Question 1

Explain Purchasing Power Parity.

Accepted Answer

PPP states that the exchange rate betwee

Question 2

Discuss the relationship between PPP and the Law of One Price.

Accepted Answer

The law of one price applies to individu

Question 3

Which of the following statements is the most accurate? In general, under the monetary approach to the exchange rate,

Accepted Answer

A)  the interest rate is not independent of the money supply growth rate in the short run. 
B)  the interest rate is independent of the money supply growth rate in the long run. 
C)  the interest rate is not independent of the money supply growth rate in the long run, but independent in the short run. 
D)  the interest rate is not independent of the money supply growth rate in the long run. 
E)  the interest rate is a factor of the money supply growth rate only in the short term. 
A)  the interest rate is not independent of the money supply growth rate in the short run. 
B)  the interest rate is independent of the money supply growth rate in the long run. 
C)  the interest rate is not independent of the money supply growth rate in the long run, but independent in the short run. 
D)  the interest rate is not independent of the money supply growth rate in the long run. 
E)  the interest rate is a factor of the money supply growth rate only in the short term.

Question 4

Which of the following statements is the most accurate? In general, under the monetary approach to the exchange rate,

Accepted Answer

A)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
B)  while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply do not affect the interest rate. 
C)  while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
D)  the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate. 
E)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate. 
A)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
B)  while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply do not affect the interest rate. 
C)  while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
D)  the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate. 
E)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate.

Question 5

What effect do non-tradable goods have on PPP?

Accepted Answer

The effect is quite substantial.
In 2006

Question 6

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

Question 7

To answer the following question, please refer to the figure below. Concentrating only at the lower right quadrant, discuss the effects of a change in U.S. expected inflation.

Accepted Answer

Lower right quadrant shows the equilibri

Question 8

Which of the following are theories meant to explain "Why Price Levels are Lower in Poorer Countries"?

Accepted Answer

A)  only Bhagwati-Kravis-Lipsey 
B)  only Balassa-Samuelson 
C)  only Goldberg-Knetter 
D)  Bhagwati-Kravis-Lipsey and Balassa-Samuelson 
E)  Bhagwati-Kravis-Lipsey and Goldberg-Knetter 
A)  only Bhagwati-Kravis-Lipsey 
B)  only Balassa-Samuelson 
C)  only Goldberg-Knetter 
D)  Bhagwati-Kravis-Lipsey and Balassa-Samuelson 
E)  Bhagwati-Kravis-Lipsey and Goldberg-Knetter

Question 9

Which one of the following statements is the most accurate?

Accepted Answer

A)  The purchasing power of any given country will increase in countries where the prices of non-tradable goods rise. 
B)  The purchasing power of any given country will fall in countries where the prices of non-tradable goods fall. 
C)  The purchasing power of any given country will fall in countries where the prices of non-tradable goods rise. 
D)  The purchasing power of any given country will remain constant in countries where the prices of non-tradable goods rise. 
E)  The purchasing power of any given country will fall in countries where the prices of non-tradable goods remain constant. 
A)  The purchasing power of any given country will increase in countries where the prices of non-tradable goods rise. 
B)  The purchasing power of any given country will fall in countries where the prices of non-tradable goods fall. 
C)  The purchasing power of any given country will fall in countries where the prices of non-tradable goods rise. 
D)  The purchasing power of any given country will remain constant in countries where the prices of non-tradable goods rise. 
E)  The purchasing power of any given country will fall in countries where the prices of non-tradable goods remain constant.

Question 10

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.

Accepted Answer

A)  perfectly flexible; depreciate; increase; higher 
B)  perfectly flexible; appreciate; increase; higher 
C)  immutable; depreciate; increase; higher 
D)  immutable; appreciate; decrease; higher 
E)  absolutely inflexible; depreciate; decrease; higher 
A)  perfectly flexible; depreciate; increase; higher 
B)  perfectly flexible; appreciate; increase; higher 
C)  immutable; depreciate; increase; higher 
D)  immutable; appreciate; decrease; higher 
E)  absolutely inflexible; depreciate; decrease; higher

Question 11

The monetary approach makes the general prediction that

Accepted Answer

A)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies. 
B)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run by the relative supplies of those monies and the relative demands for them. 
C)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run and long run by the relative supplies of those monies and the relative demands for them. 
D)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them. 
E)  the money supply in the U.S. will adjust to European monetary equilibrium. 
A)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies. 
B)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run by the relative supplies of those monies and the relative demands for them. 
C)  the exchange rate, which is the relative price of American and European money, is fully determined in the short run and long run by the relative supplies of those monies and the relative demands for them. 
D)  the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them. 
E)  the money supply in the U.S. will adjust to European monetary equilibrium.

Question 12

Under the monetary approach to the exchange rate,

Accepted Answer

A)  a reduction in the money supply will cause immediate currency depreciation. 
B)  a rise in the money supply will cause currency depreciation. 
C)  a rise in the money supply will cause immediate currency appreciation. 
D)  a rise in the money supply will cause depreciation. 
E)  a rise in the money supply will cause immediate currency depreciation. 
A)  a reduction in the money supply will cause immediate currency depreciation. 
B)  a rise in the money supply will cause currency depreciation. 
C)  a rise in the money supply will cause immediate currency appreciation. 
D)  a rise in the money supply will cause depreciation. 
E)  a rise in the money supply will cause immediate currency depreciation.

Question 13

Which of the following statements is the most accurate?

Accepted Answer

A)  The law of one price does fare well in all recent studies. 
B)  The law of one price does fare well in many recent studies. 
C)  The law of one price sometimes fares well in recent studies. 
D)  The law of one price does not fare well in recent studies. 
E)  The law of one price has not been studied recently. 
A)  The law of one price does fare well in all recent studies. 
B)  The law of one price does fare well in many recent studies. 
C)  The law of one price sometimes fares well in recent studies. 
D)  The law of one price does not fare well in recent studies. 
E)  The law of one price has not been studied recently.

Question 14

Explain the Law of One Price. Give an example.

Accepted Answer

The law of one price states that in comp

Question 15

Which of the following statements is most accurate?

Accepted Answer

A)  In the money market, an increase in U.S. money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
B)  In the money market, an increase in European money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
C)  In the money market, an increase in U.S. money supply growth rate leads to a decrease in the long-run nominal dollar/euro exchange rate. 
D)  In the money market, an increase in European money supply growth leads to an increase in the long-run nominal dollar/euro exchange rate. 
E)  In the money market, an increase in U.S. money supply level leads to a proportional decrease in the long-run nominal dollar/euro exchange rate. 
A)  In the money market, an increase in U.S. money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
B)  In the money market, an increase in European money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
C)  In the money market, an increase in U.S. money supply growth rate leads to a decrease in the long-run nominal dollar/euro exchange rate. 
D)  In the money market, an increase in European money supply growth leads to an increase in the long-run nominal dollar/euro exchange rate. 
E)  In the money market, an increase in U.S. money supply level leads to a proportional decrease in the long-run nominal dollar/euro exchange rate.

Question 16

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 17

Which of the following statements is most accurate?

Accepted Answer

A)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
B)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
C)  A relative expansion of U.S. output causes a long-run appreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real depreciation of the dollar against the euro. 
D)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro. 
E)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro. 
A)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
B)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro. 
C)  A relative expansion of U.S. output causes a long-run appreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real depreciation of the dollar against the euro. 
D)  A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro. 
E)  A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.

Question 18

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

Accepted Answer

A)  increases; decrease; increase 
B)  increases; increase; increase 
C)  increases; decrease; decrease 
D)  increases; increase; decrease 
E)  decreases; increase; increase 
A)  increases; decrease; increase 
B)  increases; increase; increase 
C)  increases; decrease; decrease 
D)  increases; increase; decrease 
E)  decreases; increase; increase

Question 19

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 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 US are perfectly competitive and there are no transportation costs or restrictions on trade.

Question 20

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

Accepted Answer

Government measures of the price level d

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

Explain Purchasing Power Parity.

Discuss the relationship between PPP and the Law of One Price.

Which of the following statements is the most accurate? In general, under the monetary approach to the exchange rate,

Which of the following statements is the most accurate? In general, under the monetary approach to the exchange rate,

What effect do non-tradable goods have on PPP?

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

To answer the following question, please refer to the figure below. Concentrating only at the lower right quadrant, discuss the effects of a change in U.S. expected inflation.

Which of the following are theories meant to explain "Why Price Levels are Lower in Poorer Countries"?

Which one of the following statements is the most accurate?

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.

The monetary approach makes the general prediction that

Under the monetary approach to the exchange rate,

Which of the following statements is the most accurate?

Explain the Law of One Price. Give an example.

Which of the following statements is most accurate?

Which of the following statements is most accurate?

Which of the following statements is most accurate?

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

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

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

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

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

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.

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

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