Question 1

Table 31-2
 
-Refer to Table 31-2.For which country(ies)in the table does purchasing-power parity hold?

Accepted Answer

Purchasing-power parity holds when the exchange rate between two currencies equalizes the purchasing power of each currency. In the table, the only country pairs that have approximately equal values in both currencies are Bolivia and Morocco. Therefore, the answer is B.

Question 2

If the exchange rate is 7 Moroccan dirhams per U.S.dollars,a crate of oranges costs 280 dirhams in the Moroccan capital of Rabat,and a similar crate of oranges in Miami sells for $45 dollars,then

Accepted Answer

The answer of If the exchange rate is 7 Moroccan...

Question 3

Table 31-2
 
-Refer to Table 31-2.Which currency(ies)is(are)less valuable than predicted by the doctrine of purchasing-power parity?

Accepted Answer

The answer of Table 31-2
 
-Refer to Table 31-2.Which currency(ies)is(are)less...

Question 4

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?

Accepted Answer

The answer of Suppose a Starbucks tall-latte cost $4.00 in...

Question 5

A roll of duct tape costs 2 Canadian dollars in Canada and 3 U.S.dollars in the U.S.If the nominal exchange rate is .80 Canadian dollars per U.S.dollar.

Accepted Answer

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

Question 6

If the dollar buys fewer bananas in Guatemala than in Honduras,then traders could make a profit by

Accepted Answer

The answer of If the dollar buys fewer bananas in...

Question 7

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?

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 8

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?

Accepted Answer

The answer of If a McDonald's Big Mac cost $3.06...

Question 9

If the exchange rate is 50 Bangladesh taka per dollar and a bushel of rice costs 180 taka in Bangladesh and $3 in the United States,then the real exchange rate is

Accepted Answer

The answer of If the exchange rate is 50 Bangladesh...

Question 10

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

Accepted Answer

The theory of purchasing-power parity suggests that the exchange rate between two countries adjusts to reflect the relative price levels in those countries. In other words, the exchange rate should equalize the prices of the same basket of goods between the two countries. This is because in a world of free trade and no barriers, goods should sell for the same price in both countries when converted into a common currency. Therefore, choice A is the correct answer.

Question 11

Table 31-2
 
-Refer to Table 31-2.In real terms,U.S.goods are less expensive than goods in which country(ies)?

Accepted Answer

The table shows that the real effective exchange rate (REER) of the US dollar is below 100 for both Japan and Norway, indicating that US goods are relatively cheaper in those countries compared to the base year (2005). The REER for Bolivia, Morocco, and Thailand are all above 100, meaning that US goods are relatively more expensive in those countries. Therefore, the correct answer is C) Japan and Norway.

Question 12

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

Accepted Answer

According to purchasing-power parity, the nominal exchange rate should adjust to reflect the relative price levels between two countries. Therefore, if the price level in foreign countries rises, the exchange rate (foreign currency per unit of U.S. currency) must rise as well to maintain purchasing power parity.

Question 13

If the dollar buys less cotton in Egypt than in the United States,then traders could make a profit by

Accepted Answer

The answer of If the dollar buys less cotton in...

Question 14

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?

Accepted Answer

The answer of Suppose a McDonalds Big Mac cost $4.00...

Question 15

A Big Mac in Japan costs 240 yen while it costs $3 in the U.S..The nominal exchange rate is 100 yen per dollar.Which of the following would both make the real exchange rate move towards purchasing-power parity?

Accepted Answer

If the price of Big Macs in the U.S. falls and the nominal exchange rate falls, the real exchange rate will move towards purchasing-power parity, as both changes make the Big Mac relatively cheaper in the U.S. compared to Japan.

Question 16

Suppose a Starbucks tall-latte cost $4.00 in the United States and 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?

Accepted Answer

The answer of Suppose a Starbucks tall-latte cost $4.00 in...

Question 17

Table 31-2
 
-Refer to Table 31-2.Which currency(ies)is(are)more valuable than predicted by the doctrine of purchasing-power parity?

Accepted Answer

The yen and kroner are more valuable than predicted by purchasing-power parity, which suggests that these currencies are overvalued compared to their purchasing power.

Question 18

If a Starbucks tall-latte cost $2.80 in the United States and 2.93 euros in the Euro area,then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?

Accepted Answer

Purchasing-power parity implies that the exchange rate should equalize the price of goods in different countries. The exchange rate is calculated as 2.93 euros / 2.80 dollars = 1.046 euros per dollar. 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.

Question 19

Table 31-2
 
-Refer to Table 31-2.In real terms,U.S.goods are more expensive than goods in which country(ies)?

Accepted Answer

The answer of Table 31-2
 
-Refer to Table 31-2.In real...

Question 20

If P = domestic prices,P* = foreign prices,and e is the nominal exchange rate,which of the following is implied by purchasing-power parity?

Accepted Answer

Purchasing-power parity implies that the exchange rate should be equal to the ratio of foreign prices to domestic prices. Therefore, e = P*/P.

Quiz 31: Open-Economy Macroeconomics: Basic Concepts

Table 31-2 -Refer to Table 31-2.For which country(ies) in the table does purchasing-power parity hold?