Chapter 31 Open-Economy Macroeconomic Models: Graded A

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Chapter 31 Open-Economy Macroeconomic Models MULTIPLE CHOICE A FIRST THEORY OF EXCHANGE-RATE DETERMINATION - PURCHASING POWER PARITY 1. Other things the same, which of the following would both inc... rease the U.S. real exchange rate with Israel? a. prices in the U.S. were higher, or prices in Israel were higher. b. prices in the U.S were higher, or prices in Israel were lower. c. prices in the U.S. were lower, or prices in Israel were higher. d. prices in the U.S. were lower, or prices in Israel were lower. : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Real exchange rate : Analytical 2. The law of one price states that a. a good must sell at the price fixed by law. b. a good must sell at the same price at all ations. c. a good cannot sell for a price greater than the legal price ceiling. d. nominal exchange rates will not vary. : B : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Law of one price : Definitional 3. Purchasing-power parity describes the forces that determine a. prices in the short run. b. prices in the long run. c. exchange rates in the short run. d. exchange rates in the long run. : D : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Definitional 4. If the real exchange rate between the U.S. and Argentina is 1, then a. purchasing-power parity holds, and 1 U.S. dollar buys 1 Argentinean bolivar. b. purchasing power parity holds, and the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina. c. purchasing power parity does not hold, but 1 U.S. dollar buys 1 Argentinean bolivar. d. purchasing power parity does not hold, but the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina. : B : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity | Real exchange rate : Definitional 5. Nominal exchange rates a. vary little over time. b. vary substantially over time. c. appreciate over time for most countries. d. depreciate over time for most countries. : B : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Nominal exchange rate volatility : Definitional 6. If purchasing-power parity holds, then the value of the a. real exchange rate is equal to one. b. nominal exchange rate is equal to one. c. real exchange rate is equal to the nominal exchange rate. d. real exchange rate is equal to the ference in inflation rates between the two countries. : A : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Definitional 7. If purchasing-power parity holds, a dollar will buy a. more goods in foreign countries than in the United States. b. as many goods in foreign countries as it does in the United States. c. fewer goods in foreign countries than it does in the United States. d. None of the above is implied by purchasing-power parity. : B : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Definitional 8. If purchasing-power parity holds, a dollar will buy a. one unit of each foreign currency. b. foreign currency equal to the U.S. price level divided by the foreign country’s price level. c. enough foreign currency to buy as many goods as it does in the United States. d. None of the above is implied by purchasing-power parity. : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Definitional 9. Which of the following does purchasing-power parity imply? a. The purchasing power of the dollar is the same in the U.S. as in foreign countries. b. The price of domestic goods relative to foreign goods cannot change. c. The nominal exchange rate is the ratio of U.S. prices to foreign prices. d. All of the above are correct. : A : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Interpretive 10. Which of the following does purchasing-power parity imply? a. the foreign price level times the nominal exchange rate (given as amount of foreign currency per dollar) equals the U.S. price level. b. The price of domestic goods relative to foreign goods cannot change. c. The nominal exchange rate is the ratio of foreign prices to U.S. prices. d. All of the above are correct. : C : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Interpretive 11. If purchasing-power parity holds, then the value of the a. nominal exchange rate is equal to one. A dollar buys as many goods in the U.S. as it does overseas. b. nominal exchange rate is equal to one. A dollar buys the quantity of foreign currency equal to the U.S. price level divided by the foreign country’s price level. c. real exchange rate is equal to one. A dollar buys as many goods in the U.S. as it does overseas. d. real exchange rate is equal to one. A dollar buys the quantity of foreign currency equal to the U.S. price level divided by the foreign country’s price level. : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Definitional 12. Which of the following does purchasing-power parity conclude should equal 1? a. both the nominal and the real exchange rate. b. the nominal exchange rate but not the real exchange rate c. the real exchange rate but not the nominal exchange rate d. neither the nominal exchange rate nor the real exchange rate : C : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Interpretive 13. According to purchasing-power parity, which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level? 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 : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Nominal exchange rate | Real exchange rate : Definitional 14. According to purchasing power parity what should the nominal exchange rate between the U.S. and another country be equal to? a. 1 b. the real exchange rate between the U.S. and that country c. the price level in the U.S. divided by the price level in the other country d. the price level in the other country divided by the price level in the U.S. : D : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 15. The theory of purchasing-power parity primarily explains a. why trade deficits tend to move to zero over time. b. how foreign prices affect domestic prices. c. the determination of the real exchange rate. d. why a change in the real exchange rate changes a country’s net exports. : C : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Definitional 16. According to purchasing power parity, if the same basket of goods costs $100 in the U.S. and 50 pounds in Britain, then what is the nominal exchange rate? a. 2 pounds per dollar b. 1 pound per dollar c. 1/2 pound per dollar d. None of the above is correct : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 17. 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? a. 8 pesos per dollar b. 1 peso per dollar c. 1/8 peso per dollar d. none of the above is correct : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 18. A basket of goods costs $800 in the U.S. In Belgium the basket of goods costs 800 euros and the exchange rate is .80 euros per U.S. dollar. In Japan the basket of goods costs 720,000 yen and the exchange rate is 900 yen per dollar. Which country has purchasing-power parity with the U.S.? a. both b. Belgium but not Japan c. Japan but not Belgium d. neither Belgium nor Japan : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 19. The price of a basket of goods is $2000 in the U.S. If purchasing power parity holds, and the dollar buys two units of some country’s currency, then how many units of foreign currency does the same basket of goods cost in that country? a. 4000 b. 2000 c. 1000 d. None of the above are correct. : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 20. If purchasing power parity holds, a bushel of rice costs $10 in the U.S., and the nominal exchange rate is 40 Thai baht per dollar, what is the price of rice in Thailand? a. 400 baht b. 200 baht c. 100 baht d. 40 baht : A : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 21. If purchasing power parity holds, the price level in the U.S. is 120, and the price level in Canada is 140, which of the following is true? a. the real exchange rate is 120/140. b. the real exchange rate is 140/120. c. the nominal exchange rate is 120/140 d. the nominal exchange rate is 140/120 : D : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 22. If purchasing power parity holds, the price level in the U.S. is 220, and the price level in Japan is 200, which of the following is true? a. the real exchange rate is 200/220 b. the real exchange rate is 220/200 c. the nominal exchange rate is 200/220 d. the nominal exchange rate is 220/200 : C : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 23. A haircut costs 200 pesos in Mexico and $20 in the U.S. The exchange rate is 12.5 pesos per dollar. The real exchange rate is a. less than one. Haircuts in Mexico are cheaper than in the U.S. b. less than one. Haircuts in Mexico are more expensive than in the U.S. c. greater than one. Haircuts in Mexico are cheaper than in the U.S. d. greater than one. Haircuts in Mexico are more expensive than in the U.S. : C : 3 : 31-2 NAT: Analytic : International trade and finance TOP: Real exchange rate : Analytical 24. The ability to profit by purchasing wheat in the U.S. and selling it in China implies that the a. nominal exchange rate is less than 1. b. nominal exchange rate is greater than 1. c. real exchange rate is less than 1. d. real exchange rate is greater than 1. : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Real exchange rate : Interpretive 25. It costs $80 for a dental appointment in the U.S. It costs 600 Egyptian pounds for the same appointment in Egypt. The nominal exchange rate is 7 pounds per dollar. The real exchange rate is a. less than one. Dental appointments in Egypt are cheaper than in the U.S. b. less than one. Dental appointments in Egypt are more expensive than in the U.S. c. greater than one. Dental appointments in Egypt are cheaper than in the U.S. d. greater than one. Dental appointments in Egypt are more expensive than in the U.S. : B : 3 : 31-2 NAT: Analytic : International trade and finance TOP: Real exchange rate : Analytical 26. If a dollar buys more potatoes in the U.S. than in France, then a. the real exchange rate is greater than 1; a profit might be made by buying potatoes in the U.S. and selling them in France. b. the real exchange rate is greater than 1; a profit might be made by buying potatoes in France. and selling them in the U.S. c. the real exchange rate is less than 1; a profit might be made by buying potatoes in the U.S. and selling them in France. d. the real exchange rate is less than 1; a profit might be made by buying potatoes in France and selling them in the U.S. : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Arbitrage | Real exchange rate : Applicative 27. If a dollar buys more rice in the China. than in the U.S., then a. the real exchange rate is greater than 1; a profit might be made by buying rice in the U.S. and selling it in China. b. the real exchange rate is greater than 1; a profit might be made by buying rice in China. and selling it in the U.S. c. the real exchange rate is less than 1; a profit might be made by buying rice in the U.S. and selling it in China. d. the real exchange rate is less than 1; a profit might be made by buying rice in China and selling it in the U.S. : B : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Arbitrage | Real exchange rate : Applicative 28. According to purchasing power parity, if two countries have the same price level because they have the same prices for all goods and services, then which of the following would equal 1? 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 : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Nominal exchange rate | Real exchange rate : Analytical 29. The nominal exchange rate is .80 euros per U.S. dollar and a basket of goods in France costs 1,000 euros while the same basket costs $800 in the U.S. The nominal exchange rate is 1.2 Australian dollars per U.S. dollar and a basket of goods in Australia costs 960 Australian dollars while the same basket costs $800 in the U.S.. Which country has purchasing-power parity with the U.S.? a. both France and Australia b. France but not Australia c. Australia but not France d. neither France nor Australia : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 30. The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing power parity to hold? a. 20 florin b. 40 florin c. 60 florin d. 80 florin : D : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 31. An MP3 player in Singapore costs 200 Singaporean dollars. In the U.S. it costs 100 US dollars. Which of the following is correct? a. if the nominal exchange rate is 2.0 Singaporean dollars per U.S. dollar, purchasing power parity holds. b. if the nominal exchange rate is 1 Singaporean dollars per U.S. dollar, purchasing power parity holds. c. if the nominal exchange rate is .50 Singaporean dollars per U.S. dollar, purchasing power parity holds. d. purchasing power parity does not hold at any of the above exchange rates. : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 32. 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 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. : B : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Arbitrage | Real exchange rate : Analytical 33. If the dollar buys fewer bananas in Guatemala than in Honduras, then traders could make a profit by a. buying bananas in Honduras and selling them in Guatemala, which would tend to raise the price of bananas in Honduras. b. buying bananas in Honduras and selling them in Guatemala, which would tend to raise the price of bananas in Guatemala. c. buying bananas in Guatemala and selling them in Honduras, which would tend to raise the price of bananas in Guatemala. d. buying bananas in Guatemala and selling them in Honduras, which would tend to raise the price of bananas in Honduras. : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Arbitrage | Real exchange rate : Analytical 34. If the dollar buys less cotton in Egypt than in the United States, then traders could make a profit by a. buying cotton in the United States and selling it in Egypt, which would tend to raise the price of cotton in the United States. b. buying cotton in the United States and selling it in Egypt, which would tend to raise the price of cotton in Egypt. c. buying cotton in Egypt and selling it in the United States, which would tend to raise the price of cotton in Egypt. d. buying cotton in Egypt and selling it in the United States, which would tend to raise the price of cotton in the United States. : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Arbitrage | Real exchange rate : Analytical 35. If the exchange rate is 70 Bangladesh taka per dollar and a bushel of rice costs 200 taka in Bangladesh and $3 in the United States, then the real exchange rate is a. greater than one and arbitrageurs could profit by buying rice in the United States and selling it in Bangladesh. b. greater than one and arbitrageurs could profit by buying rice in Bangladesh and selling it in the United States. c. less than one and arbitrageurs could profit by buying rice in the United States and selling it in Bangladesh. d. less than one and arbitrageurs could profit by buying rice in Bangladesh and selling it in the United States. : B : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Arbitrage | Real exchange rate : Analytical 36. 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 $45 dollars, then a. the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in the United States 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 United States. c. the real exchange rate is less than one and arbitrageurs could profit by buying oranges in the United States 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 United States. : C : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Arbitrage | Real exchange rate : Analytical 37. A roll of duct tape costs 2 Canadian dollars in Canada and 1.75 U.S. dollars in the U.S. If the nominal exchange rate were 1.10 Canadian dollars per U.S. dollar. a. A profit could be made by buying duct tape in Canada and selling it in the U.S. This would tend to drive up the price of U.S. duct tape. b. A profit could be made by buying duct tape in Canada and selling it in the U.S. This would tend to drive up the price of Canadian duct tape. c. A profit could be made by buying duct tape in the U.S. and selling it in Canada. This would tend to drive up the price of U.S. duct tape. d. A profit could be made by buying duct tape in the U.S. and selling it in Canada. This would tend to drive up the price of Canadian duct tape. : C : 3 : 31-2 NAT: Analytic : International trade and finance TOP: Arbitrage | Real exchange rate : Analytical 38. A ton of scrap iron sells for $150 in the U.S. and 1400 yuan in China. The nominal exchange rate is 6.7 yuan per dollar. a. A profit could be made by buying scrap iron in China and selling it in the U.S. This would tend to drive down the price of U.S. scrap iron. b. A profit could be made by buying scrap iron in China and selling it in the U.S. This would tend to drive down the price of Chinese scrap iron. c. A profit could be made by buying scrap iron in the U.S. and selling it in China. This would tend to drive down the price of U.S. scrap iron. d. A profit could be made by buying scrap iron in the U.S. and selling it in China. This would tend to drive down the price of Chinese scrap iron. : D : 3 : 31-2 NAT: Analytic : International trade and finance TOP: Arbitrage | Real exchange rate : Analytical 39. According to the theory of purchasing-power parity, the nominal exchange rate between two countries must lect the fering a. price levels in those countries. b. resource endowments in those countries. c. income levels in those countries. d. standards of living between those countries. : A : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Interpretive 40. If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity? a. P = e/P* b. 1 = e/P* c. e = P*/P d. None of the above is correct. : C : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical Use the (hypothetical) information in the following table to wer the following questions. Table 31-2 Country Currency Currency per U.S. Dollar U.S. Price Index Country Price Index Bolivia boloviano 8.00 200 1600 Japan yen 80.00 200 20,000 Morocco dinar 10.00 200 2,000 Norwegian kroner 6.5 200 1,500 Thailand baht 40.00 200 7,000 41. er to Table 31-2. For which country(ies) in the table does purchasing-power parity hold? a. Bolivia and Japan b. Bolivia and Morocco c. Japan and Morocco d. Norway and Thailand : B : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 42. er to Table 31-2. Which currency(ies) is(are) less valuable than predicted by the doctrine of purchasing-power parity? a. boloviano and dinar b. yen and kroner c. baht and kroner d. baht : D : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 43. er to Table 31-2. Which currency(ies) is(are) more valuable than predicted by the doctrine of purchasing-power parity? a. boloviano and dinar b. yen, kroner, and baht c. yen and kroner d. baht : C : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 44. er to Table 31-2. In real terms, U.S. goods are more expensive than goods in which country(ies)? a. Bolovia and Morocco b. Japan, Norway, and Thailand c. Japan and Norway d. Thailand : D : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 45. er to Table 31-2. In real terms, U.S. goods are less expensive than goods in which country(ies)? a. Bolivia and Morocco b. Japan, Norway, and Thailand c. Japan and Norway d. Thailand : C : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 46. If a McDonald's Big Mac cost $3.06 in the United States and 3.21 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar? a. 1.05 If the value is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro area. b. 1.05 If the value is less than this, it costs fewer dollars to buy a Big Mac in the U.S. then in the Euro area. c. .95 If the value is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro area. d. .95 If the value is less than this, it costs fewer dollars to buy a Big Mac in the U.S. than in the Euro area. : B : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity | Big Mac index : Analytical 47. A Big Mac in Japan costs 320 yen while it costs $3.60 in the U.S.. The nominal exchange rate is 80 yen per dollar. Which of the following would both make the real exchange rate move towards purchasing-power parity? a. the price of Big Macs in the U.S. falls, the nominal exchange rate falls b. the price of Big Macs in the U.S. falls, the nominal exchange rate rises c. the price of Big Macs in the U.S. rises, the nominal exchange rate falls d. the price of Big Macs in the U.S. rises, the nominal exchange rate rises : D : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 48. A Starbucks Grande Latte costs $3.75 in the U.S. and 28 yuan in China. The nominal exchange rate is 6.75 yuan per dollar. The real exchange rate is a. 1.106. If purchasing power partiy held the nominal exchange rate would be higher. b. 1.106. If purchasing power parity held the nominal exchange rate would be lower. c. .904. If purchasing power partiy held the nominal exchange rate would be higher. d. .904. If purchasing power parity held the nominal exchange rate would be lower. : C : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 49. If a Starbucks tall latte cost $3.20 in the United States and 3 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar? a. .938 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area. b. .938 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S. then in the Euro area. c. 1.067 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area. d. 1.067 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S. than in the Euro area. : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 50. Suppose a Starbucks tall latte cost $4.00 in the United States and 3.20 euros in the Euro area. Also, suppose a McDonald’s Big Mac costs $3.50 in the United States and 2.45 euros in Euro area. If the nominal exchange rate is .75 euros per dollar, the prices of which goods have prices that are consistent with purchasing power parity? a. Both the tall latte and the Big Mac. b. Neither the tall latte nor the Big Mac. c. The tall latte but not the Big Mac. d. The Big Mac but not the tall latte. : B : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 51. Suppose a Starbucks tall latte cost $4.00 in the United States and 3.20 euros in the Euro area. Also, suppose a McDonald’s Big Mac costs $3.50 in the United States and 2.45 euros in Euro area. If the nominal exchange rate is .80 euros per dollar, which goods have prices that are consistent with purchasing power parity? a. Both the tall latte and the Big Mac. b. Neither the tall latte nor the Big Mac. c. The tall latte but not the Big Mac. d. The Big Mac but not the tall latte. : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 52. Suppose a McDonalds Big Mac cost $4.00 in the United States and 3.20 euros in the euro area and 5.20 Australian dollars in Australia. If exchange rates are .75 euros per dollar and 1.3 Australian dollars per dollar, where does purchasing power parity hold? a. Both the euro area and Australia. b. Neither the euro area or Australia. c. The euro area but not Australia. d. Australia but not the euro area. : D : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 53. Suppose a Starbucks tall latte cost $4.00 in the United States, 5.00 euros in the euro area and $2.50 Australian dollars in Australia. Nominal exchange rates are .80 euros per dollar and 1.4 Australian dollars per U.S. dollar. Where does purchasing power parity hold? a. Both the euro area and Australia. b. Neither the euro area or Australia. c. The euro area but not Australia. d. Australia but not the euro area. : B : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity | Starbucks index : Analytical 54. Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U.S. currency must rise if the price levels in a. foreign countries rise. b. the United States rises. c. both countries rise. d. both countries fall. : A : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 55. If purchasing power parity holds, when a country's central bank increases the money supply, its a. price level rises and its currency appreciates relative to other currencies in the world. b. price level rises and its currency depreciates relative to other currencies in the world. c. price level falls and its currency appreciates relative to other currencies in the world. d. price level falls and its currency depreciates relative to other currencies in the world. : B : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 56. If purchasing power parity holds, when a country's central bank decreases the money supply, its 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 : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 57. If purchasing power parity holds, when a country's central bank increases the money supply, a unit of money 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. : D : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 58. According to purchasing power parity, when a country's central bank decreases the money supply, a unit of money 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. : A : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 59. Prices in both the U.S. and China rise, but prices in China increase by a smaller percentage. According to purchasing-power parity the U.S. dollar a. gains value both in terms of the domestic goods and services it can buy and in terms of the Chinese 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 Chinese 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 Chinese currency it can buy. d. loses value both in terms of the domestic goods and services it can buy and in terms of the Chinese currency it can buy. : D : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 60. Prices in both the U.S. and India rise, but prices in India increase by a larger percentage. According to purchasing-power parity the U.S. dollar a. gains value both in terms of the domestic goods and services it can buy and in terms of the Indian 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 Indian 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 Indian currency it can buy. d. loses value both in terms of the domestic goods and services it can buy and in terms of the Indian currency it can buy. : C : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 61. According to purchasing power parity, 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 of goods rose from 600 units of some other country’s currency to 1,000 units of that country’s currency, then the a. nominal exchange rate would appreciate. b. nominal exchange rate would depreciate. c. real exchange rate would appreciate. d. real exchange rate would depreciate. : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 62. According to purchasing power parity, inflation in the U.S. causes the dollar to 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. : B : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 63. According to purchasing power parity which of the following would happen if a country raised its money supply growth rate? a. its nominal exchange rate would fall b. its real exchange rate would fall c. its real net exports would rise d. All of the above would happen. : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 64. You hold currency from a foreign country. If that country has a higher rate of inflation than the United States, then over time the foreign currency will buy a. more goods in that country and buy more dollars. b. more goods in that country but buy fewer dollars. c. fewer goods in that country but buy more dollars. d. fewer goods in that country and buy fewer dollars. : D : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 65. According to purchasing power parity, if it took 3.5 Israeli Shekels to buy a dollar this year, but it took 4 to buy it last year, then the dollar has a. appreciated, indicating inflation was higher in the U.S. than in Israel. b. appreciated, indicating inflation was lower in the U.S. than in Israel. c. depreciated, indicating inflation was higher in the U.S. than in Israel. d. depreciated, indicating inflation was lower in the U.S. than in Israel. : C : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 66. According to purchasing power parity, if it took 4 Israeli Shekels to buy a dollar this year, but it took 3.5 to buy it last year, then the dollar has a. appreciated, indicating inflation was higher in the U.S. than in Israel. b. appreciated, indicating inflation was lower in the U.S. than in Israel. c. depreciated, indicating inflation was higher in the U.S. than in Israel. d. depreciated, indicating inflation was lower in the U.S. than in Israel. : B : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 67. According to purchasing power parity, if it took 1,100 Korean Won to buy a dollar this year, but it took 1,000 to buy it last year, then the dollar has a. appreciated, indicating inflation was higher in the U.S. than in Korea. b. appreciated indicating inflation was lower in the U.S. than in Korea. c. depreciated indicating inflation was higher in the U.S. than in Korea. d. depreciated indicating inflation was lower in the U.S. than in Korea. : B : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 68. Last summer when you went to Stockholm Sweden you exchanged $20 to get 16 kronas to buy a meal. This summer you exchanged $25 to get 18 kronas to buy the same meal. The nominal exchange rate a. rose. If purchasing-power parity holds, than prices in the Sweden rose faster than prices in the U.S. b. rose. If purchasing-power parity holds, than prices in the U.S. rose faster than prices in the Sweden. c. fell. If purchasing-power parity holds, than prices in the Sweden rose faster than prices in the U.S. d. fell. If purchasing-power parity holds, than prices in the U.S. rose faster than prices in the Sweden. : D : 3 : 31-2 NAT: Analytic : International trade and finance TOP: Real exchange rate : Analytical 69. According to purchasing power parity, if the Federal Reserve increased the money supply a. U.S. prices would rise and the nominal exchange rate would rise. b. U.S. prices would rise and the nominal exchange rate would fall. c. U.S. prices would fall and the nominal exchange rate would rise. d. U.S. prices and the nominal exchange rate would fall. : B : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 70. If the Kenyan nominal exchange rate declines, and prices are unchanged in Kenya and abroad, then the Kenyan real exchange rate a. does not change. b. rises. c. declines d. None of the above is necessarily correct. : C : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Real exchange rate : Analytical 71. If the Mexican nominal exchange rate does not change, but prices rise faster abroad than in Mexico, then the Mexican real exchange rate a. does not change. b. rises. c. declines. d. None of the above is necessarily correct. : C : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Real exchange rate : Analytical 72. If the Canadian nominal exchange rate does not change, but prices rise faster in Canada than in all other countries, then the Canadian real exchange rate a. does not change. b. rises. c. declines. d. There is not enough information to wer the question : B : 3 : 31-3 NAT: Analytic : International trade and finance TOP: Real exchange rate : Analytical 73. According to purchasing-power parity, if prices in the United States increase by a larger percentage than prices in Poland, then a. the real exchange defined as Polish goods per unit of U.S. goods rises. b. the real exchange defined as Polish goods per unit of U.S. goods falls. c. the nominal exchange rate defined as Polish currency per dollar rises. d. the nominal exchange rate defined as Polish currency per dollar falls. : D : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 74. According to purchasing-power parity, if prices in the United States increase by a smaller percentage than prices in Poland, then a. the real exchange defined as Polish goods per unit of U.S. goods rises. b. the real exchange defined as Polish goods per unit of U.S. goods falls. c. the nominal exchange rate defined as Polish currency per dollar rises. d. the nominal exchange rate defined as Polish currency per dollar falls. : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Applicative 75. According to purchasing power parity, if over the course of a year the price level in the U.S. rises more than in Canada, then which of the following rises? 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. nominal exchange rate and the U.S. real exchange rate d. neither the real exchange rate nor the nominal exchange rate : D : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Nominal exchange rate | Real exchange rate : Analytical 76. According to purchasing power parity, if over the course of a year the price level in the U.S. rises more than in Japan, then which of the following falls? 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. nominal exchange rate and the U.S. real exchange rate d. neither the real exchange rate nor the nominal exchange rate : B : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Nominal exchange rate | Real exchange rate : Analytical 77. If the U.S. price level is increasing by 3 percent annually and the Swiss price level is increasing by 2 percent annually, by about what percent would the price of a dollar in terms of Swiss francs need to change according to purchasing power parity? a. decrease by 5 percent b. decrease by 1 percent c. increase by 5 percent d. increase by 1 percent : B : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 78. Suppose inflation is higher in the United States over the next six months than in foreign countries. If exchange rates are given in terms of how much foreign currency a dollar buys or how many foreign goods U.S. goods buy, then according to purchasing-power parity we should expect to see a. only the nominal exchange rate depreciate. b. both the real and nominal exchange rate appreciate. c. both the real and nominal exchange rate depreciate. d. only the real exchange rate appreciate. : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Analytical 79. According to the doctrine of purchasing-power parity, which of the following should depreciate if over the next year the inflation rate is higher in the U.S. than in the Euro area? a. both the U.S. real exchange rate and the U.S. nominal exchange rate b. the U.S. real exchange rate, but not the U.S. nominal exchange rate c. the U.S. nominal exchange rate, but not the U.S. real exchange rate d. neither the U.S. nominal exchange rate nor the U.S. real exchange rate : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Interpretive 80. Suppose that the inflation rate is higher in Turkey than in the U.S. for the next six months. Then according to purchasing power parity, if exchange rates are given in terms of how many Turkish lira or how many Turkish goods a U.S. dollar buys, a. the nominal exchange rate rises but the real exchange rate does not. b. the nominal exchange rate does not rise, but the real exchange rate does. c. both the nominal and real exchange rates rise. d. neither the nominal nor the real exchange rate rises. : A : 2 : 31-2 NAT: Analytic : International trade and finance TOP: Real exchange rate : Analytical 81. From 1970 to 1998 the U.S. dollar a. gained value compared to the German mark because inflation was higher in Germany. b. gained value compared to the German mark because inflation was lower in Germany. c. lost value compared to the German mark because inflation was higher in Germany. d. lost value compared to the German mark because inflation was lower in Germany. : D : 2 : 31-3 NAT: Analytic : International trade and finance TOP: U.S. exchange rates | Purchasing-power parity : Definitional 82. From 1970 to 1998 the U.S. dollar a. gained value compared to the German mark because inflation was higher in the U.S. b. gained value compared to the German mark because inflation was lower in the U.S. c. lost value compared to the German mark because inflation was higher in the U.S. d. lost value compared to the German mark because inflation was lower in the U.S. : C : 2 : 31-3 NAT: Analytic : International trade and finance TOP: U.S. exchange rates | Purchasing-power parity : Definitional 83. From 1970 to 1998 the U.S. dollar a. gained value compared to the Italian lira because inflation was higher in Italy. b. gained value compared to the Italian lira because inflation was lower in Italy. c. lost value compared to the Italian lira because inflation was higher in Italy. d. lost value compared to the Italian lira because inflation was lower in Italy. : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: U.S. exchange rates | Purchasing-power parity : Definitional 84. From 1970 to 1998 the U.S. dollar a. gained value compared to the Italian lira because inflation was higher in the U.S. b. gained value compared to the Italian lira because inflation was lower in the U.S. c. lost value compared to the Italian lira because inflation was higher in the U.S. d. lost value compared to the Italian lira because inflation was lower in the U.S. : B : 2 : 31-3 NAT: Analytic : International trade and finance TOP: U.S. exchange rates | Purchasing-power parity : Definitional 85. During a hyperinflation the real domestic value of a country’s currency 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. : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Real exchange rate | Hyperinflation : Applicative 86. Which of the following events would be consistent with purchasing-power parity? a. The price level in the United States rises more rapidly than that in Ireland and the real exchange rate defined as Irish goods per unit of U.S. goods stays the same. b. The money supply in the United States rises more rapidly than in Egypt and the nominal exchange rate defined as Egyptian pounds per dollar falls. c. Earl, a worldwide traveler, looks at exchange rates and worldwide breakfast prices one morning and finds that whatever country he decides to go to he can convert $15 into enough al currency to buy the same breakfast. d. All of the above are correct. : D : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Interpretive 87. On behalf of your firm, you make frequent trips to Singapore. You notice that you always have to pay more dollars to get enough al currency to get your nails manicured than you have to pay to get manicured in the United States. This is a. inconsistent with purchasing-power parity, but might be explained by limited opportunities for arbitrage in manicuring across international borders. b. consistent with purchasing-power parity if prices in Hong Kong are rising more rapidly than prices in the United States. c. consistent with purchasing-power parity if prices in Hong Kong are rising less rapidly than prices in the United States. d. None of the above is correct. : A : 2 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Interpretive 88. Purchasing-power parity theory does not hold at all times because a. many goods are not easily trported. b. the same goods produced in ferent countries may be imperfect substitutes for each other. c. Both a and b are correct. d. prices are ferent across countries. : C : 1 : 31-3 NAT: Analytic : International trade and finance TOP: Purchasing-power parity : Interpretive [Show More]

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