Question 1

The entity in any nation that accurately controls directly or indirectly the supply of money is referred to as the:

Accepted Answer

A)  executive branch. 
B)  central bank. 
C)  treasury. 
D)  legislative branch.

Question 2

Give an intuitive explanation as to why faster money growth leads to a depreciating currency.

Accepted Answer

The answer of Give an intuitive explanation as to why...

Question 3

Under the monetary approach to exchange rates, if there is a rise in a foreign market's income, ceteris paribus,, then the exchange rate should:

Accepted Answer

A)  depreciate. 
B)  hold steady. 
C)  appreciate. 
D)  appreciate and then remain steady.

Question 4

When real interest parity holds:

Accepted Answer

A)  nominal interest rates are equal all over the world. 
B)  real interest rates are equal across nations with different currencies. 
C)  real interest rates on dollar assets are equal but not for all currencies. 
D)  real interest rates will follow a pattern of convergence, but equilibrium will never occur.

Question 5

If a pair of Nike shoes cost $45 in New York and $65 in Berlin, then we would expect the price to:

Accepted Answer

A)  drop in New York and increase in Berlin. 
B)  remain the same in both places. 
C)  increase in New York and decrease in Berlin. 
D)  increase in Berlin and stay constant in New York.

Question 6

What is the situation when a home currency purchases more goods and services at home than abroad when converted to a foreign currency?

Accepted Answer

A)  The domestic currency is undervalued. 
B)  The domestic currency is overvalued. 
C)  The domestic currency is unstable. 
D)  The domestic currency is depreciating.

Question 7

Short-run PPP may not hold for a variety of reasons. Which of the following is NOT cited in your textbook as one of those reasons?

Accepted Answer

A)  weather and other environmental conditions that affect trade 
B)  transactions costs 
C)  nontraded goods 
D)  imperfect competition and price stickiness

Question 8

A nation with greater income, ceteris paribus, will have:

Accepted Answer

A)  lower prices. 
B)  higher prices. 
C)  lower money supply. 
D)  higher prices and higher money supply.

Question 9

Explain how exchange rates may be used as nominal anchors.

Accepted Answer

The answer of Explain how exchange rates may be used...

Question 10

Purchasing power parity exists when: I. there are no arbitrage opportunities.
II) prices are the same when expressed in a common currency.
III) the goods in question are identical.

Accepted Answer

A)  I only 
B)  I and II only 
C)  II and III only 
D)  I, II, and III

Question 11

Under the monetary approach to exchange rates, if there is a rise in a country's home money supply, ceteris paribus,, then the exchange rate should:

Accepted Answer

A)  depreciate. 
B)  hold steady. 
C)  appreciate. 
D)  appreciate and then remain steady.

Question 12

Real interest parity indicates that, when PPP and UIP hold:

Accepted Answer

A)  nominal interest rates are equal across countries. 
B)  inflation rates are equal across countries. 
C)  real interest rates are equal across countries. 
D)  nominal interest rates vary across countries.

Question 13

If we can accurately predict monetary growth, and if the assumption that demand for real money balances is constant, then we may predict:

Accepted Answer

A)  changes in exchange rates only. 
B)  changes in price levels only. 
C)  both changes in price levels and changes in exchange rates. 
D)  neither changes in price levels nor changes in exchange rates.

Question 14

A lesson from hyperinflationary periods is that:

Accepted Answer

A)  real GDP seems not to be affected. 
B)  the price level rises but soon a period of decreasing prices ensues. 
C)  the demand for real money balances decreases during periods of extreme instability. 
D)  the demand for real money balances is always constant.

Question 15

If a basket of goods in the United States costs $1,000, and the same basket of goods in Japan costs ¥125,000, then for PPP to exist, $1 should trade for ____ Japanese yen.

Accepted Answer

A)  4 
B)  50 
C)  125 
D)  125,000

Question 16

The long-run monetary model of exchange rates provides that real income changes result in a(n) _______ change in the price level and a(n) ________ change in the strength of the currency.

Accepted Answer

A)  corresponding; opposite 
B)  corresponding; corresponding 
C)  opposite; corresponding 
D)  opposite; opposite

Question 17

When the relative price of a good in Germany versus the United States is 3, if the nominal exchange rate is E$/€ = 1.5 and the U.S. price is $10, what is the German price?

Accepted Answer

A)  €4 
B)  €15 
C)  €20 
D)  €45

Question 18

When the Japanese inflation rate is less than the Australian inflation rate, Japanese prices are:

Accepted Answer

A)  rising faster than Australian prices. 
B)  rising more slowly than Australian prices. 
C)  rising at the same rate as Australian prices. 
D)  not rising.

Question 19

If conditions hold for the long-run monetary exchange rate model, it can provide opportunities for nations to achieve less price-level volatility by:

Accepted Answer

A)  constraining policy choices to respect a nominal anchor, such as a target for a nominal exchange rate. 
B)  allowing international organizations such as the IMF to control economic variables. 
C)  conducting a currency reform effort. 
D)  embarking on a campaign for dollarization.

Question 20

Which of the following statements is NOT a reason for explaining the deviations from PPP?

Accepted Answer

A)  Some goods are not tradeable. 
B)  Markets are imperfect and there could be legal obstacles. 
C)  Prices can be sticky in different countries. 
D)  There are no transportation costs.

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