Question 1

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

Question 2

Explain the Law of One Price. Give an example.

Accepted Answer

The law of one price states that in comp

Question 3

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 4

An increase in the world relative demand for U.S. output causes

Accepted Answer

A)  a short-run real depreciation of the dollar against the euro. 
B)  a long-run real appreciation of the dollar against the euro. 
C)  a long-run real depreciation of the dollar against the euro. 
D)  a short-run real appreciation of the euro against the dollar. 
E)  a long-run real appreciation of the euro against the dollar. 
A)  a short-run real depreciation of the dollar against the euro. 
B)  a long-run real appreciation of the dollar against the euro. 
C)  a long-run real depreciation of the dollar against the euro. 
D)  a short-run real appreciation of the euro against the dollar. 
E)  a long-run real appreciation of the euro against the dollar.

Question 5

What can explain the failure of relative PPP to hold in reality?

Accepted Answer

Government measures of the price level d

Question 6

Explain Purchasing Power Parity.

Accepted Answer

PPP states that the exchange rate betwee

Question 7

Who among the following list of people is an early 20th century economist from Yale University who wrote the book The Theory of Interest?

Accepted Answer

A)  Gustav Cassel 
B)  Irving Fisher 
C)  David Ricardo 
D)  Paul Krugman 
E)  Israel Kirzner 
A)  Gustav Cassel 
B)  Irving Fisher 
C)  David Ricardo 
D)  Paul Krugman 
E)  Israel Kirzner

Question 8

In January 2013, the world's cheapest Big Macs were sold in

Accepted Answer

A)  the Philippines. 
B)  Russia. 
C)  China. 
D)  Malaysia. 
E)  the Czech Republic. 
A)  the Philippines. 
B)  Russia. 
C)  China. 
D)  Malaysia. 
E)  the Czech Republic.

Question 9

In practice

Accepted Answer

A)  changes in national price levels often tell us relatively little about exchange rate movements. 
B)  changes in national price levels raise the exchange rate. 
C)  changes in national price levels lower the exchange rate. 
D)  changes in national price levels often tell us about exchange rate movements. 
E)  changes in national price levels match identical changes in the exchange rate. 
A)  changes in national price levels often tell us relatively little about exchange rate movements. 
B)  changes in national price levels raise the exchange rate. 
C)  changes in national price levels lower the exchange rate. 
D)  changes in national price levels often tell us about exchange rate movements. 
E)  changes in national price levels match identical changes in the exchange rate.

Question 10

The PPP theory fails in reality for all of the following reasons EXCEPT

Accepted Answer

A)  transport costs. 
B)  monopolistic or oligopolistic practices in goods markets. 
C)  the inflation data reported in different countries are based on different commodity baskets. 
D)  restrictions on trade. 
E)  inflation rates are unrelated to money supply growth. 
A)  transport costs. 
B)  monopolistic or oligopolistic practices in goods markets. 
C)  the inflation data reported in different countries are based on different commodity baskets. 
D)  restrictions on trade. 
E)  inflation rates are unrelated to money supply growth.

Question 11

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 12

Fill in the following table, assuming the law of one price prevails.

Accepted Answer

The answer of Fill in the following table, assuming the...

Question 13

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 14

Discuss why the empirical support for PPP and the law of one price is weak in recent data.

Accepted Answer

The failure of these propositions in the

Question 15

Under Purchasing Power Parity

Accepted Answer

A)  E$/E = PᶦUS/PᶦE. 
B)  E$/E = PᶦE/PᶦUS. 
C)  E$/E = PUS/PE. 
D)  E$/E = PE/PES. 
E)  E$/E = PᶦE ₊ PᶦUS/PᶦE. 
A)  E$/E = PᶦUS/PᶦE. 
B)  E$/E = PᶦE/PᶦUS. 
C)  E$/E = PUS/PE. 
D)  E$/E = PE/PES. 
E)  E$/E = PᶦE ₊ PᶦUS/PᶦE.

Question 16

Describe and explain the relationship between expected inflation rates in two countries and their interest rate differential according to the PPP theory.

Accepted Answer

Expected inflation is given by the follo

Question 17

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 18

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  Departures from PPP are similar in both the short run and long run. 
B)  Departures from PPP are even greater in the long run than in the short run. 
C)  Departures from PPP are always greater in the short run than in the long run. 
D)  It is hard to tell whether departures from PPP are greater in the short run than in the long run. 
E)  Departures from PPP may often be greater in the short run than in the long run. 
A)  Departures from PPP are similar in both the short run and long run. 
B)  Departures from PPP are even greater in the long run than in the short run. 
C)  Departures from PPP are always greater in the short run than in the long run. 
D)  It is hard to tell whether departures from PPP are greater in the short run than in the long run. 
E)  Departures from PPP may often be greater in the short run than in the long run.

Question 19

Explain why price levels are lower in poorer countries.

Accepted Answer

One theory explains the difference in pr

Question 20

Which of the following statements is MOST accurate?

Accepted Answer

A)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
B)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
C)  A relative expansion of U.S. output causes a long-run appreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real depreciation of the dollar against the euro. 
D)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro. 
E)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro. 
A)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
B)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
C)  A relative expansion of U.S. output causes a long-run appreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real depreciation of the dollar against the euro. 
D)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro. 
E)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.

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

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

Explain the Law of One Price. Give an example.

Which of the following statements is the MOST accurate?

An increase in the world relative demand for U.S. output causes

What can explain the failure of relative PPP to hold in reality?

Explain Purchasing Power Parity.

Who among the following list of people is an early 20th century economist from Yale University who wrote the book The Theory of Interest?

In January 2013, the world's cheapest Big Macs were sold in

In practice

The PPP theory fails in reality for all of the following reasons EXCEPT

Under a flexible-price monetary approach to the exchange rate

Fill in the following table, assuming the law of one price prevails.

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

Discuss why the empirical support for PPP and the law of one price is weak in recent data.

Under Purchasing Power Parity

Describe and explain the relationship between expected inflation rates in two countries and their interest rate differential according to the PPP theory.

Which of the following statements is MOST accurate?

Which one of the following statements is the MOST accurate?

Explain why price levels are lower in poorer countries.

Which of the following statements is MOST accurate?

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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