Question 1

Concrete likely does not follow the law of one price due to:

Accepted Answer

A) technical differences. 
B) lack of information regarding prices. 
C) tariffs. 
D) high transportation costs. 
A) technical differences. 
B) lack of information regarding prices. 
C) tariffs. 
D) high transportation costs.

Question 2

If we let P = the domestic price of a basket of goods and Pf the foreign price of the same basket of goods measured in domestic currency:

Accepted Answer

A) If   > 1 foreign products will seem inexpensive. 
B) If   > 1 foreign products will seem expensive. 
C) If   = 1 the nominal exchange rate is also = 1. 
D) You cannot determine the relative prices of foreign goods from the equation   . 
A) If   > 1 foreign products will seem inexpensive. 
B) If   > 1 foreign products will seem expensive. 
C) If   = 1 the nominal exchange rate is also = 1. 
D) You cannot determine the relative prices of foreign goods from the equation   .

Question 3

Explain why an appreciating U.S.dollar does not benefit everyone in the U.S.

Accepted Answer

An appreciating U.S.$ will benefit impor

Question 4

If a country is running a current account deficit year after year, what should we expect to happen to the exchange rate for that country? Explain.

Accepted Answer

A country running a current account defi

Question 5

The real and nominal exchange rates differ in the sense that:

Accepted Answer

A) the real exchange rate does not express differences in the purchasing power of a currency. 
B) the nominal exchange rate is adjusted for price differences between countries and the real is not. 
C) the nominal exchange rate does not reflect differences in purchasing power between currencies. 
D) nominal exchange rates are fixed but real rates are flexible. 
A) the real exchange rate does not express differences in the purchasing power of a currency. 
B) the nominal exchange rate is adjusted for price differences between countries and the real is not. 
C) the nominal exchange rate does not reflect differences in purchasing power between currencies. 
D) nominal exchange rates are fixed but real rates are flexible.

Question 6

A decrease in Americans' preference for foreign goods will lead to the following in the foreign exchange market:

Accepted Answer

A) an increase in the demand for dollars. 
B) a decrease in the supply of dollars. 
C) a depreciation of the dollar relative to foreign currencies. 
D) a movement down the demand curve for dollars. 
A) an increase in the demand for dollars. 
B) a decrease in the supply of dollars. 
C) a depreciation of the dollar relative to foreign currencies. 
D) a movement down the demand curve for dollars.

Question 7

The empirical evidence on purchasing power parity over the long run seems to point out that:

Accepted Answer

A) the higher a country's inflation rate, the greater is the appreciation in the country's currency. 
B) the theory of purchasing power parity cannot explain long-run changes in exchange rates. 
C) the higher a country's inflation rate the greater is the depreciation in the country's currency. 
D) there isn't any clear link between inflation rates and exchange rates. 
A) the higher a country's inflation rate, the greater is the appreciation in the country's currency. 
B) the theory of purchasing power parity cannot explain long-run changes in exchange rates. 
C) the higher a country's inflation rate the greater is the depreciation in the country's currency. 
D) there isn't any clear link between inflation rates and exchange rates.

Question 8

Considering the law of one price, evidence in the foreign exchange markets over brief intervals shows:

Accepted Answer

A) the law works most of the time. 
B) this is the closest thing to a perfect law in economics. 
C) that the law fails most of the time. 
D) the law only works in the very short run. 
A) the law works most of the time. 
B) this is the closest thing to a perfect law in economics. 
C) that the law fails most of the time. 
D) the law only works in the very short run.

Question 9

For many years now the United States has been running large current account deficits.What do you know about the capital account for the United States and what you predict for the exchange rate in the future? Explain.

Accepted Answer

The current account deficits imply that

Question 10

An American traveling to Europe will find it easier to make purchases now because:

Accepted Answer

A) most countries in Europe accept U.S.dollars. 
B) most of the countries of Europe have adopted the British pounds as the standard currency. 
C) many of the countries in Europe now use the same currency, the euro. 
D) all of the countries in Europe now use the same currency, the euro. 
A) most countries in Europe accept U.S.dollars. 
B) most of the countries of Europe have adopted the British pounds as the standard currency. 
C) many of the countries in Europe now use the same currency, the euro. 
D) all of the countries in Europe now use the same currency, the euro.

Question 11

A tariff disrupts the workings of the law of one price because tariffs:

Accepted Answer

A) are standardized by GATT. 
B) are taxes on imports and can vary across products and countries. 
C) apply only to goods countries export. 
D) are only applied to commodity products. 
A) are standardized by GATT. 
B) are taxes on imports and can vary across products and countries. 
C) apply only to goods countries export. 
D) are only applied to commodity products.

Question 12

A country running a current account deficit over a long time is likely to see its exchange rate:

Accepted Answer

A) hold steady. 
B) appreciate. 
C) depreciate. 
D) the rate can rise, fall, or hold steady; the current account and the exchange rate are not linked. 
A) hold steady. 
B) appreciate. 
C) depreciate. 
D) the rate can rise, fall, or hold steady; the current account and the exchange rate are not linked.

Question 13

Between 1998 and the end of 2000, the U.S.ran a large trade deficit; this should have caused the dollar to depreciate against foreign currencies but instead the dollar appreciated.The main reason for this is:

Accepted Answer

A) foreign exchange markets are slow to react. 
B) the supply of dollars actually fell. 
C) the dramatic increase in U.S.stock prices attracted a lot of foreign capital increasing the demand for dollars by more than the increase in the supply of dollars. 
D) the demand for dollars shifted left by more than the supply of dollars shifted right. 
A) foreign exchange markets are slow to react. 
B) the supply of dollars actually fell. 
C) the dramatic increase in U.S.stock prices attracted a lot of foreign capital increasing the demand for dollars by more than the increase in the supply of dollars. 
D) the demand for dollars shifted left by more than the supply of dollars shifted right.

Question 14

A U.S.resident who wants to purchase an automobile that comes from Japan:

Accepted Answer

A) will be supplying yen on the foreign exchange market. 
B) will make up part of the demand for dollars on the foreign exchange market. 
C) will make up part of the supply of dollars on the foreign exchange market. 
D) will not be a participant in the foreign exchange market. 
A) will be supplying yen on the foreign exchange market. 
B) will make up part of the demand for dollars on the foreign exchange market. 
C) will make up part of the supply of dollars on the foreign exchange market. 
D) will not be a participant in the foreign exchange market.

Question 15

If Americans develop a greater appreciation for Mexican-made goods, we should observe the following change in the dollar-peso market:

Accepted Answer

A) the supply curve of dollars shifts right. 
B) the demand curve for pesos shifts left. 
C) the supply curve of dollars shifts left. 
D) the demand curve for dollars shifts right. 
A) the supply curve of dollars shifts right. 
B) the demand curve for pesos shifts left. 
C) the supply curve of dollars shifts left. 
D) the demand curve for dollars shifts right.

Question 16

The theory of purchasing power parity says:

Accepted Answer

A) the real exchange rate is always greater than one. 
B) a dollar should buy the same goods no matter where in the world you go. 
C) the dollar price of a basket of goods in the U.S.should equal the yen price of a basket of goods in Japan. 
D) the real exchange rate is always less than one. 
A) the real exchange rate is always greater than one. 
B) a dollar should buy the same goods no matter where in the world you go. 
C) the dollar price of a basket of goods in the U.S.should equal the yen price of a basket of goods in Japan. 
D) the real exchange rate is always less than one.

Question 17

Short-run movements in nominal exchange rates are primarily due to:

Accepted Answer

A) changing prices of goods and services in the countries involved. 
B) changing expected rates of return on domestic and foreign assets. 
C) inflation differentials. 
D) changes in exports. 
A) changing prices of goods and services in the countries involved. 
B) changing expected rates of return on domestic and foreign assets. 
C) inflation differentials. 
D) changes in exports.

Question 18

Ignoring risk differences, if we observe American investors purchasing foreign bonds when the U.S.interest rate is above the foreign interest rate, we could assume that:

Accepted Answer

A) American investors lack good information. 
B) these investors expect the dollar to appreciate over the life of their investment. 
C) these investors expect the dollar to depreciate over the life of their investment. 
D) these investors expect that U.S.inflation will slow. 
A) American investors lack good information. 
B) these investors expect the dollar to appreciate over the life of their investment. 
C) these investors expect the dollar to depreciate over the life of their investment. 
D) these investors expect that U.S.inflation will slow.

Question 19

The price of a Big Mac in the U.S.is $2.00; the price in France is 3.35 euros.The current exchange rate is 1.05€/$.What is the real exchange rate?

Accepted Answer

The real Big Mac exchange rate is the U.

Question 20

The theory of purchasing power parity implies the real exchange rate between two countries is:

Accepted Answer

A) flexible. 
B) less than one. 
C) greater than one. 
D) equal to one. 
A) flexible. 
B) less than one. 
C) greater than one. 
D) equal to one.

Exam 10: Foreign Exchange

Concrete likely does not follow the law of one price due to:

If we let P = the domestic price of a basket of goods and Pf the foreign price of the same basket of goods measured in domestic currency:

Explain why an appreciating U.S.dollar does not benefit everyone in the U.S.

If a country is running a current account deficit year after year, what should we expect to happen to the exchange rate for that country? Explain.

The real and nominal exchange rates differ in the sense that:

A decrease in Americans' preference for foreign goods will lead to the following in the foreign exchange market:

The empirical evidence on purchasing power parity over the long run seems to point out that:

Considering the law of one price, evidence in the foreign exchange markets over brief intervals shows:

For many years now the United States has been running large current account deficits.What do you know about the capital account for the United States and what you predict for the exchange rate in the future? Explain.

An American traveling to Europe will find it easier to make purchases now because:

A tariff disrupts the workings of the law of one price because tariffs:

A country running a current account deficit over a long time is likely to see its exchange rate:

Between 1998 and the end of 2000, the U.S.ran a large trade deficit; this should have caused the dollar to depreciate against foreign currencies but instead the dollar appreciated.The main reason for this is:

A U.S.resident who wants to purchase an automobile that comes from Japan:

If Americans develop a greater appreciation for Mexican-made goods, we should observe the following change in the dollar-peso market:

The theory of purchasing power parity says:

Short-run movements in nominal exchange rates are primarily due to:

Ignoring risk differences, if we observe American investors purchasing foreign bonds when the U.S.interest rate is above the foreign interest rate, we could assume that:

The price of a Big Mac in the U.S.is $2.00; the price in France is 3.35 euros.The current exchange rate is 1.05€/$.What is the real exchange rate?

The theory of purchasing power parity implies the real exchange rate between two countries is:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

Filters

If we let P = the domestic price of a basket of goods and P_f the foreign price of the same basket of goods measured in domestic currency: