Question 1

Table 31-2 
-Refer to Table 31-2. Which currency(ies) is(are) 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 2

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

Accepted Answer

According to purchasing-power parity theory, when a country's central bank increases the money supply, it leads to inflation, which in turn increases the country's price level. As a result, the country's currency will depreciate relative to other countries' currencies because the goods in the country become relatively more expensive compared to other countries. Therefore, choice B is the correct answer.

Question 3

Table 31-2 
-Refer to Table 31-2. Which currency(ies) is(are) 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

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 5

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

Accepted Answer

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

Question 6

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 holds when the exchange rate between two countries adjusts to equalize the price of a basket of goods and services between them. To determine where PPP holds, we need to compare the prices of the same good, in this case, a Starbucks latte, in different countries. Using the exchange rates given, we find that the price of a latte in euros is $5.00/0.80 = $6.25, and the price in Australian dollars is $2.50/1.4 = $1.79. Therefore, the price of a latte in the euro area is higher than in the US, while the price in Australia is lower. Thus, purchasing-power parity holds in Australia but not in the euro area.

Question 7

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 8

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 determine the real exchange rate, we need to compare the prices of the same good in both countries.

In Morocco, a crate of oranges costs 400 dirhams. Converting this to dollars using the exchange rate of 8 dirhams per dollar, we get:

400 dirhams / 8 dirhams per dollar = $50

So in Morocco, a crate of oranges costs $50.

In Miami, a similar crate of oranges sells for $55.

Since $50 is less than $55, this means that the real exchange rate is less than one.

Arbitrageurs could profit by buying oranges in Morocco for $50, and selling them in Miami for $55, making a profit of $5 per crate. Therefore, choice B is correct.

Question 9

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

Accepted Answer

Purchasing-power parity suggests that if the price level in foreign countries increases, the foreign currency per unit of U.S. currency must increase as well to balance out the difference in purchasing power between the two currencies.

Question 10

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 11

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

According to purchasing-power parity, the nominal exchange rate e should be equal to the ratio of foreign prices to domestic prices (P*/P), in order to equalize the purchasing power of currencies across countries. Therefore, option C is the correct choice. Option A is incorrect because it has the variables in the wrong order. Option B is incorrect because it implies that foreign prices are always equal to one, which is not the case. Option D is incorrect because there is a correct answer for this question.

Question 12

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 13

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 14

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 which goods have prices consistent with purchasing-power parity (PPP), we need to compare the prices of the same goods in different currencies after converting the currencies using the exchange rate. 
For the tall latte: 
- In the US, the price is $4.00 
- In Europe, the price is 3.20 euros 
Using the nominal exchange rate of 0.80 euros per dollar, we convert $4.00 to euros: 
$4.00 x 0.80 = 3.20 euros 
The price of the tall latte in Europe (3.20 euros) is the same as the price of the tall latte in the US after converting to euros (3.20 euros). Therefore, the tall latte has a price consistent with PPP. 
For the Big Mac: 
- In the US, the price is $4.40 
- In Europe, the price is 5.50 euros 
Using the nominal exchange rate of 0.80 euros per dollar, we convert $4.40 to euros: 
$4.40 x 0.80 = 3.52 euros 
The price of the Big Mac in Europe (5.50 euros) is higher than the price of the Big Mac in the US after converting to euros (3.52 euros). Therefore, the Big Mac does not have a price consistent with PPP.

Question 15

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

To calculate the real exchange rate, we need to use the formula:
Real Exchange Rate = (Nominal Exchange Rate x Domestic Price) / Foreign Price
Here, Domestic Price = $3.75 and Foreign Price = 28 yuan.

Real Exchange Rate = (6.75 x $3.75) / 28 yuan
Real Exchange Rate = $25.31 / 28 yuan
Real Exchange Rate = 0.904

So the real exchange rate is 0.904. If purchasing power parity held, the nominal exchange rate would be higher, as the real exchange rate is currently below 1.

Question 16

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 17

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 18

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 one country has a higher inflation rate than the other, its currency should depreciate relative to the other country's currency in order to maintain parity in purchasing power.

Question 19

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

Accepted Answer

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

Question 20

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

Accepted Answer