Question 1

Suppose that a lobster in Nova Scotia costs $10 and the same type of lobster in New Brunswick costs $30.How could people make a profit in the situation?

Accepted Answer

The answer of Suppose that a lobster in Nova Scotia...

Question 2

What does the law of one price state?

Accepted Answer

The law of one price states that in a market with perfect competition and no transaction costs, identical goods must sell at the same price in all locations. This is due to the fact that consumers would simply buy the cheaper version of the good, and sellers would raise the price of the cheaper version to match the more expensive version, until both sell at the same price.

Question 3

Suppose that the exchange rate is 50 Bangladesh taka per Canadian dollar,and that a bushel of rice costs 200 taka in Bangladesh and $3 in Canada.Which statement is consistent with these facts?

Accepted Answer

The answer of Suppose that the exchange rate is 50...

Question 4

Suppose that the dollar buys more bananas in Honduras than in Costa Rica.How could traders make a profit?

Accepted Answer

Traders could buy bananas where they are cheaper (Honduras) and sell them where they are more expensive (Costa Rica), which would increase demand and prices in Honduras.

Question 5

What does purchasing-power parity imply for the exchange rate?

Accepted Answer

Purchasing-power parity (PPP) implies that the real exchange rate is equal to one, meaning that a basket of goods should cost the same in two different countries when prices are converted into a common currency at the prevailing exchange rate. This concept does not directly relate to the nominal exchange rate being one, the real exchange rate equating to the nominal exchange rate, or the real exchange rate being the difference in inflation rates between two countries.

Question 6

Suppose the price of a standard pair of sport shoes is €60 in Spain and $85 in Canada,and the current exchange rate is 0.75 euro for one dollar.What is the purchasing-power parity exchange rate of the dollar?

Accepted Answer

Purchasing-power parity exchange rate (PPPER) is the exchange rate that ensures the same amount of goods across countries. 
Here, the price of sport shoes in Spain is €60 and in Canada is $85. 
So, as per PPPER, $85 should be equal to (or can purchase the same amount of goods as) €60.
Let's calculate the PPPER: 
€1= $0.75 (given exchange rate) 
Then, x $85= €60 
Or, $85= €60/$x 
Or, x= €60/$85 
Or, x=0.7058 (approx) 
Therefore, the PPPER of the dollar is 0.71 euro/dollar (approx). 
Hence, the best choice is C.

Question 7

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

Accepted Answer

The theory of purchasing-power parity suggests that the nominal exchange rate between two countries should reflect the different price levels in those countries. In other words, if a basket of goods costs $100 in the United States and the same basket of goods costs €80 in the eurozone, then the exchange rate between the U.S. dollar and the euro should be such that $1 equals €0.80. This would ensure that the purchasing power of each currency is equal.

Question 8

How do nominal exchange rates change over time?

Accepted Answer

Nominal exchange rates can vary substantially over time due to a variety of factors such as changing economic conditions, global events, and government policies. It is not accurate to say that they appreciate or depreciate over time for most countries as this depends on individual country-specific factors.

Question 9

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

Accepted Answer

The answer of If P = domestic prices,P* = foreign...

Question 10

Refer to the Table 12-1.What countries in the table does purchasing-power parity hold for?

Accepted Answer

The answer of Refer to the Table 12-1.What countries in...

Question 11

What happened after the introduction of the euro as the common currency of many European countries?

Accepted Answer

The introduction of the euro as the common currency of many European countries reduced the costs of trading within Europe through the elimination of currency exchange fees and reduced currency risk. This led to an increase in international trade among participating countries. The euro did not necessarily lead to greater differences in monetary policy amongst participating countries. The introduction of the euro had no direct impact on trade between European countries and Canada.

Question 12

Suppose that the exchange rate is 10 Moroccan dirhams per Canadian dollar.Also suppose that you can buy a crate of oranges for 300 dirhams in the Moroccan capital of Rabat and can buy a similar crate of oranges in Ottawa for $35.Which statement is consistent with these facts?

Accepted Answer

To determine the real exchange rate, we need to compare the prices of goods in both countries using the exchange rate. In this case, we can convert the price of a crate of oranges in Canada from dollars to dirhams by multiplying $35 by 10, which equals 350 dirhams. This means that the crate of oranges is cheaper in Canada (350 dirhams) than it is in Morocco (300 dirhams). Therefore, arbitrageurs could buy oranges in Morocco for 300 dirhams, sell them in Canada for 350 dirhams, and profit from the price difference. This would increase demand for dirhams and decrease demand for Canadian dollars, causing the exchange rate to adjust until the price of oranges is equalized across both countries. Thus, the real exchange rate is greater than one, and arbitrageurs could profit by buying oranges in Morocco and selling them in Canada.

Question 13

How has the introduction of the euro affected arbitrage?

Accepted Answer

The introduction of the euro has eliminated the possibility of arbitrage based on exchange-rate differences within Europe because all countries within the Eurozone now use the same currency, eliminating any differences in prices due to exchange rates. However, other forms of arbitrage, such as price differences between different markets, may still exist.

Question 14

What terms refers to the process of taking advantage of different prices for a good in different markets?

Accepted Answer

Arbitrage refers to the process of taking advantage of different prices for a good in different markets. It involves buying a good at a low price in one market and selling it at a higher price in another market, making a profit on the price difference.

Question 15

Suppose that the dollar buys less cotton in Canada than in Egypt.How could traders make a profit?

Accepted Answer

The answer of Suppose that the dollar buys less cotton...

Question 16

What does purchasing-power parity imply?

Accepted Answer

Purchasing-power parity (PPP) implies that in the absence of transportation and other transaction costs, identical goods should have the same price in different countries when prices are converted into a common currency. This concept is often illustrated with the example of a standard product, like a hamburger, to explain how PPP works across different countries.

Question 17

What does purchasing-power parity explain?

Accepted Answer

Purchasing-power parity explains exchange rates in the long run.

Question 18

Suppose the nominal exchange rate between the yen and the U.S.dollar is 260 yen per U.S.dollar,and that the nominal exchange rate between the Canadian dollar and the U.S.dollar is 1.30 Canadian dollars per U.S.dollar.How many yen would it take to buy a Canadian dollar?

Accepted Answer

To calculate how many yen it would take to buy a Canadian dollar, we need to use the exchange rates between the yen and the U.S. dollar, and between the Canadian dollar and the U.S. dollar. We can set up a proportion:
260 yen / 1 USD = x yen / 1.30 CAD
Solving for x, we get:
x = (260 yen / 1 USD) * (1.30 CAD / 1 USD) = 338 yen/CAD
Therefore, it would take 338 yen to buy 1 Canadian dollar. Rounded to the nearest whole number, this is 200 yen per Canadian dollar. Answer choice C) is correct.

Question 19

The nominal exchange rate is about 3 Aruban florins per dollar.If a basket of goods in Canada costs $40,how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold?

Accepted Answer

For purchasing-power parity to hold, the cost of the basket of goods in Aruba in florins should equal the cost in Canada in dollars multiplied by the exchange rate. Therefore, 40 dollars * 3 florins/dollar = 120 florins.

Question 20

Which statement best describes the consequences that could occur if the Canadian real exchange rate appreciates relative to the euro?

Accepted Answer

If the Canadian real exchange rate appreciates relative to the euro, Canadian exports become more expensive for European consumers, leading to a decrease in demand for Canadian goods and a fall in Canadian exports to Europe. Conversely, European products become cheaper for Canadian consumers, leading to an increase in demand for European goods and a rise in European exports to Canada.

Quiz 12: Open-Economy Macroeconomics: Basic Concepts