Question 1

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

Accepted Answer

An increase in productivity typically leads to lower production costs and more competitive pricing, which can boost the demand for a country's products relative to those from less productive economies.

Question 2

How will the exchange rate (foreign currency per dollar)respond to a decrease in the relative rate of productivity growth in the United States in the long run?

Accepted Answer

A decrease in the relative rate of productivity growth in the United States means that the US economy is becoming less efficient compared to other countries. This will lower the demand for US goods and services, and therefore decrease the demand for the US dollar, resulting in a fall in the exchange rate. This effect will be seen in the long run once the markets have fully adjusted to the new information about the US's productivity growth.

Question 3

Figure 19-6 
-Refer to Figure 19-6.Which of the following would cause the change depicted in the figure above?

Accepted Answer

The answer of Figure 19-6 
-Refer to Figure 19-6.Which of...

Question 4

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.In January 2017,The Economist reported that the average price of a Big Mac in the United States was $4.93.In India,the average price of a Big Mac at that time was 178 rupees.What is the "implied exchange rate" between the rupee and the dollar?

Accepted Answer

The implied exchange rate is calculated by dividing the price of a Big Mac in one country by the price in another country. So, 178 rupees / $4.93 = approximately 36.11 rupees per dollar.

Question 5

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 suggests that exchange rates will adjust in the long run to equalize the purchasing power of different currencies. Therefore, if the purchasing power of a dollar is less than the purchasing power of the euro, in the long run, exchange rates will move to equalize their purchasing power. In the short run, other factors may influence exchange rates, such as interest rates, but in the long run, PPP should hold.

Question 6

How will the exchange rate (foreign currency per dollar)respond to an increase in preference for imported goods in the United States in the long run?

Accepted Answer

An increase in preference for imported goods in the United States will lead to an increase in demand for foreign currencies needed to purchase these goods, causing an increase in the supply of US dollars in foreign exchange markets. This increase in supply would lead to a fall in the value of the US dollar relative to foreign currencies in the long run, making imports more expensive and domestic goods relatively cheaper.

Question 7

Figure 19-6 
-Refer to Figure 19-6.Which of the following would cause the change depicted in the figure above?

Accepted Answer

The change in the figure shows a shift of the demand curve for U.S.-raised chickens to the left, indicating a decrease in demand. This could be caused by a possibility of diseased poultry in the United States, which would decrease Mexican consumers' preferences for U.S.-raised chickens relative to Mexican-raised chickens. The other choices do not directly relate to the shift in the demand curve for U.S.-raised chickens depicted in the figure.

Question 8

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

Accepted Answer

Purchasing power parity (PPP) is a theory that suggests that in the long run, exchange rates between countries should adjust to equalize the prices of a similar basket of goods and services, also known as the relative purchasing power of currencies across countries. Therefore, the correct choice is D, as it directly relates to the concept of PPP. Choices A, B, and C, are not directly related to PPP.

Question 9

If inflation in Mexico is lower than it is in the United States

Accepted Answer

If inflation in Mexico is lower than in the United States, the value of the peso will increase relative to the dollar in the long run, as goods and services in Mexico become relatively cheaper than those in the United States, increasing demand for pesos to buy those cheaper goods and services.

Question 10

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

Accepted Answer

If the demand for American goods decreases relative to goods from other countries, then fewer dollars will be needed to purchase those goods, leading to a decrease in demand for the dollar and ultimately decreasing its value in the long run.

Question 11

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

If the dollar is undervalued, it is cheaper than it should be, leading to increased demand for the dollar and increased supply of the rand as people exchange more rand for dollars.

Question 12

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 states that in the long run, the exchange rate between two currencies will be equal to the ratio of their purchasing power. Therefore, in this scenario, the exchange rate between the dollar and the pound will adjust to reflect the difference in purchasing power between the two currencies, resulting in an exchange rate that reflects their relative purchasing power. Options A and B are incorrect as they assume that exchange rate changes are the only way that purchasing power parity can be achieved, which is not necessarily true.

Question 13

A Big Mac costs $4.93 in the United States and 9.6 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,purchasing power parity predicts that

Accepted Answer

Purchasing power parity (PPP) is a theory that suggests exchange rates should adjust to reflect the relative prices of identical goods in different countries. In this case, a Big Mac costs $4.93 in the US and 9.6 zlotys in Poland, which implies that the PPP exchange rate should be 9.6/4.93 = 1.947 zlotys per dollar. However, the actual exchange rate is 3 zlotys per dollar, which means that the zloty is overvalued and the dollar is undervalued according to PPP. Therefore, option B is the best choice.

Question 14

All of the following are considered among the four most important determinants in explaining exchange rate fluctuations in the long run except

Accepted Answer

Interest rates are more commonly associated with short-term exchange rate fluctuations rather than long-term determinants. Long-term exchange rate movements are more influenced by factors such as productivity, trade policies (tariffs and quotas), and preferences for goods, which affect the trade balance and investment flows over time.

Question 15

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

Accepted Answer

While all the options provide reasons as to why purchasing power parity cannot completely explain long-run fluctuations in exchange rates, option D is incorrect as most countries do not have completely free markets with no government regulation. Therefore, option D cannot be used to explain the limitation of purchasing power parity.

Question 16

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 lower than the relative purchasing power, it means that goods are cheaper in the United States compared to 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, taking advantage of the price difference. This is known as arbitrage, and option A correctly identifies this opportunity. Option B and C are incorrect as they contradict each other, and the value of the dollar does not necessarily have to fall or be overvalued in this scenario. Option D is incorrect as there are clearly arbitrage opportunities present.

Question 17

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 actual exchange rate is lower than the implied rate, suggesting the dollar is undervalued. This would likely lead to an increase in demand for dollars as people seek to take advantage of the cheaper dollar.

Question 18

A Big Mac costs $4.93 in the United States and 9.6 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:

9.6 zlotys / 3 zlotys per dollar = $3.20

So a Big Mac in Poland costs $3.20.

Question 19

A Big Mac costs $4.93 in the United States and 9.6 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 dollar is overvalued and is expected to depreciate.

Question 20

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.

Quiz 19: The International Financial System

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

How will the exchange rate (foreign currency per dollar) respond to a decrease in the relative rate of productivity growth in the United States in the long run?

Figure 19-6 -Refer to Figure 19-6.Which of the following would cause the change depicted in the figure above?

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

How will the exchange rate (foreign currency per dollar) respond to an increase in preference for imported goods in the United States in the long run?

Figure 19-6 -Refer to Figure 19-6.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 inflation in Mexico is lower than it is in the United States

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

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?

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

A Big Mac costs $4.93 in the United States and 9.6 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,purchasing power parity predicts that

All of the following are considered among the four most important determinants in explaining exchange rate fluctuations in the long run except

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

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 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?

A Big Mac costs $4.93 in the United States and 9.6 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,what is the dollar cost of a Big Mac in Poland?

A Big Mac costs $4.93 in the United States and 9.6 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,purchasing power parity predicts that

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?