187
Barro
Chapter 18
TRUE/FALSE
1. If the dollar per yen exchange rate rises, then so does the value of the dollar.
2. When absolute purchasing power parity holds, the real exchange rate is 1.
3. Relative purchasing power parity says that the country with the higher inflation rate will see its
currency depreciate.
4. The interest rate differential between two countries is the real interest rate.
5. If a country fixes its exchange rate, it gives up control of its money supply.
6. The nominal exchange rate is measured by quantities of currencies exchanged, while the real exchange
rate is measured by quantities of goods exchanged.
7. Fixed exchange rates are determined by market forces.
8. Flexible exchange rates are determined by market forces.
9. Poorer countries tend to have high real exchange rates because the prices for nontradable goods is low
in these countries.
10. The combination of interest rate parity and relative purchasing power parity implies that expected real
incomes are the same in the home country and the foreign country.
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MULTIPLE CHOICE
1. The nominal exchange rate is:
a.
foreign good per home good.
c.
the number of units of foreign currency
per one unit of the home currency.
b.
the number of units of foreign currency
per one unit of home currency divided by
the ratio of the foreign price level to the
home price level.
d.
all of the above.
2. The real exchange rate is:
a.
foreign good per home good.
c.
the number of units of foreign currency
per one unit of the home currency.
b.
nominal exchange rate divided by the ratio
of the foreign price level to the home price
level.
d.
all of the above.
3. Flexible exchange rates are determined by:
a.
the market.
c.
the UN.
b.
the home country government.
d.
the International Monetary Fund.
4. Fixed exchange rates are determined by:
a.
the market.
c.
the UN.
b.
the governments of the two countries.
d.
the International Monetary Fund.
5. Purchasing power parity is the idea that:
a.
the nominal exchange equals the ratio of
the foreign price to the home price.
c.
the nominal exchange equals the home
price less the foreign price.
b.
the nominal exchange rate equals the
foreign price time the home price.
d.
the nominal exchange equals the home
price less the foreign price.
6. Purchasing power parity may not hold due to:
a.
inflation.
c.
market clearing.
b.
nontraded goods such as services.
d.
all of the above.
7. Purchasing power parity may not hold due to:
a.
inflation.
c.
shifts in the terms of trade.
b.
market clearing.
d.
all of the above.
8. Absolutely purchasing power parity means:
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a.
the quantity of goods that can be bought in
the home country equals the quantity of
good that can be bought in the foreign
country.
c.
the nominal exchange rate is the ratio of
the foreign price to the home price.
b.
buying and selling goods looks equally
attractive in both countries.
d.
all of the above.
9. Absolute purchasing power parity means:
a.
the quantity of goods that can be bought in
the home country equals the quantity of
good that can be bought in the foreign
country.
c.
the nominal exchange rate is the ratio of
the home price to the world price.
b.
buying and selling goods looks more
attractive in the home country.
d.
all of the above.
10. Absolute purchasing power parity means:
a.
the quantity of goods that can be bought in
the home country is greater than the
quantity of goods that can be bought in the
foreign country.
c.
the nominal exchange rate is the ratio of
the foreign price to the world price.
b.
buying and selling goods looks equally
attractive in both countries.
d.
all of the above.
11. Absolutely purchasing power parity means:
a.
the quantity of goods that can be bought in
the home country is greater than the
quantity of goods that can be bought in the
foreign country.
c.
the nominal exchange rate is the ratio of
the foreign price to the home price.
b.
buying and selling goods looks more
attractive in the home country.
d.
all of the above.
12. Non-traded goods include:
a.
personal services like haircuts.
c.
consumer goods like shirts.
b.
durable goods like tv sets.
d.
all of the above.
13. Non-traded goods include:
a.
commodities like wheat.
c.
consumer goods like shirts.
b.
real estate.
d.
all of the above.
14. Relative purchasing power parity says that:
a.
the growth rate of the nominal exchange
rate is the foreign inflation rate less the
home inflation rate.
c.
the growth rate of the nominal exchange
rate is the home inflation rate plus the
foreign inflation rate.
b.
the growth rate of the nominal exchange
d.
the growth rate of the nominal exchange
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rate is the foreign inflation rate times the
home inflation rate.
rate is the foreign inflation rate divided by
the home inflation rate.
15. Relative purchasing power parity implies a country will see its currency fall in value, if
a.
its inflation rate is lower than the foreign
inflation rate.
c.
its inflation rate is higher than the foreign
inflation rate.
b.
its price level is higher than the foreign
price level.
d.
its price level is lower than the foreign
price level.
16. Relative purchasing power parity implies a country will see its currency rise in value, if
a.
its inflation rate is lower than the foreign
inflation rate.
c.
its inflation rate is higher than the foreign
inflation rate.
b.
its price level is higher than the foreign
price level.
d.
its price level is lower than the foreign
price level.
17. Relative purchasing power parity implies a country will see its currency keep the same value, if
a.
its inflation rate is lower than the foreign
inflation rate.
c.
its inflation rate is equal to the foreign
inflation rate.
b.
its price level is higher than the foreign
price level.
d.
its price level is equal to the foreign price
level.
18. If the home inflation rate is 5% and the foreign inflation rate is 9%, then by relative purchasing power
parity the home country would expect is exchange rate to:
a.
rise in value by 5%.
c.
rise value by 4%.
b.
fall in value by 5%.
d.
fall in value by 4%.
19. If the home inflation rate is 9% and the foreign inflation rate is 5%, then by relative purchasing power
parity the home country would expect is exchange rate to:
a.
rise in value by 5%.
c.
rise value by 4%.
b.
fall in value by 5%.
d.
fall in value by 4%.
20. If the home inflation rate is 5% and the foreign inflation rate is 5%, then by relative purchasing power
parity the home country would expect is exchange rate to:
a.
rise in value by 5%.
c.
have no change in its value.
b.
fall in value by 5%.
d.
fall in value by 10%.
21. Interest rate parity says that:
a.
the interest rate differential is the growth
rate of the nominal exchange rate.
c.
the interest rate differential is the growth
rate of the real exchange rate.
b.
the interest rate differential is ratio of the
foreign price level to the home price level.
d.
the interest rate differential is ratio of the
home price level to the foreign price level.
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22. If the home interest rate is 5% and the foreign interest rate is 7%, then the expected growth of the
nominal exchange rate is:
a.
2%.
c.
-2%.
b.
5%.
d.
-12%.
23. If the home interest rate is 5% and the foreign interest rate is 7%, then the difference in the expected
inflation rates is:
a.
2%.
c.
-2%.
b.
5%.
d.
-12%.
24. If the home interest rate is 7% and the foreign interest rate is 5%, then the expected growth of the
nominal exchange rate is:
a.
2%.
c.
-2%.
b.
7%.
d.
-12%.
25. If the home interest rate is 7% and the foreign interest rate is 5%, then the difference in the expected
inflation rates is:
a.
2%.
c.
-2%.
b.
7%.
d.
-12%.
26. If absolute purchasing power parity holds, under fixed exchange rates:
a.
the home interest rate equals the foreign
interest rate.
c.
the growth rate of the nominal exchange
rate is zero.
b.
the home inflation rate equals the foreign
inflation rate.
d.
all of the above.
27. If absolute purchasing power parity holds, under fixed exchange rates:
a.
the home interest rate equals the foreign
interest rate.
c.
the growth rate of the nominal exchange
rate is positive.
b.
the home inflation is lower than the
foreign inflation rate.
d.
all of the above.
28. If absolute purchasing power parity holds, under fixed exchange rates:
a.
the home interest rate is higher than the
foreign interest rate.
c.
the growth rate of the nominal exchange
rate is negative.
b.
the home inflation rate equals the foreign
inflation rate.
d.
all of the above.
29. If absolute purchasing power parity holds, under fixed exchange rates:
a.
the home interest rate is higher than the
c.
the growth rate of the nominal exchange
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foreign interest rate.
rate is zero.
b.
the home inflation rate is lower than the
foreign inflation rate.
d.
all of the above.
30. If a country with a fixed exchange rate tries to raise its money stock it will:
a.
see its central bank gain domestic
government bonds.
c.
see its money stock fall back to its initial
level.
b.
see its central bank lose international
reserves.
d.
all of the above.
31. If a country with a fixed exchange rate tries to raise its money stock it will:
a.
see its central bank gain domestic
government bonds.
c.
see its money stock continue to rise.
b.
see its central bank gain international
reserves.
d.
all of the above.
32. If a country with a fixed exchange rate tries to raise its money stock:
a.
see its central bank lose domestic
government bonds.
c.
see its money stock continue to rise.
b.
see its central bank lose international
reserves.
d.
all of the above.
33. If a country with a fixed exchange rate tries to raise its money stock:
a.
see its central bank lose domestic
government bonds.
c.
see its money stock fall back to its initial
level.
b.
see its central bank gain international
reserves.
d.
all of the above.
34. A revaluation is when a country:
a.
allows its currency’s value to float.
c.
lowers the fixed value of its currency.
b.
raises the fixed value of its currency.
d.
allows its currency value to be set by the
market.
35. A devaluation is when a country:
a.
allows its currency’s value to float.
c.
lowers the fixed value of its currency.
b.
raises the fixed value of its currency.
d.
allows its currency value to be set by the
market.
36. A depreciation is when the value of a country’s currency:
a.
is fixed by the government.
c.
falls in value in the exchange market.
b.
rises in value in the exchange market.
d.
is fixed in relationship to gold.
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37. An appreciation is when the value of a country’s currency:
a.
is fixed by the government.
c.
falls in value in the exchange market.
b.
rises in value in the exchange market.
d.
is fixed in relationship to gold.
38. Under a fixed exchange rate regime, losses of international reserves imply that:
a.
the pressure on a country that needs to
devalue it currency is greater.
c.
countries are not under much pressure to
change the value of their currency.
b.
the pressure on a country that needs to
revalue its currency is greater.
d.
countries can not change the value of their
currencies.
39. Fixed exchange rates:
a.
facilitate transactions between countries
compared to floating exchange rates.
c.
constrain monetary policy officials.
b.
make monetary policy interdependent
between the countries fixing their
exchange rate.
d.
all of the above.
40. Fixed exchange rates:
a.
facilitate transactions between countries
compared to floating exchange rates.
c.
give domestic monetary policy officials
more autonomy.
b.
make monetary policy independent
between the countries fixing their
exchange rate.
d.
all of the above.
41. Fixed exchange rates:
a.
make transactions between countries
riskier compared to floating exchange
rates.
c.
give domestic monetary policy officials
more autonomy.
b.
make monetary policy interdependent
between the countries fixing their
exchange rate.
d.
all of the above.
42. Fixed exchange rates:
a.
make transactions between countries
riskier compared to floating exchange
rates.
c.
constrain monetary policy officials.
b.
make monetary policy independent
between the countries fixing their
exchange rate.
d.
all of the above.
43. Floating exchange rates:
a.
make transactions between countries more
c.
provide autonomy for monetary policy
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difficult.
authorities.
b.
make monetary policy independent.
d.
all of the above.
44. Floating exchange rates:
a.
make transactions between countries more
difficult.
c.
constrain monetary policy officials.
b.
make monetary policy interdependent
between the countries.
d.
all of the above.
45. Floating exchange rates:
a.
make transactions between countries
easier.
c.
constrain monetary policy officials.
b.
make monetary policy independent.
d.
all of the above.
46. Floating exchange rates:
a.
make transactions between countries
easier.
c.
provide autonomy for monetary policy
authorities.
b.
make monetary policy interdependent
between the countries.
d.
all of the above.
47. Under fixed exchange rates a country’s:
a.
money supply is fixed.
c.
monetary policy makers are not
independent.
b.
inflation rate is fixed.
d.
all of the above.
48. Under fixed exchange rates a country’s:
a.
money supply is fixed.
c.
monetary policy makers are independent.
b.
inflation rate will rise.
d.
all of the above.
49. Under fixed exchange rates a country’s:
a.
money supply is domestically controlled.
c.
monetary policy makers are independent.
b.
inflation rate is fixed.
d.
all of the above.
50. Under fixed exchange rates a country’s:
a.
money supply is domestically controlled.
c.
monetary policy makers are not
independent.
b.
inflation rate will rise.
d.
all of the above.
51. Suppose the exchange rate between the U.S. dollar and the Argentinian peso is 3 pesos per dollar
today. It rises to 3.1 pesos per dollar the next day. This means the dollar has
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a.
appreciated and the peso has depreciated.
c.
appreciated, and the peso has appreciated.
b.
depreciated and the peso has appreciated.
d.
depreciated, and the peso has depreciated.
52. In 1950, one U.S. dollar bought 361 Japanese yen, and in 2006, one U.S. dollar bought 117 yen. The
U.S. dollar
a.
gained over half of its value in terms of
yen.
c.
appreciated relative to the yen.
b.
lost over half of its value in terms of yen.
d.
appreciated relative to most of the world’s
currencies.
53. If a country’s government intervenes often in the exchange rate market, then the country
a.
is operating closer to a flexible exchange-
rate model than a fixed exchange-rate
model.
c.
is operating closer to a fixed exchange-
rate model than a flexible exchange-rate
model.
b.
will experience repeated appreciations of
its currency.
d.
is not a member of the International
Monetary Fund (IMF).
54. At a simplified level, purchasing power parity makes sense because, if it did not, housefholds would
a.
want to purchase all of their goods in one
place, the more expensive country.
c.
not want to purchase any goods from
either country.
b.
want to purchase equal portions of their
goods in each country.
d.
want to purchase all of their goods in one
place, the cheaper country.
55. The real exchange rate is measured in units of
a.
goods bought in the foreign country
relative to goods bought in the home
country.
c.
labor supply in the foreign country relative
to labor supply in the home country.
b.
prices in the foreign country relative to
prices in the home country.
d.
none of the above.
56. If you can buy one pound of flour for $1.25 in the U.S. and one pound of flour for 0.75 £ (pounds) in
the U.K., then purchasing power parity implies the
a.
real exchange rate is 1.25 £ per $.
c.
nominal exchange rate is 1.67 £ per $.
b.
nominal exchange rate is 0.6 £ per $.
d.
real exchange rate is 0.6 £ per $.
57. Purchasing power parity implies the
a.
nominal exchange rate equals one.
c.
real exchange rate equals one.
b.
nominal exchange is greater than one.
d.
real exchange rate is less than one.
58. The Balassa-Samuelson hypothesis identifies a pattern of poor countries having
a.
low nominal exchange rates.
c.
low real exchange rates.
b.
high nominal exchange rates.
d.
high real exchange rates.
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59. The pattern of real exchange rates across countries that is identified by the Balassa-Samuelson
hypothesis occurs because
a.
low-income countries tend to have low
prices for nontradable goods.
c.
low-income countries tend to have low
prices for tradable goods.
b.
low-income countries tend to have high
prices for nontradable goods.
d.
low-income countries tend to have low
real exchange rates.
60. The combination of interest-rate parity and relative purchasing power parity leads to the conclusion
that the
a.
foreign expected real interest rate is
greater than the home expected real
interest rate.
c.
foreign expected nominal interest rate
equals the home expected real interest
rate.
b.
foreign expected real interest rate equals
the home expected real interest rate.
d.
foreign expected nominal interest rate
equals the home expected nominal interest
rate.
61. The Bretton Woods System refers to
a.
the flexible exchange-rate system that the
International Monetary Fund (IMF)
prefers.
c.
the fixed exchange-rate regime which
linked other currencies to the dollar and
the dollar to gold.
b.
the flexible exchange-rate regime
introduced just after World War II that
gave France the major role in stabilizing
currencies.
d.
the fixed exchange-rate regime which
linked the U.S. and other currencies to
silver.
62. Under the Bretton Woods System, the U.S. dollar
a.
was allowed to vary around a wide band
compared to other participating countries.
c.
was not fixed, but the U.S. nominal
interest rate was fixed relative to other
participating countries.
b.
varied according to market conditions, but
the other participating countries did not
allow their currencies to vary.
d.
was the only participating currency linked
directly to gold.
63. If the country of Colombia decides to fix its nominal exchange rate with the U.S. dollar, then in the
long run, it will have
a.
roughly the same inflation rate as the U.S.
c.
roughly the same real GDP as the U.S.
b.
a higher inflation rate than the inflation
rate for the U.S.
d.
a higher real GDP than the real GDP in
the U.S.
64. One reason that a country with a record of high inflation might want to fix its nominal exchange rate
with the U.S. dollar is that
a.
the country will, in the long run, have
about the same inflation rate as the U.S.
c.
the fixed exchange-rate will act as a
monetary-policy rule which prevents the
country from reneging on a pledge of low
inflation.
b.
the fixed exchange-rate will help the
country gain credibility in fighting high
inflation.
d.
all of the above.
65. In exchange rate policy, sterilization refers to
a.
the market’s ability to clear excess
quantities of currency supplied rapidly.
c.
anti-crime laws the U.S. passed to prevent
“money laundering.”
b.
the central bank’s attempt to offset an
initial intervention in the exchange
market.
d.
the process the International Monetary
Fund (IMF) uses to lend to a country in
need.
66. In a fixed exchange-rate regime, the money supply is
a.
exogenous.
c.
endogenous.
b.
interdependent.
d.
highly skewed.
SHORT ANSWER
1. What is a nominal exchange rate?
2. What is absolute purchasing power parity, what does it imply and why might it not hold?
3. What is relative purchasing power parity and when does it say the home country will see its currency
lose value?
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4. What is interest-rate parity and what does this imply about when the exchange rate will be stable?
5. What are the advantages of fixed and floating exchange rates?
ANS: