Question 1

_____________ exchange rates are exchange rates that are fixed at a certain level through the actions of a government.

Accepted Answer

Pegged exchange rates are fixed at a certain level through the actions of a government. Variable and flexible exchange rates are free to fluctuate based on market forces, while speculated and real exchange rates do not exist.

Question 2

The following two graphs depict the equilibrium price of a pound of grapes in California and West Virginia, respectively. Assume the type and quality of the grapes being sold in the two states are identical. Further, assume grape sellers incur zero costs to transport grapes between the two states and there are no other barriers to trade. Use these graphs to answer the next three questions:

-Which of the following pairs of prices is consistent with the law of one price?

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 3

Pegged exchange rates can also be referred to as ____________ exchange rates.

Accepted Answer

Pegged exchange rates are also known as fixed exchange rates because the value of a currency is fixed to the value of another currency or commodity, and this rate is maintained by the central bank of the respective country.

Question 4

In order to maintain a pegged exchange rate in China:

Accepted Answer

To maintain a pegged exchange rate, the Chinese government must intervene in the foreign exchange market to adjust the supply of the yuan, buying or selling foreign currency to maintain the desired exchange rate level.

Question 5

If the Bank of Japan (the Japanese central bank) were to take steps to devalue the yen in foreign currency markets,the Japanese ____________ curve would shift rightward in the short run and the Japanese __________ curve would shift leftward in the long run.

Accepted Answer

The answer of If the Bank of Japan (the Japanese...

Question 6

Suppose market forces outside of the control of the Chinese government are causing the price of Chinese yuan in terms of Japanese yen to rise.In order to maintain the current value of the yuan,the Chinese government must:

Accepted Answer

To maintain the current value of the yuan, the Chinese government must buy yen with newly created yuan. This will increase the supply of yuan in the market, decreasing its value, and increasing the supply of yen, which will raise its value. Thus, the exchange rate between yuan and yen can be kept stable. Other options such as filing a pegging application with international currency-management agencies or banning Chinese firms from hiring Japanese workers are not relevant to maintaining the exchange rate between two currencies. Additionally, using tax incentives to encourage Chinese firms to hire more Japanese workers is not related to currency exchange rates. The World Trade Organization only deals with trade regulations, not currency exchange rates.

Question 7

If the Bank of Japan (the Japanese central bank) were to take steps to devalue the yen in foreign currency markets,____________,which would cause Japanese real gross domestic product (GDP) to increase in the short run.

Accepted Answer

If the Bank of Japan devalues the yen, it becomes cheaper for foreigners to purchase Japanese goods and services, increasing the demand for Japanese exports. This increase in aggregate demand would lead to an increase in Japanese real GDP in the short run.

Question 8

Floating exchange rates can also be referred to as ___________ exchange rates.

Accepted Answer

Floating exchange rates are also known as flexible exchange rates because they are determined by market forces of supply and demand, and can fluctuate freely over time. Fixed exchange rates, on the other hand, are set by governments or central banks and are not subject to market forces. Real exchange rates refer to exchange rates that have been adjusted for changes in inflation, while pegged exchange rates involve fixing the value of one currency to another. Specialized exchange rates is not a commonly used term.

Question 9

The national government or central bank of country X might take steps to purposefully depreciate their currency because:

Accepted Answer

When a country's currency is depreciated, it becomes cheaper relative to foreign currencies. This makes its exports relatively less expensive, which can increase demand for products from country X among consumers in country Y. As a result, producers in country X are likely to sell more goods to consumers in country Y.

Question 10

If the Central Reserve Bank of Peru (the Pervian central bank) were to take steps to devalue the sol (the Peruvian currency) in foreign currency markets,the Peruvian aggregate demand curve would ____________ in the short run and the Peruvian short-run aggregate supply curve would ____________ in the long run.

Accepted Answer

If the Central Reserve Bank of Peru were to devalue the sol, it would make exports cheaper and more attractive, leading to an increase in demand for Peruvian goods and services in foreign markets. This would shift the Peruvian aggregate demand curve rightward.

However, in the short run, the Peruvian short-run aggregate supply curve would shift leftward because the devaluation of the currency would increase the cost of imported inputs, leading to higher costs for firms and a decrease in their willingness to supply goods and services.

In the long run, firms would adjust to the higher costs by finding alternative sources for inputs and increasing their efficiency, leading to an increase in the potential output and a rightward shift of the Peruvian short-run aggregate supply curve.

Question 11

According to the theory of purchasing power parity,why should identical goods have the same price in different locations?

Accepted Answer

The answer of According to the theory of purchasing power...

Question 12

_____________ exchange rates are exchange rates that are determined by the market forces of supply and demand for currency.

Accepted Answer

Floating exchange rates, also known as market-determined exchange rates, are determined by the market forces of supply and demand for currency. This means that the exchange rate fluctuates based on changes in these market forces, such as changes in interest rates or economic policies.

Question 13

The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West Virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next two questions:

-Suppose the price of a pound of flax seed is currently $1.20 in both Kentucky and West Virginia.Further,suppose there is a decrease in demand for flax seed in Kentucky,but not in West Virginia.Before flax seed sellers are able to adjust the relative quantity of flax seed supplied in the two states,the decrease in demand causes the equilibrium price of a pound of flax seed in Kentucky to change by $0.20.The law of one price suggests that the price of a pound of flax seed will be _____________ in West Virginia after sellers adjust the relative quantity of flax seed supplied in the two states.

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 14

If the theory of purchasing power parity holds,then how much does an Egyptian tapestry cost in the United States if the same tapestry sells for 15,000 Egyptian pounds in Egypt and the exchange rate is $0.14 per Egyptian pound?

Accepted Answer

Purchasing power parity (PPP) states that the exchange rates between two currencies should be equal to the ratio of the price levels of the two countries. Therefore, the price of the Egyptian tapestry in the United States can be calculated as follows:

Price in US dollars = Price in Egyptian pounds x Exchange rate

Price in US dollars = 15000 x 0.14

Price in US dollars = $2,100

Therefore, the answer is B) $2,100.

Question 15

In the short run,____________ would increase domestic aggregate demand in the context of the aggregate supply-aggregate demand model.

Accepted Answer

The answer of In the short run,____________ would increase domestic...

Question 16

The following two graphs depict the equilibrium price of a pound of grapes in California and West Virginia, respectively. Assume the type and quality of the grapes being sold in the two states are identical. Further, assume grape sellers incur zero costs to transport grapes between the two states and there are no other barriers to trade. Use these graphs to answer the next three questions:

-According to the law of one price,the price of grapes will:

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 17

The following graph depicts the market for potatoes in West Virginia. Assume there are similar markets for potatoes in all other U.S. states and that the potatoes sold in all states are identical. Further, assume potato sellers incur zero costs to transport potatoes between any U.S. state and that there are no other barriers to trade. Use this graph to answer the next two questions:
 
-Suppose the equilibrium price of a pound of potatoes in all U.S.states is initially $1.20.Further,suppose there is an increase in potato demand in all U.S.states except West Virginia.This increase in demand causes potato prices in all U.S.states,except West Virginia,to increase.If the law of one price holds,potato sellers will eventually adjust the relative quantity of potatoes they sell in all U.S.states,including West Virginia.After this adjustment:

Accepted Answer

Since there is an increase in demand in all other U.S.states except West Virginia, the price of potatoes will increase in those states due to an increase in demand. As a result of this increase in price, potato sellers in West Virginia will find it profitable to sell more potatoes to those states, leading to an increase in supply in West Virginia. The increase in supply in West Virginia will lead to a decrease in prices in West Virginia. Therefore, the price of a pound of potatoes in all states that share a border with West Virginia will also fall due to the decrease in prices in West Virginia.

Question 18

The following two graphs depict the equilibrium price of a pound of grapes in California and West Virginia, respectively. Assume the type and quality of the grapes being sold in the two states are identical. Further, assume grape sellers incur zero costs to transport grapes between the two states and there are no other barriers to trade. Use these graphs to answer the next three questions:

-According to the law of one price,the supply curve in the California grape market will ______________,and the supply curve in the West Virginia grape market will _____________.

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 19

The following graph depicts the market for potatoes in West Virginia. Assume there are similar markets for potatoes in all other U.S. states and that the potatoes sold in all states are identical. Further, assume potato sellers incur zero costs to transport potatoes between any U.S. state and that there are no other barriers to trade. Use this graph to answer the next two questions:
 
-According to the law of ___________,after accounting for transportation costs and trade barriers,identical goods in different locations must sell for the same price.

Accepted Answer

The law of one price states that identical goods in different locations must sell for the same price after accounting for transportation costs and trade barriers. In this case, since there are no transportation costs or trade barriers, the price of potatoes should be the same in all U.S. states. Therefore, the best choice is C, the law of one price.

Question 20

The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West Virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next two questions:

-Suppose the price of a pound of flax seed in West Virginia is currently $1.00.The law of one price suggests that because the price of a pound of flax seed is $1.20 in Kentucky,the price of a pound of flax seed will be ___________ in West Virginia after sellers adjust their supply in both markets.

Accepted Answer

The law of one price suggests that prices will converge as sellers adjust supply to eliminate price differences, leading to a price between $1.00 and $1.20.

Quiz 20: International Finance

_____________ exchange rates are exchange rates that are fixed at a certain level through the actions of a government.

Pegged exchange rates can also be referred to as ____________ exchange rates.

In order to maintain a pegged exchange rate in China:

If the Bank of Japan (the Japanese central bank) were to take steps to devalue the yen in foreign currency markets,the Japanese __ curve would shift rightward in the short run and the Japanese curve would shift leftward in the long run.

Suppose market forces outside of the control of the Chinese government are causing the price of Chinese yuan in terms of Japanese yen to rise.In order to maintain the current value of the yuan,the Chinese government must:

If the Bank of Japan (the Japanese central bank) were to take steps to devalue the yen in foreign currency markets,____________,which would cause Japanese real gross domestic product (GDP) to increase in the short run.

Floating exchange rates can also be referred to as ___________ exchange rates.

The national government or central bank of country X might take steps to purposefully depreciate their currency because:

If the Central Reserve Bank of Peru (the Pervian central bank) were to take steps to devalue the sol (the Peruvian currency) in foreign currency markets,the Peruvian aggregate demand curve would in the short run and the Peruvian short-run aggregate supply curve would in the long run.

According to the theory of purchasing power parity,why should identical goods have the same price in different locations?

_____________ exchange rates are exchange rates that are determined by the market forces of supply and demand for currency.

If the theory of purchasing power parity holds,then how much does an Egyptian tapestry cost in the United States if the same tapestry sells for 15,000 Egyptian pounds in Egypt and the exchange rate is $0.14 per Egyptian pound?

In the short run,____________ would increase domestic aggregate demand in the context of the aggregate supply-aggregate demand model.