Question 1

Under a flexible-price monetary approach to the exchange rate

Accepted Answer

A)  when the domestic money supply falls, the price level would eventually fall, increasing the interest rate. 
B)  when the domestic money supply falls, the price level would fall right away, causing a reduction in the interest rate. 
C)  when the domestic money supply falls, the price level would fall right away, causing an increase in the interest rate. 
D)  when the domestic money supply falls, the price level would eventually fall, keeping the interest rate constant. 
E)  when the domestic money supply falls, the price level would fall right away, keeping the interest rate constant. 
A)  when the domestic money supply falls, the price level would eventually fall, increasing the interest rate. 
B)  when the domestic money supply falls, the price level would fall right away, causing a reduction in the interest rate. 
C)  when the domestic money supply falls, the price level would fall right away, causing an increase in the interest rate. 
D)  when the domestic money supply falls, the price level would eventually fall, keeping the interest rate constant. 
E)  when the domestic money supply falls, the price level would fall right away, keeping the interest rate constant.

Question 2

Interest rate differences between countries depend on

Accepted Answer

A)  differences in expected inflation, but not on expected changes in the real exchange rate. 
B)  differences in expected changes in the real exchange rate, but not on expected inflation. 
C)  neither differences in expected inflation, nor on expected changes in the real exchange rate. 
D)  differences in expected inflation and nothing else. 
E)  differences in expected inflation, and on expected changes in the real exchange rate. 
A)  differences in expected inflation, but not on expected changes in the real exchange rate. 
B)  differences in expected changes in the real exchange rate, but not on expected inflation. 
C)  neither differences in expected inflation, nor on expected changes in the real exchange rate. 
D)  differences in expected inflation and nothing else. 
E)  differences in expected inflation, and on expected changes in the real exchange rate.

Question 3

Discuss the effects of ongoing inflation based on the PPP theory.

Accepted Answer

Other things equal, money supply growth

Question 4

In the short run

Accepted Answer

A)  the interest rate can rise when the domestic money supply falls. 
B)  the interest rate can decrease when the domestic money supply falls. 
C)  the interest rate stays constant when the domestic money supply falls. 
D)  the interest rate rises in the same proportion as the domestic money supply falls. 
E)  the interest rate never rises when the domestic money supply falls. 
A)  the interest rate can rise when the domestic money supply falls. 
B)  the interest rate can decrease when the domestic money supply falls. 
C)  the interest rate stays constant when the domestic money supply falls. 
D)  the interest rate rises in the same proportion as the domestic money supply falls. 
E)  the interest rate never rises when the domestic money supply falls.

Question 5

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 6

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 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

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)  re = πe + R. 
B)  re = 2πe + R2. 
C)  re = πe + R2. 
D)  re = R - πe. 
E)  re = R2 - πe. 
A)  re = πe + R. 
B)  re = 2πe + R2. 
C)  re = πe + R2. 
D)  re = R - πe. 
E)  re = R2 - πe.

Question 9

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 10

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  Relative price changes could not lead to PPP violations even if trade were free and costless. 
B)  Relative price changes could lead to PPP violations only if trade were free and costless. 
C)  Relative price changes could lead to PPP violations even if trade were free and costless. 
D)  Price changes could lead to PPP violations even if trade were free and costless. 
E)  Price changes could not lead to PPP violations even if trade were free and costless. 
A)  Relative price changes could not lead to PPP violations even if trade were free and costless. 
B)  Relative price changes could lead to PPP violations only if trade were free and costless. 
C)  Relative price changes could lead to PPP violations even if trade were free and costless. 
D)  Price changes could lead to PPP violations even if trade were free and costless. 
E)  Price changes could not lead to PPP violations even if trade were free and costless.

Question 11

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

Accepted Answer

The law of one price applies to individu

Question 12

What are the predictions for the long run equilibrium of the Monetary Approach?

Accepted Answer

Money supplies: Given the equations, @#IMG-DLM& =

Question 13

Describe the chain of events leading to exchange rate determination for the following cases:
(a) An increase in U.S. money supply
(d) Increase in growth rate of U.S. money supply
(c) Increase in world relative demand for U.S. products
(d) Increase in relative U.S. output supply

Accepted Answer

Chain of events leading to exchange rate

Question 14

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 15

What is the Fisher Effect? Provide an example.

Accepted Answer

All else equal, a rise in a country's ex

Question 16

Which one of the following statements is the MOST accurate?

Accepted Answer

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

Question 17

Under Purchasing Power Parity

Accepted Answer

A)  E$/E = PUS/PE. 
B)  E$/E = PE/PES. 
C)  E$/E = PUS + PE. 
D)  E$/E = PUS - PE. 
E)  E$/P = PUS/PE. 
A)  E$/E = PUS/PE. 
B)  E$/E = PE/PES. 
C)  E$/E = PUS + PE. 
D)  E$/E = PUS - PE. 
E)  E$/P = PUS/PE.

Question 18

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

Accepted Answer

Let
∙ Real dollar/euro exchange rate = @#IMG-DLM&

Question 19

Under sticky prices

Accepted Answer

A)  a fall in the money supply raises the interest rate to preserve money market equilibrium. 
B)  a fall in the money supply reduces the interest rate to preserve money market equilibrium. 
C)  a fall in the money supply keeps the interest rate intact to preserve money market equilibrium. 
D)  a fall in the money supply does not affect the interest rate in the short run, only in the long run. 
E)  a fall in the money supply raises the interest rate to preserve money market equilibrium in the long run. 
A)  a fall in the money supply raises the interest rate to preserve money market equilibrium. 
B)  a fall in the money supply reduces the interest rate to preserve money market equilibrium. 
C)  a fall in the money supply keeps the interest rate intact to preserve money market equilibrium. 
D)  a fall in the money supply does not affect the interest rate in the short run, only in the long run. 
E)  a fall in the money supply raises the interest rate to preserve money market equilibrium in the long run.

Question 20

What effect do non-tradable goods have on PPP?

Accepted Answer

The effect is quite substantial.
In 2006

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

Under a flexible-price monetary approach to the exchange rate

Interest rate differences between countries depend on

Discuss the effects of ongoing inflation based on the PPP theory.

In the short run

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

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

Which of the following statements is MOST accurate?

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

Which of the following statements is the MOST accurate?

Which one of the following statements is the MOST accurate?

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

What are the predictions for the long run equilibrium of the Monetary Approach?

Describe the chain of events leading to exchange rate determination for the following cases: (a) An increase in U.S. money supply (d) Increase in growth rate of U.S. money supply (c) Increase in world relative demand for U.S. products (d) Increase in relative U.S. output supply

Under the monetary approach to the exchange rate

What is the Fisher Effect? Provide an example.

Which one of the following statements is the MOST accurate?

Under Purchasing Power Parity

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

Under sticky prices

What effect do non-tradable goods have on PPP?

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

Filters

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