Open-Economy Macroeconomics: Basic Concepts 7673
65. Other things the same, which of the following could be a consequence of an appreciation of the
U.S. real exchange rate?
a. John, a French citizen, decides that Iowa pork is now relatively less expensive and orders more
for his restaurant.
b. Nick, a U.S. citizen, decides that the trip to Nepal he’s been thinking about is now affordable.
c. Roberta, a U.S. citizen, decides to import fewer windshield wipers for her auto parts company.
d. All of the above are correct.
66. Other things the same, if the U.S. real exchange rate appreciates, U.S. net exports
a. increase and U.S. net capital outflow decreases.
b. decrease and U.S. net capital outflow increases.
c. and U.S. net capital outflow both increase.
d. and U.S. net capital outflow both decrease.
7674 Open-Economy Macroeconomics: Basic Concepts
67. If the number of Japanese yen a dollar buys falls, but neither country’s price level changes, then
the real exchange rate
a. depreciates which causes U.S. net exports to increase.
b. depreciates which causes U.S. net exports to decrease.
c. appreciates which causes U.S. net exports to increase.
d. appreciates, which causes U.S. net exports to decrease.
68. When the Mexican peso gets “stronger” relative to the dollar,
a. the U.S. trade deficit with Mexico rises.
b. the U.S. trade deficit with Mexico falls.
c. the U.S. trade deficit with Mexico is unchanged.
d. None of the above necessarily happens.
Open-Economy Macroeconomics: Basic Concepts 7675
69. If the U.S. real exchange rate appreciates, U.S. exports to Europe
a. and European exports to the U.S. both rise.
b. and European exports to the U.S. both fall.
c. rise, and European exports to the U.S. fall.
d. fall, and European exports to the U.S. rise.
70. Suppose that the nominal exchange rate is 80 yen per dollar, that the price of a basket of goods in
the U.S. is $500 and the price of a basket of goods in Japan is 50,000 yen. Suppose that these
values change to 100 yen per dollar, $600, and 70,000 yen. Then the real exchange rate would
a. appreciate which by itself would make U.S. net exports fall.
b. appreciate which by itself would make U.S. net exports rise.
c. depreciate which by itself would make U.S. net exports fall.
d. depreciate which by itself would make U.S. net exports rise.
7676 Open-Economy Macroeconomics: Basic Concepts
71. Suppose that the nominal exchange rate is .80 euro per dollar, that the price of a basket of goods
in the U.S. is $500 and the price of a basket of goods in Germany is 400 Euro. Suppose that these
values change to .90 euro per dollar, $600, and 600 euro. Then the real exchange rate would
a. appreciate which by itself would make U.S. net exports fall.
b. appreciate which by itself would make U.S. net exports rise.
c. depreciate which by itself would make U.S. net exports fall.
d. depreciate which by itself would make U.S. net exports rise.
72. If the U.S. has a trade deficit and the nominal exchange rate depreciates, then other things the
same
a. the trade deficit rises and net capital outflow rises.
b. the trade deficit rises and net capital outflow falls.
c. the trade deficit falls and net capital outflows rise.
d. the trade deficit falls and net capital outflows fall.
Open-Economy Macroeconomics: Basic Concepts 7677
73. Other things the same, which of the following would both make Americans more willing to buy
Italian goods?
a. the nominal exchange rate falls, the price of goods in Italy falls
b. the nominal exchange rate falls, the price of goods in Italy rises
c. the nominal exchange rate rises, the price of goods in Italy falls
d. the nominal exchange rate rises, the price of goods in Italy rises
74. If the real exchange rate is less than 1, then the
a. nominal exchange rate x U.S. price > foreign price. The dollars required to purchase a good in
the U.S. would buy more than enough foreign currency to buy the same good overseas.
b. nominal exchange rate x U.S. price > foreign price. The dollars required to purchase a good in
the U.S. would not buy enough foregoing currency to buy the same good overseas.
c. nominal exchange rate x U.S. price < foreign price. The dollars required to purchase a good in
the U.S. would buy more than enough foreign currency to buy the same good overseas.
d. nominal exchange rate x U.S. price < foreign price. The dollars required to purchase a good in
the U.S. would not buy enough foreign currency to buy the same good overseas.
7678 Open-Economy Macroeconomics: Basic Concepts
75. If the real exchange rate is greater than 1, then the
a. nominal exchange rate x U.S. price > foreign price. The dollars required to purchase a good in
the U.S. would buy more than enough foreign currency to buy the same good overseas.
b. nominal exchange rate x U.S. price > foreign price. The dollars required to purchase a good in
the U.S. would not buy enough foregoing currency to buy the same good overseas.
c. nominal exchange rate x U.S. price < foreign price. The dollars required to purchase a good in
the U.S. would buy more than enough foreign currency to buy the same good overseas.
d. nominal exchange rate x U.S. price < foreign price. The dollars required to purchase a good in
the U.S. would not buy enough foreign currency to buy the same good overseas.
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.
Open-Economy Macroeconomics: Basic Concepts 7679
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. purchasing-power parity holds, and 1 U.S. dollar buys 1 Argentinean bolivar.
b. purchasing-power parity holds, and the amount of dollars needed to buy goods in the U.S. is the
same as the amount needed to buy enough Argentinean bolivars to buy the same goods in
Argentina.
c. purchasing-power parity does not hold, but 1 U.S. dollar buys 1 Argentinean bolivar.
d. purchasing-power parity does not hold, but the amount of dollars needed to buy goods in the
U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same
goods in Argentina.
7680 Open-Economy Macroeconomics: Basic Concepts
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.
Open-Economy Macroeconomics: Basic Concepts 7681
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.
7682 Open-Economy Macroeconomics: Basic Concepts
9. Which of the following does purchasing–power parity imply?
a. the foreign price level times the nominal exchange rate (given as amount of foreign currency per
dollar) equals the U.S. price level.
b. The price of domestic goods relative to foreign goods cannot change.
c. The nominal exchange rate is the ratio of foreign prices to U.S. prices.
d. All of the above are correct.
10. If purchasing-power parity holds, then the value of the
a. nominal exchange rate is equal to one. A dollar buys as many goods in the U.S. as it does
overseas.
b. nominal exchange rate is equal to one. A dollar buys the quantity of foreign currency equal to
the U.S. price level divided by the foreign country’s price level.
c. real exchange rate is equal to one. A dollar buys as many goods in the U.S. as it does
overseas.
d. real exchange rate is equal to one. A dollar buys the quantity of foreign currency equal to the
U.S. price level divided by the foreign country’s price level.
Open-Economy Macroeconomics: Basic Concepts 7683
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
7684 Open-Economy Macroeconomics: Basic Concepts
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.
Open-Economy Macroeconomics: Basic Concepts 7685
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
7686 Open-Economy Macroeconomics: Basic Concepts
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
Open-Economy Macroeconomics: Basic Concepts 7687
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.
7688 Open-Economy Macroeconomics: Basic Concepts
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. The nominal exchange rate is .80 euros per U.S. dollar and a basket of goods in France costs
1,000 euros while the same basket costs $800 in the U.S. The nominal exchange rate is 1.2
Australian dollars per U.S. dollar and a basket of goods in Australia costs 960 Australian dollars
while the same basket costs $800 in the U.S.. Which country has purchasing-power parity with the
U.S.?
a. both France and Australia
b. France but not Australia
c. Australia but not France
d. neither France nor Australia
Open-Economy Macroeconomics: Basic Concepts 7689
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
7690 Open-Economy Macroeconomics: Basic Concepts
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. the real exchange rate is above its purchasing-power parity value. An increase in the nominal
exchange rate can move it back.
b. the real exchange rate is above its purchasing-power parity value. A decrease in the nominal
exchange rate can move it back.
c. the real exchange rate is below its purchasing-power parity value. An increase in the nominal
exchange rate can move it back.
d. the real exchange rate is below its purchasing-power parity value. A decrease in the nominal
exchange rate can move it back.
Open-Economy Macroeconomics: Basic Concepts 7691
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. the real exchange rate is greater than 1; a profit might be made by buying corn in the U.S. and
selling it in Mexico.
b. the real exchange rate is greater than 1; a profit might be made by buying corn in Mexico and
selling it in the U.S.
c. the real exchange rate is less than 1; a profit might be made by buying corn in the U.S. and
selling it in Mexico.
d. the real exchange rate is less than 1; a profit might be made by buying corn in Mexico and
selling it in the U.S.
7692 Open-Economy Macroeconomics: Basic Concepts
29. If a dollar buys more rice in the China. than in the U.S., then
a. the real exchange rate is greater than 1; a profit might be made by buying rice in the U.S. and
selling it in China.
b. the real exchange rate is greater than 1; a profit might be made by buying rice in China. and
selling it in the U.S.
c. the real exchange rate is less than 1; a profit might be made by buying rice in the U.S. and
selling it in China.
d. the real exchange rate is less than 1; a profit might be made by buying rice in China and selling
it in the U.S.
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.