Question 1

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. B

Question 2

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

Accepted Answer

Other things equal, money supply growth at a constant rate eventually results in ongoing price level inflation at the same rate as the money supply growth, but changes in this long-run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services.
The interest rate, however, is affected by continuing growth in the money supply (inflation). This can be shown by combining PPP with the interest parity condition. To show it analytically, recall that the condition of parity between dollar and euro assets is:   And according to relative PPP:   If people expect relative PPP to hold, the difference between interest rates offered by dollar and euro deposits will equal the difference between the expected inflation rates, over the relative horizon, in the U.S. and Europe.

Question 3

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 long 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 long 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. E

Question 4

Which of the following statements is the most accurate?

Accepted Answer

A)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over different commodities space. 
B)  Absolute PPP may be valid even when relative PPP is not, provided the factors causing deviations from relative PPP are more or less stable over time. 
C)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time. 
D)  Relative PPP is not valid when absolute PPP is not. 
E)  Relative PPP is only valid when absolute PPP is valid, providing the factors causing deviations from relative PPP are more or less stable over time. 
A)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over different commodities space. 
B)  Absolute PPP may be valid even when relative PPP is not, provided the factors causing deviations from relative PPP are more or less stable over time. 
C)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time. 
D)  Relative PPP is not valid when absolute PPP is not. 
E)  Relative PPP is only valid when absolute PPP is valid, providing the factors causing deviations from relative PPP are more or less stable over time.

Question 5

Which of the following statements is the most accurate?

Accepted Answer

A)  If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same. 
B)  If the law of one price holds true for every commodity, PPP must hold automatically. 
C)  If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same. 
D)  If the law of one price does not hold true for every commodity, PPP cannot be true as long as the reference baskets used to reckon different countries' price levels are the same. 
E)  If PPP holds true, then the law of one price must hold true automatically. 
A)  If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same. 
B)  If the law of one price holds true for every commodity, PPP must hold automatically. 
C)  If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same. 
D)  If the law of one price does not hold true for every commodity, PPP cannot be true as long as the reference baskets used to reckon different countries' price levels are the same. 
E)  If PPP holds true, then the law of one price must hold true automatically.

Question 6

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

Accepted Answer

The answer of Is a depreciation of the dollar/euro exchange...

Question 7

In the long run

Accepted Answer

A)  exchange rates obey relative PPP when all disturbances occur in the output markets. 
B)  exchange rates obey absolute PPP when all disturbances occur in the output markets. 
C)  exchange rates are unlikely to obey relative PPP when all disturbances occur in the output markets. 
D)  exchange rates are unlikely to obey relative PPP when all disturbances are monetary in nature. 
E)  exchange rates obey absolute PPP when all disturbances are monetary in nature. 
A)  exchange rates obey relative PPP when all disturbances occur in the output markets. 
B)  exchange rates obey absolute PPP when all disturbances occur in the output markets. 
C)  exchange rates are unlikely to obey relative PPP when all disturbances occur in the output markets. 
D)  exchange rates are unlikely to obey relative PPP when all disturbances are monetary in nature. 
E)  exchange rates obey absolute PPP when all disturbances are monetary in nature.

Question 8

Discuss the differences between Absolute PPP and Relative PPP.

Accepted Answer

Absolute PPP states that the exchange ra

Question 9

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 10

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 11

To answer the following question, please refer to the figure below. Concentrating only at the upper right quadrant, discuss the foreign exchange market equilibrium.

Accepted Answer

The upper right quadrant describes the e

Question 12

What is the Fisher Effect? Provide an example.

Accepted Answer

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

Question 13

The PPP theory fails in reality because

Accepted Answer

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

Question 14

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

Accepted Answer

For Example: If the U.S. price level ris

Question 15

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 16

Under Purchasing Power Parity,

Accepted Answer

A)    
B)    
C)    
D)    
E)    
A)    
B)    
C)    
D)    
E)

Question 17

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 18

Assuming relative PPP, fill in the table below:

Accepted Answer

The answer of Assuming relative PPP, fill in the table...

Question 19

Under the monetary approach to the exchange rate,

Accepted Answer

A)  an interest rate decrease is associated with higher expected inflation and a currency that will be weaker on all future dates. 
B)  an interest rate increase is associated with higher expected deflation and a currency that will be weaker on all future dates. 
C)  an interest rate increase is associated with higher expected inflation and a currency that will be strengthened on all future dates. 
D)  an interest rate increase is associated with higher expected deflation and a currency that will be strengthened on all future dates. 
E)  an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all future dates. 
A)  an interest rate decrease is associated with higher expected inflation and a currency that will be weaker on all future dates. 
B)  an interest rate increase is associated with higher expected deflation and a currency that will be weaker on all future dates. 
C)  an interest rate increase is associated with higher expected inflation and a currency that will be strengthened on all future dates. 
D)  an interest rate increase is associated with higher expected deflation and a currency that will be strengthened on all future dates. 
E)  an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all future dates.

Question 20

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

Accepted Answer

The answer of What are the predictions for the long...

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

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

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

Which one of the following statements is the most accurate?

Which of the following statements is the most accurate?

Which of the following statements is the most accurate?

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

In the long run

Discuss the differences between Absolute PPP and Relative PPP.

Under sticky prices,

Which of the following statements is the most accurate?

To answer the following question, please refer to the figure below. Concentrating only at the upper right quadrant, discuss the foreign exchange market equilibrium.

What is the Fisher Effect? Provide an example.

The PPP theory fails in reality because

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

Which of the following statements is the most accurate? In general,

Under Purchasing Power Parity,

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

Assuming relative PPP, fill in the table below:

Under the monetary approach to the exchange rate,

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

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

Optimum Currency Areas and the European Experience

Financial Globalization: Opportunity and Crisis

Developing Countries: Growth, Crisis, and Reform

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