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

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

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Which one of the following statements is the MOST accurate?

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

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

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

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What effect do non-tradable goods have on PPP?

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Which of the following statements is MOST accurate?

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

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Which of the following statements is the MOST accurate?

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Present and explain the Fundamental Equation of the Monetary Approach.

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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.

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

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

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

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

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

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The monetary approach makes the general prediction that

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

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Explain the Law of One Price.Give an example.

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

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