Question 1

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  Departures from PPP are similar in both the short run and long run. 
B)  Departures from PPP are even greater in the long run than in the long run. 
C)  Departures from PPP are always greater in the short run than in the long run. 
D)  It is hard to tell whether departures from PPP are greater in the short run than in the long run. 
E)  Departures from PPP may often be greater in the short run than in the long run. 
A)  Departures from PPP are similar in both the short run and long run. 
B)  Departures from PPP are even greater in the long run than in the long run. 
C)  Departures from PPP are always greater in the short run than in the long run. 
D)  It is hard to tell whether departures from PPP are greater in the short run than in the long run. 
E)  Departures from PPP may often be greater in the short run than in the long run.

Question 2

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 3

Which of the following statements is the MOST accurate?

Accepted Answer

A)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over different commodities space. 
B)  Absolute PPP may be valid even when relative PPP is not, provided the factors causing deviations from relative PPP are more or less stable over time. 
C)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time. 
D)  Relative PPP is not valid when absolute PPP is not. 
E)  Relative PPP is only valid when absolute PPP is valid, providing the factors causing deviations from relative PPP are more or less stable over time. 
A)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over different commodities space. 
B)  Absolute PPP may be valid even when relative PPP is not, provided the factors causing deviations from relative PPP are more or less stable over time. 
C)  Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time. 
D)  Relative PPP is not valid when absolute PPP is not. 
E)  Relative PPP is only valid when absolute PPP is valid, providing the factors causing deviations from relative PPP are more or less stable over time.

Question 4

The expected rate of change in the nominal dollar/euro exchange rate is best described as

Accepted Answer

A)  the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe expected inflation difference. 
B)  the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe real interest rate difference. 
C)  the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe expected inflation difference. 
D)  the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe real interest rate difference. 
E)  the expected rate of change in the real dollar/euro exchange rate plus the European expected inflation. 
A)  the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe expected inflation difference. 
B)  the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe real interest rate difference. 
C)  the expected rate of change in the real dollar/euro exchange rate plus the U.S.-Europe expected inflation difference. 
D)  the expected rate of change in the real dollar/euro exchange rate minus the U.S.-Europe real interest rate difference. 
E)  the expected rate of change in the real dollar/euro exchange rate plus the European expected inflation.

Question 5

Which of the following statements is the MOST accurate?

Accepted Answer

A)  If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same. 
B)  If the law of one price holds true for every commodity, PPP must hold automatically. 
C)  If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same. 
D)  If the law of one price does not hold true for every commodity, PPP cannot be true as long as the reference baskets used to reckon different countries' price levels are the same. 
E)  If PPP holds true, then the law of one price must hold true automatically. 
A)  If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same. 
B)  If the law of one price holds true for every commodity, PPP must hold automatically. 
C)  If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same. 
D)  If the law of one price does not hold true for every commodity, PPP cannot be true as long as the reference baskets used to reckon different countries' price levels are the same. 
E)  If PPP holds true, then the law of one price must hold true automatically.

Question 6

Which of the following statements is the MOST accurate? The law of one price states

Accepted Answer

A)  in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
B)  in competitive markets free of transportation costs and official barrier to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency. 
C)  in competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price. 
D)  identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
E)  in competitive markets free of official barrier to trade, identical goods are sold at the same price regardless of transportation costs. 
A)  in competitive markets free of transportation costs and official barriers to trade, identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
B)  in competitive markets free of transportation costs and official barrier to trade, identical goods sold in the same country must sell for the same price when their prices are expressed in terms of the same currency. 
C)  in competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price. 
D)  identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. 
E)  in competitive markets free of official barrier to trade, identical goods are sold at the same price regardless of transportation costs.

Question 7

Which of the following statements is the MOST accurate?

Accepted Answer

A)  In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries' products are traded. 
B)  In the long run, national price levels play a key role only in determining interest rates. 
C)  In the long run, national price levels play a key role only in determining the relative prices at which countries' products are traded. 
D)  In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded. 
E)  In the long run, national price levels play no role in determining interest rates and the relative prices at which countries' products are traded. 
A)  In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries' products are traded. 
B)  In the long run, national price levels play a key role only in determining interest rates. 
C)  In the long run, national price levels play a key role only in determining the relative prices at which countries' products are traded. 
D)  In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries' products are traded. 
E)  In the long run, national price levels play no role in determining interest rates and the relative prices at which countries' products are traded.

Question 8

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

Accepted Answer

Government measures of the price level d

Question 9

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

Question 10

Discuss why the empirical support for PPP and the law of one price is weak in recent data.

Accepted Answer

The failure of these propositions in the

Question 11

Who among the following list of people is an early 20th century economist from Yale University who wrote the book The Theory of Interest?

Accepted Answer

A)  Gustav Cassel 
B)  Irving Fisher 
C)  David Ricardo 
D)  Paul Krugman 
E)  Israel Kirzner 
A)  Gustav Cassel 
B)  Irving Fisher 
C)  David Ricardo 
D)  Paul Krugman 
E)  Israel Kirzner

Question 12

Explain why price levels are lower in poorer countries.

Accepted Answer

One theory explains the difference in pr

Question 13

Define the concept of the real exchange rate and explain how it differs from the nominal exchange rate.

Accepted Answer

In general, the real exchange rate betwe

Question 14

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 15

Under Purchasing Power Parity

Accepted Answer

A)  E$/E = PiUS/PiE. 
B)  E$/E = PiE/PiUS. 
C)  E$/E = PUS/PE. 
D)  E$/E = PE/PES. 
E)  E$/E = PiE + PiUS/PiE. 
A)  E$/E = PiUS/PiE. 
B)  E$/E = PiE/PiUS. 
C)  E$/E = PUS/PE. 
D)  E$/E = PE/PES. 
E)  E$/E = PiE + PiUS/PiE.

Question 16

The PPP theory fails in reality for all of the following reasons EXCEPT

Accepted Answer

A)  transport costs. 
B)  monopolistic or oligopolistic practices in goods markets. 
C)  the inflation data reported in different countries are based on different commodity baskets. 
D)  restrictions on trade. 
E)  inflation rates are unrelated to money supply growth. 
A)  transport costs. 
B)  monopolistic or oligopolistic practices in goods markets. 
C)  the inflation data reported in different countries are based on different commodity baskets. 
D)  restrictions on trade. 
E)  inflation rates are unrelated to money supply growth.

Question 17

Present and explain the Fundamental Equation of the Monetary Approach.

Accepted Answer

Assume @#IMG-DLM& = PUS/PE and that domestic price

Question 18

Which of the following statements is the MOST accurate?

Accepted Answer

A)  The prices of identical commodity baskets, when converted to a single currency, are the same across countries. 
B)  The prices of identical commodity baskets, when converted to a single currency, differ substantially across countries. 
C)  The prices of identical commodity baskets, when converted to a single currency, do not differ substantially across countries. 
D)  The prices of identical commodity baskets, when converted to a single currency, are often the same across countries. 
E)  The prices of identical commodity baskets, when converted to a single currency, are the same across countries more than 50% of the time. 
A)  The prices of identical commodity baskets, when converted to a single currency, are the same across countries. 
B)  The prices of identical commodity baskets, when converted to a single currency, differ substantially across countries. 
C)  The prices of identical commodity baskets, when converted to a single currency, do not differ substantially across countries. 
D)  The prices of identical commodity baskets, when converted to a single currency, are often the same across countries. 
E)  The prices of identical commodity baskets, when converted to a single currency, are the same across countries more than 50% of the time.

Question 19

Is a depreciation of the dollar/euro exchange rate correlated with a decrease in the dollar return on U.S. deposits?

Accepted Answer

No.
Assume that the Interest Parity is m

Question 20

When the domestic money prices of goods are held constant

Accepted Answer

A)  a nominal dollar appreciation makes U.S. goods cheaper compared with foreign goods. 
B)  a nominal dollar depreciation makes U.S. goods less appealing in foreign markets. 
C)  a nominal dollar appreciation does not affect the prices of U.S. goods. 
D)  a nominal dollar depreciation makes U.S. goods more expensive compared with foreign goods. 
E)  a nominal dollar depreciation makes U.S. goods cheaper compared with foreign goods and a nominal dollar appreciation makes U.S. goods more expensive compared with foreign goods. 
A)  a nominal dollar appreciation makes U.S. goods cheaper compared with foreign goods. 
B)  a nominal dollar depreciation makes U.S. goods less appealing in foreign markets. 
C)  a nominal dollar appreciation does not affect the prices of U.S. goods. 
D)  a nominal dollar depreciation makes U.S. goods more expensive compared with foreign goods. 
E)  a nominal dollar depreciation makes U.S. goods cheaper compared with foreign goods and a nominal dollar appreciation makes U.S. goods more expensive compared with foreign goods.

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

Which one of the following statements is the MOST accurate?

The monetary approach makes the general prediction that

Which of the following statements is the MOST accurate?

The expected rate of change in the nominal dollar/euro exchange rate is best described as

Which of the following statements is the MOST accurate?

Which of the following statements is the MOST accurate? The law of one price states

Which of the following statements is the MOST accurate?

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

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

Discuss why the empirical support for PPP and the law of one price is weak in recent data.

Who among the following list of people is an early 20th century economist from Yale University who wrote the book The Theory of Interest?

Explain why price levels are lower in poorer countries.

Define the concept of the real exchange rate and explain how it differs from the nominal exchange rate.

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.

Under Purchasing Power Parity

The PPP theory fails in reality for all of the following reasons EXCEPT

Present and explain the Fundamental Equation of the Monetary Approach.

Which of the following statements is the MOST accurate?

Is a depreciation of the dollar/euro exchange rate correlated with a decrease in the dollar return on U.S. deposits?

When the domestic money prices of goods are held constant

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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