Question 1

One important reason to study the purchasing power parity theory is because

Accepted Answer

A)  investors should borrow in a foreign currency, when there is a forward discount. 
B)  when inflation rates differ across international borders, PPP provides a baseline forecast of future exchange rates. 
C)  forecasting exchange rates is difficult and PPP makes it easier. 
D)  it provides currency dealers with a way to identify arbitrage opportunities. 
A)  investors should borrow in a foreign currency, when there is a forward discount. 
B)  when inflation rates differ across international borders, PPP provides a baseline forecast of future exchange rates. 
C)  forecasting exchange rates is difficult and PPP makes it easier. 
D)  it provides currency dealers with a way to identify arbitrage opportunities. B

Question 2

Suppose annual inflation rates in the U.S.and Mexico are expected to be 6% and 80%,respectively,over the next several years.If the current spot rate for the Mexican peso is $.005,then the best estimate of the peso's spot value in 3 years is ________.

Accepted Answer

A)  $.00276 
B)  $.01190 
C)  $.00321 
D)  $.00102 
A)  $.00276 
B)  $.01190 
C)  $.00321 
D)  $.00102 D

Question 3

Within the United States,what is the name for the power of a dollar when it is used to purchase an amount of goods and services?

Accepted Answer

A)  internal purchasing power 
B)  external purchasing power 
C)  absolute purchasing power parity 
D)  relative purchasing power parity 
A)  internal purchasing power 
B)  external purchasing power 
C)  absolute purchasing power parity 
D)  relative purchasing power parity A

Question 4

The theory of relative purchasing power parity states that,between two nations,the ________.

Accepted Answer

A)  inflation rates are unrelated 
B)  exchange rate differential reflects the inflation rate differential 
C)  inflation rate is smaller in weaker currencies 
D)  the interest rate is greater than the inflation rate during depreciations 
A)  inflation rates are unrelated 
B)  exchange rate differential reflects the inflation rate differential 
C)  inflation rate is smaller in weaker currencies 
D)  the interest rate is greater than the inflation rate during depreciations

Question 5

What is the distinction between relative purchasing power parity and absolute purchasing power parity?

Accepted Answer

The theory of relative PPP specifies tha

Question 6

When people describe what they think an exchange rate value should be,they often use a benchmark model,known as ________.

Accepted Answer

A)  purchasing power parity 
B)  interest rate parity 
C)  the Fisher effect 
D)  the International Fisher effect 
A)  purchasing power parity 
B)  interest rate parity 
C)  the Fisher effect 
D)  the International Fisher effect

Question 7

Could fluctuations in the real exchange rate cause deviations from absolute purchasing power parity? Why?

Accepted Answer

The real exchange rate,say,of the dollar

Question 8

When is a currency said to be overvalued?

Accepted Answer

A)  when its internal purchasing power is greater than its external purchasing power 
B)  when its external purchasing power is greater than its internal purchasing power 
C)  when its external purchasing power is less than its internal purchasing power 
D)  when its internal purchasing power is equal than its external purchasing power 
A)  when its internal purchasing power is greater than its external purchasing power 
B)  when its external purchasing power is greater than its internal purchasing power 
C)  when its external purchasing power is less than its internal purchasing power 
D)  when its internal purchasing power is equal than its external purchasing power

Question 9

The version of purchasing power parity that states the exchange rates will adjust to equalize the internal and external purchasing power of a currency is known as the ________.

Accepted Answer

A)  relative purchasing power parity 
B)  equilibrium purchasing power parity 
C)  absolute purchasing power parity 
D)  real exchange rate equilibrium 
A)  relative purchasing power parity 
B)  equilibrium purchasing power parity 
C)  absolute purchasing power parity 
D)  real exchange rate equilibrium

Question 10

What is the name of the ratio of a price level at one point in time to the price level in a designated base year?

Accepted Answer

A)  bid-ask spread 
B)  reserve requirement 
C)  percent spread 
D)  price index 
A)  bid-ask spread 
B)  reserve requirement 
C)  percent spread 
D)  price index

Question 11

The following options are all important reasons to study the theory of PPP EXCEPT:

Accepted Answer

A)  it provides a baseline forecast of future exchange rates that is usually considered whenever it is necessary to forecast future cash flows in different currencies. 
B)  deviations from PPP significantly affect the profitability of firms. 
C)  it is particularly useful in assessing cost-of-living differences across countries 
D)  the deviations from the theory are very small when it comes to the determination of exchange rates 
A)  it provides a baseline forecast of future exchange rates that is usually considered whenever it is necessary to forecast future cash flows in different currencies. 
B)  deviations from PPP significantly affect the profitability of firms. 
C)  it is particularly useful in assessing cost-of-living differences across countries 
D)  the deviations from the theory are very small when it comes to the determination of exchange rates

Question 12

Under what conditions could the law of one price be violated?

Accepted Answer

The law of one price says that the price

Question 13

Within Germany,what is the name for the power of a U.S.dollar when it is used to purchase an amount of goods and services?

Accepted Answer

A)  internal purchasing power 
B)  external purchasing power 
C)  absolute purchasing power parity 
D)  relative purchasing power parity 
A)  internal purchasing power 
B)  external purchasing power 
C)  absolute purchasing power parity 
D)  relative purchasing power parity

Question 14

What is more appropriate to use when attempting to find information about the purchasing power of a currency?

Accepted Answer

A)  the spot exchange rate 
B)  the forward rate 
C)  the price levels 
D)  the price indexes 
A)  the spot exchange rate 
B)  the forward rate 
C)  the price levels 
D)  the price indexes

Question 15

In the absence of pure competition,firms who segment markets may be able to charge different prices in different countries for the same good.This practice is known as ________.

Accepted Answer

A)  mark to market 
B)  interest rate arbitrage 
C)  pricing to market 
D)  speculation 
A)  mark to market 
B)  interest rate arbitrage 
C)  pricing to market 
D)  speculation

Question 16

When the price level of an economy is ________,________ is occurring.Conversely,when the price level is ________,________ is occurring.

Accepted Answer

A)  rising, deflation, falling, inflation 
B)  rising, inflation, falling, deflation 
C)  falling, inflation, rising, deflation 
D)  falling, deflation, rising, deflation 
A)  rising, deflation, falling, inflation 
B)  rising, inflation, falling, deflation 
C)  falling, inflation, rising, deflation 
D)  falling, deflation, rising, deflation

Question 17

What is the name given to the weighted average of the nominal prices of the goods and services consumed in the economy?

Accepted Answer

A)  nominal price 
B)  monetary value 
C)  price level 
D)  consumption bundle 
A)  nominal price 
B)  monetary value 
C)  price level 
D)  consumption bundle

Question 18

When the currency of a country is stronger in foreign exchange markets than its PPP exchange rate,the dollar value of the country's GDP per capita when measured by current exchange rates is ________.

Accepted Answer

A)  smaller than when measured by PPP exchange rates 
B)  larger than when measured by PPP exchange rates 
C)  the same as when measured by PPP exchange rates 
D)  slightly the same as when measured by PPP exchange rates 
A)  smaller than when measured by PPP exchange rates 
B)  larger than when measured by PPP exchange rates 
C)  the same as when measured by PPP exchange rates 
D)  slightly the same as when measured by PPP exchange rates

Question 19

When the price of one commodity is the same wherever in the world the good is being sold when denominated in a particular currency,it is said the Law of ________ prevails.

Accepted Answer

A)  currency supply 
B)  currency demand 
C)  purchasing power parity 
D)  one price 
A)  currency supply 
B)  currency demand 
C)  purchasing power parity 
D)  one price

Question 20

A 150% return in Belarus is higher than a 15% dollar return in the U.S.

Accepted Answer

A)  because arbitrage opportunities exist. 
B)  when the inflation controls are suspended in Belarus. 
C)  it depends on whether these are nominal or real returns. 
D)  regardless of nominal or real returns. 
A)  because arbitrage opportunities exist. 
B)  when the inflation controls are suspended in Belarus. 
C)  it depends on whether these are nominal or real returns. 
D)  regardless of nominal or real returns.

Exam 8: Purchasing Power Parity and Real Exchange Rates

One important reason to study the purchasing power parity theory is because

Suppose annual inflation rates in the U.S.and Mexico are expected to be 6% and 80%,respectively,over the next several years.If the current spot rate for the Mexican peso is $.005,then the best estimate of the peso's spot value in 3 years is ________.

Within the United States,what is the name for the power of a dollar when it is used to purchase an amount of goods and services?

The theory of relative purchasing power parity states that,between two nations,the ________.

What is the distinction between relative purchasing power parity and absolute purchasing power parity?

When people describe what they think an exchange rate value should be,they often use a benchmark model,known as ________.

Could fluctuations in the real exchange rate cause deviations from absolute purchasing power parity? Why?

When is a currency said to be overvalued?

The version of purchasing power parity that states the exchange rates will adjust to equalize the internal and external purchasing power of a currency is known as the ________.

What is the name of the ratio of a price level at one point in time to the price level in a designated base year?

The following options are all important reasons to study the theory of PPP EXCEPT:

Under what conditions could the law of one price be violated?

Within Germany,what is the name for the power of a U.S.dollar when it is used to purchase an amount of goods and services?

What is more appropriate to use when attempting to find information about the purchasing power of a currency?

In the absence of pure competition,firms who segment markets may be able to charge different prices in different countries for the same good.This practice is known as ________.

When the price level of an economy is ________,________ is occurring.Conversely,when the price level is ________,________ is occurring.

What is the name given to the weighted average of the nominal prices of the goods and services consumed in the economy?

When the currency of a country is stronger in foreign exchange markets than its PPP exchange rate,the dollar value of the country's GDP per capita when measured by current exchange rates is ________.

When the price of one commodity is the same wherever in the world the good is being sold when denominated in a particular currency,it is said the Law of ________ prevails.

A 150% return in Belarus is higher than a 15% dollar return in the U.S.

Globalization and the Multinational Corporation

The Foreign Exchange Market

Forward Markets and Transaction Exchange Risk

The Balance of Payments

Exchange Rate Systems

Interest Rate Parity

Speculation and Risk in the Foreign Exchange Market

Measuring and Managing Real Exchange Risk

Exchange Rate Determination and Forecasting

International Debt Financing

International Equity Financing

International Capital Market Equilibrium

Country and Political Risk

International Capital Budgeting

Additional Topics in International Capital Budgeting

Risk Management and the Foreign Currency Hedging Decision

Financing International Trade

Managing Net Working Capital

Foreign Currency Futures and Options

Interest Rates and Foreign Currency Swaps

Filters

When the price level of an economy is , is occurring.Conversely,when the price level is , is occurring.