Question 1

If the U.S. real GDP growth rate is greater than that of Canada, then the dollar will depreciate:

Accepted Answer

A)  only if the U.S. inflation rate exceeds Canada's inflation rate. 
B)  regardless of the relative inflation rates. 
C)  only if the U.S. inflation rate is less than Canada's inflation rate. 
D)  only if the U.S. inflation rate is less than that of Canada's other trade partners. 
A)  only if the U.S. inflation rate exceeds Canada's inflation rate. 
B)  regardless of the relative inflation rates. 
C)  only if the U.S. inflation rate is less than Canada's inflation rate. 
D)  only if the U.S. inflation rate is less than that of Canada's other trade partners.

Question 2

Which of the following situations would exhibit relative PPP?

Accepted Answer

A)  Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro-yen rate depreciates by 7%. 
B)  Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro-yen rate depreciates by 2%. 
C)  Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro-yen rate appreciates by 2%. 
D)  Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro-yen rate appreciates by 5%. 
A)  Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro-yen rate depreciates by 7%. 
B)  Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro-yen rate depreciates by 2%. 
C)  Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro-yen rate appreciates by 2%. 
D)  Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro-yen rate appreciates by 5%.

Question 3

Suppose a new car costs 210,000 Mexican pesos in Mexico, while the same car costs $19,500 in the United States. The nominal exchange rate is currently at E$/Peso = $.10/Peso. If we assume PPP to hold, is the dollar under or overvalued? If so, by how much?

Accepted Answer

To determine if the dollar is under or o

Question 4

As economies adjust to inflation, there is an adjustment of exchange rates to reflect the changed price level. This adjustment is called:

Accepted Answer

A)  real exchange rates. 
B)  convergence. 
C)  adjustment costs. 
D)  revaluation. 
A)  real exchange rates. 
B)  convergence. 
C)  adjustment costs. 
D)  revaluation.

Question 5

The Fisher effect creates a link between _____ and ______.

Accepted Answer

A)  expected profits; unemployment rates 
B)  exchange rates; expected profits 
C)  inflation rates; unemployment rates 
D)  inflation rates; interest rates 
A)  expected profits; unemployment rates 
B)  exchange rates; expected profits 
C)  inflation rates; unemployment rates 
D)  inflation rates; interest rates

Question 6

Other nominal anchors or targets, such as rules for monetary growth, sometimes fail to optimize economic conditions in the short run because:

Accepted Answer

A)  monetary growth rates are unrelated to inflation. 
B)  it is complicated to figure out how to hold down money creation. 
C)  corrupt politicians pay no attention and give out extra currency to political supporters. 
D)  low monetary growth may curb inflation but may also constrain growth of real income. 
A)  monetary growth rates are unrelated to inflation. 
B)  it is complicated to figure out how to hold down money creation. 
C)  corrupt politicians pay no attention and give out extra currency to political supporters. 
D)  low monetary growth may curb inflation but may also constrain growth of real income.

Question 7

The difference between the simple monetary model and the general monetary model of exchange rate determination in the long run is that:

Accepted Answer

A)  the simple model refers to only one nation, while the general model includes all nations. 
B)  the simple model has only one equation, while the general model includes a number of simultaneous equations. 
C)  the simple model assumes a constant demand function for real balances, while the general model assumes that the demand for real balances is a decreasing function of the nominal interest rate. 
D)  the general model applies to increases and decreases in the relevant variables; the simple model does not allow relevant variables to decrease. 
A)  the simple model refers to only one nation, while the general model includes all nations. 
B)  the simple model has only one equation, while the general model includes a number of simultaneous equations. 
C)  the simple model assumes a constant demand function for real balances, while the general model assumes that the demand for real balances is a decreasing function of the nominal interest rate. 
D)  the general model applies to increases and decreases in the relevant variables; the simple model does not allow relevant variables to decrease.

Question 8

Zimbabwe's hyperinflation reached ______in 2008.

Accepted Answer

A)  1,231,000,000% 
B)  231,000,000% 
C)  1,000,000% 
D)  5% 
A)  1,231,000,000% 
B)  231,000,000% 
C)  1,000,000% 
D)  5%

Question 9

If a nation experiences 10% inflation and its trading partner does not, and if PPP holds, what happens to its real exchange rate?

Accepted Answer

A)  It depreciates by 10%. 
B)  It appreciates by 10%. 
C)  It does not change. 
D)  It becomes negative. 
A)  It depreciates by 10%. 
B)  It appreciates by 10%. 
C)  It does not change. 
D)  It becomes negative.

Question 10

(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. If PPP were to hold at the given nominal exchange rate, then the price of a computer in Mexico would be _____ pesos.

Accepted Answer

A)  500 
B)  50 
C)  5,000 
D)  0.02 
A)  500 
B)  50 
C)  5,000 
D)  0.02

Question 11

With an annual inflation of 3.5%, prices will double in _____ years, and if inflation increases to 10%, prices will double in _______ year(s).

Accepted Answer

A)  20; 7 
B)  17; 20 
C)  35; 1 
D)  2; 4 
A)  20; 7 
B)  17; 20 
C)  35; 1 
D)  2; 4

Question 12

Economists have developed models to predict changes in exchange rates based on inflation trends. To guide forecasts of exchange rates, economists calculate the average:

Accepted Answer

A)  speed of convergence. 
B)  PPP. 
C)  interest parity. 
D)  price deviation. 
A)  speed of convergence. 
B)  PPP. 
C)  interest parity. 
D)  price deviation.

Question 13

Factors that could weaken the relationship between money growth rates and changes in price levels and rates of exchange include:

Accepted Answer

A)  national differences in variables affecting growth of real income or the demand for money. 
B)  differences in transportation costs, making trade nearly impossible. 
C)  differences in the willingness of government to address economic problems with fiscal versus monetary policy. 
D)  national differences in variables, differences in transportation costs, and differences in the willingness of government to address economic problems with fiscal policy. 
A)  national differences in variables affecting growth of real income or the demand for money. 
B)  differences in transportation costs, making trade nearly impossible. 
C)  differences in the willingness of government to address economic problems with fiscal versus monetary policy. 
D)  national differences in variables, differences in transportation costs, and differences in the willingness of government to address economic problems with fiscal policy.

Question 14

The law of one price requires:

Accepted Answer

A)  trade frictions. 
B)  perfect competition. 
C)  trade frictions and perfect competition. 
D)  neither trade frictions nor perfect competition. 
A)  trade frictions. 
B)  perfect competition. 
C)  trade frictions and perfect competition. 
D)  neither trade frictions nor perfect competition.

Question 15

According to the long-run monetary model of the price level:

Accepted Answer

A)  the demand for money is always proportional to the supply of money. 
B)  when the demand for money decreases, prices respond very slowly. 
C)  as long as prices are flexible, a change in the supply of money or the demand for money will result in a change in the price level to restore equilibrium. 
D)  equilibrium conditions require a change in real GDP to lower inflation. 
A)  the demand for money is always proportional to the supply of money. 
B)  when the demand for money decreases, prices respond very slowly. 
C)  as long as prices are flexible, a change in the supply of money or the demand for money will result in a change in the price level to restore equilibrium. 
D)  equilibrium conditions require a change in real GDP to lower inflation.

Question 16

(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. If PPP were to hold at the given nominal exchange rate, then the price of a computer in South Africa would be _____ rands.

Accepted Answer

A)  4,000 
B)  40 
C)  800 
D)  8,000 
A)  4,000 
B)  40 
C)  800 
D)  8,000

Question 17

If nominal income in a nation decreases, economists would predict the:

Accepted Answer

A)  supply of money will rise. 
B)  demand for money will rise. 
C)  supply of money will decrease. 
D)  demand for money will decrease. 
A)  supply of money will rise. 
B)  demand for money will rise. 
C)  supply of money will decrease. 
D)  demand for money will decrease.

Question 18

The broad measure of money is referred to as:

Accepted Answer

A)  M0. 
B)  M1. 
C)  M2. 
D)  M3. 
A)  M0. 
B)  M1. 
C)  M2. 
D)  M3.

Question 19

Under what circumstances would there be a "no-arbitrage" situation in goods markets between two nations?

Accepted Answer

A)  when one of the currencies is undervalued 
B)  when one of the currencies is overvalued 
C)  when both of the currencies are overvalued 
D)  when the relative price of the currencies is equal to one 
A)  when one of the currencies is undervalued 
B)  when one of the currencies is overvalued 
C)  when both of the currencies are overvalued 
D)  when the relative price of the currencies is equal to one

Question 20

Absolute PPP and relative PPP differ in what way?

Accepted Answer

A)  Absolute PPP always holds but relative PPP may not. 
B)  Relative PPP may hold even when absolute PPP does not. 
C)  Relative and absolute PPP always hold. 
D)  Absolute PPP relates to changes in inflation and exchange rates, whereas relative PPP relates to their levels. 
A)  Absolute PPP always holds but relative PPP may not. 
B)  Relative PPP may hold even when absolute PPP does not. 
C)  Relative and absolute PPP always hold. 
D)  Absolute PPP relates to changes in inflation and exchange rates, whereas relative PPP relates to their levels.

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

If the U.S. real GDP growth rate is greater than that of Canada, then the dollar will depreciate:

Which of the following situations would exhibit relative PPP?

Suppose a new car costs 210,000 Mexican pesos in Mexico, while the same car costs $19,500 in the United States. The nominal exchange rate is currently at E$/Peso = $.10/Peso. If we assume PPP to hold, is the dollar under or overvalued? If so, by how much?

As economies adjust to inflation, there is an adjustment of exchange rates to reflect the changed price level. This adjustment is called:

The Fisher effect creates a link between _____ and ______.

Other nominal anchors or targets, such as rules for monetary growth, sometimes fail to optimize economic conditions in the short run because:

The difference between the simple monetary model and the general monetary model of exchange rate determination in the long run is that:

Zimbabwe's hyperinflation reached ______in 2008.

If a nation experiences 10% inflation and its trading partner does not, and if PPP holds, what happens to its real exchange rate?

(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. If PPP were to hold at the given nominal exchange rate, then the price of a computer in Mexico would be _____ pesos.

With an annual inflation of 3.5%, prices will double in _____ years, and if inflation increases to 10%, prices will double in _______ year(s).

Economists have developed models to predict changes in exchange rates based on inflation trends. To guide forecasts of exchange rates, economists calculate the average:

Factors that could weaken the relationship between money growth rates and changes in price levels and rates of exchange include:

The law of one price requires:

According to the long-run monetary model of the price level:

(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. If PPP were to hold at the given nominal exchange rate, then the price of a computer in South Africa would be _____ rands.

If nominal income in a nation decreases, economists would predict the:

The broad measure of money is referred to as:

Under what circumstances would there be a "no-arbitrage" situation in goods markets between two nations?

Absolute PPP and relative PPP differ in what way?

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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Suppose a new car costs 210,000 Mexican pesos in Mexico, while the same car costs $19,500 in the United States. The nominal exchange rate is currently at E_$/Peso= $.10/Peso. If we assume PPP to hold, is the dollar under or overvalued? If so, by how much?

The Fisher effect creates a link between _ and __.

With an annual inflation of 3.5%, prices will double in _ years, and if inflation increases to 10%, prices will double in ___ year(s).