Question 1

If we can accurately predict monetary growth, and if the assumption that demand for real money balances is constant, then we may predict:
A) changes in exchange rates only.
B) changes in price levels only.
C) both changes in price levels and changes in exchange rates.
D) neither changes in price levels nor changes in exchange rates.

Accepted Answer

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Question 2

If Europe has a real GDP growth rate of 5%, and the United States has a real GDP growth rate of 6%, while money growth in Europe is 7%, and money growth in the United States is 5%, what would the monetary exchange rate model predict for exchange rates in the long run?
A) The U.S. dollar would appreciate by 3% against the euro.
B) The U.S. dollar would depreciate by 3% against the euro.
C) The U.S. dollar and the euro would not change against each other because the growth rates are offsetting.
D) The U.S. dollar would appreciate by 1% against the euro.

Accepted Answer

The monetary exchange rate model suggests that the currency of a country with lower money growth relative to its GDP growth will appreciate. The U.S. has a lower money growth rate (5%) compared to its GDP growth (6%), while Europe has a higher money growth rate (7%) compared to its GDP growth (5%). This implies the U.S. dollar would appreciate against the euro. The difference in money growth rates (7% - 5% = 2%) minus the difference in GDP growth rates (6% - 5% = 1%) results in a 3% appreciation of the U.S. dollar against the euro.

Question 3

Forecasting exchange rates involves:
A) knowing the history of exchange rate behavior.
B) assessing data on money supply growth and potential real income growth.
C) understanding the relationship between monetary policy and unemployment.
D) assessing data on money supply and unemployment.

Accepted Answer

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A) knowing the history...

Question 4

According to the long-run monetary model of the price level:
A) the demand for money is always proportional to the supply of money.
B) when the demand for money decreases, prices respond very slowly.
C) as long as prices are flexible, a change in the supply of money or the demand for money will result in a change in the price level to restore equilibrium.
D) equilibrium conditions require a change in real GDP to lower inflation.

Accepted Answer

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Question 5

If there is an increase in the money supply in the United States, using the monetary model of the exchange rate, one would predict that the U.S. dollar would:
A) become stronger.
B) appreciate in the short run, but not in the long run.
C) depreciate.
D) depreciate in the short run, but not in the long run.

Accepted Answer

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Question 6

If U.S. real income increases, then the prediction of the monetary model of exchange rates would be that the U.S. dollar would:
A) become stronger.
B) appreciate in the short run, but not in the long run.
C) depreciate.
D) depreciate in the short run, but not in the long run.

Accepted Answer

In the monetary model of exchange rates, an increase in U.S. real income would lead to higher demand for money. If the money supply does not change, this would lead to higher interest rates, attracting foreign capital and causing the dollar to appreciate. However, if the money supply adjusts to the increased demand, the exchange rate may not change significantly. In the context of the options given, the model suggests that the dollar would depreciate as the increased income leads to higher imports, increasing the supply of dollars in the foreign exchange market.

Question 7

Under the monetary approach to exchange rates, if real money demand is greater at home but relative money supply is greater in foreign markets, then the exchange rate should be:
A) greater than one.
B) equal to one.
C) less than one.
D) There is not enough information provided to answer the question.

Accepted Answer

The monetary approach to exchange rates suggests that exchange rates are determined by the relative supply and demand for different currencies, which in turn are influenced by factors like inflation, interest rates, and economic growth. However, the statement provided does not give specific values or a clear basis for comparing the real money demand and supply between the two markets, making it impossible to determine the specific exchange rate value or its relation to one.

Question 8

When we consider growth rates of the variables, the growth of the price level (inflation) is equal to:
A) growth in nominal GDP.
B) growth in real GDP.
C) growth of the monetary aggregate.
D) growth of the nominal supply of money minus the growth rate of real income.

Accepted Answer

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Question 9

Under the monetary approach to exchange rates, if there is a rise in a country's home money supply, ceteris paribus,, then the exchange rate should: A) depreciate. B) hold steady. C) appreciate. D) appreciate and then remain steady.

Accepted Answer

According to the monetary approach to exchange rates, an increase in a country's money supply will lead to an increase in the demand for goods and services which, in turn, will increase the demand for that country's currency. This increased demand for the currency will cause an appreciation in the exchange rate, making foreign goods and services cheaper and domestic goods and services more expensive. Therefore, the exchange rate should depreciate when there is a rise in a country's home money supply.

Question 10

Combining the relative PPP with the monetary model of exchange rates, we find that the rate of depreciation of a currency (relative to another nation) in the long run is equal to:
A) the sum of nominal money supply growth rates in each nation.
B) the difference between the nominal money supply growth rates in each nation minus the difference between growth rates of real GDP.
C) the average of growth rates of real GDP in each nation.
D) the sum of population growth plus technology growth.

Accepted Answer

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Question 11

The long-run relationship between money growth, income growth, and the change in the price level in a nation is:
A) money growth = real income growth - change in the price level.
B) real income growth - money growth = change in the price level.
C) change in the price level = money growth - real income growth.
D) real income growth/change in the price level = money growth.

Accepted Answer

According to the quantity theory of money, the long-run relationship between money growth, income growth, and the change in the price level in a nation is expressed as: MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real output (income). Rearranging this equation, we get: M/V = PY. Assuming that V and Y are relatively stable and not significantly affected by changes in the money supply in the long run, we can simplify the equation to: %ΔM - %ΔP = %ΔY. This implies that the percentage change in the money supply minus the percentage change in the price level is equal to the percentage change in real output (income). Rearranging this equation, we get: %ΔY = %ΔM - %ΔP, which is equivalent to option B.

Question 12

Under the monetary approach to exchange rates, if there is a rise in a foreign market's income, ceteris paribus,, then the exchange rate should: A) depreciate. B) hold steady. C) appreciate. D) appreciate and then remain steady.

Accepted Answer

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Question 13

Under the monetary approach to exchange rates, if both real money demand and money supply are greater at home than in foreign markets, then the exchange rate should be:
A) greater than one.
B) equal to one.
C) less than one.
D) There is not enough information provided to answer the question.

Accepted Answer

According to the monetary approach to exchange rates, if both real money demand and money supply are greater at home than in foreign markets, the exchange rate should be greater than one. This is because the increased demand for money at home relative to foreign countries will cause the home currency to appreciate in value, resulting in a higher exchange rate.

Question 14

The long-run monetary model of exchange rates provides that real income changes result in a(n) _______ change in the price level and a(n) ________ change in the strength of the currency.
A) corresponding; opposite
B) corresponding; corresponding
C) opposite; corresponding
D) opposite; opposite

Accepted Answer

According to the long-run monetary model of exchange rates, real income changes result in an opposite change in the price level and a corresponding change in the strength of the currency. This is because an increase in real income leads to an increase in demand for goods and services, which in turn leads to an increase in prices. However, the increase in prices makes domestic goods and services relatively more expensive, which reduces demand for exports and causes the currency to appreciate in value. Conversely, a decrease in real income leads to a decrease in prices, which makes domestic goods and services relatively cheaper and increases demand for exports, causing the currency to depreciate.

Question 15

Under the monetary approach to exchange rates, if the exchange rate has appreciated, this suggests that:
A) the home country's money supply has risen.
B) the foreign country's money supply has risen.
C) the home country's income has fallen.
D) the foreign country's money supply has fallen.

Accepted Answer

Under the monetary approach, an appreciation of the home currency suggests a decrease in the foreign country's money supply, leading to a higher value of the home currency relative to the foreign currency.

Question 16

An increase in money supply by 15%, ceteris paribus,, in the United States would cause the exchange rate to: A) appreciate by 15%. B) appreciate by 7.5%. C) depreciate by 15%. D) stay the same.

Accepted Answer

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Question 17

Which of the following statements about the relationship between money, prices, and exchange rates in the long run is NOT correct?
A) Since money is neutral in the long run, real income growth has no effect on inflation or the nominal exchange rate for a nation.
B) The rate of growth of prices (inflation rate) = the difference between money growth and real income growth.
C) The rate of depreciation of the nominal exchange rate between one nation and another is directly related to the difference in the inflation rates in the nations.
D) When a nation's real income grows, its inflation rate decreases.

Accepted Answer

A) The statement that real income growth has no effect on inflation or the nominal exchange rate in the long run is incorrect because money neutrality implies that changes in the money supply only affect nominal variables (like the price level and nominal exchange rates) in the long run, not real variables like real income. However, this does not mean that real income growth has no effect on inflation or nominal exchange rates; rather, it suggests that changes in the money supply do not have long-term effects on real income.

Question 18

If we assume that prices adjust in the long run so that the nominal demand for money equals the nominal supply of money, then:
A) we can determine changes in exchange rates if absolute PPP holds.
B) absolute PPP will hold.
C) relative PPP will hold.
D) exchange rates will not change.

Accepted Answer

If prices adjust in the long run so that the nominal demand for money equals the nominal supply of money, then relative PPP will hold. This is because changes in inflation rates will impact exchange rates, as different inflation rates will result in different changes in the relative prices of two countries' goods. Therefore, while absolute PPP may not necessarily hold, relative PPP will still be relevant in determining exchange rates in the long run.

Question 19

If prices are flexible and PPP holds, it is possible to forecast the exchange rate in the long run whenever ______ change in a nation, ceteris paribus,. A) real income and nominal growth rate of the money supply B) levels of trade and financial flows C) capital controls D) short-run nominal interest rates

Accepted Answer

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Question 20

If the U.S. real GDP growth rate is greater than that of Canada, then the dollar will depreciate:
A) only if the U.S. inflation rate exceeds Canada's inflation rate.
B) regardless of the relative inflation rates.
C) only if the U.S. inflation rate is less than Canada's inflation rate.
D) only if the U.S. inflation rate is less than that of Canada's other trade partners.

Accepted Answer

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Quiz 14: Exchange Rates I: the Monetary Approach in the Long Run

If we can accurately predict monetary growth, and if the assumption that demand for real money balances is constant, then we may predict:

If Europe has a real GDP growth rate of 5%, and the United States has a real GDP growth rate of 6%, while money growth in Europe is 7%, and money growth in the United States is 5%, what would the monetary exchange rate model predict for exchange rates in the long run?

Forecasting exchange rates involves:

According to the long-run monetary model of the price level:

If there is an increase in the money supply in the United States, using the monetary model of the exchange rate, one would predict that the U.S. dollar would:

If U.S. real income increases, then the prediction of the monetary model of exchange rates would be that the U.S. dollar would:

Under the monetary approach to exchange rates, if real money demand is greater at home but relative money supply is greater in foreign markets, then the exchange rate should be:

When we consider growth rates of the variables, the growth of the price level (inflation) is equal to:

Under the monetary approach to exchange rates, if there is a rise in a country's home money supply, ceteris paribus,, then the exchange rate should:

Combining the relative PPP with the monetary model of exchange rates, we find that the rate of depreciation of a currency (relative to another nation) in the long run is equal to:

The long-run relationship between money growth, income growth, and the change in the price level in a nation is:

Under the monetary approach to exchange rates, if there is a rise in a foreign market's income, ceteris paribus,, then the exchange rate should:

Under the monetary approach to exchange rates, if both real money demand and money supply are greater at home than in foreign markets, then the exchange rate should be:

The long-run monetary model of exchange rates provides that real income changes result in a(n) _ change in the price level and a(n) __ change in the strength of the currency.

Under the monetary approach to exchange rates, if the exchange rate has appreciated, this suggests that:

An increase in money supply by 15%, ceteris paribus,, in the United States would cause the exchange rate to:

Which of the following statements about the relationship between money, prices, and exchange rates in the long run is NOT correct?

If we assume that prices adjust in the long run so that the nominal demand for money equals the nominal supply of money, then:

If prices are flexible and PPP holds, it is possible to forecast the exchange rate in the long run whenever ______ change in a nation, ceteris paribus,.

If the U.S. real GDP growth rate is greater than that of Canada, then the dollar will depreciate: