Question 1

According to purchasing-power parity,if over the course of a year the price level in the U.S.rises more than in Japan,then which of the following falls?
A)the U.S.real exchange rate,but not the U.S.nominal exchange rate
B)the U.S.nominal exchange rate,but not the U.S.real exchange rate
C)the U.S.nominal exchange rate and the U.S.real exchange rate
D)neither the real exchange rate nor the nominal exchange rate

Accepted Answer

According to the purchasing power parity (PPP) theory, the nominal exchange rate adjusts to equalize the prices of identical goods and services in two different countries. If the price level in the US rises more than in Japan, it means that the US dollar's purchasing power has decreased relative to that of the Japanese yen. Therefore, the US must allow its nominal exchange rate to decrease (i.e., depreciate) to restore the PPP equilibrium. The US real exchange rate, which accounts for changes in the relative inflation rates, will also fall because of the change in the nominal exchange rate, assuming Japan has a lower inflation rate than the US.

Question 2

According to purchasing-power parity,if it took 58 Indian rupees to buy a dollar today,but it took 55 to buy it a year ago,then the dollar has
A)appreciated,indicating inflation was higher in the U.S.than in India.
B)appreciated,indicating inflation was lower in the U.S.than in India.
C)depreciated,indicating inflation was higher in the U.S.than in India.
D)depreciated,indicating inflation was lower in the U.S.than in India.

Accepted Answer

The dollar has appreciated because it now takes more Indian rupees to buy a dollar. This suggests that inflation was lower in the U.S. than in India, as the purchasing power of the dollar has increased relative to the rupee.

Question 3

If over the next six months inflation is higher in the U.S.than in foreign countries,then according to purchasing-power parity
A)only the nominal exchange rate depreciates.
B)both the real and nominal exchange rate appreciate.
C)both the real and nominal exchange rate depreciate.
D)only the real exchange rate appreciates.

Accepted Answer

According to purchasing-power parity, if inflation is higher in the U.S. than in foreign countries, the U.S. dollar should depreciate against foreign currencies to maintain parity. However, since only the nominal exchange rate includes the effect of inflation, it is the nominal exchange rate that would depreciate, while the real exchange rate would remain unchanged. Therefore, the correct answer is A, only the nominal exchange rate depreciates.

Question 4

According to purchasing-power parity,if it took 55 Indian rupees to buy a dollar today,but it took 58 to buy it a year ago,then the dollar has
A)appreciated,indicating inflation was higher in the U.S.than in India.
B)appreciated,indicating inflation was lower in the U.S.than in India.
C)depreciated,indicating inflation was higher in the U.S.than in India.
D)depreciated,indicating inflation was lower in the U.S.than in India.

Accepted Answer

The dollar has depreciated because it takes fewer rupees to buy a dollar now than it did a year ago, indicating inflation was higher in the U.S. than in India.

Question 5

According to purchasing-power parity,if over the course of a year the price level in the U.S.rises more than in Canada,then which of the following rises?
A)the U.S.real exchange rate,but not the U.S.nominal exchange rate
B)the U.S.nominal exchange rate,but not the U.S.real exchange rate
C)the U.S.nominal exchange rate and the U.S.real exchange rate
D)neither the real exchange rate nor the nominal exchange rate

Accepted Answer

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

Question 6

If over the next few years inflation is higher in Mexico than in the U.S. ,then according to purchasing-power parity which of the following should rise?
A)the U.S.real exchange rate but not the U.S.nominal exchange rate
B)the U.S.nominal exchange rate but not the U.S.real exchange rate
C)the U.S.real exchange rate but not the U.S.nominal exchange rate.
D)neither the U.S.real nor the U.S.nominal exchange rate.

Accepted Answer

According to purchasing-power parity, if inflation is higher in Mexico than in the U.S., the U.S. nominal exchange rate should rise to offset the inflation differential, keeping the real exchange rate constant.

Question 7

If the Canadian nominal exchange rate does not change,but prices rise faster abroad than in Canada,then the Canadian real exchange rate
A)does not change.
B)rises.
C)declines.
D)None of the above is necessarily correct.

Accepted Answer

The real exchange rate adjusts for differences in price levels between countries. If prices rise faster abroad than in Canada, the real exchange rate declines, making Canadian goods relatively cheaper.

Question 8

According to purchasing-power parity,if the Federal Reserve increased the money supply
A)U.S.prices would rise and the nominal exchange rate would rise.
B)U.S.prices would rise and the nominal exchange rate would fall.
C)U.S.prices would fall and the nominal exchange rate would rise.
D)U.S.prices and the nominal exchange rate would fall.

Accepted Answer

According to purchasing-power parity, an increase in the money supply would cause inflation, which would lead to higher prices in the U.S. economy. This would make U.S. goods relatively more expensive compared to goods from other countries, leading to a fall in the nominal exchange rate. Therefore, U.S. prices would rise and the nominal exchange rate would fall.

Question 9

From 1970 to 1998 the U.S.dollar
A)gained value compared to the German mark because inflation was higher in Germany.
B)gained value compared to the German mark because inflation was lower in Germany.
C)lost value compared to the German mark because inflation was higher in Germany.
D)lost value compared to the German mark because inflation was lower in Germany.

Accepted Answer

The U.S. dollar lost value compared to the German mark because inflation was generally lower in Germany, making the mark stronger relative to the dollar.

Question 10

During 2011,the price level in the U.S.rose at a faster rate than the price level in Japan.Other things the same,according to purchasing-power parity,this difference in inflation rates should have caused
A)the nominal exchange rate of the dollar to appreciate relative to the yen.
B)the real exchange rate of the dollar to appreciate relative to the yen.
C)the nominal exchange rate of the dollar to depreciate relative to the yen.
D)the real exchange rate of the dollar to depreciate relative to the yen.

Accepted Answer

According to the purchasing-power parity theory, inflation rates affect exchange rates. When the price level increases, the currency of the country with higher inflation becomes less valuable, causing the nominal exchange rate to depreciate. Therefore, the nominal exchange rate of the dollar should depreciate relative to the yen in this scenario.

Question 11

According to the doctrine of purchasing-power parity,which of the following should depreciate if over the next year the inflation rate is higher in the U.S.than in the Euro area?
A)both the U.S.real exchange rate and the U.S.nominal exchange rate
B)the U.S.real exchange rate,but not the U.S.nominal exchange rate
C)the U.S.nominal exchange rate,but not the U.S.real exchange rate
D)neither the U.S.nominal exchange rate nor the U.S.real exchange rate

Accepted Answer

According to the doctrine of purchasing-power parity, if the inflation rate is higher in the U.S. than in the Euro area, then the U.S. dollar should depreciate. This will cause a decrease in the U.S. real exchange rate, which is the ratio of the prices of a basket of goods between the two countries. However, the nominal exchange rate, which is the price of one currency in terms of another, may not necessarily depreciate due to other factors such as changes in interest rates or capital flows. Therefore, option C, which states that only the U.S. nominal exchange rate will depreciate, is the best choice.

Question 12

If the U.S.price level is increasing by 3 percent annually and the Japanese price level is increasing by 1 percent annually,then according to purchasing-power parity,by about what percent would the nominal exchange rate be changing?
A)decreasing by 4 percent
B)decreasing by 2 percent
C)increasing by 4 percent
D)increasing by 2 percent

Accepted Answer

The answer of If the U.S.price level is increasing by...

Question 13

If the Kenyan nominal exchange rate declines,and prices are unchanged in Kenya and abroad,then the Kenyan real exchange rate
A)does not change.
B)rises.
C)declines
D)None of the above is necessarily correct.

Accepted Answer

The real exchange rate is the nominal exchange rate adjusted for price levels. If the nominal exchange rate declines and prices remain unchanged, the real exchange rate also declines.

Question 14

According to purchasing-power parity,if prices in the United States increase by a larger percentage than prices in the United Kingdom,then the
A)real exchange rate rises.
B)nominal exchange rate rises.
C)real exchange rate falls.
D)nominal exchange rate falls.

Accepted Answer

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

Question 15

You hold currency from a foreign country.If that country has a higher rate of inflation than the United States,then over time the foreign currency will buy
A)more goods in that country and buy more dollars.
B)more goods in that country but buy fewer dollars.
C)fewer goods in that country but buy more dollars.
D)fewer goods in that country and buy fewer dollars.

Accepted Answer

Higher inflation in the foreign country reduces the purchasing power of its currency, meaning it will buy fewer goods domestically and depreciate against the dollar, buying fewer dollars.

Question 16

According to purchasing-power parity,if it took 1,100 Korean Won to buy a dollar this year,but it took 1,000 to buy it last year,then the dollar has
A)appreciated,indicating inflation was higher in the U.S.than in Korea.
B)appreciated indicating inflation was lower in the U.S.than in Korea.
C)depreciated indicating inflation was higher in the U.S.than in Korea.
D)depreciated indicating inflation was lower in the U.S.than in Korea.

Accepted Answer

The dollar has appreciated because it now takes more Korean Won to buy a dollar, indicating that inflation was lower in the U.S. than in Korea.

Question 17

According to purchasing-power parity,if prices in the United States increase by a smaller percentage than prices in the United Kingdom,then the
A)real exchange rate rises.
B)nominal exchange rate rises.
C)real exchange rate falls.
D)nominal exchange rate falls.

Accepted Answer

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

Question 18

If the Mexican nominal exchange rate does not change,but prices rise faster in Mexico than in all other countries,then the Mexican real exchange rate
A)does not change.
B)rises.
C)declines.
D)There is not enough information to answer the question

Accepted Answer

The real exchange rate is a measure of the relative price of goods and services between two countries. It is calculated by adjusting the nominal exchange rate for inflation. If prices in Mexico are rising faster than in all other countries, this means that Mexican goods and services are becoming relatively more expensive compared to goods and services from other countries. Therefore, the real exchange rate of Mexico should be rising.

Question 19

From 1970 to 1998 the U.S.dollar
A)gained value compared to the Italian lira because inflation was higher in Italy.
B)gained value compared to the Italian lira because inflation was lower in Italy.
C)lost value compared to the Italian lira because inflation was higher in Italy.
D)lost value compared to the Italian lira because inflation was lower in Italy.

Accepted Answer

The U.S. dollar gained value compared to the Italian lira because inflation was higher in Italy, leading to a depreciation of the lira relative to the dollar.

Question 20

From 1970 to 1998 the U.S.dollar
A)gained value compared to the German mark because inflation was higher in the U.S.
B)gained value compared to the German mark because inflation was lower in the U.S.
C)lost value compared to the German mark because inflation was higher in the U.S.
D)lost value compared to the German mark because inflation was lower in the U.S.

Accepted Answer

The U.S. dollar lost value compared to the German mark because inflation was higher in the U.S. than in Germany during that period, leading to a depreciation of the dollar.

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

According to purchasing-power parity,if over the course of a year the price level in the U.S.rises more than in Japan,then which of the following falls?

According to purchasing-power parity,if it took 58 Indian rupees to buy a dollar today,but it took 55 to buy it a year ago,then the dollar has

If over the next six months inflation is higher in the U.S.than in foreign countries,then according to purchasing-power parity

According to purchasing-power parity,if it took 55 Indian rupees to buy a dollar today,but it took 58 to buy it a year ago,then the dollar has

According to purchasing-power parity,if over the course of a year the price level in the U.S.rises more than in Canada,then which of the following rises?

If over the next few years inflation is higher in Mexico than in the U.S. ,then according to purchasing-power parity which of the following should rise?

If the Canadian nominal exchange rate does not change,but prices rise faster abroad than in Canada,then the Canadian real exchange rate

According to purchasing-power parity,if the Federal Reserve increased the money supply

From 1970 to 1998 the U.S.dollar

During 2011,the price level in the U.S.rose at a faster rate than the price level in Japan.Other things the same,according to purchasing-power parity,this difference in inflation rates should have caused

According to the doctrine of purchasing-power parity,which of the following should depreciate if over the next year the inflation rate is higher in the U.S.than in the Euro area?

If the U.S.price level is increasing by 3 percent annually and the Japanese price level is increasing by 1 percent annually,then according to purchasing-power parity,by about what percent would the nominal exchange rate be changing?

If the Kenyan nominal exchange rate declines,and prices are unchanged in Kenya and abroad,then the Kenyan real exchange rate

According to purchasing-power parity,if prices in the United States increase by a larger percentage than prices in the United Kingdom,then the

You hold currency from a foreign country.If that country has a higher rate of inflation than the United States,then over time the foreign currency will buy

According to purchasing-power parity,if it took 1,100 Korean Won to buy a dollar this year,but it took 1,000 to buy it last year,then the dollar has

According to purchasing-power parity,if prices in the United States increase by a smaller percentage than prices in the United Kingdom,then the

If the Mexican nominal exchange rate does not change,but prices rise faster in Mexico than in all other countries,then the Mexican real exchange rate

From 1970 to 1998 the U.S.dollar

From 1970 to 1998 the U.S.dollar