Chapter 14: Exchange Rates and Purchasing Power Parity
MULTIPLE CHOICE
1. The nominal exchange rate is:
a. The price of one currency in terms of another.
b. The rate at which two countries’ goods trade against each other.
c. The rate at which purchasing power is equal in two countries.
d. None of the above.
2. The real exchange rate is:
a. The price of one currency in terms of another.
b. The rate at which two countries’ goods trade against each other.
c. The rate at which purchasing power is equal in two countries.
d. None of the above.
3. The purchasing power parity exchange rate is:
a. The price of one currency in terms of another.
b. The rate at which two countries goods trade against each other.
c. The rate at which purchasing power is equal in two countries.
d. None of the above.
4. If the nominal exchange rate between the yen and the U.S. dollar moves from 110 to 120,
which of the following statements is true?
a. It takes more dollars to buy yen.
b. The value of the yen has risen.
c. The value of the yen has fallen.
d. None of the above.
5. If the nominal exchange rate between the yen and the U.S. dollar moves from 110 to 100,
which of the following statements is true?
a. It takes fewer dollars to buy yen.
b. The value of the yen has risen.
c. The value of the yen has fallen.
d. None of the above.
6. In the real exchange rate equation (𝑟𝑒 = 𝑒 × 𝑃𝑈𝑆 𝑃𝐽
⁄), an increase in the U.S. price level
means:
a. It will take more Japanese good to buy a unit of U.S. goods.
b. The real value of the yen has fallen.
c. The value of the real exchange rate increases.
d. All of the above.
7. In the real exchange rate equation (𝑟𝑒 = 𝑒 × 𝑃𝑈𝑆 𝑃𝐽
⁄), an increase in the Japanese price
level means:
a. It will take more Japanese goods to buy a unit of U.S. goods.
b. The real value of the yen has fallen.
c. The value of the real exchange rate increases.
d. None of the above.
8. In the real exchange rate equation (𝑟𝑒 = 𝑒 × 𝑃𝑈𝑆 𝑃𝐽
⁄), an increase in the nominal
exchange rate means:
a. It takes fewer yen to buy a U. S. dollar.
b. The real value of the yen has risen.
c. The value of the real exchange rate rises.
d. None of the above.
9. If the nominal exchange rate (yen/US$) increases:
a. The price of Japan’s imports falls.
b. Import demand in Japan increases.
c. Import demand in Japan falls.
d. None of the above.
10. If the nominal exchange rate (yen/US$) decreases:
a. The value of the yen increases.
b. The price of Japan’s imports falls.
c. Import demand in Japan increases.
d. All of the above.
11. If the nominal exchange rate (yen/US$) increases:
a. The value of the yen falls.
b. The international ($) price of Japan’s exports falls.
c. Japan supplies more goods for export.
d. All of the above.
12. If the nominal exchange rate (yen/US$) decreases, which of the following does not
happen?
a. The value of the yen rises.
b. The international (US$) price of Japanese goods rises.
c. Japan supplies less for export.
d. Japan supplies more for export.
13. The figure below demonstrates:
a. The higher the value of the yen, the higher the trade deficit in Japan.
b. The lower the value of the yen, the higher the trade deficit in Japan.
c. The higher the trade deficit, the lower the value of the yen
d. None of the above.
TRUE/FALSE
1. Imports into Japan are positively correlated with the value of the yen.
2. Exports from Japan are negatively correlated with the value of the yen.
3. If a forward rate of a currency (home/foreign) is above the spot rate, the currency is said
to be at a forward premium.
4. The purchasing power parity (PPP) hypothesis is that the real exchange rate will adjust so
that the purchasing power of a currency will be the same in every country.
5. The purchasing power parity model is appropriate for forecasting long run movements in
nominal exchange rates.
6. Exchange rate exposure refers to situations in which foreign sales of multinational
enterprises are not denominated in the MNS’s home-country currency.
SHORT ANSWER
1. What is the difference between nominal and real exchange rates?
2. What is the purchasing power parity (PPP) hypothesis?
3. Why doesn’t the purchasing power parity (PPP) hypothesis hold exactly?
4. Why does exchange rate hedging involve forecasting future exchange rates?
5. What is the monetary approach to exchange rate determination?
6. What is the difference between a nominal exchange rate and an effective exchange rate
and between a real exchange rate and a real effective exchange rate?