Question 1

A Big Mac in Japan costs 320 yen while it costs $3.60 in the U.S..The nominal exchange rate is 80 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

The answer of A Big Mac in Japan costs 320...

Question 2

Table 18-2
 
-Refer to Table 18-2.For which country(ies)in the table does purchasing-power parity hold?
A) Bolivia and Japan
B) Bolivia and Morocco
C) Japan and Morocco
D) Norway and Thailand

Accepted Answer

Purchasing-power parity (PPP) means that the exchange rate between two countries' currencies equals the ratio of the countries' price levels. In other words, a given amount of currency should be able to purchase the same quantity of goods in any country. In this table, Bolivia and Morocco have price indexes that are proportional to their exchange rates, indicating PPP holds. However, Japan and Norway have price indexes that are not proportional to their exchange rates, indicating PPP does not hold. Thailand is not mentioned as a country where PPP holds, so it cannot be part of the answer. Therefore, the best choice is B, Bolivia and Morocco.

Question 3

A ton of scrap iron sells for $150 in the U.S.and 1400 yuan in China.The nominal exchange rate is 6.7 yuan per dollar.
A) A profit could be made by buying scrap iron in China and selling it in the U.S.This would tend to drive down the price of U.S.scrap iron.
B) A profit could be made by buying scrap iron in China and selling it in the U.S.This would tend to drive down the price of Chinese scrap iron.
C) A profit could be made by buying scrap iron in the U.S.and selling it in China.This would tend to drive down the price of U.S.scrap iron.
D) A profit could be made by buying scrap iron in the U.S.and selling it in China.This would tend to drive down the price of Chinese scrap iron.

Accepted Answer

If a profit could be made by buying scrap iron in the U.S. and selling it in China, this would increase the supply of scrap iron in China and decrease the demand for Chinese scrap iron. This would lead to a fall in the price of Chinese scrap iron. Conversely, the increased demand for U.S. scrap iron would lead to a rise in the price of U.S. scrap iron.

Question 4

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) both countries rise.
D) both countries fall.

Accepted Answer

Purchasing-power parity suggests that currencies will adjust based on the price levels in foreign countries. Therefore, if the price levels in foreign countries rise, the nominal exchange rate given as foreign currency per unit of U.S. currency must also rise.

Question 5

If a McDonald's Big Mac cost $3.06 in the United States and 3.21 euros in the Euro area,then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?
A) 1.05 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) 1.05 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) .95 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) .95 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 $3.06...

Question 6

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

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

Question 7

Table 18-2
 
-Refer to Table 18-2.Which currency(ies)is(are)less valuable than predicted by the doctrine of purchasing-power parity?
A) boloviano and dinar
B) yen and kroner
C) baht and kroner
D) baht

Accepted Answer

The baht is less valuable than predicted by the doctrine of purchasing-power parity because its country price index is higher than its U.S. price index, meaning goods are relatively more expensive in Thailand than in the United States. The other currencies have either a country price index equal to or lower than their U.S. price index, indicating their relative value is in line with the doctrine of purchasing-power parity.

Question 8

Suppose a McDonalds Big Mac cost $4.00 in the United States and 3.20 euros in the euro area and 5.20 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) Neither the euro area or Australia.
C) The euro area but not Australia.
D) Australia but not the euro area.

Accepted Answer

The answer of Suppose a McDonalds Big Mac cost $4.00...

Question 9

A roll of duct tape costs 2 Canadian dollars in Canada and 1.75 U.S.dollars in the U.S.If the nominal exchange rate were 1.10 Canadian dollars per U.S.dollar.
A) A profit could be made by buying duct tape in Canada and selling it in the U.S.This would tend to drive up the price of U.S.duct tape.
B) A profit could be made by buying duct tape in Canada and selling it in the U.S.This would tend to drive up the price of Canadian duct tape.
C) A profit could be made by buying duct tape in the U.S.and selling it in Canada.This would tend to drive up the price of U.S.duct tape.
D) A profit could be made by buying duct tape in the U.S.and selling it in Canada.This would tend to drive up the price of Canadian duct tape.

Accepted Answer

Buying duct tape in the U.S. at a lower price and selling it in Canada at a higher price would lead to an increase in demand for U.S. duct tape and hence drive up its price. This would have no effect on the price of Canadian duct tape.

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 $3.50 in the United States and 2.45 euros in 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) Neither the tall latte nor the Big Mac.
C) The tall latte but not the Big Mac.
D) The Big Mac but not the tall latte.

Accepted Answer

To determine if the prices are consistent with purchasing power parity, we need to compare the prices in terms of a common currency. Converting the price of the Starbucks tall latte from dollars to euros, we get: $4.00 x 0.80 euros per dollar = 3.20 euros. This is the same as the price in the Euro area, so the tall latte has a price consistent with purchasing power parity.

Converting the price of the McDonald's Big Mac from dollars to euros, we get: $3.50 x 0.80 euros per dollar = 2.80 euros. This is not the same as the price in the Euro area, so the Big Mac does not have a price consistent with purchasing power parity.

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

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?
A) Both the euro area and Australia.
B) Neither the euro area or Australia.
C) The euro area but not Australia.
D) Australia but not the euro area.

Accepted Answer

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

Question 12

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 partiy 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 partiy 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 the Starbucks Grande Latte in China (28 yuan) by the price of the same item in the US converted to yuan (3.75 x 6.75 = 25.31 yuan). Real Exchange Rate = (Price of a good in one country / Price of the same good in another country) x Nominal Exchange Rate. Therefore, Real Exchange Rate = (28 / 25.31) x 6.75 = 7.48. However, this is the exchange rate that exists, not the real exchange rate that would exist if Purchasing Power Parity (PPP) held. Since the price of the Starbucks Grande Latte is higher in China than in the US, PPP suggests that the nominal exchange rate should be higher than it currently is. Therefore, the real exchange rate if PPP held would be lower than the exchange rate that currently exists, which is 1/7.48 = 0.1337 or 0.904. Therefore, the correct answer is C).

Question 13

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 $3.50 in the United States and 2.45 euros in Euro area.If the nominal exchange rate is .75 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) Neither the tall latte nor the Big Mac.
C) The tall latte but not the Big Mac.
D) The Big Mac but not the tall latte.

Accepted Answer

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

Question 14

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 the purchasing power parity theory, an increase in the money supply in a country results in an increase in its domestic price level. This increase in the domestic price level leads to a decrease in the international competitiveness of its goods and services, causing a depreciation of its currency relative to other currencies in the world. Therefore, if purchasing power parity holds, when a country's central bank increases the money supply, its price level rises and its currency depreciates relative to other currencies in the world.

Question 15

Table 18-2
 
-Refer to Table 18-2.In real terms,U.S.goods are less expensive than goods in which country(ies)?
A) Bolivia and Morocco
B) Japan,Norway,and Thailand
C) Japan and Norway
D) Thailand

Accepted Answer

According to Table 18-2, the real CVD-adjusted price level for U.S. goods is lower than the price level for goods in Japan and Norway. Therefore, the correct choice is C.

Question 16

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 exchange rate between two countries should adjust so that a basket of goods and services will have the same price in both countries. This means that the nominal exchange rate between two countries must reflect the differing price levels in those countries. Therefore, option A is the best choice.

Question 17

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 (PPP) suggests that the exchange rate between two countries should equal the ratio of the two countries' price levels. The formula for PPP is e = P*/P, which means that the exchange rate (e) should be equal to the ratio of foreign prices (P*) to domestic prices (P).

Question 18

Table 18-2
 
-Refer to Table 18-2.Which currency(ies)is(are)more valuable than predicted by the doctrine of purchasing-power parity?
A) boloviano and dinar
B) yen,kroner,and baht
C) yen and kroner
D) baht

Accepted Answer

The doctrine of purchasing-power parity states that the exchange rates should adjust so that the same basket of goods costs the same across countries. In other words, the currency with a lower price index should have a stronger value. Based on the table, both Bolivia and Morocco have lower price indices but their currencies are not more valuable than predicted by purchasing-power parity. On the other hand, Japan, Norway, and Thailand have higher price indices than the US but their currencies are more valuable than predicted by purchasing-power parity. Therefore, the correct choice is B, which includes yen, kroner, and baht. However, the question asks for the best choice(s), which could include C (yen and kroner) if the context specifies that only two currencies are to be selected.

Question 19

Table 18-2
 
-Refer to Table 18-2.In real terms,U.S.goods are more expensive than goods in which country(ies)?
A) Bolovia and Morocco
B) Japan,Norway,and Thailand
C) Japan and Norway
D) Thailand

Accepted Answer

The answer of Table 18-2
 
-Refer to Table 18-2.In real...

Question 20

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 $45 dollars,then
A) the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in the United States 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 United States.
C) the real exchange rate is less than one and arbitrageurs could profit by buying oranges in the United States 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 United States.

Accepted Answer

The answer of If the exchange rate is 8 Moroccan...

Quiz 31: Open-Economy Macroeconomic Models

A Big Mac in Japan costs 320 yen while it costs $3.60 in the U.S..The nominal exchange rate is 80 yen per dollar.Which of the following would both make the real exchange rate move towards purchasing-power parity?

Table 18-2 -Refer to Table 18-2.For which country(ies) in the table does purchasing-power parity hold?

A ton of scrap iron sells for $150 in the U.S.and 1400 yuan in China.The nominal exchange rate is 6.7 yuan per dollar.

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

If a McDonald's Big Mac cost $3.06 in the United States and 3.21 euros in the Euro area,then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?

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?

Table 18-2 -Refer to Table 18-2.Which currency(ies) is(are) less valuable than predicted by the doctrine of purchasing-power parity?

Suppose a McDonalds Big Mac cost $4.00 in the United States and 3.20 euros in the euro area and 5.20 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 roll of duct tape costs 2 Canadian dollars in Canada and 1.75 U.S.dollars in the U.S.If the nominal exchange rate were 1.10 Canadian dollars per U.S.dollar.

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 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

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

Table 18-2 -Refer to Table 18-2.In real terms,U.S.goods are less expensive than goods in which country(ies) ?

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

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

Table 18-2 -Refer to Table 18-2.Which currency(ies) is(are) more valuable than predicted by the doctrine of purchasing-power parity?

Table 18-2 -Refer to Table 18-2.In real terms,U.S.goods are more expensive than goods in which country(ies) ?

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 $45 dollars,then