Question 1

If the price for a Big Mac in the US is $2.00 and the price for a Big Mac in the UK is ₤3,what is the absolute purchasing-power parity equilibrium exchange rate between the dollar and the Euro (using the dollar as the domestic currency)?

Accepted Answer

The absolute purchasing-power parity equilibrium exchange rate between the dollar and the Euro is the rate at which the price of a Big Mac in the US is equal to the price of a Big Mac in the UK. In this case, the price of a Big Mac in the US is $2.00 and the price of a Big Mac in the UK is ₤3. Therefore, the absolute purchasing-power parity equilibrium exchange rate between the dollar and the Euro is ₤3/$2.00 = 1.5.

Question 2

According to the law of one price,in order for commodity arbitrage to equalize the price of traded commodities,it is necessary to assume all of the following except?

Accepted Answer

The law of one price assumes that traders are buying and selling identical products, so there cannot be strong differentiation among the traded goods. A, B, and C are necessary assumptions for the law of one price to hold, as transportation costs, tariffs, and non-tariff barriers can all create price differences between markets.

Question 3

According to the relative purchasing-power parity theory,what is the percentage change in the exchange rate if the price for one unit of corn in the US is $10 in 2003 and $12 in 2004,and in the UK,₤15 in 2003 and ₤20 in 2004?

Accepted Answer

The relative purchasing-power parity (PPP) theory suggests that the percentage change in the exchange rate between two countries' currencies should equal the difference in the inflation rates between those two countries. The inflation rate in the US is (12-10)/10 = 20%, and in the UK, it's (20-15)/15 = 33.3%. The difference is 33.3% - 20% = 13.3%. According to PPP, the US dollar should depreciate by 13.3% relative to the British pound, hence the correct answer is -13.3%.

Question 4

A nation's currency will depreciate if the nation itself experiences which of the following?

Accepted Answer

Economic growth can lead to a currency depreciation if it results in increased imports, leading to a higher demand for foreign currencies.

Question 5

Which of the following will cause a nation's currency to depreciate?

Accepted Answer

An increase in the price level (inflation) will lead to a decrease in the value of a nation's currency, as it will make its exports more expensive and less competitive on the global market.

Question 6

A nation's currency will appreciate if the nation's economy experiences which of the following?

Accepted Answer

An increase in the domestic interest rate can attract foreign capital, leading to higher demand for the nation's currency and causing it to appreciate.

Question 7

Which of the following approaches to exchange rate determination postulates that exchange rates are determined in the process of equilibrating or balancing the demand and supply of financial assets in each country?

Accepted Answer

The asset model of exchange rates postulates that exchange rates are determined in the process of equilibrating or balancing the demand and supply of financial assets in each country, including stocks, bonds, and money market instruments. It suggests that exchange rates are influenced by relative interest rates, inflation rates, and economic growth rates among countries. The trade approach to exchange rates focuses on the trade flows and balances between countries, while the elasticities approach emphasizes the responsiveness of exports and imports to changes in exchange rates. None of the above options provide this specific explanation.

Question 8

Which of the following approaches to exchange rate determination postulates that exchange rates are determined in the process of equilibrating or balancing the demand and supply of financial assets in each country?

Accepted Answer

The portfolio model of exchange rates postulates that exchange rates are determined in the process of equilibrating or balancing the demand and supply of financial assets in each country. The trade approach to exchange rates views exchange rates as being determined by the forces of supply and demand in the foreign exchange market based on trade flows between countries. The elasticities approach emphasizes the role of price elasticities of demand and supply in determining exchange rates.

Question 9

According to the absolute PPP theory,which of the following would occur if the price level in the US decreases relative to the UK,and before this increase the dollar was in an exchange rate equilibrium with the sterling?

Accepted Answer

According to the absolute Purchasing Power Parity (PPP) theory, if the price level in the US decreases relative to the UK, the US dollar will appreciate relative to the sterling. This is because lower prices in the US make its goods and services cheaper compared to those in the UK, increasing demand for dollars to buy these cheaper US goods and services.

Question 10

Which approach to exchange rate determination stresses the role of trade in the determination of exchange rates?

Accepted Answer

The elasticities approach to exchange rates stresses the role of trade in the determination of exchange rates by analyzing the responsiveness of imports and exports to changes in exchange rates.

Question 11

Which of the following would occur if labor productivity in the UK increased relative to that in the US,and before this increase the dollar was in an exchange rate equilibrium with the sterling?

Accepted Answer

An increase in labor productivity in the UK relative to that in the US means that goods and services produced in the UK become relatively cheaper. This will cause an increase in demand for pounds by the US, as they would need more pounds to purchase goods and services from the UK. Therefore, choice B is the correct answer. Choice A is incorrect as an increase in demand for pounds will lead to an increase in imports from the UK, not a decrease. Choice C and D are also incorrect as they are not relevant to the scenario presented in the question.

Question 12

The trade or elasticities approach is more useful in explaining exchange rates during which time frame?

Accepted Answer

The trade or elasticities approach is more useful in explaining exchange rates in the long run as it considers the effects of trade balances and price elasticities of imports and exports, which take time to adjust.

Question 13

Which of the following is true about PPP theory?

Accepted Answer

PPP theory, or purchasing power parity theory, states that the change in the exchange rate between two currencies is proportional to the change in the ratio in the two countries' general price levels. This means that if one country's prices increase at a faster rate than the other country, its currency will weaken in relation to the other country's currency. Conversely, if one country's prices increase at a slower rate than the other country, its currency will strengthen in relation to the other country's currency.

Question 14

From which of the following does a nation's demand for foreign exchange arise?

Accepted Answer

The demand for foreign exchange in a nation primarily arises from the need to import goods and services from other nations. This is because, to pay for these imports, domestic entities must exchange their local currency for the currency of the exporting country.

Question 15

Which of the following approaches to exchange rate determination stresses the role of the flow of goods and services in the determination of exchange rates?

Accepted Answer

The trade approach to exchange rates emphasizes the role of the flow of goods and services in the determination of exchange rates. The portfolio and asset models of exchange rates emphasize the role of financial factors, such as interest rates and inflation.

Question 16

Which of the following states that the equilibrium exchange rate is equal to the ratio of price levels in the two nations?

Accepted Answer

The absolute purchasing-power parity theory states that the equilibrium exchange rate is equal to the ratio of price levels in the two nations. The relative theory of exchange rate determination and the relative purchasing-power parity theory consider other factors besides price levels, while the absolute theory of exchange rate determination does not take into account price levels at all.

Question 17

Which of the following would occur if labor productivity in the UK increased relative to that in the US,and before this increase the dollar was in an exchange rate equilibrium with the sterling?

Accepted Answer

If labor productivity in the UK increases relative to the US, it means that goods and services produced per hour of work in the UK will increase compared to the US. This will make UK goods relatively cheaper and more competitive, and US consumers will demand more pounds to buy UK goods. As a result, the demand for pounds will increase, and the exchange rate will adjust to reflect this new demand. Therefore, the US will now demand more pounds.

Question 18

According to the absolute PPP theory,which of the following would occur if the price level in the US increases relative to the UK,and before this increase the dollar was in exchange rate equilibrium with the sterling?

Accepted Answer

According to absolute PPP theory, if the price level in one country increases relative to another country, the currency of the country with the higher price level will depreciate, making its imports cheaper. Therefore, if the price level in the US increases relative to the UK, the dollar will depreciate, making imports from the UK cheaper for the US.

Question 19

From which of the following does a nation's demand for foreign exchange arise?

Accepted Answer

A nation's demand for foreign exchange arises when speculators expect the foreign currency to appreciate, as they will buy more of it in anticipation of future gains.

Question 20

Which of the following states that the percentage change in the exchange rate is equal to the difference in the percentage change in the price level in the two countries?

Accepted Answer

The statement in question is the definition of the relative purchasing-power parity theory. The other choices are incorrect because they do not specifically address the relationship between exchange rates and price levels in different countries.

Quiz 12: Exchange Rate Determination

If the price for a Big Mac in the US is $2.00 and the price for a Big Mac in the UK is ₤3,what is the absolute purchasing-power parity equilibrium exchange rate between the dollar and the Euro (using the dollar as the domestic currency) ?

According to the law of one price,in order for commodity arbitrage to equalize the price of traded commodities,it is necessary to assume all of the following except?

According to the relative purchasing-power parity theory,what is the percentage change in the exchange rate if the price for one unit of corn in the US is $10 in 2003 and $12 in 2004,and in the UK,₤15 in 2003 and ₤20 in 2004?

A nation's currency will depreciate if the nation itself experiences which of the following?

Which of the following will cause a nation's currency to depreciate?

A nation's currency will appreciate if the nation's economy experiences which of the following?

Which of the following approaches to exchange rate determination postulates that exchange rates are determined in the process of equilibrating or balancing the demand and supply of financial assets in each country?

Which of the following approaches to exchange rate determination postulates that exchange rates are determined in the process of equilibrating or balancing the demand and supply of financial assets in each country?

According to the absolute PPP theory,which of the following would occur if the price level in the US decreases relative to the UK,and before this increase the dollar was in an exchange rate equilibrium with the sterling?

Which approach to exchange rate determination stresses the role of trade in the determination of exchange rates?

Which of the following would occur if labor productivity in the UK increased relative to that in the US,and before this increase the dollar was in an exchange rate equilibrium with the sterling?

The trade or elasticities approach is more useful in explaining exchange rates during which time frame?

Which of the following is true about PPP theory?

From which of the following does a nation's demand for foreign exchange arise?

Which of the following approaches to exchange rate determination stresses the role of the flow of goods and services in the determination of exchange rates?

Which of the following states that the equilibrium exchange rate is equal to the ratio of price levels in the two nations?

Which of the following would occur if labor productivity in the UK increased relative to that in the US,and before this increase the dollar was in an exchange rate equilibrium with the sterling?

According to the absolute PPP theory,which of the following would occur if the price level in the US increases relative to the UK,and before this increase the dollar was in exchange rate equilibrium with the sterling?

From which of the following does a nation's demand for foreign exchange arise?

Which of the following states that the percentage change in the exchange rate is equal to the difference in the percentage change in the price level in the two countries?