Question 1

Suppose the same basket of goods costs $100 in the USA and £80 in Britain. According to PPP, if the prices do not change, what will be the exchange rate?
A) $5 per pound
B) $4 per pound
C) $1.25 per pound
D) $0.80 per pound

Accepted Answer

According to PPP, the exchange rate would adjust so that the same basket of goods would cost the same in both countries. Since the basket of goods costs $100 in the US and £80 in Britain, we know that £80 must be worth $100 in order for the prices to be equal. Therefore, the exchange rate would be 1 pound = $100/£80 = $1.25 per pound.

Question 2

Suppose a resident of the USA buys a Jaguar car from the UK, and the UK exporter uses the receipts to buy shares in Boeing. Which of the following statements is true from the perspective of the UK?
A) Net exports fall, and net capital outflow rises.
B) Net exports rise, and net capital outflow rises.
C) none of these answers
D) Net exports rise, and net capital outflow falls.
E) Net exports fall, and net capital outflow falls.

Accepted Answer

The answer of Suppose a resident of the USA buys...

Question 3

Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow?
A) An increase in saving associated with an equal increase in net capital outflow leaves domestic investment unchanged.
B) For a given amount of saving, an increase in net capital outflow must decrease domestic investment.
C) For a given amount of saving, a decrease in net capital outflow must decrease domestic investment.
D) Saving is the sum of investment and net capital outflow.

Accepted Answer

For a given amount of saving, a decrease in net capital outflow must increase domestic investment, not decrease it, as saving is the sum of investment and net capital outflow.

Question 4

Suppose that a US dollar buys more gold in Australia than it buys in Russia. What does purchasing-power parity imply should happen?

Accepted Answer

The answer of Suppose that a US dollar buys more...

Question 5

What does purchasing-power parity imply about the real exchange rate?

Accepted Answer

The answer of What does purchasing-power parity imply about the...

Question 6

A fall in the euro's nominal exchange rate in terms of US dollars
A) will always lead to a fall in the real exchange rate of the euro in terms of US dollars.
B) may be offset by a rise in the price level in the eurozone so that the real exchange rate of the euro in terms of US dollars is unchanged.
C) will always make US imports into the eurozone countries more expensive relative to goods produced in the eurozone.
D) may make the eurozone a less affordable holiday destination for US residents.

Accepted Answer

A fall in the nominal exchange rate does not necessarily mean a fall in the real exchange rate if offset by a rise in the price level in the eurozone. Therefore, option A is incorrect. Option C is partially correct because US imports into the eurozone will become relatively more expensive, but it does not necessarily mean eurozone goods will become cheaper in the US. Option D is also partially correct, but it is not always the case as it depends on various other factors such as the level of income and preferences of US residents.

Question 7

Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is it not completely accurate?

Accepted Answer

The answer of Under what circumstances does purchasing-power parity explain...

Question 8

Suppose the inflation rate over the last 20 years has been 10 per cent in the UK, 7 per cent in Japan, and 3 per cent in the USA. If purchasing power parity holds, which of the following statements is true? Over this period,
A) the value of the dollar should have fallen compared to the value of the pound and the yen.
B) none of these answers
C) the yen should have fallen in value compared to the pound and risen compared to the dollar.
D) the value of the pound should have risen compared to the value of the yen and the dollar.
E) the yen should have risen in value compared to the pound and fallen compared to the dollar.

Accepted Answer

According to purchasing power parity, a currency with a lower inflation rate should appreciate relative to a currency with a higher inflation rate. Thus, the yen (7% inflation) should appreciate against the pound (10% inflation) and depreciate against the dollar (3% inflation).

Question 9

When people take advantage of differences in prices for the same good by buying it where it is cheap and selling it where it is expensive, it is known as
A) net exports.
B) purchasing power parity.
C) net capital outflow.
D) currency appreciation.
E) arbitrage.

Accepted Answer

The given scenario is an example of arbitrage, which involves taking advantage of price differences for the same good in different markets. Net exports refers to the value of a country's exports minus the value of its imports, purchasing power parity is the theory that exchange rates should adjust to equalize the buying power of different currencies, net capital outflow refers to the difference between a country's investments abroad and foreign investments within the country, and currency appreciation refers to an increase in the value of a currency relative to other currencies. None of these concepts accurately describe the given scenario.

Question 10

a) How do we find the real exchange rate from the nominal exchange rate?
b) Suppose a bottle of wine costs 20 euros in France and 25 dollars in the USA. If the exchange rate is .80 euros per dollar, what is the real exchange rate?

Accepted Answer

The answer of a) How do we find the real...

Question 11

What is the logic behind the theory of purchasing-power parity?

Accepted Answer

The answer of What is the logic behind the theory...

Question 12

Suppose that money supply growth continues to be higher in Turkey than it is in the United States. What does purchasing-power parity imply will happen to the real and to the nominal exchange rate?

Accepted Answer

The answer of Suppose that money supply growth continues to...

Question 13

Suppose that Brian, a resident of the UK, buys software from a company in Japan. Explain what this is and in what directions this changes UK net exports and UK net capital outflow.

Accepted Answer

The answer of Suppose that Brian, a resident of the...

Question 14

According to purchasing-power parity, what is the relationship between changes in price levels between two countries and changes in nominal exchange rates?

Accepted Answer

The answer of According to purchasing-power parity, what is the...

Question 15

Suppose the money supply in Mexico grows more quickly than the money supply in the USA. We would expect that
A) the Mexican peso should appreciate relative to the US dollar.
B) the Mexican peso should depreciate relative to the US dollar.
C) none of these answers
D) the Mexican peso should maintain a constant exchange rate with the US dollar because of purchasing power parity.

Accepted Answer

If the money supply in Mexico grows more quickly than the money supply in the USA, it would lead to an increase in the supply of pesos in the foreign exchange market. This would result in a depreciation of the Mexican peso relative to the US dollar as there would be more pesos available for a smaller amount of US dollars.

Question 16

Why are net exports and net capital outflow always equal?

Accepted Answer

The answer of Why are net exports and net capital...

Question 17

Which of the following is a reason why exchange rates may deviate from their purchasing power parity values for many years?
A) Some goods are not tradable.
B) In some cases, a foreign-produced good is not a perfect substitute for a domestically produced version of the same thing.
C) In some markets, import quotas limit the ability of firms to agree on exchange prices.
D) Both a and b are correct.

Accepted Answer

The deviation from purchasing power parity values can be caused by non-tradable goods and imperfect substitutes in some cases. Both options A and B are correct, leading to option D as the best answer. Option C does not directly relate to the deviation from purchasing power parity values.

Question 18

If the UK price level is increasing by 3 per cent annually and the Swiss price level is increasing by 5 per cent annually, by what percentage would the pound sterling price of Swiss francs need to change according to purchasing power parity?
A) depreciate by 5 per cent per year
B) appreciate by 3 per cent per year
C) appreciate by 5 per cent per year
D) depreciate by 2 per cent per year

Accepted Answer

According to purchasing power parity, the exchange rate should adjust to compensate for differences in inflation rates between two countries. In this case, since the UK inflation rate is lower than Switzerland's, the pound sterling should appreciate relative to the Swiss franc to maintain purchasing power parity. The percentage change would be the difference between the two inflation rates, which is 5% - 3% = 2%. Therefore, the pound sterling price of Swiss francs would need to depreciate by 2% per year to maintain purchasing power parity. Thus, the correct answer is D- depreciate by 2 per cent per year.

Question 19

Which of the following is a statement of the purchasing power parity theory of exchange rate determination? The exchange rate will adjust in the
A) long run until the interest rate is roughly the same in both countries.
B) long run until real GDP is roughly the same in both countries.
C) long run until the average price of goods is roughly the same in both countries.
D) short run until the average price of goods is roughly the same in both countries.

Accepted Answer

The purchasing power parity theory of exchange rate determination states that in the long run, the exchange rate will adjust until the average price of goods is roughly the same in both countries. This means that a currency will appreciate or depreciate to reflect differences in the inflation rates across countries.

Question 20

How do the nominal exchange rate and the real exchange rate differ?

Accepted Answer

The answer of How do the nominal exchange rate and...

Quiz 29: Open-Economy Macroeconomics: Basic Concepts

Suppose the same basket of goods costs $100 in the USA and £80 in Britain. According to PPP, if the prices do not change, what will be the exchange rate?

Suppose a resident of the USA buys a Jaguar car from the UK, and the UK exporter uses the receipts to buy shares in Boeing. Which of the following statements is true from the perspective of the UK?

Which of the following statements is not true about the relationship between national saving, investment, and net capital outflow?

Suppose that a US dollar buys more gold in Australia than it buys in Russia. What does purchasing-power parity imply should happen?

What does purchasing-power parity imply about the real exchange rate?

A fall in the euro's nominal exchange rate in terms of US dollars

Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is it not completely accurate?

Suppose the inflation rate over the last 20 years has been 10 per cent in the UK, 7 per cent in Japan, and 3 per cent in the USA. If purchasing power parity holds, which of the following statements is true? Over this period,

When people take advantage of differences in prices for the same good by buying it where it is cheap and selling it where it is expensive, it is known as

a) How do we find the real exchange rate from the nominal exchange rate? b) Suppose a bottle of wine costs 20 euros in France and 25 dollars in the USA. If the exchange rate is .80 euros per dollar, what is the real exchange rate?

What is the logic behind the theory of purchasing-power parity?

Suppose that money supply growth continues to be higher in Turkey than it is in the United States. What does purchasing-power parity imply will happen to the real and to the nominal exchange rate?

Suppose that Brian, a resident of the UK, buys software from a company in Japan. Explain what this is and in what directions this changes UK net exports and UK net capital outflow.

According to purchasing-power parity, what is the relationship between changes in price levels between two countries and changes in nominal exchange rates?

Suppose the money supply in Mexico grows more quickly than the money supply in the USA. We would expect that

Why are net exports and net capital outflow always equal?

Which of the following is a reason why exchange rates may deviate from their purchasing power parity values for many years?

If the UK price level is increasing by 3 per cent annually and the Swiss price level is increasing by 5 per cent annually, by what percentage would the pound sterling price of Swiss francs need to change according to purchasing power parity?

Which of the following is a statement of the purchasing power parity theory of exchange rate determination? The exchange rate will adjust in the

How do the nominal exchange rate and the real exchange rate differ?