Question 1

If purchasing-power parity holds,when a country's central bank decreases the money supply,its

Accepted Answer

A)  price level rises and its currency appreciates relative to other currencies in the world.
B)  price level falls and its currency appreciates relative to other currencies in the world.
C)  price level rises and its currency depreciates relative to other currencies in the world.
D)  price level falls and its currency depreciates relative to other currencies in the world. B

Question 2

Suppose a Starbucks tall latte costs $4.00 in the United States and 3.20 euros in the Euro area.Also,suppose a McDonald's Big Mac costs $4.40 in the United States and 5.50 euros in Euro area.If the nominal exchange rate is .80 euros per dollar,the prices of which goods have prices that are consistent with purchasing-power parity?

Accepted Answer

A)  both the tall latte and the Big Mac
B)  the tall latte but not the Big Mac
C)  the Big Mac but not the tall latte
D)  neither the tall latte nor the Big Mac B

Question 3

According to purchasing-power parity,which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level?

Accepted Answer

A)  the real exchange rate,but not the nominal exchange rate
B)  the nominal exchange rate,but not the real exchange rate
C)  the real exchange rate and the nominal exchange rate
D)  neither the real exchange rate nor the nominal exchange rate B

Question 4

According to purchasing-power parity,when a country's central bank decreases the money supply,a unit of money

Accepted Answer

A)  gains value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.
B)  gains value in terms of the domestic goods and services it can buy,but loses value in terms of the foreign currency it can buy.
C)  loses value in terms of the domestic goods and services it can buy,but gains value in terms of the foreign currency it can buy.
D)  loses value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.

Question 5

According to purchasing-power parity,if a basket of goods costs $100 in the U.S.and the same basket costs 800 pesos in Argentina,then what is the nominal exchange rate?

Accepted Answer

A)  8 pesos per dollar
B)  1 peso per dollar
C)  1/8 peso per dollar
D)  none of the above is correct

Question 6

If purchasing-power parity holds,when a country's central bank increases the money supply,a unit of money

Accepted Answer

A)  gains value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.
B)  gains value in terms of the domestic goods and services it can buy,but loses value in terms of the foreign currency it can buy.
C)  loses value in terms of the domestic goods and services it can buy,but gains value in terms of the foreign currency it can buy.
D)  loses value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.

Question 7

If a dollar buys more corn in the U.S.than in Mexico,then

Accepted Answer

A)  the real exchange rate is greater than 1;a profit might be made by buying corn in the U.S.and selling it in Mexico.
B)  the real exchange rate is greater than 1;a profit might be made by buying corn in Mexico and selling it in the U.S.
C)  the real exchange rate is less than 1;a profit might be made by buying corn in the U.S.and selling it in Mexico.
D)  the real exchange rate is less than 1;a profit might be made by buying corn in Mexico and selling it in the U.S.

Question 8

During a hyperinflation the real domestic value of a country's currency

Accepted Answer

A)  falls and its nominal exchange rate depreciates.
B)  falls and its nominal exchange rate appreciates.
C)  rises and its nominal exchange rate depreciates.
D)  rises and its nominal exchange rate appreciates.

Question 9

According to purchasing-power parity,if it took 55 Indian rupees to buy a dollar today,but it took 58 to buy it a year ago,then the dollar has

Accepted Answer

A)  appreciated,indicating inflation was higher in the U.S.than in India.
B)  appreciated,indicating inflation was lower in the U.S.than in India.
C)  depreciated,indicating inflation was higher in the U.S.than in India.
D)  depreciated,indicating inflation was lower in the U.S.than in India.

Question 10

A basket of goods costs $800 in the U.S.In Belgium the basket of goods costs 640 euros and the exchange rate is .80 euros per U.S.dollar.In Japan the basket of goods costs 90,000 yen and the exchange rate is 90 yen per dollar.Which country has purchasing-power parity with the U.S.?

Accepted Answer

A)  both Belgium and Japan
B)  Belgium but not Japan
C)  Japan but not Belgium
D)  neither Belgium nor Japan

Question 11

If purchasing power parity holds,then if the price of a basket of goods in the U.S.rose from $1,500 to $2,000 and the price of the same basket in Mexico rose from 12,000 pesos to 18,000 pesos

Accepted Answer

A)  inflation was higher in the U.S.than Mexico so the U.S.dollar would appreciate.
B)  inflation was higher in the U.S.than Mexico so the U.S.dollar would depreciate.
C)  inflation was lower in the U.S.than Mexico so the U.S.dollar would appreciate.
D)  inflation was lower in the U.S.than Mexico so the U.S dollar would depreciate.

Question 12

If over the next few years inflation is higher in Mexico than in the U.S. ,then according to purchasing-power parity which of the following should rise?

Accepted Answer

A)  the U.S.real exchange rate but not the U.S.nominal exchange rate
B)  the U.S.nominal exchange rate but not the U.S.real exchange rate
C)  the U.S.real exchange rate but not the U.S.nominal exchange rate.
D)  neither the U.S.real nor the U.S.nominal exchange rate.

Question 13

If the exchange rate is 8 Moroccan dirhams per U.S.dollars,a crate of oranges costs 400 dirhams in the Moroccan capital of Rabat,and a similar crate of oranges in Miami sells for $55 dollars,then

Accepted Answer

A)  the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in the U.S.and selling them in Morocco.
B)  the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in Morocco and selling them in the U.S.
C)  the real exchange rate is less than one and arbitrageurs could profit by buying oranges in the U.S.and selling them in Morocco.
D)  the real exchange rate is less than one and arbitrageurs could profit by buying oranges in Morocco and selling them in the U.S.

Question 14

If purchasing-power parity holds but then U.S.prices rise,which of the following move the exchange rate back towards purchasing-power parity?

Accepted Answer

A)  foreign prices rise or the U.S.nominal exchange rate rises
B)  foreign prices rise or the U.S.nominal exchange rate falls
C)  foreign prices fall or the U.S.nominal exchange rate rises
D)  foreign prices fall or the U.S.nominal exchange rate falls

Question 15

On behalf of your firm,you make frequent trips to Tokyo.You notice that you always have to pay more dollars to get your hair cut than you pay in the U.S.This observation is

Accepted Answer

A)  consistent with purchasing-power parity if prices in Japan are rising more rapidly than prices in the United States.
B)  consistent with purchasing-power parity if prices in Japan are rising less rapidly than prices in the United States.
C)  inconsistent with purchasing-power parity,but might be explained by limited opportunities for arbitrage in haircuts across international borders.
D)  None of the above is correct.

Question 16

If a lobster in Maine costs $10 and that the same type of lobster in Massachusetts costs $30,then people could make a profit by

Accepted Answer

A)  buying lobsters in Maine and selling them in Massachusetts.This action would increase the price of lobster in Massachusetts.
B)  buying lobsters in Maine and selling them in Massachusetts.This action would decrease the price of lobster in Massachusetts.
C)  buying lobsters in Massachusetts and selling them in Maine.This action would increase the price of lobster in Massachusetts.
D)  buying lobsters in Massachusetts and selling them in Maine.This action would decrease the price of lobster in Massachusetts.

Question 17

A pair of running shoes costs $70 in the U.S.If the price of the same shoes is 4500 rupees in India and the exchange rate is 60 rupees per dollar,than the real exchange rate is

Accepted Answer

A)  more than 1,so a profit could be made by buying these shoes in the U.S.and selling them in India.
B)  more than 1,so a profit could be made by buying these shoes in India and selling them in the U.S.
C)  less than 1,so a profit could be made by buying these shoes in the U.S.and selling them in India.
D)  less than 1,so a profit could be made by buying these shoes in India and selling them in the U.S.

Question 18

According to purchasing-power parity,inflation in the U.S.causes the dollar to

Accepted Answer

A)  depreciate relative to all other currencies.
B)  depreciate relative to currencies of countries that have lower inflation rates.
C)  appreciate relative to all other countries.
D)  appreciate relative to currencies of countries that have lower inflation rates.

Question 19

Purchasing-power parity theory does not hold at all times because

Accepted Answer

A)  many goods are not easily transported.
B)  the same goods produced in different countries may be imperfect substitutes for each other.
C)  Both a and b are correct.
D)  prices are different across countries.

Question 20

If purchasing-power parity holds,the price level in the U.S.is 250,and the price level in Japan is 260,which of the following is true?

Accepted Answer

A)  the real exchange rate is 250/260
B)  the real exchange rate is 260/250
C)  the nominal exchange rate is 250/260
D)  the nominal exchange rate is 260/250

Exam 18: Open Economy Macroeconomics Basic Concepts: A First Theory of Exchange-Rate Determination Purchasing-Power Parity