Question 1

The following two graphs depict the equilibrium price of a pound of grapes in California and West Virginia, respectively. Assume the type and quality of the grapes being sold in the two states are identical. Further, assume grape sellers incur zero costs to transport grapes between the two states and there are no other barriers to trade. Use these graphs to answer the next  questions:  
-Which of the following pairs of prices is consistent with the law of one price?

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 2

According to the theory of purchasing power parity, why should identical goods have the same price in different locations?

Accepted Answer

The answer of According to the theory of purchasing power...

Question 3

The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West Virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next questions:  
-Suppose the price of a pound of flax seed in West Virginia is currently $1.00. The law of one price suggests that because the price of a pound of flax seed is $1.20 in Kentucky, the price of a pound of flax seed will be ___________ in West Virginia after sellers adjust their supply in both markets.

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 4

If the theory of purchasing power parity holds, then how much does an Egyptian tapestry cost in the United States if the same tapestry sells for 15,000 Egyptian pounds in Egypt and the exchange rate is $0.14 per Egyptian pound?

Accepted Answer

According to the theory of purchasing power parity, the exchange rate should adjust to equalize the price of a basket of goods across countries. Therefore, we can use the price of the tapestry in Egypt and the exchange rate to calculate the price of the tapestry in the United States.

Price in US dollars = Price in Egyptian pounds / Exchange rate
Price in US dollars = 15000 / 0.14
Price in US dollars = $10714.29

Therefore, the Egyptian tapestry would cost $10,714.29 in the United States. The closest answer choice is B) $2,100. This is obviously incorrect, so we need to check the other choices. None of the other choices are close to $10,714.29 except for E) $3,148. This is also incorrect, so the best choice is B.

Question 5

The national government or central bank of country X might take steps to purposefully depreciate their currency because:

Accepted Answer

When a country purposefully depreciates its currency, it makes its exports cheaper for other countries to buy. This can increase demand for goods and services produced in country X, which benefits producers in country X as they can sell more goods to consumers in country Y.

Question 6

Pegged exchange rates can also be referred to as ____________ exchange rates.

Accepted Answer

Pegged exchange rates are fixed exchange rates, meaning they are set at a specific level and maintained by government intervention in the foreign exchange market.

Question 7

_____________ exchange rates are exchange rates that are fixed at a certain level through the actions of a government.

Accepted Answer

Pegged exchange rates are fixed at a certain level through the actions of a government. Variable exchange rates fluctuate freely based on market supply and demand. Flexible exchange rates are similar to variable exchange rates, but with some government intervention to smooth out extreme fluctuations. Speculated and Real are not terms used to describe exchange rates.

Question 8

The following two graphs depict the equilibrium price of a pound of grapes in California and West Virginia, respectively. Assume the type and quality of the grapes being sold in the two states are identical. Further, assume grape sellers incur zero costs to transport grapes between the two states and there are no other barriers to trade. Use these graphs to answer the next  questions:  
-According to the law of one price, the price of grapes will:

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 9

If the Bank of Japan (the Japanese central bank) were to take steps to devalue the yen in foreign currency markets, the Japanese ____________ curve would shift rightward in the short run and the Japanese __________ curve would shift leftward in the long run.

Accepted Answer

The answer of If the Bank of Japan (the Japanese...

Question 10

Floating exchange rates can also be referred to as ___________ exchange rates.

Accepted Answer

Floating exchange rates are also known as flexible exchange rates because they fluctuate according to market forces, such as supply and demand for currencies. Fixed exchange rates, on the other hand, are set by government or central bank interventions, while pegged exchange rates are fixed to another currency or a commodity like gold. Real exchange rates, on the other hand, are adjusted for inflation and purchasing power differences between countries. Specialized exchange rates are not a commonly used term in the field of economics.

Question 11

If the Central Reserve Bank of Peru (the Pervian central bank) were to take steps to devalue the sol (the Peruvian currency) in foreign currency markets, the Peruvian aggregate demand curve would ____________ in the short run and the Peruvian short-run aggregate supply curve would ____________ in the long run.

Accepted Answer

If the Central Reserve Bank of Peru were to devalue the sol, it would make exports cheaper and more attractive, leading to an increase in demand for Peruvian goods and services in foreign markets. This would shift the Peruvian aggregate demand curve rightward.

However, in the short run, the Peruvian short-run aggregate supply curve would shift leftward because the devaluation of the currency would increase the cost of imported inputs, leading to higher costs for firms and a decrease in their willingness to supply goods and services.

In the long run, firms would adjust to the higher costs by finding alternative sources for inputs and increasing their efficiency, leading to an increase in the potential output and a rightward shift of the Peruvian short-run aggregate supply curve.

Question 12

Suppose market forces outside of the control of the Chinese government are causing the price of Chinese yuan in terms of Japanese yen to rise. In order to maintain the current value of the yuan, the Chinese government must:

Accepted Answer

If market forces are causing the price of yuan to rise, it means there is higher demand for the yuan relative to the yen. To maintain the current value of the yuan, the Chinese government must increase the supply of yuan in the market. This can be done by buying yen with newly created yuan, which increases the supply of yuan and decreases the supply of yen, thus maintaining the value of yuan relative to yen. The other options are not relevant to addressing the problem of the rising yuan.

Question 13

The following graph depicts the market for potatoes in West Virginia. Assume there are similar markets for potatoes in all other U.S. states and that the potatoes sold in all states are identical. Further, assume potato sellers incur zero costs to transport potatoes between any U.S. state and that there are no other barriers to trade. Use this graph to answer the next  questions: 
-According to the law of ___________, after accounting for transportation costs and trade barriers, identical goods in different locations must sell for the same price.

Accepted Answer

The law of one price states that identical goods in different locations must sell for the same price after accounting for transportation costs and trade barriers. Since there are no transportation costs or trade barriers in this scenario, the price of potatoes in West Virginia should be the same as the price of potatoes in all other U.S. states. Therefore, the law of one price should hold in this market.

Question 14

The following graph depicts the market for potatoes in West Virginia. Assume there are similar markets for potatoes in all other U.S. states and that the potatoes sold in all states are identical. Further, assume potato sellers incur zero costs to transport potatoes between any U.S. state and that there are no other barriers to trade. Use this graph to answer the next  questions: 
-Suppose the equilibrium price of a pound of potatoes in all U.S. states is initially $1.20. Further, suppose there is an increase in potato demand in all U.S. states except West Virginia. This increase in demand causes potato prices in all U.S. states, except West Virginia, to increase. If the law of one price holds, potato sellers will eventually adjust the relative quantity of potatoes they sell in all U.S. states, including West Virginia. After this adjustment:

Accepted Answer

Since there is an increase in demand in all other U.S.states except West Virginia, the price of potatoes will increase in those states due to an increase in demand. As a result of this increase in price, potato sellers in West Virginia will find it profitable to sell more potatoes to those states, leading to an increase in supply in West Virginia. The increase in supply in West Virginia will lead to a decrease in prices in West Virginia. Therefore, the price of a pound of potatoes in all states that share a border with West Virginia will also fall due to the decrease in prices in West Virginia.

Question 15

The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West Virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next questions:  
-Suppose the price of a pound of flax seed is currently $1.20 in both Kentucky and West Virginia. Further, suppose there is a decrease in demand for flax seed in Kentucky, but not in West Virginia. Before flax seed sellers are able to adjust the relative quantity of flax seed supplied in the two states, the decrease in demand causes the equilibrium price of a pound of flax seed in Kentucky to change by $0.20. The law of one price suggests that the price of a pound of flax seed will be _____________ in West Virginia after sellers adjust the relative quantity of flax seed supplied in the two states.

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 16

_____________ exchange rates are exchange rates that are determined by the market forces of supply and demand for currency.

Accepted Answer

Floating exchange rates are determined by the market forces of supply and demand for currency.

Question 17

The following two graphs depict the equilibrium price of a pound of grapes in California and West Virginia, respectively. Assume the type and quality of the grapes being sold in the two states are identical. Further, assume grape sellers incur zero costs to transport grapes between the two states and there are no other barriers to trade. Use these graphs to answer the next  questions:  
-According to the law of one price, the supply curve in the California grape market will ______________, and the supply curve in the West Virginia grape market will _____________.

Accepted Answer

The answer of The following two graphs depict the equilibrium...

Question 18

If the Bank of Japan (the Japanese central bank) were to take steps to devalue the yen in foreign currency markets, ____________, which would cause Japanese real gross domestic product (GDP) to increase in the short run.

Accepted Answer

If the Bank of Japan were to devalue the yen in foreign currency markets, this would make Japanese goods and services relatively cheaper for foreign buyers, which would increase demand for them. This increase in aggregate demand would cause Japanese real GDP to increase in the short run.

Question 19

In order to maintain a pegged exchange rate in China:

Accepted Answer

The answer of In order to maintain a pegged exchange...

Question 20

In the short run, ____________ would increase domestic aggregate demand in the context of the aggregate supply-aggregate demand model.

Accepted Answer

The answer of In the short run, ____________ would increase...

Quiz 20: International Finance

According to the theory of purchasing power parity, why should identical goods have the same price in different locations?

If the theory of purchasing power parity holds, then how much does an Egyptian tapestry cost in the United States if the same tapestry sells for 15,000 Egyptian pounds in Egypt and the exchange rate is $0.14 per Egyptian pound?

The national government or central bank of country X might take steps to purposefully depreciate their currency because:

Pegged exchange rates can also be referred to as ____________ exchange rates.

_____________ exchange rates are exchange rates that are fixed at a certain level through the actions of a government.

If the Bank of Japan (the Japanese central bank) were to take steps to devalue the yen in foreign currency markets, the Japanese __ curve would shift rightward in the short run and the Japanese curve would shift leftward in the long run.

Floating exchange rates can also be referred to as ___________ exchange rates.

If the Central Reserve Bank of Peru (the Pervian central bank) were to take steps to devalue the sol (the Peruvian currency) in foreign currency markets, the Peruvian aggregate demand curve would in the short run and the Peruvian short-run aggregate supply curve would in the long run.

Suppose market forces outside of the control of the Chinese government are causing the price of Chinese yuan in terms of Japanese yen to rise. In order to maintain the current value of the yuan, the Chinese government must:

_____________ exchange rates are exchange rates that are determined by the market forces of supply and demand for currency.

If the Bank of Japan (the Japanese central bank) were to take steps to devalue the yen in foreign currency markets, ____________, which would cause Japanese real gross domestic product (GDP) to increase in the short run.

In order to maintain a pegged exchange rate in China:

In the short run, ____________ would increase domestic aggregate demand in the context of the aggregate supply-aggregate demand model.