Question 1

The following graph depicts the market for potatoes in West Virginia. Assume there are similar markets for potatoes in all other U.S. states and that the potatoes sold in all states are identical. Further, assume potato sellers incur zero costs to transport potatoes between any U.S. states and that there are no other barriers to trade. Use this graph to answer the next question. -Suppose the equilibrium price of a pound of potatoes in all U.S. states is initially $1.20. Which scenario could cause a shift in West Virginia from S₁ to S₂ as shown in the graph?

Accepted Answer

A shift in the supply curve in West Virginia would be caused by a change in the cost of production or selling price of potatoes in West Virginia. However, choice A, C, D, and E do not affect the cost of production or selling price of potatoes in West Virginia. The only choice that would cause a shift in the supply curve in West Virginia is B, where potato farmers in other states produce unusually small crops of potatoes, causing the price in those states to rise to $1.50. Since potato sellers can transport potatoes between any U.S. states with zero costs, potato sellers in West Virginia would have a stronger incentive to sell their potatoes in other states where prices are higher than $1.20, leading to a decrease in supply of potatoes in West Virginia and a shift of the supply curve to the left from S₁ to S₂.

Question 2

The following two graphs depict the equilibrium price of a pound of grapes in California and West Virginia, respectively. Assume the type and quality of the grapes being sold in the two states are identical. Further, assume grape sellers incur zero costs to transport grapes between the two states and there are no other barriers to trade. Use these graphs to answer the next questions.
 
-Which of the following pairs of prices is consistent with the law of one price?

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 3

If the Central Reserve Bank of Peru the Peruvian central bank) were to take steps to devalue the sol the Peruvian currency) in foreign currency markets, the Peruvian aggregate demand curve would________ in the short run, and the Peruvian short-run aggregate supply curve would ________ in the long run.

Accepted Answer

The answer of If the Central Reserve Bank of Peru...

Question 4

The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West Virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next questions.

-Suppose the price of a pound of flax seed is currently $1.20 in both Kentucky and West Virginia. Further, suppose there is a decrease in demand for flax seed in Kentucky but not in West Virginia. Before flax seed sellers are able to adjust the relative quantity of flax seed supplied in the two states, the decrease in demand causes the equilibrium price of a pound of flax seed in Kentucky to change by $0.20. The law of one price suggests that the price of a pound of flax seed be ________ in West Virginia after sellers adjust the relative quantity of flax seed supplied in the two states.

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 5

Suppose market forces outside of the control of the Chinese government are causing the price of Chinese yuan in terms of Japanese yen to rise. In order to maintain the current value of the yuan, the Chinese government must

Accepted Answer

Buying yen with newly created yuan is an example of a currency intervention, which is a tool used by governments to influence the exchange rate of their currency. By purchasing yen with yuan, the Chinese government would increase the demand for yen and decrease the supply of yuan on the foreign exchange market, which would cause the yuan to weaken relative to the yen. This would offset the market forces that were causing the yuan to appreciate and help maintain the current value of the yuan.

Question 6

According to the theory of purchasing power parity, why should identical goods have the same price in different locations?

Accepted Answer

The answer of According to the theory of purchasing power...

Question 7

If the Bank of Japan the Japanese central bank) were to take steps to devalue the yen in foreign currency markets, ________,  which would cause Japanese real gross domestic product GDP) to increase in the short run.

Accepted Answer

Devaluation of the yen in foreign currency markets would make Japanese goods and services cheaper for foreign consumers, leading to an increase in demand for Japanese exports. This would increase aggregate demand for Japanese goods and services, causing Japanese real GDP to increase in the short run.

Question 8

In order to maintain a pegged exchange rate in China,

Accepted Answer

The answer of In order to maintain a pegged exchange...

Question 9

The following two graphs depict the equilibrium price of a pound of grapes in California and West Virginia, respectively. Assume the type and quality of the grapes being sold in the two states are identical. Further, assume grape sellers incur zero costs to transport grapes between the two states and there are no other barriers to trade. Use these graphs to answer the next questions.
 
- According to the law of one price, the supply curve in the California grape market will shift to the ________, and the supply curve in the West Virginia grape market will ________.

Accepted Answer

According to the law of one price, if the price of grapes is higher in West Virginia than in California, suppliers will move grapes from California to West Virginia. This will decrease the supply in California (shifting the supply curve to the left) and increase the supply in West Virginia (shifting the supply curve to the right).

Question 10

The national government or central bank of country X might take steps to purposefully depreciate its currency because

Accepted Answer

Depreciating the currency of country X would make the goods produced in country X cheaper in comparison to goods produced in country Y. This would increase the demand for goods produced in country X and benefit producers in country X. Consumers in country Y would also benefit from the cheaper goods.

Question 11

Pegged exchange rates can also be referred to as ________ exchange rates.

Accepted Answer

Pegged exchange rates are also known as fixed exchange rates as they are fixed at a specific value. The exchange rate is pegged to another currency or a basket of currencies._Variable exchange rates fluctuate based on the demand and supply of the currency in the foreign exchange market. Flexible exchange rates fluctuate based on market forces without intervention from the government or central bank. Specialized and nominal exchange rates are not relevant in this context.

Question 12

According to the law of ________, after accounting for transportation costs and trade barriers, identical goods in different locations must sell for the same price.

Accepted Answer

The law of one price states that after factoring in transportation costs and trade barriers, identical goods should sell at the same price regardless of their location. This principle is based on the idea of arbitrage, which assumes that if a difference in price exists between two markets, buyers and sellers will take advantage of the difference to make a profit until the price equalizes. Therefore, firms that charge different prices for the same product in different markets would be at a disadvantage, as customers would be able to buy cheaper products from other markets and resell them in the higher-priced market.

Question 13

Floating exchange rates can also be referred to as ________ exchange rates.

Accepted Answer

Floating exchange rates are also called flexible exchange rates because they allow the exchange rate to fluctuate based on the supply and demand of the currency in the foreign exchange market. This is in contrast to fixed exchange rates, which are pegged to a specific value, or real exchange rates, which reflect changes in the relative prices of goods and services in different countries. Specialized exchange rates do not exist.

Question 14

If the theory of purchasing power parity holds, then how much does an Egyptian tapestry cost in the United States if the same tapestry sells for 15,000 Egyptian pounds in Egypt and the exchange rate is $0.14 per Egyptian pound?

Accepted Answer

According to the theory of purchasing power parity, the price of the same product should be equal in different countries when measured in the same currency after adjusting for the exchange rate. So, to find the cost of the tapestry in the United States, we need to convert the price in Egyptian pounds to U.S. dollars using the exchange rate:

15,000 Egyptian pounds x $0.14/Egyptian pound = $2,100

Therefore, the cost of the tapestry in the United States would be $2,100.

Question 15

In the short run, ________ would increase domestic aggregate demand in the context of the aggregate supply-aggregate demand model.

Accepted Answer

The answer of In the short run, ________ would increase...

Question 16

The following two graphs depict the equilibrium price of a pound of grapes in California and West Virginia, respectively. Assume the type and quality of the grapes being sold in the two states are identical. Further, assume grape sellers incur zero costs to transport grapes between the two states and there are no other barriers to trade. Use these graphs to answer the next questions.
 
-According to the law of one price, the price of grapes will

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 17

If the Bank of Japan (the Japanese central bank) were to take steps to devalue the yen in foreign currency markets, the Japanese ________ curve would shift rightward in the short run and the Japanese ________ curve would shift leftward in the long run.

Accepted Answer

The answer of If the Bank of Japan (the Japanese...

Question 18

________ exchange rates are exchange rates that are fixed at a certain level through the actions of a government.

Accepted Answer

Pegged exchange rates are fixed at a certain level through the actions of a government. Variable and flexible exchange rates are determined by market forces, speculated exchange rates are based on expectations and predictions, and real exchange rates take into account inflation and other factors.

Question 19

________ exchange rates are exchange rates that are determined by the market forces of supply and demand for currency.

Accepted Answer

A floating exchange rate is one where the exchange rate is determined by the forces of supply and demand in the foreign exchange market. Governments do not intervene in the market to maintain a specific exchange rate level. This is in contrast to a pegged exchange rate where the government sets a specific exchange rate for its currency, or a Government-determined exchange rate where the government controls the exchange rate through its monetary policy. Rigid and Stock exchange rates are not commonly used terms in foreign exchange markets.

Question 20

The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West Virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next questions.

-Suppose the price of a pound of flax seed in West Virginia is currently $1.00. The law of one price suggests that because the price of a pound of flax seed is $1.20 in Kentucky, the price of a pound of flax seed will be ________ in West Virginia after sellers adjust their supplies in both markets.

Accepted Answer

The law of one price suggests that prices will equalize across markets due to arbitrage. Sellers will move flax seed from West Virginia to Kentucky to take advantage of the higher price, increasing supply in Kentucky and decreasing it in West Virginia, leading to a price adjustment between $1.00 and $1.20.

Quiz 20: International Finance

If the Central Reserve Bank of Peru the Peruvian central bank) were to take steps to devalue the sol the Peruvian currency) in foreign currency markets, the Peruvian aggregate demand curve would in the short run, and the Peruvian short-run aggregate supply curve would in the long run.

Suppose market forces outside of the control of the Chinese government are causing the price of Chinese yuan in terms of Japanese yen to rise. In order to maintain the current value of the yuan, the Chinese government must

According to the theory of purchasing power parity, why should identical goods have the same price in different locations?

If the Bank of Japan the Japanese central bank) were to take steps to devalue the yen in foreign currency markets, ________, which would cause Japanese real gross domestic product GDP) to increase in the short run.

In order to maintain a pegged exchange rate in China,

The national government or central bank of country X might take steps to purposefully depreciate its currency because

Pegged exchange rates can also be referred to as ________ exchange rates.

According to the law of ________, after accounting for transportation costs and trade barriers, identical goods in different locations must sell for the same price.

Floating exchange rates can also be referred to as ________ exchange rates.

If the theory of purchasing power parity holds, then how much does an Egyptian tapestry cost in the United States if the same tapestry sells for 15,000 Egyptian pounds in Egypt and the exchange rate is $0.14 per Egyptian pound?

In the short run, ________ would increase domestic aggregate demand in the context of the aggregate supply-aggregate demand model.

If the Bank of Japan (the Japanese central bank) were to take steps to devalue the yen in foreign currency markets, the Japanese curve would shift rightward in the short run and the Japanese curve would shift leftward in the long run.

________ exchange rates are exchange rates that are fixed at a certain level through the actions of a government.

________ exchange rates are exchange rates that are determined by the market forces of supply and demand for currency.