Question 1

If combine harvesters are cheaper in the United States than they are in Canada, the law of one price predicts that once exchange rates are taken into account:

Accepted Answer

The law of one price states that in a competitive market, identical goods should have the same price in different countries when their prices are expressed in the same currency. Therefore, once exchange rates are taken into account, the prices of combine harvesters in the two countries should equalize in the long run, assuming transportation costs and tariffs are not a barrier. This is option A. Option B could happen as well, but it is not the only possible outcome as option A covers both countries. Option C and D are not relevant in this scenario.

Question 2

What is the relationship between an increase in money supply and net exports?

Accepted Answer

An increase in money supply leads to lower interest rates and higher inflation in the economy. As a result, the home currency will depreciate, making exports cheaper and more attractive to foreign buyers. This leads to an increase in net exports. Therefore, choice B is correct.

Question 3

In the long run, with a floating exchange rate, changes in _____ will have an impact on the real exchange rate.

Accepted Answer

The answer of In the long run, with a floating...

Question 4

Purchasing power parity is limited by:

Accepted Answer

The answer of Purchasing power parity is limited by:
...

Question 5

Purchasing power parity is an application of the law of:

Accepted Answer

Purchasing power parity is an application of the law of one price, which states that identical goods and services should have the same price in different countries when the price is expressed in the same currency. This means that exchange rates should adjust so that the same basket of goods can be purchased at the same cost in different countries, taking into account the exchange rate.

Question 6

If purchasing power parity holds and the nominal exchange rate is 1.5 U.S. dollars for one Canadian dollar, then a Big Mac that costs two Canadian dollars in Canada will cost _____ U.S. dollar(s) in the United States.

Accepted Answer

If purchasing power parity holds, the price of a Big Mac in the U.S. should equal the price in Canada converted to U.S. dollars. At an exchange rate of 1.5 U.S. dollars per Canadian dollar, a Big Mac costing 2 Canadian dollars would cost 2 * 1.5 = 3 U.S. dollars.

Question 7

In the long run, an increase in the domestic money supply:

Accepted Answer

The answer of In the long run, an increase in...

Question 8

Compared with a closed economy, an increase in the growth rate of the money supply in an open economy increases aggregate demand by a:

Accepted Answer

In an open economy, an increase in the growth rate of the money supply will lead to an increase in both domestic and foreign demand for goods and services, which will increase aggregate demand. However, in the long run, the increase in demand will be partially offset by an increase in prices due to the increase in the money supply, leading to a smaller increase in aggregate demand. Therefore, the increase in aggregate demand is larger only in the short run compared to a closed economy.

Question 9

Which of the following would NOT prevent purchasing power parity from holding?

Accepted Answer

Purchasing power parity (PPP) theory states that in the absence of transaction costs and barriers to trade, the price of identical goods should be the same across different countries when prices are expressed in a common currency. Fluctuations in foreign exchange rates are a mechanism through which PPP adjusts rather than a barrier to PPP holding. High transportation costs, non-tradable goods, and tariffs and quotas all represent barriers to trade or transaction costs that can prevent PPP from holding by causing price differences for the same goods across countries.

Question 10

Suppose an increase in the demand for dollars has caused an appreciation of the dollar. According to the purchasing power parity theorem, the value of the dollar in the future will:

Accepted Answer

According to the purchasing power parity theorem, an appreciation in the dollar will eventually lead to a depreciation as the market adjusts to restore equilibrium. This means that the value of the dollar in the future will depreciate.

Question 11

A country currently operating in a recession would benefit most from:

Accepted Answer

In a recession, an expansion in the money supply that leads to a depreciation of the domestic currency would help to stimulate exports and boost economic activity. A depreciated currency makes exports cheaper, making them more attractive to consumers in foreign countries, ultimately increasing demand for domestic products and services. This can lead to increased production, hiring, and economic growth.

Question 12

Which of the following will NOT prevent purchasing power parity from occurring in the real world?

Accepted Answer

Speculation by foreign exchange traders can cause fluctuations in exchange rates which can prevent purchasing power parity from occurring. High transportation costs, nontradable services, and trade restrictions may affect the speed or accuracy of achieving purchasing power parity, but they will not prevent it from occurring altogether.

Question 13

Assume that the initial real exchange rate for a country and its trading partner is 1:1. If there is inflation in the country, then PPP predicts:

Accepted Answer

The answer of Assume that the initial real exchange rate...

Question 14

Contractionary monetary policy, assuming demand for the currency stays constant, tends to result in:

Accepted Answer

Contractionary monetary policy typically involves raising interest rates or reducing the supply of money in an economy, which can make the currency more attractive to investors due to higher returns on investments denominated in that currency. This increased demand for the currency, even if the initial demand stays constant, can lead to currency appreciation.

Question 15

If the Federal Reserve made the decision to decrease the money supply in the United States, this would lead to:

Accepted Answer

If the Federal Reserve decreases the money supply, it will lead to a decrease in AD due to lower spending and investment in the economy. Additionally, this decrease in the money supply will cause the U.S. dollar to appreciate, making exports relatively more expensive, and thus, leading to an increase in the relative price of U.S. exports as compared to foreign exports. Therefore, the correct answer is D.

Question 16

Which items are usually cheaper in poorer countries?

Accepted Answer

The answer of Which items are usually cheaper in poorer...

Question 17

If purchasing power parity holds and the nominal exchange rate is £1 for $2, then an iPhone that cost $450 in New York should cost _____ in London.

Accepted Answer

According to the purchasing power parity (PPP) theory, the same goods should cost the same amount in different countries when prices are converted into a common currency. Since the nominal exchange rate is £1 for $2, an iPhone costing $450 in New York should cost £225 in London to maintain PPP.

Question 18

Expansionary monetary policy lowers the:

Accepted Answer

The answer of Expansionary monetary policy lowers the:
...

Question 19

Which of the following prevents the purchasing power parity theorem from holding perfectly?

Accepted Answer

Transportation costs make the prices of goods different in different countries, goods that cannot be shipped cannot be compared in different countries, and tariffs and quotas interfere with the free flow of goods between countries, making it difficult to achieve purchasing power parity.

Question 20

_____ are usually _____ in developing countries because of lower wages and immigration laws that prevent the free movement of labor.

Accepted Answer

The answer of _____ are usually _____ in developing countries...

Quiz 20: International Finance