Question 1

If the Canadian real exchange rate appreciates relative to the euro,which of the following best describes the consequences?
A)Canadian exports to Europe and European exports to Canada both rise.
B)Canadian exports to Europe and European exports to Canada both fall.
C)Canadian exports to Europe rise, and European exports to Canada fall.
D)Canadian exports to Europe fall, and European exports to Canada rise.

Accepted Answer

An appreciation of the Canadian real exchange rate relative to the euro means that the Canadian dollar has strengthened against the euro. This makes Canadian goods relatively more expensive for European consumers, reducing demand for Canadian exports to Europe. At the same time, European goods become relatively cheaper for Canadian consumers, increasing demand for European exports to Canada. Therefore, Canadian exports to Europe are likely to fall, and European exports to Canada are likely to rise, which is best described by choice D.

Question 2

What terms refers to the process of taking advantage of different prices for a good in different markets?
A)arbitrage
B)absolute advantage
C)capitalism
D)the law of one price

Accepted Answer

Arbitrage refers to the process of taking advantage of different prices for a good in different markets by buying low in one market and selling high in another market. This process occurs until the prices for the same good equalize across markets, known as the law of one price. Absolute advantage refers to a situation where one country can produce a good more efficiently than another country. Capitalism refers to an economic system based on private ownership and free markets. The law of one price refers to the idea that, in a competitive market, the same good should have the same price in different markets.

Question 3

Suppose that a lobster in Nova Scotia costs $10 and the same type of lobster in New Brunswick costs $30.How could people make a profit in the situation?
A)by buying lobsters in Nova Scotia and selling them in New Brunswick, which would increase the price of lobster in New Brunswick
B)by buying lobsters in Nova Scotia and selling them in New Brunswick, which would decrease the price of lobster in New Brunswick
C)by buying lobsters in New Brunswick and selling them in Nova Scotia, which would increase the price of lobster in New Brunswick
D)by buying lobsters in New Brunswick and selling them in Nova Scotia, which would decrease the price of lobster in New Brunswick

Accepted Answer

The answer of Suppose that a lobster in Nova Scotia...

Question 4

Suppose that the dollar buys less cotton in Canada than in Egypt.How could traders make a profit?
A)by buying cotton in Canada and selling it in Egypt, which would tend to raise the price of cotton in Canada
B)by buying cotton in Canada and selling it in Egypt, which would tend to raise the price of cotton in Egypt
C)by buying cotton in Egypt and selling it in Canada, which would tend to raise the price of cotton in Egypt
D)by buying cotton in Egypt and selling it in Canada, which would tend to raise the price of cotton in Canada

Accepted Answer

The answer of Suppose that the dollar buys less cotton...

Question 5

What does purchasing-power parity explain?
A)It explains prices in the short run.
B)It explains prices in the long run.
C)It explains exchange rates in the short run.
D)It explains exchange rates in the long run.

Accepted Answer

Purchasing-power parity (PPP) explains exchange rates in the long run. It theorizes that in the long run, exchange rates between two countries will converge to the rate that equalizes the purchasing power of each currency. This means that a unit of currency in one country should have the same purchasing power as a unit of currency in another country.

Question 6

Suppose that the exchange rate is 50 Bangladesh taka per Canadian dollar,and that a bushel of rice costs 200 taka in Bangladesh and $3 in Canada.Which of the following is consistent with these facts?
A)The real exchange rate is greater than one, and arbitrageurs could profit by buying rice in Canada and selling it in Bangladesh.
B)The real exchange rate is greater than one, and arbitrageurs could profit by buying rice in Bangladesh and selling it in Canada.
C)The real exchange rate is less than one, and arbitrageurs could profit by buying rice in Canada and selling it in Bangladesh.
D)The real exchange rate is less than one, and arbitrageurs could profit by buying rice in Bangladesh and selling it in Canada.

Accepted Answer

The answer of Suppose that the exchange rate is 50...

Question 7

What does purchasing-power parity imply?
A)that real incomes should be the same in all countries
B)that the nominal exchange rates should be equal to 1 for all currencies
C)that the price of a standard hamburger should be the same everywhere
D)that the rent for an apartment should be the same everywhere

Accepted Answer

Purchasing-power parity (PPP) implies that in the absence of transportation and other transaction costs, identical goods should have the same price in different countries when prices are converted into a common currency. This concept is often illustrated with the example of a standard product, like a hamburger, to explain how PPP works across different countries.

Question 8

Suppose the price of a standard pair of sport shoes is €40 in Spain and $75 in Canada,and the current exchange rate is 0.75 euro for one dollar.What is the purchasing-power parity exchange rate of the dollar?
A)0.40 euro/dollar
B)0.53 euro/dollar
C)0.75 euro/dollar
D)1.53 euro/dollar

Accepted Answer

Purchasing-power parity (PPP) exchange rate can be calculated as the ratio of the price of the same basket of goods in two different countries. Here the basket of goods is a standard pair of sport shoes. We have the following information: 
Price of sport shoes in Spain (Pₛ) = €40
Price of sport shoes in Canada (Pₙ) = $75
Exchange rate (ER) = 0.75 euro/dollar

Using the PPP formula we get, 
Pₙ/Pₛ = ER
$75/€40 = 0.75
1.875 ≈ 0.75  (as 0.75 euro/dollar)

Therefore, the PPP exchange rate of the dollar is €40/$75 = 0.53 euro/dollar. 
Hence, the correct answer is B.

Question 9

Table 12-1
 
-Refer to the Table 12-1.What countries in the table does purchasing-power parity hold for?
A)Bolivia and Japan
B)Bolivia and Morocco
C)Japan and Thailand
D)Thailand and Morocco

Accepted Answer

Purchasing-power parity (PPP) holds when the exchange rate between two currencies equals the ratio of the countries' price levels. Looking at the table, only Bolivia and Morocco have the same price level ratio as their exchange rate ratio. Therefore, PPP holds for Bolivia and Morocco. It does not hold for Japan and Thailand.

Question 10

Suppose that the exchange rate is 10 Moroccan dirhams per Canadian dollar.Also suppose that you can buy a crate of oranges for 300 dirhams in the Moroccan capital of Rabat and can buy a similar crate of oranges in Ottawa for $35.Which of the following is consistent with these facts?
A)The real exchange rate is greater than one, and arbitrageurs could profit by buying oranges in Canada 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 Canada.
C)The real exchange rate is less than one, and arbitrageurs could profit by buying oranges in Canada 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 Canada.

Accepted Answer

If the exchange rate is 10 dirhams per Canadian dollar and a crate of oranges costs 300 dirhams in Morocco, then the price of the crate in Canadian dollars is $30. Therefore, the price of a crate in Canada ($35) is greater than the price of a crate in Morocco ($30). This means that the Moroccan dirham is undervalued relative to the Canadian dollar, so the real exchange rate is greater than one. Arbitrageurs could profit by buying oranges in Morocco (paying 300 dirhams) and selling them in Canada (receiving $35). They would be able to exchange the Canadian dollars back into dirhams at the original exchange rate and make a profit.

Question 11

According to the theory of purchasing-power parity,what must the nominal exchange rate between two countries reflect?
A)the different price levels in those countries
B)the different resource endowments in those countries
C)the different income levels in those countries
D)the different standards of living between those countries

Accepted Answer

The theory of purchasing-power parity states that the nominal exchange rate between two countries should reflect the differences in the price levels of those countries. This means that if one country has a higher overall price level than the other, the exchange rate should adjust in order to maintain parity between the two currencies. This allows for goods and services to be priced consistently across borders and helps to facilitate international trade.

Question 12

How do nominal exchange rates change over time?
A)They vary little over time.
B)They vary substantially over time.
C)They appreciate over time for most countries.
D)They depreciate over time for most countries.

Accepted Answer

Nominal exchange rates are known to vary substantially over time due to a wide range of factors such as changes in economic conditions, political events, and market factors. The fluctuations in exchange rates can have a significant impact on international trade and investment, making it important for businesses and investors to closely monitor and manage their exposure to currency risk.

Question 13

If P = domestic prices,P* = foreign prices,and e is the nominal exchange rate,what is implied by purchasing-power parity?
A)P = e/P*
B)1 = e/P*
C)e = P*/P
D)P/P*=1

Accepted Answer

The answer of If P = domestic prices,P* = foreign...

Question 14

Suppose the nominal exchange rate between the yen and the U.S.dollar is 220 yen per U.S.dollar,and that the nominal exchange rate between the Canadian dollar and the U.S.dollar is 1.10 Canadian dollars per U.S.dollar.How many yen would it take to buy a Canadian dollar?
A)200
B)20
C)0.5
D)0.005

Accepted Answer

The answer of Suppose the nominal exchange rate between the...

Question 15

The nominal exchange rate is about 2 Aruban florins per dollar.If a basket of goods in Canada costs $40,how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold?
A)20 florins
B)40 florins
C)80 florins
D)100 florins

Accepted Answer

According to purchasing-power parity, the price of the same basket of goods should be equal in different countries. Therefore, if a basket of goods costs $40 in Canada, the equivalent basket of goods in Aruba should also cost $40. Since the exchange rate is 2 florins per dollar, the basket of goods in Aruba should cost 2 x $40 = 80 florins. Therefore, the correct answer is C.

Question 16

What happened after the introduction of the euro as the common currency of many European countries?
A)It led to less international trade.
B)It reduced the costs of trading within Europe.
C)It led to greater differences in monetary policy amongst participating countries.
D)It reduced trade of some European countries with Canada.

Accepted Answer

The introduction of the euro as the common currency of many European countries reduced the costs of trading within Europe by eliminating exchange rate fluctuations and transaction costs associated with exchanging currency. It also made it easier for businesses to engage in cross-border trade within the eurozone.

Question 17

What does purchasing-power parity imply for the exchange rate?
A)that the real exchange rate is equal to one
B)that the nominal exchange rate is equal to one
C)that the real exchange rate is equal to the nominal exchange rate
D)that the real exchange rate is equal to the difference in inflation rates between the two countries

Accepted Answer

Purchasing-power parity (PPP) implies that the real exchange rate is equal to one, meaning that a basket of goods should cost the same in two different countries when prices are converted into a common currency at the prevailing exchange rate. This concept does not directly relate to the nominal exchange rate being one, the real exchange rate equating to the nominal exchange rate, or the real exchange rate being the difference in inflation rates between two countries.

Question 18

What does the law of one price state?
A)A good cannot be sold at a black market price.
B)A good must sell at the price fixed by law.
C)A good must sell at the same price at all locations.
D)A good cannot sell for a price greater than the legal price ceiling.

Accepted Answer

The law of one price refers to the economic theory that in a competitive market with no transportation costs and no barriers to trade, identical goods will sell for the same price in all locations. This means that a good must sell at the same price at all locations, hence making choice C the correct answer. The other choices are either too narrow in their definition of pricing or are not related to the law of one price.

Question 19

Suppose that the dollar buys more bananas in Honduras than in Guatemala.How could traders make a profit?
A)by buying bananas in Honduras and selling them in Guatemala, which would tend to raise the price of bananas in Honduras
B)by buying bananas in Honduras and selling them in Guatemala, which would tend to raise the price of bananas in Guatemala
C)by buying bananas in Guatemala and selling them in Honduras, which would tend to raise the price of bananas in Guatemala
D)by buying bananas in Guatemala and selling them in Honduras, which would tend to raise the price of bananas in Honduras

Accepted Answer

By buying bananas in Honduras (where they are cheaper) and selling them in Guatemala (where they are more expensive), traders can make a profit by taking advantage of the price difference. This would lead to an increase in demand for bananas in Honduras, which would raise the price of bananas in that market.

Question 20

How has the introduction of the euro affected arbitrage?
A)It has eliminated the possibility of arbitrage within Europe.
B)It has eliminated the possibility of arbitrage based on exchange-rate differences within Europe.
C)It has increased the possibilities for arbitrage within Europe.
D)It has not affected the possibilities for arbitrage within Europe.

Accepted Answer

Before the introduction of the euro, there were exchange-rate differences between the currencies of different European countries. This allowed for arbitrage, where investors could buy in one country and sell in another to take advantage of the exchange-rate difference. With the introduction of the euro, these exchange-rate differences were eliminated, making such arbitrage opportunities rare. However, arbitrage still exists for other reasons such as price differences between two markets or different types of securities. Therefore, the introduction of the euro has eliminated the possibility of arbitrage based on exchange-rate differences within Europe.

Quiz 12: Open-Economy Macroeconomics: Basic Concepts

If the Canadian real exchange rate appreciates relative to the euro,which of the following best describes the consequences?

What terms refers to the process of taking advantage of different prices for a good in different markets?

Suppose that a lobster in Nova Scotia costs $10 and the same type of lobster in New Brunswick costs $30.How could people make a profit in the situation?

Suppose that the dollar buys less cotton in Canada than in Egypt.How could traders make a profit?

What does purchasing-power parity explain?

Suppose that the exchange rate is 50 Bangladesh taka per Canadian dollar,and that a bushel of rice costs 200 taka in Bangladesh and $3 in Canada.Which of the following is consistent with these facts?

What does purchasing-power parity imply?

Suppose the price of a standard pair of sport shoes is €40 in Spain and $75 in Canada,and the current exchange rate is 0.75 euro for one dollar.What is the purchasing-power parity exchange rate of the dollar?

Table 12-1 -Refer to the Table 12-1.What countries in the table does purchasing-power parity hold for?

Suppose that the exchange rate is 10 Moroccan dirhams per Canadian dollar.Also suppose that you can buy a crate of oranges for 300 dirhams in the Moroccan capital of Rabat and can buy a similar crate of oranges in Ottawa for $35.Which of the following is consistent with these facts?

According to the theory of purchasing-power parity,what must the nominal exchange rate between two countries reflect?

How do nominal exchange rates change over time?

If P = domestic prices,P* = foreign prices,and e is the nominal exchange rate,what is implied by purchasing-power parity?

Suppose the nominal exchange rate between the yen and the U.S.dollar is 220 yen per U.S.dollar,and that the nominal exchange rate between the Canadian dollar and the U.S.dollar is 1.10 Canadian dollars per U.S.dollar.How many yen would it take to buy a Canadian dollar?

The nominal exchange rate is about 2 Aruban florins per dollar.If a basket of goods in Canada costs $40,how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold?

What happened after the introduction of the euro as the common currency of many European countries?

What does purchasing-power parity imply for the exchange rate?

What does the law of one price state?

Suppose that the dollar buys more bananas in Honduras than in Guatemala.How could traders make a profit?

How has the introduction of the euro affected arbitrage?