Question 1

If people expect relative PPP to hold

Accepted Answer

A)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, in the United States and Europe, respectively, over the relevant horizon. 
B)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected in Europe and the United States, respectively. 
C)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively, in the short run. 
D)  the difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively. 
E)  the difference between the interest rates offered by dollar and euro deposits will be below the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively. 
A)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, in the United States and Europe, respectively, over the relevant horizon. 
B)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected in Europe and the United States, respectively. 
C)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively, in the short run. 
D)  the difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively. 
E)  the difference between the interest rates offered by dollar and euro deposits will be below the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively. A

Question 2

Does the existence of non-tradable goods allow for deviations from Purchasing power Parity?

Accepted Answer

Yes, the existence of nontradables allows deviations from PPP. This is because the price of a nontradable is determined entirely by its domestic supply and demand curves, and in turn fluctuations in demand and supply for these good will affect the price level. Examples include housing, haircut, services etc.

Question 3

Suppose Russia's inflation rate is 200% over one year but the inflation rate in Switzerland is only 2%. According to relative PPP, what should happen over the year to the Swiss franc's exchange rate against the Russian ruble?

Accepted Answer

(Eᵣᵤblₑ/fᵣₐnc, t - Eᵣᵤblₑ/fᵣₐnc, t₋₁)/Eᵣᵤblₑ/fᵣₐnc, t₋₁ = 2 - 0.02 = 1.98
So there will be a 198% depreciation of the ruble against the franc or, conversely, a 198% appreciation of the franc against the ruble.

Question 4

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 5

When all variables start out at their long-run equilibrium levels, the most important determinants of long-run swings in nominal exchange rates do NOT include

Accepted Answer

A)  a shift in relative money supply levels. 
B)  a shift in relative money supply growth rates. 
C)  a change in relative output demand. 
D)  a change in relative output supply. 
E)  a change in relative inflation rates. 
A)  a shift in relative money supply levels. 
B)  a shift in relative money supply growth rates. 
C)  a change in relative output demand. 
D)  a change in relative output supply. 
E)  a change in relative inflation rates.

Question 6

Describe the chain of events leading to exchange rate determination for the following cases:
(a)An increase in U.S. money supply
(d)Increase in growth rate of U.S. money supply
(c)Increase in world relative demand for U.S. products
(d)Increase in relative U.S. output supply

Accepted Answer

Chain of events leading to exchange rate

Question 7

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

Accepted Answer

Other things equal, money supply growth

Question 8

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 9

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 10

In the long run

Accepted Answer

A)  exchange rates obey relative PPP when all disturbances occur in the output markets. 
B)  exchange rates obey absolute PPP when all disturbances occur in the output markets. 
C)  exchange rates are unlikely to obey relative PPP when all disturbances occur in the output markets. 
D)  exchange rates are unlikely to obey relative PPP when all disturbances are monetary in nature. 
E)  exchange rates obey absolute PPP when all disturbances are monetary in nature. 
A)  exchange rates obey relative PPP when all disturbances occur in the output markets. 
B)  exchange rates obey absolute PPP when all disturbances occur in the output markets. 
C)  exchange rates are unlikely to obey relative PPP when all disturbances occur in the output markets. 
D)  exchange rates are unlikely to obey relative PPP when all disturbances are monetary in nature. 
E)  exchange rates obey absolute PPP when all disturbances are monetary in nature.

Question 11

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 12

What is the Fisher Effect?
 Provide an example.

Accepted Answer

All else equal, a rise in a country's ex

Question 13

Which of the following statements is the MOST accurate?

Accepted Answer

A)  If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same. 
B)  If the law of one price holds true for every commodity, PPP must hold automatically. 
C)  If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same. 
D)  If the law of one price does not hold true for every commodity, PPP cannot be true as long as the reference baskets used to reckon different countries' price levels are the same. 
E)  If PPP holds true, then the law of one price must hold true automatically. 
A)  If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same. 
B)  If the law of one price holds true for every commodity, PPP must hold automatically. 
C)  If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same. 
D)  If the law of one price does not hold true for every commodity, PPP cannot be true as long as the reference baskets used to reckon different countries' price levels are the same. 
E)  If PPP holds true, then the law of one price must hold true automatically.

Question 14

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 15

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 16

Which of the following statements is the MOST accurate?

Accepted Answer

A)  The law of one price does fare well in all recent studies. 
B)  The law of one price does fare well in many recent studies. 
C)  The law of one price sometimes fares well in recent studies. 
D)  The law of one price does not fare well in recent studies. 
E)  The law of one price has not been studied recently. 
A)  The law of one price does fare well in all recent studies. 
B)  The law of one price does fare well in many recent studies. 
C)  The law of one price sometimes fares well in recent studies. 
D)  The law of one price does not fare well in recent studies. 
E)  The law of one price has not been studied recently.

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

Under sticky prices

Accepted Answer

A)  a fall in the money supply raises the interest rate to preserve money market equilibrium. 
B)  a fall in the money supply reduces the interest rate to preserve money market equilibrium. 
C)  a fall in the money supply keeps the interest rate intact to preserve money market equilibrium. 
D)  a fall in the money supply does not affect the interest rate in the short run, only in the long run. 
E)  a fall in the money supply raises the interest rate to preserve money market equilibrium in the long run. 
A)  a fall in the money supply raises the interest rate to preserve money market equilibrium. 
B)  a fall in the money supply reduces the interest rate to preserve money market equilibrium. 
C)  a fall in the money supply keeps the interest rate intact to preserve money market equilibrium. 
D)  a fall in the money supply does not affect the interest rate in the short run, only in the long run. 
E)  a fall in the money supply raises the interest rate to preserve money market equilibrium in the long run.

Question 19

Assuming relative PPP, fill in the table below:

Accepted Answer

The answer of Assuming relative PPP, fill in the table...

Question 20

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.

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

If people expect relative PPP to hold

Does the existence of non-tradable goods allow for deviations from Purchasing power Parity?

Suppose Russia's inflation rate is 200% over one year but the inflation rate in Switzerland is only 2%. According to relative PPP, what should happen over the year to the Swiss franc's exchange rate against the Russian ruble?

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

When all variables start out at their long-run equilibrium levels, the most important determinants of long-run swings in nominal exchange rates do NOT include

Describe the chain of events leading to exchange rate determination for the following cases: (a)An increase in U.S. money supply (d)Increase in growth rate of U.S. money supply (c)Increase in world relative demand for U.S. products (d)Increase in relative U.S. output supply

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

Which one of the following statements is the MOST accurate?

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

In the long run

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

What is the Fisher Effect? Provide an example.

Which of the following statements is the MOST accurate?

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

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?

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

Under sticky prices

Assuming relative PPP, fill in the table below:

In the short run

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

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

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.