Question 1

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

According to purchasing-power parity, if prices in China rise by a larger percentage than in the U.S., the U.S. dollar gains value relative to the Chinese currency, as it can buy more Chinese goods. However, it loses value domestically as prices rise.

Question 2

Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U.S.currency must rise if the price level(s)in

Accepted Answer

Purchasing-power parity states that the exchange rate between two currencies should adjust to equalize the prices of a basket of goods and services in both countries. Therefore, if the price level in a foreign country rises, the nominal exchange rate must rise to maintain purchasing power parity.

Question 3

According to purchasing-power parity,when a country's central bank decreases the money supply,a unit of money

Accepted Answer

When a country's central bank decreases the money supply, it typically leads to an increase in the value of the currency. This is because there is less currency available, making each unit of currency more valuable. According to purchasing-power parity, this increase in value should be reflected both in terms of the domestic goods and services a unit of money can buy (due to decreased inflation or deflation) and in terms of the foreign currency it can buy (as the currency strengthens against others).

Question 4

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

The answer of According to purchasing-power parity,if the price of...

Question 5

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

Accepted Answer

The answer of Prices in both the U.S.and India rise,but...

Question 6

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

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 7

If purchasing-power parity holds,when a country's central bank increases the money supply,a unit of money

Accepted Answer

Increasing the money supply typically leads to inflation, reducing the value of money domestically and causing depreciation in foreign exchange markets, thus reducing its value in terms of foreign currency.

Question 8

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

The Big Mac price in euros (3.60) divided by the exchange rate (0.80) equals $4.50, which matches the U.S. price, indicating purchasing-power parity. The tall latte does not match this condition.

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

Accepted Answer

To calculate the real exchange rate, we need to divide the price of a Starbucks Grande Latte in the U.S. by the price in China and multiply it by the exchange rate:

Real exchange rate = (U.S. price/China price) x nominal exchange rate
Real exchange rate = ($3.75/28 yuan) x 6.75 yuan/dollar
Real exchange rate = 0.536 x 6.75
Real exchange rate = 3.623 yuan/dollar

This means that it costs 3.623 yuan to buy one U.S. dollar's worth of goods in China. Since the nominal exchange rate is 6.75 yuan/dollar, this suggests that the yuan is undervalued relative to the dollar, i.e. it takes fewer yuan to buy the same amount of goods as in the U.S. Thus, if purchasing power parity held, the nominal exchange rate would be higher (i.e. it would take more yuan to buy one U.S. dollar). Therefore, the answer is C - .904, and not 1.106.

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

The answer of According to purchasing-power parity,if the price of...

Question 11

According to purchasing-power parity,inflation in the U.S.causes the dollar to

Accepted Answer

According to purchasing-power parity, if the U.S. experiences higher inflation than another country, the dollar will depreciate relative to that country's currency.

Question 12

According to purchasing-power parity which of the following would happen if a country raised its money supply growth rate?

Accepted Answer

Increasing the money supply typically leads to inflation, causing the nominal exchange rate to fall as the domestic currency depreciates.

Question 13

If a Starbucks tall latte costs $3.20 in the United States and 3 euros in the Euro area,then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?

Accepted Answer

Purchasing-power parity implies that the exchange rate should be such that the cost of a tall latte is the same in both countries. In this case, the cost of a tall latte in the U.S. is $3.20, and the cost of a tall latte in the Euro area is 3 euros. Therefore, the exchange rate should be 3 euros/$3.20 = 0.938 euros per dollar. If the exchange rate is less than this, it will cost more dollars to buy a tall latte in the U.S. than in the Euro area.

Question 14

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?

Accepted Answer

Purchasing-power parity suggests that the exchange rate should equalize the price of identical goods in different countries. Here, 3.60 euros per Big Mac divided by $4.50 per Big Mac gives an exchange rate of 0.80 euros per dollar.

Question 15

Suppose a Starbucks tall latte costs $4.00 in the United States,5.00 euros in the euro area and $2.50 Australian dollars in Australia.Nominal exchange rates are .80 euros per dollar and 1.4 Australian dollars per U.S.dollar.Where does purchasing-power parity hold?

Accepted Answer

The answer of Suppose a Starbucks tall latte costs $4.00...

Question 16

If purchasing-power parity holds,when a country's central bank decreases the money supply,its

Accepted Answer

According to the purchasing-power parity theory, a decrease in a country's money supply will result in a decrease in its price level. As a result, its currency will appreciate relative to other currencies in the world because it will be able to purchase more with its currency. Therefore, the correct answer is that the country's price level falls and its currency appreciates relative to other currencies in the world.

Question 17

Suppose a Starbucks tall latte costs $4.00 in the United States and 3.20 euros in the Euro area.Also,suppose a McDonald's Big Mac costs $4.40 in the United States and 5.50 euros in Euro area.If the nominal exchange rate is .80 euros per dollar,the prices of which goods have prices that are consistent with purchasing-power parity?

Accepted Answer

Purchasing-power parity (PPP) theory suggests that the prices of goods should be equalized across countries when converted to a common currency based on the exchange rate. In this case, we can convert the prices of the Starbucks latte and McDonald's Big Mac from dollars to euros using the exchange rate of 0.80 euros per dollar. If we do this, we find that the Starbucks latte costs 3.20 euros and the Big Mac costs 3.52 euros when converted. Since the price of the latte in the Euro area (3.20 euros) is consistent with the price based on the PPP conversion (also 3.20 euros), choice B is correct. The price of the Big Mac in the Euro area (5.50 euros) is not consistent with the PPP conversion (3.52 euros), so choices A, C, and D are all incorrect.

Question 18

If purchasing-power parity holds,when a country's central bank increases the money supply,its

Accepted Answer

According to purchasing-power parity, an increase in a country's money supply should lead to an increase in its price level. This would lead to a decrease in the value of its currency relative to other currencies in the world, as goods and services become more expensive in that country. Therefore, the correct choice is B, as the currency would depreciate relative to other currencies in the world.

Question 19

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

To compare prices, we need to convert all prices into one currency. Assuming that the US dollar is the common currency, we have:

- Big Mac price in the US = $4.40
- Big Mac price in the euro area = 3.30 euros/$0.75 per euro = $4.40
- Big Mac price in Australia = 5.72 AUD/$1.3 per AUD = $4.40

Therefore, purchasing-power parity holds in both the euro area and Australia, where the price of a Big Mac is equivalent to $4.40 in US dollars.

Question 20

Other things the same,according to purchasing-power parity,if over the next few years Mexico has a higher money supply growth rate than the U.S. ,then

Accepted Answer

According to purchasing-power parity, if Mexico has a higher money supply growth rate than the U.S., prices in Mexico will rise faster than in the U.S. This will lead to the depreciation of the Mexican peso relative to the U.S. dollar, meaning the dollar will appreciate against the peso.

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