Deck 16: Price Levels and the Exchange Rate in the Long Run

Question 1

Long-run changes in the nominal exchange rate are a function of:

A) demand in the two countries.
B) supply in the two countries.
C) the market structures in the two countries.
D) relative prices in the two countries.

Answer 1

relative prices in the two countries.

Question 2

In the long run, exchange rate movements are dominated by:

A) inflation differentials.
B) transportation costs.
C) quotas.
D) market structures.

Answer 2

inflation differentials.

Question 3

If the money supply in the U.S. is rising faster than the money supply in the EU then:

A) the dollar should appreciate in nominal terms.
B) the dollar should depreciate in nominal terms.
C) the dollar should appreciate in real terms.
D) the dollar should depreciate in real terms.

Answer 3

the dollar should depreciate in nominal terms.

Question 4

If real GDP in the U.S. is rising faster than real GDP in the EU then:

A) the dollar should appreciate in nominal terms.
B) the dollar should depreciate in nominal terms.
C) the dollar should appreciate in real terms.
D) the dollar should depreciate in real terms.

Question 5

If proportion of money individuals want to hold increases in the U.S. and the proportion of money individuals want to hold remains constant in the EU then:

A) the dollar should appreciate in nominal terms.
B) the dollar should depreciate in nominal terms.
C) the dollar should appreciate in real terms.
D) the dollar should depreciate in real terms.

Question 6

If the money supply in the EU is rising faster than the money supply in the U.S. then:

A) the dollar should appreciate in nominal terms.
B) the dollar should depreciate in nominal terms.
C) the dollar should appreciate in real terms.
D) the dollar should depreciate in real terms.

Question 7

If real GDP in the EU is rising faster than real GDP in the U.S. then:

A) the dollar should appreciate in nominal terms.
B) the dollar should depreciate in nominal terms.
C) the dollar should appreciate in real terms.
D) the dollar should depreciate in real terms.

Question 8

If the proportion of money individuals want to hold increases in the EU and the proportion of money individuals want to hold remains constant in the U.S. then:

A) the dollar should appreciate in nominal terms.
B) the dollar should depreciate in nominal terms.
C) the dollar should appreciate in real terms.
D) the dollar should depreciate in real terms.

Question 9

Which of the following is not a determinant of nominal exchange rates?

A) Price levels
B) Real GDP
C) Capital flows
D) All are determinants of the nominal exchange rate

Question 10

Which of the following would tend to cause a depreciation of a country's currency?

A) a fall in domestic real GDP
B) a fall in the money supply
C) a rise in k in the foreign country
D) a rising price level in the foreign country

Question 11

If the real interest rate in the U.S. increases relative to the real interest rate in Japan then:

A) more capital will flow from the U.S. to Japan causing the dollar to appreciate.
B) more capital will flow from the U.S. to Japan causing the dollar to depreciate.
C) more capital will flow from Japan to the U.S. causing the dollar to appreciate.
D) more capital will flow from Japan to the U.S. causing the dollar to depreciate.

Question 12

If the real interest rate in the U.S. decreases relative to the real interest rate in Japan then:

A) more capital will flow from the U.S. to Japan causing the dollar to appreciate.
B) more capital will flow from the U.S. to Japan causing the dollar to
Depreciate.
C) more capital will flow from Japan to the U.S. causing the dollar to appreciate.
D) more capital will flow from Japan to the U.S. causing the dollar to depreciate.

Question 13

An increase in the real interest rate would tend to cause an appreciation of the real exchange rate.

Question 14

The real interest rate is equal to the nominal interest rate divided by the expected rate of inflation.

Question 15

Real interest parity is important in determining changes in the nominal exchange rate.

Question 16

If the real interest rate in the U.S. are 3% and the real interest rate in Japan is 1% one would expect the real value of the dollar to appreciate against the yen.

Question 17

Suppose that prices in the U.S. rose relative to prices in Canada. Describe what would tend to happen to the exchange rate of the U.S. dollar relative to the Canadian dollar.

Question 18

Suppose that a basket of goods costs $1,000 in the U.S. and the same basket of goods costs 200 zlotys in Poland. Explain what would happen to the dollar/zloty exchange rate if prices in the U.S. did not change but the price of the basket in Poland went to 500 zlotys.

Question 19

Discuss why the concept of PPP tends to fail empirical tests.

Question 20

Why are prices on average lower in poorer countries?

Question 21

Describe how it would be possible for the nominal exchange rate to depreciate and the real exchange rate to appreciate.

Question 22

Discuss the factors that would tend to cause the real exchange rate to change in the long run.

Question 23

Describe the various types of exchange-rate indexes.

Question 24

Explain the relationship between the real exchange rate and real interest rates.

Question 25

Explain why it is important to know if the real exchange rate is appreciating or depreciating.