Question 1

If the implied exchange rate between Big Mac prices in the United States and Poland is 2.13 zlotys per dollar, but the actual exchange rate between the United States and Poland is 3.16 zlotys per dollar, which of the following would you expect to see?

Accepted Answer

The answer of If the implied exchange rate between Big...

Question 2

Figure 30-1 
-Refer to Figure 30-1. Which of the following would cause the change depicted in the figure above?

Accepted Answer

The answer of Figure 30-1 
-Refer to Figure 30-1. Which...

Question 3

If the GDP deflator in the United States is 114, and the GDP deflator in Ukraine is 142, which of the following exchange rates would the theory of purchasing power parity predict in the long run? (The Ukrainian currency is the hryvnia.)

Accepted Answer

The theory of purchasing power parity (PPP) suggests that in the long run, exchange rates should adjust so that an identical basket of goods in two different countries will cost the same amount when priced in the same currency. To find the predicted exchange rate, you can use the ratio of the GDP deflators. The calculation is 142 (Ukraine's GDP deflator) / 114 (US GDP deflator) = 1.25. This means, according to PPP, 1 US dollar should exchange for 1.25 hryvnias in the long run.

Question 4

If relative purchasing power between the United States and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is "overvalued"?

Accepted Answer

If the actual exchange rate between the dollar and the Argentinean peso is higher than 3.22 pesos per dollar (as in option B), we would say that the dollar is overvalued, meaning that it is worth more than what the purchasing power parity suggests. This would make US exports more expensive and less competitive in Argentina, while making Argentinean imports cheaper in the US, leading to a trade deficit for the US.

Question 5

The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory. In July 2013, the Economist reported that the average price of a Big Mac in the U.S. was $4.56. In Sweden, the average price of a Big Mac at that time was 41.6 kronor. What is the "implied exchange rate" between Swedish kronor and U.S. dollars?

Accepted Answer

The answer of The "Big Mac Theory of Exchange Rates"...

Question 6

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

Accepted Answer

Purchasing power parity suggests that the exchange rate between two currencies should adjust in the long run to reflect differences in inflation rates between the two countries. Since the price of a Big Mac is higher in Brazil than in the US, purchasing power parity would suggest that the Brazilian real is overvalued relative to the US dollar. Therefore, the dollar is undervalued relative to the real.

Question 7

If the average productivity of American firms is rising more quickly than the average productivity of Indian firms, which of the following would you expect to see? (India's currency is the rupee.)

Accepted Answer

If American firms are becoming more productive compared to Indian firms, it is likely that American firms can produce goods at a lower cost and sell them at a lower price. This will make American products more attractive to consumers than Indian products, which may lead to a decrease in the quantity demanded of Indian products relative to American products. This could result in a decrease in the value of the rupee relative to the dollar, but there is no guarantee of this happening. The prices of Indian products could also decrease, but this is not necessarily the most likely scenario. Finally, an increase in the quantity demanded of Indian products relative to American products is unlikely if American firms are more productive.

Question 8

If, at the current exchange rate between the dollar and the Norwegian kroner of 5.78 kroner per dollar, the dollar is "overvalued," how do you expect demand and supply in the foreign exchange markets to respond?

Accepted Answer

The answer of If, at the current exchange rate between...

Question 9

How will the exchange rate (foreign currency per dollar) respond to an increase in the relative rate of productivity growth in the United States in the long run?

Accepted Answer

An increase in the relative rate of productivity growth in the United States will lead to an increase in demand for the US currency, as investors expect higher returns on their investments due to the stronger economy. This increased demand for US dollars will result in an appreciation of the USD, causing the exchange rate to rise. This effect will occur in the long run and will be sustained as long as the US maintains its higher rate of productivity growth.

Question 10

If inflation in Russia is higher than it is in the United States,

Accepted Answer

If inflation is higher in Russia than in the United States, the purchasing power of the ruble decreases relative to the dollar, making the dollar more valuable in the long run.

Question 11

Figure 30-1 
-Refer to Figure 30-1. Which of the following would cause the change depicted in the figure above?

Accepted Answer

An increase in American preferences for EU goods would increase demand for EU goods, shifting the demand curve for EU currency to the right, as depicted in the figure.

Question 12

If the purchasing power of the dollar is greater than the purchasing power of the euro, purchasing power parity predicts that the exchange rate will

Accepted Answer

Purchasing Power Parity (PPP) theory predicts that in the long run, exchange rates will adjust so that the purchasing power of different currencies will be equalized. This means the exchange rate should reflect the relative purchasing power across the currencies.

Question 13

Figure 30-2 
-Refer to Figure 30-2. Which of the following would cause the change depicted in the figure above?

Accepted Answer

The decrease in the quantity of Chinese imports and the increase in the quantity of U.S. exports suggests a decrease in demand for Chinese goods compared to U.S. goods. This could be caused by a decrease in consumer preferences for Chinese goods, such as if there were safety concerns about tainted cat food from China, as in choice (B). The other choices provide no obvious reason for the change shown in the figure.

Question 14

If the U.S. government places tariffs on imports from countries that have been accused of deliberately undervaluing their currencies, the price of these imports will ________ and the demand for the undervalued currency will ________.

Accepted Answer

When tariffs are placed on imports, the cost of these goods increases for consumers in the importing country, leading to a rise in prices. However, the demand for the exporting country's currency is likely to fall because the higher prices can reduce the volume of goods imported, thus decreasing the need to exchange for the exporting country's currency.

Question 15

Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?

Accepted Answer

Purchasing power parity assumes that all goods and services are traded internationally, which is not the case in reality. Some goods and services are produced and consumed only within a country, and this can affect exchange rates in the long run.

Question 16

Countries that use the euro as their currency face similar concerns as countries did during the years of the gold standard in that each are (were)

Accepted Answer

Countries that use the euro cannot conduct monetary policy because it is controlled by the European Central Bank (ECB). Similarly, during the years of the gold standard, countries were not able to conduct monetary policy because the value of their currency was tied to the value of gold.

Question 17

Suppose the GDP deflator in the United States is 125 and the GDP deflator in Japan is 100. Also assume the United States has trade barriers on Japanese goods in the form of quotas. What does this imply about the exchange rate of yen per dollar under the theory of purchasing power parity in the long run?

Accepted Answer

According to the theory of purchasing power parity, the exchange rate between two countries should adjust such that the purchasing power of a currency in one country equals the purchasing power of the same currency in another country. In this case, since the GDP deflator in Japan is lower than the United States, it implies that prices in Japan are lower than prices in the United States. Therefore, the yen should be able to buy more goods in Japan than in the United States. The trade barriers on Japanese goods will make Japanese goods more expensive in the United States, which will further increase the relative price of goods in the United States. This will cause the yen to depreciate against the dollar, such that the exchange rate of yen per dollar will be less than 0.8. Therefore, the correct answer is D.

Question 18

If the GDP deflator in the United States is 114, and the GDP deflator in Ukraine is 142, which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)

Accepted Answer

The answer of If the GDP deflator in the United...

Question 19

Because the value of the euro is determined by factors that affect the entire euro zone, during the recession of 2007-2009, individual countries using the euro

Accepted Answer

With a fixed exchange rate system in place, countries in the euro zone cannot independently control their exchange rate. As a result, they were unable to have their exchange rates depreciate during the recession, which can help boost exports and stimulate economic growth.

Question 20

Figure 30-1 
-Refer to Figure 30-1. Which of the following would cause the change depicted in the figure above?

Accepted Answer

The change in the figure above depicts a shift in the demand curve for goods produced in the EU to the left. This could be caused by an increase in the price level of goods produced in the EU relative to the price level of goods produced in the United States, as shown in option D. As the prices of EU goods increase, American consumers may shift their preferences towards American goods, causing a decrease in demand for EU goods.

Quiz 30: The International Financial System

If the implied exchange rate between Big Mac prices in the United States and Poland is 2.13 zlotys per dollar, but the actual exchange rate between the United States and Poland is 3.16 zlotys per dollar, which of the following would you expect to see?

Figure 30-1 -Refer to Figure 30-1. Which of the following would cause the change depicted in the figure above?

If the GDP deflator in the United States is 114, and the GDP deflator in Ukraine is 142, which of the following exchange rates would the theory of purchasing power parity predict in the long run? (The Ukrainian currency is the hryvnia.)

If relative purchasing power between the United States and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is "overvalued"?

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, purchasing power parity predicts that

If the average productivity of American firms is rising more quickly than the average productivity of Indian firms, which of the following would you expect to see? (India's currency is the rupee.)

If, at the current exchange rate between the dollar and the Norwegian kroner of 5.78 kroner per dollar, the dollar is "overvalued," how do you expect demand and supply in the foreign exchange markets to respond?

How will the exchange rate (foreign currency per dollar) respond to an increase in the relative rate of productivity growth in the United States in the long run?

If inflation in Russia is higher than it is in the United States,

Figure 30-1 -Refer to Figure 30-1. Which of the following would cause the change depicted in the figure above?

If the purchasing power of the dollar is greater than the purchasing power of the euro, purchasing power parity predicts that the exchange rate will

Figure 30-2 -Refer to Figure 30-2. Which of the following would cause the change depicted in the figure above?

If the U.S. government places tariffs on imports from countries that have been accused of deliberately undervaluing their currencies, the price of these imports will and the demand for the undervalued currency will .

Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?

Countries that use the euro as their currency face similar concerns as countries did during the years of the gold standard in that each are (were)

If the GDP deflator in the United States is 114, and the GDP deflator in Ukraine is 142, which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)

Because the value of the euro is determined by factors that affect the entire euro zone, during the recession of 2007-2009, individual countries using the euro

Figure 30-1 -Refer to Figure 30-1. Which of the following would cause the change depicted in the figure above?