Question 1

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?
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

According to the theory of purchasing-power parity, the real exchange rate is determined by the relative prices of similar goods in different countries. Here, the price of a Big Mac in Japan is lower than in the U.S., which means that the yen is undervalued relative to the dollar. To move towards purchasing-power parity, the real exchange rate needs to adjust so that the yen appreciates relative to the dollar. One way this can happen is if the price of Big Macs in the U.S. falls, which makes the U.S. dollar relatively weaker. If the nominal exchange rate also falls, it would reinforce the adjustment in the real exchange rate. Therefore, option A is the correct answer. Option B would lead to the opposite effect, where the real exchange rate diverges from purchasing-power parity. Option C or D might also lead to exchange rate adjustments, but they would depend on other factors affecting the exchange rate besides Big Mac prices.

Question 2

Use the (hypothetical) information in the following table to answer the following questions.
Table 31-2 
-Refer to Table 31-2. Which currency(ies) is(are) have a nominal exchange rate less than that predicted by the doctrine of purchasing-power parity?
A)the euro and the riyal
B)the pound and the yen
C)the bolivar
D)the yen

Accepted Answer

The answer of Use the (hypothetical) information in the following...

Question 3

If the dollar buys less cotton in Egypt than in the United States, then traders could make a profit by
A)buying cotton in the United States and selling it in Egypt, which would tend to raise the price of cotton in the United States.
B)buying cotton in the United States and selling it in Egypt, which would tend to raise the price of cotton in Egypt.
C)buying cotton in Egypt and selling it in the United States, which would tend to raise the price of cotton in Egypt.
D)buying cotton in Egypt and selling it in the United States, which would tend to raise the price of cotton in the United States.

Accepted Answer

The answer of If the dollar buys less cotton in...

Question 4

Use the (hypothetical) information in the following table to answer the following questions.
Table 31-2 
-Refer to Table 31-2. For which country(ies) in the table does purchasing-power parity with the U.S. hold?
A)Germany and Japan
B)Japan and Saudi Arabia
C)Britain and Venezuela
D)Germany

Accepted Answer

The answer of Use the (hypothetical) information in the following...

Question 5

A pair of running shoes costs $70 in the U.S. If the price of the same shoes is 4500 rupees in India and the exchange rate is 60 rupees per dollar, than the real exchange rate is
A)more than 1, so a profit could be made by buying these shoes in the U.S. and selling them in India.
B)more than 1, so a profit could be made by buying these shoes in India and selling them in the U.S.
C)less than 1, so a profit could be made by buying these shoes in the U.S. and selling them in India.
D)less than 1, so a profit could be made by buying these shoes in India and selling them in the U.S.

Accepted Answer

The answer of A pair of running shoes costs $70...

Question 6

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

The theory of purchasing-power parity suggests that the nominal exchange rate between two countries should adjust to reflect the relative price levels in those countries. This means that if one country has a higher inflation rate than another, its currency should depreciate relative to the other country’s currency to maintain parity in purchasing power. Therefore, choice A is the correct answer.

Question 7

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
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.

Accepted Answer

The answer of A tall latte in China costs 30...

Question 8

If a McDonald's Big Mac cost $4.50 in the United States and 3.60 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?
A)1.25 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)1.25 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).80 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).80 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 $4.50...

Question 9

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 parity 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 parity held the nominal exchange rate would be higher.
D).904. If purchasing-power parity held the nominal exchange rate would be lower.

Accepted Answer

To calculate the real exchange rate, we divide the price of the Starbucks latte in China (28 yuan) by the price of the latte in the US ($3.75) multiplied by the nominal exchange rate (6.75 yuan per dollar).

Real exchange rate = (28 yuan / ($3.75 x 6.75 yuan per dollar)) = 0.904 or 90.4%

This means that the price of the latte in China is 90.4% of the price of the latte in the US when we take into account the exchange rate and the relative purchasing power of the two currencies.

If purchasing power parity held, the nominal exchange rate would be adjusted so that the real exchange rate would be 1. This suggests that the current nominal exchange rate (6.75 yuan per dollar) is overvalued with respect to the purchasing power of the two currencies. Therefore, if PPP held, the nominal exchange rate would be lower, implying that answer D is incorrect.

Question 10

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 equal the ratio of foreign prices to domestic prices. Therefore, e = P*/P.

Question 11

Use the (hypothetical) information in the following table to answer the following questions.
Table 31-2 
-Refer to Table 31-2. In real terms, U.S. goods are more expensive than goods in which country(ies)?
A)Britain
B)Germany and Japan
C)Japan
D)Germany and Venezuela

Accepted Answer

In real terms, U.S. goods are more expensive than goods in Japan.

Question 12

If a lobster in Maine costs $10 and that the same type of lobster in Massachusetts costs $30, then people could make a profit by
A)buying lobsters in Maine and selling them in Massachusetts. This action would increase the price of lobster in Massachusetts.
B)buying lobsters in Maine and selling them in Massachusetts. This action would decrease the price of lobster in Massachusetts.
C)buying lobsters in Massachusetts and selling them in Maine. This action would increase the price of lobster in Massachusetts.
D)buying lobsters in Massachusetts and selling them in Maine. This action would decrease the price of lobster in Massachusetts.

Accepted Answer

The answer of If a lobster in Maine costs $10...

Question 13

If the exchange rate is 60 Indian rupees per dollar and a bushel of rice costs 200 rupees in India and $3 in the U.S., then the real exchange rate is
A)greater than one and arbitrageurs could profit by buying rice in the U.S. and selling it in India.
B)greater than one and arbitrageurs could profit by buying rice in India and selling it in the U.S..
C)less than one and arbitrageurs could profit by buying rice in the U.S. and selling it in India.
D)less than one and arbitrageurs could profit by buying rice in India and selling it in the U.S..

Accepted Answer

The real exchange rate is calculated by multiplying the nominal exchange rate by the ratio of foreign to domestic prices.

Nominal exchange rate = 60 rupees/dollar

Foreign price (U.S.) = $3

Domestic price (India) = 200 rupees

Real exchange rate = (60 rupees/dollar) x ($3/200 rupees) = 0.9

Since the real exchange rate is less than one, arbitrageurs could profit by buying rice in the U.S. and selling it in India. This is because the same quantity of rice can be purchased for less money in the U.S. than in India (in dollar terms), so arbitrageurs could buy rice in the U.S. for $3 and sell it in India for more than $3 worth of rupees (due to the exchange rate) - giving them a profit.

Question 14

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 $55 dollars, then
A)the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in the U.S. 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 U.S.
C)the real exchange rate is less than one and arbitrageurs could profit by buying oranges in the U.S. 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 U.S.

Accepted Answer

To determine the real exchange rate, we need to compare the price of the same goods in two different countries using their respective currencies. In this case, we have the price of a crate of oranges in Morocco (400 dirhams) and the price of the same crate of oranges in the U.S. ($55).

To compare the prices, we need to convert one of the prices into the other currency using the exchange rate. Converting the price of the oranges in Morocco into dollars, we get:

400 dirhams / 8 dirhams per dollar = $50

Since the price of the oranges in the U.S. is $55 and the converted price in Morocco is $50, it is cheaper to buy the oranges in Morocco and sell them in the U.S. So, arbitrageurs could profit by buying oranges in Morocco and selling them in the U.S.

Therefore, the real exchange rate is less than one, and the correct answer is B.

Question 15

A pair of jeans cost $25 in the U.S. and 1600 dinar in Algeria. If the nominal exchange rate is 75 dinar per U.S. dollar, then the real exchange rate is
A)more than one, so a profit could be made by buying jeans in Algeria and selling them in the U.S.
B)more than one, so a profit could be made by buying jeans in the U.S. and selling them in Algeria.
C)less than one, so a profit could be made by buying jeans in Algeria and selling them in the U.S.
D)less than one, so a profit could be made by buying jeans in the U.S. and selling them in Algeria.

Accepted Answer

The answer of A pair of jeans cost $25 in...

Question 16

Use the (hypothetical) information in the following table to answer the following questions.
Table 31-2 
-Refer to Table 31-2. Which currency(ies) is(are) have a higher nominal exchange rate than predicted by the doctrine of purchasing-power parity?
A)the bolivar and the pound
B)the euro and the riyal
C)the yen
D)the pound

Accepted Answer

The yen has a higher nominal exchange rate than predicted by the doctrine of purchasing-power parity.

Question 17

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

Accepted Answer

The answer of If the dollar buys fewer bananas in...

Question 18

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

Accepted Answer

If a dollar buys more rice in China than in the U.S., it implies that the price of rice in China is lower than its price in the U.S. This means that the Chinese yuan is undervalued relative to the U.S. dollar. Therefore, if one were to buy rice in China using U.S. dollars, they would get more rice for the same amount of dollars. They could then sell this rice in the U.S. for a higher price, earning a profit. This would lead to an increase in demand for Chinese yuan and a decrease in demand for the U.S. dollar, pushing up the value of the yuan and lowering the value of the dollar. As a result, the real exchange rate would increase, or be greater than 1. Thus, option B is the best choice.

Question 19

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

Accepted Answer

The answer of An MP3 player in Singapore costs 200...

Question 20

Use the (hypothetical) information in the following table to answer the following questions.
Table 31-2 
-Refer to Table 31-2. In real terms, U.S. goods are less expensive than goods in which country(ies)?
A)Britain and Japan
B)Germany and Saudi Arabia
C)Germany and Venezuela
D)Japan

Accepted Answer

The answer of Use the (hypothetical) information in the following...

Quiz 31: Open-Economy Macroeconomics: Basic Concepts

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?

Use the (hypothetical) information in the following table to answer the following questions. Table 31-2 -Refer to Table 31-2. Which currency(ies) is(are) have a nominal exchange rate less than that predicted by the doctrine of purchasing-power parity?

If the dollar buys less cotton in Egypt than in the United States, then traders could make a profit by

Use the (hypothetical) information in the following table to answer the following questions. Table 31-2 -Refer to Table 31-2. For which country(ies) in the table does purchasing-power parity with the U.S. hold?

A pair of running shoes costs $70 in the U.S. If the price of the same shoes is 4500 rupees in India and the exchange rate is 60 rupees per dollar, than the real exchange rate is

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

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

If a McDonald's Big Mac cost $4.50 in the United States and 3.60 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?

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

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

Use the (hypothetical) information in the following table to answer the following questions. Table 31-2 -Refer to Table 31-2. In real terms, U.S. goods are more expensive than goods in which country(ies) ?

If a lobster in Maine costs $10 and that the same type of lobster in Massachusetts costs $30, then people could make a profit by

If the exchange rate is 60 Indian rupees per dollar and a bushel of rice costs 200 rupees in India and $3 in the U.S., then the real exchange rate is

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 $55 dollars, then

A pair of jeans cost $25 in the U.S. and 1600 dinar in Algeria. If the nominal exchange rate is 75 dinar per U.S. dollar, then the real exchange rate is

Use the (hypothetical) information in the following table to answer the following questions. Table 31-2 -Refer to Table 31-2. Which currency(ies) is(are) have a higher nominal exchange rate than predicted by the doctrine of purchasing-power parity?

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

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

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?

Use the (hypothetical) information in the following table to answer the following questions. Table 31-2 -Refer to Table 31-2. In real terms, U.S. goods are less expensive than goods in which country(ies) ?