Question 1

An increase in the world relative demand for U.S. output causes

Accepted Answer

A)  a short-run real depreciation of the dollar against the euro. 
B)  a long-run real appreciation of the dollar against the euro. 
C)  a long-run real depreciation of the dollar against the euro. 
D)  a short-run real appreciation of the euro against the dollar. 
E)  a long-run real appreciation of the euro against the dollar. 
A)  a short-run real depreciation of the dollar against the euro. 
B)  a long-run real appreciation of the dollar against the euro. 
C)  a long-run real depreciation of the dollar against the euro. 
D)  a short-run real appreciation of the euro against the dollar. 
E)  a long-run real appreciation of the euro against the dollar.

Question 2

Which of the following statements is MOST accurate?

Accepted Answer

A)  In the money market, an increase in U.S. money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
B)  In the money market, an increase in European money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
C)  In the money market, an increase in U.S. money supply growth rate leads to a decrease in the long-run nominal dollar/euro exchange rate. 
D)  In the money market, an increase in European money supply growth leads to an increase in the long-run nominal dollar/euro exchange rate. 
E)  In the money market, an increase in U.S. money supply level leads to a proportional decrease in the long-run nominal dollar/euro exchange rate. 
A)  In the money market, an increase in U.S. money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
B)  In the money market, an increase in European money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate. 
C)  In the money market, an increase in U.S. money supply growth rate leads to a decrease in the long-run nominal dollar/euro exchange rate. 
D)  In the money market, an increase in European money supply growth leads to an increase in the long-run nominal dollar/euro exchange rate. 
E)  In the money market, an increase in U.S. money supply level leads to a proportional decrease in the long-run nominal dollar/euro exchange rate.

Question 3

In January 2013, the world's cheapest Big Macs were sold in

Accepted Answer

A)  the Philippines. 
B)  Russia. 
C)  China. 
D)  Malysia. 
E)  the Czech Republic. 
A)  the Philippines. 
B)  Russia. 
C)  China. 
D)  Malysia. 
E)  the Czech Republic.

Question 4

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate

Accepted Answer

A)  the interest rate is not independent of the money supply growth rate in the short run. 
B)  the interest rate is independent of the money supply growth rate in the long run. 
C)  the interest rate is not independent of the money supply growth rate in the long run, but independent in the short run. 
D)  the interest rate is not independent of the money supply growth rate in the long run. 
E)  the interest rate is a factor of the money supply growth rate only in the short term. 
A)  the interest rate is not independent of the money supply growth rate in the short run. 
B)  the interest rate is independent of the money supply growth rate in the long run. 
C)  the interest rate is not independent of the money supply growth rate in the long run, but independent in the short run. 
D)  the interest rate is not independent of the money supply growth rate in the long run. 
E)  the interest rate is a factor of the money supply growth rate only in the short term.

Question 5

The difference between nominal and real interest rates is that

Accepted Answer

A)  nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms. 
B)  nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output. 
C)  nominal interest rates can fluctuate, while real interest rates always remain fixed. 
D)  real interest rates can fluctuate, while nominal interest rates always remain fixed. 
E)  real interest rates are the same in every country, while nominal interest rates are different for every country. 
A)  nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms. 
B)  nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output. 
C)  nominal interest rates can fluctuate, while real interest rates always remain fixed. 
D)  real interest rates can fluctuate, while nominal interest rates always remain fixed. 
E)  real interest rates are the same in every country, while nominal interest rates are different for every country.

Question 6

How can long run values in the real exchange rate change?

Accepted Answer

An increase in world relative demand for

Question 7

What is the real interest rate parity condition?

Accepted Answer

The nominal interest rates are

Question 8

Under PPP (and by the Fisher Effect), all else equal

Accepted Answer

A)  a rise in a country's expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation. 
B)  a fall in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. 
C)  a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. 
D)  a rise in a country's expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation. 
E)  a fall in a country's expected inflation rate will eventually cause an inversely proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation. 
A)  a rise in a country's expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation. 
B)  a fall in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. 
C)  a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. 
D)  a rise in a country's expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation. 
E)  a fall in a country's expected inflation rate will eventually cause an inversely proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.

Question 9

The monetary approach to interest rates assumes that the prices of goods are ________, which implies that a country's currency will ________, when nominal interest rates ________ because of ________ expected future inflation.

Accepted Answer

A)  perfectly flexible; depreciate; increase; higher 
B)  perfectly flexible; appreciate; increase; higher 
C)  immutable; depreciate; increase; higher 
D)  immutable; appreciate; decrease; higher 
E)  absolutely inflexible; depreciate; decrease; higher 
A)  perfectly flexible; depreciate; increase; higher 
B)  perfectly flexible; appreciate; increase; higher 
C)  immutable; depreciate; increase; higher 
D)  immutable; appreciate; decrease; higher 
E)  absolutely inflexible; depreciate; decrease; higher

Question 10

If people expect relative PPP to hold

Accepted Answer

A)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, in the United States and Europe, respectively, over the relevant horizon. 
B)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected in Europe and the United States, respectively. 
C)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively, in the short run. 
D)  the difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively. 
E)  the difference between the interest rates offered by dollar and euro deposits will be below the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively. 
A)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, in the United States and Europe, respectively, over the relevant horizon. 
B)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected in Europe and the United States, respectively. 
C)  the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively, in the short run. 
D)  the difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively. 
E)  the difference between the interest rates offered by dollar and euro deposits will be below the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively.

Question 11

Does the existence of non-tradable goods allow for deviations from Purchasing power Parity?

Accepted Answer

Yes, the existence of nontradables allow

Question 12

To answer the following question, please refer to the figure below. Concentrating only at the lower left quadrant, discuss the relationship between the U.S. real money supply and the dollar/euro exchange rate, E$/E.

Accepted Answer

The lower left quadrant in the figure de

Question 13

In practice

Accepted Answer

A)  changes in national price levels often tell us relatively little about exchange rate movements. 
B)  changes in national price levels raise the exchange rate. 
C)  changes in national price levels lower the exchange rate. 
D)  changes in national price levels often tell us about exchange rate movements. 
E)  changes in national price levels match identical changes in the exchange rate. 
A)  changes in national price levels often tell us relatively little about exchange rate movements. 
B)  changes in national price levels raise the exchange rate. 
C)  changes in national price levels lower the exchange rate. 
D)  changes in national price levels often tell us about exchange rate movements. 
E)  changes in national price levels match identical changes in the exchange rate.

Question 14

Explain why exchange rate model based on PPP is a long run theory.

Accepted Answer

PPP theory is a monetary approach to the

Question 15

Fill in the following table, assuming the law of one price prevails.

Accepted Answer

The answer of Fill in the following table, assuming the...

Question 16

Under sticky prices

Accepted Answer

A)  an interest rate rise is associated with lower expected deflation and a long-run currency appreciation, so the currency appreciates immediately. 
B)  an interest rate rise is associated with higher expected inflation and a long-run currency appreciation, so the currency appreciates immediately. 
C)  an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency appreciates immediately. 
D)  an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency depreciates immediately. 
E)  an interest rate rise is associated with lower expected inflation and a long-run currency appreciation, so the currency appreciates immediately. 
A)  an interest rate rise is associated with lower expected deflation and a long-run currency appreciation, so the currency appreciates immediately. 
B)  an interest rate rise is associated with higher expected inflation and a long-run currency appreciation, so the currency appreciates immediately. 
C)  an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency appreciates immediately. 
D)  an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency depreciates immediately. 
E)  an interest rate rise is associated with lower expected inflation and a long-run currency appreciation, so the currency appreciates immediately.

Question 17

Which of the following statements is the MOST accurate about the Law of One Price on Scandinavian ferry lines?

Accepted Answer

A)  Due to menu costs, the Law of One Price does not hold. 
B)  To avoid arbitrage opportunities, the Law of One Price must hold. 
C)  Transaction costs of exchanging currency causes the Law of One Price to fail. 
D)  Transportation costs between ferry lines leads to a violation of the Law of One Price. 
E)  The physical distance allowed the Law of One Price to hold. 
A)  Due to menu costs, the Law of One Price does not hold. 
B)  To avoid arbitrage opportunities, the Law of One Price must hold. 
C)  Transaction costs of exchanging currency causes the Law of One Price to fail. 
D)  Transportation costs between ferry lines leads to a violation of the Law of One Price. 
E)  The physical distance allowed the Law of One Price to hold.

Question 18

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate

Accepted Answer

A)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
B)  while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply do not affect the interest rate. 
C)  while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
D)  the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate. 
E)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate. 
A)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
B)  while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply do not affect the interest rate. 
C)  while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate. 
D)  the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate. 
E)  while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate.

Question 19

Suppose Russia's inflation rate is 200% over one year but the inflation rate in Switzerland is only 2%. According to relative PPP, what should happen over the year to the Swiss franc's exchange rate against the Russian ruble?

Accepted Answer

(Eruble/franc, t - Eruble/franc, t-1)/Er

Question 20

Which of the following statements is the MOST accurate?

Accepted Answer

A)  The law of one price does fare well in all recent studies. 
B)  The law of one price does fare well in many recent studies. 
C)  The law of one price sometimes fares well in recent studies. 
D)  The law of one price does not fare well in recent studies. 
E)  The law of one price has not been studied recently. 
A)  The law of one price does fare well in all recent studies. 
B)  The law of one price does fare well in many recent studies. 
C)  The law of one price sometimes fares well in recent studies. 
D)  The law of one price does not fare well in recent studies. 
E)  The law of one price has not been studied recently.

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

An increase in the world relative demand for U.S. output causes

Which of the following statements is MOST accurate?

In January 2013, the world's cheapest Big Macs were sold in

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate

The difference between nominal and real interest rates is that

How can long run values in the real exchange rate change?

What is the real interest rate parity condition?

Under PPP (and by the Fisher Effect), all else equal

The monetary approach to interest rates assumes that the prices of goods are ________, which implies that a country's currency will ________, when nominal interest rates ________ because of ________ expected future inflation.

If people expect relative PPP to hold

Does the existence of non-tradable goods allow for deviations from Purchasing power Parity?

To answer the following question, please refer to the figure below. Concentrating only at the lower left quadrant, discuss the relationship between the U.S. real money supply and the dollar/euro exchange rate, E$/E.

In practice

Explain why exchange rate model based on PPP is a long run theory.

Fill in the following table, assuming the law of one price prevails.

Under sticky prices

Which of the following statements is the MOST accurate about the Law of One Price on Scandinavian ferry lines?

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate

Suppose Russia's inflation rate is 200% over one year but the inflation rate in Switzerland is only 2%. According to relative PPP, what should happen over the year to the Swiss franc's exchange rate against the Russian ruble?

Which of the following statements is the MOST accurate?

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

The monetary approach to interest rates assumes that the prices of goods are , which implies that a country's currency will , when nominal interest rates because of expected future inflation.