Question 1

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. D

Question 2

Which of the following are theories meant to explain "Why Price Levels are Lower in Poorer Countries"?

Accepted Answer

A) only Bhagwati-Kravis-Lipsey 
B) only Balassa-Samuelson 
C) only Goldberg-Knetter 
D) Bhagwati-Kravis-Lipsey and Balassa-Samuelson 
E) Bhagwati-Kravis-Lipsey and Goldberg-Knetter 
A) only Bhagwati-Kravis-Lipsey 
B) only Balassa-Samuelson 
C) only Goldberg-Knetter 
D) Bhagwati-Kravis-Lipsey and Balassa-Samuelson 
E) Bhagwati-Kravis-Lipsey and Goldberg-Knetter D

Question 3

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. E

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

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 6

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 7

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

(E_{ruble/franc,t} - E_{ruble/franc,t-1})/E_{ruble/franc,t-1} = 2 - 0.02 = 1.98 So

Question 8

Which of the following statements is the MOST accurate?

Accepted Answer

A) The prices of identical commodity baskets,when converted to a single currency,are the same across countries. 
B) The prices of identical commodity baskets,when converted to a single currency,differ substantially across countries. 
C) The prices of identical commodity baskets,when converted to a single currency,do not differ substantially across countries. 
D) The prices of identical commodity baskets,when converted to a single currency,are often the same across countries. 
E) The prices of identical commodity baskets,when converted to a single currency,are the same across countries more than 50% of the time. 
A) The prices of identical commodity baskets,when converted to a single currency,are the same across countries. 
B) The prices of identical commodity baskets,when converted to a single currency,differ substantially across countries. 
C) The prices of identical commodity baskets,when converted to a single currency,do not differ substantially across countries. 
D) The prices of identical commodity baskets,when converted to a single currency,are often the same across countries. 
E) The prices of identical commodity baskets,when converted to a single currency,are the same across countries more than 50% of the time.

Question 9

To answer the following question,please refer to the figure below.Concentrating only at the lower right quadrant,discuss the effects of a change in U.S.expected inflation.

Accepted Answer

Lower right quadrant shows the equilibri

Question 10

Which of the following statements is the MOST accurate?

Accepted Answer

A) Relative PPP is not a reasonable approximation to the data. 
B) Relative PPP is sometimes a reasonable approximation to the data but often performs poorly. 
C) Relative PPP is sometimes a reasonable approximation to the data. 
D) PPP is sometimes a reasonable approximation to the data. 
E) PPP is sometimes a reasonable approximation to the data but usually performs poorly. 
A) Relative PPP is not a reasonable approximation to the data. 
B) Relative PPP is sometimes a reasonable approximation to the data but often performs poorly. 
C) Relative PPP is sometimes a reasonable approximation to the data. 
D) PPP is sometimes a reasonable approximation to the data. 
E) PPP is sometimes a reasonable approximation to the data but usually performs poorly.

Question 11

Explain why price levels are lower in poorer countries.

Accepted Answer

One theory explains the difference in pr

Question 12

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 13

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 14

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 15

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 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 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 18

What is the Fisher Effect? Provide an example.

Accepted Answer

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

Question 19

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 20

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 do 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 do 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.

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

Which of the following statements is the MOST accurate?

Which of the following are theories meant to explain "Why Price Levels are Lower in Poorer Countries"?

Under sticky prices

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

Under sticky prices

Under the monetary approach to the exchange rate

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?

Which of the following statements is the MOST accurate?

To answer the following question,please refer to the figure below.Concentrating only at the lower right quadrant,discuss the effects of a change in U.S.expected inflation.

Which of the following statements is the MOST accurate?

Explain why price levels are lower in poorer countries.

In practice

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

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

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

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

Which one of the following statements is the MOST accurate?

What is the Fisher Effect? Provide an example.

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

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

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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