Question 1

Suppose a McDonalds Big Mac cost $4.00 in the United States and 3.20 euros in the euro area and 5.20 Australian dollars in Australia. If exchange rates are .75 euros per dollar and 1.3 Australian dollars per dollar, where does purchasing power parity hold?
A) Both the euro area and Australia.
B) Neither the euro area or Australia.
C) The euro area but not Australia.
D) Australia but not the euro area.

Accepted Answer

The answer of Suppose a McDonalds Big Mac cost $4.00...

Question 2

According to the theory of purchasing-power parity, the nominal exchange rate between two countries must reflect the differing
A) price levels in those countries.
B) resource endowments in those countries.
C) income levels in those countries.
D) standards of living between those countries.

Accepted Answer

According to the theory of purchasing-power parity, the nominal exchange rate between two countries must reflect the differing price levels in those countries. This means that the exchange rate should adjust in a way that makes the purchasing power of each currency equivalent, regardless of the nominal exchange rate.

Question 3

Table 13-2
 
-Refer to Table 13-2. For which country(ies) in the table does purchasing-power parity hold?
A) Bolivia and Japan
B) Bolivia and Morocco
C) Japan and Morocco
D) Norway and Thailand

Accepted Answer

Purchasing-power parity (PPP) holds when a unit of any given currency should be able to buy the same quantity of goods in all countries. In the table, Bolivia and Morocco have the same PPP value of 1, indicating that the purchasing power of their currencies is equivalent. However, this value is different for Norway, Thailand, and Japan, suggesting that their currencies have different purchasing power. Therefore, the correct answer is B) Bolivia and Morocco.

Question 4

Suppose a Starbucks tall latte cost $4.00 in the United States and 3.20 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $3.50 in the United States and 2.45 euros in Euro area. If the nominal exchange rate is .80 euros per dollar, which goods have prices that are consistent with purchasing power parity?
A) Both the tall latte and the Big Mac.
B) Neither the tall latte nor the Big Mac.
C) The tall latte but not the Big Mac.
D) The Big Mac but not the tall latte.

Accepted Answer

To determine if prices are consistent with purchasing power parity, we need to compare the prices using the nominal exchange rate.

For the Starbucks tall latte:
$4.00 = 4.00/0.8 = 5 euros
This is greater than the 3.20 euros it costs in the Euro area, suggesting that the U.S. dollar is overvalued and the Euro is undervalued.

For the McDonald's Big Mac:
$3.50 = 3.50/0.8 = 4.375 euros
This is greater than the 2.45 euros it costs in the Euro area, suggesting that the U.S. dollar is overvalued and the Euro is undervalued.

Therefore, only the tall latte has a price consistent with purchasing power parity.

Question 5

If a McDonald's Big Mac cost $3.06 in the United States and 3.21 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?
A) 1.05 If the value is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro area.
B) 1.05 If the value is less than this, it costs fewer dollars to buy a Big Mac in the U.S. then in the Euro area.
C) .95 If the value is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro area.
D) .95 If the value is less than this, it costs fewer dollars to buy a Big Mac in the U.S. than in the Euro area.

Accepted Answer

The answer of If a McDonald's Big Mac cost $3.06...

Question 6

Suppose a Starbucks tall latte cost $4.00 in the United States and 3.20 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $3.50 in the United States and 2.45 euros in Euro area. If the nominal exchange rate is .75 euros per dollar, the prices of which goods have prices that are consistent with purchasing power parity?
A) Both the tall latte and the Big Mac.
B) Neither the tall latte nor the Big Mac.
C) The tall latte but not the Big Mac.
D) The Big Mac but not the tall latte.

Accepted Answer

The answer of Suppose a Starbucks tall latte cost $4.00...

Question 7

Table 13-2
 
-Refer to Table 13-2. In real terms, U.S. goods are more expensive than goods in which country(ies)?
A) Bolovia and Morocco
B) Japan, Norway, and Thailand
C) Japan and Norway
D) Thailand

Accepted Answer

The answer of Table 13-2
 
-Refer to Table 13-2. In...

Question 8

Suppose a Starbucks tall latte cost $4.00 in the United States, 5.00 euros in the euro area and $2.50 Australian dollars in Australia. Nominal exchange rates are .80 euros per dollar and 1.4 Australian dollars per U.S. dollar. Where does purchasing power parity hold?
A) Both the euro area and Australia.
B) Neither the euro area or Australia.
C) The euro area but not Australia.
D) Australia but not the euro area.

Accepted Answer

The answer of Suppose a Starbucks tall latte cost $4.00...

Question 9

A Big Mac in Japan costs 320 yen while it costs $3.60 in the U.S.. The nominal exchange rate is 80 yen per dollar. Which of the following would both make the real exchange rate move towards purchasing-power parity?
A) the price of Big Macs in the U.S. falls, the nominal exchange rate falls
B) the price of Big Macs in the U.S. falls, the nominal exchange rate rises
C) the price of Big Macs in the U.S. rises, the nominal exchange rate falls
D) the price of Big Macs in the U.S. rises, the nominal exchange rate rises

Accepted Answer

The answer of A Big Mac in Japan costs 320...

Question 10

Table 13-2
 
-Refer to Table 13-2. In real terms, U.S. goods are less expensive than goods in which country(ies)?
A) Bolivia and Morocco
B) Japan, Norway, and Thailand
C) Japan and Norway
D) Thailand

Accepted Answer

The table shows the exchange rates for five different countries' currencies in terms of U.S. dollars. The lower the number in the "U.S. Dollar Equivalent" column, the stronger the currency. Therefore, if U.S. goods are relatively less expensive in a certain country, it means that the currency in that country is stronger than the U.S. dollar. From the table, we can see that the countries with the lowest U.S. dollar equivalent are Japan and Norway, indicating that their currencies are relatively stronger than the U.S. dollar. Therefore, the correct answer is C.

Question 11

A roll of duct tape costs 2 Canadian dollars in Canada and 1.75 U.S. dollars in the U.S. If the nominal exchange rate were 1.10 Canadian dollars per U.S. dollar.
A) A profit could be made by buying duct tape in Canada and selling it in the U.S. This would tend to drive up the price of U.S. duct tape.
B) A profit could be made by buying duct tape in Canada and selling it in the U.S. This would tend to drive up the price of Canadian duct tape.
C) A profit could be made by buying duct tape in the U.S. and selling it in Canada. This would tend to drive up the price of U.S. duct tape.
D) A profit could be made by buying duct tape in the U.S. and selling it in Canada. This would tend to drive up the price of Canadian duct tape.

Accepted Answer

As the exchange rate between Canadian and U.S. dollars is 1.10 Canadian dollars per U.S. dollar, it means that 1.75 U.S. dollars is equivalent to 1.925 Canadian dollars. Since 2 Canadian dollars is more than 1.925 Canadian dollars, it is cheaper to buy duct tape in the U.S. and sell it in Canada, earning a profit. This would increase the supply of duct tape in Canada and decrease it in the U.S., leading to an increase in the price of U.S. duct tape. Therefore, option C is correct.

Question 12

Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U.S. currency must rise if the price levels in
A) foreign countries rise.
B) the United States rises.
C) both countries rise.
D) both countries fall.

Accepted Answer

Purchasing-power parity states that exchange rates should adjust to equalize the prices of identical goods and services in different countries. Therefore, if the price level in foreign countries rises, the nominal exchange rate must rise as well to maintain the parity.

Question 13

If purchasing power parity holds, when a country's central bank increases the money supply, its
A) price level rises and its currency appreciates relative to other currencies in the world.
B) price level rises and its currency depreciates relative to other currencies in the world.
C) price level falls and its currency appreciates relative to other currencies in the world.
D) price level falls and its currency depreciates relative to other currencies in the world.

Accepted Answer

If purchasing power parity holds, an increase in the money supply will lead to an increase in the price level. This means that the country's currency will depreciate, as its goods and services are now relatively more expensive compared to other countries.

Question 14

If a Starbucks tall latte cost $3.20 in the United States and 3 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?
A) .938 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area.
B) .938 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S. then in the Euro area.
C) 1.067 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area.
D) 1.067 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S. than in the Euro area.

Accepted Answer

The answer of If a Starbucks tall latte cost $3.20...

Question 15

Table 13-2
 
-Refer to Table 13-2. Which currency(ies) is(are) more valuable than predicted by the doctrine of purchasing-power parity?
A) boloviano and dinar
B) yen, kroner, and baht
C) yen and kroner
D) baht

Accepted Answer

The yen and kroner are more valuable than predicted by the doctrine of purchasing-power parity, which suggests that exchange rates should adjust to equalize the price of identical goods in different countries.

Question 16

A Starbucks Grande Latte costs $3.75 in the U.S. and 28 yuan in China. The nominal exchange rate is 6.75 yuan per dollar. The real exchange rate is
A) 1.106. If purchasing power partiy held the nominal exchange rate would be higher.
B) 1.106. If purchasing power parity held the nominal exchange rate would be lower.
C) .904. If purchasing power partiy held the nominal exchange rate would be higher.
D) .904. If purchasing power parity held the nominal exchange rate would be lower.

Accepted Answer

The real exchange rate is equal to nominal exchange rate times domestic price divided by foreign price. In this case, real exchange rate = 6.75 x ($3.75/28) = 0.904. If purchasing power parity held, the nominal exchange rate would be higher to equalize the prices of the same product in different countries. Therefore, the correct choice is C.

Question 17

A ton of scrap iron sells for $150 in the U.S. and 1400 yuan in China. The nominal exchange rate is 6.7 yuan per dollar.
A) A profit could be made by buying scrap iron in China and selling it in the U.S. This would tend to drive down the price of U.S. scrap iron.
B) A profit could be made by buying scrap iron in China and selling it in the U.S. This would tend to drive down the price of Chinese scrap iron.
C) A profit could be made by buying scrap iron in the U.S. and selling it in China. This would tend to drive down the price of U.S. scrap iron.
D) A profit could be made by buying scrap iron in the U.S. and selling it in China. This would tend to drive down the price of Chinese scrap iron.

Accepted Answer

Buying scrap iron in the U.S. and selling it in China would result in a profit due to the higher price of scrap iron in China. This would increase demand for U.S. scrap iron and could potentially drive up the price, while simultaneously increasing the supply of scrap iron in China, potentially driving down the price there.

Question 18

If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity?
A) P = e/P*
B) 1 = e/P*
C) e = P*/P
D) None of the above is correct.

Accepted Answer

Purchasing-power parity implies that the exchange rate should reflect the Relative purchasing power of currencies. This means that the exchange rate should be equal to the ratio of foreign prices to domestic prices: e = P*/P.

Question 19

If the exchange rate is 8 Moroccan dirhams per U.S. dollars, a crate of oranges costs 400 dirhams in the Moroccan capital of Rabat, and a similar crate of oranges in Miami sells for $45 dollars, then
A) the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in the United States and selling them in Morocco.
B) the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in Morocco and selling them in the United States.
C) the real exchange rate is less than one and arbitrageurs could profit by buying oranges in the United States and selling them in Morocco.
D) the real exchange rate is less than one and arbitrageurs could profit by buying oranges in Morocco and selling them in the United States.

Accepted Answer

The answer of If the exchange rate is 8 Moroccan...

Question 20

Table 13-2
 
-Refer to Table 13-2. Which currency(ies) is(are) less valuable than predicted by the doctrine of purchasing-power parity?
A) boloviano and dinar
B) yen and kroner
C) baht and kroner
D) baht

Accepted Answer

The doctrine of purchasing-power parity suggests that exchange rates should adjust so that the price of a basket of goods is the same in different countries. However, the exchange rate of the baht is lower than predicted by the doctrine, indicating that it is less valuable than expected. The other currencies (boliviano, dinar, yen, and kroner) are not mentioned as having exchange rates that deviate from the predicted value.

Quiz 13: Open-Economy Macroeconomic Models

Suppose a McDonalds Big Mac cost $4.00 in the United States and 3.20 euros in the euro area and 5.20 Australian dollars in Australia. If exchange rates are .75 euros per dollar and 1.3 Australian dollars per dollar, where does purchasing power parity hold?

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

Table 13-2 -Refer to Table 13-2. For which country(ies) in the table does purchasing-power parity hold?

If a McDonald's Big Mac cost $3.06 in the United States and 3.21 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?

Table 13-2 -Refer to Table 13-2. In real terms, U.S. goods are more expensive than goods in which country(ies) ?

Suppose a Starbucks tall latte cost $4.00 in the United States, 5.00 euros in the euro area and $2.50 Australian dollars in Australia. Nominal exchange rates are .80 euros per dollar and 1.4 Australian dollars per U.S. dollar. Where does purchasing power parity hold?

A Big Mac in Japan costs 320 yen while it costs $3.60 in the U.S.. The nominal exchange rate is 80 yen per dollar. Which of the following would both make the real exchange rate move towards purchasing-power parity?

Table 13-2 -Refer to Table 13-2. In real terms, U.S. goods are less expensive than goods in which country(ies) ?

A roll of duct tape costs 2 Canadian dollars in Canada and 1.75 U.S. dollars in the U.S. If the nominal exchange rate were 1.10 Canadian dollars per U.S. dollar.

Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U.S. currency must rise if the price levels in

If purchasing power parity holds, when a country's central bank increases the money supply, its

If a Starbucks tall latte cost $3.20 in the United States and 3 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?

Table 13-2 -Refer to Table 13-2. Which currency(ies) is(are) more valuable than predicted by the doctrine of purchasing-power parity?

A Starbucks Grande Latte costs $3.75 in the U.S. and 28 yuan in China. The nominal exchange rate is 6.75 yuan per dollar. The real exchange rate is

A ton of scrap iron sells for $150 in the U.S. and 1400 yuan in China. The nominal exchange rate is 6.7 yuan per dollar.

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

If the exchange rate is 8 Moroccan dirhams per U.S. dollars, a crate of oranges costs 400 dirhams in the Moroccan capital of Rabat, and a similar crate of oranges in Miami sells for $45 dollars, then

Table 13-2 -Refer to Table 13-2. Which currency(ies) is(are) less valuable than predicted by the doctrine of purchasing-power parity?