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Open-Economy Macroeconomics: Basic Concepts 7693
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.
7694 Open-Economy Macroeconomics: Basic Concepts
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.
Open-Economy Macroeconomics: Basic Concepts 7695
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.
7696 Open-Economy Macroeconomics: Basic Concepts
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.
Open-Economy Macroeconomics: Basic Concepts 7697
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.
7698 Open-Economy Macroeconomics: Basic Concepts
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
Open-Economy Macroeconomics: Basic Concepts 7699
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
7700 Open-Economy Macroeconomics: Basic Concepts
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.
Open-Economy Macroeconomics: Basic Concepts 7701
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.
7702 Open-Economy Macroeconomics: Basic Concepts
49. If a Starbucks tall latte cost $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 cost $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
Open-Economy Macroeconomics: Basic Concepts 7703
51. Suppose a Starbucks tall latte cost $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 cost $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
7704 Open-Economy Macroeconomics: Basic Concepts
53. Suppose a Starbucks tall latte cost $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.
Open-Economy Macroeconomics: Basic Concepts 7705
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.
7706 Open-Economy Macroeconomics: Basic Concepts
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.
Open-Economy Macroeconomics: Basic Concepts 7707
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.
7708 Open-Economy Macroeconomics: Basic Concepts
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.
Open-Economy Macroeconomics: Basic Concepts 7709
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.
7710 Open-Economy Macroeconomics: Basic Concepts
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.
Open-Economy Macroeconomics: Basic Concepts 7711
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.
7712 Open-Economy Macroeconomics: Basic Concepts
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.
