Question 1

The idea that the value of money is equal across countries is known as

Accepted Answer

Purchasing power parity theory suggests that the exchange rate between two currencies will adjust to ensure that a basket of goods has the same value in both countries. In other words, goods should cost the same amount in both countries after adjusting for exchange rates. Therefore, purchasing power parity implies that the value of money is equal across countries.

Question 2

If prices increase in Mexico, but remain constant in the United States, then

Accepted Answer

If prices increase in Mexico while remaining constant in the United States, people may expect the value of the dollar to rise in the future because the purchasing power of the dollar relative to the Mexican currency increases, making the dollar more attractive.

Question 3

Suppose the exchange rate between the U.S. dollar and the Jamaican dollar was $1 U.S. = $40 Jamaican dollars. A beach towel sells for $20 in Miami and $60 Jamaican in Negril.

Accepted Answer

The answer of Suppose the exchange rate between the U.S....

Question 4

Suppose a Japanese bank offers a 4 percent interest rate and U.S. banks offer a 2 percent interest rate. People must expect the yen to

Accepted Answer

The answer of Suppose a Japanese bank offers a 4...

Question 5

Suppose that the price of an identical sport- utility vehicle is $32,000 in U.S. dollars in the United States and $32,000 in Canadian dollars in Canada. Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S. dollar. Does purchasing power parity hold for SUVs between the United States and Canada?

Accepted Answer

The answer of Suppose that the price of an identical...

Question 6

According to purchasing power parity, the foreign exchange market will

Accepted Answer

According to purchasing power parity, the exchange rate between two currencies should adjust to reflect the difference in inflation rates between the two countries. This means that if inflation is higher in one country compared to another, its currency should depreciate relative to the other's currency. Conversely, if inflation is lower in one country compared to another, its currency should appreciate relative to the other's currency. Therefore, the foreign exchange market will adjust the value of the exchange rate based on the differing inflation rates between nations.

Question 7

Suppose that the price of an identical sport- utility vehicle is $32,000 in U.S. dollars in the United States and $32,000 in Canadian dollars in Canada. Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S. dollar. Based on this information what will happen to the exchange rate between the United States and Canada?

Accepted Answer

The answer of Suppose that the price of an identical...

Question 8

Suppose the exchange rate between the U.S. dollar and the Mexican peso was $1 = 5 pesos. A can of Pepsi sells for $2 in Boston and 12 pesos in Mexico City.

Accepted Answer

According to the law of one price, the price of a good should be the same in different countries when adjusted for the exchange rate. However, in this case, a can of Pepsi is being sold for $2 in the US and 12 pesos in Mexico City, which translates to $2.40 based on the exchange rate ($1 = 5 pesos). This means that the price of Pepsi in Mexico City is higher than the price of Pepsi in the US when adjusted for the exchange rate, indicating that purchasing power parity does not prevail. This could be due to various factors such as transportation costs, taxes, and tariffs.

Question 9

According to purchasing power parity, if the exchange rate between the dollar and the Brazilian real is 2 reals per dollar, and a Big Mac costs $3.10 in the U.S., then the Brazilian price will be

Accepted Answer

According to purchasing power parity, the price of a Big Mac in Brazil should be the same as in the U.S. when converted at the exchange rate. If a Big Mac costs $3.10 in the U.S. and the exchange rate is 2 reals per dollar, then the price in Brazil should be 3.10 * 2 = 6.20 reals.

Question 10

If the price level rises in the United States., the expected future exchange rate

Accepted Answer

The expected future exchange rate is affected by many factors, including the relative inflation rates between countries. In this case, if the price level in the United States rises, this means that there is inflation in the US economy. As a result, the purchasing power of the US dollar decreases, causing the exchange rate to fall. Therefore, the correct choice is A.

Question 11

According to purchasing power parity, a rise in inflation in the United States. relative to the rest of the world will lead to

Accepted Answer

According to the purchasing power parity theory, if inflation rises in the United States relative to other countries, the prices of goods and services in the US will increase compared to other countries, which will make them relatively less attractive to foreign buyers. As a result, demand for US dollars will decrease, leading to a depreciation in the exchange rate. This will make US exports cheaper and more competitive, while imports into the US will become more expensive. As a result, a rise in inflation in the US, relative to other countries, will lead to an exchange rate depreciation.

Question 12

In the long run, the nominal exchange rate

Accepted Answer

The nominal exchange rate is the rate at which one currency can be exchanged for another. It is determined by the supply and demand for each currency, which is influenced by various factors including trade flows, capital flows, and expectations about future exchange rates. However, in the long run, the nominal exchange rate is primarily a monetary phenomenon, as it is determined by the quantities of money in two countries. Specifically, if the money supply in one country increases relative to the other country, this should lead to an increase in the nominal exchange rate (i.e., the currency of the country with the higher money supply should depreciate relative to the other currency). This is because an increase in the money supply leads to higher prices in that country, which reduces the purchasing power of its currency, and thus makes it less valuable relative to other currencies. Therefore, choice B is the best answer. Choices A, C, and D are all incorrect because they either make incorrect statements or are not relevant to the question.

Question 13

Suppose that U.S. inflation is 3 percent and Turkish inflation is 70 percent. The effect of this discrepancy on the foreign exchange market is that

Accepted Answer

The high inflation in Turkey will lead to a decrease in the purchasing power of the Turkish currency, causing it to depreciate against the U.S. dollar. Therefore, option A is the correct choice. Option B is incorrect because interest rate parity is a concept related to interest rates rather than inflation rates. Option C is incorrect because high inflation in Turkey will not lead to an appreciation of its currency. Option D is incorrect because the question does not provide any information to suggest that the dollar will depreciate.

Question 14

Suppose the exchange rate between the dollar and the euro is 2 euros per dollar. The price of clocks in Europe is 20 euros while the price of the same clock in the United States is $5. It can be concluded that

Accepted Answer

According to the given information, 1 euro is equal to $0.50 ($1/2). This means that a clock in Europe costs $10 (20 euros x $0.50). However, the same clock costs only $5 in the United States. Therefore, money buys more in the United States than in Europe. Option D is the correct choice. The other options are not relevant to the given information.

Question 15

A decrease in the demand for U.S. exports _ the demand for U.S. dollars and shifts the demand curve for U.S. dollars .

Accepted Answer

A decrease in the demand for U.S. exports means fewer foreign buyers need to exchange their currency for U.S. dollars, leading to a decrease in demand for U.S. dollars. This downward pressure on demand shifts the demand curve for U.S. dollars leftward.

Question 16

In France, the price of a computer is 1,227.6 euros. In Japan, the price of the same computer is 137,920 yen. If a U.S. dollar can buy 1.023 euros or 119.93 yen, then purchasing power parity
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Accepted Answer

The answer of In France, the price of a computer...

Question 17

When a nation's currency depreciates, the country might

Accepted Answer

When a nation's currency depreciates, it means that the value of the currency has fallen in relation to other currencies. This can be caused by a variety of factors, but one common cause is high inflation. If a country has a high inflation rate compared to other countries with which it trades, its currency will be worth less in relation to those currencies. Therefore, choice C is the correct answer. Choices A and D are incorrect because they suggest an increase in demand for the domestic currency, which would actually cause the currency to appreciate, not depreciate. Choice B is also incorrect because it suggests that a low inflation rate would cause the currency to depreciate, which is not necessarily the case.

Question 18

If exchange rates and prices are such that a CD purchased in the U.S. is less expensive than a CD purchased in Mexico, purchasing power parity predicts that the demand for dollars will and the supply of dollars will .

Accepted Answer

According to the theory of purchasing power parity, in the scenario described, there will be an increased demand for dollars as people will want to purchase CDs from the US at a lower cost. This increased demand for dollars will lead to an appreciation of the dollar in relation to the Mexican peso. As a result, the supply of dollars will decrease as Mexicans will want to hold on to their pesos, which will now have a lower purchasing power in USD.

Question 19

Suppose that $1 U.S. costs $1.50 Canadian. If in St. Louis a CD costs $10 U.S. and in Montreal it costs $15 Canadian, then .

Accepted Answer

The answer of Suppose that $1 U.S. costs $1.50 Canadian....

Question 20

If the prices in the United States rise faster than those in other countries,

Accepted Answer

If prices in the United States rise faster than those in other countries, it means that the purchasing power of the US dollar has decreased relative to other currencies. Therefore, demand for the US dollar will fall, causing the exchange rate to fall.

Quiz 9: The Exchange Rate and the Balance of Payments