Question 1

What are the predictions for the long-run equilibrium of the Monetary Approach?

Accepted Answer

Money supplies: Given the equations, = P_US/P_E P_US = M_US^S/L(R_$, Y_US) P_E = M_E^S/L( , Y_E) one can show that an increase in the U.S. money supply M_US^S causes a proportional increase in the U.S. price level P_US, which in turn causes a proportional increase in . Thus, an increase in U.S. money supply causes a proportional long-run depreciation of the dollar against the euro and vice versa. Interest rates: A rise in the interest rate R_$ lowers U.S. money demand L(R_$, Y_US) thereby causing a rise in the U.S. price level and a proportional depreciation of the dollar against the euro. Output levels: A rise in U.S. output Y_US raises real U.S. money demand leading to a fall in the long-run U.S. price level and an appreciation of the dollar against the euro.

Question 2

Which of the following are theories meant to explain "Why price levels are lower in poorer countries"?

Accepted Answer

A)   only Bhagwati-Kravis-Lipsey
B)   only Balassa-Samuelson
C)   only Goldberg-Knetter
D)   Bhagwati-Kravis-Lipsey and Balassa-Samuelson
E)   Bhagwati-Kravis-Lipsey and Goldberg-Knetter D

Question 3

The PPP theory fails in reality for all of the following reasons EXCEPT

Accepted Answer

A)   transport costs.
B)   monopolistic or oligopolistic practices in goods markets.
C)   the inflation data reported in different countries are based on different commodity baskets.
D)   restrictions on trade.
E)   inflation rates are unrelated to money supply growth. E

Question 4

In the long run

Accepted Answer

A)   exchange rates obey relative PPP when all disturbances occur in the output markets.
B)   exchange rates obey absolute PPP when all disturbances occur in the output markets.
C)   exchange rates are unlikely to obey relative PPP when all disturbances occur in the output markets.
D)   exchange rates are unlikely to obey relative PPP when all disturbances are monetary in nature.
E)   exchange rates obey absolute PPP when all disturbances are monetary in nature.

Question 5

The difference between nominal and real interest rates is that

Accepted Answer

A)   nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms.
B)   nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output.
C)   nominal interest rates can fluctuate, while real interest rates always remain fixed.
D)   real interest rates can fluctuate, while nominal interest rates always remain fixed.
E)   real interest rates are the same in every country, while nominal interest rates are different for every country.

Question 6

Under Purchasing Power Parity

Accepted Answer

A)   E$/P = PUS/PE.
B)   E$/E = PUS/PE.
C)   E$/E = PUS - PE.
D)   E$/E = PE/PES.
E)   E$/E = PUS + PE.

Question 7

In practice

Accepted Answer

A)   changes in national price levels often tell us relatively little about exchange rate movements.
B)   changes in national price levels raise the exchange rate.
C)   changes in national price levels lower the exchange rate.
D)   changes in national price levels often tell us about exchange rate movements.
E)   changes in national price levels match identical changes in the exchange rate.

Question 8

What are the predictions of the PPP theory with regards to the real exchange rates?

Accepted Answer

The answer of What are the predictions of the PPP...

Question 9

Under the monetary approach to the exchange rate

Accepted Answer

A)   an interest rate decrease is associated with higher expected inflation and a currency that will be weaker on all future dates.
B)   an interest rate increase is associated with higher expected deflation and a currency that will be weaker on all future dates.
C)   an interest rate increase is associated with higher expected inflation and a currency that will be strengthened on all future dates.
D)   an interest rate increase is associated with higher expected deflation and a currency that will be strengthened on all future dates.
E)   an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all future dates.

Question 10

Who among the following list of people is an early 20th century economist from Yale University who wrote the book The Theory of Interest?

Accepted Answer

A)   Gustav Cassel
B)   Irving Fisher
C)   David Ricardo
D)   Paul Krugman
E)   Israel Kirzner

Question 11

Which of the following statements is the MOST accurate?

Accepted Answer

A)   If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same.
B)   If the law of one price holds true for every commodity, PPP must hold automatically.
C)   If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same.
D)   If the law of one price does not hold true for every commodity, PPP cannot be true as long as the reference baskets used to reckon different countries' price levels are the same.
E)   If PPP holds true, then the law of one price must hold true automatically.

Question 12

Fill in the following table, assuming the law of one price prevails.

Accepted Answer

The answer of Fill in the following table, assuming the...

Question 13

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate

Accepted Answer

A)   the interest rate is not independent of the money supply growth rate in the short run.
B)   the interest rate is independent of the money supply growth rate in the long run.
C)   the interest rate is not independent of the money supply growth rate in the long run, but independent in the short run.
D)   the interest rate is not independent of the money supply growth rate in the long run.
E)   the interest rate is a factor of the money supply growth rate only in the short term.

Question 14

When all variables start out at their long-run equilibrium levels, the most important determinants of long-run swings in nominal exchange rates do NOT include

Accepted Answer

A)   a shift in relative money supply levels.
B)   a shift in relative money supply growth rates.
C)   a change in relative output demand.
D)   a change in relative output supply.
E)   a change in relative inflation rates.

Question 15

Which of the following statements is the MOST accurate?

Accepted Answer

A)   The law of one price applies only to the general price level.
B)   The law of one price applies to the general price level while PPP applies to individual commodities.
C)   The law of one price applies to individual commodities while PPP applies to both the general price level and to individual commodities.
D)   PPP applies only to individual commodities.
E)   The law of one price applies to individual commodities while PPP applies to the general price level.

Question 16

What is the real exchange rate between the dollar and the euro equal to?

Accepted Answer

The answer of What is the real exchange rate between...

Question 17

Explain Purchasing Power Parity.

Accepted Answer

The answer of Explain Purchasing Power Parity....

Question 18

In order for the condition E$/HK$ = PUS/PHK to hold, what assumptions does the principle of purchasing power parity make?

Accepted Answer

A)   Only that there are no transportation costs and restrictions on trade.
B)   Only that the markets are perfectly competitive, i.e., P = MC.
C)   The factors of production are identical between countries.
D)   No arbitrage exists.
E)   HK and the U.S. are perfectly competitive and there are no transportation costs or restrictions on trade.

Question 19

What effect do non-tradable goods have on PPP?

Accepted Answer

The answer of What effect do non-tradable goods have on...

Question 20

Under Purchasing Power Parity

Accepted Answer

A)   E$/E = PiUS/PiE.
B)   E$/E = PiE/PiUS.
C)   E$/E = PUS/PE.
D)   E$/E = PE/PES.
E)   E$/E = PiE + PiUS/PiE.

Exam 16: Price Levels and the Exchange Rate in the Long Run

What are the predictions for the long-run equilibrium of the Monetary Approach?

Which of the following are theories meant to explain "Why price levels are lower in poorer countries"?

The PPP theory fails in reality for all of the following reasons EXCEPT

In the long run

The difference between nominal and real interest rates is that

Under Purchasing Power Parity

In practice

What are the predictions of the PPP theory with regards to the real exchange rates?

Under the monetary approach to the exchange rate

Who among the following list of people is an early 20th century economist from Yale University who wrote the book The Theory of Interest?

Which of the following statements is the MOST accurate?

Fill in the following table, assuming the law of one price prevails.

Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate

When all variables start out at their long-run equilibrium levels, the most important determinants of long-run swings in nominal exchange rates do NOT include

Which of the following statements is the MOST accurate?

What is the real exchange rate between the dollar and the euro equal to?

Explain Purchasing Power Parity.

In order for the condition E_$/HK$ = P_US/P_HK to hold, what assumptions does the principle of purchasing power parity make?

What effect do non-tradable goods have on PPP?

Under Purchasing Power Parity