Question 1

When exchange rates are defined as foreign currency per dollar and foreign goods per US goods, the ability to profit by purchasing wheat in the United States and selling it in China implies that the

Accepted Answer

The real exchange rate is less than 1, indicating that the cost of foreign goods in terms of domestic goods is lower. This makes it profitable to buy wheat in the U.S. (where it's cheaper) and sell it in China (where it's relatively more expensive), exploiting the difference in real exchange rates.

Question 2

You hold currency from a foreign country. If that country has a lower rate of inflation than the United States, then over time the foreign currency will buy

Accepted Answer

A lower rate of inflation in a foreign country compared to the United States means the purchasing power of the foreign currency increases relative to the U.S. dollar. This leads to the foreign currency buying more goods in its own country and more dollars in the exchange market.

Question 3

The dollar is said to appreciate against the euro if the exchange rate

Accepted Answer

When the dollar appreciates, it means the exchange rate rises, making U.S. goods more expensive in terms of euros.

Question 4

The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $50, how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold?

Accepted Answer

Purchasing-power parity (PPP) implies that the same basket of goods should cost the same in both countries when converted to a common currency. If the basket costs $50 in the US and the exchange rate is 2 florins per dollar, then the basket should cost 50 x 2 = 100 florins in Aruba for PPP to hold.

Question 5

Other things the same, if the exchange rate changes from 35 Thai bhat per dollar to 21 Thai bhat per dollar, then the dollar has

Accepted Answer

The dollar has depreciated because it now exchanges for fewer Thai bhat, meaning it buys fewer Thai goods.

Question 6

Suppose a Starbucks tall latte costs $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 0.80 euros per dollar, which goods have prices that are consistent with purchasing-power parity?

Accepted Answer

The Big Mac price in euros (3.60) divided by the exchange rate (0.80) equals $4.50, which matches the U.S. price, indicating PPP. The tall latte does not match as 2.50 euros divided by 0.80 equals $3.125, not $4.00.

Question 7

If you are vacationing in Spain and the dollar depreciates relative to the euro, then the dollar buys

Accepted Answer

When the dollar depreciates relative to the euro, each dollar is worth fewer euros, meaning it will take more dollars to buy the same amount of goods or services priced in euros.

Question 8

According to purchasing-power parity, which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level?

Accepted Answer

According to purchasing-power parity (PPP), the nominal exchange rate equals the ratio of the foreign price level to the domestic price level, ensuring that a unit of currency has the same purchasing power in different countries.

Question 9

Purchasing-power parity theory does not hold at all times because

Accepted Answer

Purchasing-power parity theory may not hold because many goods are not easily transported, and the same goods produced in different countries may be imperfect substitutes, affecting price equalization.

Question 10

Suppose exchange rates are defined as foreign currency per dollar and foreign goods per U.S. goods. According to purchasing-power parity, if the price of a basket of goods in the United States rose from $1,500 to $2,000 and the price of the same basket of goods rose from 600 units of some other country's currency to 1,000 units of that country's currency, then the

Accepted Answer

The answer of Suppose exchange rates are defined as foreign...

Question 11

According to purchasing-power parity, inflation in the United States causes the dollar to

Accepted Answer

Purchasing-power parity (PPP) suggests that in the long run, exchange rates will adjust so that the same basket of goods in two different countries will have the same price when measured in a common currency. Therefore, if the United States experiences higher inflation than other countries, the value of the dollar will depreciate relative to the currencies of those countries with lower inflation rates. This is because higher inflation in the U.S. means that the U.S. goods become relatively more expensive compared to goods in countries with lower inflation, leading to a depreciation of the dollar to restore the parity.

Question 12

If the Chinese nominal exchange rate (foreign currency per Chinese Yuan) does not change, but prices rise slower in China than in all other countries, then the Chinese real exchange rate

Accepted Answer

If prices rise slower in China than in other countries, the purchasing power of the Chinese Yuan increases relative to other currencies, causing the real exchange rate to fall.

Question 13

According to purchasing-power parity, when a country's central bank decreases the money supply, a unit of money

Accepted Answer

When a country's central bank decreases the money supply, it typically leads to an increase in the value of the currency. This is because there is less currency available, making each unit of currency more valuable. According to purchasing-power parity, this increase in value should be reflected both in terms of the domestic goods and services a unit of money can buy (due to decreased inflation or deflation) and in terms of the foreign currency it can buy (as the currency strengthens against others).

Question 14

If the price levels in the United States and in France are unchanged, but the nominal exchange rate (euro per U.S. dollar) falls, then the U.S. dollar

Accepted Answer

When the nominal exchange rate (euro per U.S. dollar) falls, it means that fewer euros can be exchanged for a dollar, indicating that the U.S. dollar has depreciated relative to the euro. A weaker dollar makes U.S. goods cheaper for Europeans, likely increasing U.S. exports and decreasing imports, thus increasing U.S. net exports.

Quiz 31: Open-Economy Macroeconomics: Basic Concepts