Question 1

Changes in relative prices occur when

Accepted Answer

A) all prices move together. 
B) all exchange rates move together. 
C) product prices change at different rates. 
D) exchange rate appreciation is greater than price appreciation. 
A) all prices move together. 
B) all exchange rates move together. 
C) product prices change at different rates. 
D) exchange rate appreciation is greater than price appreciation. C

Question 2

Is PPP a theory of exchange rate determination? Explain why or why not?

Accepted Answer

PPP is not a theory of exchange rate determination. It describes an equilibrium relationship between two endogenous variables-prices and exchange rates. As such,the PPP relationship should be viewed as a short-cut rather than a substitute for a complete determination of prices and exchange rates. Its main usefulness is in providing a guide to the general trend of exchange rates rather than day-to-day fluctuations.

Question 3

Is relative PPP a useful equilibrium concept for describing general trends in exchange rates? Under what kinds of circumstances would the concepts of PPP be best applied?

Accepted Answer

Relative PPP is not a theory of exchange rate determination but rather an equilibrium condition that may be useful for establishing general trends in exchange rates.It may only be useful for understanding exchange rates in the long run,not on a day to day basis.Moreover,exchange rates vary for multiple reasons,while relative PPP only considers the inflation differential between two currencies.The larger this difference is,the more valuable relative PPP will be for understanding the long term trend in an exchange rate.

Question 4

In the long run,________ dominate exchange rate movements.

Accepted Answer

A) short-run inflation differentials 
B) long-run inflation differentials 
C) short-run relative price changes 
D) All of the above 
A) short-run inflation differentials 
B) long-run inflation differentials 
C) short-run relative price changes 
D) All of the above

Question 5

Suppose a year ago the exchange rate between Mexican pesos and dollars was 13.5 pesos per dollar,and that according to relative PPP the exchange rate was in equilibrium.Furthermore,assume that since then,Mexican inflation has been 12 percent while the U.S.inflation has been 3 percent.If according to relative PPP the peso is now said to be overvalued,what is a possible exchange rate consistent with this assertion?

Accepted Answer

A) 13.5 pesos per dollar. 
B) 14.72 pesos per dollar. 
C) 15 pesos per dollar. 
D) 20 pesos per dollar. 
A) 13.5 pesos per dollar. 
B) 14.72 pesos per dollar. 
C) 15 pesos per dollar. 
D) 20 pesos per dollar.

Question 6

We expect PPP to hold better

Accepted Answer

A) for annual data than monthly data. 
B) for high-inflation countries. 
C) in the long run. 
D) All of the above. 
A) for annual data than monthly data. 
B) for high-inflation countries. 
C) in the long run. 
D) All of the above.

Question 7

Empirical studies find that exchange rates are much more variable than inflation differentials. How can we explain this empirical result?

Accepted Answer

Financial markets adjust faster than goo

Question 8

The empirical data indicate that in the short run exchange rates are much more variable than inflation differentials.

Accepted Answer

A) True 
 B)False

Question 9

PPP is a theory of real exchange rate determination.

Accepted Answer

A) True 
 B)False

Question 10

If absolute PPP holds,then the real exchange rate must equal 1.

Accepted Answer

A) True 
 B)False

Question 11

What is the difference between endogenous and exogenous variables? In the equilibrium condition of PPP,which variables are endogenous and which are exogenous?

Accepted Answer

Endogenous variables are considered with

Question 12

Arbitrage operations can be executed

Accepted Answer

A) in foreign exchange markets. 
B) in goods markets. 
C) Both A and B. 
D) None of the above. 
A) in foreign exchange markets. 
B) in goods markets. 
C) Both A and B. 
D) None of the above.

Question 13

Relative PPP indicates that

Accepted Answer

A) the exchange rate between any two currencies is equal to the ratio of their price indexes. 
B) the same good sells for the same price internationally. 
C) the percentage change in the exchange rate is equal to the inflation differential between the domestic and foreign country. 
D) relative prices determine exchange rates. 
A) the exchange rate between any two currencies is equal to the ratio of their price indexes. 
B) the same good sells for the same price internationally. 
C) the percentage change in the exchange rate is equal to the inflation differential between the domestic and foreign country. 
D) relative prices determine exchange rates.

Question 14

If the exchange rate is equal to the ratio of the domestic and foreign price indexes,

Accepted Answer

A) absolute PPP holds. 
B) relative PPP holds. 
C) one currency is said to be overvalued. 
D) one currency is said to be undervalued. 
A) absolute PPP holds. 
B) relative PPP holds. 
C) one currency is said to be overvalued. 
D) one currency is said to be undervalued.

Question 15

Relative price changes indicate

Accepted Answer

A) all prices move together. 
B) all exchange rates move together. 
C) some prices increase faster than others. 
D) exchange rates appreciate faster than prices change. 
A) all prices move together. 
B) all exchange rates move together. 
C) some prices increase faster than others. 
D) exchange rates appreciate faster than prices change.

Question 16

Which of the following is incorrect?

Accepted Answer

A) Exchange rates in the short run are much more variable than inflation differentials. 
B) Deviations from PPP are much more apparent for monthly data than annual. 
C) PPP holds best in the long run. 
D) None of the above. 
A) Exchange rates in the short run are much more variable than inflation differentials. 
B) Deviations from PPP are much more apparent for monthly data than annual. 
C) PPP holds best in the long run. 
D) None of the above.

Question 17

Which of the following statements is correct?

Accepted Answer

A) PPP is a theory of exchange rate determination. 
B) Inflation differentials cause changes in exchange rates. 
C) PPP is an equilibrium relationship between two endogenous variables. 
D) PPP, or the law of one price, should hold well for individual goods. 
A) PPP is a theory of exchange rate determination. 
B) Inflation differentials cause changes in exchange rates. 
C) PPP is an equilibrium relationship between two endogenous variables. 
D) PPP, or the law of one price, should hold well for individual goods.

Question 18

According to The Economist magazine's Big Mac index,one of the most overvalued currencies as of July 2008 was the Norwegian kroner.Which of the following is a likely implication of that fact?

Accepted Answer

A) That goods and services are more expensive in Norway than in the U.S. 
B) That the Norwegian currency is going to be undervalued in the near future. 
C) That the Norwegian currency is likely to appreciate in the near future. 
D) That the Norwegian government is running a large deficit. 
A) That goods and services are more expensive in Norway than in the U.S. 
B) That the Norwegian currency is going to be undervalued in the near future. 
C) That the Norwegian currency is likely to appreciate in the near future. 
D) That the Norwegian government is running a large deficit.

Question 19

Briefly explain the difference between absolute and relative PPP.

Accepted Answer

Absolute PPP deals with levels of variab

Question 20

If relative PPP held,then the real exchange rate must be equal to one.

Accepted Answer

A) True 
 B)False

Changes in relative prices occur when

Is PPP a theory of exchange rate determination? Explain why or why not?

Is relative PPP a useful equilibrium concept for describing general trends in exchange rates? Under what kinds of circumstances would the concepts of PPP be best applied?

In the long run,________ dominate exchange rate movements.

We expect PPP to hold better

Empirical studies find that exchange rates are much more variable than inflation differentials. How can we explain this empirical result?

The empirical data indicate that in the short run exchange rates are much more variable than inflation differentials.

PPP is a theory of real exchange rate determination.

If absolute PPP holds,then the real exchange rate must equal 1.

What is the difference between endogenous and exogenous variables? In the equilibrium condition of PPP,which variables are endogenous and which are exogenous?

Arbitrage operations can be executed

Relative PPP indicates that

If the exchange rate is equal to the ratio of the domestic and foreign price indexes,

Relative price changes indicate

Which of the following is incorrect?

Which of the following statements is correct?

According to The Economist magazine's Big Mac index,one of the most overvalued currencies as of July 2008 was the Norwegian kroner.Which of the following is a likely implication of that fact?

Briefly explain the difference between absolute and relative PPP.

If relative PPP held,then the real exchange rate must be equal to one.

An Introduction to International Trade

Tools of Analysis for International Trade Models

The Classical Model of International Trade

The Heckscher-Ohlin Model

Tests of Trade Models: the Leontief Paradox and Its Aftermath

Tariffs

Nontariff Barriers and Arguments for Protection

Commercial Policy: History and Practice

Preferential Trade Agreements

International Trade and Economic Growth

The Balance of Payments

The Foreign Exchange Market

International Monetary Systems

Exchange Rates in the Short Run

Theories of the Current Account Balance

Open Economy Macroeconomics

International Banking, debt and Risk

Filters

Exam 15: Exchange Rates in the Long Run

Changes in relative prices occur when

Is PPP a theory of exchange rate determination? Explain why or why not?

Is relative PPP a useful equilibrium concept for describing general trends in exchange rates? Under what kinds of circumstances would the concepts of PPP be best applied?

In the long run,________ dominate exchange rate movements.

We expect PPP to hold better

Empirical studies find that exchange rates are much more variable than inflation differentials. How can we explain this empirical result?

The empirical data indicate that in the short run exchange rates are much more variable than inflation differentials.

PPP is a theory of real exchange rate determination.

If absolute PPP holds,then the real exchange rate must equal 1.

What is the difference between endogenous and exogenous variables? In the equilibrium condition of PPP,which variables are endogenous and which are exogenous?

Arbitrage operations can be executed

Relative PPP indicates that

If the exchange rate is equal to the ratio of the domestic and foreign price indexes,

Relative price changes indicate

Which of the following is incorrect?

Which of the following statements is correct?

According to The Economist magazine's Big Mac index,one of the most overvalued currencies as of July 2008 was the Norwegian kroner.Which of the following is a likely implication of that fact?

Briefly explain the difference between absolute and relative PPP.

If relative PPP held,then the real exchange rate must be equal to one.

An Introduction to International Trade

Tools of Analysis for International Trade Models

The Classical Model of International Trade

The Heckscher-Ohlin Model

Tests of Trade Models: the Leontief Paradox and Its Aftermath

Tariffs

Nontariff Barriers and Arguments for Protection

Commercial Policy: History and Practice

Preferential Trade Agreements

International Trade and Economic Growth

The Balance of Payments

The Foreign Exchange Market

International Monetary Systems

Exchange Rates in the Short Run

Theories of the Current Account Balance

Open Economy Macroeconomics

International Banking, debt and Risk

Filters