariff Distortions to Trade

International Trade Policy

Regional Economic Arrangements

International Trade and Economic Growth

National Income Accounting and the Balance of Payments

Money, Interest Rates, and the Exchange Rate

Open Economy Macroeconomics

Macroeconomic Policy and Floating Exchange Rates

Fixed Exchange Rates and Currency Unions

International Monetary Arrangements

Capital Flows and the Developing Countries

Filters

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

Describe how it would be possible for the nominal exchange rate to depreciate and the real exchange rate to appreciate.

Goods prices tend to adjust more quickly than exchange rates.

If the dollar depreciates then foreign stocks and bonds will become more expensive.

The equilibrium exchange rate occurs when the demand for foreign exchange equals the supply of foreign exchange.

Short-run changes in the exchange rate are less volatile than inflation differentials between countries.

Discuss why the concept of PPP tends to fail empirical tests.

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

One of the major problems associated with using a price index to measure PPP is that:

An increase in a country's price level generally causes an appreciation of the country's exchange rate.

As the dollar appreciates:

As the dollar/Euro exchange rate increases:

If U.S. prices increase with no change in Japanese prices, the demand for yen would:

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

The theory that the exchange rate reflects the relative purchasing power in each country is known as:

The price in the foreign exchange market is called:

An individual price that is adjusted by the overall level of prices is called:

Which of the following price indexes is the best one to use when calculating PPP?

If the nominal exchange rate changes then the real exchange rate must also change.

If absolute PPP holds, then relative PPP will not hold.

The more products are differentiated, the more we expect the law of one price to hold.

Introduction: An Overview of the World Economy

Why Countries Trade

Comparative Advantage and the Production Possibilities Frontier

Factor Endowments and the Commodity Composition of Trade

Intra-Industry Trade

The Firm in the World Economy

International Factor Movements

Tariffs

Nontariff Distortions to Trade

International Trade Policy

Regional Economic Arrangements

International Trade and Economic Growth

National Income Accounting and the Balance of Payments

Money, Interest Rates, and the Exchange Rate

Open Economy Macroeconomics

Macroeconomic Policy and Floating Exchange Rates

Fixed Exchange Rates and Currency Unions

International Monetary Arrangements

Capital Flows and the Developing Countries

Filters