Question 1

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

Accepted Answer

A)  eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. 
B)  eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do affect the full-employment output level and the long-run relative prices of goods and services. 
C)  eventually results in ongoing price level inflation at the same rate, 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. 
D)  eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services. 
E)  eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services. 
A)  eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level or the long-run relative prices of goods and services. 
B)  eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do affect the full-employment output level and the long-run relative prices of goods and services. 
C)  eventually results in ongoing price level inflation at the same rate, 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. 
D)  eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services. 
E)  eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services.

Question 2

Under Purchasing Power Parity,

Accepted Answer

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

Question 3

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

Question 4

Which of the following statements is the most accurate?

Accepted Answer

A)  In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries' products are traded. 
B)  In the long run, national price levels play a key role only in determining interest rates. 
C)  In the long run, national price levels play a key role only in determining the relative prices at which countries' products are traded. 
D)  In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded. 
E)  In the long run, national price levels play no role in determining interest rates and the relative prices at which countries' products are traded. 
A)  In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries' products are traded. 
B)  In the long run, national price levels play a key role only in determining interest rates. 
C)  In the long run, national price levels play a key role only in determining the relative prices at which countries' products are traded. 
D)  In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded. 
E)  In the long run, national price levels play no role in determining interest rates and the relative prices at which countries' products are traded.

Question 5

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 6

What is the real interest rate parity condition?

Accepted Answer

The nominal interest rates are

Question 7

Which of the following statements is most accurate?

Accepted Answer

A)  The United States price level will place a relatively light weight on commodities produced and consumed in America, while the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. 
B)  The United States price level will place a relatively light weight on commodities produced and consumed in America, and the European price level will place a relatively light weight on commodities produced and consumed in Europe. 
C)  The United States price level will place a relatively heavy weight on commodities produced and consumed in America, and the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. 
D)  The United States price level will place a relatively heavy weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America. 
E)  The United States price level will place a relatively light weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America. 
A)  The United States price level will place a relatively light weight on commodities produced and consumed in America, while the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. 
B)  The United States price level will place a relatively light weight on commodities produced and consumed in America, and the European price level will place a relatively light weight on commodities produced and consumed in Europe. 
C)  The United States price level will place a relatively heavy weight on commodities produced and consumed in America, and the European price level will place a relatively heavy weight on commodities produced and consumed in Europe. 
D)  The United States price level will place a relatively heavy weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America. 
E)  The United States price level will place a relatively light weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America.

Question 8

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 9

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 10

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

Accepted Answer

The real exchange rate between two count

Question 11

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 12

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 13

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

Accepted Answer

An increase in world relative demand for

Question 14

What is the real exchange rate between the dollar and the euro equal to?

Accepted Answer

The answer of What is the real exchange rate between...

Question 15

When all variables start out at their long-run equilibrium levels, the most important determinant of long-run swings in nominal exchange rates is

Accepted Answer

A)  a shift in relative money supply levels. 
B)  a shift in relative money supply growth rates. 
C)  a change in relative output demand. 
D)  a change in relative output supply. 
E)  a change in relative inflation rates. 
A)  a shift in relative money supply levels. 
B)  a shift in relative money supply growth rates. 
C)  a change in relative output demand. 
D)  a change in relative output supply. 
E)  a change in relative inflation rates.

Question 16

Define the concept of the real exchange rate and explain how it differs from the nominal exchange rate.

Accepted Answer

The answer of Define the concept of the real exchange...

Question 17

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 18

The difference between nominal and real interest rates is that

Accepted Answer

A)  nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms. 
B)  nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output. 
C)  nominal interest rates can fluctuate, while real interest rates always remain fixed. 
D)  real interest rates can fluctuate, while nominal interest rates always remain fixed. 
E)  real interest rates are the same in every country, while nominal interest rates are different for every country. 
A)  nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms. 
B)  nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output. 
C)  nominal interest rates can fluctuate, while real interest rates always remain fixed. 
D)  real interest rates can fluctuate, while nominal interest rates always remain fixed. 
E)  real interest rates are the same in every country, while nominal interest rates are different for every country.

Question 19

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.

Accepted Answer

The lower left quadrant in the figure de

Question 20

Which of the following statements is the most accurate? The law of one price states:

Accepted Answer

A)  in competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
B)  in competitive markets free of transportation costs and official barrier to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency. 
C)  in competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price. 
D)  identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
E)  in competitive markets free of official barrier to trade, identical goods are sold at the same price regardless of transportation costs. 
A)  in competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
B)  in competitive markets free of transportation costs and official barrier to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency. 
C)  in competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price. 
D)  identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
E)  in competitive markets free of official barrier to trade, identical goods are sold at the same price regardless of transportation costs.

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

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

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.

Which of the following statements is the most accurate?

Which of the following statements is the most accurate?

What is the real interest rate parity condition?

Which of the following statements is most accurate?

Which of the following statements is the most accurate?

Floating exchange rates

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

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

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

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

What is the real exchange rate between the dollar and the euro equal to?

When all variables start out at their long-run equilibrium levels, the most important determinant of long-run swings in nominal exchange rates is

Define the concept of the real exchange rate and explain how it differs from the nominal exchange rate.

In practice,

The difference between nominal and real interest rates is that

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 of the following statements is the most accurate? The law of one price states:

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

Filters

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.