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

Using monetary theory, one can show that the price level (index) in an economy is equal to:

If money growth is bigger than income growth, then we can expect:

An example of a nontraded product would be:

The long-run relationship between money growth, income growth, and the change in the price level in a nation is:

Empirically, during the period 1975-2005, the relationship among the growth rate of money, changes in the price level, and changes in the exchange rate was:

Whenever the supply of money is growing at a constant rate, if there is price flexibility and real income is constant, then the price level:

Explain how PPP, UIP, and the Fisher effect lead to the insight that real interest rates equalize across countries.

When the law of one price holds for all goods and services, the real exchange rate is always equal to:

Combining the relative PPP with the monetary model of exchange rates, we find that the rate of depreciation of a currency (relative to another nation) in the long run is equal to:

According to the simple monetary model, money is growing at 5% in the United States and 6% in the United Kingdom, while real GDP is rising at 3% in the United States, and at 5% in the United Kingdom. What will this do to the exchange rate?

Using the relationship between expected exchange rates and inflation differentials in combination with uncovered interest parity, we find:

Forecasting exchange rates involves:

Absolute purchasing power parity implies that:

According to the long-run monetary model, we can rearrange terms in the money demand/supply in our long-run relationship to show that when the nominal supply of money is increased, ceteris paribus,:

Explain the difference between absolute and relative PPP.

(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. With the price of the computer given in the local currency, the South African rand is _______.

The M1 measure of money includes demand deposits but excludes:

If prices are held constant and income increases by 12%, the demand for money will:

For a given level of real income, the demand for real money balances is inversely related to:

If a nation uses one or a combination of nominal anchors, a trade-off is that it loses: