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

To answer the following question,please refer to the figure below.Concentrating only at the lower left quadrant,discuss the relationship between the U.S.real money supply and the dollar/euro exchange rate,E_$/E.

Which one of the following statements is the MOST accurate?

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

Is a depreciation of the dollar/euro exchange rate correlated with a decrease in the dollar return on U.S.deposits?

What are the predictions for the long run equilibrium of the Monetary Approach?

What effect do non-tradable goods have on PPP?

Which of the following statements is MOST accurate?

What are the predictions of the PPP theory with regards to the real exchange rates?

Which of the following statements is the MOST accurate?

Present and explain the Fundamental Equation of the Monetary Approach.

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.

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

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

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

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

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

The monetary approach makes the general prediction that

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

Explain the Law of One Price.Give an example.

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