Question 1

Table 31-2
 
-Refer to Table 31-2. For which countries  in the table does purchasing-power parity with the U.S. hold?
A) Germany and Japan
B) Japan and Saudi Arabia
C) Britain and Venezuela
D) Germany

Accepted Answer

The answer of Table 31-2
 
-Refer to Table 31-2. For...

Question 2

Suppose a Starbucks tall latte cost $4.00 in the United States and 2.50 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $4.50 in the United States and 3.60 euros in the Euro area. If the nominal exchange rate is .80 euros per dollar, which goods have prices that are consistent with purchasing-power parity?
A) both the tall latte and the Big Mac
B) the tall latte but not the Big Mac
C) the Big Mac but not the tall latte
D) neither the Big Mac nor the tall latte

Accepted Answer

The Big Mac price in euros (3.60) divided by the exchange rate (0.80) equals $4.50, which matches the US price, indicating PPP. The tall latte does not match when converted.

Question 3

If the exchange rate is 8 Moroccan dirhams per U.S. dollars, a crate of oranges costs 400 dirhams in the Moroccan capital of Rabat, and a similar crate of oranges in Miami sells for $55 dollars, then
A) the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in the U.S. and selling them in Morocco.
B) the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in Morocco and selling them in the U.S.
C) the real exchange rate is less than one and arbitrageurs could profit by buying oranges in the U.S. and selling them in Morocco.
D) the real exchange rate is less than one and arbitrageurs could profit by buying oranges in Morocco and selling them in the U.S.

Accepted Answer

To determine if arbitrage is possible, we need to compare the cost of buying and transporting oranges between the two countries. One crate of oranges costs 400 dirhams, which is equivalent to $50 using the exchange rate of 8 dirhams per dollar. Therefore, it is cheaper to buy oranges in Morocco than in the U.S. as they cost $55 in Miami. An arbitrageur could purchase oranges in Morocco for $50, transport them to the U.S., and sell them for $55, making a profit. Therefore, arbitrageurs could profit by buying oranges in Morocco and selling them in the U.S.

Question 4

If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity?
A) P = e/P*
B) 1 = e/P*
C) e = P*/P
D) None of the above is correct.

Accepted Answer

Purchasing-power parity states that the nominal exchange rate (e) between two countries' currencies should be equal to the ratio of the foreign prices (P*) and domestic prices (P). Therefore, the correct equation is e = P*/P.

Question 5

If the exchange rate is 60 Indian rupees per dollar and a bushel of rice costs 200 rupees in India and $3 in the U.S., then the real exchange rate is
A) greater than one and arbitrageurs could profit by buying rice in the U.S. and selling it in India.
B) greater than one and arbitrageurs could profit by buying rice in India and selling it in the U.S..
C) less than one and arbitrageurs could profit by buying rice in the U.S. and selling it in India.
D) less than one and arbitrageurs could profit by buying rice in India and selling it in the U.S..

Accepted Answer

The answer of If the exchange rate is 60 Indian...

Question 6

Table 31-2
 
-Refer to Table 31-2. In real terms, U.S. goods are less expensive than goods in which countries?
A) Britain and Japan
B) Germany and Saudi Arabia
C) Germany and Venezuela
D) Japan

Accepted Answer

The answer of Table 31-2
 
-Refer to Table 31-2. In...

Question 7

Table 31-2
 
-Refer to Table 31-2. Which currencies is/are have a higher nominal exchange rate than predicted by the doctrine of purchasing-power parity?
A) the bolivar and the pound
B) the euro and the riyal
C) the yen
D) the pound

Accepted Answer

The answer of Table 31-2
 
-Refer to Table 31-2. Which...

Question 8

Suppose a Starbucks tall latte cost $4.00 in the United States and 3.20 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $4.40 in the United States and 5.50 euros in Euro area. If the nominal exchange rate is .80 euros per dollar, the prices of which goods have prices that are consistent with purchasing-power parity?
A) both the tall latte and the Big Mac
B) the tall latte but not the Big Mac
C) the Big Mac but not the tall latte
D) neither the tall latte nor the Big Mac

Accepted Answer

To determine which goods have prices that are consistent with purchasing-power parity, we need to convert the prices from one currency to the other using the nominal exchange rate:

- Tall Latte:
$4.00 = 4.00/0.80 = 5.00 euros
This means that the price of the latte in the US is higher than in the Euro area (3.20 euros), which violates purchasing-power parity. Therefore, choice A is incorrect.

- Big Mac:
$4.40 = 4.40/0.80 = 5.50 euros
The price of the Big Mac in the US is the same as in the Euro area, which is consistent with purchasing-power parity. Therefore, choice B is correct.

Therefore, the answer is B: the tall latte but not the Big Mac.

Question 9

According to the theory of purchasing-power parity, the nominal exchange rate between two countries must reflect the differing
A) price levels in those countries.
B) resource endowments in those countries.
C) income levels in those countries.
D) standards of living between those countries.

Accepted Answer

The theory of purchasing-power parity states that the nominal exchange rate between two countries must reflect the differing price levels in those countries. This means that if one country has a higher price level compared to another, its currency should depreciate so that the goods and services become relatively cheaper and more competitive, equalizing the purchasing power between the two currencies.

Question 10

A pair of jeans cost $25 in the U.S. and 1600 dinar in Algeria. If the nominal exchange rate is 75 dinar per U.S. dollar, then the real exchange rate is
A) more than one, so a profit could be made by buying jeans in Algeria and selling them in the U.S.
B) more than one, so a profit could be made by buying jeans in the U.S. and selling them in Algeria.
C) less than one, so a profit could be made by buying jeans in Algeria and selling them in the U.S.
D) less than one, so a profit could be made by buying jeans in the U.S. and selling them in Algeria.

Accepted Answer

The answer of A pair of jeans cost $25 in...

Question 11

If a Starbucks tall latte cost $3.20 in the United States and 3 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?
A) .938 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area.
B) .938 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S. then in the Euro area.
C) 1.067 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area.
D) 1.067 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S. than in the Euro area.

Accepted Answer

Purchasing-power parity implies that the exchange rate should be such that the cost of a good is the same in both countries. In this case, the cost of a tall latte is $3.20 in the US and 3 euros in the Euro area. Therefore, the exchange rate should be 3 euros / $3.20 = 0.938 euros per dollar. If the exchange rate is less than this, it will cost more dollars to buy a tall latte in the US than in the Euro area.

Question 12

If purchasing-power parity holds, when a country's central bank increases the money supply, its
A) price level rises and its currency appreciates relative to other currencies in the world.
B) price level rises and its currency depreciates relative to other currencies in the world.
C) price level falls and its currency appreciates relative to other currencies in the world.
D) price level falls and its currency depreciates relative to other currencies in the world.

Accepted Answer

According to purchasing-power parity, an increase in a country's money supply will lead to a rise in its price level. As the country's goods become relatively more expensive, demand for its currency will decrease, resulting in a depreciation of its currency relative to other currencies in the world. Therefore, the correct choice is B.

Question 13

Suppose a McDonalds Big Mac cost $4.40 in the United States and 3.30 euros in the euro area and 5.72 Australian dollars in Australia. If exchange rates are .75 euros per dollar and 1.3 Australian dollars per dollar, where does purchasing-power parity hold?
A) both the euro area and Australia
B) the euro area but not Australia
C) Australia but not the euro area
D) neither the euro area nor Australia

Accepted Answer

Purchasing-power parity holds in the euro area because the price of a Big Mac in euros (3.30) is equal to the price of a Big Mac in dollars (4.40) multiplied by the exchange rate (0.75). Purchasing-power parity also holds in Australia because the price of a Big Mac in Australian dollars (5.72) is equal to the price of a Big Mac in dollars (4.40) multiplied by the exchange rate (1.3).

Question 14

Suppose a Starbucks tall latte cost $4.00 in the United States, 5.00 euros in the euro area and $2.50 Australian dollars in Australia. Nominal exchange rates are .80 euros per dollar and 1.4 Australian dollars per U.S. dollar. Where does purchasing-power parity hold?
A) both the euro area and Australia
B) the euro area but not Australia
C) Australia but not the euro area
D) neither the euro area or Australia

Accepted Answer

To test for purchasing-power parity, we need to compare the prices of the same good in different countries after adjusting for exchange rates. We can use the U.S. price as the base because the U.S. dollar is the world's dominant currency.

Using the nominal exchange rates given, we convert the euro and Australian prices to U.S. dollars:

- 5.00 euros / 0.80 euros per dollar = $6.25 
- $2.50 Australian dollars / 1.4 Australian dollars per dollar = $1.79

Now we can compare the prices:

- U.S. price = $4.00 
- Euro price (PPP) = $6.25 
- Australian price (PPP) = $1.79

The euro price is higher than the U.S. price, indicating that the euro is overvalued relative to the dollar. The Australian price is lower than the U.S. price, indicating that the Australian dollar is undervalued relative to the dollar.

Therefore, purchasing-power parity holds in Australia but not in the euro area. Choice B is the correct answer.

Question 15

Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U.S. currency must rise if the price levels) in
A) foreign countries rise.
B) the United States rises.
C) all countries rise.
D) all countries fall.

Accepted Answer

Purchasing-power parity states that the exchange rate between two currencies should be equal to the ratio of the price levels in the two countries. Therefore, if the price level in a foreign country rises, the nominal exchange rate of their currency per unit of U.S. currency must also rise to maintain parity.

Question 16

Table 31-2
 
-Refer to Table 31-2. Which currencies’ is/are have a nominal exchange rate less than that predicted by the doctrine of purchasing-power parity?
A) the euro and the riyal
B) the pound and the yen
C) the bolivar
D) the yen

Accepted Answer

The answer of Table 31-2
 
-Refer to Table 31-2. Which...

Question 17

Table 31-2
 
-Refer to Table 31-2. In real terms, U.S. goods are more expensive than goods in which countries?
A) Britain
B) Germany and Japan
C) Japan
D) Germany and Venezuela

Accepted Answer

The answer of Table 31-2
 
-Refer to Table 31-2. In...

Question 18

If a McDonald's Big Mac cost $4.50 in the United States and 3.60 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?
A) 1.25 If the value is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro area.
B) 1.25 If the value is less than this, it costs fewer dollars to buy a Big Mac in the U.S. then in the Euro area.
C) .80 If the value is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro area.
D) .80 If the value is less than this, it costs fewer dollars to buy a Big Mac in the U.S. than in the Euro area.

Accepted Answer

The answer of If a McDonald's Big Mac cost $4.50...

Question 19

A Starbucks Grande Latte costs $3.75 in the U.S. and 28 yuan in China. The nominal exchange rate is 6.75 yuan per dollar. The real exchange rate is
A) 1.106. If purchasing-power parity held the nominal exchange rate would be higher.
B) 1.106. If purchasing-power parity held the nominal exchange rate would be lower.
C) .904. If purchasing power parity held the nominal exchange rate would be higher.
D) .904. If purchasing-power parity held the nominal exchange rate would be lower.

Accepted Answer

To calculate the real exchange rate, we need to divide the price of a Starbucks Grande Latte in the U.S. by the price in China and multiply it by the exchange rate:

Real exchange rate = (U.S. price/China price) x nominal exchange rate
Real exchange rate = ($3.75/28 yuan) x 6.75 yuan/dollar
Real exchange rate = 0.536 x 6.75
Real exchange rate = 3.623 yuan/dollar

This means that it costs 3.623 yuan to buy one U.S. dollar's worth of goods in China. Since the nominal exchange rate is 6.75 yuan/dollar, this suggests that the yuan is undervalued relative to the dollar, i.e. it takes fewer yuan to buy the same amount of goods as in the U.S. Thus, if purchasing power parity held, the nominal exchange rate would be higher (i.e. it would take more yuan to buy one U.S. dollar). Therefore, the answer is C - .904, and not 1.106.

Question 20

A Big Mac in Japan costs 400 yen while it costs $4.50 in the U.S.. The nominal exchange rate is 100 yen per dollar. Which of the following would both make the real exchange rate move towards purchasing-power parity?
A) the price of Big Macs in the U.S. falls, the nominal exchange rate falls
B) the price of Big Macs in the U.S. falls, the nominal exchange rate rises
C) the price of Big Macs in the U.S. rises, the nominal exchange rate falls
D) the price of Big Macs in the U.S. rises, the nominal exchange rate rises

Accepted Answer

According to the theory of purchasing-power parity, the real exchange rate is determined by the relative prices of similar goods in different countries. Here, the price of a Big Mac in Japan is lower than in the U.S., which means that the yen is undervalued relative to the dollar. To move towards purchasing-power parity, the real exchange rate needs to adjust so that the yen appreciates relative to the dollar. One way this can happen is if the price of Big Macs in the U.S. falls, which makes the U.S. dollar relatively weaker. If the nominal exchange rate also falls, it would reinforce the adjustment in the real exchange rate. Therefore, option A is the correct answer. Option B would lead to the opposite effect, where the real exchange rate diverges from purchasing-power parity. Option C or D might also lead to exchange rate adjustments, but they would depend on other factors affecting the exchange rate besides Big Mac prices.

Quiz 13: Open-Economy Macroeconomics: Basic Concepts

Table 31-2 -Refer to Table 31-2. For which countries in the table does purchasing-power parity with the U.S. hold?

If the exchange rate is 8 Moroccan dirhams per U.S. dollars, a crate of oranges costs 400 dirhams in the Moroccan capital of Rabat, and a similar crate of oranges in Miami sells for $55 dollars, then

If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity?

If the exchange rate is 60 Indian rupees per dollar and a bushel of rice costs 200 rupees in India and $3 in the U.S., then the real exchange rate is

Table 31-2 -Refer to Table 31-2. In real terms, U.S. goods are less expensive than goods in which countries?

Table 31-2 -Refer to Table 31-2. Which currencies is/are have a higher nominal exchange rate than predicted by the doctrine of purchasing-power parity?

According to the theory of purchasing-power parity, the nominal exchange rate between two countries must reflect the differing

A pair of jeans cost $25 in the U.S. and 1600 dinar in Algeria. If the nominal exchange rate is 75 dinar per U.S. dollar, then the real exchange rate is

If a Starbucks tall latte cost $3.20 in the United States and 3 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?

If purchasing-power parity holds, when a country's central bank increases the money supply, its

Suppose a McDonalds Big Mac cost $4.40 in the United States and 3.30 euros in the euro area and 5.72 Australian dollars in Australia. If exchange rates are .75 euros per dollar and 1.3 Australian dollars per dollar, where does purchasing-power parity hold?

Suppose a Starbucks tall latte cost $4.00 in the United States, 5.00 euros in the euro area and $2.50 Australian dollars in Australia. Nominal exchange rates are .80 euros per dollar and 1.4 Australian dollars per U.S. dollar. Where does purchasing-power parity hold?

Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U.S. currency must rise if the price levels) in

Table 31-2 -Refer to Table 31-2. Which currencies’ is/are have a nominal exchange rate less than that predicted by the doctrine of purchasing-power parity?

Table 31-2 -Refer to Table 31-2. In real terms, U.S. goods are more expensive than goods in which countries?

If a McDonald's Big Mac cost $4.50 in the United States and 3.60 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?

A Starbucks Grande Latte costs $3.75 in the U.S. and 28 yuan in China. The nominal exchange rate is 6.75 yuan per dollar. The real exchange rate is

A Big Mac in Japan costs 400 yen while it costs $4.50 in the U.S.. The nominal exchange rate is 100 yen per dollar. Which of the following would both make the real exchange rate move towards purchasing-power parity?