Question 1

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

Accepted Answer

Other things equal,money supply growth a

Question 2

In order for the condition E$/HK$ = PUS/PHK to hold,what assumptions does the principle of purchasing power parity make?

Accepted Answer

A) Only that there are no transportation costs and restrictions on trade. 
B) Only that the markets are perfectly competitive,i.e. ,P = MC. 
C) The factors of production are identical between countries. 
D) No arbitrage exists. 
E) HK and the US are perfectly competitive and there are no transportation costs or restrictions on trade. 
A) Only that there are no transportation costs and restrictions on trade. 
B) Only that the markets are perfectly competitive,i.e. ,P = MC. 
C) The factors of production are identical between countries. 
D) No arbitrage exists. 
E) HK and the US are perfectly competitive and there are no transportation costs or restrictions on trade.

Question 3

When the domestic money prices of goods are held constant

Accepted Answer

A) a nominal dollar appreciation makes U.S.goods cheaper compared with foreign goods. 
B) a nominal dollar depreciation makes U.S.goods less appealing in foreign markets. 
C) a nominal dollar appreciation does not affect the prices of U.S.goods. 
D) a nominal dollar depreciation makes U.S.goods more expensive compared with foreign goods. 
E) a nominal dollar depreciation makes U.S.goods cheaper compared with foreign goods and a nominal dollar appreciation makes U.S.goods more expensive compared with foreign goods. 
A) a nominal dollar appreciation makes U.S.goods cheaper compared with foreign goods. 
B) a nominal dollar depreciation makes U.S.goods less appealing in foreign markets. 
C) a nominal dollar appreciation does not affect the prices of U.S.goods. 
D) a nominal dollar depreciation makes U.S.goods more expensive compared with foreign goods. 
E) a nominal dollar depreciation makes U.S.goods cheaper compared with foreign goods and a nominal dollar appreciation makes U.S.goods more expensive compared with foreign goods.

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

Under Purchasing Power Parity

Accepted Answer

A) E$/E = PiUS/PiE. 
B) E$/E = PiE/PiUS. 
C) E$/E = PUS/PE. 
D) E$/E = PE/PES. 
E) E$/E = PiE + PiUS/PiE. 
A) E$/E = PiUS/PiE. 
B) E$/E = PiE/PiUS. 
C) E$/E = PUS/PE. 
D) E$/E = PE/PES. 
E) E$/E = PiE + PiUS/PiE.

Question 6

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 t

Question 7

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 8

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.

Question 9

Interest rate differences between countries depend on

Accepted Answer

A) differences in expected inflation,but not on expected changes in the real exchange rate. 
B) differences in expected changes in the real exchange rate,but not on expected inflation. 
C) neither differences in expected inflation,nor on expected changes in the real exchange rate. 
D) differences in expected inflation and nothing else. 
E) differences in expected inflation,and on expected changes in the real exchange rate. 
A) differences in expected inflation,but not on expected changes in the real exchange rate. 
B) differences in expected changes in the real exchange rate,but not on expected inflation. 
C) neither differences in expected inflation,nor on expected changes in the real exchange rate. 
D) differences in expected inflation and nothing else. 
E) differences in expected inflation,and on expected changes in the real exchange rate.

Question 10

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 11

Under Purchasing Power Parity

Accepted Answer

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

Question 12

Discuss the differences between Absolute PPP and Relative PPP.

Accepted Answer

Absolute PPP states that the exchange ra

Question 13

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 14

Explain Purchasing Power Parity.

Accepted Answer

PPP states that the exchange rate betwee

Question 15

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 16

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.

Question 17

Which of the following statements is the MOST accurate?

Accepted Answer

A) The law of one price applies only to the general price level. 
B) The law of one price applies to the general price level while PPP applies to individual commodities. 
C) The law of one price applies to individual commodities while PPP applies to both the general price level and to individual commodities. 
D) PPP applies only to individual commodities. 
E) The law of one price applies to individual commodities while PPP applies to the general price level. 
A) The law of one price applies only to the general price level. 
B) The law of one price applies to the general price level while PPP applies to individual commodities. 
C) The law of one price applies to individual commodities while PPP applies to both the general price level and to individual commodities. 
D) PPP applies only to individual commodities. 
E) The law of one price applies to individual commodities while PPP applies to the general price level.

Question 18

How can long run values in the real exchange rate change?

Accepted Answer

An increase in world relative demand for

Question 19

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

Accepted Answer

PPP theory is a monetary approach to the

Question 20

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

Accepted Answer

Yes,the existence of nontradables allows

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

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

In order for the condition E$/HK$ = PUS/PHK to hold,what assumptions does the principle of purchasing power parity make?

When the domestic money prices of goods are held constant

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

Under Purchasing Power Parity

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

Floating exchange rates

If people expect relative PPP to hold

Interest rate differences between countries depend on

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

Under Purchasing Power Parity

Discuss the differences between Absolute PPP and Relative PPP.

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

Explain Purchasing Power Parity.

Which of the following statements is MOST accurate?

In the short run

Which of the following statements is the MOST accurate?

How can long run values in the real exchange rate change?

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

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

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

In order for the condition E_$/HK$ = P_US/P_HK to hold,what assumptions does the principle of purchasing power parity make?

The expected real interest rate (r^e)in terms of the nominal interest rate (R)and the expected inflation rate (π^e)is given by