Question 1

Understanding the theory of purchasing power parity is important because deviations from PPP significantly affect the

Accepted Answer

A)  operations of the central bank. 
B)  hedging activities of multinational firms. 
C)  profitability of multinational firms. 
D)  arbitrage opportunities in the banking markets. 
A)  operations of the central bank. 
B)  hedging activities of multinational firms. 
C)  profitability of multinational firms. 
D)  arbitrage opportunities in the banking markets.

Question 2

In its absolute version,purchasing power parity states that price levels worldwide should be ________ when expressed in a common currency.

Accepted Answer

A)  equal 
B)  roughly equal 
C)  different 
D)  opportunities for arbitrage 
A)  equal 
B)  roughly equal 
C)  different 
D)  opportunities for arbitrage

Question 3

What effects do deviations from the law of one price have on absolute purchasing power parity?

Accepted Answer

Any of the forces that create a deviatio

Question 4

If a country's freely floating currency is undervalued in terms of purchasing power parity,its capital account is likely to be

Accepted Answer

A)  in deficit or tending toward a deficit. 
B)  in surplus or tending toward a surplus. 
C)  subsidized by the International Monetary Fund. 
D)  a candidate for loans from the World Bank. 
A)  in deficit or tending toward a deficit. 
B)  in surplus or tending toward a surplus. 
C)  subsidized by the International Monetary Fund. 
D)  a candidate for loans from the World Bank.

Question 5

Because the real exchange is composed of three variables that can all move simultaneously,many combinations of changes lead to a real appreciation of the 	pound (in this case).Which one of the following options is NOT a basic movement?

Accepted Answer

A)  a decrease in the pound prices of U.S. goods, not holding the dollar prices constant 
B)  a decrease in the dollar prices of U.S. goods, holding the exchange rate and the pound prices of goods constant 
C)  an increase in the pound prices of goods, holding the exchange rate and the dollar prices of goods constant 
D)  an increase in the nominal exchange rate ($/?), holding the dollar prices and pound prices of goods constant 
A)  a decrease in the pound prices of U.S. goods, not holding the dollar prices constant 
B)  a decrease in the dollar prices of U.S. goods, holding the exchange rate and the pound prices of goods constant 
C)  an increase in the pound prices of goods, holding the exchange rate and the dollar prices of goods constant 
D)  an increase in the nominal exchange rate ($/?), holding the dollar prices and pound prices of goods constant

Question 6

Explain what is meant by the real exchange rate?

Accepted Answer

The real exchange rate of the dollar rel

Question 7

Which one of the following reasons for violations of the Law of One Price is the most obvious?

Accepted Answer

A)  tariffs on imports 
B)  banking rules 
C)  industrial policies 
D)  exchange rate controls 
A)  tariffs on imports 
B)  banking rules 
C)  industrial policies 
D)  exchange rate controls

Question 8

All of the following options are reasons why the prices of goods and services deviate from the law of one price EXCEPT:

Accepted Answer

A)  sticky prices. 
B)  speculation. 
C)  tariffs and quotas. 
D)  price index. 
A)  sticky prices. 
B)  speculation. 
C)  tariffs and quotas. 
D)  price index.

Question 9

What is the name of the expression that refers to the costs that a firm incurs in changing its prices?

Accepted Answer

A)  fixed costs 
B)  variable costs 
C)  cost-base pricing 
D)  menu costs 
A)  fixed costs 
B)  variable costs 
C)  cost-base pricing 
D)  menu costs

Question 10

When the external purchasing power or a currency is greater than the internal purchasing power,the currency is said to be ________.

Accepted Answer

A)  overvalued 
B)  undervalued 
C)  at parity 
D)  in arbitrage 
A)  overvalued 
B)  undervalued 
C)  at parity 
D)  in arbitrage

Question 11

What is likely to happen to the balance of trade when inflation is great in Mexico than in the U.S.but the peso is pegged to the dollar?

Accepted Answer

If the peso is pegged to the dollar and

Question 12

All of the following options are some of the factors that cause deviations from absolute PPP EXCEPT:

Accepted Answer

A)  transaction costs. 
B)  non-traded goods. 
C)  balance of payments. 
D)  changes in relative prices. 
A)  transaction costs. 
B)  non-traded goods. 
C)  balance of payments. 
D)  changes in relative prices.

Question 13

If people expect that their future purchasing power will decline,what will happen to the exchange rate today?

Accepted Answer

Typically,when people think that the pur

Understanding the theory of purchasing power parity is important because deviations from PPP significantly affect the

In its absolute version,purchasing power parity states that price levels worldwide should be ________ when expressed in a common currency.

What effects do deviations from the law of one price have on absolute purchasing power parity?

If a country's freely floating currency is undervalued in terms of purchasing power parity,its capital account is likely to be

Because the real exchange is composed of three variables that can all move simultaneously,many combinations of changes lead to a real appreciation of the pound (in this case).Which one of the following options is NOT a basic movement?

Explain what is meant by the real exchange rate?

Which one of the following reasons for violations of the Law of One Price is the most obvious?

All of the following options are reasons why the prices of goods and services deviate from the law of one price EXCEPT:

What is the name of the expression that refers to the costs that a firm incurs in changing its prices?

When the external purchasing power or a currency is greater than the internal purchasing power,the currency is said to be ________.

What is likely to happen to the balance of trade when inflation is great in Mexico than in the U.S.but the peso is pegged to the dollar?

All of the following options are some of the factors that cause deviations from absolute PPP EXCEPT:

If people expect that their future purchasing power will decline,what will happen to the exchange rate today?

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

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Exam 8: Purchasing Power Parity and Real Exchange Rates

Understanding the theory of purchasing power parity is important because deviations from PPP significantly affect the

In its absolute version,purchasing power parity states that price levels worldwide should be ________ when expressed in a common currency.

What effects do deviations from the law of one price have on absolute purchasing power parity?

If a country's freely floating currency is undervalued in terms of purchasing power parity,its capital account is likely to be

Because the real exchange is composed of three variables that can all move simultaneously,many combinations of changes lead to a real appreciation of the pound (in this case).Which one of the following options is NOT a basic movement?

Explain what is meant by the real exchange rate?

Which one of the following reasons for violations of the Law of One Price is the most obvious?

All of the following options are reasons why the prices of goods and services deviate from the law of one price EXCEPT:

What is the name of the expression that refers to the costs that a firm incurs in changing its prices?

When the external purchasing power or a currency is greater than the internal purchasing power,the currency is said to be ________.

What is likely to happen to the balance of trade when inflation is great in Mexico than in the U.S.but the peso is pegged to the dollar?

All of the following options are some of the factors that cause deviations from absolute PPP EXCEPT:

If people expect that their future purchasing power will decline,what will happen to the exchange rate today?

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