Question 1

Use the (hypothetical) information in the following table to answer the following questions.Table 18-2
 $\begin{array}{|l|l|c|l|c}
\hline \text { Country } & \text { Currency } & \begin{array}{l}
\text { Currency per } \
\text { U.S. Dollar }
\end{array} & \begin{array}{l}
\text { U.S. Price } \
\text { Index }
\end{array} & \begin{array}{l}
\text { Country Price } \
\text { Index }
\end{array} \
\hline \text { Bolivia } & \text { boloviano } & 8.00 & 200 & 1600 \
\hline \text { Japan } & \text { yen } & 80.00 & 200 & 20,000 \
\hline \text { Morocco } & \text { dinar } & 10.00 & 200 & 2,000 \
\hline \text { Norwegian } & \text { kroner } & 6.5 & 200 & 1,500 \
\hline \text { Thailand } & \text { baht } & 40.00 & 200 & 7,000 \
\hline
\end{array}$

-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 Use the (hypothetical) information in the following...

Question 2

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 3

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 states that the exchange rate between two currencies should eventually equalize the prices of a basket of goods and services across countries. Therefore, if the price level in a foreign country rises compared to the United States, the foreign currency must increase in value (and the nominal exchange rate must rise) to maintain purchasing power parity.

Question 4

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 5

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

The answer of A roll of duct tape costs 2...

Question 6

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 check for purchasing power parity, we need to convert the prices of both goods into the same currency using the exchange rate.

In dollars: 
- Tall Latte = $4.00 
- Big Mac = $3.50

In euros: 
- Tall Latte = 3.20 euros 
- Big Mac = 2.45 euros

Now, we can compare the prices of the two goods. If purchasing power parity holds, then the price of the same good should be the same in different countries when converted to the same currency using the exchange rate.

Using the exchange rate of .80 euros per dollar: 
- The tall latte in euros converts to $4.00 (3.20 euros x 0.80). This is the same price as in the United States, so the tall latte is consistent with purchasing power parity. 
- The Big Mac in euros converts to $1.96 (2.45 euros x 0.80). This is not the same price as in the United States, so the Big Mac is not consistent with purchasing power parity.

Therefore, the correct choice is C) The tall latte but not the Big Mac.

Question 7

Use the (hypothetical) information in the following table to answer the following questions.Table 18-2
 $\begin{array}{|l|l|c|l|c}
\hline \text { Country } & \text { Currency } & \begin{array}{l}
\text { Currency per } \
\text { U.S. Dollar }
\end{array} & \begin{array}{l}
\text { U.S. Price } \
\text { Index }
\end{array} & \begin{array}{l}
\text { Country Price } \
\text { Index }
\end{array} \
\hline \text { Bolivia } & \text { boloviano } & 8.00 & 200 & 1600 \
\hline \text { Japan } & \text { yen } & 80.00 & 200 & 20,000 \
\hline \text { Morocco } & \text { dinar } & 10.00 & 200 & 2,000 \
\hline \text { Norwegian } & \text { kroner } & 6.5 & 200 & 1,500 \
\hline \text { Thailand } & \text { baht } & 40.00 & 200 & 7,000 \
\hline
\end{array}$

-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 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 9

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

The cost of scrap iron in China is 1400 yuan, which is equivalent to approximately $209. This is higher than the $150 price in the U.S., so buying in the U.S. and selling in China could yield a profit, potentially driving down the price in China.

Question 10

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 11

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 12

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...

Question 13

Use the (hypothetical) information in the following table to answer the following questions.Table 18-2
 $\begin{array}{|l|l|c|l|c}
\hline \text { Country } & \text { Currency } & \begin{array}{l}
\text { Currency per } \
\text { U.S. Dollar }
\end{array} & \begin{array}{l}
\text { U.S. Price } \
\text { Index }
\end{array} & \begin{array}{l}
\text { Country Price } \
\text { Index }
\end{array} \
\hline \text { Bolivia } & \text { boloviano } & 8.00 & 200 & 1600 \
\hline \text { Japan } & \text { yen } & 80.00 & 200 & 20,000 \
\hline \text { Morocco } & \text { dinar } & 10.00 & 200 & 2,000 \
\hline \text { Norwegian } & \text { kroner } & 6.5 & 200 & 1,500 \
\hline \text { Thailand } & \text { baht } & 40.00 & 200 & 7,000 \
\hline
\end{array}$

-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 14

Use the (hypothetical) information in the following table to answer the following questions.Table 18-2
 $\begin{array}{|l|l|c|l|c}
\hline \text { Country } & \text { Currency } & \begin{array}{l}
\text { Currency per } \
\text { U.S. Dollar }
\end{array} & \begin{array}{l}
\text { U.S. Price } \
\text { Index }
\end{array} & \begin{array}{l}
\text { Country Price } \
\text { Index }
\end{array} \
\hline \text { Bolivia } & \text { boloviano } & 8.00 & 200 & 1600 \
\hline \text { Japan } & \text { yen } & 80.00 & 200 & 20,000 \
\hline \text { Morocco } & \text { dinar } & 10.00 & 200 & 2,000 \
\hline \text { Norwegian } & \text { kroner } & 6.5 & 200 & 1,500 \
\hline \text { Thailand } & \text { baht } & 40.00 & 200 & 7,000 \
\hline
\end{array}$

-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

To determine where U.S. goods are less expensive in real terms, compare the ratio of the U.S. price index to the country price index adjusted by the exchange rate. For Japan and Norway, the real exchange rate indicates U.S. goods are cheaper.

Question 15

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 implies that the exchange rate between two countries should equal the ratio of the price levels of the two countries. Therefore, e = P*/P.

Question 16

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 find the real exchange rate, we need to calculate the price of the latte in each country's currency and then adjust for the exchange rate.

In the US: $3.75
In China: 28 yuan

Using the nominal exchange rate, we can convert yuan to dollars:
28 yuan ÷ 6.75 yuan/dollar = $4.15

Therefore, the real exchange rate is:
$3.75 ÷ $4.15 = 0.904

If purchasing power parity held, the nominal exchange rate would be higher, meaning that $1 would be worth more in China and therefore the real exchange rate would be lower.

Question 17

Use the (hypothetical) information in the following table to answer the following questions.Table 18-2
 $\begin{array}{|l|l|c|l|c}
\hline \text { Country } & \text { Currency } & \begin{array}{l}
\text { Currency per } \
\text { U.S. Dollar }
\end{array} & \begin{array}{l}
\text { U.S. Price } \
\text { Index }
\end{array} & \begin{array}{l}
\text { Country Price } \
\text { Index }
\end{array} \
\hline \text { Bolivia } & \text { boloviano } & 8.00 & 200 & 1600 \
\hline \text { Japan } & \text { yen } & 80.00 & 200 & 20,000 \
\hline \text { Morocco } & \text { dinar } & 10.00 & 200 & 2,000 \
\hline \text { Norwegian } & \text { kroner } & 6.5 & 200 & 1,500 \
\hline \text { Thailand } & \text { baht } & 40.00 & 200 & 7,000 \
\hline
\end{array}$

-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 18

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 nominal exchange rate between two countries must reflect the differences in price levels between those countries. In other words, the exchange rate should adjust so that the same basket of goods costs the same in both countries, taking into account the exchange rate. This ensures that there is no advantage in purchasing goods from one country over another due to exchange rate discrepancies.

Question 19

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, an increase in the money supply will lead to an increase in the price level. If this occurs, the country's currency will depreciate relative to other currencies because it will take more of that currency to purchase the same amount of goods and services as before. Therefore, choice B is the correct answer.

Question 20

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...

Quiz 18: Open-Economy Macroeconomic Models

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?

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 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 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 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.

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 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?

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

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 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

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

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

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?