Question 1

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

Accepted Answer

The real exchange rate between two countries is a broad summary measure of the prices one country's goods and services relative to the other's. PPP predicts that the real exchange rate never permanently changes, which is different from nominal exchange rates that deals with the relative price of two currencies.

Question 2

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. B

Question 3

Under the monetary approach to 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. C

Question 4

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 5

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 6

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 7

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 8

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 9

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 10

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 11

Discuss the differences between Absolute PPP and Relative PPP.

Accepted Answer

Absolute PPP states that the exchange ra

Question 12

Assuming relative PPP, fill in the table below:

Accepted Answer

Using ( @#IMG-DLM& -

Question 13

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 14

Explain the Law of One Price. Give an example.

Accepted Answer

The law of one price states that in comp

Question 15

Construct a table that will summarize the effects of money market and output market changes on the long-run nominal dollar/euro exchange rate

Accepted Answer

The answer of Construct a table that will summarize the...

Question 16

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 17

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 18

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 19

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 20

Explain Purchasing Power Parity.

Accepted Answer

PPP states that the exchange rate betwee

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

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

Floating exchange rates

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

Which of the following statements is MOST accurate?

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

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

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 MOST accurate?

Which of the following statements is the MOST accurate?

In the long run

Discuss the differences between Absolute PPP and Relative PPP.

Assuming relative PPP, fill in the table below:

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

Explain the Law of One Price. Give an example.

Construct a table that will summarize the effects of money market and output market changes on the long-run nominal dollar/euro exchange rate

Under the monetary approach to the exchange rate

Which of the following statements is the MOST accurate? In general

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

Which of the following statements is the MOST accurate?

Explain Purchasing Power Parity.

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

Financial Globalization: Opportunity and Crisis

Optimum Currency Areas and the Euro

Developing Countries: Growth, Crisis, and Reform

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