Question 1

Suppose that the nominal exchange rate between the dollar and the English pound was 1 pound per $2 and that the English price level was twice that of the United States,then the real exchange rate is

Accepted Answer

The real exchange rate is calculated as nominal exchange rate times domestic price level divided by foreign price level. In this case, nominal exchange rate is 1 pound per $2 and domestic (U.S.) price level is 1 whereas foreign (English) price level is 2. Thus, real exchange rate = 1/2 = 0.5. Since the question asks for the real exchange rate in terms of pounds per dollar, we take the reciprocal and get 2 pounds per $1. Therefore, the correct choice is D.

Question 2

Under a fixed exchange rate system,if the British pound is undervalued,the British monetary authorities must

Accepted Answer

If the British pound is undervalued, it means that it is weaker than the level that the monetary authorities believe it should be, and they would want to strengthen it to bring it to the desired level. To achieve this, they would need to sell pounds and buy dollars, which increases demand for the pound and reduces supply, thereby increasing its value.

Question 3

In theory with flexible exchange rates should allow countries to conduct ________ monetary and fiscal policies,exchange rates,but paradoxically the experience of the relatively flexible exchange rates of the 1970s suggests that such policies caused exchange rate ________.

Accepted Answer

Flexible exchange rates should theoretically allow countries to conduct independent monetary and fiscal policies, but the experience of the 1970s showed that these policies caused exchange rate instability. Therefore, the best choice is B, which includes "independent" policies and acknowledges the issue of exchange rate instability. The other choices either include contradictory terms (e.g. "managed" and "unstable") or do not address the issue of exchange rate instability.

Question 4

According to PPP theory,the yen price of the dollar would fall in a year from 140 to 132 yen if along with a Japanese inflation rate of 2 percent,the U.S.inflation rate is ________ percent.

Accepted Answer

The Purchasing Power Parity (PPP) theory suggests that exchange rates will adjust to compensate for inflation differentials between two countries. If the Japanese inflation rate is 2%, and the yen price of the dollar falls from 140 to 132 yen, this implies the dollar has depreciated relative to the yen. To find the U.S. inflation rate that would cause this under PPP, we can use the formula: (1 + US inflation rate) / (1 + Japanese inflation rate) = (Initial exchange rate / Final exchange rate). Plugging in the given values: (1 + US inflation rate) / (1 + 0.02) = 140 / 132. Solving for the US inflation rate gives approximately 7.71%.

Question 5

In a fixed exchange rate system such as the Bretton Woods system,a country would be forced to "devalue" its currency if persistent balance of payments ________ cause it to ________ foreign exchange reserves.

Accepted Answer

In a fixed exchange rate system such as the Bretton Woods system, if a country experiences persistent balance of payments deficits, it means that it is importing more than it is exporting and is effectively running short of foreign exchange reserves. In order to maintain the fixed exchange rate, the country would be forced to devalue its currency, making imports more expensive and exports cheaper. Therefore, the best choice is B.

Question 6

If PPP theory were perfectly valid,movements in nominal exchange rates

Accepted Answer

PPP theory suggests that nominal exchange rates are adjusted to reflect inflation differentials between countries, so that real exchange rates stay constant. Therefore, if PPP theory were perfectly valid, movements in nominal exchange rates would be matched by inflation differentials in such a way that real exchange rates never change.

Question 7

If new sources of nickel are unexpectedly found in the United States,the dollar tends to ________ in a way ________ by the PPP theory of exchange rates.

Accepted Answer

The discovery of new nickel sources would increase the supply of nickel, potentially boosting the U.S. economy and leading to an appreciation of the dollar. However, this is not directly predicted by the Purchasing Power Parity (PPP) theory, which focuses on price levels and inflation rates rather than resource discoveries.

Question 8

Under a fixed exchange system with a flexible price level,balance of payments equilibrium will occur

Accepted Answer

Under a fixed exchange system with a flexible price level, the exchange rate is fixed, but the domestic price level can adjust to maintain balance of payments equilibrium. Eventually, as prices adjust, the economy will reach balance of payments equilibrium automatically in the long-run without the need for any policy intervention such as devaluation or revaluation, or an activist monetary policy.

Question 9

According to PPP theory,the rate which the U.S.dollar appreciates against the British pound is equal to

Accepted Answer

According to purchasing power parity (PPP) theory, exchange rates should adjust to equalize the prices of an identical basket of goods and services. Therefore, the rate at which the U.S. dollar appreciates against the British pound should reflect the difference in inflation rates between the two countries. Choice C is the only option that reflects this concept.

Question 10

A fixed exchange rate system in which most central banks in the world agree to buy or sell dollars as needed to maintain the foreign price of their currency

Accepted Answer

The fixed exchange rate system in which most central banks agree to buy or sell dollars as needed to maintain the foreign price of their currency was known as the Bretton Woods System and it existed between World War II and the early 1970s.

Question 11

A stronger dollar implies that foreigners will find U.S.exports ________ and U.S.citizens will find imports ________.

Accepted Answer

A stronger dollar makes U.S. exports more expensive for foreigners and makes imports less expensive for U.S. citizens.

Question 12

A fixed exchange rate is preferable to a flexible exchange rate because

Accepted Answer

A fixed exchange rate is not necessarily preferable to a flexible exchange rate for the reasons listed. Each system has its own advantages and disadvantages, and the choice depends on the specific economic context and policy goals.

Question 13

The impact of U.S.expansionary fiscal policy in the 1980s included which of the following?

Accepted Answer

Expansionary fiscal policy involves increasing government spending and/or reducing taxes, which leads to increased demand for goods and services. This increased demand can lead to inflation and higher interest rates as the economy overheats. Additionally, as interest rates rise, investors may withdraw their money from countries with lower interest rates, leading to a higher exchange rate for the US dollar. However, higher exchange rates make US exports more expensive, leading to lower exports and a lower demand for US goods abroad. Therefore, the impact of US expansionary fiscal policy in the 1980s included higher interest and foreign exchange rates and lower exports, as seen in option A.

Question 14

In the dollar-yen market,a movement of the exchange rate from 130 to 125 yen per dollar is good news for Japanese ________ and good news for U.S.________.

Accepted Answer

A movement of the exchange rate from 130 to 125 yen per dollar means the yen has appreciated relative to the dollar. This is good for Japanese importers of U.S. goods because they now need fewer yen to buy the same amount of dollars to pay for American goods. It is also good for U.S. exporters to Japan because their goods become cheaper in yen terms, potentially increasing their sales in Japan.

Question 15

The United States no longer manufactures television sets.This situation is ________ the workings of the PPP theory of exchange rates,since inflation in Pacific Rim nations,which raises the price of the TVs they build,________ necessarily lead to a large drop in U.S.demand for their TVs and thus a depreciation of their currencies.

Accepted Answer

The answer of The United States no longer manufactures television...

Question 16

According to PPP theory,the yen price of the dollar would rise in a year from 130 to 135 yen if along with a U.S.inflation rate of 6 percent,the Japanese inflation rate is ________ percent.

Accepted Answer

The answer of According to PPP theory,the yen price of...

Question 17

In the 1970s and 1980s,the real exchange rate of the dollar ________,which is ________ PPP theory.

Accepted Answer

According to PPP theory, the real exchange rate should be consistent and should reflect the relative prices of goods and services between countries. If the real exchange rate fluctuates widely, it is inconsistent with PPP theory. Therefore, Option B is the best choice because it suggests that the real exchange rate of the dollar fluctuated widely, which is inconsistent with PPP theory.

Question 18

If the U.S.interest rate falls relative to European interest rates,the dollar tends to ________ in a way ________ by the PPP theory of exchange rates.

Accepted Answer

When the U.S. interest rate falls relative to European interest rates, investors will be less likely to hold U.S. dollars, which will cause the dollar to depreciate. This is predicted by the PPP theory of exchange rates, which states that the exchange rate between two currencies should be equal to the ratio of their price levels.

Question 19

Drastic fluctuations in exchange rates are possible in the plausible situation of very ________ short-run elasticities of demand for imports and exports,in which a nation's supply curve of its currency to the foreign exchange market can temporarily be ________.

Accepted Answer

In the short run, if the elasticities of demand for imports and exports are low, then a change in the exchange rate will have a relatively small effect on the quantity of imports and exports. This means that the supply curve of a nation's currency to the foreign exchange market will be relatively inelastic, or downward-sloping.

Question 20

If the United States tightens its fiscal policy and eases up on monetary policy,the dollar tends to ________ in a way ________ by the PPP theory of exchange rates.

Accepted Answer

Tightening fiscal policy can lead to a stronger dollar due to reduced government spending or increased taxes, while easing monetary policy can lead to lower interest rates. However, the PPP theory primarily focuses on price levels and inflation, not fiscal or monetary policy, so the appreciation is not predicted by PPP.

Quiz 7: International Trade, exchange Rates, and Macroeconomic Policy

Suppose that the nominal exchange rate between the dollar and the English pound was 1 pound per $2 and that the English price level was twice that of the United States,then the real exchange rate is

Under a fixed exchange rate system,if the British pound is undervalued,the British monetary authorities must

In theory with flexible exchange rates should allow countries to conduct monetary and fiscal policies,exchange rates,but paradoxically the experience of the relatively flexible exchange rates of the 1970s suggests that such policies caused exchange rate .

According to PPP theory,the yen price of the dollar would fall in a year from 140 to 132 yen if along with a Japanese inflation rate of 2 percent,the U.S.inflation rate is ________ percent.

In a fixed exchange rate system such as the Bretton Woods system,a country would be forced to "devalue" its currency if persistent balance of payments cause it to foreign exchange reserves.

If PPP theory were perfectly valid,movements in nominal exchange rates

If new sources of nickel are unexpectedly found in the United States,the dollar tends to in a way by the PPP theory of exchange rates.

Under a fixed exchange system with a flexible price level,balance of payments equilibrium will occur

According to PPP theory,the rate which the U.S.dollar appreciates against the British pound is equal to

A fixed exchange rate system in which most central banks in the world agree to buy or sell dollars as needed to maintain the foreign price of their currency

A stronger dollar implies that foreigners will find U.S.exports and U.S.citizens will find imports .

A fixed exchange rate is preferable to a flexible exchange rate because

The impact of U.S.expansionary fiscal policy in the 1980s included which of the following?

In the dollar-yen market,a movement of the exchange rate from 130 to 125 yen per dollar is good news for Japanese and good news for U.S..

According to PPP theory,the yen price of the dollar would rise in a year from 130 to 135 yen if along with a U.S.inflation rate of 6 percent,the Japanese inflation rate is ________ percent.

In the 1970s and 1980s,the real exchange rate of the dollar ,which is PPP theory.

If the U.S.interest rate falls relative to European interest rates,the dollar tends to in a way by the PPP theory of exchange rates.

Drastic fluctuations in exchange rates are possible in the plausible situation of very short-run elasticities of demand for imports and exports,in which a nation's supply curve of its currency to the foreign exchange market can temporarily be .

If the United States tightens its fiscal policy and eases up on monetary policy,the dollar tends to in a way by the PPP theory of exchange rates.