Question 1

If the exchange rate between the Canadian dollar and the Mexican peso (pesos per Canadian 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 between the Canadian dollar and the Mexican peso is less than the relative purchasing power between the two countries, it means that goods are cheaper in Canada than they are in Mexico. This creates opportunities for profit by purchasing goods in Canada and then selling them in Mexico at a higher price. This is known as arbitrage.

Question 2

If inflation in Mexico is lower than it is in Canada,

Accepted Answer

If inflation is lower in Mexico than in Canada, the value of the peso will increase relative to the Canadian dollar in the long run, as goods and services in Mexico become relatively cheaper than those in Canada.

Question 3

If,at the current exchange rate between the Canadian dollar and the South African rand of 6.92 rand per Canadian dollar,the Canadian 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 4

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

Accepted Answer

Purchasing power parity suggests that in the long run, exchange rates will adjust to equalize the purchasing power of different currencies. Therefore, if the purchasing power of the Canadian dollar is less than the purchasing power of the euro, exchange rates will eventually adjust such that the Canadian dollar buys more goods and services. This will happen in the long run, as exchange rates may be volatile in the short run.

Question 5

Figure 15.6  Alt text for Figure 15.6: In figure 15.6,a graph illustrates the quantity of euros traded against the exchange rate.
Long description for Figure 15.6: The x-axis is labelled,quantity of euros traded per day.The y-axis is labelled,exchange rate,Canadian dollar against the euro,with values 1.00 and 1.05 dollars marked.A straight line supply curve,S slopes up from the bottom left corner to the top right corner.2 parallel straight line demand curves,D1 and D2 slope down form the top left corner to the bottom right corner.Curve D2 is plotted to the left of curve D1.The change from curve D1 to curve D2 is indicated by a left pointing arrow.Curve S intersects curve D1 at point A,with a y-axis value of 1.05.Curve S intersects curve D2 at point B,with a y-axis value of 1.00.Points A and B are connected to their corresponding x and y-axis values with dotted lines.The difference between the y-axis values is indicated with a down pointing arrow.
-Refer to Figure 15.6.Which of the following would cause the change depicted in the figure above?

Accepted Answer

The answer of Figure 15.6  Alt text for Figure...

Question 6

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

Accepted Answer

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

Question 7

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

Accepted Answer

The answer of A Big Mac costs $4.07 in Canada...

Question 8

Figure 15.6  Alt text for Figure 15.6: In figure 15.6,a graph illustrates the quantity of euros traded against the exchange rate.
Long description for Figure 15.6: The x-axis is labelled,quantity of euros traded per day.The y-axis is labelled,exchange rate,Canadian dollar against the euro,with values 1.00 and 1.05 dollars marked.A straight line supply curve,S slopes up from the bottom left corner to the top right corner.2 parallel straight line demand curves,D1 and D2 slope down form the top left corner to the bottom right corner.Curve D2 is plotted to the left of curve D1.The change from curve D1 to curve D2 is indicated by a left pointing arrow.Curve S intersects curve D1 at point A,with a y-axis value of 1.05.Curve S intersects curve D2 at point B,with a y-axis value of 1.00.Points A and B are connected to their corresponding x and y-axis values with dotted lines.The difference between the y-axis values is indicated with a down pointing arrow.
-Refer to Figure 15.6.Which of the following would cause the change depicted in the figure above?

Accepted Answer

An increase in the price level of goods produced in the EU relative to the price level of goods produced in Canada would cause a decrease in demand for EU goods, which would shift the demand curve to the left (from D1 to D2) and result in a lower exchange rate (from point A to point B).

Question 9

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

Accepted Answer

If there is an increase in preference for imported goods in Canada, it means Canadians will be demanding more foreign currencies to purchase these goods, which will increase the demand for foreign currencies and decrease the demand for Canadian dollars. As a result, the exchange rate will fall in the long run.

Question 10

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

Accepted Answer

Purchasing power parity is the theory that in the long run, exchange rates will adjust to equalize the purchasing power of different currencies in different countries. This means that if the same basket of goods costs more in one country than another, the theory suggests that the currency of the country with lower prices will appreciate against the currency of the country with higher prices. This condition is known as relative price levels, and its equalization leads to purchasing power parity. Therefore, the best choice is D, which refers to the equalization of the relative purchasing power of currencies across countries.

Question 11

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

Accepted Answer

First, we need to convert the Polish zlotys to Canadian dollars using the exchange rate:

8.63 zlotys ÷ 3 zlotys per Canadian dollar = $2.88

Now that we have the price of a Big Mac in Canadian dollars in Poland ($2.88), we can compare it to the Canadian price of $4.07. Since the Polish price is lower, we can infer that the Canadian dollar cost of a Big Mac in Poland is less than $4.07.

Therefore, the best choice is C, $2.88.

Question 12

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

Accepted Answer

While A, B, and C are valid reasons why purchasing power parity may not completely explain long-run fluctuations in exchange rates, the statement "most countries have free markets with little, if any, government regulation" is not accurate. Many countries have varying degrees of government intervention in their economies, which can greatly impact exchange rates. Therefore, the statement does not provide a valid explanation.

Question 13

If the purchasing power of the Canadian 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) theory predicts that in the long run, the exchange rate between two currencies will adjust so that a basket of goods will cost the same in both currencies, reflecting the relative purchasing power across the currencies.

Question 14

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

Accepted Answer

Using the exchange rate of 3 zlotys per Canadian dollar, we can convert the cost of a Big Mac in Poland to Canadian dollars: 
8.63 zlotys / 3 zlotys per Canadian dollar = $2.88 CAD 
According to purchasing power parity, identical goods should sell for the same price in different countries, after adjusting for exchange rates. However, a Big Mac costs $4.07 in Canada, while it only costs $2.88 CAD when using the exchange rate to convert the price from Poland. This suggests that the Canadian dollar is overvalued and that a Big Mac is more expensive in Canada than it should be according to purchasing power parity.

Question 15

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

Accepted Answer

If the South African rand is considered undervalued, it means that it is cheaper than it perhaps should be. This makes South African goods and services cheaper for foreign buyers, increasing the demand for the rand as more people want to buy it to pay for those goods and services. Simultaneously, because the rand is cheap, people holding Canadian dollars might find it attractive to exchange them for rands to take advantage of the favorable rate, thus increasing the supply of Canadian dollars in the market.

Question 16

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.If the average price of a Big Mac in Canada was $4.07.In Japan,the average price of a Big Mac was 320 yen.What is the "implied exchange rate" between the yen and the Canadian 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, 320 yen / $4.07 = 78.62 yen per Canadian dollar.

Question 17

Figure 15.7  Alt text for Figure 15.7: In figure 15.7,a graph illustrates the quantity of dollars traded against the exchange rate.
Long description for Figure 15.7: The x-axis is labelled,quantity of dollars traded per day.The y-axis is labelled,exchange rate,peso to Canadian dollar,with values 1.00 and 1.05 dollars marked.A straight line supply curve slopes up from the bottom left corner to the top right corner.2 parallel straight line demand curves,D1 and D2 slope down form the top left corner to the bottom right corner.Curve D2 is plotted to the left of curve D1.The change from curve D1 to curve D2 is indicated by a left pointing arrow.Curve S intersects curve D1 at a point with a y-axis value of 13.5.Curve S intersects curve D2 at a point with a y-axis value of 13.00.Both points of intersections are connected to their corresponding y-axis values with dotted lines.The difference between the y-axis values is indicated with a down pointing arrow.
-Refer to Figure 15.7.Which of the following would cause the change depicted in the figure above?

Accepted Answer

The answer of Figure 15.7  Alt text for Figure...

Question 18

Figure 15.7  Alt text for Figure 15.7: In figure 15.7,a graph illustrates the quantity of dollars traded against the exchange rate.
Long description for Figure 15.7: The x-axis is labelled,quantity of dollars traded per day.The y-axis is labelled,exchange rate,peso to Canadian dollar,with values 1.00 and 1.05 dollars marked.A straight line supply curve slopes up from the bottom left corner to the top right corner.2 parallel straight line demand curves,D1 and D2 slope down form the top left corner to the bottom right corner.Curve D2 is plotted to the left of curve D1.The change from curve D1 to curve D2 is indicated by a left pointing arrow.Curve S intersects curve D1 at a point with a y-axis value of 13.5.Curve S intersects curve D2 at a point with a y-axis value of 13.00.Both points of intersections are connected to their corresponding y-axis values with dotted lines.The difference between the y-axis values is indicated with a down pointing arrow.
-Refer to Figure 15.7.Which of the following would cause the change depicted in the figure above?

Accepted Answer

The answer of Figure 15.7  Alt text for Figure...

Question 19

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

Accepted Answer

If the demand for Canadian goods decreases relative to goods from other countries, this will decrease the overall demand for the Canadian dollar, lowering its value in the long run. The other options would either have no effect on the value of the Canadian dollar or could possibly increase its value.

Question 20

By 2015,________ members of the European Union were using the euro as their currency.

Accepted Answer

As of 2015, 19 members of the European Union (EU) were using the euro as their currency. The other EU countries still had their own national currencies.

Quiz 15: The International Financial System

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