Question 1

A currency pegged at a value above the market equilibrium exchange rate is

Accepted Answer

When a currency is pegged at a value above the market equilibrium exchange rate, it is overvalued. This means that the currency is more expensive than what it should be based on economic fundamentals and market forces. As a result, the demand for the currency may decrease while the supply increases, leading to a potential imbalance in supply and demand and depreciation of the currency relative to its pegged value.

Question 2

If the implied exchange rate between Big Mac prices in the United States and the Philippines is 68 pesos per dollar,but the actual exchange rate between the United States and the Philippines is 43 pesos per dollar,which of the following would you expect to see?

Accepted Answer

The answer of If the implied exchange rate between Big...

Question 3

If the purchasing power of the dollar is less than the purchasing power of the British pound,purchasing power parity predicts that the exchange rate will

Accepted Answer

Purchasing power parity (PPP) is a theory that suggests that the exchange rate between two currencies should adjust to bring their purchasing power into equilibrium. Therefore, if the purchasing power of the dollar is less than the purchasing power of the British pound, PPP predicts that the exchange rate will eventually adjust to reflect this difference in purchasing power. In the long run, the exchange rate will be equal to the relative purchasing power across the currencies, meaning that Choice C is the correct answer. Choices A and B are not entirely accurate because the exchange rate will eventually adjust to reflect the relative purchasing power between the two currencies, regardless of whether the exchange rate is currently higher or lower than the predicted equilibrium rate.

Question 4

The year in which euro coins and paper currency were introduced and participating "euro zone" countries withdrew old domestic currencies from circulation was

Accepted Answer

Euro coins and paper currency were introduced in 2002 and participating "euro zone" countries withdrew old domestic currencies from circulation. The Eurozone initially consisted of 12 countries. The other answer choices are incorrect.

Question 5

Figure 30-2
 
-Refer to Figure 30-2. Which of the following would cause the change depicted in the figure above?

Accepted Answer

An increased preference for Mexican tequila would increase demand for Mexican goods, causing a shift in the demand curve depicted in the figure.

Question 6

Figure 30-2
 
-Refer to Figure 30-2. Which of the following would cause the change depicted in the figure above?

Accepted Answer

A new trade agreement removing tariffs would likely increase the demand for Mexican goods, causing a shift in the economic conditions depicted in the figure.

Question 7

Purchasing power parity is the theory that,in the long run,exchange rates move to equalize

Accepted Answer

Purchasing power parity theory suggests that in the long run, exchange rates will adjust to equalize the purchasing power of currencies across different countries. This means that the cost of a given basket of goods and services should have roughly the same price across different countries when expressed in a common currency. This idea is based on the assumption that if there are persistent differences in prices across different countries, then arbitrage opportunities will arise as goods can be bought in the cheaper country and sold in the more expensive country until prices equalize. The PPP theory can also be based on inflation rates, in which an increase in inflation in a country will cause its currency to depreciate to bring back parity.

Question 8

If,at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar,the rand is "undervalued," how do you expect demand and supply in the foreign exchange markets to respond?

Accepted Answer

If the rand is undervalued, it means that it is cheaper than it should be. Therefore, more people will want to buy the rand because it is a good deal, increasing the demand for the rand. At the same time, because the rand is undervalued, people will want to sell their dollars to get more rand for their money, increasing the supply of the dollar.

Question 9

A Big Mac costs $4.07 in the United States and 8.63 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,purchasing power parity predicts that

Accepted Answer

Purchasing power parity suggests that currencies will adjust to equalize the price of identical goods in different countries. Since the Big Mac is cheaper in Poland when converted to dollars, the zloty is undervalued, and the dollar is overvalued. This implies the dollar will depreciate as the supply of dollars rises to purchase cheaper goods in Poland.

Question 10

With a common currency such as the euro,

Accepted Answer

With a common currency such as the euro, individual countries using the currency are no longer able to run independent monetary policies. This is because the European Central Bank (ECB) determines monetary policy for all countries using the euro.

Question 11

By 2011,________ members of the European Union were using the euro as their currency.

Accepted Answer

As of 2011, 17 members of the European Union were using the euro as their currency. Some of the members that were using the euro at the time included Germany, France, Italy, Spain, Portugal, Greece, and Ireland.

Question 12

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.In July 2011,The Economist reported that the average price of a Big Mac in the United States was $4.07.In Japan,the average price of a Big Mac at that time was 320 yen.What is the "implied exchange rate" between the yen and the dollar?

Accepted Answer

The implied exchange rate is calculated by dividing the price of the Big Mac in Japan by the price in the US: 320 yen / $4.07 = 78.62 yen per dollar.

Question 13

If the exchange rate between the U.S.dollar and the Mexican peso (pesos per dollar)is less than the relative purchasing power between the two countries,which of the following would be true?

Accepted Answer

If the exchange rate is less than the relative purchasing power, it means that goods are cheaper in the United States than in Mexico. This creates an opportunity for profit by purchasing goods in the United States at the lower price and then selling them in Mexico at a higher price.

Question 14

If,at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar,the dollar is "undervalued," how do you expect demand and supply in the foreign exchange markets to respond?

Accepted Answer

The answer of If,at the current exchange rate between the...

Question 15

A Big Mac costs $4.07 in the United States and 8.63 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,purchasing power parity predicts that

Accepted Answer

The purchasing power parity suggests that the exchange rate between two currencies should reflect the relative prices of goods and services in the two countries. In this case, the price of a Big Mac is higher in Poland compared to the US when converted into dollars using the exchange rate of 3 zlotys per dollar. Therefore, the exchange rate implies the dollar is overvalued, as it can buy more goods in another country compared to the home country.

Question 16

All of the following explain why purchasing power parity does not completely explain long-run fluctuations in exchange rates except

Accepted Answer

While the other options provide reasons why purchasing power parity may not hold true in all cases, option D is incorrect as many countries do have government regulations and intervention in their markets that can affect exchange rates.

Question 17

A Big Mac costs $4.07 in the United States and 8.63 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,what is the dollar cost of a Big Mac in Poland?

Accepted Answer

- First, we need to convert the price of a Big Mac in Poland from zlotys to dollars: 
8.63 zlotys / 3 zlotys per dollar = $2.88
- Therefore, the dollar cost of a Big Mac in Poland is $2.88.

Question 18

If the purchasing power of a dollar is less than the purchasing power of the euro,purchasing power parity would predict that

Accepted Answer

Purchasing power parity (PPP) theory predicts that exchange rates will adjust to equalize the purchasing power of different currencies in the long run. This means that if the purchasing power of a dollar is less than the purchasing power of a euro, the exchange rate between the two currencies will adjust over time to eliminate the discrepancy. In the short run, there may be fluctuations in exchange rates due to other factors such as interest rate differentials and speculation, but PPP theory focuses on the long-term equilibrium. Therefore, option B is correct. Options A, C, and D are incorrect because they refer to short-term adjustments in interest rates or exchange rates, which are not necessarily related to PPP theory.

Question 19

If a country's currency ________ the dollar,its exchange rate is fixed.

Accepted Answer

If a country's currency is pegged to the dollar, its exchange rate is fixed. This means that the value of the currency is directly tied to the value of the dollar and cannot fluctuate freely in currency markets.

Question 20

Pegging a country's exchange rate to the dollar can be advantageous in all of the following situations except

Accepted Answer

Pegging a country's exchange rate to the dollar limits the ability to conduct independent monetary policy, as the country's central bank must adjust its interest rates in line with the Federal Reserve. Therefore, option C is not advantageous. A, B, and D are all advantageous because pegging to the dollar can provide stability and predictability in trade with the US, increase confidence in the country's currency, and help control inflation by making imports cheaper.

Quiz 19: The International Financial System

A currency pegged at a value above the market equilibrium exchange rate is

If the implied exchange rate between Big Mac prices in the United States and the Philippines is 68 pesos per dollar,but the actual exchange rate between the United States and the Philippines is 43 pesos per dollar,which of the following would you expect to see?

If the purchasing power of the dollar is less than the purchasing power of the British pound,purchasing power parity predicts that the exchange rate will

The year in which euro coins and paper currency were introduced and participating "euro zone" countries withdrew old domestic currencies from circulation was

Figure 30-2 -Refer to Figure 30-2. Which of the following would cause the change depicted in the figure above?

Figure 30-2 -Refer to Figure 30-2. Which of the following would cause the change depicted in the figure above?

Purchasing power parity is the theory that,in the long run,exchange rates move to equalize

If,at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar,the rand is "undervalued," how do you expect demand and supply in the foreign exchange markets to respond?

A Big Mac costs $4.07 in the United States and 8.63 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,purchasing power parity predicts that

With a common currency such as the euro,

By 2011,________ members of the European Union were using the euro as their currency.

If the exchange rate between the U.S.dollar and the Mexican peso (pesos per dollar) is less than the relative purchasing power between the two countries,which of the following would be true?

If,at the current exchange rate between the dollar and the South African rand of 6.92 rand per dollar,the dollar is "undervalued," how do you expect demand and supply in the foreign exchange markets to respond?

A Big Mac costs $4.07 in the United States and 8.63 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,purchasing power parity predicts that

All of the following explain why purchasing power parity does not completely explain long-run fluctuations in exchange rates except

A Big Mac costs $4.07 in the United States and 8.63 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,what is the dollar cost of a Big Mac in Poland?

If the purchasing power of a dollar is less than the purchasing power of the euro,purchasing power parity would predict that

If a country's currency ________ the dollar,its exchange rate is fixed.

Pegging a country's exchange rate to the dollar can be advantageous in all of the following situations except