Question 1

If a dollar buys more potatoes in the U.S. than in France, then

Accepted Answer

If a dollar buys more potatoes in the U.S. than in France, it implies that the price level of potatoes in the U.S. is lower than in France. Therefore, the dollar is relatively stronger than the euro, which means the real exchange rate is less than 1. Consequently, a profit might be made by buying potatoes in the U.S. and selling them in France.

Question 2

If purchasing power parity holds, the price level in the U.S. is 220, and the price level in Japan is 200, which of the following is true?

Accepted Answer

The answer of If purchasing power parity holds, the price...

Question 3

If purchasing power parity holds, a bushel of rice costs $10 in the U.S., and the nominal exchange rate is 40 Thai baht per dollar, what is the price of rice in Thailand?

Accepted Answer

The answer of If purchasing power parity holds, a bushel...

Question 4

The nominal exchange rate is .80 euros per U.S. dollar and a basket of goods in France costs 1,000 euros while the same basket costs $800 in the U.S. The nominal exchange rate is 1.2 Australian dollars per U.S. dollar and a basket of goods in Australia costs 960 Australian dollars while the same basket costs $800 in the U.S.. Which country has purchasing-power parity with the U.S.?

Accepted Answer

The answer of The nominal exchange rate is .80 euros...

Question 5

An MP3 player in Singapore costs 200 Singaporean dollars. In the U.S. it costs 100 US dollars. Which of the following is correct?

Accepted Answer

The answer of An MP3 player in Singapore costs 200...

Question 6

The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing power parity to hold?

Accepted Answer

The answer of The nominal exchange rate is about 2...

Question 7

The ability to profit by purchasing wheat in the U.S. and selling it in China implies that the

Accepted Answer

The answer of The ability to profit by purchasing wheat...

Question 8

If a lobster in Maine costs $10 and that the same type of lobster in Massachusetts costs $30, then people could make a profit by

Accepted Answer

The answer of If a lobster in Maine costs $10...

Question 9

If the dollar buys fewer bananas in Guatemala than in Honduras, then traders could make a profit by

Accepted Answer

The answer of If the dollar buys fewer bananas in...

Question 10

If a dollar buys more rice in the China. than in the U.S., then

Accepted Answer

If a dollar buys more rice in China than in the U.S., it means that the price of rice in China is lower than in the U.S. Therefore, the real exchange rate is greater than 1. Buying rice in China and selling it in the U.S. will result in a profit due to the price difference. Thus, option B is the correct answer.

Question 11

If purchasing power parity holds, the price level in the U.S. is 120, and the price level in Canada is 140, which of the following is true?

Accepted Answer

The answer of If purchasing power parity holds, the price...

Question 12

A basket of goods costs $800 in the U.S. In Belgium the basket of goods costs 800 euros and the exchange rate is .80 euros per U.S. dollar. In Japan the basket of goods costs 720,000 yen and the exchange rate is 900 yen per dollar. Which country has purchasing-power parity with the U.S.?

Accepted Answer

The answer of A basket of goods costs $800 in...

Question 13

If the exchange rate is 70 Bangladesh taka per dollar and a bushel of rice costs 200 taka in Bangladesh and $3 in the United States, then the real exchange rate is

Accepted Answer

To calculate the real exchange rate, we divide the price of rice in Bangladesh (200 taka) by the price of rice in the US ($3) and multiply by the exchange rate (70 taka per dollar).

Real exchange rate = (200/3) x 70 = 466.67

A real exchange rate greater than one means that the same good is more expensive in one country than in the other. In this case, rice is more expensive in Bangladesh compared to the US. Arbitrageurs could profit by buying rice in Bangladesh (where it is cheaper) and selling it in the US (where it is more expensive). Therefore, option B is the correct choice.

Question 14

According to purchasing power parity, if two countries have the same price level because they have the same prices for all goods and services, then which of the following would equal 1?

Accepted Answer

According to purchasing power parity, the real exchange rate equals 1 because both countries have the same price level. The nominal exchange rate will also be equal to 1 because there is no need for any adjustment. Therefore, both the real and nominal exchange rates will be equal to 1.

Question 15

If the dollar buys less cotton in Egypt than in the United States, then traders could make a profit by

Accepted Answer

The answer of If the dollar buys less cotton in...

Question 16

The price of a basket of goods is $2000 in the U.S. If purchasing power parity holds, and the dollar buys two units of some country's currency, then how many units of foreign currency does the same basket of goods cost in that country?

Accepted Answer

The answer of The price of a basket of goods...

Question 17

A haircut costs 200 pesos in Mexico and $20 in the U.S. The exchange rate is 12.5 pesos per dollar. The real exchange rate is

Accepted Answer

To compare the cost of haircuts in Mexico and the U.S., we need to convert Mexican pesos to U.S. dollars using the exchange rate.

200 pesos ÷ 12.5 pesos per dollar = $16

So the price of a haircut in Mexico is $16. Since $16 is less than $20, haircuts in Mexico are cheaper than in the U.S.

To calculate the real exchange rate, we need to divide the price level in Mexico (in pesos) by the price level in the U.S. (in dollars) and then divide by the exchange rate.

Price level in Mexico (in pesos): 200 pesos 
Price level in the U.S. (in dollars): $20 
Exchange rate: 12.5 pesos per dollar

(200 / 12.5) / 20 = 0.8

The real exchange rate is 0.8, which is less than one. This means that haircuts in Mexico are cheaper than in the U.S. even when we take into account the exchange rate.

Question 18

It costs $80 for a dental appointment in the U.S. It costs 600 Egyptian pounds for the same appointment in Egypt. The nominal exchange rate is 7 pounds per dollar. The real exchange rate is

Accepted Answer

To calculate the real exchange rate, we need to divide the cost of a dental appointment in the U.S. by the cost of the same appointment in Egypt, and then multiply by the nominal exchange rate:

Real exchange rate = ($80 / 600 EGP) x 7 EGP per dollar = 0.93

Since the real exchange rate is less than one, it means that dental appointments in Egypt are more expensive than in the U.S.

Question 19

According to purchasing-power parity, if a basket of goods costs $100 in the U.S. and the same basket costs 800 pesos in Argentina, then what is the nominal exchange rate?

Accepted Answer

The answer of According to purchasing-power parity, if a basket...

Question 20

According to purchasing power parity, if the same basket of goods costs $100 in the U.S. and 50 pounds in Britain, then what is the nominal exchange rate?

Accepted Answer

According to purchasing power parity, the same basket of goods should cost the same amount when converted to a common currency. Therefore, if the basket of goods costs $100 in the U.S. and 50 pounds in Britain, then the nominal exchange rate should be such that $100 is equal to 50 pounds. Thus, the nominal exchange rate would be 1/2 pound per dollar.

Quiz 13: Open-Economy Macroeconomic Models