Question 1

The nominal exchange rate is

Accepted Answer

The nominal exchange rate is defined as the value of one country's currency in terms of another country's currency, typically expressed as the amount of foreign currency one can get for a unit of domestic currency or vice versa. This is what choice A describes.

Question 2

A decrease in the demand for U.S. exports ________ the demand for U.S. dollars and shifts the demand curve for U.S. dollars ________.

Accepted Answer

A decrease in the demand for U.S. exports reduces the amount of foreign currency needed to buy those exports, which in turn decreases the demand for U.S. dollars, shifting the demand curve for U.S. dollars to the left.

Question 3

If the price level in the U.S. is 120, the price level in South Africa is 140, and the nominal exchange rate is 7 South African rands per dollar, then the real exchange rate is

Accepted Answer

The real exchange rate is calculated as (Nominal Exchange Rate * Domestic Price Level) / Foreign Price Level. Here, it is (7 * 120) / 140 = 6 South African goods per U.S. good.

Question 4

According to purchasing power parity, a rise in inflation in the United States. relative to the rest of the world will lead to

Accepted Answer

According to purchasing power parity, a rise in inflation in the United States relative to the rest of the world will lead to an exchange rate depreciation. This is because higher inflation in a country reduces the value of its currency relative to others, making its goods more expensive internationally and thus depreciating its currency.

Question 5

Suppose that $1 U.S. costs $1.50 Canadian. If in St. Louis a CD costs $10 U.S. and in Montreal it costs $15 Canadian, then

Accepted Answer

Purchasing power parity holds because the cost of a CD in both countries is equivalent when adjusted for the exchange rate.

Question 6

Suppose that your firm wants to import sugarcane from Brazil. The exchange rate is 3 Brazilian reals per U.S. dollar and sugarcane costs 36 reals per ton. How much is a ton of sugarcane in U.S. dollars?

Accepted Answer

To convert the cost from reals to U.S. dollars, divide the cost in reals by the exchange rate: 36 reals / 3 reals per U.S. dollar = $12.

Question 7

When a nation's currency depreciates, the country might

Accepted Answer

When a nation's currency depreciates, it often indicates that the country's inflation rate is higher than that of the nations with which it trades. This is because higher inflation reduces the purchasing power of the currency, making it less valuable compared to foreign currencies.

Question 8

Suppose that the price of an identical sport-utility vehicle is $32,000 in U.S. dollars in the United States and $32,000 in Canadian dollars in Canada. Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S. dollar. Based on this information what will happen to the exchange rate between the United States and Canada?

Accepted Answer

The value of the U.S. dollar will fall as U.S. residents purchase SUVs in Canada because the SUV is cheaper in Canada when converted to U.S. dollars ($32,000 CAD = $24,000 USD at $0.75 USD/CAD), leading to an increased demand for Canadian dollars to make purchases, thereby increasing the value of the Canadian dollar relative to the U.S. dollar.

Question 9

Suppose that the price of an identical sport-utility vehicle is $32,000 in U.S. dollars in the United States and $32,000 in Canadian dollars in Canada. Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S. dollar. Does purchasing power parity hold for SUVs between the United States and Canada?

Accepted Answer

The answer of Suppose that the price of an identical...

Question 10

The real exchange rate is the

Accepted Answer

The real exchange rate is the relative price of U.S. produced output relative to foreign-produced output.

Question 11

Given the U.S. price level P, the foreign country price level P*, and the nominal exchange rate E expressed in foreign currency per U.S. dollar, the real exchange rate RER is given by

Accepted Answer

The real exchange rate (RER) is calculated as RER = E × (P/P*), where E is the nominal exchange rate (expressed in units of foreign currency per U.S. dollar), P is the domestic price level, and P* is the foreign price level. This formula adjusts the nominal exchange rate by the price levels in the two countries, providing a measure of the relative purchasing power of the two currencies.

Question 12

In the long run, the nominal exchange rate

Accepted Answer

The nominal exchange rate in the long run is primarily influenced by the relative quantities of money in two countries, as it reflects the price of one currency in terms of another. Changes in money supply can lead to inflation or deflation, affecting the nominal exchange rate.

Question 13

The real exchange rate is

Accepted Answer

The answer of The real exchange rate is
...

Question 14

Suppose that U.S. inflation is 3 percent and Turkish inflation is 70 percent. The effect of this discrepancy on the foreign exchange market is that

Accepted Answer

The Turkish currency will depreciate relative to the dollar because higher inflation in Turkey compared to the U.S. reduces the purchasing power of the Turkish currency, making it less valuable compared to the dollar.

Question 15

"The Big Mac index is The Economist's burger-based measure of whether currencies are over- or undervalued.... [E]xchange rates should eventually adjust to make the price of a basket of goods the same in each country. Our basket contains just one item: the Big Mac hamburger, which is pretty much the
Same around the world."
The Economist, July 28, 2012
Which principle is The Economist relying on when using the Big Mac to value exchange rates?

Accepted Answer

The Economist's Big Mac index is based on the principle of purchasing power parity (PPP), which suggests that in the long run, exchange rates should adjust so that an identical good or basket of goods costs the same in different countries when priced in a common currency.

Question 16

If the nominal exchange rate rises and price levels stay constant, the real exchange rate will

Accepted Answer

When the nominal exchange rate rises (meaning the domestic currency depreciates or you need more of the domestic currency to buy a unit of foreign currency) and the price levels stay constant, the real exchange rate will rise. This is because the real exchange rate adjusts the nominal rate by the relative prices of a basket of goods in the two countries, and if those prices stay constant but the nominal rate changes, the real rate will move in the direction of the nominal rate change.

Question 17

Given the U.S. price level P, the foreign country price level P*, and the real exchange rate RER in foreign currency per U.S. dollar, the nominal exchange rate E would be given by

Accepted Answer

The nominal exchange rate E is calculated as E = RER × (P*/P), where RER is the real exchange rate, P is the domestic price level, and P* is the foreign price level. This formula adjusts the real exchange rate by the ratio of foreign to domestic prices to get the nominal exchange rate.

Question 18

If the price level rises in the United States but not in foreign nations and the current exchange rate does not change, the expected future exchange rate

Accepted Answer

When the price level rises in the United States but not in foreign nations, U.S. goods become relatively more expensive compared to foreign goods. This makes U.S. exports less competitive and decreases demand for the dollar, leading to an expectation that the value of the dollar will fall in the future compared to foreign currencies.

Question 19

According to purchasing power parity, the foreign exchange market will

Accepted Answer

Purchasing power parity (PPP) theory states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that the exchange rate between two countries will adjust to reflect differences in inflation rates, making option C correct.

Question 20

Initially the nominal exchange rate between the South Korean won and the U.S. dollar is 950 won per dollar. If the nominal exchange rate increases to 1000 won per dollar and the U.S and Korean price levels do not change, the real exchange rate

Accepted Answer

The real exchange rate increases because the nominal exchange rate has increased while the price levels in both countries remain unchanged. This means that the won has depreciated relative to the dollar, making U.S. goods more expensive in terms of Korean goods.

Quiz 9: The Exchange Rate and the Balance of Payments