Deck 15: The International Financial System

Question 1

During what period of time was the gold standard used?

A)from the nineteenth century until the 1930s
B)from the eighteenth century until the nineteenth century
C)from 1914 until 1929
D)from 1944 until 1980
E)from 1970 until 1993

Answer 1

from the nineteenth century until the 1930s

Question 2

You decide to work in Japan for the next 10 years, accumulate some savings, then move back to Canada and convert your savings from yen to dollars.At the time of your move, economists predict that consumers in Canada have reignited their love of Japanese products, especially hybrid cars, and expect that this strong preference for Japanese products will continue for the next decade.How should this influence your decision to work and save in Japan?

A)You should be discouraged as the growing Canadian preference for Japanese goods should increase the value of the yen to the dollar and decrease the value of your savings when converted to dollars.
B)You should be discouraged as the growing Canadian preference for Japanese goods should decrease the value of the yen to the dollar and decrease the value of your savings when converted to dollars.
C)You should be encouraged as the growing Canadian preference for Japanese goods should decrease the value of the yen to the dollar and raise the value of your savings when converted to dollars.
D)You should be encouraged as the growing Canadian preference for Japanese goods should increase the value of the yen to the dollar and raise the value of your savings when converted to dollars.

Answer 2

You should be encouraged as the growing Canadian preference for Japanese goods should increase the value of the yen to the dollar and raise the value of your savings when converted to dollars.

Question 3

The Bretton Woods system ended in

A)the 1920s.
B)the 1940s.
C)the 1970s.
D)the 1990s.
E)the 2000s.

Answer 3

the 1970s.

Question 4

Under the Bretton Woods exchange rate system, set up in 1944, which of the following was true?

A)Americans could sell their dollars to the American government in exchange for gold.
B)Americans could sell their dollars to the American government in exchange for silver.
C)Americans could sell their dollars to foreign central banks in exchange for gold.
D)Foreign central banks could sell their dollars to the American government in exchange for gold.
E)Americans were required to pay for imports from other countries with gold.

Question 5

Airbus is a passenger aircraft manufacturer based in Europe, but like the rest of the global aerospace industry, conducts is business in U.S.dollars.Suppose Airbus sells an aircraft to Air France, and Air France pays Airbus in U.S.dollars.If the value of the U.S.dollar rises relative to the euro, Airbus's profits in Europe will ________ because it will receive ________ when it converts the dollars it earns from the sale into euros.

A)rise; more
B)rise; less
C)fall; more
D)fall; less

Question 6

Under which exchange rate system was a dollar redeemable for gold only if the dollar was presented by a foreign central bank?

A)the gold standard
B)a managed float exchange rate system
C)the Bretton Woods System
D)a fiat system
E)the international monetary fund system

Question 7

The gold standard is an example of

A)a floating exchange rate system.
B)a managed float exchange rate system.
C)a fixed exchange rate system.
D)a flexible exchange rate system.
E)the Bretton Woods System.

Question 8

Why did Canada abandon the gold standard in the 1930s?

A)The government wanted to rapidly expand the money supply in response to the Great Depression.
B)The government wanted to move away from a floating exchange rate system to a fixed exchange rate system.
C)The Treasury Department in the United States found it was cheaper to print paper money instead of gold coins.
D)New sources of gold were discovered, so the price of gold plummeted, dramatically reducing the value of the dollar.
E)Other countries stopped accepting Canadian money as payment for their goods and services.

Question 9

In Canada today, how much gold will the Bank of Canada give you in exchange for $1?

A)none
B)$1 worth of gold (based on the market price of an ounce of gold at the time you redeem the gold)
C)1 ounce of gold
D)1/35th of an ounce of gold
E)1 ounce of gold less the difference in the value between the Canadian and American dollars

Question 10

The current exchange rate system in Canada is best described as a

A)silver standard.
B)floating exchange rate system.
C)fixed exchange rate system.
D)gold standard.
E)the Bretton Woods system.

Question 11

China's exchange rate system from 1994 through 2005 is an example of

A)a floating exchange rate system.
B)a managed float exchange rate system.
C)a fixed exchange rate system.
D)a flexible exchange rate system.
E)the Bretton Woods System.

Question 12

Fluctuating exchange rates can alter a multinational firm's profits and losses.The Canadian corporation, Magna International, produces car parts and sells car parts in Europe.If the dollar depreciates against the euro, then Magna International's revenues from these operations should ________ and its costs from these operations should ________.

A)rise; fall
B)rise; rise
C)fall; fall
D)fall; rise

Question 13

If the value of a country's currency is determined only by the demand and supply for that country's currency, the country is said to have a

A)floating exchange rate.
B)fixed exchange rate.
C)gold standard.
D)managed float.
E)bretton woods exchange rate.

Question 14

Suppose an economy's exchange rate system is the gold standard and vast tracks of gold are discovered.If the economy is at full employment, what should this discovery do?

A)It should raise the money supply but have no impact on the price level.
B)It should raise the money supply and cause inflation.
C)It should raise the money supply and cause disinflation.
D)It should lower the money supply and cause deflation.
E)It should not change the money supply.

Question 15

The exchange rate system agreed to in 1944 in which the U.S.government agreed to buy or sell gold at a fixed price of $35 per ounce is referred to as

A)the gold standard.
B)the Bretton Woods System.
C)a floating currency standard.
D)a flexible exchange rate system.
E)the International Monetary Fund system.

Question 16

Under the gold standard, to increase the money supply in the country, the government must

A)simply print more currency.
B)have enough gold to back up the increase in the money supply.
C)buy foreign currencies with dollars to increase foreign currency reserves.
D)increase the value of the country's currency on foreign exchange markets.
E)sell reserves of gold to the Federal Reserve of the United States.

Question 17

In what year was the Bretton Woods system of currency exchange set up?

A)1912
B)1924
C)1929
D)1944
E)1969

Question 18

Gold stored by Bank of Canada backs all Canadian currency.

Question 19

If currencies around the world are based on the gold standard, and Japan raises the amount of gold for which the yen will trade, then holding all else constant,

A)the yen will depreciate against the dollar.
B)the yen will appreciate against the dollar.
C)the value of the yen relative to the dollar will stay constant.
D)the value of U.S.exports to Japan in terms of the yen will increase.
E)the yen will depreciate against currencies not using the gold standard.

Question 20

When the value of a currency is determined mostly by demand and supply, but with occasional government intervention, the exchange rate system is defined as

A)fixed.
B)floating.
C)managed float.
D)Bretton Woods.
E)mixed economy.

Question 21

During what period of time did Canada most consistently adhere to the gold standard?

A)from the nineteenth century until the 1930s
B)from the eighteenth century until the nineteenth century
C)from 1914 until 1929
D)from 1944 until 1980
E)from 1980 until 1993

Question 22

Expanding, contracting, and managing the money supply is easier for a central bank under the gold standard.

Question 23

Canada abandoned the ________ because the government wanted to rapidly expand the money supply in response to the Great Depression.

A)gold standard
B)Bretton Woods system
C)managed float
D)floating exchange rate system
E)international monetary fund

Question 24

Under the Bretton Woods exchange rate system, the U.S.government agreed to buy or sell gold at a fixed price of ________ per ounce.

A)$1
B)$35
C)$70
D)$100
E)$400

Question 25

Fluctuating exchange rates can alter a multinational firm's profits and losses.The Canadian corporation WestJet provides flight services domestically and in the United States.If the Canadian dollar appreciates against the U.S.dollar, then WestJet's revenues from these operations should ________ and its costs from these operations should ________.

A)rise; fall
B)rise; rise
C)fall; fall
D)fall; rise

Question 26

Under the Bretton Woods system, U.S.dollars were redeemable for ________ only if the dollars were presented by a foreign central bank.

A)silver
B)the foreign central bank's home currency (i.e., Canadian dollars for the Bank of Canada)
C)gold
D)U)S.Treasury bonds
E)foreign currency

Question 27

When the value of a currency is determined ________, the exchange rate system is defined as a managed float.

A)only by supply and demand
B)by its issuing government
C)mostly by supply and demand but with occasional government intervention
D)by its issuing government with occasional readjustments in value
E)by supply and demand only within a narrow range determined by the currency's issuing government

Question 28

The ________ system of currency exchange was set up in 1944.

A)gold standard
B)Bretton Woods
C)managed float
D)flexible
E)eurozone

Question 29

You decide to work in London (UK)for the next 5 years, accumulate some savings, then move back to Canada and convert your savings from British pounds to Canadian dollars.At the time of your move, economists predict that consumers in Canada have lost their affinity for British products, and expect that this declining preference for British products will continue for the next decade.How should this influence your decision to work and save in London?

A)You should be discouraged since the declining Canadian preference for British goods should increase the value of the pound compared to the Canadian dollar, which would decrease the value of your savings when converted to Canadian dollars.
B)You should be discouraged since the declining Canadian preference for British goods should decrease the value of the pound compared to the Canadian dollar, which would decrease the value of your savings when converted to Canadian dollars.
C)You should be encouraged since the declining Canadian preference for British goods should decrease the value of the pound compared to the Canadian dollar, which would raise the value of your savings when converted to Canadian dollars.
D)You should be encouraged since the declining Canadian preference for British goods should increase the value of the pound compared to the Canadian dollar, which would raise the value of your savings when converted to Canadian dollars.

Question 30

If two countries adhere to a gold standard, the exchange rate for their currencies is fixed.

Question 31

Under a floating exchange rate, the exchange rate

A)will change whenever the price of gold changes.
B)is controlled by central bank intervention.
C)is determined by the interaction of supply of the currency and demand for the currency.
D)is pegged against the euro.
E)is determined by price of gold.

Question 32

The ________ in Canada is best described as a floating exchange rate system.

A)earliest used exchange rate system
B)current exchange rate system
C)exchange rate system used prior to the great depression
D)exchange rate system set up at the end of World War II
E)exchange rate system in use until the 1930s

Question 33

Managed float exchange systems were abandoned with the implementation of the gold standard.

Question 34

Under the Bretton Woods exchange rate system, ________ could sell their dollars to the U.S.government in exchange for gold.

A)foreign central banks
B)Canadian citizens
C)foreign citizens
D)American corporations
E)all of the above

Question 35

The Bretton Woods exchange rate system was a

A)floating exchange rate system.
B)managed float exchange rate system.
C)fixed exchange rate system.
D)flexible exchange rate system.
E)a currency union system.

Question 36

In Canada today, the Bank of Canada will give you ________ in exchange for $1.

A)1/35 of an ounce of gold
B)$1 worth of gold (based on the market price of an ounce of gold at the time you redeem the gold)
C)1 ounce of gold
D)no gold
E)1 gram of gold

Question 37

What are the three main exchange rate systems, and how do they operate?

Question 38

How were exchange rates determined under the gold standard? How did the Bretton Woods system differ from the gold standard?

Question 39

When the value of a currency is determined ________, the exchange rate system is defined as a floating exchange rate system.

A)only by supply and demand
B)by its issuing government
C)mostly by supply and demand but with occasional government intervention
D)by its issuing government with occasional readjustments in value
E)by supply and demand only within a narrow range determined by the currency's issuing government

Question 40

Airbus is a passenger aircraft manufacturer based in Europe but, like the rest of the global aerospace industry, conducts its business in U.S.dollars.Suppose Airbus sells an aircraft to Air France, and Air France pays Airbus in U.S.dollars.If the value of the U.S.dollar falls relative to the euro, Airbus's profits in Europe will ________ because it will receive ________ when it converts the dollars it earns from the sale into euros.

A)rise; more
B)rise; less
C)fall; more
D)fall; less

Question 41

If the exchange rate between the Canadian dollar and the Indian rupee (rupees per dollar)is greater than the relative purchasing power between the two countries, which of the following would be true?

A)There are opportunities for profit by purchasing goods in India and then selling them in Canada.
B)Purchasing power parity predicts that the value of the dollar will rise as traders take advantage of arbitrage opportunities.
C)Purchasing power parity predicts that the dollar is undervalued as traders take advantage of arbitrage opportunities.
D)There are no arbitrage opportunities for which traders can take advantage.
E)Indian workers are more productive than Canadian workers.

Question 42

If the current price of a Big Mac is 30,500 rupiahs in Indonesia and $4.79 in the United States, what exchange rate does the Big Mac Theory of exchange rates predict?

A)6367 rupiahs per dollar
B)0)0002 rupiahs per dollar
C)1 rupiahs per dollar
D)6336 rupiahs per dollar
E)1460.95 rupiahs per dollar

Question 43

The currency adopted by most countries in Western Europe is referred to as the

A)euro.
B)Eurodollar.
C)yen.
D)pound.
E)the rouble.

Question 44

Under the gold standard, the government must have enough gold to back up any

A)increase in money demand.
B)increase in the money supply.
C)change in its currency's exchange rate.
D)foreign currency deposits in its central bank.
E)additional government spending.

Question 45

Which of the following is most important in explaining exchange rate fluctuations in the short run?

A)relative price levels across countries
B)preferences for domestic and foreign goods
C)interest rates
D)relative rates of productivity growth across countries
E)government debt

Question 46

Foreign currency prices of the Canadian dollar are currently determined by a managed float exchange rate system.

Question 47

You are a Canadian citizen who works in Toronto and owns a winter home in Phoenix, Arizona.When you spend the winters in Phoenix, an increase in the value of the Canadian dollar relative to the U.S.dollar should

A)help you as each Canadian dollar of your salary is now worth more U.S.dollars.
B)hurt you as each Canadian dollar of your salary is now worth less U.S.dollars.
C)hurt you as it is now more expensive to live in Phoenix since the Canadian dollar appreciation.
D)help you as it is now less expensive to live in Canada since the Canadian dollar appreciation.
E)hurt you as each Canadian dollar of your salary is unchanged in value in U.S.dollars.

Question 48

Purchasing power parity is the theory that, in the long run, exchange rates should be at a level such that equivalent amounts of any country's currency

A)will equalize nominal interest rates across countries.
B)are valued inversely relative to the size of its GDP.
C)should earn the same real rate of return.
D)allow one to buy the same amount of goods and services.
E)equate wages in different countries.

Question 49

The Bretton Woods system was established in 1944 and remained in place until the early 1970s.

Question 50

What factors are not important in determining exchange rate fluctuations in the Canadian dollar in the long run?

A)relative price levels across countries
B)relative rates of productivity growth across countries
C)foreign preferences for Canadian goods
D)speculating in currency markets
E)Canadian preferences for foreign goods

Question 51

U.S.dollars can currently be exchanged for gold by foreign central banks, but not by Canadian, U.S., or any other foreign citizens.

Question 52

If one U.S.dollar could be exchanged for one Canadian dollar in 1970, and one U.S.dollar can now be exchanged for 1.13 Canadian dollars, which of the following is true?

A)The U.S.dollar lost value against the Canadian dollar.
B)The Canadian dollar lost value against the U.S.dollar.
C)The Canadian dollar gained value against the U.S.dollar.
D)Inflation has been higher in the US than in Canada.
E)Both A and C are true.

Question 53

What is the difference between a fixed exchange rate system and a managed float exchange rate system?

Question 54

Canadian currency continues to be backed by the gold standard to this day.

Question 55

If currencies around the world are based on the gold standard and the European Union lowers the amount of gold for which the euro will trade, then holding all else constant,

A)the euro will depreciate against the Canadian dollar.
B)the euro will appreciate against the Canadian dollar.
C)the value of the euro relative to the Canadian dollar will stay constant.
D)the value of Canadian exports to EU countries in terms of the euro will decrease.
E)the value of Canadian companies profits earned in Europe will rise.

Question 56

The current exchange rate system has which of the following characteristics?

A)Canada allows the dollar to float against other major currencies.
B)All developing countries allow their currencies to float against the dollar and other major currencies.
C)The countries of the European Union have adopted the gold standard.
D)Several developing countries in Asia have adopted the Bretton Woods system.
E)The current global foreign exchange system is a fixed system.

Question 57

From the beginning of 2002 until 2015, the value of the Canadian dollar has ________ relative to the U.S.dollar and ________ relative to the Japanese yen.

A)appreciated then depreciated; depreciated
B)appreciated then depreciated; appreciated slightly
C)depreciated then appreciated; appreciated slightly
D)depreciated; depreciated
E)depreciated then appreciated; depreciated

Question 58

If the purchasing power of a dollar is greater than the purchasing power of the yen, purchasing power parity would predict that

A)in the short run, exchange rates will move to equalize the purchasing power of the dollar and the yen.
B)in the long run, exchange rates will move to equalize the purchasing power of the dollar and the yen.
C)in the long run, interest rates will move to equalize the purchasing power of the dollar and the yen.
D)in the short run, interest rates will move to equalize the purchasing power of the dollar and the yen.
E)in the short run, Canada will grow more quickly than Japan.

Question 59

Exchange rates under the Bretton Woods system were determined by relative supplies of gold held by countries within the system.

Question 60

What is the connection between the gold held at the Canadian Mint in Ottawa and the Canadian money supply?

Question 61

If, at the current exchange rate between the dollar and the Norwegian kroner of 5.78 kroner per dollar, the dollar is "overvalued," how do you expect demand and supply in the foreign exchange markets to respond?

A)The demand for the dollar will rise, while the supply of the kroner will fall.
B)The demand for the dollar will fall, while the supply of the kroner will rise.
C)The supply of the dollar will rise, while the demand for the kroner will fall.
D)The supply of the dollar will rise, while the demand for the kroner will rise.
E)The supply of the dollar will fall, while the demand for the kroner remains unchanged.

Question 62

If the GDP deflator in Canada is 114, and the GDP deflator in Ukraine is 142, which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)

A)The demand for the dollar will rise since the dollar is undervalued.
B)The demand for the dollar will fall since the dollar is overvalued.
C)The supply of the dollar will fall since the dollar is undervalued.
D)The demand and supply of dollars will remain the same as the dollar is correctly valued.
E)No prediction regarding changes in the demand or supply of the dollar can be made without information on the exchange rate between the Canada and Ukraine.

Question 63

Which of the following would increase the value of the dollar in the long run?

A)an increase in inflation in Canada relative to other countries
B)an increase in the demand for Canadian goods relative to goods from other countries
C)a decrease in Canadian tariffs on foreign goods
D)an increase in the supply of dollars on the foreign exchange market
E)a slow down in Canadian productivity growth relative to other countries

Question 64

If the average productivity of Canadian firms is rising more quickly than the average productivity of Indian firms, which of the following would you expect to see? (India's currency is the rupee.)

A)an increase in the value of the rupee relative to the dollar
B)a decrease in the prices of Indian products
C)a decrease in the quantity demanded of Indian products relative to Canadian products
D)an increase in the quantity demanded of Indian products relative to Canadian products
E)a drop in Canadian net exports

Question 65

If relative purchasing power between Canada and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is "overvalued"?

A)if the actual exchange rate between the dollar and the Argentinean peso is 3.22 pesos per dollar
B)if the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollar
C)if the actual exchange rate between the dollar and the Argentinean peso is 0.22 pesos per dollar
D)if the actual exchange rate between the dollar and the Argentinean peso is 3 pesos per dollar
E)if the actual exchange rate between the dollar and the Argentinean peso is 2.5 pesos per dollar

Question 66

If inflation in Russia is higher than it is in Canada

A)the purchasing power of the ruble in buying Russian goods will rise relative to the dollar.
B)the value of the dollar will rise in the long run.
C)the value of the ruble will rise in the long run.
D)the real exchange rate will change but the nominal exchange rate will not.
E)Both A and C are correct.

Question 67

Which of the following would prevent the purchasing power of currencies being equal in the long run?

A)barriers to trade
B)universal preferences
C)free trade agreements between countries
D)expansionary monetary policy in one country
E)improved transportation links between countries

Question 68

If the GDP deflator in Canada is 114, and the GDP deflator in Ukraine is 142, which of the following exchange rates would the theory of purchasing power parity predict in the long run? (The Ukrainian currency is the hryvnia.)

A)0)25 hryvnias per dollar
B)0)80 hryvnias per dollar
C)1)25 hryvnias per dollar
D)2)80 hryvnias per dollar
E)28 hryvnias per dollar

Question 69

Suppose the GDP deflator in Canada is 125 and the GDP deflator in Japan is 100.Also assume Canada has trade barriers on Japanese goods in the form of quotas.What does this imply about the exchange rate of yen per dollar under the theory of purchasing power parity in the long run?

A)The exchange rate of yen per dollar will be greater than 1.25.
B)The exchange rate of yen per dollar will be equal to 1.25.
C)The exchange rate of yen per dollar will be greater than 0.8 but less than 1.25.
D)The exchange rate of yen per dollar will be equal to 0.8.
E)The exchange rate of yen per dollar will be less than 0.8.

Question 70

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

A)the dollar will appreciate as the demand for dollars falls in the long run.
B)the dollar will appreciate as the supply of dollars falls in the long run.
C)the dollar will depreciate as the demand for dollars falls in the long run.
D)the dollar will depreciate as the supply of dollars rises in the long run.
E)the dollar will appreciate as the United States grows more slowly than Brazil.

Question 71

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, what is the dollar cost of a Big Mac in Brazil?

A)$0.89
B)$2.25
C)$4.50
D)$8.00
E)$9.00

Question 72

Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?

A)Some goods and services produced in any country are not traded internationally.
B)Consumer preferences for goods and services across countries are very similar.
C)Most countries do not impose barriers to trade.
D)Most countries have free markets with little, if any, government regulation.
E)The prices of most internationally traded commodity are set in U.S.dollars.

Question 73

The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory.In July 2011, the Economist reported that the average price of a Big Mac in the U.S.was $4.07.In Mexico, the average price of a Big Mac at that time was 32 pesos.What is the "implied exchange rate" between the peso and the dollar?

A)1)30 pesos per dollar
B)4)17 pesos per dollar
C)7)86 pesos per dollar
D)12.72 pesos per dollar
E)14.36 pesos per dollar

Question 74

If the implied exchange rate between Big Mac prices in Canada and Poland is 2.13 zlotys per dollar, but the actual exchange rate between Canada and Poland is 3.16 zlotys per dollar, which of the following would you expect to see?

A)an appreciation of the dollar
B)an increase in the demand for zlotys
C)an increase in the demand for dollars
D)Both A and C are correct.

Question 75

Figure 15.1 Alt text for Figure 15.1: In figure 15.1, a graph illustrates the quantity of euros traded against the exchange rate.
Long description for Figure 15.1: The x-axis is labelled, quantity of euros traded per day.The y-axis is labelled, exchange rate, Canadian dollar against euro, with values 1.00 and 1.05 marked.An upward sloping supply curve intersects the downward sloping demand curves D1 and D2.The intersection point of S and D1, A, corresponds to the point Canadian dollar 1.05 of the y-axis, and is displayed by a dotted line.The intersection point of S and D2, B, corresponds to the point 1.00 of the y-axis, also displayed by a dotted line.A down arrow is shown between the 2 dotted lines.A bold left arrow points from D1 to D2.Two dotted vertical lines from the intersection points also meet the x-axis.
Refer to Figure 15.1.Which of the following would cause the change depicted in the figure above?

A)Canadian productivity rises relative to European productivity.
B)Europeans decrease their preferences for Canadian goods relative to European goods.
C)The European Union increases its quotas on French wine.
D)an increase in the price level of Canadian goods relative to European goods
E)the signing of a free trade agreement between the eurozone and Canada

Question 76

How will the exchange rate (foreign currency per dollar)respond to an increase in the relative rate of productivity growth in Canada in the long run?

A)Exchange rates will rise.
B)Exchange rates will fall.
C)Exchange rates will be unaffected by changes in the relative rate of productivity growth in Canada, both in the short run and in the long run.
D)The exchange rate will be affected in the short run, but not in the long run.

Question 77

Which of the following is a reason Greece has had a slow recovery from the financial crisis of 2007-2009?

A)Currency union meant Greece was unable to exploit a falling exchange rate to boost exports.
B)Austerity programs required Greece to maintain an artificially high exchange rate.
C)Greece's recovery plan was based on poorly targeted increases in government spending.
D)The expansionary fiscal policy of tax cuts was ineffective.
E)Greece used contractionary fiscal policy to guarantee stable incomes for retired people.

Question 78

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

A)the dollar is undervalued.
B)the dollar is overvalued.
C)the real is undervalued.
D)the dollar is at the value predicted by purchasing power parity.
E)both B and C are correct.

Question 79

Figure 15.2 Alt text for Figure 15.2: In figure 15.2, a graph illustrates the quantity of dollars traded against the exchange rate.
Long description for Figure 15.2: The x-axis is labelled, quantity of dollars traded per day.The y-axis is labelled, exchange rate, yuan against the Canadian dollar, with values 8.08 yaun and 8.10 yaun marked.Supply curve S is a straight line which slopes up from the bottom left corner to the top right corner.2 parallel straight line demand curves, D1 and D2 slope down from the top left corner to the bottom right corner, with curve D2 plotted to the right of curve D1.Curve S intersects curve D1 at point A, with a y-axis value of 8.08 yaun.Curve S intersects curve D2 at point B, with a y-axis value of 8.10 yuan.Points A and B are connected to their corresponding values on the y-axis with dotted lines.The difference between the y-axis values is indicated with a up pointing arrow.
Refer to Figure 15.2.Which of the following would cause the change depicted in the figure above?

A)Lack of investment in infrastructure causes Canadian productivity to fall relative to Chinese productivity.
B)Tainted cat food from China causes Canadian consumers to decrease their preferences for Chinese goods relative to Canadian goods.
C)A new trade agreement with China results in Canada removing all tariffs on clothing imported from China.
D)An expansionary monetary policy causes an increase in the price level of Canadian goods relative to Chinese goods.
E)The Chinese yuan becomes recognized as an international reserve currency.

Question 80

Because the value of the euro is determined by factors that affect the entire eurozone, during the recession of 2007-2009, individual countries using the euro

A)were unable to have their exchange rates depreciate.
B)were more insulated from unemployment increases than most countries.
C)experienced a greater increase in exports than did most countries.
D)were able to use expansionary monetary policy to lessen the impact of the recession.
E)saw the cost of imports rise more than other countries.