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.
b.
c.
d.
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.
b.
c.
d.
10. If purchasing-power parity holds, then the value of the
a.
b.
c.
d.
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.
b.
c.
d.
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.
b.
c.
d.
29. If a dollar buys more rice in the China. than in the U.S., then
a.
b.
c.
d.
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.
b.
c.
d.
33. If the dollar buys fewer bananas in Guatemala than in Honduras, then traders could make a profit by
a.
b.
c.
d.
34. If the dollar buys less cotton in Egypt than in the United States, then traders could make a profit by
a.
b.
c.
d.
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.
b.
c.
d.
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.
b.
c.
d.
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