Question 1

Everything else fundamental remaining unchanged, the monetary approach predicts that a 5 percent cut in the money supply by the Fed will result in:

Accepted Answer

A)  inflation in the U.S.economy.
B)  a decrease in the market rate of interest in the U.S.
C)  an increase in foreign investments by the Americans.
D)  an appreciation of the U.S.dollar vis-à-vis other currencies.

Question 2

The phenomenon of overshooting is based on the existence of:

Accepted Answer

A)  covered interest parity.
B)  irrational investor behavior.
C)  sticky prices and the belief that PPP and the monetary approach hold in the long-run.
D)  perfectly competitive global markets and flexible prices.

Question 3

"High-income countries have a price level which is much higher than the low-income countries." Which of the following is most likely to explain this price differential?

Accepted Answer

A)  With the development process of a nation, its productivity in making traded goods rises much faster than that in making non-traded goods.
B)  Traded goods are much more sensitive to the income levels than are non-traded goods and services.
C)  Prices of non-traded goods and services are relatively stable across high and low-income nations.
D)  Labor involved in production of non-traded goods and services in high-income nations receive lower wages than the labor producing traded goods.

Question 4

The _____ effect suggests that speculations can sometimes be destabilizing as the actions of the international investors move the exchange rate away from the long-run equilibrium value consistent with fundamental economic influences.

Accepted Answer

A)  bandwagon
B)  overshooting
C)  exchange rate
D)  arbitrage

Question 5

The monetary approach predicts that an increase in the money supply by 12 percent in both China and Thailand will:

Accepted Answer

A)  result in an appreciation of the Thai baht against the Yuan.
B)  result in a depreciation of the Thai baht against the Yuan.
C)  have no effect on the baht per Yuan exchange rate.
D)  lower the volume of trade between Thailand and China.

Question 6

Exchange rate overshooting occurs:

Accepted Answer

A)  because interest rates are sticky.
B)  because product prices are sticky in the short run.
C)  only if investors and speculators react irrationally to any change in the monetary policies of the domestic or the foreign government.
D)  when one of the nations has a very high rate of inflation.

Question 7

The law of _____ states that a product that is easily and freely traded in a perfectly competitive global market should cost the same everywhere once the prices at different places are expressed in the same currency.

Accepted Answer

A)  international trade
B)  one price
C)  diminishing returns
D)  relative PPP

Question 8

The law of one price works better if:

Accepted Answer

A)  transportation costs for the product are close to zero.
B)  there is incomplete information.
C)  there are few buyers and sellers.
D)  the governments of the trading countries implement adequate trade barriers.

Question 9

The _____ approach to exchange rates emphasizes the importance of the supply and demand for money as a key to understanding the determinants of exchange rates.

Accepted Answer

A)  purchasing-power-parity
B)  asset market
C)  monetary
D)  balance of payments

Question 10

Which of the following is NOT linked together by uncovered interest parity?

Accepted Answer

A)  The domestic interest rate
B)  The foreign interest rate
C)  The current spot exchange rate
D)  The current forward exchange rate

Question 11

Given the combination of PPP with quantity theory equations, which of the following statements is true?

Accepted Answer

A)  Everything else remaining unchanged, the price of the foreign currency (e)  would be reduced by an increase in the relative size of the money supply in the domestic economy.
B)  Everything else remaining unchanged, the price of the foreign currency (e)  would be raised by an increase in the relative size of foreign production.
C)  As long as the money supplies in the two countries are the same, the exchange rate will be equal to one
D)  The exchange rate would remain unaffected as long as the relative growth in productivity between the two nations remains constant, even if the relative money supply varies between the two economies.

Question 12

According to the relative version of purchasing power parity, when the inflation differential between the foreign country and the home country is positive:

Accepted Answer

A)  the domestic currency tends to depreciate.
B)  the domestic currency tends to appreciate.
C)  the inflation rate in the home country tends to decrease.
D)  the inflation rate in the home country overshoots.

Question 13

A decrease in the foreign interest rate relative to the domestic interest rate _____ the exchange rate value of a foreign currency in the short run.

Accepted Answer

A)  raises
B)  lowers
C)  does not affect
D)  causes fluctuations in

Question 14

Overshooting occurs when exchange rates:

Accepted Answer

A)  become volatile suddenly.
B)  continually diverge away from the long-run equilibrium.
C)  adjust faster in the long-run than they do in the short-run.
D)  adjust faster in the short-run than they do in the long-run. D

Question 15

Economists believe that the _____ determines the price level in the long run.

Accepted Answer

A)  money supply
B)  asset market approach
C)  exchange rate
D)  marginal tax rate A

Question 16

_____ purchasing power parity states that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time.

Accepted Answer

A)  Full
B)  Partial
C)  Relative
D)  Absolute

Question 17

Everything else remaining unchanged, an increase in interest rates in the United States is most likely to result in:

Accepted Answer

A)  depreciation of the dollar.
B)  outflows of capital from the United States.
C)  capital inflows into the United States.
D)  a decrease in the demand for dollar-denominated financial assets.

Question 18

The _____ exchange rate is the market rate between two currencies.

Accepted Answer

A)  nominal bilateral
B)  real bilateral
C)  nominal effective
D)  real effective

Question 19

There is more empirical evidence in the literature to suggest that:

Accepted Answer

A)  the absolute version of purchasing power parity holds in the short run.
B)  the relative version of purchasing power parity holds in the short run.
C)  the absolute version of purchasing power parity holds in the long run.
D)  the relative version of purchasing power parity holds in the long run. D

Question 20

Absolute PPP holds for a product bundle if:

Accepted Answer

A)  the law of diminishing returns holds for all the goods in the bundle.
B)  the goods are traded with minimum transportation costs.
C)  there exists free trade in all the commodities.
D)  the law of one price holds for each of the goods in the bundle.

Exam 19: What Determines Exchange Rates

Everything else fundamental remaining unchanged, the monetary approach predicts that a 5 percent cut in the money supply by the Fed will result in:

Correct AnswerverifiedShow Answer

The phenomenon of overshooting is based on the existence of:

Correct AnswerverifiedShow Answer

"High-income countries have a price level which is much higher than the low-income countries." Which of the following is most likely to explain this price differential?

Correct AnswerverifiedShow Answer

The _____ effect suggests that speculations can sometimes be destabilizing as the actions of the international investors move the exchange rate away from the long-run equilibrium value consistent with fundamental economic influences.

Correct AnswerverifiedShow Answer

The monetary approach predicts that an increase in the money supply by 12 percent in both China and Thailand will:

Correct AnswerverifiedShow Answer

Exchange rate overshooting occurs:

Correct AnswerverifiedShow Answer

The law of _____ states that a product that is easily and freely traded in a perfectly competitive global market should cost the same everywhere once the prices at different places are expressed in the same currency.

Correct AnswerverifiedShow Answer

The law of one price works better if:

Correct AnswerverifiedShow Answer

The _____ approach to exchange rates emphasizes the importance of the supply and demand for money as a key to understanding the determinants of exchange rates.

Correct AnswerverifiedShow Answer

Which of the following is NOT linked together by uncovered interest parity?

Correct AnswerverifiedShow Answer

Given the combination of PPP with quantity theory equations, which of the following statements is true?

Correct AnswerverifiedShow Answer

According to the relative version of purchasing power parity, when the inflation differential between the foreign country and the home country is positive:

Correct AnswerverifiedShow Answer

A decrease in the foreign interest rate relative to the domestic interest rate _____ the exchange rate value of a foreign currency in the short run.

Correct AnswerverifiedShow Answer

Overshooting occurs when exchange rates:

Correct AnswerverifiedD

Economists believe that the _____ determines the price level in the long run.

Correct AnswerverifiedA

_____ purchasing power parity states that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time.

Correct AnswerverifiedShow Answer

Everything else remaining unchanged, an increase in interest rates in the United States is most likely to result in:

Correct AnswerverifiedShow Answer

The _____ exchange rate is the market rate between two currencies.

Correct AnswerverifiedShow Answer

There is more empirical evidence in the literature to suggest that:

Correct AnswerverifiedD

Absolute PPP holds for a product bundle if:

Correct AnswerverifiedShow Answer

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