Question 1

Suppose a Starbucks tall latte costs $4.00 in the United States and 2.50 euros in the Euro area.Also,suppose a McDonald's Big Mac costs $4.50 in the United States and 3.60 euros in the Euro area.If the nominal exchange rate is .80 euros per dollar,which goods have prices that are consistent with purchasing-power parity?

Accepted Answer

A) both the tall latte and the Big Mac 
B) the tall latte but not the Big Mac 
C) the Big Mac but not the tall latte 
D) neither the Big Mac nor the tall latte

Question 2

If purchasing-power parity holds,a bushel of rice costs $10 in the U.S. ,and the nominal exchange rate is 25 Thai baht per dollar,what is the price of rice in Thailand?

Accepted Answer

A) 400 baht 
B) 250 bhat 
C) 100 bhat 
D) None of the above is correct.

Question 3

According to the doctrine of purchasing-power parity,which of the following should depreciate if over the next year the inflation rate is higher in the U.S.than in the Euro area?

Accepted Answer

A) both the U.S.real exchange rate and the U.S.nominal exchange rate 
B) the U.S.real exchange rate,but not the U.S.nominal exchange rate 
C) the U.S.nominal exchange rate,but not the U.S.real exchange rate 
D) neither the U.S.nominal exchange rate nor the U.S.real exchange rate

Question 4

Prices in both the U.S.and China rise,but prices in China increase by a larger percentage.According to purchasing-power parity,the U.S.dollar

Accepted Answer

A) gains value both in terms of the domestic goods and services it can buy and in terms of the Chinese currency it can buy. 
B) gains value in terms of the domestic goods and services it can buy,but loses value in terms of the Chinese currency it can buy. 
C) loses value in terms of the domestic goods and services it can buy,but gains value in terms of the Chinese currency it can buy. 
D) loses value both in terms of the domestic goods and services it can buy and in terms of the Chinese currency it can buy.

Question 5

According to purchasing-power parity,if the same basket of goods costs $100 in the U.S.and 50 pounds in Britain,then what is the nominal exchange rate?

Accepted Answer

A) 2 pounds per dollar 
B) 1 pound per dollar 
C) 1/2 pound per dollar 
D) None of the above is correct

Question 6

If a dollar buys more rice in the China.than in the U.S. ,then

Accepted Answer

A) the real exchange rate is greater than 1;a profit might be made by buying rice in the U.S.and selling it in China. 
B) the real exchange rate is greater than 1;a profit might be made by buying rice in China.and selling it in the U.S. 
C) the real exchange rate is less than 1;a profit might be made by buying rice in the U.S.and selling it in China. 
D) the real exchange rate is less than 1;a profit might be made by buying rice in China and selling it in the U.S.

Question 7

If the Kenyan nominal exchange rate declines,and prices are unchanged in Kenya and abroad,then the Kenyan real exchange rate

Accepted Answer

A) does not change. 
B) rises. 
C) declines 
D) None of the above is necessarily correct.

Question 8

According to purchasing-power parity,if over the course of a year the price level in the U.S.rises more than in Canada,then which of the following rises?

Accepted Answer

A) the U.S.real exchange rate,but not the U.S.nominal exchange rate 
B) the U.S.nominal exchange rate,but not the U.S.real exchange rate 
C) the U.S.nominal exchange rate and the U.S.real exchange rate 
D) neither the real exchange rate nor the nominal exchange rate

Question 9

A tall latte in China costs 30 yuan.The same latte in the U.S.costs 4 dollars.If the exchange rate is 6.5 yuan per dollar then,the real exchange rate is

Accepted Answer

A) .867 so the good is more expensive in the U.S. 
B) .867 so the good is more expensive in China. 
C) 1.154 so the god is more expensive in the U.S. 
D) 1.154 so the good is more expensive in China.

Question 10

According to purchasing-power parity,if the price of a basket of goods in the U.S.rose from $1,500 to $2,000 and the price of the same basket of goods rose from 600 units of some other country's currency to 1,000 units of that country's currency,then the

Accepted Answer

A) nominal exchange rate would appreciate. 
B) nominal exchange rate would depreciate. 
C) real exchange rate would appreciate. 
D) real exchange rate would depreciate.

Question 11

A basket of goods cost $800 in the U.S.The same basket of goods costs $1,000 in France and the exchange rate is .80 euros per dollar.The same basket of goods costs 960 Australian dollars and the exchange rate is 1.2 Australian dollars per U.S.dollar.Purchasing power parity with the U.S.holds in

Accepted Answer

A) both France and Australia 
B) France but not Australia 
C) Australia but not France 
D) neither France nor Australia

Question 12

If the dollar buys fewer bananas in Guatemala than in Honduras,then traders could make a profit by

Accepted Answer

A) buying bananas in Honduras and selling them in Guatemala,which would tend to raise the price of bananas in Honduras. 
B) buying bananas in Honduras and selling them in Guatemala,which would tend to raise the price of bananas in Guatemala. 
C) buying bananas in Guatemala and selling them in Honduras,which would tend to raise the price of bananas in Guatemala. 
D) buying bananas in Guatemala and selling them in Honduras,which would tend to raise the price of bananas in Honduras.

Question 13

A Big Mac in Japan costs 400 yen while it costs $4.50 in the U.S..The nominal exchange rate is 100 yen per dollar.Which of the following would both make the real exchange rate move towards purchasing-power parity?

Accepted Answer

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

Question 14

An MP3 player in Singapore costs 200 Singaporean dollars.In the U.S.it costs 100 US dollars.What is the nominal exchange rate if purchasing-power parity holds?

Accepted Answer

A) 2.0 
B) 1.0 
C) .50 
D) None of the above is correct.

Question 15

If purchasing-power parity holds,then the value of the

Accepted Answer

A) nominal exchange rate is equal to one.A dollar buys as many goods in the U.S.as it does overseas. 
B) nominal exchange rate is equal to one.A dollar buys the quantity of foreign currency equal to the U.S.price level divided by the foreign country's price level. 
C) real exchange rate is equal to one.A dollar buys as many goods in the U.S.as it does overseas. 
D) real exchange rate is equal to one.A dollar buys the quantity of foreign currency equal to the U.S.price level divided by the foreign country's price level.

Question 16

According to purchasing-power parity,if the price of a basket of goods in the U.S.rose from $2,000 to $2,104 and the price of the same basket of goods rose from 800 units to 832 units of some other country's currency,then the

Accepted Answer

A) nominal exchange rate would appreciate. 
B) nominal exchange rate would depreciate. 
C) real exchange rate would appreciate. 
D) real exchange rate would depreciate.

Question 17

The nominal exchange rate is about 2 Aruban florin per dollar.If a basket of goods in the United States costs $40,how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold?

Accepted Answer

A) 20 florin 
B) 40 florin 
C) 60 florin 
D) 80 florin

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?

Accepted Answer

A) P = e/P* 
B) 1 = e/P* 
C) e = P*/P 
D) None of the above is correct.

Question 19

The ability to profit by purchasing wheat in the U.S.and selling it in China implies that the

Accepted Answer

A) nominal exchange rate is less than 1. 
B) nominal exchange rate is greater than 1. 
C) real exchange rate is less than 1. 
D) real exchange rate is greater than 1.

Question 20

Suppose a McDonalds Big Mac costs $4.40 in the United States and 3.30 euros in the euro area and 5.72 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?

Accepted Answer

A) both the euro area and Australia 
B) the euro area but not Australia 
C) Australia but not the euro area 
D) neither the euro area nor Australia

Exam 18: Open Economy Macroeconomics Basic Concepts: A First Theory of Exchange-Rate Determination Purchasing-Power Parity