Question 1

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 real exchange rate is the price of a good in one country relative to the price of the same good in another country, adjusted for the exchange rate. In this case, the real exchange rate is the price of a pair of jeans in Algeria relative to the price of a pair of jeans in the U.S., adjusted for the exchange rate.The price of a pair of jeans in Algeria is 1600 dinar. The price of a pair of jeans in the U.S. is $25. The nominal exchange rate is 75 dinar per U.S. dollar.The real exchange rate is:1600 dinar / 25 U.S. dollars * 75 dinar / U.S. dollar = 80The real exchange rate is more than one, so a profit could be made by buying jeans in Algeria and selling them in the U.S.

Question 2

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

Buying cotton in the United States and selling it in Egypt would tend to raise the price of cotton in the United States because the demand for cotton in Egypt would increase, leading to a higher price.

Question 3

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 means that the price of rice in China is lower than in the U.S. Therefore, the real exchange rate is greater than 1. Buying rice in China and selling it in the U.S. will result in a profit due to the price difference. Thus, option B is the correct answer.

Question 4

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 (PPP) states that the nominal exchange rate between two countries should equal the ratio of the price levels in the two countries. Therefore, e = P*/P, which is option C. Option A and B do not accurately reflect PPP.

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

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

Accepted Answer

The answer of If purchasing-power parity holds,a bushel of rice...

Question 7

If a dollar buys more corn in the U.S.than in Mexico,then
A)the real exchange rate is greater than 1;a profit might be made by buying corn in the U.S.and selling it in Mexico.
B)the real exchange rate is greater than 1;a profit might be made by buying corn in Mexico and selling it in the U.S.
C)the real exchange rate is less than 1;a profit might be made by buying corn in the U.S.and selling it in Mexico.
D)the real exchange rate is less than 1;a profit might be made by buying corn in Mexico and selling it in the U.S.

Accepted Answer

The answer of If a dollar buys more corn in...

Question 8

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 states that the nominal exchange rate between two countries must reflect the differing price levels in those countries. In other words, if the price level in one country is higher than in another, the exchange rate should adjust to reflect that difference in purchasing power. This is because, in the absence of trade barriers and transportation costs, consumers would seek to buy goods where they are cheaper, and the exchange rate would adjust to make that possible.

Question 9

If purchasing-power parity holds,the price level in the U.S.is 250,and the price level in Japan is 260,which of the following is true?
A)the real exchange rate is 250/260
B)the real exchange rate is 260/250
C)the nominal exchange rate is 250/260
D)the nominal exchange rate is 260/250

Accepted Answer

The answer of If purchasing-power parity holds,the price level in...

Question 10

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

Accepted Answer

To check if purchasing power parity holds, we need to compare the cost of the same basket of goods in different countries, adjusted for exchange rates.

For France: 
The cost of the basket of goods in France is $1,000. To convert this to dollars, we multiply by the exchange rate: 
$1,000 x 0.80 euros/dollar = $800 
So the cost in France, adjusted for exchange rates, is the same as in the U.S. Therefore, purchasing power parity holds in France.

For Australia: 
The cost of the basket of goods in Australia is 960 Australian dollars. To convert this to dollars, we divide by the exchange rate: 
960 Australian dollars / 1.2 dollars/Australian dollar = $800 
So the cost in Australia, adjusted for exchange rates, is the same as in the U.S. Therefore, purchasing power parity also holds in Australia.

Since purchasing power parity holds in both France and Australia, the answer is (A) both France and Australia.

Question 12

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

Accepted Answer

The ability to profit by purchasing wheat in the U.S. and selling it in China implies that the real exchange rate is less than 1, indicating that U.S. wheat is cheaper in China, allowing for arbitrage opportunities.

Question 13

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

Purchasing-power parity implies that the exchange rate should equal the ratio of the price levels. Here, 200 Singaporean dollars / 100 US dollars = 2.0.

Question 14

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 answer of If the exchange rate is 60 Indian...

Question 15

If purchasing-power parity holds but then U.S.prices rise,which of the following move the exchange rate back towards purchasing-power parity?
A)foreign prices rise or the U.S.nominal exchange rate rises
B)foreign prices rise or the U.S.nominal exchange rate falls
C)foreign prices fall or the U.S.nominal exchange rate rises
D)foreign prices fall or the U.S.nominal exchange rate falls

Accepted Answer

If U.S. prices rise, for purchasing-power parity to hold, either foreign prices must rise to match the increase, or the U.S. nominal exchange rate must fall to make U.S. goods cheaper in foreign currency terms.

Question 16

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 prices of the same basket of goods between two countries. Here, we are comparing the price of a crate of oranges in Morocco and the US. 
In Morocco: 1 crate of oranges = 400 dirhams 
In the US: 1 crate of oranges = $55 
We need to convert the price of the crate of oranges in Morocco to dollars: 
400 Moroccan dirhams / 8 Moroccan dirhams per USD = $50 
So, the price of a crate of oranges in Morocco is $50, and the price of a crate of oranges in the US is $55. 
Since the price of the same basket of goods (oranges) is higher in the US than in Morocco, we can say that the real exchange rate is greater than one (since it takes more Moroccan dirhams to buy the same basket of goods in the US). 
Arbitrageurs could buy crates of oranges in Morocco for $50, and sell them in the US for $55, making a profit of $5 per crate. Therefore, they could profit by buying oranges in Morocco and selling them in the US.

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

Traders would buy bananas where they are cheaper (Honduras) and sell them where they are more expensive (Guatemala), increasing demand and price in Honduras.

Question 18

If purchasing-power parity holds,the price level in the U.S.is 140,and the price level in Canada is 120,which of the following is true?
A)the real exchange rate is 120/140.
B)the real exchange rate is 140/120.
C)the nominal exchange rate is 120/140
D)the nominal exchange rate is 140/120

Accepted Answer

The answer of If purchasing-power parity holds,the price level in...

Question 19

If purchasing-power parity between France and the U.S.holds,but then U.S.prices rise,
A)the real exchange rate is above its purchasing-power parity value.An increase in the nominal exchange rate can move it back.
B)the real exchange rate is above its purchasing-power parity value.A decrease in the nominal exchange rate can move it back.
C)the real exchange rate is below its purchasing-power parity value.An increase in the nominal exchange rate can move it back.
D)the real exchange rate is below its purchasing-power parity value.A decrease in the nominal exchange rate can move it back.

Accepted Answer

If the purchasing-power parity between France and the U.S. holds, but U.S. prices rise, then the real exchange rate is above its purchasing-power parity value. A decrease in the nominal exchange rate can move it back towards the purchasing-power parity value. This is because a decrease in the nominal exchange rate means that it takes fewer U.S. dollars to purchase one euro, which makes U.S. goods relatively cheaper compared to French goods, and can help to restore the balance of trade between the two countries.

Question 20

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...

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

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

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

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

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 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

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?

If a dollar buys more corn in the U.S.than in Mexico,then

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

If purchasing-power parity holds,the price level in the U.S.is 250,and the price level in Japan is 260,which of the following is true?

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 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

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

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?

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 purchasing-power parity holds but then U.S.prices rise,which of the following move the exchange rate back towards purchasing-power parity?

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

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

If purchasing-power parity holds,the price level in the U.S.is 140,and the price level in Canada is 120,which of the following is true?

If purchasing-power parity between France and the U.S.holds,but then U.S.prices rise,

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