Quiz 523

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Quiz 523

1. The law of one price states that

a. a good must sell at the price fixed by law.
b. a good must sell at the same price at all locations.
c. a good cannot sell for a price greater than the legal price ceiling.
d. nominal exchange rates will not vary.

2. Purchasing-power parity describes the forces that determine

a. prices in the short run.
b. prices in the long run.
c. exchange rates in the short run.
d. exchange rates in the long run.

3. If the real exchange rate between the U.S. and Argentina is 1, then
a. purchasing-power parity holds, and 1 U.S. dollar buys 1 Argentinean bolivar.
b. purchasing-power parity holds, and the amount of dollars needed to buy goods in the U.S. is
the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in
Argentina.
c. purchasing-power parity does not hold, but 1 U.S. dollar buys 1 Argentinean bolivar.
d. purchasing-power parity does not hold, but the amount of dollars needed to buy goods in the
U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same
goods in Argentina.

4. Nominal exchange rates

a. vary little over time.
b. vary substantially over time.
c. appreciate over time for most countries.
d. depreciate over time for most countries.
5. If purchasing-power parity holds, then the value of the
a. real exchange rate is equal to one.
b. nominal exchange rate is equal to one.
c. real exchange rate is equal to the nominal exchange rate.
d. real exchange rate is equal to the difference in inflation rates between the two countries.

6. If purchasing-power parity holds, a dollar will buy

a. more goods in foreign countries than in the United States.
b. as many goods in foreign countries as it does in the United States.
c. fewer goods in foreign countries than it does in the United States.
d. None of the above is implied by purchasing-power parity.

7. If purchasing-power parity holds, a dollar will buy

a. one unit of each foreign currency.
b. foreign currency equal to the U.S. price level divided by the foreign country’s price level.
c. enough foreign currency to buy as many goods as it does in the United States.
d. None of the above is implied by purchasing-power parity.

8. Which of the following does purchasing-power parity imply?

a. The purchasing power of the dollar is the same in the U.S. as in foreign countries.
b. The price of domestic goods relative to foreign goods cannot change.
c. The nominal exchange rate is the ratio of U.S. prices to foreign prices.
d. All of the above are correct.

9. Which of the following does purchasing-power parity imply?

a. the foreign price level times the nominal exchange rate (given as amount of foreign currency
per dollar) equals the U.S. price level.
b. The price of domestic goods relative to foreign goods cannot change.
c. The nominal exchange rate is the ratio of foreign prices to U.S. prices.
d. All of the above are correct.

10. If purchasing-power parity holds, then the value of the

a. nominal exchange rate is equal to one. A dollar buys as many goods in the U.S. as it does
overseas.
b. nominal exchange rate is equal to one. A dollar buys the quantity of foreign currency equal to
the U.S. price level divided by the foreign country’s price level.
c. real exchange rate is equal to one. A dollar buys as many goods in the U.S. as it does overseas.
d. real exchange rate is equal to one. A dollar buys the quantity of foreign currency equal to the
U.S. price level divided by the foreign country’s price level.

11. Which of the following does purchasing-power parity conclude should equal 1?
a. both the nominal and the real exchange rate.
b. the nominal exchange rate but not the real exchange rate
c. the real exchange rate but not the nominal exchange rate
d. neither the nominal exchange rate nor the real exchange rate
12. According to purchasing-power parity, which of the following necessarily equals the ratio of
the foreign price level divided by the domestic price level?
a. the real exchange rate, but not the nominal exchange rate
b. the nominal exchange rate, but not the real exchange rate
c. the real exchange rate and the nominal exchange rate
d. neither the real exchange rate nor the nominal exchange rate

13. According to purchasing-power parity what should the nominal exchange rate between the
U.S. and another country be equal to?
a. 1
b. the real exchange rate between the U.S. and that country
c. the price level in the U.S. divided by the price level in the other country
d. the price level in the other country divided by the price level in the U.S.

14. The theory of purchasing-power parity primarily explains

a. why trade deficits tend to move to zero over time.
b. how foreign prices affect domestic prices.
c. the determination of the real exchange rate.
d. why a change in the real exchange rate changes a country’s net exports.

15. According to purchasing-power parity, if the same basket of goods costs $100 in the U.S. and
50 pounds in Britain, then what is the nominal exchange rate?
a. 2 pounds per dollar
b. 1 pound per dollar
c. 1/2 pound per dollar
d. None of the above is correct

16. According to purchasing-power parity, if a basket of goods costs $100 in the U.S. and the
same basket costs 800 pesos in Argentina, then what is the nominal exchange rate?
a. 8 pesos per dollar
b. 1 peso per dollar
c. 1/8 peso per dollar
d. none of the above is correct

17. The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the
United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing-
power parity to hold?
a. 20 florin
b. 40 florin
c. 60 florin
d. 80 florin

18. A basket of goods costs $800 in the U.S. In Belgium the basket of goods costs 640 euros and
the exchange rate is .80 euros per U.S. dollar. In Japan the basket of goods costs 90,000 yen and
the exchange rate is 90 yen per dollar. Which country has purchasing-power parity with the
U.S.?
a. both Belgium and Japan
b. Belgium but not Japan
c. Japan but not Belgium
d. neither Belgium nor Japan

19. According to purchasing-power parity, if two countries have the same price level because
they have the same prices for all goods and services, then which of the following would equal 1?
a. the real exchange rate, but not the nominal exchange rate
b. the nominal exchange rate, but not the real exchange rate
c. the real exchange rate and the nominal exchange rate
d. neither the real exchange rate nor the nominal exchange rate

20. The price of a basket of goods is $2000 in the U.S. If purchasing-power parity holds, and the
dollar buys two units of some country’s currency, then how many units of foreign currency does
the same basket of goods cost in that country?
a. 4000
b. 2000
c. 1000
d. None of the above are correct.

21. 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.

22. 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

23. 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

24. 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

25. 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

26. 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.

27. 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.

28. 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.

29. 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.
30. 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.

31. 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.

32. 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.

33. 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.

34. 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.
35. 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.

36. 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.

37. 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..

38. 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.

39. 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.
40. 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.

Use the (hypothetical) information in the following table to answer the following questions.

Table 31-2

Country
Currency Currency per
U.S. Dollar U.S. Price
Index Country Price
Index
Britain Pound .6 200 120
Germany Euro .80 200 200
Japan Yen 100 200 18000
Saudi Arabia Riyal 4 200 900
Venezuela Bolivar 6 200 1200

41. 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

42. 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

43. 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

44. 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

45. 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

46. 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.

47. 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

48. 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.

49. 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?
a. .938 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S.
than in the Euro area.
b. .938 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S.
then in the Euro area.
c. 1.067 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S.
than in the Euro area.
d. 1.067 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S.
than in the Euro area.

50. 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?
a. both the tall latte and the Big Mac
b. the tall latte but not the Big Mac
c. the Big Mac but not the tall latte
d. neither the tall latte nor the Big Mac

51. 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?
a. both the tall latte and the Big Mac
b. the tall latte but not the Big Mac
c. the Big Mac but not the tall latte
d. neither the Big Mac nor the tall latte

52. 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?
a. both the euro area and Australia
b. the euro area but not Australia
c. Australia but not the euro area
d. neither the euro area nor Australia

53. 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?
a. both the euro area and Australia
b. the euro area but not Australia
c. Australia but not the euro area
d. neither the euro area or Australia

54. 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
a. foreign countries rise.
b. the United States rises.
c. all countries rise.
d. all countries fall.

55. If purchasing-power parity holds, when a country's central bank increases the money supply,
its
a. price level rises and its currency appreciates relative to other currencies in the world.
b. price level rises and its currency depreciates relative to other currencies in the world.
c. price level falls and its currency appreciates relative to other currencies in the world.
d. price level falls and its currency depreciates relative to other currencies in the world.

56. If purchasing-power parity holds, when a country's central bank decreases the money supply,
its
a. price level rises and its currency appreciates relative to other currencies in the world.
b. price level falls and its currency appreciates relative to other currencies in the world.
c. price level rises and its currency depreciates relative to other currencies in the world.
d. price level falls and its currency depreciates relative to other currencies in the world.

57. If purchasing-power parity holds, when a country's central bank increases the money supply,
a unit of money
a. gains value both in terms of the domestic goods and services it can buy and in terms of the
foreign currency it can buy.
b. gains value in terms of the domestic goods and services it can buy, but loses value in terms of
the foreign currency it can buy.
c. loses value in terms of the domestic goods and services it can buy, but gains value in terms of
the foreign currency it can buy.
d. loses value both in terms of the domestic goods and services it can buy and in terms of the
foreign currency it can buy.

58. According to purchasing-power parity, when a country's central bank decreases the money
supply, a unit of money
a. gains value both in terms of the domestic goods and services it can buy and in terms of the
foreign currency it can buy.
b. gains value in terms of the domestic goods and services it can buy, but loses value in terms of
the foreign currency it can buy.
c. loses value in terms of the domestic goods and services it can buy, but gains value in terms of
the foreign currency it can buy.
d. loses value both in terms of the domestic goods and services it can buy and in terms of the
foreign currency it can buy.

59. 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
a. gains value both in terms of the domestic goods and services it can buy and in terms of the
Chinese currency it can buy.
b. gains value in terms of the domestic goods and services it can buy, but loses value in terms of
the Chinese currency it can buy.
c. loses value in terms of the domestic goods and services it can buy, but gains value in terms of
the Chinese currency it can buy.
d. loses value both in terms of the domestic goods and services it can buy and in terms of the
Chinese currency it can buy.
60. 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
a. gains value both in terms of the domestic goods and services it can buy and in terms of the
Indian currency it can buy.
b. gains value in terms of the domestic goods and services it can buy, but loses value in terms of
the Indian currency it can buy.
c. loses value in terms of the domestic goods and services it can buy, but gains value in terms of
the Indian currency it can buy.
d. loses value both in terms of the domestic goods and services it can buy and in terms of the
Indian currency it can buy.

61. 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
a. nominal exchange rate would appreciate.
b. nominal exchange rate would depreciate.
c. real exchange rate would appreciate.
d. real exchange rate would depreciate.

62. 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
a. nominal exchange rate would appreciate.
b. nominal exchange rate would depreciate.
c. real exchange rate would appreciate.
d. real exchange rate would depreciate.

63. According to purchasing-power parity, inflation in the U.S. causes the dollar to
a. depreciate relative to all other currencies.
b. depreciate relative to currencies of countries that have lower inflation rates.
c. appreciate relative to all other countries.
d. appreciate relative to currencies of countries that have lower inflation rates.

64. According to purchasing-power parity which of the following would happen if a country
raised its money supply growth rate?
a. its nominal exchange rate would fall
b. its real exchange rate would fall
c. its real net exports would rise
d. All of the above would happen.

65. 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
a. prices in Mexico will rise by a larger percentage than in the U.S. So, the dollar will appreciate
against the Mexican peso.
b. prices in Mexico will rise by larger percentage than in the U.S. So, the dollar will depreciate
against the Mexican peso.
c. prices in Mexico will rise by a smaller percentage than in the U.S. So, the dollar will
appreciate against the Mexican peso.
d. prices in Mexico will rise by a smaller percentage than in the U.S. So, the dollar will
depreciate against the Mexican peso.

66. 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.

67. 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.

68. 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.

69. 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.

70. 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.

71. 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.
72. 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.

73. 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

74. 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.

75. 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.

76. 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

77. 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

78. 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

79. 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.

80. 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

81. 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.

82. 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

83. 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.

84. 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.
85. 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.

86. From 1970 to 1998 the U.S. dollar

a. gained value compared to the Italian lira because inflation was higher in the U.S.
b. gained value compared to the Italian lira because inflation was lower in the U.S.
c. lost value compared to the Italian lira because inflation was higher in the U.S.
d. lost value compared to the Italian lira because inflation was lower in the U.S.

87. During a hyperinflation the real domestic value of a country’s currency

a. falls and its nominal exchange rate depreciates.
b. falls and its nominal exchange rate appreciates.
c. rises and its nominal exchange rate depreciates.
d. rises and its nominal exchange rate appreciates.

88. Which of the following events would be consistent with purchasing-power parity?
a. The price level in the United States rises more rapidly than that in Ireland and the real
exchange rate defined as Irish goods per unit of U.S. goods stays the same.
b. The money supply in the United States rises more rapidly than in Egypt and the nominal
exchange rate defined as Egyptian pounds per dollar falls.
c. Earl, a worldwide traveler, looks at exchange rates and worldwide breakfast prices one
morning and finds that whatever country he decides to go to he can convert $15 into enough
local currency to buy the same breakfast.
d. All of the above are correct.

89. On behalf of your firm, you make frequent trips to Tokyo. You notice that you always have
to pay more dollars to get your hair cut than you pay in the U.S. This observation is
a. consistent with purchasing-power parity if prices in Japan are rising more rapidly than prices
in the United States.
b. consistent with purchasing-power parity if prices in Japan are rising less rapidly than prices in
the United States.
c. inconsistent with purchasing-power parity, but might be explained by limited opportunities for
arbitrage in haircuts across international borders.
d. None of the above is correct.

90. Purchasing-power parity theory does not hold at all times because
a. many goods are not easily transported.
b. the same goods produced in different countries may be imperfect substitutes for each other.
c. Both a and b are correct.
d. prices are different across countries.

91. If purchasing power parity holds and a basket of goods costs $300 in the U.S. and the same
basket costs 450 manats in Azerbiajan, then what is the nominal exchange rate?
a. about .67 manats per dollar
b. 1 manat per dollar
c. 1.5 manats per dollar
d. about 1.67 manats per dollar

92. A basket of goods costs $800 in the U.S. In Canada the same basket of goods costs 800
Canadian dollars and the exchange rate is 1.25 Canadian dollars per U.S. dollars. In Turkey the
same basket of goods costs 2400 lira and the exchange rate is 3 lira per dollar. Which country
has purchasing-power parity with the U.S.?
a. Both Canada and Turkey
b. Canada but not Turkey
c. Turkey but not Canada
d. neither Canada or Turkey

93. If a dollar buys less coffee in the U.S. than in Kenya, then
a. the real exchange rate is greater than 1; a profit might be made by buying coffee in Kenya and
selling it in the U.S.
b. the real exchange rate is greater than 1; a profit might be made by buying coffee in the U.S.
and selling it in Kenya.
c. the real exchange rate is less than 1; a profit might be made by buying coffee in Kenya and
selling it in the U.S.
d. the real exchange rate is less than 1; a profit might be made by buying coffee in the U.S. and
selling it in Kenya.

94. If purchasing power parity holds, then 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 in Mexico rose from 12,000 pesos to 18,000
pesos
a. inflation was higher in the U.S. than Mexico so the U.S. dollar would appreciate.
b. inflation was higher in the U.S. than Mexico so the U.S.dollar would depreciate.
c. inflation was lower in the U.S. than Mexico so the U.S. dollar would appreciate.
d. inflation was lower in the U.S. than Mexico so the U.S dollar would depreciate.

95. If purchasing power parity holds, then if the price of a basket of goods in the U.S. rose from
$1.000 to $1,200 and the price of the same basket in Poland rose from 6,400 Polish zloty to
8,000 zloty, then
a. the nominal exchange rate would be unchanged and the real exchange rate would appreciate.
b. the U.S. dollar would appreciate and the real exchange rate would stay the same.
c. the nominal exchange rate would be unchanged and the real exchange rate would depreciate.
d. the U.S. dollar would depreciate and the real exchange rate would be unchanged.