Question 1

Economists consider high and volatile inflation to be:

Accepted Answer

A)  a positive factor in economic growth, since higher prices equal higher profits for firms. 
B)  a negative factor in economic growth, as firms and workers deal with uncertainty about profitability, investments, and wages. 
C)  neutral regarding its effect on economic growth. 
D)  beneficial to the government, which often spends before it taxes. 
A)  a positive factor in economic growth, since higher prices equal higher profits for firms. 
B)  a negative factor in economic growth, as firms and workers deal with uncertainty about profitability, investments, and wages. 
C)  neutral regarding its effect on economic growth. 
D)  beneficial to the government, which often spends before it taxes.

Question 2

Even though we assume the nominal interest rate on money is zero, there is a benefit to holding money. This is generally thought to be:

Accepted Answer

A)  the prestige of having a large income. 
B)  the interest earned from investing it. 
C)  the ease of conducting transactions by having a perfectly liquid payment system. 
D)  the depreciation of the value of the dollar as prices increase. 
A)  the prestige of having a large income. 
B)  the interest earned from investing it. 
C)  the ease of conducting transactions by having a perfectly liquid payment system. 
D)  the depreciation of the value of the dollar as prices increase.

Question 3

The law of one price works under some assumptions. Which of the following is NOT an assumption for the law of one price?

Accepted Answer

A)  There is free competition. 
B)  There is no transportation cost. 
C)  There are no tariffs. 
D)  The skill level of workers is identical in both countries. 
A)  There is free competition. 
B)  There is no transportation cost. 
C)  There are no tariffs. 
D)  The skill level of workers is identical in both countries.

Question 4

The price level in the country is determined by ______ and _______.

Accepted Answer

A)  nominal money supply; demand for real money 
B)  demand for real money; average tax rate 
C)  demand for real money; growth of GDP 
D)  supply of real money; demand for real money 
A)  nominal money supply; demand for real money 
B)  demand for real money; average tax rate 
C)  demand for real money; growth of GDP 
D)  supply of real money; demand for real money

Question 5

A basket of goods sold in the Eurozone is priced and weighted as shown in the following table.   The United States is interested in maintaining a competitive effective exchange rate. The Fed is tasked with making sure that the dollar does not appreciate relative to the currencies of the rest of the world. Calculate the effective exchange rate, given the data, and discuss what the Fed will have to do (if anything) to achieve its goal.

Accepted Answer

The answer of A basket of goods sold in the...

Question 6

Evidence on the existence of relative PPP shows that:

Accepted Answer

A)  the evidence for relative PPP is scanty and the theory is largely discredited. 
B)  the evidence for relative PPP is hit or miss, and so one should exercise caution in using relative PPP to predict changes in a nation's exchange rates. 
C)  relative PPP is an approximate guide to predicting the relationship between changes in inflation and exchange rates over long periods, such as decades. 
D)  both absolute and relative PPP hold nearly perfectly in the short and long run, and are used with great accuracy to make predictions. 
A)  the evidence for relative PPP is scanty and the theory is largely discredited. 
B)  the evidence for relative PPP is hit or miss, and so one should exercise caution in using relative PPP to predict changes in a nation's exchange rates. 
C)  relative PPP is an approximate guide to predicting the relationship between changes in inflation and exchange rates over long periods, such as decades. 
D)  both absolute and relative PPP hold nearly perfectly in the short and long run, and are used with great accuracy to make predictions.

Question 7

Whenever two nations experience inflation, and the nominal exchange rates move by the same percentage to offset, we say there is:

Accepted Answer

A)  absolute PPP. 
B)  indeterminate PPP. 
C)  inverted PPP. 
D)  relative PPP. 
A)  absolute PPP. 
B)  indeterminate PPP. 
C)  inverted PPP. 
D)  relative PPP.

Question 8

According to the quantity theory of money, the demand for money is equal to:

Accepted Answer

A)  nominal income divided by real income. 
B)  a constant proportion of nominal income. 
C)  the demand for money held as an asset. 
D)  real income divided by velocity. 
A)  nominal income divided by real income. 
B)  a constant proportion of nominal income. 
C)  the demand for money held as an asset. 
D)  real income divided by velocity.

Question 9

If PPP and uncovered interest parity hold, then the long-run real rate of interest in each nation:

Accepted Answer

A)  will never change. 
B)  will equalize. 
C)  will increase. 
D)  will decrease. 
A)  will never change. 
B)  will equalize. 
C)  will increase. 
D)  will decrease.

Question 10

When we incorporate a relationship between expected inflation and liquidity preference (demand for real balances) into our long-run model, it can help to explain:

Accepted Answer

A)  erratic shifts in exchange rates. 
B)  how changes in expectations can move the markets quickly. 
C)  why sometimes PPP seems not to hold in the short run. 
D)  erratic shifts in exchange rates, how changes in expectations can move the markets quickly, and why sometimes PPP seems not to hold in the short run. 
A)  erratic shifts in exchange rates. 
B)  how changes in expectations can move the markets quickly. 
C)  why sometimes PPP seems not to hold in the short run. 
D)  erratic shifts in exchange rates, how changes in expectations can move the markets quickly, and why sometimes PPP seems not to hold in the short run.

Question 11

If U.S. real income increases, then the prediction of the monetary model of exchange rates would be that the U.S. dollar would:

Accepted Answer

A)  become stronger. 
B)  appreciate in the short run, but not in the long run. 
C)  depreciate. 
D)  depreciate in the short run, but not in the long run. 
A)  become stronger. 
B)  appreciate in the short run, but not in the long run. 
C)  depreciate. 
D)  depreciate in the short run, but not in the long run.

Question 12

Nominal anchors restrain inflation and rising interest rates by:

Accepted Answer

A)  putting limits on trade. 
B)  imposing capital controls. 
C)  forcing restrictions on easy monetary policies. 
D)  imposing price and wage controls. 
A)  putting limits on trade. 
B)  imposing capital controls. 
C)  forcing restrictions on easy monetary policies. 
D)  imposing price and wage controls.

Question 13

If we assume that prices adjust in the long run so that the nominal demand for money equals the nominal supply of money, then:

Accepted Answer

A)  we can determine changes in exchange rates if absolute PPP holds. 
B)  absolute PPP will hold. 
C)  relative PPP will hold. 
D)  exchange rates will not change. 
A)  we can determine changes in exchange rates if absolute PPP holds. 
B)  absolute PPP will hold. 
C)  relative PPP will hold. 
D)  exchange rates will not change.

Question 14

A basket of goods sold in the Eurozone is priced and weighted as shown in the following table:   And the same basket for the United States is priced and weighted as shown in the following table:   The exchange rate for $/€ is 1.25.
Does purchasing power parity hold?

Accepted Answer

The answer of A basket of goods sold in the...

Question 15

Absolute PPP doesn't do a very good job explaining exchange rates in the short run. Give and fully explain two of the three reasons for this failure.

Accepted Answer

One reason for the failure of Absolute P

Question 16

The relative purchasing power of a currency is:

Accepted Answer

A)  the exchange rate expressed in ounces of gold. 
B)  the value of one currency in terms of the goods and services a unit will purchase compared with an equivalent amount of another currency. 
C)  the official value of one nation's currency compared with the official value of another currency. 
D)  the value of the currency during an economic expansion compared with its value during a recession. 
A)  the exchange rate expressed in ounces of gold. 
B)  the value of one currency in terms of the goods and services a unit will purchase compared with an equivalent amount of another currency. 
C)  the official value of one nation's currency compared with the official value of another currency. 
D)  the value of the currency during an economic expansion compared with its value during a recession.

Question 17

Under the monetary approach to exchange rates, if both real money demand and money supply are greater at home than in foreign markets, then the exchange rate should be:

Accepted Answer

A)  greater than one. 
B)  equal to one. 
C)  less than one. 
D)  There is not enough information provided to answer the question. 
A)  greater than one. 
B)  equal to one. 
C)  less than one. 
D)  There is not enough information provided to answer the question.

Question 18

If more home goods are required to buy the same amount of foreign goods, then we say that foreign currency has experienced a:

Accepted Answer

A)  nominal appreciation. 
B)  nominal depreciation. 
C)  real appreciation. 
D)  real depreciation. 
A)  nominal appreciation. 
B)  nominal depreciation. 
C)  real appreciation. 
D)  real depreciation.

Question 19

When the inflation rate in any nation changes, ceteris paribus:

Accepted Answer

A)  only absolute PPP is disturbed. 
B)  only relative PPP is disturbed. 
C)  both absolute and relative PPP are disturbed. 
D)  the inflation rates in other nations will have to change as well. 
A)  only absolute PPP is disturbed. 
B)  only relative PPP is disturbed. 
C)  both absolute and relative PPP are disturbed. 
D)  the inflation rates in other nations will have to change as well.

Question 20

Evidence suggests that convergence to PPP occurs:

Accepted Answer

A)  instantly, as arbitrageurs take advantage of profit opportunities. 
B)  rapidly, as arbitrageurs learn of profit opportunities. 
C)  slowly, as arbitrageurs operate, and production, prices, and exchange rates adjust. 
D)  never. 
A)  instantly, as arbitrageurs take advantage of profit opportunities. 
B)  rapidly, as arbitrageurs learn of profit opportunities. 
C)  slowly, as arbitrageurs operate, and production, prices, and exchange rates adjust. 
D)  never.

Exam 14: Exchange Rates I: the Monetary Approach in the Long Run

Economists consider high and volatile inflation to be:

Even though we assume the nominal interest rate on money is zero, there is a benefit to holding money. This is generally thought to be:

The law of one price works under some assumptions. Which of the following is NOT an assumption for the law of one price?

The price level in the country is determined by ______ and _______.

Evidence on the existence of relative PPP shows that:

Whenever two nations experience inflation, and the nominal exchange rates move by the same percentage to offset, we say there is:

According to the quantity theory of money, the demand for money is equal to:

If PPP and uncovered interest parity hold, then the long-run real rate of interest in each nation:

When we incorporate a relationship between expected inflation and liquidity preference (demand for real balances) into our long-run model, it can help to explain:

If U.S. real income increases, then the prediction of the monetary model of exchange rates would be that the U.S. dollar would:

Nominal anchors restrain inflation and rising interest rates by:

If we assume that prices adjust in the long run so that the nominal demand for money equals the nominal supply of money, then:

A basket of goods sold in the Eurozone is priced and weighted as shown in the following table: And the same basket for the United States is priced and weighted as shown in the following table: The exchange rate for $/€ is 1.25. Does purchasing power parity hold?

Absolute PPP doesn't do a very good job explaining exchange rates in the short run. Give and fully explain two of the three reasons for this failure.

The relative purchasing power of a currency is:

Under the monetary approach to exchange rates, if both real money demand and money supply are greater at home than in foreign markets, then the exchange rate should be:

If more home goods are required to buy the same amount of foreign goods, then we say that foreign currency has experienced a:

When the inflation rate in any nation changes, ceteris paribus:

Evidence suggests that convergence to PPP occurs:

Trade in the Global Economy

Trade and Technology: The Ricardian Model

Gains and Losses From Trade in the Specific-Factors Model

Trade and Resources: the Heckscher-Ohlin Model

Movement of Labor and Capital Between Countries

Increasing Returns to Scale and Monopolistic Competition

Offshoring of Goods and Services

Import Tariffs and Quotas Under Perfect Competition

Import Tariffs and Quotas Under Imperfect Competition

Export Subsidies in Agriculture and High-Technology Industries

International Agreements: Trade, Labor, and the Environment

The Global Macroeconomy

Introduction to Exchange Rates and the Foreign Exchange Market

Exchange Rates II: the Asset Approach in the Short Run

National and International Accounts: Income, Wealth, and the Balance of Payments

Balance of Payments I: the Gains From Financial Globalization

Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run

Fixed Versus Floating: International Monetary Experience

Exchange Rate Crises: How Pegs Work and How They Break

The Euro

Topics in International Macroeconomics

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The price level in the country is determined by and _.