Question 1

For many years, China tightly managed its currency, through intervention and capital controls, effectively pegging the yuan to the U.S.dollar at a rate of about 8 yuan per dollar.Which of the exchange rate regimes discussed in the textbook did China have at that time?

Accepted Answer

China had a fixed exchange rate regime, as it pegged the yuan to the U.S. dollar at a specific rate and used interventions and capital controls to maintain this rate.

Question 2

The actual exchange rate of the real, Brazil's currency, is 2.40 real per U.S.dollar.According to the PPP estimation, the exchange rate should be 1.20 real per U.S.dollar.This implies that the real is:

Accepted Answer

PPP estimation suggests that a currency should have the same purchasing power in different countries. If the actual exchange rate is higher than the PPP estimation, it means that the currency is overvalued and it takes more units of that currency to buy a unit of another currency. Conversely, if the actual exchange rate is lower than the PPP estimation, it means that the currency is undervalued and it takes fewer units of that currency to buy a unit of another currency. In this case, 1.20 real per U.S. dollar is lower than the actual exchange rate of 2.40 real per U.S. dollar, which implies that the real is undervalued by (2.40-1.20)/2.40=50%.

Question 3

When a country occasionally buys or sells currencies to influence the exchange rate but usually lets market forces determine the exchange rate, it has a:

Accepted Answer

A partially flexible exchange rate, also known as a managed float, is when a country allows market forces to determine the exchange rate most of the time but may intervene occasionally to influence the rate. This allows some stability while still allowing for some flexibility in response to market changes.

Question 4

In what type of exchange rate system is the level of official reserves the most important?

Accepted Answer

In a fixed exchange rate system, the government or central bank commits to maintaining a specific exchange rate and will use its official reserves to buy or sell its currency on the foreign exchange market to maintain this rate. Therefore, the level of official reserves is the most important in this system.

Question 5

Suppose a given basket of goods and services costs 15 dollars in the United States and 14,250 won in Korea.If the exchange rate is 900 won per dollar, purchasing power parity implies that the:

Accepted Answer

The answer of Suppose a given basket of goods and...

Question 6

In theory, partially flexible exchange rates:

Accepted Answer

The answer of In theory, partially flexible exchange rates:
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Question 7

Macroeconomic policy is:

Accepted Answer

Macroeconomic policy is most limited under fixed exchange rates because the government commits to maintaining the exchange rate and must adjust its monetary policies accordingly, often at the expense of other macroeconomic objectives.

Question 8

Suppose that the rate of inflation in Japan is 1 percent and the rate of inflation in the United States is 3 percent.If the real exchange rate remains constant, the value of the U.S.dollar relative to the yen must:

Accepted Answer

The difference in inflation rates between Japan and the United States is 2 percent (3% - 1%). According to purchasing power parity theory, if the real exchange rate remains constant, the difference in inflation rates between two countries should lead to an equal change in their nominal exchange rate. Therefore, the US dollar should fall by 2 percent relative to the yen in this scenario.

Question 9

Suppose 500,000 yen buys a basket of goods in Japan.If, at the existing exchange rate, it costs more than 500,000 yen to buy the same basket of goods in the United States, then purchasing power parity implies that the:

Accepted Answer

The answer of Suppose 500,000 yen buys a basket of...

Question 10

Suppose 60,000 pesos buys a basket of goods in Mexico.If, at the existing exchange rate, it costs less than 60,000 pesos to buy the same basket of goods in the United States, then purchasing power parity implies that the:

Accepted Answer

According to purchasing power parity, the exchange rate should adjust such that the same basket of goods costs the same amount in different currencies. If it costs less in the United States, then the dollar should be worth more pesos in order to equalize the purchasing power of the two currencies. Therefore, the dollar should cost more pesos.

Question 11

Purchasing power parity is used to estimate:

Accepted Answer

Purchasing power parity (PPP) is primarily used to estimate changes in long-run exchange rates, based on the idea that in the long run, exchange rates should adjust so that an identical good in two different countries has the same price when expressed in the same currency.

Question 12

Suppose a McDonald's Big Mac costs 29 pesos in Mexico and the exchange rate between the peso and the Canadian dollar is 10 pesos per Canadian dollar.According to purchasing power parity, a Canadian Big Mac should cost:

Accepted Answer

According to purchasing power parity, the cost of goods should be the same in each country when prices are converted into a common currency. Therefore, a Big Mac costing 29 pesos in Mexico would cost 29 pesos / 10 pesos per Canadian dollar = 2.90 Canadian dollars in Canada.

Question 13

Suppose a given basket of goods and services costs 9 dollars in the Australia and 5,400 baht in Thailand.If the exchange rate is 600 baht per Australian dollar, purchasing power parity implies that the:

Accepted Answer

The answer of Suppose a given basket of goods and...

Question 14

Purchasing power parity is criticized because it:

Accepted Answer

The answer of Purchasing power parity is criticized because it:
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Question 15

Suppose a given basket of goods and services costs 6 dollars in the United States and 4,500 won in Korea.If the exchange rate is 900 won per dollar, purchasing power parity implies that the:

Accepted Answer

Purchasing power parity (PPP) suggests that the exchange rate between two currencies should equal the ratio of the two countries' price levels. In this case, the price level in Korea (4,500 won) is lower than the price level in the United States (6 dollars). Therefore, according to PPP, the won is undervalued and the dollar is overvalued. To restore PPP, the dollar must depreciate, making it cheaper, and the won must appreciate, making it more expensive. Thus, choice C is correct.

Question 16

Critics of purchasing power parity argue that:

Accepted Answer

The answer of Critics of purchasing power parity argue that:
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Question 17

If a basket of goods costs $10 in the United States and 100,000 rubles in Russia, then purchasing power parity will exist if the exchange rate between the ruble and the dollar is:

Accepted Answer

Purchasing power parity exists when the same basket of goods costs the same amount of money in different countries after accounting for exchange rates. Therefore, if the basket of goods costs $10 in the United States and 100,000 rubles in Russia, then the exchange rate should be such that 100,000 rubles can be exchanged for $10. This would be equivalent to an exchange rate of 10,000 rubles per dollar, which is option B.

Question 18

Suppose a McDonald's Big Mac costs 30 pesos in Argentina.At the same time, suppose the exchange rate between the peso and the euro is roughly 15 pesos per euro.According to purchasing power parity, a Big Mac in Europe should cost:

Accepted Answer

According to purchasing power parity, the cost of a Big Mac should be equalized across countries once exchanged into the same currency. In this case, since a Big Mac costs 30 pesos in Argentina and the exchange rate between the peso and the euro is 15 pesos per euro, the cost of a Big Mac in euros is 2 euros (30 pesos/15 pesos per euro = 2 euros). The correct answer is therefore B.

Question 19

Partially flexible exchange rates are:

Accepted Answer

Partially flexible exchange rates have advantages and disadvantages over both fixed and fully flexible exchange rates, depending on the specific circumstances of the economy. Therefore, they are not necessarily superior to either fixed or flexible exchange rates in all situations.

Question 20

If a basket of goods costs 10 dollars in the United States and 11 euros in Belgium, then purchasing power parity will exist if the exchange rate between the euro and the dollar is:

Accepted Answer

Purchasing power parity (PPP) is the theory that the exchange rate between two currencies should be equal to the ratio of the two countries' price levels. In this case, the price level in the United States is $10 and the price level in Belgium is 11 euros. Therefore, the exchange rate should be the ratio of these two prices: 11 euros/$10 ≈ 1.1 euros per dollar. This means that if someone exchanged dollars for euros at this rate, they could buy the same basket of goods in either country.

Quiz 35: International Financial Policy