Question 1

Gold is $420 per ounce in Canada and 2100 pesos per ounce in Mexico.According to the purchasing power parity theory,if oil is $25 a barrel in Canada,then it is _________ pesos in Mexico.

Accepted Answer

According to the purchasing power parity theory, the exchange rate between two countries should be such that the purchasing power of each currency is equal. Therefore, we can use the ratio of the price of gold in Canada and Mexico to calculate the exchange rate between the two countries:
$420 per ounce / 2100 pesos per ounce = 0.2 dollars per peso
Now, if oil is $25 per barrel in Canada, it should cost:
$25 per barrel / $0.2 per peso = 125 pesos per barrel
Therefore, the answer is C) 125.

Question 2

Between 1973 and 1999,annual inflation in developing nations that export mainly manufactured goods averaged 23%,while inflation averaged 59% in countries that export mainly raw materials.Other things being equal,the PPP theory would predict that,in the long run,the currencies of the raw materials exporting countries should have

Accepted Answer

The Purchasing Power Parity (PPP) theory suggests that in the long run, currencies of countries with higher inflation rates should depreciate relative to countries with lower inflation rates. Therefore, based on the information given in the question, we can predict that the currencies of raw materials exporting countries (with an average inflation rate of 59%) should have depreciated relative to currencies of manufactured goods exporting countries (with an average inflation rate of 23%). Thus, the best answer is C - depreciated relative to the currencies of countries exporting manufactured goods.

Question 3

If a certain automotive part can be purchased in Mexico for 58 pesos or in Canada for $5.20 and if the nominal exchange rate is 11 pesos per Canadian dollar,then the real exchange rate for the automotive part is equal to

Accepted Answer

The answer of If a certain automotive part can be...

Question 4

If a certain automotive part can be purchased in Mexico for 58 pesos or in Canada for $6.25 and if the nominal exchange rate is 11 pesos per Canadian dollar,then the real exchange rate for the automotive part is equal to

Accepted Answer

To find the real exchange rate, we need to compare the prices of the automotive part in two different countries using the nominal exchange rate.

Let's convert the Canadian price to pesos using the exchange rate:

$6.25 * 11 pesos/USD = 68.75 pesos

Now we can compare the prices:

Mexico price = 58 pesos
Canada price = 68.75 pesos

To find the real exchange rate, we need to divide the Canada price by the Mexico price:

68.75 pesos / 58 pesos = 1.1879

Rounded to two decimal places, the real exchange rate is 1.19. This means that it is more expensive to buy the automotive part in Canada than in Mexico, because the real exchange rate is higher than the nominal exchange rate.

Question 5

In comparison to a fixed exchange rate system,a flexible exchange rate system

Accepted Answer

In a flexible exchange rate system, changes in the monetary policy of a country will have a direct impact on its exchange rate, as the rate is determined by market forces. This means that the impact of monetary policy on aggregate demand is stronger in a flexible exchange rate system compared to a fixed exchange rate system, where the exchange rate is fixed and not affected by market forces.

Question 6

The law of one price states that if transportation costs are relatively small,then the

Accepted Answer

The law of one price states that in a competitive market where transportation costs are relatively small, the price of an identical internationally traded commodity should be the same in all locations. This is because competition will drive prices towards equilibrium.

Question 7

Purchasing power parity is the theory that nominal exchange rates are determined

Accepted Answer

Purchasing power parity (PPP) suggests that exchange rates adjust so that identical goods cost the same in different countries, which aligns with the law of one price.

Question 8

Gold is $420 per ounce in Canada.The exchange rate between Canada and Mexico is $0.20 per Mexican peso.According to the purchasing power parity theory,the price of gold in Mexico is _________ pesos per ounce.

Accepted Answer

The answer of Gold is $420 per ounce in Canada.The...

Question 9

The price of gold is 300 U.S.dollars per ounce in New York and 435 Canadian dollars per ounce in Toronto.If the law of one price holds for gold,the nominal exchange rate is __________ Canadian dollars per U.S.dollar.

Accepted Answer

According to the law of one price, the price of the same product should be the same in different markets when expressed in a common currency. In this case, the price of gold is 300 USD per ounce in New York and 435 Canadian dollars per ounce in Toronto. To compare the prices, we need to convert the Canadian price into USD using the nominal exchange rate.

435 Canadian dollars = 435/100 = 4.35 Canadian dollars per USD (assuming the USD is the base currency)
The nominal exchange rate is the price of one currency in terms of another currency. Therefore, we need to take the reciprocal of the above rate to get the USD per Canadian dollar rate, which is:

1/4.35 = 0.2299 (rounded to four decimal places)

Converting the Toronto price of 435 Canadian dollars per ounce into USD, we get:

435/100 x 0.2299 = 1 USD = 0.6898, which is rounded to two decimal places as 0.69

Therefore, the nominal exchange rate is 1 USD = 1/0.6898 = 1.4490 Canadian dollars, which is rounded to two decimal places as 1.45. Hence, the correct answer is D) 1.45.

Question 10

If a certain automotive part can be purchased in Mexico for 58 pesos or in Canada for $6.25 and if the nominal exchange rate is 10 pesos per Canadian dollar,then the automotive part

Accepted Answer

The answer of If a certain automotive part can be...

Question 11

The price of gold is US$300 per ounce in New York and 2550 pesos per ounce in Mexico City.If the law of one price holds for gold,the nominal exchange rate is __________ pesos per U.S.dollar.

Accepted Answer

According to the law of one price, the prices of the same commodity should be the same in different markets after accounting for the exchange rate. In this case, if the price of gold is $300 per ounce in New York and 2550 pesos per ounce in Mexico City, then the exchange rate should be calculated as follows:

300 dollars per ounce = x pesos per ounce

x = 300 * 2550 pesos per ounce

x = 765,000 pesos per ounce

Therefore, the nominal exchange rate is 765,000 / 90,000 = 8.5 pesos per U.S. dollar.

Question 12

The proposition that if transportation costs are relatively small,then the price of an internationally traded commodity must be the same in all locations,is called

Accepted Answer

The proposition that if transportation costs are relatively small, then the price of an internationally traded commodity must be the same in all locations is called the law of one price. This suggests that in an efficient market, there should not be any arbitrage opportunities from buying low and selling high across different markets.

Question 13

If a certain automotive part can be purchased in Mexico for 61 pesos or in Canada for $6.25 and if the nominal exchange rate is 11 pesos per Canadian dollar,then the automotive part

Accepted Answer

The answer of If a certain automotive part can be...

Question 14

The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination

Accepted Answer

Purchasing power parity theory suggests that exchange rates should adjust over time to equalize the prices of identical goods and services in different countries, taking into account the exchange rate. This is more likely to hold true in the long run between countries with very different inflation rates, as opposed to the short run or when there are significant volumes of non-traded goods and services. The theory also assumes that there are no barriers to trade and that goods are freely traded. Additionally, the theory may not hold true for international trade in non-standardized goods and services, and is not applicable when there are fixed exchange rates.

Question 15

Falling interest rates _____________ the return on Canadian assets,making them ___________ attractive relative to foreign assets.This ____________ the value of the dollar.

Accepted Answer

Falling interest rates decrease the return on Canadian assets, making them less attractive relative to foreign assets. This decreases the value of the dollar.

Question 16

Gold is 2,100 pesos per ounce in Mexico.The exchange rate between Canada and Mexico is 5 Mexican pesos per dollar.According to the purchasing power parity theory,the price of gold in Canada is _________ dollars per ounce.

Accepted Answer

The answer of Gold is 2,100 pesos per ounce in...

Question 17

Based on the purchasing power parity theory,currencies of countries with higher inflation relative to other countries will tend to ____________ in the long run.

Accepted Answer

According to purchasing power parity theory, currencies of countries with higher inflation relative to other countries will tend to depreciate in the long run. This is because inflation erodes the value of a currency, making it less valuable compared to currencies of countries with lower inflation rates. As a result, goods and services in the high inflation country will become relatively more expensive, leading to a decrease in demand for its currency and a fall in its exchange rate.

Question 18

Based on the purchasing power parity theory,currencies of countries with lower inflation relative to other countries will tend to _____________ in the long run.

Accepted Answer

According to the purchasing power parity theory, currencies of countries with lower inflation relative to other countries will tend to appreciate in the long run because their purchasing power will increase relative to other currencies, making their goods and services more expensive for foreigners to purchase. This should lead to an increase in demand for the currency and cause its value to appreciate.

Question 19

The theory that nominal exchange rates are determined as necessary for the law of one price to hold is called

Accepted Answer

The theory that nominal exchange rates are determined as necessary for the law of one price to hold is called purchasing power parity (PPP). PPP states that in the absence of trade barriers and transaction costs, identical goods in different countries should have the same price when expressed in the same currency. The exchange rate required to equate the price of a basket of goods between two countries is the PPP exchange rate.

Question 20

Gold is $420 per ounce in Canada and 2100 pesos per ounce in Mexico.According to the purchasing power parity theory,if oil is $20 a barrel in Canada,then it is _________ pesos in Mexico.

Accepted Answer

To solve this problem, we will use the principle of purchasing power parity (PPP), which states that exchange rates should adjust to make the price of an identical basket of goods and services equal across two countries. In this case, we are given the price of gold in Canada and Mexico, and we need to find the price of oil in Mexico, given the price of oil in Canada.

Let P be the price of oil in pesos in Mexico. Then, according to PPP:

$$ \frac{P}{2100} = \frac{20}{420} $$

Cross-multiplying and simplifying, we get:

$$ P = \frac{2100 	imes 20}{420} = 100 $$

Therefore, the price of oil in pesos in Mexico is 100. The correct answer is C).

Quiz 13: Savings, Capital Formation and Comparative Economic Growth

Gold is $420 per ounce in Canada and 2100 pesos per ounce in Mexico.According to the purchasing power parity theory,if oil is $25 a barrel in Canada,then it is _________ pesos in Mexico.

If a certain automotive part can be purchased in Mexico for 58 pesos or in Canada for $5.20 and if the nominal exchange rate is 11 pesos per Canadian dollar,then the real exchange rate for the automotive part is equal to

If a certain automotive part can be purchased in Mexico for 58 pesos or in Canada for $6.25 and if the nominal exchange rate is 11 pesos per Canadian dollar,then the real exchange rate for the automotive part is equal to

In comparison to a fixed exchange rate system,a flexible exchange rate system

The law of one price states that if transportation costs are relatively small,then the

Purchasing power parity is the theory that nominal exchange rates are determined

Gold is $420 per ounce in Canada.The exchange rate between Canada and Mexico is $0.20 per Mexican peso.According to the purchasing power parity theory,the price of gold in Mexico is _________ pesos per ounce.

The price of gold is 300 U.S.dollars per ounce in New York and 435 Canadian dollars per ounce in Toronto.If the law of one price holds for gold,the nominal exchange rate is __________ Canadian dollars per U.S.dollar.

If a certain automotive part can be purchased in Mexico for 58 pesos or in Canada for $6.25 and if the nominal exchange rate is 10 pesos per Canadian dollar,then the automotive part

The price of gold is US$300 per ounce in New York and 2550 pesos per ounce in Mexico City.If the law of one price holds for gold,the nominal exchange rate is __________ pesos per U.S.dollar.

The proposition that if transportation costs are relatively small,then the price of an internationally traded commodity must be the same in all locations,is called

If a certain automotive part can be purchased in Mexico for 61 pesos or in Canada for $6.25 and if the nominal exchange rate is 11 pesos per Canadian dollar,then the automotive part

The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination

Falling interest rates _______ the return on Canadian assets,making them _ attractive relative to foreign assets.This ________ the value of the dollar.

Gold is 2,100 pesos per ounce in Mexico.The exchange rate between Canada and Mexico is 5 Mexican pesos per dollar.According to the purchasing power parity theory,the price of gold in Canada is _________ dollars per ounce.

Based on the purchasing power parity theory,currencies of countries with higher inflation relative to other countries will tend to ____________ in the long run.

Based on the purchasing power parity theory,currencies of countries with lower inflation relative to other countries will tend to _____________ in the long run.

The theory that nominal exchange rates are determined as necessary for the law of one price to hold is called

Gold is $420 per ounce in Canada and 2100 pesos per ounce in Mexico.According to the purchasing power parity theory,if oil is $20 a barrel in Canada,then it is _________ pesos in Mexico.