Question 1

Which of the following statements is MOST accurate?

Accepted Answer

A)  In the output market, an increase in demand for U.S. output leads to an increase in the long-run nominal dollar/euro exchange rate. 
B)  In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate. 
C)  In the output market, a decrease in demand for U.S. output leads to a decrease in the long-run nominal dollar/euro exchange rate. 
D)  In the output market, an increase in the demand for European output leads to a decrease in the long-run nominal dollar/euro exchange rate. 
E)  In the output market, an increase in the demand for European output leads to an increase in the long-run nominal euro/dollar exchange rate. 
A)  In the output market, an increase in demand for U.S. output leads to an increase in the long-run nominal dollar/euro exchange rate. 
B)  In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate. 
C)  In the output market, a decrease in demand for U.S. output leads to a decrease in the long-run nominal dollar/euro exchange rate. 
D)  In the output market, an increase in the demand for European output leads to a decrease in the long-run nominal dollar/euro exchange rate. 
E)  In the output market, an increase in the demand for European output leads to an increase in the long-run nominal euro/dollar exchange rate.

Question 2

Which of the following statements is the MOST accurate?
The law of one price states

Accepted Answer

A)  in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
B)  in competitive markets free of transportation costs and official barriers to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency. 
C)  in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price. 
D)  identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
E)  in competitive markets free of official barriers to trade, identical goods are sold at the same price regardless of transportation costs. 
A)  in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
B)  in competitive markets free of transportation costs and official barriers to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency. 
C)  in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price. 
D)  identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
E)  in competitive markets free of official barriers to trade, identical goods are sold at the same price regardless of transportation costs.

Question 3

What effect do non-tradable goods have on PPP?

Accepted Answer

The effect is quite substantial.
In 2006

Question 4

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.

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

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 7

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

Accepted Answer

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

Question 8

Present and explain the Fundamental Equation of the Monetary Approach.

Accepted Answer

@#IMG-DLM& 
Therefore, the exchange rate is fully

Question 9

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 10

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 11

Which of the following statements is the MOST accurate?

Accepted Answer

A)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over different commodities space. 
B)  Absolute PPP may be valid even when relative PPP is not, provided the factors causing deviations from relative PPP are more or less stable over time. 
C)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time. 
D)  Relative PPP is not valid when absolute PPP is not. 
E)  Relative PPP is only valid when absolute PPP is valid, providing the factors causing deviations from relative PPP are more or less stable over time. 
A)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over different commodities space. 
B)  Absolute PPP may be valid even when relative PPP is not, provided the factors causing deviations from relative PPP are more or less stable over time. 
C)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time. 
D)  Relative PPP is not valid when absolute PPP is not. 
E)  Relative PPP is only valid when absolute PPP is valid, providing the factors causing deviations from relative PPP are more or less stable over time.

Question 12

The monetary approach makes the general prediction that

Accepted Answer

A)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies. 
B)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run by the relative supplies of those monies and the relative demands for them. 
C)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run and long run by the relative supplies of those monies and the relative demands for them. 
D)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them. 
E)  the money supply in the U.S. will adjust to European monetary equilibrium. 
A)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies. 
B)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run by the relative supplies of those monies and the relative demands for them. 
C)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run and long run by the relative supplies of those monies and the relative demands for them. 
D)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them. 
E)  the money supply in the U.S. will adjust to European monetary equilibrium.

Question 13

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

Accepted Answer

A)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
B)  while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply does not affect the interest rate. 
C)  while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
D)  the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate. 
E)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate. 
A)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
B)  while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply does not affect the interest rate. 
C)  while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
D)  the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate. 
E)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate.

Question 14

Floating exchange rates

Accepted Answer

A)  systematically lead to much larger but less frequent short-run deviations from the absolute PPP. 
B)  systematically lead to much larger and more frequent short-run deviations from the relative PPP. 
C)  systematically lead to much smaller and less frequent short-run deviations from the relative PPP. 
D)  systematically lead to much smaller but more frequent short-run deviations from the relative PPP. 
E)  systematically lead to much smaller and less frequent short-run deviations from the absolute PPP. 
A)  systematically lead to much larger but less frequent short-run deviations from the absolute PPP. 
B)  systematically lead to much larger and more frequent short-run deviations from the relative PPP. 
C)  systematically lead to much smaller and less frequent short-run deviations from the relative PPP. 
D)  systematically lead to much smaller but more frequent short-run deviations from the relative PPP. 
E)  systematically lead to much smaller and less frequent short-run deviations from the absolute PPP.

Question 15

Which of the following statements is the MOST accurate?
In general

Accepted Answer

A)  the monetary approach to the exchange rate is a long run theory. 
B)  the monetary approach to the exchange rate is a short run theory. 
C)  the monetary approach to the exchange rate is both a short and long run theory. 
D)  the monetary approach to the exchange rate neither long run nor short run theory. 
E)  the monetary approach to the exchange rate is considered less practical than the law of one price. 
A)  the monetary approach to the exchange rate is a long run theory. 
B)  the monetary approach to the exchange rate is a short run theory. 
C)  the monetary approach to the exchange rate is both a short and long run theory. 
D)  the monetary approach to the exchange rate neither long run nor short run theory. 
E)  the monetary approach to the exchange rate is considered less practical than the law of one price.

Question 16

Under Purchasing Power Parity

Accepted Answer

A)  E$/P = PUS/PE. 
B)  E$/E = PUS/PE. 
C)  E$/E = PUS - PE. 
D)  E$/E = PE/PES. 
E)  E$/E = PUS + PE. 
A)  E$/P = PUS/PE. 
B)  E$/E = PUS/PE. 
C)  E$/E = PUS - PE. 
D)  E$/E = PE/PES. 
E)  E$/E = PUS + PE.

Question 17

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 18

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 19

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

Accepted Answer

The answer of Explain why Relative PPP is useful when...

Question 20

Discuss the relationship between PPP and the Law of One Price.

Accepted Answer

The law of one price applies to individu

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

Which of the following statements is MOST accurate?

Which of the following statements is the MOST accurate? The law of one price states

What effect do non-tradable goods have on PPP?

Which of the following statements is the MOST accurate?

Under sticky prices

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

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

Present and explain the Fundamental Equation of the Monetary Approach.

Which one of the following statements is the MOST accurate?

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

Which of the following statements is the MOST accurate?

The monetary approach makes the general prediction that

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

Floating exchange rates

Which of the following statements is the MOST accurate? In general

Under Purchasing Power Parity

Under the monetary approach to the exchange rate

Under the monetary approach to the exchange rate

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

Discuss the relationship between PPP and the Law of One Price.

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

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