Question 1

When we consider growth rates of the variables, the growth of the price level (inflation) is equal to:

Accepted Answer

A)  growth in nominal GDP. 
B)  growth in real GDP. 
C)  growth of the monetary aggregate. 
D)  growth of the nominal supply of money minus the growth rate of real income. 
A)  growth in nominal GDP. 
B)  growth in real GDP. 
C)  growth of the monetary aggregate. 
D)  growth of the nominal supply of money minus the growth rate of real income.

Question 2

Evidence on hyperinflationary periods indicates:

Accepted Answer

A)  a complete breakdown of the monetary exchange rate theory in the short run. 
B)  that it takes longer for monetary and price level swings to show up in the exchange rate data. 
C)  that the relationship between high inflation and exchange depreciation is much tighter even in the short run. 
D)  that the government's inability to control monetary growth led to the currency becoming completely worthless domestically but, ironically, more valuable outside the nation. 
A)  a complete breakdown of the monetary exchange rate theory in the short run. 
B)  that it takes longer for monetary and price level swings to show up in the exchange rate data. 
C)  that the relationship between high inflation and exchange depreciation is much tighter even in the short run. 
D)  that the government's inability to control monetary growth led to the currency becoming completely worthless domestically but, ironically, more valuable outside the nation.

Question 3

Hyperinflation is a condition described by:

Accepted Answer

A)  a 5% increase in price each year. 
B)  a sustained increase in price of 50% or more per month. 
C)  any kind of price increase. 
D)  the rise in prices during a recession. 
A)  a 5% increase in price each year. 
B)  a sustained increase in price of 50% or more per month. 
C)  any kind of price increase. 
D)  the rise in prices during a recession.

Question 4

How could conditions of imperfect competition explain deviations from PPP?

Accepted Answer

A)  Imperfect competition means that prices are higher than costs and may not converge. 
B)  Governments often restrict trade in those goods. 
C)  Goods sold under conditions of imperfect competition are often inferior. 
D)  Arbitrageurs do not recognize profit opportunities in these markets. 
A)  Imperfect competition means that prices are higher than costs and may not converge. 
B)  Governments often restrict trade in those goods. 
C)  Goods sold under conditions of imperfect competition are often inferior. 
D)  Arbitrageurs do not recognize profit opportunities in these markets.

Question 5

Globalization trends may ____ the tendency for prices to converge.

Accepted Answer

A)  retard 
B)  speed up 
C)  eliminate 
D)  render irrelevant 
A)  retard 
B)  speed up 
C)  eliminate 
D)  render irrelevant

Question 6

In the general model of the demand for money, the demand for real balances is based on which of the following two variables?

Accepted Answer

A)  the supply of money and the price level 
B)  the demand for assets and the supply of assets 
C)  the level of real income and the nominal rate of interest 
D)  expectations of inflation and money velocity 
A)  the supply of money and the price level 
B)  the demand for assets and the supply of assets 
C)  the level of real income and the nominal rate of interest 
D)  expectations of inflation and money velocity

Question 7

The nominal exchange rate between two currencies tells us:

Accepted Answer

A)  changes in the exchange rate over time. 
B)  how many units of one currency can be purchased with one unit of the home currency. 
C)  how much in terms of goods and services the home currency will buy in the foreign nation compared with the home nation. 
D)  how much depreciation or appreciation has occurred in the home exchange rate. 
A)  changes in the exchange rate over time. 
B)  how many units of one currency can be purchased with one unit of the home currency. 
C)  how much in terms of goods and services the home currency will buy in the foreign nation compared with the home nation. 
D)  how much depreciation or appreciation has occurred in the home exchange rate.

Question 8

In equilibrium, all traded goods sell at the same price internationally. If the same goods are expressed in their home prices, then the ratio of the prices is equal to:

Accepted Answer

A)  one. 
B)  zero. 
C)  the rate of interest. 
D)  the nominal exchange rate between the two currencies. 
A)  one. 
B)  zero. 
C)  the rate of interest. 
D)  the nominal exchange rate between the two currencies.

Question 9

The demand for real money balances is:

Accepted Answer

A)  proportional to nominal income. 
B)  proportional to real income. 
C)  disproportional to real GDP. 
D)  determined by the real rate of interest. 
A)  proportional to nominal income. 
B)  proportional to real income. 
C)  disproportional to real GDP. 
D)  determined by the real rate of interest.

Question 10

During the economic crisis of 2008-10, efforts to keep inflation pinned at 2%:

Accepted Answer

A) made things more difficult, since nominal interest rates cannot fall below zero. 
B) made things more difficult, since nominal interest rates cannot rise above zero. 
C) made things easier, since nominal interest rates cannot fall below zero. 
D) made things easier, since nominal interest rates cannot rise above zero. 
A) made things more difficult, since nominal interest rates cannot fall below zero. 
B) made things more difficult, since nominal interest rates cannot rise above zero. 
C) made things easier, since nominal interest rates cannot fall below zero. 
D) made things easier, since nominal interest rates cannot rise above zero.

Question 11

The monetary approach to exchange rates describes:

Accepted Answer

A)  long-run relationships between money, prices, and exchange rates. 
B)  a short-run relationship between exchange rates and interest rates. 
C)  a short-run measure of fluctuations in exchange rates. 
D)  a theory based on the idea that exchange rates are constant in the long run. 
A)  long-run relationships between money, prices, and exchange rates. 
B)  a short-run relationship between exchange rates and interest rates. 
C)  a short-run measure of fluctuations in exchange rates. 
D)  a theory based on the idea that exchange rates are constant in the long run.

Question 12

In equilibrium, all traded goods sell at the same price internationally because of:

Accepted Answer

A)  government direction. 
B)  arbitrage. 
C)  markets in which buyers and sellers do not interact. 
D)  the fact that the underlying value is the same everywhere. 
A)  government direction. 
B)  arbitrage. 
C)  markets in which buyers and sellers do not interact. 
D)  the fact that the underlying value is the same everywhere.

Question 13

If a nation experiences 10% inflation and its trading partner does not, and if PPP holds, what happens to its nominal 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 14

The primary difference between the simple quantity theory of money and one in which interest rates matter is that with the more general model:

Accepted Answer

A)  there are jumps in exchange rates. 
B)  there are no effects of inflation. 
C)  monetary policy autonomy is maintained. 
D)  exchange rates are held constant. 
A)  there are jumps in exchange rates. 
B)  there are no effects of inflation. 
C)  monetary policy autonomy is maintained. 
D)  exchange rates are held constant.

Question 15

The long-run Fisher effect links rises in inflation with rises in nominal interest rates by the same proportion, resulting in ____ the demand for real money balances.

Accepted Answer

A)  no effect on 
B)  an increase in 
C)  a decrease in 
D)  an increase in the supply of money offsetting the increase in 
A)  no effect on 
B)  an increase in 
C)  a decrease in 
D)  an increase in the supply of money offsetting the increase in

Question 16

In the long run, the demand for real balances rises whenever:

Accepted Answer

A)  nominal interest rates fall. 
B)  real GDP rises. 
C)  the exchange rate rises. 
D)  nominal interest rates fall and real GDP rises. 
A)  nominal interest rates fall. 
B)  real GDP rises. 
C)  the exchange rate rises. 
D)  nominal interest rates fall and real GDP rises.

Question 17

Incorporating the liquidity preference function into the simple model changes its outcome somewhat. What is the impact?

Accepted Answer

A)  Changes in the growth of the money supply cause inflation and nominal interest rates to change, which affects demand for real balances and causes further discontinuous influences on prices. 
B)  Changes in the inflation rate no longer affect nominal interest rates: the Fisher effect is no longer operative. 
C)  Changes in nominal interest rates have an immediate effect on the real exchange rate, bypassing the adjustment process. 
D)  Changes in the money growth rate increase real balances, since prices are no longer flexible. 
A)  Changes in the growth of the money supply cause inflation and nominal interest rates to change, which affects demand for real balances and causes further discontinuous influences on prices. 
B)  Changes in the inflation rate no longer affect nominal interest rates: the Fisher effect is no longer operative. 
C)  Changes in nominal interest rates have an immediate effect on the real exchange rate, bypassing the adjustment process. 
D)  Changes in the money growth rate increase real balances, since prices are no longer flexible.

Question 18

(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. According to the information provided, under conditions of PPP, the price of a computer should be ____ reals in Brazil.

Accepted Answer

A)  2,200 
B)  1,200 
C)  1,100 
D)  550 
A)  2,200 
B)  1,200 
C)  1,100 
D)  550

Question 19

Whenever the absolute purchasing power of two currencies is the same, the real exchange rate between them is equal to:

Accepted Answer

A)  zero. 
B)  one. 
C) 125 
D)  1/PPP. 
A)  zero. 
B)  one. 
C) 125 
D)  1/PPP.

Question 20

If Europe has a real GDP growth rate of 5%, and the United States has a real GDP growth rate of 6%, while money growth in Europe is 7%, and money growth in the United States is 5%, what would the monetary exchange rate model predict for exchange rates in the long run?

Accepted Answer

A)  The U.S. dollar would appreciate by 3% against the euro. 
B)  The U.S. dollar would depreciate by 3% against the euro. 
C)  The U.S. dollar and the euro would not change against each other because the growth rates are offsetting. 
D)  The U.S. dollar would appreciate by 1% against the euro. 
A)  The U.S. dollar would appreciate by 3% against the euro. 
B)  The U.S. dollar would depreciate by 3% against the euro. 
C)  The U.S. dollar and the euro would not change against each other because the growth rates are offsetting. 
D)  The U.S. dollar would appreciate by 1% against the euro.

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

When we consider growth rates of the variables, the growth of the price level (inflation) is equal to:

Evidence on hyperinflationary periods indicates:

Hyperinflation is a condition described by:

How could conditions of imperfect competition explain deviations from PPP?

Globalization trends may ____ the tendency for prices to converge.

In the general model of the demand for money, the demand for real balances is based on which of the following two variables?

The nominal exchange rate between two currencies tells us:

In equilibrium, all traded goods sell at the same price internationally. If the same goods are expressed in their home prices, then the ratio of the prices is equal to:

The demand for real money balances is:

During the economic crisis of 2008-10, efforts to keep inflation pinned at 2%:

The monetary approach to exchange rates describes:

In equilibrium, all traded goods sell at the same price internationally because of:

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

The primary difference between the simple quantity theory of money and one in which interest rates matter is that with the more general model:

The long-run Fisher effect links rises in inflation with rises in nominal interest rates by the same proportion, resulting in ____ the demand for real money balances.

In the long run, the demand for real balances rises whenever:

Incorporating the liquidity preference function into the simple model changes its outcome somewhat. What is the impact?

(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. According to the information provided, under conditions of PPP, the price of a computer should be ____ reals in Brazil.

Whenever the absolute purchasing power of two currencies is the same, the real exchange rate between them is equal to:

If Europe has a real GDP growth rate of 5%, and the United States has a real GDP growth rate of 6%, while money growth in Europe is 7%, and money growth in the United States is 5%, what would the monetary exchange rate model predict for exchange rates in the long run?

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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