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.
b.
c.
d.
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.