Question 1

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

Accepted Answer

According to purchasing-power parity, if a country's central bank increases its money supply, its price level should rise relative to other countries' price levels. This means that its currency will be worth less in relation to other currencies, leading to currency depreciation. Therefore, choice B is the correct answer.

Question 2

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

Accepted Answer

To compare the prices of oranges in Morocco and the US, we need to convert both prices into the same currency. Converting the price of 400 dirhams in Morocco, we get:

400 dirhams / 8 dirhams per dollar = $50

So, a crate of oranges costs $50 in Morocco. Since a similar crate of oranges sells for $55 in the US, the exchange rate implied by the prices is:

Exchange rate = $55 / $50 = 1.1

Since this exchange rate is greater than the actual exchange rate of 8 dirhams per dollar, arbitrageurs could profit by buying oranges in Morocco and selling them in the US, thereby benefiting from the difference in prices. Hence, option B is correct.

Question 3

Table 31-2
 
-Refer to Table 31-2. Which currencyies) isare) have a nominal exchange rate less than that predicted by the doctrine of purchasing-power parity?

Accepted Answer

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

Question 4

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?

Accepted Answer

The answer of Suppose a McDonalds Big Mac cost $4.40...

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

Accepted Answer

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

Question 6

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

Accepted Answer

According to purchasing-power parity, the nominal exchange rate must adjust to reflect changes in the relative price levels between countries. Therefore, if the price level in a foreign country rises relative to the United States, the nominal exchange rate must rise (i.e. more units of US currency are needed to purchase the same amount of foreign currency) to maintain parity in purchasing power between the two currencies.

Question 7

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

Accepted Answer

Purchasing-power parity with the U.S. holds for a country when the exchange rate between the two currencies reflects the relative price levels of the two countries. In other words, the exchange rate should reflect what it costs to buy goods and services in each country. Looking at the table, we can see that the GDP per capita (a measure of income) is higher in the U.S. compared to all the other countries listed. However, the price level (which measures how expensive goods and services are) is higher in Britain and Venezuela compared to the U.S. This means that the exchange rate between the U.S. dollar and the currencies of Britain and Venezuela should be higher than what it currently is if purchasing-power parity is to hold. On the other hand, both the income and price level in Japan and Saudi Arabia are lower than that of the U.S. This means that the exchange rate between the U.S. dollar and the currencies of these countries should be lower than what it currently is if purchasing-power parity is to hold. Therefore, the only country/countries for which purchasing-power parity holds is/are Britain and Venezuela.

Question 8

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

Accepted Answer

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

Question 9

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

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. In other words, if Country A has a higher price level than Country B, the exchange rate should reflect that difference in order for goods to have equal purchasing power.

Question 10

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?

Accepted Answer

To determine if prices are consistent with purchasing-power parity, we need to compare the prices using the exchange rate.

For the Starbucks tall latte: 
4.00 USD = 3.20 euros 
1 USD = 0.80 euros

Using the exchange rate, 4.00 USD is equivalent to 3.20 euros. This means the prices are consistent with purchasing-power parity.

For the McDonald's Big Mac: 
4.40 USD = 5.50 euros 
1 USD = 1.25 euros

Using the exchange rate, 4.40 USD is equivalent to 5.50 euros. This means the price of the Big Mac is not consistent with purchasing-power parity because it is more expensive in the Euro area than in the United States.

Therefore, only the tall latte has prices that are consistent with purchasing-power parity.

Question 11

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?

Accepted Answer

Purchasing-power parity (PPP) suggests that equivalent goods should have the same price in different countries once the exchange rate has been taken into account. We can calculate the theoretical price of a tall latte in euros and Australian dollars by dividing the U.S. price by the corresponding exchange rate.

In the case of the euro area, the theoretical price of a tall latte is $4.00/.80 euros per dollar = 5.00 euros, which is the actual price. Therefore, PPP holds in the euro area.

In the case of Australia, the theoretical price of a tall latte is $4.00/1.4 Australian dollars per U.S. dollar = 2.86 Australian dollars. However, the actual price is $2.50 Australian dollars, which is lower than the theoretical price. Therefore, PPP does not hold in Australia.

Thus, the correct choice is B, PPP holds in the euro area but not in Australia.

Question 12

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

Accepted Answer

Purchasing-power parity implies that the exchange rate (e) should equal the ratio of foreign prices (P*) to domestic prices (P), which can be rearranged to e = P*/P.

Question 13

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?

Accepted Answer

The answer of Suppose a Starbucks tall latte cost $4.00...

Question 14

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

Accepted Answer

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

Question 15

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?

Accepted Answer

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

Question 16

Table 31-2
 
-Refer to Table 31-2. Which currencyies) isare) have a higher nominal exchange rate than predicted by the doctrine of purchasing-power parity?

Accepted Answer

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

Question 17

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?

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.

Question 18

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

Accepted Answer

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

Question 19

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?

Accepted Answer

The answer of If a Starbucks tall latte cost $3.20...

Question 20

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

Accepted Answer

The real exchange rate is calculated by dividing the nominal exchange rate by the ratio of the foreign price level to the domestic price level. Using the prices given, the domestic price of the latte is $3.75 and the foreign price is 28 yuan. Therefore, the ratio of the foreign price level to the domestic price level is (28/3.75) = 7.47. Dividing the nominal exchange rate (6.75 yuan per dollar) by this ratio gives a real exchange rate of approximately 0.904, meaning that the Chinese yuan is undervalued relative to the U.S. dollar (i.e. you get more Chinese yuan for each dollar than you should if purchasing-power parity held). Therefore, if purchasing-power parity held, the nominal exchange rate should be higher than 6.75 yuan per dollar. The correct answer is C.

Quiz 18: Open-Economy Macroeconomics: Basic Concepts