Question 1

Suppose the nominal exchange rate between the yen and the U.S. dollar is 260 yen per U.S. dollar, and that the nominal exchange rate between the Canadian dollar and the U.S. dollar is 1.30 Canadian dollars per U.S. dollar. How many yen would it take to buy a Canadian dollar?

Accepted Answer

To calculate how many yen it would take to buy a Canadian dollar, we need to use the exchange rates between the yen and the U.S. dollar, and between the Canadian dollar and the U.S. dollar. We can set up a proportion:
260 yen / 1 USD = x yen / 1.30 CAD
Solving for x, we get:
x = (260 yen / 1 USD) * (1.30 CAD / 1 USD) = 338 yen/CAD
Therefore, it would take 338 yen to buy 1 Canadian dollar. Rounded to the nearest whole number, this is 200 yen per Canadian dollar. Answer choice C) is correct.

Question 2

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 statement is consistent with these facts?

Accepted Answer

To find the real exchange rate, we need to divide the price of rice in Bangladesh by the price of rice in Canada, both in terms of Bangladesh taka:

Real exchange rate = (Price of rice in Bangladesh / Price of rice in Canada) x (Canadian dollars per taka)
Real exchange rate = (200 taka / $3) x (1 Canadian dollar / 50 taka)
Real exchange rate = 66.666... Canadian dollars per $1

Since the real exchange rate is less than one, this means that goods are cheaper in Canada than in Bangladesh in terms of taka. This also means that arbitrageurs could buy rice in Canada (using Canadian dollars) and sell it in Bangladesh (earning taka), making a profit. Therefore, option C is the correct answer.

Question 3

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

Accepted Answer

According to the theory of purchasing-power parity, the nominal exchange rate between two countries must reflect the different price levels in those countries. This means that if the price level in one country is higher than the price level in another country, then the exchange rate should reflect that difference in prices. This is because if the exchange rate does not reflect the difference in prices, then goods will be cheaper in one country relative to another, which would lead to an imbalance in trade.

Question 4

What does the law of one price state?

Accepted Answer

The law of one price states that identical goods should sell for the same price in different markets. Therefore, option C is the correct choice. Options A, B, and D do not accurately describe the law of one price.

Question 5

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

Accepted Answer

The introduction of the euro as the common currency of many European countries reduced the costs of trading within Europe, as there was no longer a need to exchange currencies when conducting trade between participating countries. This led to an increase in trade within the Eurozone.

Question 6

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

Accepted Answer

Arbitrage is the process of taking advantage of different prices for a good in different markets by buying the good at a lower price in one market and selling it at a higher price in another market. This is done to profit from the price difference between the two markets. The other options, currency exchange and capitalism, are not directly related to this process. The law of one price refers to the idea that identical goods should have the same price in different markets, which is the opposite of what arbitrage takes advantage of.

Question 7

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

Accepted Answer

The answer of Suppose that the dollar buys more bananas...

Question 8

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?

Accepted Answer

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

Question 9

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

Accepted Answer

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

Question 10

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

Accepted Answer

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

Question 11

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 statement is consistent with these facts?

Accepted Answer

The real exchange rate can be calculated as the price of a basket of goods in one country divided by the price of the same basket of goods in another country. In this case, we can calculate the price of a basket of oranges in Canada as 35 CAD and in Morocco as 300 MAD. Converting the Moroccan price to CAD using the exchange rate of 10 MAD/CAD, we get 30 CAD. Therefore, the real exchange rate is 30/35 = 0.857, which is less than one. This means that goods are cheaper in Morocco than in Canada, and arbitrageurs could profit by buying oranges in Morocco for 300 MAD and selling them in Canada for 35 CAD (which they could convert to 350 MAD), earning a profit of 50 MAD per crate.

Question 12

Suppose the price of a standard pair of sport shoes is €60 in Spain and $85 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?

Accepted Answer

Purchasing-power parity exchange rate (PPPER) is the exchange rate that ensures the same amount of goods across countries. 
Here, the price of sport shoes in Spain is €60 and in Canada is $85. 
So, as per PPPER, $85 should be equal to (or can purchase the same amount of goods as) €60.
Let's calculate the PPPER: 
€1= $0.75 (given exchange rate) 
Then, x $85= €60 
Or, $85= €60/$x 
Or, x= €60/$85 
Or, x=0.7058 (approx) 
Therefore, the PPPER of the dollar is 0.71 euro/dollar (approx). 
Hence, the best choice is C.

Question 13

Which statement best describes the consequences that could occur if the Canadian real exchange rate appreciates relative to the euro?

Accepted Answer

If the Canadian real exchange rate appreciates relative to the euro, Canadian exports to Europe become more expensive, making them less competitive, causing them to fall. On the other hand, European exports to Canada become relatively less expensive, making them more competitive and causing them to rise. Therefore, the correct choice is D, Canadian exports to Europe fall, and European exports to Canada rise.

Question 14

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

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 15

What does purchasing-power parity explain?

Accepted Answer

Purchasing-power parity explains exchange rates in the long run by stating that fluctuations in exchange rates should eventually balance out as prices adjust in different countries.

Question 16

The nominal exchange rate is about 3 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?

Accepted Answer

The answer of The nominal exchange rate is about 3...

Question 17

What does purchasing-power parity imply?

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 18

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

Accepted Answer

The answer of 
-Refer to the Table 12-1. What countries...

Question 19

How has the introduction of the euro affected arbitrage?

Accepted Answer

The introduction of the euro has eliminated the possibility of arbitrage based on exchange-rate differences within Europe, as all countries now share the same currency. This means that there is no longer a need to exchange one currency for another and take advantage of exchange rate discrepancies. However, other forms of arbitrage, such as price differentials between markets, may still exist within Europe.

Question 20

How do nominal exchange rates change over time?

Accepted Answer

Nominal exchange rates can vary substantially over time due to many factors such as changes in inflation rates, interest rates, political developments, and economic performance. It is common for currencies to experience large fluctuations in their exchange rates in response to various shocks and changes in the global economic environment. Therefore, choice B is the best answer.

Quiz 12: Open-Economy Macroeconomics: Basic Concepts