Question 1

The 'purchasing power parity theory' of exchange rate determination states that:
A) in the short run, costs of labour are the most important determinant of the exchange rate.
B) in the long run, a government agency sets the exchange rate between countries to maintain purchasing power.
C) in the long run, exchange rates will move to equalise the purchasing power of different countries.
D) in the long run, exchange rates are mainly driven by currency speculators' expectations.

Accepted Answer

The purchasing power parity theory suggests that in the long run, exchange rates will move to equalize the purchasing power of different countries. This means that if the price of goods in one country is higher than in another, the currency of the first country should depreciate to make foreign goods cheaper and equalize the purchasing power of consumers in both countries.

Question 2

'Purchasing power parity' is the theory that in the long run,exchange rates move to equalise
A) nominal interest rates across countries.
B) real GDP across countries.
C) corporate profits across countries.
D) the relative purchasing power of currencies across countries.

Accepted Answer

Purchasing power parity theory states that in the long run, exchange rates between two currencies will equalize the relative purchasing power of each currency. This means that if one currency can purchase more goods and services in its home country than another currency can in its home country, then the exchange rate should adjust so that both currencies have equal purchasing power in a third country, such as through international trade. Therefore, the relative purchasing power of currencies across countries is the best choice.

Question 3

Soon after the Australia dollar was floated,it ________ against the US dollar and ________ against other major currencies.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated

Accepted Answer

The answer of Soon after the Australia dollar was floated,it...

Question 4

Assume that a Big Mac burger costs $3.57 in Australia and 7.80 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,what is the dollar cost of a Big Mac in Poland?
A) $1.19
B) $2.60
C) $4.23
D) $10.71

Accepted Answer

To find the dollar cost of a Big Mac in Poland, we need to convert 7.80 zlotys into dollars. To do this, we can use the exchange rate of 3 zlotys per dollar:

7.80 zlotys / 3 zlotys per dollar = $2.60

Therefore, the dollar cost of a Big Mac in Poland is $2.60.

Question 5

All of the following explain why purchasing power parity does not completely explain long-run fluctuations in exchange rates,except:
A) not all goods and services produced in any country are traded internationally.
B) consumer preferences for goods and services differ across countries.
C) some countries impose barriers to trade.
D) most countries have free markets with little, if any, government regulation.

Accepted Answer

This statement is incorrect. Many countries have government regulation and intervention in their economies, which can affect exchange rates in the long run.

Question 6

All of the following are considered among the four most important determinants in explaining exchange rate fluctuations in the long run,except
A) tariffs and quotas.
B) preferences for domestic and foreign goods.
C) interest rates.
D) relative rates of productivity growth across countries.

Accepted Answer

Interest rates are more commonly associated with short-term exchange rate fluctuations rather than long-term determinants. Long-term exchange rate movements are more influenced by factors such as productivity, trade policies (tariffs and quotas), and preferences for goods, which affect the trade balance and investment flows over time.

Question 7

Describe how the 'Bretton Woods System' operated.
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Accepted Answer

The answer of Describe how the 'Bretton Woods System' operated.
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Question 8

The 'theory of purchasing power parity' implies that:
A) in the long run, the prices of goods in different countries will be the same when measured in a common currency.
B) the prices of goods in different countries are always the same.
C) the nominal exchange rates will equate over time.
D) demand and supply have no influence over the exchange rate.

Accepted Answer

The theory of purchasing power parity suggests that, in the long run, the prices of goods in different countries will become the same when measured in a common currency. This occurs because exchange rates adjust to reflect differences in inflation and other factors that affect the cost of goods. Therefore, choice A is the correct answer. Choices B, C, and D are incorrect because they do not accurately reflect the implications of the theory of purchasing power parity.

Question 9

According to the theory of 'purchasing power parity',the foreign exchange market will
A) no longer demand Australian dollars if the inflation rate in Australia is higher than the inflation rates in other countries.
B) undervalue the Australian dollar if inflation in Australia is higher than the inflation rates in other countries.
C) adjust the value of currencies to reflect differing inflation rates between countries.
D) result in an increase in the supply of dollars whenever Australia's inflation rate is lower than the inflation rates in other countries.

Accepted Answer

The theory of purchasing power parity suggests that the exchange rate between two currencies should adjust to reflect differences in inflation rates between the two countries. If inflation is higher in Australia compared to other countries, the exchange rate should adjust by devaluing the Australian dollar to reflect the decreased purchasing power of the currency due to inflation. Similarly, if inflation is lower in Australia compared to other countries, the exchange rate should adjust by appreciating the Australian dollar to reflect the increased purchasing power of the currency. Therefore, option C is the correct answer.

Question 10

Because of inflation,the prices of Australian goods are rising faster than prices of goods in Great Britain.If purchasing power parity holds,then
A) the Australian dollar will depreciate against the British pound.
B) the Australian dollar will appreciate against the British pound.
C) the value of the Australian dollar relative to the British pound will remain the same.
D) it will take fewer Australian dollars to buy one British pound.

Accepted Answer

Purchasing power parity (PPP) assumes that in the long run, exchange rates between two countries will adjust to reflect the difference in inflation between the two countries. If the prices of goods in one country are rising faster than in another, then over time, the currency of the country with higher inflation will depreciate to reflect the difference in purchasing power. Therefore, if prices are rising faster in Australia than in Great Britain, the Australian dollar will depreciate against the British pound.

Question 11

If prices rise slower in the United States than in Australia,then
A) demand for the US dollar declines and the US dollar appreciates relative to the Australian dollar.
B) demand for the US dollar declines and the US dollar depreciates relative to the Australian dollar.
C) demand for the US dollar increases and the US dollar appreciates relative to the Australian dollar.
D) demand for the US dollar increases and the US dollar depreciates relative to the Australian dollar.

Accepted Answer

If prices rise slower in the US, the US dollar becomes more attractive, increasing demand and causing it to appreciate relative to the Australian dollar.

Question 12

Assume that a Big Mac burger costs $3.57 in Australia and 7.80 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,purchasing power parity predicts that the dollar will
A) appreciate as the demand for dollars rises in the long run.
B) appreciate as the supply of dollars falls in the long run.
C) depreciate as the demand for dollars falls in the long run.
D) depreciate as the supply of dollars rises in the long run.

Accepted Answer

The answer of Assume that a Big Mac burger costs...

Question 13

The trade weighted index (TWI)is a measure of the
A) difference between exports and imports, to establish the balance of trade on goods and services.
B) value of the Australian dollar against a basket of currencies of its major trading partners.
C) volume of international trade throughout the world.
D) price changes in goods and services traded between Australia and the rest of the world.

Accepted Answer

The trade weighted index (TWI) measures the value of the Australian dollar against a basket of currencies of its major trading partners. It is calculated by combining a range of exchange rate indices weighted by the importance of the corresponding country in Australian international trade.

Question 14

The Australian dollar was floated in ________.
A) 1974
B) 1983
C) 1989
D) 2001

Accepted Answer

The Australian dollar was floated on December 12, 1983, which means that it became a fully free-floating currency and its value was determined by supply and demand in the foreign exchange market.

Question 15

Suppose the price of a mobile phone in Australia is $400 and 30 000 yen in Japan.If the current exchange rate is 100 yen to the dollar,then purchasing power parity theory would predict that in the long run
A) the yen will depreciate relative to the dollar.
B) the yen will appreciate relative to the dollar.
C) the value of the yen relative to the dollar will not change.
D) both the yen and the dollar will appreciate.

Accepted Answer

Purchasing power parity (PPP) theory states that in the long run, the exchange rate between two countries will adjust to equalize the prices of identical goods and services in both countries. In this case, according to PPP, the price of the mobile phone in Japan should be around $400 (30,000 yen/100 yen per dollar = $300). Since the actual price in Japan is higher than this, PPP predicts that the value of the yen will appreciate relative to the dollar, so that the price of the phone in Japan will eventually equalize with that in Australia. Therefore, the correct answer is B – the yen will appreciate relative to the dollar.

Question 16

What was the General Agreement on Tariffs and Trade (GATT)? What did it accomplish?
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Accepted Answer

The answer of What was the General Agreement on Tariffs...

Question 17

Which of the following is not a feature of the current exchange rate system?
A) Some developing countries attempt to keep their currencies' exchange rates fixed against the US dollar or other major currencies.
B) Developed countries rely on the gold standard to fix their currencies' exchange rates.
C) Most Western European countries have adopted a single currency: the euro.
D) Australia allows the dollar to float against other major currencies, only intervening occasionally.

Accepted Answer

Developed countries no longer rely on the gold standard to fix their currencies' exchange rates. The current exchange rate system is based on flexible exchange rates, where the value of a currency is determined by market forces of supply and demand. Developed countries, like all other countries, have adopted this system.

Question 18

Exchange rates will equalise purchasing power parity in the long run unless
A) all products can be traded internationally.
B) products do not differ across countries.
C) countries practise free trade.
D) countries impose barriers to trade, such as tariffs and quotas.

Accepted Answer

If countries impose barriers to trade, the prices of goods and services will differ from country to country, leading to different purchasing power. This will prevent exchange rates from equalizing purchasing power parity in the long run. Choices A, B, and C are incorrect because for exchange rates to equalize purchasing power parity, products must either be traded internationally, not differ too much across countries, or countries must practice free trade.

Question 19

What factors are most important for determining exchange rate fluctuations in the long run?
A) Relative price levels across countries
B) Relative rates of productivity growth across countries
C) Preferences for domestic and foreign goods across countries
D) All of these options are correct

Accepted Answer

All of these factors play a significant role in determining exchange rate fluctuations in the long run. Relative price levels across countries determine the purchasing power parity of a currency, while relative rates of productivity growth impact a country's competitiveness and influence international trade flows. Preferences for domestic and foreign goods can also affect the demand for a currency.

Question 20

Which of the following will cause the Australian dollar to depreciate against the Japanese yen?
A) Prices in Japan rise faster than prices in Australia.
B) The average productivity of Japanese firms is higher than Australian firms.
C) Australian consumers decrease their preferences for Japanese goods.
D) A quota is placed on Australian products.

Accepted Answer

The answer of Which of the following will cause the...

Quiz 20: Macroeconomics in an Open Economy

The 'purchasing power parity theory' of exchange rate determination states that:

'Purchasing power parity' is the theory that in the long run,exchange rates move to equalise

Soon after the Australia dollar was floated,it against the US dollar and against other major currencies.

Assume that a Big Mac burger costs $3.57 in Australia and 7.80 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,what is the dollar cost of a Big Mac in Poland?

All of the following explain why purchasing power parity does not completely explain long-run fluctuations in exchange rates,except:

All of the following are considered among the four most important determinants in explaining exchange rate fluctuations in the long run,except

Describe how the 'Bretton Woods System' operated. _ _

The 'theory of purchasing power parity' implies that:

According to the theory of 'purchasing power parity',the foreign exchange market will

Because of inflation,the prices of Australian goods are rising faster than prices of goods in Great Britain.If purchasing power parity holds,then

If prices rise slower in the United States than in Australia,then

Assume that a Big Mac burger costs $3.57 in Australia and 7.80 zlotys in Poland.If the exchange rate is 3 zlotys per dollar,purchasing power parity predicts that the dollar will

The trade weighted index (TWI) is a measure of the

The Australian dollar was floated in ________.

Suppose the price of a mobile phone in Australia is $400 and 30 000 yen in Japan.If the current exchange rate is 100 yen to the dollar,then purchasing power parity theory would predict that in the long run

What was the General Agreement on Tariffs and Trade (GATT)? What did it accomplish? _ _

Which of the following is not a feature of the current exchange rate system?

Exchange rates will equalise purchasing power parity in the long run unless

What factors are most important for determining exchange rate fluctuations in the long run?

Which of the following will cause the Australian dollar to depreciate against the Japanese yen?