Question 1

From 1970 to 1998 the U.S.dollar
A) gained value compared to the Italian lira because inflation was higher in the U.S.
B) gained value compared to the Italian lira because inflation was lower in the U.S.
C) lost value compared to the Italian lira because inflation was higher in the U.S.
D) lost value compared to the Italian lira because inflation was lower in the U.S.

Accepted Answer

When a currency has lower inflation than another currency, it tends to gain value compared to the other currency. Therefore, the U.S. dollar gained value compared to the Italian lira because inflation was lower in the U.S. during the period of 1970 to 1998.

Question 2

Suppose that the inflation rate is higher in Turkey than in the U.S.for the next six months.Then according to purchasing power parity,if exchange rates are given in terms of how many Turkish lira or how many Turkish goods a U.S.dollar buys,
A) the nominal exchange rate rises but the real exchange rate does not.
B) the nominal exchange rate does not rise,but the real exchange rate does.
C) both the nominal and real exchange rates rise.
D) neither the nominal nor the real exchange rate rises.

Accepted Answer

The answer of Suppose that the inflation rate is higher...

Question 3

During a hyperinflation the real domestic value of a country's currency
A) falls and its nominal exchange rate depreciates.
B) falls and its nominal exchange rate appreciates.
C) rises and its nominal exchange rate depreciates.
D) rises and its nominal exchange rate appreciates.

Accepted Answer

During hyperinflation, the real domestic value of a country's currency falls as prices increase rapidly. This causes a depreciation in the nominal exchange rate.

Question 4

Which of the following events would be consistent with purchasing-power parity?
A) The price level in the United States rises more rapidly than that in Ireland and the real exchange rate defined as Irish goods per unit of U.S.goods stays the same.
B) The money supply in the United States rises more rapidly than in Egypt and the nominal exchange rate defined as Egyptian pounds per dollar falls.
C) Earl,a worldwide traveler,looks at exchange rates and worldwide breakfast prices one morning and finds that whatever country he decides to go to he can convert $5 into enough local currency to buy the same breakfast.
D) All of the above are correct.

Accepted Answer

The answer of Which of the following events would be...

Question 5

On behalf of your firm,you make frequent trips to Singapore.You notice that you always have to pay more dollars to get enough local currency to get your nails manicured than you have to pay to get manicured in the United States.This is
A) inconsistent with purchasing-power parity,but might be explained by limited opportunities for arbitrage in manicuring across international borders.
B) consistent with purchasing-power parity if prices in Hong Kong are rising more rapidly than prices in the United States.
C) consistent with purchasing-power parity if prices in Hong Kong are rising less rapidly than prices in the United States.
D) None of the above is correct.

Accepted Answer

Purchasing-power parity theory suggests that exchange rates should adjust to equalize the price of identical goods and services in different countries. However, this does not always happen due to limited opportunities for arbitrage (buying a good in one market and selling it in another to take advantage of price differentials) across international borders. In this case, the higher price for manicures in Singapore may be due to higher costs of production or limited competition in the local market, making it difficult for arbitrageurs to take advantage of the price differential.

Question 6

Purchasing-power parity theory does not hold at all times because
A) many goods are not easily transported.
B) the same goods produced in different countries may be imperfect substitutes for each other.
C) Both a and b are correct.
D) prices are different across countries.

Accepted Answer

Purchasing-power parity theory assumes that identical goods should be priced the same in different countries, but in reality, many goods are not easily transported or are not perfect substitutes for each other, causing differences in prices across countries. Therefore, both options A and B are correct, and thus, the theory does not hold at all times.

Quiz 31: Open-Economy Macroeconomics: Basic Concepts

From 1970 to 1998 the U.S.dollar

Suppose that the inflation rate is higher in Turkey than in the U.S.for the next six months.Then according to purchasing power parity,if exchange rates are given in terms of how many Turkish lira or how many Turkish goods a U.S.dollar buys,

During a hyperinflation the real domestic value of a country's currency

Which of the following events would be consistent with purchasing-power parity?

On behalf of your firm,you make frequent trips to Singapore.You notice that you always have to pay more dollars to get enough local currency to get your nails manicured than you have to pay to get manicured in the United States.This is

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