Question 1

If purchasing-power parity holds,a dollar will buy
A) more goods in foreign countries than in the United States.
B) as many goods in foreign countries as it does in the United States.
C) fewer goods in foreign countries than it does in the United States.
D) None of the above is implied by purchasing-power parity.

Accepted Answer

Purchasing power parity (PPP) is an economic theory that suggests that exchange rates between currencies should adjust until the price of an identical basket of goods is equalized across countries. Therefore, if PPP holds, a dollar will be able to buy as many goods in foreign countries as it does in the United States.

Question 2

An MP3 player in Singapore costs 200 Singaporean dollars.In the U.S.it costs 100 US dollars.Which of the following is correct?
A) if the nominal exchange rate is 2.0 Singaporean dollars per U.S.dollar,purchasing power parity holds.
B) if the nominal exchange rate is 1 Singaporean dollars per U.S.dollar,purchasing power parity holds.
C) if the nominal exchange rate is .50 Singaporean dollars per U.S.dollar,purchasing power parity holds.
D) purchasing power parity does not hold at any of the above exchange rates.

Accepted Answer

The answer of An MP3 player in Singapore costs 200...

Question 3

Purchasing-power parity describes the forces that determine
A) prices in the short run.
B) prices in the long run.
C) exchange rates in the short run.
D) exchange rates in the long run.

Accepted Answer

Purchasing-power parity theory suggests that exchange rates will adjust over time to reflect differences in the price levels of countries. Therefore, it describes the forces that determine exchange rates in the long run.

Question 4

If purchasing power parity holds,the price level in the U.S.is 120,and the price level in Canada is 140,which of the following is true?
A) the real exchange rate is 120/140.
B) the real exchange rate is 140/120.
C) the nominal exchange rate is 120/140
D) the nominal exchange rate is 140/120

Accepted Answer

The answer of If purchasing power parity holds,the price level...

Question 5

The nominal exchange rate is about 2 Aruban florin per dollar.If a basket of goods in the United States costs $40,how many florins must a basket of goods in Aruba cost for purchasing power parity to hold?
A) 20 florin
B) 40 florin
C) 60 florin
D) 80 florin

Accepted Answer

The answer of The nominal exchange rate is about 2...

Question 6

The nominal exchange rate is .80 euros per U.S.dollar and a basket of goods in France costs 1,000 euros while the same basket costs $800 in the U.S.The nominal exchange rate is 1.2 Australian dollars per U.S.dollar and a basket of goods in Australia costs 960 Australian dollars while the same basket costs $800 in the U.S..Which country has purchasing-power parity with the U.S.?
A) both France and Australia
B) France but not Australia
C) Australia but not France
D) neither France nor Australia

Accepted Answer

The answer of The nominal exchange rate is .80 euros...

Question 7

Other things the same,which of the following would both increase the U.S.real exchange rate?
A) prices in the U.S.were higher,or prices in Israel were higher.
B) prices in the U.S were higher,or prices in Israel were lower.
C) prices in the U.S.were lower,or prices in Israel were higher.
D) prices in the U.S.were lower,or prices in Israel were lower.

Accepted Answer

A higher price level in the U.S. would cause an increase in the exchange rate because it would make U.S. goods relatively more expensive compared to foreign goods. Similarly, a lower price level in Israel would cause an increase in the exchange rate because it would make Israeli goods relatively more expensive compared to U.S. goods. Therefore, either prices in the U.S. being higher or prices in Israel being lower would both lead to an increase in the U.S. real exchange rate.

Question 8

The theory of purchasing-power parity primarily explains
A) why trade deficits tend to move to zero over time.
B) how foreign prices affect domestic prices.
C) the determination of the real exchange rate.
D) why a change in the real exchange rate changes a country's net exports.

Accepted Answer

The theory of purchasing-power parity explains the determination of the real exchange rate, specifically how the relative changes in prices between two countries affect the exchange rate. It suggests that in the long run, the exchange rate between two countries will adjust to reflect the differences in their inflation rates and prices of goods and services.

Question 9

If a lobster in Maine costs $10 and that the same type of lobster in Massachusetts costs $30,then people could make a profit by
A) buying lobsters in Maine and selling them in Massachusetts.This action would increase the price of lobster in Massachusetts.
B) buying lobsters in Maine and selling them in Massachusetts.This action would decrease the price of lobster in Massachusetts.
C) buying lobsters in Massachusetts and selling them in Maine.This action would increase the price of lobster in Massachusetts.
D) buying lobsters in Massachusetts and selling them in Maine.This action would decrease the price of lobster in Massachusetts.

Accepted Answer

The answer of If a lobster in Maine costs $10...

Question 10

If purchasing-power parity holds,then the value of the
A) real exchange rate is equal to one.
B) nominal exchange rate is equal to one.
C) real exchange rate is equal to the nominal exchange rate.
D) real exchange rate is equal to the difference in inflation rates between the two countries.

Accepted Answer

Purchasing-power parity (PPP) implies that the real exchange rate is equal to one, meaning that a basket of goods costs the same in two different countries when measured in a common currency.

Question 11

According to purchasing power parity,if the same basket of goods costs $100 in the U.S.and 50 pounds in Britain,then what is the nominal exchange rate?
A) 2 pounds per dollar
B) 1 pound per dollar
C) 1/2 pound per dollar
D) None of the above is correct

Accepted Answer

The answer of According to purchasing power parity,if the same...

Question 12

Nominal exchange rates
A) vary little over time.
B) vary substantially over time.
C) appreciate over time for most countries.
D) depreciate over time for most countries.

Accepted Answer

Nominal exchange rates can be affected by a variety of factors including inflation, interest rates, and political stability, among others. Therefore, they often fluctuate substantially over time.

Question 13

If purchasing-power parity holds,a dollar will buy
A) one unit of each foreign currency.
B) foreign currency equal to the U.S.price level divided by the foreign country's price level.
C) enough foreign currency to buy as many goods as it does in the United States.
D) None of the above is implied by purchasing-power parity.

Accepted Answer

The answer of If purchasing-power parity holds,a dollar will buy
A)...

Question 14

If a dollar buys more potatoes in the U.S.than in France,then
A) the real exchange rate is greater than 1;a profit might be made by buying potatoes in the U.S.and selling them in France.
B) the real exchange rate is greater than 1;a profit might be made by buying potatoes in France.and selling them in the U.S.
C) the real exchange rate is less than 1;a profit might be made by buying potatoes in the U.S.and selling them in France.
D) the real exchange rate is less than 1;a profit might be made by buying potatoes in France and selling them in the U.S.

Accepted Answer

If a dollar buys more potatoes in the U.S. than in France, then the price of potatoes is lower in the U.S. than in France. This means that the exchange rate between the U.S. dollar and the French euro is such that the U.S. dollar is relatively cheaper than the euro. Therefore, the real exchange rate is less than 1, as 1 U.S. dollar buys fewer euros than 1 euro buys dollars. In this case, a profit might be made by buying potatoes in the U.S. with U.S. dollars (which are relatively cheaper) and then selling them in France for euros (which are relatively more expensive). This would result in gaining more euros for each dollar spent, leading to a profit.

Question 15

According to purchasing-power parity,which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level?
A) the real exchange rate,but not the nominal exchange rate
B) the nominal exchange rate,but not the real exchange rate
C) the real exchange rate and the nominal exchange rate
D) neither the real exchange rate nor the nominal exchange rate

Accepted Answer

The answer of According to purchasing-power parity,which of the following...

Question 16

According to purchasing power parity,if two countries have the same price level because they have the same prices for all goods and services,then which of the following would equal 1?
A) the real exchange rate,but not the nominal exchange rate
B) the nominal exchange rate,but not the real exchange rate
C) the real exchange rate and the nominal exchange rate
D) neither the real exchange rate nor the nominal exchange rate

Accepted Answer

According to purchasing power parity, the real exchange rate between two countries with the same price level would be equal to 1 because the real exchange rate measures the relative prices of goods and services between two countries. The nominal exchange rate, on the other hand, measures the relative value of two currencies in the foreign exchange market and is affected by factors such as interest rates and capital flows. Therefore, the real exchange rate and the nominal exchange rate would both be equal to 1 in this scenario.

Question 17

If the real exchange rate between the U.S.and Argentina is 1,then
A) purchasing-power parity holds,and 1 U.S.dollar buys 1 Argentinean bolivar.
B) purchasing power parity holds,and the amount of dollars needed to buy goods in the U.S.is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina.
C) purchasing power parity does not hold,but 1 U.S.dollar buys 1 Argentinean bolivar.
D) purchasing power parity does not hold,but the amount of dollars needed to buy goods in the U.S.is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina.

Accepted Answer

Purchasing power parity (PPP) is an economic theory that suggests that the exchange rate between two countries should adjust to equalize the price of a basket of goods and services between the two countries. Therefore, if the real exchange rate between the U.S. and Argentina is 1, purchasing power parity holds and the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina. Option B correctly reflects this concept.

Question 18

The law of one price states that
A) a good must sell at the price fixed by law.
B) a good must sell at the same price at all locations.
C) a good cannot sell for a price greater than the legal price ceiling.
D) nominal exchange rates will not vary.

Accepted Answer

The law of one price states that a good must sell at the same price at all locations. This means that in a competitive market, identical goods will have the same price regardless of where they are sold. This is the result of arbitrage, where traders will buy goods in a low-cost market and sell them in a high-cost market to take advantage of the price difference. Thus, the law of one price is an important concept in international trade and finance, ensuring that prices are consistent across countries for identical goods.

Question 19

If purchasing power parity holds,a bushel of rice costs $10 in the U.S. ,and the nominal exchange rate is 2 Thai bhat per dollar,what is the price of rice in Thailand?
A) 20 bhat
B) 10 bhat
C) 5 bhat
D) 2 bhat

Accepted Answer

Purchasing power parity implies that the price of goods should be the same in different countries when expressed in a common currency. If a bushel of rice costs $10 in the U.S. and the exchange rate is 2 Thai baht per dollar, then the price in Thailand should be 10 dollars * 2 baht/dollar = 20 baht.

Question 20

Which of the following does purchasing-power parity imply?
A) The purchasing power of the dollar is the same in the U.S.as in foreign countries.
B) The price of domestic goods relative to foreign goods cannot change.
C) The nominal exchange rate is the ratio of U.S.prices to foreign prices.
D) All of the above are correct.

Accepted Answer

The answer of Which of the following does purchasing-power parity...

Quiz 31: Open-Economy Macroeconomics: Basic Concepts

If purchasing-power parity holds,a dollar will buy

An MP3 player in Singapore costs 200 Singaporean dollars.In the U.S.it costs 100 US dollars.Which of the following is correct?

Purchasing-power parity describes the forces that determine

If purchasing power parity holds,the price level in the U.S.is 120,and the price level in Canada is 140,which of the following is true?

The nominal exchange rate is about 2 Aruban florin per dollar.If a basket of goods in the United States costs $40,how many florins must a basket of goods in Aruba cost for purchasing power parity to hold?

Other things the same,which of the following would both increase the U.S.real exchange rate?

The theory of purchasing-power parity primarily explains

If a lobster in Maine costs $10 and that the same type of lobster in Massachusetts costs $30,then people could make a profit by

If purchasing-power parity holds,then the value of the

According to purchasing power parity,if the same basket of goods costs $100 in the U.S.and 50 pounds in Britain,then what is the nominal exchange rate?

Nominal exchange rates

If purchasing-power parity holds,a dollar will buy

If a dollar buys more potatoes in the U.S.than in France,then

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

According to purchasing power parity,if two countries have the same price level because they have the same prices for all goods and services,then which of the following would equal 1?

If the real exchange rate between the U.S.and Argentina is 1,then

The law of one price states that

If purchasing power parity holds,a bushel of rice costs $10 in the U.S. ,and the nominal exchange rate is 2 Thai bhat per dollar,what is the price of rice in Thailand?

Which of the following does purchasing-power parity imply?