Deck 12: Foreign Trade and the Exchange Rate

Question 1

We say that the terms of trade have improved when

A) the prices of imports rise more rapidly than those of exports.
B) the value of imports increases.
C) the prices of exports rise less rapidly than those of imports.
D) the ratio of export to import prices rises.
E) the ratio of export to import prices falls.

Answer 1

the ratio of export to import prices rises.

Question 2

The trajectory of the weighted exchange rate of the U.S. dollar shows

A) a dramatic reduction beginning in 1980 finally bottoming out in late 1985 so that one-half of the decline was recovered by 1986.
B) a small reduction beginning in 1980 followed by a precipitous decline starting in 1985 and continuing through at least 1987.
C) a dramatic increase beginning in 1980 finally peaking in late 1985 so that nearly one-half of the gain had eroded by 1986.
D) a small increase beginning in 1980 followed by a sharp increase starting in 1985 and continuing through at least 1987.
E) a stable international valuation through 1985 when a sudden downturn eroded 50 percent of the value of the dollar in just one year.

Answer 2

a dramatic increase beginning in 1980 finally peaking in late 1985 so that nearly one-half of the gain had eroded by 1986.

Question 3

Suppose that i) the dollar depreciated, ii) domestic prices in the United States rose, and iii) real income in the United States nonetheless rose, too.
In this case, you would expect net exports to

A) fall because each of the events noted tends to push net exports down.
B) rise because each of the events noted tends to push net exports down.
C) fall, but you would be unsure because the depreciation of the dollar would tend to push exports up even as imports rose in response to domestic inflation and real GDP.
D) rise, but you would be unsure because domestic inflation would tend to depress exports even as imports fell in response to the depreciation and income effects.
E) none of the above.

Answer 3

fall, but you would be unsure because the depreciation of the dollar would tend to push exports up even as imports rose in response to domestic inflation and real GDP.

Question 4

Suppose that the United States were to enact tight monetary policy during a period of fiscal stimulus. Which of the following implications would be consistent with real exchange rate theory?

A) A large influx of dollars might negate the monetary policy.
B) A large depreciation in the value of the dollar might be expected.
C) A large increase in interest rates abroad might be expected.
D) All of the above.
E) None of the above.

Question 5

Purchasing power parity does not hold up as well in the short run as it does in the long run because

A) prices are fixed in the short run and the resulting inflexibility is hard to describe theoretically.
B) substitution among similar goods is nearly impossible when an international transaction is involved.
C) goods arbitrage is not an instantaneous, costless process.
D) its conclusions are drawn from price stability, a long-term phenomenon.
E) all of the above.

Question 6

The sharp decrease in net exports over the past decade is due to

A) a dramatic increase in the U.S. trade deficit with Japan.
B) a dramatic increase in the U.S. trade deficit with Germany.
C) a dramatic increase in the U.S. trade deficit with China.
D) a dramatic increase in the U.S. trade deficit with Canada.
E) both a and c.

Question 7

Changes in the real exchange rate

A) reflect changes in the purchasing power of one currency relative to the rest of the world.
B) indicate changes in the prices of goods produced in one country relative to the rest of the world.
C) are positive if domestic prices in one country climb relative to those in the rest of the world.
D) can be caused by changes in either the domestic price index or the price index of goods produced and traded across the rest of the world.
E) all of the above.

Question 8

The relative prices of U.S. goods sold in Europe can change from day to
Day, even though domestic prices for the same goods in the United States are fixed in the short run, because

A) the prices of European goods sold at home are not fixed in the short run.
B) the nominal and not the real exchange rate can move in the very short run.
C) both the real and the nominal exchange rates can move in the very short run.
D) the theory that assumes that prices are fixed in the short run is fallacious.
E) none of the above.

Question 9

Assuming the usual relationship between the real exchange rate and the interest rate, the net exports should display

A) a negative correlation with both GDP and the interest rate.
B) a negative correlation with GDP and a positive correlation with the interest rate.
C) a positive correlation with both GDP and the interest rate.
D) a positive correlation with GDP and a negative correlation with the interest rate.
E) a positive correlation with GDP and no significant correlation with the interest rate.

Question 10

Net exports for the United States

A) were consistently negative for the three decades prior to 1981 but have since turned dramatically positive; as a result, the United States became a net debtor nation in 1985.
B) were consistently positive for the three decades prior to 1981 but have since turned slightly negative.
C) were consistently positive for the three decades prior to 1981 but have since turned dramatically negative; as a result, the United States became a net creditor in 1985.
D) were consistently positive for the three decades prior to 1981 but have since been fluctuating up and down around zero.
E) none of the above.

Question 11

Which of the following could serve as an algebraic representation of a net export function of the usual shape? In each, X denotes net exports, Y denotes ^{GDP, and EP/P}w ^{denotes the real exchange rate.}

A)
B)
C)
D)
E)

Question 12

The trade-weighted exchange rate of the dollar against the rest of the world

A) depreciated abruptly after 1985.
B) appreciated by 58 percent from 1981 through 1984.
C) increased at an annual rate of nearly 20 percent in the early 1980s.
D) was higher at the end of 1984 than it was in 1976.
E) all of the above.

Question 13

The theory of purchasing power parity predicts

A) stable domestic prices in the long and short runs on both sides of an international transaction.
B) stable real exchange rates in the long and short runs that maintain relative purchasing powers across international borders.
C) stable domestic and foreign prices for traded goods in the long run but uncertain real exchange rates in the short term.
D) variable relative prices of foreign goods driven by uncertainty in the real exchange rate.
E) none of the above.

Question 14

Let expected inflation in the United States be 5 percent with a nominal rate of interest equal to 10 percent; let corresponding inflationary expectations abroad equal 10 percent with a nominal interest rate of 12 percent. According to interest rate parity,

A) people must expect the dollar to appreciate by 3 percent.
B) people must expect the dollar to appreciate by 5 percent.
C) people must expect the dollar to appreciate by -3 percent.
D) people must expect the dollar to appreciate by -5 percent.
E) expectations about the future strength of the dollar must still be undetermined.

Question 15

The strong positive correlation between the size of an expected depreciation of a currency and the size of the deviation of the trade-weighted exchange rate from parity

A) is a short-term relationship based on interest rate parity.
B) is a long-term relationship based on purchasing power parity.
C) is a loose relationship that does not really stand up to the weight of empirical testing.
D) is a short-term relationship based entirely on the rigidity of prices in the short run.
E) none of the above.

Question 16

Which of the following word equations accurately represents the income identity for an open economy?

A) GDP = consumption + investment + government spending + imports - exports.
B) GDP = consumption + investment + government spending + net exports.
C) GDP = aggregate demand - net exports.
D) GDP = consumption + investment + government spending - net exports + imports.
E) None of the above.

Question 17

If purchasing power parity were perfectly applicable in both the short and long runs, then you would expect to observe

A) net exports depending on real income and the real exchange rate.
B) net exports depending only on real income.
C) net exports being exogenously fixed by policy makers.
D) net exports depending only on movement in the real exchange rate.
E) net exports depending only on foreign variables.

Question 18

Suppose that the Japanese yen appreciated relative to the dollar. This would mean that

A) official intervention should be expected to return the exchange rate to its pegged position.
B) each dollar could now buy more yen than before.
C) each dollar could now buy fewer yen than before.
D) an immediate adjustment back to the original exchange rate should be expected as a result of third currency arbitrage.
E) none of the above.

Question 19

With which of the following countries has the United States incurred the most rapidly increased trade deficits?

A) Japan
B) Germany
C) China
D) Canada
E) Both a and c

Question 20

Net exports, in general, are

A) positively correlated with the real exchange rate.
B) positively correlated with real income.
C) positively correlated with the domestic price index.
D) negatively correlated with the price index of the rest of the world.
E) none of the above.

Question 21

Suppose that the demand for money were to become increasingly sensitive to changes in the interest rate. In that case, you would expect to see

A) the exchange rate become more sensitive to changes in fiscal policy.
B) the exchange rate become less sensitive to changes in fiscal policy.
C) no change in the sensitivity of the exchange rate to changes in fiscal policy.
D) an influx of foreign demand for domestic currency neutralize the increased sensitivity of domestic demand.
E) none of the above.

Question 22

To incorporate an international sector into a closed IS-LM model, it is necessary to

A) adjust both the IS and LM curves.
B) adjust only the LM curve.
C) adjust only the IS curve.
D) adjust the entire structure so that the underlying geometry is drawn with GDP on one axis and the real exchange rate on the other.
E) none of the above.

Question 23

Let real interest rates in the United States climb. The dollar, in that case, could appreciate in the short run because higher demand for U.S. assets means higher demand for the dollar. In the long term, though, the dollar could depreciate because

A) the dollar's being valued over parity produces the expectation of depreciation.
B) an expected depreciation of the dollar causes people to sell dollars; this increases the supply of dollars and lowers their price, the exchange rate.
C) an expected depreciation of the dollar makes U.S. assets relatively less attractive; this reduces the demand for dollars and lowers their price, the exchange rate.
D) all of the above.
E) none of the above.

Question 24

Suppose the Fed decides to restrict the rate of growth of the money supply in the United States. You should expect to see

A) an initial increase in the value of the dollar that is diminished somewhat over the long run.
B) an initial increase in the value of the dollar that is swamped by a second- round depreciation.
C) an initial increase in the value of the dollar that continues until the Fed changes policy again.
D) an initial decline in the value of the dollar that is offset somewhat over the long run.
E) an initial decline in the value of the dollar that continues until the Fed changes policy again.

Question 25

An increase in real interest rates in the United States should cause

A) real interest rates in the rest of the world to fall.
B) the value of the U.S. dollar to depreciate.
C) real interest rates in the rest of the world to climb by less than 2 percent.
D) the difference between the U.S. interest rate and interest rates in the rest of the world to shrink.
E) both b and d.

Question 26

Which of the following would you expect to see in an open economy that just experienced a large increase in the money supply?

A) A depreciation of the currency
B) An expansion in GDP and imports
C) An expansion in exports
D) An expansion in net exports
E) All of the above

Question 27

Suppose you were told that net exports had become more sensitive to changes in GDP. In that case, you would expect that

A) monetary policy had become less effective in stabilizing GDP in the short run.
B) monetary policy had become more effective in stabilizing GDP in the long run.
C) monetary policy had become less effective in stabilizing GDP in the long run.
D) monetary policy had become more effective in stabilizing GDP in the short run.
E) b and d.

Question 28

If the real interest rate in the United States climbs, which of the following might occur in the rest of the world?

A) Real interest rates climb by just as much
B) Real interest rates climb but not by just as much
C) Real interest rates hold steady.
D) Real interest rates fall by a large amount.
E) Real interest rates fall by a small amount.

Question 29

The pure Keynesian government spending multiplier, in an open economy, depends on not only the marginal propensity to consume and the income tax rate but also

A) the parity of purchasing power.
B) the marginal propensity to import.
C) the real exchange rate.
D) the nominal exchange rate.
E) all of the above.

Question 30

Suppose the Congress of the United States passes a large reduction in federal taxes. You should expect to see

A) an initial reduction in the value of the dollar followed by a period of gradual appreciation.
B) an initial increase in the value of the dollar followed by a period of gradual depreciation.
C) an initial reduction in the value of the dollar that continues until the Fed accommodates the Congress by increasing the rate of growth of the money supply.
D) an initial increase in the value of the dollar that continues until the Fed accommodates the Congress by restricting the rate of growth of the money supply.
E) none of the above.

Question 31

The inclusion of a strong negative correlation between net exports and GDP in the definition of aggregate demand serves

A) to make the IS curve steeper in direct opposition to the effect of the correlation between net exports and the exchange rate.
B) to make the IS curve flatter in direct opposition to the effect of the correlation between net exports and the exchange rate.
C) to amplify the effect of the correlation between net exports and the exchange rate in making the IS curve steeper.
D) to amplify the effect of the correlation between net exports and the exchange rate in making the IS curve flatter.
E) none of the above.

Question 32

The inclusion of a strong correlation between the exchange rate and the real rate of interest serves to

A) make the IS curve steeper because higher interest rates mean higher exchange rates and larger net exports.
B) make the IS curve flatter because higher interest rates mean higher exchange rates and smaller net exports.
C) make the LM curve steeper because higher interest rates mean larger inflows of currency and correspondingly greater sensitivity of the demand for money to changes in the interest rate.
D) make the LM curve flatter because higher interest rates mean higher exchange rates and smaller demand for foreign currencies.
E) none of the above.

Question 33

Consider an economy initially in equilibrium with neither a trade deficit nor a government deficit. If taxes were cut without a corresponding reduction in government spending, you should expect to see

A) higher interest rates.
B) an appreciated domestic currency.
C) a reduction in net exports.
D) both a trade deficit and a government deficit.
E) all of the above.

Question 34

If you were told that the exchange rate had become more sensitive to changes in the interest rate, then you would conclude that

A) monetary policy had become less effective in stabilizing GDP in the short run.
B) monetary policy had become more effective in stabilizing GDP in the short run.
C) monetary policy had become less effective in stabilizing GDP in the long run.
D) monetary policy had become more effective in stabilizing GDP in the long run.
E) monetary policy had become less effective in stabilizing GDP not only at home, but also throughout the rest of the world.

Question 35

Which of the following best describes the link between changes in a real interest rate and changes in an exchange rate? An increase in U.S. interest rates should produce

A) an inflated difference between the U.S. rate of interest and the rate applied in the rest of the world, leading to a self-fulfilling prophecy that the dollar will eventually depreciate.
B) a decline in worldwide rates, which in turn increases worldwide demand for the dollar; the exchange rate, the price of the dollar, therefore climbs.
C) inflation in the rest of the world and a corresponding appreciation in the value of the dollar.
D) any of the above, depending on the circumstance.
E) none of the above.

Question 36

Suppose investment grew increasingly sensitive to changes in the domestic interest rate. In that case, you would expect to see

A) the exchange rate become more sensitive to changes in monetary policy.
B) the exchange rate become less sensitive to changes in monetary policy.
C) no change in the sensitivity of the exchange rate to changes in monetary policy.
D) foreign investment take up the slack and neutralize the structural changes in domestic investment behavior.
E) none of the above.

Question 37

The adjustments required to successfully expand a model of a closed domestic economy into one that accommodates international trade include

A) the explicit addition of net exports in the accounting identity defining aggregate demand.
B) the explicit recognition that net exports depend on both GDP and the exchange rate.
C) the explicit recognition that the exchange rate depends on the domestic real rate of interest.
D) all of the above.
E) none of the above.

Question 38

Let the marginal propensity to consume equal 0.9, the proportional income tax rate equal 0.2, the marginal propensity to import equal 0.12, the sensitivity coefficient of investment and the interest rate equal 0.03, and the exchange rate sensitivity to parity differential equal 0.1. In this case, the simple, pure government spending multiplier must equal

A) 10.
B) 3.8.
C) 2.5.
D) 2.2.
E) none of the above.

Question 39

If real interest rates in the United States fell, with the dollar initially trading for 9 French francs, which of the following scenarios might be observed?

A) The value of the dollar might climb to 9.5 francs before falling back to 9.25 francs.
B) The value of the dollar might fall immediately to 8.5 francs and then continue downward more slowly to a new equilibrium of 8.25 francs.
C) The value of the dollar might fall to 8.5 francs before recovering partially to 8.82 francs.
D) The value of the dollar might hold in the neighborhood of 9 francs while domestic prices adjusted over the long term.
E) None of the above.

Question 40

A 1-point increase in the real rate of interest in the United States produces less than a 1-point increase in the difference between the U.S. real interest rate and the real interest rate for the rest of the world because

A) assets across the world become less attractive, face reduced demand, which supports lower prices and correspondingly higher returns.
B) assets across the world are linked by multinational corporations to U.S. assets and thus U.S. interest rates.
C) the expected depreciation of the dollar that accompanies any increase in U.S. rates dampens the increase almost immediately.
D) liquidity concerns hamper pure price arbitrage in exchange markets.
E) all of the above.

Question 41

Which of the following policies would you expect to crowd out exports?

A) A reduction in the money supply
B) An increase in the money supply
C) An increase in federal income taxes
D) An increase in government spending
E) None of the above

Question 42

If the British pound were set at $2.80 and the Swiss franc were set at $0.70, then the exchange rate between pound and francs would be

A) 1 pound = 25 francs.
B) 1 pound = 0.25 francs.
C) 1 pound = 3.5 francs.
D) 1 pound = 2.1 francs.
E) 1 pound = 4 francs.

Question 43

The rapid depreciation of the dollar in the late 1980s

A) eliminated the trade deficit.
B) led to steady improvement in the trade deficit after 1984.
C) coincided with steady improvement in the trade deficit apart from a slight decrease in net exports in 1986.
D) brought the real trade-weighted value of the dollar well below its 1980 level.
E) none of the above.

Question 44

Which of the following would you expect to see in an economy that had just seen its government increase expenditures?

A) A depreciation in the currency
B) An expansion of investment and exports
C) A contraction in imports
D) An expansion in net exports
E) None of the above

Question 45

The United States operates under which kind of an exchange-rate system?

A) Fixed
B) Flexible
C) International
D) Currency market
E) Fixed-float

Question 46

Consider an outside shock on the value of the dollar that causes it to depreciate. The Fed could defend the dollar by

A) increasing the money supply thereby lowering the LM curve and driving the interest rate up.
B) increasing government spending thereby raising the IS curve and driving the interest rate up.
C) reducing the money supply thereby raising the LM curve and driving the interest rate up.
D) increasing taxes thereby lowering the IS curve and driving the interest rate down.
E) simultaneously increasing government spending and the money supply so that GDP climbs with a fixed interest rate.

Question 47

Fiscal policy is neutral in the long run even in an open economy in part because

A) any increase in government spending is negated either by a reduction in net exports or by a reduction in investment.
B) higher rates of interest and higher price levels reachieve equilibrium at potential GDP with a higher real exchange rate.
C) any increase in government spending is immediately financed by influxes of foreign investment.
D) a and b.
E) all of the above.

Question 48

Which of the following is correct?

A) Contractionary fiscal and monetary policies both increase the interest rate, appreciate the domestic currency, and increase the trade deficit.
B) Contractionary fiscal policy reduces the interest rate, depreciates domestic currency, and reduces the trade deficit; contractionary monetary policy does the opposite.
C) Contractionary monetary policy reduces the interest rate, depreciates domestic currency, and reduces the trade deficit; contractionary fiscal policy does the opposite.
D) Only contractionary monetary policy has any effect on international variables.
E) Only contractionary fiscal policy has any effect on international variables.

Question 49

Monetary policy is neutral in the long run even in an open economy in part because

A) price adjustments eventually return the nominal and real exchange rates to their original levels.
B) price adjustments eventually return the real exchange rate to its original level by depreciating the nominal rate by the rate of inflation.
C) potential GDP is always achieved in the long run even if the real and nominal exchange rates are altered.
D) all the stimulus eventually leaks out into the rest of the world.
E) none of the above.

Question 50

In an open economy, compared with a closed economy, you should expect

A) fiscal policy to be less effective the potential offset is larger) and monetary policy to be more effective net exports and investment are both sensitive to interest rate changes).
B) fiscal policy to be less effective because the offset is larger but the effectiveness of monetary policy to be unchanged.
C) both fiscal and monetary policies to be more effective because both net exports and investment are sensitive to changes in the interest rate.
D) both fiscal and monetary policies to be less effective because the potential offsets of both should be larger.
E) none of the above to be true.

Question 51

Large open economies tend to have

A) domestic price levels highly responsive to exchange rate movements.
B) domestic price levels that respond to exchange rate movements only when their central bank fails to intervene.
C) extreme competition from imports for those goods produced domestically.
D) domestic price levels that respond a great deal to exchange rate movements.
E) little price variation in the prices of the good they import.

Question 52

Exchange rate stabilization policies tend to

A) prevent money neutrality from holding.
B) suffer from the same negative side effects as interest rate stabilization policies.
C) cause fiscal policy to become nonneutral.
D) all of the above.
E) none of the above.

Question 53

Exporters prefer

A) monetary stimulus to fiscal stimulus because the higher interest rates associated with fiscal stimulus depreciate currencies and expand net and gross exports.
B) monetary stimulus to fiscal stimulus because the lower interest rates associated with monetary stimulus depreciate currencies and expand gross and net exports.
C) monetary stimulus to fiscal stimulus because the lower interest rates associated with monetary stimulus depreciate currencies and expand net exports if not necessarily gross exports.
D) fiscal stimulus to monetary stimulus because fiscal stimulus most usually is directed at the export markets in lieu of protectionist legislation.
E) none of the above.

Question 54

At the turn of the century, the U.S. economy supported

A) imports considerably greater than exports, financed by capital inflows in excess of 3 percent of GDP per year.
B) imports slightly in excess of exports, financed by capital inflows just under 1 percent of GDP per year.
C) imports almost exactly matching exports so that capital inflows were almost negligible year in and year out.
D) imports slightly less than exports, financed by capital inflows just under 1 percent of GDP per year.
E) imports considerably less than exports, financed by capital inflows in excess of 2 percent of GDP per year.

Question 55

Which of the following helps explain how the protective stimulus of a trade tariff can be diminished?

A) Any increase in net exports drives both GDP and interest rates higher and thus causes domestic currency to appreciate and reduce the price increase associated with the tariff.
B) Exporters from abroad try to stabilize the international prices of their goods, even in the face of a tariff.
C) Smaller than expected increases in import prices undermine the anticipated reduction in total imports.
D) All of the above are at least partial explanations.
E) Only b and c apply, because an increase in net exports should make both GDP and the interest rate fall.

Question 56

Which of the following policies would keep an economy operating at full potential while combating an excessive trade deficit and an overvalued domestic currency?

A) Reducing government spending and increasing the domestic money supply so that the interest rate falls at potential GDP
B) Increasing both government spending and the domestic money supply so that the interest rate increases at potential GDP
C) Reducing both government spending and taxes so that the interest rate falls and GDP climbs above potential
D) Increasing both government spending and taxes so that the interest rate increases even as GDP climbs above potential
E) Placing import restrictions on the country's largest imports

Question 57

The rapid appreciation of the dollar in the early 1980s

A) eliminated the trade deficit left over from the 1970s.
B) led to an increase in the trade deficit between 1980 and 1986.
C) coincided with a steady decline in the U.S. trade balance through 1985.
D) brought the real trade-weighted value of the dollar its highest level in over 10 years.
E) none of the above.

Question 58

The enactment of protectionist measures to aid domestic producers

A) has a muted impact on prices and trade, since it has the effect of increasing interest rates and thus the exchange rate.
B) has a muted impact on prices and trade, since it has the effect of decreasing interest rates and thus the exchange rate.
C) has a muted impact on prices and trade, since it has the effect of increasing interest rates and thus decreasing the exchange rate.
D) has a muted impact on prices and trade, since it has the effect of decreasing interest rates and thus increasing the exchange rate.
E) none of the above.

Question 59

The rapid appreciation of the dollar in the early 1980s

A) eliminated the trade deficit left over from the 1970s.
B) led to an increase in the trade deficit between 1980 and 1986.
C) coincided with a steady decline in the U.S. trade balance through 1985.
D) brought the real trade-weighted value of the dollar its lowest level in over 10 years.
E) none of the above.

Question 60

Small open economies tend to have

A) domestic price levels highly responsive to exchange rate movements.
B) domestic price levels that respond to exchange rate movements only when their central bank fails to intervene.
C) little competition from imports for those goods produced domestically.
D) domestic price levels that respond very little to exchange rate movements.
E) large price differences between the domestic and foreign prices of the good they export.

Question 61

Given an economy with flexible prices, a description of domestic monetary policy can be expressed as to

A) maintain interest rates slightly above the world rate to create a reserve buffer.
B) maintain interest rates slightly below the world rate to reduce the opportunity cost of creating a reserve buffer.
C) keep the domestic price level equal to world prices expressed in terms of domestic currency through the exchange rate.
D) keep net exports equal to zero by manipulating the price level to move against the exchange rate.
E) keep the economy operating at full potential in the face of potentially large shifts in aggregate demand derived from random shocks to net exports.

Question 62

Let the United States endure a 10 percent rate of inflation during some year when the rest of the world sees only a 5 percent rate. Assuming that the United States were in trade balance at the beginning of the year, maintaining a fixed exchange rate across the world, in this case, would

A) cause the U.S. trade balance to grow positive.
B) have no effect on the U.S. trade balance.
C) cause the U.S. trade balance to grow negative.
D) cause further U.S. inflation as aggregate demand from abroad increased across U.S. markets.
E) none of the above.

Question 63

Under floating exchange rates,

A) domestic inflation rates are inex o rably linked across national boundari e s .
B) domestic inflation in one country can lead to inflation in another, even if the exchange rate moves to preserve purchasing power parity.
C) domestic inflation is dictated outside the bounds that would have constrained prices in a fixed-rate regime.
D) domestic economies are insulated from the effects of macroeconomic policies in another country.
E) domestic economies enjoy much greater freedom to use monetary policy for stabilization purposes.

Question 64

Let the United States endure an inflation rate of 10 percent in some year during which the rest of the world saw inflation of only 5 percent. The theory of purchasing power parity would predict, in that case, that the dollar should

A) appreciate by 10 percent.
B) appreciate by 5 percent.
C) depreciate by 10 percent.
D) depreciate by 5 percent.
E) be devalued by 10 percent.