Question 1

Adoption of the euro as both a medium of exchange and unit of account in the EU countries serves to increase competition among European firms and decrease individual countries' monetary policy options when confronted by recessions and booms.

Accepted Answer

Adoption of the euro eliminates currency exchange costs and facilitates trade among EU countries, leading to increased competition among European firms. However, since countries no longer have control over their own currency, they cannot independently adjust monetary policy to respond to economic shocks, limiting their options during recessions and booms.

Question 2

Has the adoption of the euro by many countries in the European Union enhanced economic growth in those countries?

Accepted Answer

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Question 3

According to the theory of purchasing power parity,if the inflation rate in the United States of America is greater than the inflation rate in Australia,explain what should happen to the exchange rate between the United States (US)dollar and the Australian dollar.

Accepted Answer

The answer of According to the theory of purchasing power...

Question 4

What is the theory of purchasing power parity?

Accepted Answer

The answer of What is the theory of purchasing power...

Question 5

Describe the four determinants of exchange rates in the long run.

Accepted Answer

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Question 6

If a firm in Thailand borrows dollars from a United States bank,its interest payments on the loan in Thai baht will decrease if the baht appreciates against the dollar.

Accepted Answer

If the Thai baht appreciates against the dollar, the firm will need to convert fewer baht to pay off the same amount of debt, thus decreasing its interest payments in baht.

Question 7

Suppose an iPod costs $200 in Australia and 25 000 yen in Japan.Suppose the exchange rate is $1 = 100 yen.According to purchasing power parity,what should happen to the exchange rate in the long run? What will be the new exchange rate?

Accepted Answer

The answer of Suppose an iPod costs $200 in Australia...

Question 8

Would we expect that purchasing power parity will hold in the long run for haircut prices between Australia and Singapore? Why or why not?

Accepted Answer

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Question 9

The European Union countries that have adopted the euro still conduct independent monetary policies within their countries.

Accepted Answer

Countries that have adopted the euro have given up their independent monetary policies and now follow the monetary policy set by the European Central Bank.

Question 10

Hypothetically,what would a report that argues that the dollar is 'undervalued' mean? How would foreign exchange markets respond to this information? Support your answer graphically.

Accepted Answer

The answer of Hypothetically,what would a report that argues that...

Question 11

A speculative attack is the result of investors' expectations that the future value of a currency will decline.

Accepted Answer

A speculative attack occurs when investors believe that a currency is overvalued or at risk of devaluation in the future, leading them to sell off their holdings, which can cause the currency's value to decline. This type of attack is based on speculation rather than economic fundamentals, and can create problems for governments and central banks trying to stabilize their currency's value.

Question 12

Explain why a country might want their currency to appreciate against the currency of a major trading partner in order to fight inflation.

Accepted Answer

The answer of Explain why a country might want their...

Question 13

If the rate of productivity growth in Australia exceeds the rate of productivity growth in Great Britain,we would expect the Australian dollar to depreciate in value against the British pound.

Accepted Answer

If the rate of productivity in Australia exceeds the rate of productivity growth in Great Britain, it implies that the Australian economy is more efficient and productive than the British economy. This could lead to an increase in demand for Australian goods and services, therefore, increasing the demand for Australian dollars. As a result, the Australian dollar would appreciate in value relative to the British pound.

Question 14

Explain how the Economist's Big Mac Index is related to purchasing power parity.Does the Big Mac Index suggest that purchasing power parity exists? Explain why or why not.

Accepted Answer

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Question 15

Suppose an Xbox costs $150 in the United States of America (USA)and £75 in Great Britain.Suppose the exchange rate is $US1 = £1.Does purchasing power parity suggest that the dollar should appreciate or depreciate against the pound? What will happen if consumers in Great Britain like the Xbox less than United States (US)consumers?

Accepted Answer

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Question 16

Fill in the values for the implied exchange rate in the various currencies per United States (US)dollar in the following table.Assume that the Big Mac burger sells for $3.06 in the United States of America.Explain whether the US dollar is overvalued or undervalued relative to each currency,and predict what will happen in the future to each exchange rate.

Accepted Answer

The answer of Fill in the values for the implied...

Question 17

In order to maintain an undervalued yuan to encourage a trade surplus,the Chinese government must buy United States dollars and increase the supply of yuan.

Accepted Answer

When the Chinese government buys United States dollars, it increases the demand for dollars and therefore causes the value of the yuan to decrease, making their exports cheaper and encouraging a trade surplus. Increasing the supply of yuan also helps keep its value low.

Question 18

What factors occur in the real world that prevent purchasing power parity from occurring fully in the long run?

Accepted Answer

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Question 19

Your friend states that (i)a strong dollar (appreciation of the dollar)is a sign of a healthy economy and that (ii)a weak dollar (depreciation of the dollar)is a sign of a weak economy.Assuming that other factors that could affect the exchange rate do not change,explain that the opposite is true when the following are considered:
a. the effect of rapidly falling incomes in Australia during a recession
b. the effect of rapidly rising incomes in Australia during an economic expansion

Accepted Answer

The answer of Your friend states that (i)a strong dollar...

Question 20

If the rate of inflation in Australia exceeds the rate of inflation in Great Britain,we would expect the Australian dollar to depreciate in value against the British pound.

Accepted Answer

When the rate of inflation in a country is higher than another country, the purchasing power of its currency decreases. This leads to a decrease in demand for the currency and causes it to depreciate in value against other currencies, such as the British pound.

Quiz 19: Comparative Advantage, international Trade, and Exchange Rates