Question 1

Suppose the exchange rate between the dollar and the euro is 2 euros per dollar.The price of a clock in Europe is 20 euros while the price of the same clock in the United States is $5.From these prices and exchange rate,it can be concluded that

Accepted Answer

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

Question 2

According to purchasing power parity,the foreign exchange market will

Accepted Answer

Purchasing power parity theory suggests that differences in inflation rates between countries will result in changes in exchange rates to reflect changes in relative prices. Specifically, currencies in countries with higher inflation rates will be expected to depreciate relative to currencies in countries with lower inflation rates. Therefore, the foreign exchange market will adjust the value of the exchange rate to reflect differing inflation rates between nations.

Question 3

If the price level rises in the United States but not in foreign nations and the current exchange rate does not change,the expected future exchange rate

Accepted Answer

If the price level rises in the United States but not in foreign nations, then American goods become relatively more expensive compared to foreign goods. As a result, people in the United States will buy more foreign goods, and people in foreign countries will buy fewer American goods. This leads to a higher demand for foreign currency and a lower demand for American currency. Thus, the value of the US dollar falls.

Question 4

Suppose that U.S.inflation is 3 percent and Turkish inflation is 70 percent.The effect of this discrepancy on the foreign exchange market is that

Accepted Answer

The higher rate of inflation in Turkey means that the purchasing power of the Turkish lira is declining at a much faster rate compared to the U.S. dollar. This will lead to a decrease in demand for Turkish currency, causing it to depreciate in the foreign exchange market.

Question 5

Suppose that the U.S.interest rate is 5 percent and the Turkish interest rate is 50 percent.The effect of this difference in the foreign exchange market is that

Accepted Answer

The high interest rate in Turkey would attract investors to invest in Turkey, causing an increase in demand for Turkish currency. However, since the supply of Turkish currency remains unchanged, the value of the Turkish currency will increase. Therefore, investors expect the Turkish currency to appreciate against the dollar, leading to a decrease in the exchange rate (i.e., depreciation of the Turkish currency) in the foreign exchange market.

Question 6

The idea that the value of money is equal across countries is known as

Accepted Answer

Purchasing power parity (PPP) is the idea that in the long run, exchange rates should move to equalize the prices of similar goods and services in different countries. This means that the value of money (its purchasing power) should be equal across countries. Interest rate parity (A) refers to the equalization of interest rates between different currencies. The expected profit parity effect (B) is not a recognized economic concept. Exchange rate parity (D) is a broad term that can refer to different concepts including interest rate parity and purchasing power parity.

Question 7

Suppose a deposit in New York earns 6 percent a year and a deposit in London earns 4 percent a year.Interest rate parity holds if the

Accepted Answer

According to interest rate parity, the difference in interest rates between two countries should be equal to the expected change in exchange rates. In this case, the interest rate differential is 2 percent (6 percent minus 4 percent), therefore, for interest rate parity to hold, the U.S. dollar must depreciate by 2 percent to make holding either currency equally profitable. Therefore, option B is the correct answer.

Question 8

Suppose that the price of an identical sport-utility vehicle is $32,000 in U.S.dollars in the United States and $32,000 in Canadian dollars in Canada.Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S.dollar.Based on this information what will happen to the exchange rate between the United States and Canada?

Accepted Answer

The value of the U.S. dollar will fall as U.S. residents purchase SUVs in Canada because the SUV is cheaper in Canada when converted to U.S. dollars ($32,000 CAD = $24,000 USD at $0.75 USD/CAD), leading to an increased demand for Canadian dollars to make purchases, thereby increasing the value of the Canadian dollar relative to the U.S. dollar.

Question 9

Suppose a British bank offers a 3 percent interest rate while a U.S.bank offers a 7 percent interest rate.People must expect the U.S.dollar will

Accepted Answer

If people expect the U.S. dollar to depreciate by 4 percent, it offsets the higher interest rate in the U.S. (7 percent) compared to the UK (3 percent), equalizing the return on investments in both currencies. This is based on the concept of interest rate parity in international finance.

Question 10

Suppose the exchange rate between the U.S.dollar and the Mexican peso was $1 = 5 pesos.A can of Pepsi sells for $2 in Boston and 12 pesos in Mexico City.

Accepted Answer

If purchasing power parity (PPP) prevailed, then the price of the can of Pepsi should be the same in both Boston and Mexico City, converted into the same currency. However, the price of the can of Pepsi in Mexico City, when converted into dollars, is 2.4 times cheaper than in Boston ($2 ÷ 12 pesos = $0.1667 per peso; $0.1667 x 5 pesos = $0.8333). This indicates that PPP does not prevail.

Question 11

In France,the price of a computer is 1,227.6 euros.In Japan,the price of the same computer is 137,920 yen.If a U.S.dollar can buy 1.023 euros or 119.93 yen,then purchasing power parity ________.

Accepted Answer

To determine the purchasing power parity (PPP) between France and Japan, we need to convert the price of the computer in both currencies to a common currency, such as the US dollar.

In France, the computer costs 1,227.6 euros, or $1,195.33 (1,227.6 x 1.023). In Japan, the computer costs 137,920 yen, or $1,150.87 (137,920 ÷ 119.93).

Thus, the PPP exchange rate between France and Japan is $1 = 108.32 yen (1,195.33 ÷ 10,979.20).

However, the actual exchange rate is $1 = 119.93 yen, so the yen is overvalued and the PPP does not hold. Therefore, the computer is cheaper in Japan than in France.

Therefore, the correct answer is C: does not hold and the computer is cheaper in Japan.

Question 12

Suppose a Japanese bank offers a 4 percent interest rate and U.S.banks offer a 2 percent interest rate.People must expect the yen to

Accepted Answer

For investors to be indifferent between investing in Japan or the U.S. despite the higher Japanese interest rate, they must expect the yen to depreciate by the interest rate differential, which is 2 percent.

Question 13

When a nation's currency depreciates,the country might

Accepted Answer

When a nation's currency depreciates, it becomes less valuable in relation to other currencies. This can lead to an increase in the prices of imported goods, which can in turn lead to higher inflation rates. If the inflation rate in the depreciating country exceeds the inflation rates in the countries with which it trades, this can make its exports more expensive and less competitive, further exacerbating the depreciation of its currency.

Question 14

If in Chicago the interest rate is 5 percent a year and in Vancouver it is 4 percent a year,________.

Accepted Answer

The answer of If in Chicago the interest rate is...

Question 15

If the prices in the United States rise faster than those in other countries,

Accepted Answer

If prices in the United States rise faster than those in other countries, it means that the value of a dollar has decreased relative to other currencies. As a result, foreigners will be less willing to hold dollars, causing the demand for the dollar to fall. This decrease in demand for the dollar will lower its exchange rate relative to other currencies. Therefore, the answer is B.

Question 16

Suppose that the price of an identical sport-utility vehicle is $32,000 in U.S.dollars in the United States and $32,000 in Canadian dollars in Canada.Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S.dollar.Does purchasing power parity hold for SUVs between the United States and Canada?

Accepted Answer

The answer of Suppose that the price of an identical...

Question 17

Suppose the exchange rate between the U.S.dollar and the Jamaican dollar was $1 U.S.= $40 Jamaican dollars.A beach towel sells for $20 in Miami and $60 Jamaican in Negril.

Accepted Answer

Purchasing power parity (PPP) suggests that in the absence of transportation costs and barriers to trade, identical goods should sell for the same price when price is expressed in a common currency. Here, the beach towel sells for $20 in Miami and, given the exchange rate, should sell for $800 Jamaican dollars in Negril to maintain PPP. However, it sells for only $60 Jamaican dollars, indicating PPP does not prevail. This discrepancy suggests the Jamaican dollar is undervalued or the U.S. dollar is overvalued, leading to expectations of the Jamaican dollar appreciating and the U.S. dollar depreciating to restore PPP.

Question 18

Suppose that the U.S.interest rate is 5 percent and the Japanese interest rate is 1 percent.The effect of this difference in the foreign exchange market is that

Accepted Answer

When there is a difference in interest rates between two countries, investors tend to move their capital to the country with the higher interest rate, expecting to earn a higher return. However, this movement can lead to expectations of currency value changes. In this case, because the U.S. interest rate is higher than Japan's, investors might move their capital from Japan to the U.S. to gain higher returns. This capital movement can lead to an expectation that the yen will appreciate against the dollar, as demand for yen increases when investors eventually convert their dollars back to yen to repatriate their profits.

Question 19

According to interest rate parity,if the interest rate is 1 percent in the European Union and the euro is expected to appreciate 3 percent,the comparable interest rate in the United States will be

Accepted Answer

According to interest rate parity, the comparable interest rate in the US will be the sum of the domestic interest rate and the expected appreciation of the currency. So, the comparable interest rate in the US will be 4 percent (1% + 3%).

Question 20

According to purchasing power parity,a rise in inflation in the United States.relative to the rest of the world will lead to

Accepted Answer

According to purchasing power parity, an increase in inflation in the United States relative to the rest of the world would cause the exchange rate to depreciate in order to equalize the prices of goods and services. This would make US exports cheaper and imports more expensive, which would, in turn, lead to a balance of payments deficit.

Quiz 9: The Exchange Rate and the Balance of Payments