Question 1

If, at the current exchange rate between the dollar and the Norwegian kroner of 5.78 kroner per dollar, the dollar is "overvalued," 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...

Question 2

If the GDP deflator in Canada is 114, and the GDP deflator in Ukraine is 142, which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)

Accepted Answer

Purchasing power parity (PPP) theory predicts exchange rate changes based on relative price levels between two countries. Without information on the exchange rate between the Canadian dollar and the Ukrainian hryvnia, it's impossible to determine if one currency is overvalued or undervalued relative to the other, hence no prediction about the demand or supply changes for the dollar can be made solely based on the GDP deflators.

Question 3

Which of the following would increase the value of the dollar in the long run?

Accepted Answer

An increase in the demand for Canadian goods relative to goods from other countries would increase the value of the dollar in the long run as it would imply an increase in demand for the currency to purchase those goods. The increased demand would also indicate higher confidence in the Canadian economy which would attract foreign investment.

Answer: C 
 A decrease in Canadian tariffs on foreign goods would increase the value of the dollar in the long run by encouraging more international trade which could lead to an increase in the demand for the currency. Additionally, a decrease in tariffs would make Canadian goods more competitive, attracting more foreign investment and boosting the overall economy.

Question 4

If the average productivity of Canadian firms is rising more quickly than the average productivity of Indian firms, which of the following would you expect to see? (India's currency is the rupee.)

Accepted Answer

When the productivity of Canadian firms increases more quickly than that of Indian firms, Canadian goods become relatively more attractive due to their higher quality, innovation, or lower prices resulting from increased efficiency. This makes consumers more likely to choose Canadian products over Indian products, leading to a decrease in the quantity demanded of Indian products relative to Canadian products.

Question 5

If relative purchasing power between Canada and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is "overvalued"?

Accepted Answer

The dollar is considered "overvalued" when the actual exchange rate makes one dollar worth more foreign currency than the relative purchasing power parity suggests. In this case, if 1 dollar can get you 4 pesos instead of the 3.22 pesos indicated by purchasing power, the dollar is overvalued.

Question 6

If inflation in Russia is higher than it is in Canada

Accepted Answer

If inflation is higher in Russia than in Canada, the purchasing power of the ruble decreases relative to the dollar, making the dollar more valuable in the long run.

Question 7

Which of the following would prevent the purchasing power of currencies being equal in the long run?

Accepted Answer

The answer of Which of the following would prevent the...

Question 8

If the GDP deflator in Canada is 114, and the GDP deflator in Ukraine is 142, which of the following exchange rates would the theory of purchasing power parity predict in the long run? (The Ukrainian currency is the hryvnia.)

Accepted Answer

According to the theory of purchasing power parity (PPP), the exchange rate between two countries should be proportionate to the ratio of their price levels or GDP deflators. 
Therefore, the exchange rate between the Canadian dollar and the Ukrainian hryvnia can be calculated as follows:

Exchange rate = Canadian GDP deflator / Ukrainian GDP deflator

Exchange rate = 114/142 = 0.802 
Therefore, the PPP predicts that one Canadian dollar should buy 0.802 Ukrainian hryvnias in the long run. 
Choice C, which is 1.25 hryvnias per dollar, is the closest to this predicted exchange rate.

Question 9

Suppose the GDP deflator in Canada is 125 and the GDP deflator in Japan is 100.Also assume Canada has trade barriers on Japanese goods in the form of quotas.What does this imply about the exchange rate of yen per dollar under the theory of purchasing power parity in the long run?

Accepted Answer

The answer of Suppose the GDP deflator in Canada is...

Question 10

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

Accepted Answer

Purchasing power parity (PPP) suggests that in the long run, exchange rates should adjust so that identical goods in different countries have the same price when expressed in a common currency. In this case, a Big Mac costs $4.00 in Canada and 9.00 reals in Brazil. Given the exchange rate of 2 reals per dollar, the Big Mac in Brazil costs 9 / 2 = $4.50 when converted to dollars, which is more expensive than in Canada. This discrepancy suggests that the real is overvalued or the dollar is undervalued. To correct this, the value of the dollar should appreciate. This appreciation can occur as the supply of dollars falls in the long run, because as dollars become more valuable, fewer are needed to purchase the same amount of goods, leading to a decrease in the supply of dollars in the foreign exchange market.

Question 11

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, what is the dollar cost of a Big Mac in Brazil?

Accepted Answer

First, we need to convert the price in Brazil from reals to dollars by dividing it by the exchange rate:
9.00 reals / 2 reals per dollar = $4.50
Therefore, the dollar cost of a Big Mac in Brazil is $4.50. So, the best choice is C.

Question 12

Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?

Accepted Answer

Purchasing power parity assumes that all goods and services are internationally traded and that there are no barriers or transaction costs to trade, which is not always the case in reality. Some goods and services are only produced and consumed domestically, which can affect exchange rates in the long run.

Question 13

The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory.In July 2011, the Economist reported that the average price of a Big Mac in the U.S.was $4.07.In Mexico, the average price of a Big Mac at that time was 32 pesos.What is the "implied exchange rate" between the peso and the dollar?

Accepted Answer

The answer of The "Big Mac Theory of Exchange Rates"...

Question 14

If the implied exchange rate between Big Mac prices in Canada and Poland is 2.13 zlotys per dollar, but the actual exchange rate between Canada and Poland is 3.16 zlotys per dollar, which of the following would you expect to see?

Accepted Answer

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

Question 15

Figure 15.1  Alt text for Figure 15.1: In figure 15.1, a graph illustrates the quantity of euros traded against the exchange rate.
Long description for Figure 15.1: The x-axis is labelled, quantity of euros traded per day.The y-axis is labelled, exchange rate, Canadian dollar against euro, with values 1.00 and 1.05 marked.An upward sloping supply curve intersects the downward sloping demand curves D1 and D2.The intersection point of S and D1, A, corresponds to the point Canadian dollar 1.05 of the y-axis, and is displayed by a dotted line.The intersection point of S and D2, B, corresponds to the point 1.00 of the y-axis, also displayed by a dotted line.A down arrow is shown between the 2 dotted lines.A bold left arrow points from D1 to D2.Two dotted vertical lines from the intersection points also meet the x-axis.
-Refer to Figure 15.1.Which of the following would cause the change depicted in the figure above?

Accepted Answer

The answer of Figure 15.1  Alt text for Figure...

Question 16

How will the exchange rate (foreign currency per dollar)respond to an increase in the relative rate of productivity growth in Canada in the long run?

Accepted Answer

An increase in the relative rate of productivity growth in Canada would lead to an increase in the demand for Canadian goods and services, which would subsequently increase demand for Canadian dollars. This increased demand for Canadian dollars would cause the exchange rate to rise in the long run, as foreign currency would become relatively cheaper compared to the Canadian dollar.

Question 17

Which of the following is a reason Greece has had a slow recovery from the financial crisis of 2007-2009?

Accepted Answer

Greece's membership in the European Union's currency union (Eurozone) means the country cannot devalue its currency to increase its competitiveness and boost exports. This has contributed to slow economic growth and recovery.

Question 18

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

Accepted Answer

The answer of A Big Mac costs $4.00 in Canada...

Question 19

Figure 15.2  Alt text for Figure 15.2: In figure 15.2, a graph illustrates the quantity of dollars traded against the exchange rate.
Long description for Figure 15.2: The x-axis is labelled, quantity of dollars traded per day.The y-axis is labelled, exchange rate, yuan against the Canadian dollar, with values 8.08 yaun and 8.10 yaun marked.Supply curve S is a straight line which slopes up from the bottom left corner to the top right corner.2 parallel straight line demand curves, D1 and D2 slope down from the top left corner to the bottom right corner, with curve D2 plotted to the right of curve D1.Curve S intersects curve D1 at point A, with a y-axis value of 8.08 yaun.Curve S intersects curve D2 at point B, with a y-axis value of 8.10 yuan.Points A and B are connected to their corresponding values on the y-axis with dotted lines.The difference between the y-axis values is indicated with a up pointing arrow.
-Refer to Figure 15.2.Which of the following would cause the change depicted in the figure above?

Accepted Answer

A decrease in Canadian consumers' preferences for Chinese goods relative to Canadian goods would shift the demand curve for Chinese goods to the left, which is likely the change depicted in the figure.

Question 20

Because the value of the euro is determined by factors that affect the entire eurozone, during the recession of 2007-2009, individual countries using the euro

Accepted Answer

Because individual countries using the euro cannot adjust their own exchange rates, they are unable to have their exchange rates depreciate in order to increase competitiveness during a recession. This can make it more difficult for them to rebound after a recession.

Quiz 15: The International Financial System

If, at the current exchange rate between the dollar and the Norwegian kroner of 5.78 kroner per dollar, the dollar is "overvalued," how do you expect demand and supply in the foreign exchange markets to respond?

If the GDP deflator in Canada is 114, and the GDP deflator in Ukraine is 142, which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)

Which of the following would increase the value of the dollar in the long run?

If the average productivity of Canadian firms is rising more quickly than the average productivity of Indian firms, which of the following would you expect to see? (India's currency is the rupee.)

If relative purchasing power between Canada and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is "overvalued"?

If inflation in Russia is higher than it is in Canada

Which of the following would prevent the purchasing power of currencies being equal in the long run?

If the GDP deflator in Canada is 114, and the GDP deflator in Ukraine is 142, which of the following exchange rates would the theory of purchasing power parity predict in the long run? (The Ukrainian currency is the hryvnia.)

Suppose the GDP deflator in Canada is 125 and the GDP deflator in Japan is 100.Also assume Canada has trade barriers on Japanese goods in the form of quotas.What does this imply about the exchange rate of yen per dollar under the theory of purchasing power parity in the long run?

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, what is the dollar cost of a Big Mac in Brazil?

Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?

If the implied exchange rate between Big Mac prices in Canada and Poland is 2.13 zlotys per dollar, but the actual exchange rate between Canada and Poland is 3.16 zlotys per dollar, which of the following would you expect to see?

How will the exchange rate (foreign currency per dollar) respond to an increase in the relative rate of productivity growth in Canada in the long run?

Which of the following is a reason Greece has had a slow recovery from the financial crisis of 2007-2009?

A Big Mac costs $4.00 in Canada and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

Because the value of the euro is determined by factors that affect the entire eurozone, during the recession of 2007-2009, individual countries using the euro