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Page 1
1.
The relative purchasing power of a currency is:
A)
the exchange rate expressed in ounces of gold.
B)
the value of one currency in terms of the goods and services a unit will purchase
compared with an equivalent amount of another currency.
C)
the official value of one nation's currency compared with the official value of
another currency.
D)
the value of the currency during an economic expansion compared with its value
during a recession.
2.
The monetary approach to exchange rates describes:
A)
long-run relationships between money, prices, and exchange rates.
B)
a short-run relationship between exchange rates and interest rates.
C)
a short-run measure of fluctuations in exchange rates.
D)
a theory based on the idea that exchange rates are constant in the long run.
3.
The idea that with frictionless trade all goods traded internationally will have the same
equilibrium price no matter which currency they are priced in is known as:
A)
covered interest parity.
B)
arbitrage.
C)
the law of one price.
D)
relativity.
4.
In equilibrium, all traded goods sell at the same price internationally because of:
A)
government direction.
B)
arbitrage.
C)
markets in which buyers and sellers do not interact.
D)
the fact that the underlying value is the same everywhere.
5.
The law of one price requires:
A)
trade frictions.
B)
perfect competition.
C)
trade frictions and perfect competition.
D)
neither trade frictions nor perfect competition.
6.
The law of one price works under some assumptions. Which of the following is NOT an
assumption for the law of one price?
A)
There is free competition.
B)
There is no transportation cost.
C)
There are no tariffs.
D)
The skill level of workers is identical in both countries.
Page 2
7.
If an automobile costs $32,000 in New York and $1 = 0.8 euros, then under the
condition of the law of one price, the cost of the automobile in Rome should be:
A)
32,000 euros.
B)
40,000 euros.
C)
35,000 euros.
D)
25,600 euros.
8.
If a pound of coffee beans costs 85 pesos in Mexico City and 10 pesos = 35 rupees, then
the same pound of coffee should cost _________ rupees in New Delhi, under the
condition of the law of one price.
A)
300
B)
297.50
C)
29,750
D)
3,500
9.
When the price of a good in the United States is $2, while in Spain it is €2, and the
nominal exchange rate is E$/€ = 1.5, what is the relative price of the good in Spain versus
the United States?
A)
1
B)
1.5
C)
2/3
D)
1/2
10.
When the relative price of a good in Germany versus the United States is 3, if the
nominal exchange rate is E$/€ = 1.5 and the U.S. price is $10, what is the German price?
A)
€4
B)
€15
C)
€20
D)
€45
11.
Purchasing power parity exists when:
I. there are no arbitrage opportunities.
II. prices are the same when expressed in a common currency.
III. the goods in question are identical.
A)
I only
B)
I and II only
C)
II and III only
D)
I, II, and III
Page 3
12.
In equilibrium, all traded goods sell at the same price internationally. If the same goods
are expressed in their home prices, then the ratio of the prices is equal to:
A)
one.
B)
zero.
C)
the rate of interest.
D)
the nominal exchange rate between the two currencies.
13.
While the law of one price relates prices on individual goods to the exchange rate, the
theory of PPP relates:
A)
the relative price level of a basket of goods to the exchange rate.
B)
prices of individual goods to consumer demand.
C)
exchange rates to interest rates.
D)
goods markets to the market for services.
14.
In the international goods market, prices of goods in different countries expressed in a
common currency must be equalized. This concept is called:
A)
exchange rate theory.
B)
the law of one price.
C)
appreciation.
D)
purchasing power parity (PPP).
15.
If a basket of goods in the United States costs $1,000, and the same basket of goods in
Japan costs ¥125,000, then for PPP to exist, $1 should trade for ____ Japanese yen.
A)
4
B)
50
C)
125
D)
125,000
16.
If a pair of Nike shoes cost $45 in New York and $65 in Berlin, then we would expect
the price to:
A)
drop in New York and increase in Berlin.
B)
remain the same in both places.
C)
increase in New York and decrease in Berlin.
D)
increase in Berlin and stay constant in New York.
17.
Absolute purchasing power parity implies that:
A)
the price of a basket of goods is cheaper in one country than in another.
B)
the price of a basket of goods is more expensive in one country than in another.
C)
the price of a basket of goods is the same in the two countries.
D)
the exchange rate is artificially held constant.
Page 4
18.
The nominal exchange rate between two currencies tells us:
A)
changes in the exchange rate over time.
B)
how many units of one currency can be purchased with one unit of the home
currency.
C)
how much in terms of goods and services the home currency will buy in the foreign
nation compared with the home nation.
D)
how much depreciation or appreciation has occurred in the home exchange rate.
19.
The real exchange rate between two currencies tells us:
A)
changes in the exchange rate over time.
B)
how many units of one currency can be purchased with one unit of the home
currency.
C)
how much in terms of goods and services the home currency will buy in the foreign
nation compared with the home nation.
D)
how much depreciation or appreciation has occurred in the home exchange rate.
20.
If a real exchange rate depreciation occurs, which of the following results?
A)
It takes more home goods to purchase the same quantity of foreign goods.
B)
It takes fewer home goods to purchase the same quantity of foreign goods.
C)
The nominal exchange rate has risen as well.
D)
The nominal exchange rate has fallen.
21.
If a real exchange rate appreciation occurs, which of the following results?
A)
It takes more home goods to purchase the same quantity of foreign goods.
B)
It takes fewer home goods to purchase the same quantity of foreign goods.
C)
The nominal exchange rate has risen as well.
D)
The nominal exchange rate has fallen.
22.
If the prices of goods in Europe increase, while the nominal exchange rate between the
euro and the U.S. dollar remains the same, we say that the U.S. dollar has experienced a:
A)
nominal appreciation.
B)
nominal depreciation.
C)
real appreciation.
D)
real depreciation.
Page 5
23.
If more home goods are required to buy the same amount of foreign goods, then we say
that foreign currency has experienced a:
A)
nominal appreciation.
B)
nominal depreciation.
C)
real appreciation.
D)
real depreciation.
24.
If fewer home goods are required to buy the same amount of foreign goods, then we say
that foreign currency has experienced a:
A)
nominal appreciation.
B)
nominal depreciation.
C)
real appreciation.
D)
real depreciation.
25.
When the law of one price holds for all goods and services, the real exchange rate is
always equal to:
A)
one.
B)
the nominal exchange rate.
C)
relative prices across countries.
D)
1/nominal exchange rate.
26.
Whenever the absolute purchasing power of two currencies is the same, the real
exchange rate between them is equal to:
A)
zero.
B)
one.
C)
125.
D)
1/PPP.
27.
What is the situation when a home currency purchases more goods and services at home
than abroad when converted to a foreign currency?
A)
The domestic currency is undervalued.
B)
The domestic currency is overvalued.
C)
The domestic currency is unstable.
D)
The domestic currency is depreciating.
Page 6
28.
What is the situation when a home currency purchases fewer goods and services at
home than abroad when converted to a foreign currency?
A)
The domestic currency is undervalued.
B)
The domestic currency is overvalued.
C)
The domestic currency is unstable.
D)
The domestic currency is appreciating.
29.
In equilibrium, with purchasing power parity, the nominal exchange rate will be equal
to:
A)
the two nations' real exchange rate.
B)
the ratio of the two nations' GDPs.
C)
the ratio of the two nations' price levels.
D)
one.
30.
Under what circumstances would there be a “no-arbitrage” situation in goods markets
between two nations?
A)
when one of the currencies is undervalued
B)
when one of the currencies is overvalued
C)
when both of the currencies are overvalued
D)
when the relative price of the currencies is equal to one
31.
If a nation experiences 10% inflation and its trading partner does not, and if PPP holds,
what happens to its nominal exchange rate?
A)
It depreciates by 10%.
B)
It appreciates by 10%.
C)
It does not change.
D)
It becomes negative.
32.
If a nation experiences 10% inflation and its trading partner does not, and if PPP holds,
what happens to its real exchange rate?
A)
It depreciates by 10%.
B)
It appreciates by 10%.
C)
It does not change.
D)
It becomes negative.
33.
When the inflation rate in any nation changes, ceteris paribus:
A)
only absolute PPP is disturbed.
B)
only relative PPP is disturbed.
C)
both absolute and relative PPP are disturbed.
D)
the inflation rates in other nations will have to change as well.
Page 7
34.
Whenever two nations experience inflation, and the nominal exchange rates move by
the same percentage to offset, we say there is:
A)
absolute PPP.
B)
indeterminate PPP.
C)
inverted PPP.
D)
relative PPP.
35.
Absolute PPP and relative PPP differ in what way?
A)
Absolute PPP always holds but relative PPP may not.
B)
Relative PPP may hold even when absolute PPP does not.
C)
Relative and absolute PPP always hold.
D)
Absolute PPP relates to changes in inflation and exchange rates, whereas relative
PPP relates to their levels.
36.
Which of the following situations would exhibit relative PPP?
A)
Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the
euro–yen rate depreciates by 7%.
B)
Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the
euro–yen rate depreciates by 2%.
C)
Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the
euro–yen rate appreciates by 2%.
D)
Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the
euro–yen rate appreciates by 5%.
37.
With relative PPP, a rise in a nation's inflation rate is always offset by an increase in the
rate of __________ of its currency.
A)
appreciation
B)
revaluation
C)
depreciation
D)
devaluation
38.
When the Japanese inflation rate is less than the Australian inflation rate, Japanese
prices are:
A)
rising faster than Australian prices.
B)
rising more slowly than Australian prices.
C)
rising at the same rate as Australian prices.
D)
not rising.
Page 8
39.
When the Chinese yuan is appreciating against the U.S. dollar, if relative PPP holds,
then this suggests that the U.S. inflation rate:
A)
exceeds the Chinese inflation rate.
B)
equals the Chinese inflation rate.
C)
exceeds the Chinese interest rate.
D)
equals the Chinese interest rate.
40.
Evidence on the existence of relative PPP shows that:
A)
the evidence for relative PPP is scanty and the theory is largely discredited.
B)
the evidence for relative PPP is hit or miss, and so one should exercise caution in
using relative PPP to predict changes in a nation's exchange rates.
C)
relative PPP is an approximate guide to predicting the relationship between
changes in inflation and exchange rates over long periods, such as decades.
D)
both absolute and relative PPP hold nearly perfectly in the short and long run, and
are used with great accuracy to make predictions.
41.
The data on exchange rate and price-level fluctuations in the United States and the
United Kingdom from 1975 to 2010 suggest that:
A)
absolute and relative PPP hold in the long run.
B)
absolute and relative PPP hold in the short run.
C)
absolute and relative PPP do not hold in the long run.
D)
It is impossible to determine the relationship between inflation and exchange rates
between the two nations.
42.
As economies adjust to inflation, there is an adjustment of exchange rates to reflect the
changed price level. This adjustment is called:
A)
real exchange rates.
B)
convergence.
C)
adjustment costs.
D)
revaluation.
43.
Economists have developed models to predict changes in exchange rates based on
inflation trends. To guide forecasts of exchange rates, economists calculate the average:
A)
speed of convergence.
B)
PPP.
C)
interest parity.
D)
price deviation.
Page 9
44.
Evidence suggests that convergence to PPP occurs:
A)
instantly, as arbitrageurs take advantage of profit opportunities.
B)
rapidly, as arbitrageurs learn of profit opportunities.
C)
slowly, as arbitrageurs operate, and production, prices, and exchange rates adjust.
D)
never.
45.
The half-life of PPP deviations is about:
A)
four months.
B)
four quarters.
C)
four years.
D)
four decades.
46.
The half-life of a PPP divergence indicates how long it takes:
A)
to disappear.
B)
for half of it to disappear.
C)
to appear.
D)
to reach half its greatest value.
47.
Short-run PPP may not hold for a variety of reasons. Which of the following is NOT
cited in your textbook as one of those reasons?
A)
weather and other environmental conditions that affect trade
B)
transactions costs
C)
nontraded goods
D)
imperfect competition and price stickiness
48.
Which of the following statements is NOT a reason for explaining the deviations from
PPP?
A)
Some goods are not tradeable.
B)
Markets are imperfect and there could be legal obstacles.
C)
Prices can be sticky in different countries.
D)
There are no transportation costs.
49.
An example of a nontraded product would be:
A)
corn.
B)
haircuts.
C)
shoes.
D)
aircraft.
Page 10
50.
How could conditions of imperfect competition explain deviations from PPP?
A)
Imperfect competition means that prices are higher than costs and may not
converge.
B)
Governments often restrict trade in those goods.
C)
Goods sold under conditions of imperfect competition are often inferior.
D)
Arbitrageurs do not recognize profit opportunities in these markets.
51.
Globalization trends may ____ the tendency for prices to converge.
A)
retard
B)
speed up
C)
eliminate
D)
render irrelevant
52.
What is the Big Mac Index?
A)
It is a price index for the top 20 stocks traded internationally.
B)
It reflects inflation trends through trade in laptop computers and international price
competition.
C)
It is an index of the price of McDonald's hamburgers quoted in one currency
designed to measure whether absolute PPP holds for Big Macs.
D)
It is a measure of unemployment in the service industries of poor nations where
Western retailers such as McDonalds have infiltrated.
53.
(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States.
If PPP were to hold at the given nominal exchange rate, then the price of a computer in
Mexico would be _____ pesos.
A)
500
B)
50
C)
5,000
D)
0.02
Page 11
54.
(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States.
If PPP were to hold at the given nominal exchange rate, then the price of a computer in
South Africa would be _____ rands.
A)
4,000
B)
40
C)
800
D)
8,000
55.
(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States.
According to the information provided, under conditions of PPP, the price of a computer
should be ____ reals in Brazil.
A)
2,200
B)
1,200
C)
1,100
D)
550
56.
(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States.
With the price of the computer given in local currency, the Indian rupee is:
A)
overvalued by 9.1%.
B)
overvalued by 20%.
C)
undervalued by 12.5%.
D)
undervalued by 20%.
Page 12
57.
(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States.
With the price of the computer given in the local currency, the South African rand is
_______.
A)
undervalued by 12.0%
B)
overvalued by 3.0%
C)
undervalued by 12.5%
D)
undervalued by 1.25%
58.
(Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States.
With the price of the computer given in the local currency, the Brazilian real is
_______.
A)
undervalued by 22%.
B)
undervalued by 12%.
C)
overvalued by 9.1%.
D)
overvalued by 20%.
59.
Price stickiness refers to:
A)
slow movements in prices.
B)
the sticker price for big-ticket items.
C)
the price of oil.
D)
the price of a Big Mac across countries.
Page 13
60.
Better communication technology has made it easier to conduct ____ in international
markets, thus ____ exchange rate adjustments to economic conditions and inflation.
A)
open market operations; eliminating
B)
arbitrage; speeding up
C)
sales and purchases of currency; slowing down
D)
portfolio investment; fundamentally changing
61.
Money can be defined:
A)
only as a unit of account.
B)
only as a store of value.
C)
only as a medium of exchange.
D)
as a unit of account, a store of value, and a medium of exchange.
62.
Money's function as a medium of exchange is important because:
A)
if there were no money, there would be no common unit of account.
B)
if there were no money, society's wealth would be zero.
C)
it eliminates the need for inefficient barter.
D)
if there were no money, exchanges would be impossible.
63.
The MOST restrictive measurement of money is:
A)
M0.
B)
M1.
C)
M2.
D)
M3.
64.
Currency is a part of which measure of money?
A)
M0 only
B)
M1 only
C)
M2 only
D)
M0, M1, and M2
65.
The M1 measure of money includes demand deposits but excludes:
A)
currency in circulation.
B)
Federal Reserve notes.
C)
travelers' checks.
D)
bank reserves.
Page 14
66.
The criterion for including an asset in any measure of money is whether it is:
A)
used for transactions and highly liquid.
B)
used as a store of value.
C)
used as collateral for loans.
D)
stable and durable.
67.
The broad measure of money is referred to as:
A)
M0.
B)
M1.
C)
M2.
D)
M3.
68.
The entity in any nation that accurately controls directly or indirectly the supply of
money is referred to as the:
A)
executive branch.
B)
central bank.
C)
treasury.
D)
legislative branch.
69.
If nominal income in a nation decreases, economists would predict the:
A)
supply of money will rise.
B)
demand for money will rise.
C)
supply of money will decrease.
D)
demand for money will decrease.
70.
According to the quantity theory of money, the demand for money is equal to:
A)
nominal income divided by real income.
B)
a constant proportion of nominal income.
C)
the demand for money held as an asset.
D)
real income divided by velocity.
71.
In general, monetary economic theory states that the demand for money is proportional
to:
A)
nominal income.
B)
the unemployment rate.
C)
the population.
D)
the exchange rate.
Page 15
72.
If we adjust the supply of money for changes in the price level, we get real balances.
The demand for real balances is proportional to:
A)
real GDP.
B)
the unemployment rate.
C)
the population.
D)
the exchange rate.
73.
If prices are held constant and income increases by 12%, the demand for money will:
A)
decrease by 21%.
B)
increase by 12%.
C)
decrease by 12%.
D)
Not enough information is provided to answer the question.
74.
The price level in the country is determined by ______ and _______.
A)
nominal money supply; demand for real money
B)
demand for real money; average tax rate
C)
demand for real money; growth of GDP
D)
supply of real money; demand for real money
75.
If money growth is bigger than income growth, then we can expect:
A)
unemployment to increase.
B)
inflation to decrease.
C)
inflation to increase.
D)
inflation and unemployment to decrease.
76.
The demand for real money balances is:
A)
proportional to nominal income.
B)
proportional to real income.
C)
disproportional to real GDP.
D)
determined by the real rate of interest.
77.
Assume nominal GDP = PY, and
L
= the proportion of nominal income that the nation
holds (demands) as money to cover its transactions. Because nominal money supply
equals nominal money demand, then:
A)
increases in nominal income cause an increase in the money supply.
B)
decreases in nominal income cause an increase in the money supply.
C)
price increases cause an increase in the money supply.
D)
an increase in the money supply causes a proportional increase in nominal income.
Page 16
78.
A nation with greater income, ceteris paribus, will have:
A)
lower prices.
B)
higher prices.
C)
lower money supply.
D)
higher prices and higher money supply.
79.
Using monetary theory, one can show that the price level (index) in an economy is equal
to:
A)
the inflation rate minus the interest rate.
B)
the average change in the level of trade over the past five quarters.
C)
the velocity of money.
D)
the ratio of the nominal supply of money to the demand for real balances.
80.
According to the long-run monetary model, we can rearrange terms in the money
demand/supply in our long-run relationship to show that when the nominal supply of
money is increased, ceteris paribus:
A)
the demand for money is decreased.
B)
the price level is increased.
C)
real income is increased.
D)
the price level is decreased.
81.
According to the long-run monetary model of the price level:
A)
the demand for money is always proportional to the supply of money.
B)
when the demand for money decreases, prices respond very slowly.
C)
as long as prices are flexible, a change in the supply of money or the demand for
money will result in a change in the price level to restore equilibrium.
D)
equilibrium conditions require a change in real GDP to lower inflation.
82.
If we assume that prices adjust in the long run so that the nominal demand for money
equals the nominal supply of money, then:
A)
we can determine changes in exchange rates if absolute PPP holds.
B)
absolute PPP will hold.
C)
relative PPP will hold.
D)
exchange rates will not change.
Page 17
83.
The long-run monetary model of exchange rates provides that real income changes
result in a(n) _______ change in the price level and a(n) ________ change in the
strength of the currency.
A)
corresponding; opposite
B)
corresponding; corresponding
C)
opposite; corresponding
D)
opposite; opposite
84.
If there is an increase in the money supply in the United States, using the monetary
model of the exchange rate, one would predict that the U.S. dollar would:
A)
become stronger.
B)
appreciate in the short run, but not in the long run.
C)
depreciate.
D)
depreciate in the short run, but not in the long run.
85.
If U.S. real income increases, then the prediction of the monetary model of exchange
rates would be that the U.S. dollar would:
A)
become stronger.
B)
appreciate in the short run, but not in the long run.
C)
depreciate.
D)
depreciate in the short run, but not in the long run.
86.
Under the monetary approach to exchange rates, if real money demand is greater at
home but relative money supply is greater in foreign markets, then the exchange rate
should be:
A)
greater than one.
B)
equal to one.
C)
less than one.
D)
There is not enough information provided to answer the question.
87.
Under the monetary approach to exchange rates, if both real money demand and money
supply are greater at home than in foreign markets, then the exchange rate should be:
A)
greater than one.
B)
equal to one.
C)
less than one.
D)
There is not enough information provided to answer the question.
Page 18
88.
Under the monetary approach to exchange rates, if there is a rise in a country's home
money supply, ceteris paribus, then the exchange rate should:
A)
depreciate.
B)
hold steady.
C)
appreciate.
D)
appreciate and then remain steady.
89.
Under the monetary approach to exchange rates, if there is a rise in a foreign market's
income, ceteris paribus, then the exchange rate should:
A)
depreciate.
B)
hold steady.
C)
appreciate.
D)
appreciate and then remain steady.
90.
Under the monetary approach to exchange rates, if the exchange rate has appreciated,
this suggests that:
A)
the home country's money supply has risen.
B)
the foreign country's money supply has risen.
C)
the home country's income has fallen.
D)
the foreign country's money supply has fallen.
91.
When we consider growth rates of the variables, the growth of the price level (inflation)
is equal to:
A)
growth in nominal GDP.
B)
growth in real GDP.
C)
growth of the monetary aggregate.
D)
growth of the nominal supply of money minus the growth rate of real income.
92.
The long-run relationship between money growth, income growth, and the change in the
price level in a nation is:
A)
money growth = real income growth – change in the price level.
B)
real income growth – money growth = change in the price level.
C)
change in the price level = money growth – real income growth.
D)
real income growth/change in the price level = money growth.
Page 19
93.
Combining the relative PPP with the monetary model of exchange rates, we find that the
rate of depreciation of a currency (relative to another nation) in the long run is equal to:
A)
the sum of nominal money supply growth rates in each nation.
B)
the difference between the nominal money supply growth rates in each nation
minus the difference between growth rates of real GDP.
C)
the average of growth rates of real GDP in each nation.
D)
the sum of population growth plus technology growth.
94.
Which of the following statements about the relationship between money, prices, and
exchange rates in the long run is NOT correct?
A)
Since money is neutral in the long run, real income growth has no effect on
inflation or the nominal exchange rate for a nation.
B)
The rate of growth of prices (inflation rate) = the difference between money growth
and real income growth.
C)
The rate of depreciation of the nominal exchange rate between one nation and
another is directly related to the difference in the inflation rates in the nations.
D)
When a nation's real income grows, its inflation rate decreases.
95.
If Europe has a real GDP growth rate of 5%, and the United States has a real GDP
growth rate of 6%, while money growth in Europe is 7%, and money growth in the
United States is 5%, what would the monetary exchange rate model predict for
exchange rates in the long run?
A)
The U.S. dollar would appreciate by 3% against the euro.
B)
The U.S. dollar would depreciate by 3% against the euro.
C)
The U.S. dollar and the euro would not change against each other because the
growth rates are offsetting.
D)
The U.S. dollar would appreciate by 1% against the euro.
96.
If the U.S. real GDP growth rate is greater than that of Canada, then the dollar will
depreciate:
A)
only if the U.S. inflation rate exceeds Canada's inflation rate.
B)
regardless of the relative inflation rates.
C)
only if the U.S. inflation rate is less than Canada's inflation rate.
D)
only if the U.S. inflation rate is less than that of Canada's other trade partners.
97.
An increase in money supply by 15%, ceteris paribus, in the United States would cause
the exchange rate to:
A)
appreciate by 15%.
B)
appreciate by 7.5%.
C)
depreciate by 15%.
D)
stay the same.
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98.
Forecasting exchange rates involves:
A)
knowing the history of exchange rate behavior.
B)
assessing data on money supply growth and potential real income growth.
C)
understanding the relationship between monetary policy and unemployment.
D)
assessing data on money supply and unemployment.
99.
If we can accurately predict monetary growth, and if the assumption that demand for
real money balances is constant, then we may predict:
A)
changes in exchange rates only.
B)
changes in price levels only.
C)
both changes in price levels and changes in exchange rates.
D)
neither changes in price levels nor changes in exchange rates.
100.
If prices are flexible and PPP holds, it is possible to forecast the exchange rate in the
long run whenever ______ change in a nation, ceteris paribus.
A)
real income and nominal growth rate of the money supply
B)
levels of trade and financial flows
C)
capital controls
D)
short-run nominal interest rates
101.
Whenever the supply of money is growing at a constant rate, if there is price flexibility
and real income is constant, then the price level:
A)
is growing at a faster rate.
B)
is decreasing.
C)
is constant.
D)
grows at the same rate.
102.
Empirically, during the period 1975–2005, the relationship among the growth rate of
money, changes in the price level, and changes in the exchange rate was:
A)
perfect.
B)
strong but not perfect.
C)
weak, but showing some correlation.
D)
completely uncorrelated, with a correlation coefficient of zero.
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103.
Factors that could weaken the relationship between money growth rates and changes in
price levels and rates of exchange include:
A)
national differences in variables affecting growth of real income or the demand for
money.
B)
differences in transportation costs, making trade nearly impossible.
C)
differences in the willingness of government to address economic problems with
fiscal versus monetary policy.
D)
national differences in variables, differences in transportation costs, and differences
in the willingness of government to address economic problems with fiscal policy.
104.
Evidence on hyperinflationary periods indicates:
A)
a complete breakdown of the monetary exchange rate theory in the short run.
B)
that it takes longer for monetary and price level swings to show up in the exchange
rate data.
C)
that the relationship between high inflation and exchange depreciation is much
tighter even in the short run.
D)
that the government's inability to control monetary growth led to the currency
becoming completely worthless domestically but, ironically, more valuable outside
the nation.
105.
Hyperinflation is a condition described by:
A)
a 5% increase in price each year.
B)
a sustained increase in price of 50% or more per month.
C)
any kind of price increase.
D)
the rise in prices during a recession.
106.
With an annual inflation of 3.5%, prices will double in _____ years, and if inflation
increases to 10%, prices will double in _______ year(s).
A)
20; 7
B)
17; 20
C)
35; 1
D)
2; 4
107.
Which of the following nations has NOT suffered bouts of extreme hyperinflation?
A)
Germany
B)
Japan
C)
Zimbabwe
D)
Argentina
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108.
Currency reform refers to:
A)
setting new rules, so currency is more efficient to use.
B)
replacing paper money and coins with electronic deposits.
C)
more oversight for banks and other institutions handling large quantities of
currency.
D)
replacing currency whose value has fallen with new units of higher value.
109.
It is not surprising to learn that, during hyperinflations, the demand for real money
balances:
A)
accelerates because people need to hold more money to cover higher prices.
B)
remains constant because we are talking about real, not nominal, balances.
C)
decreases, as the value of the nominal money decreases.
D)
is unpredictable.
110.
When there is a hyperinflationary period, large changes in exchange rates and price
levels happen ________ during periods of more stable prices and exchange rates.
A)
at about the same rate as
B)
more slowly than
C)
much more rapidly than
D)
slightly more rapidly than
111.
A lesson from hyperinflationary periods is that:
A)
real GDP seems not to be affected.
B)
the price level rises but soon a period of decreasing prices ensues.
C)
the demand for real money balances decreases during periods of extreme
instability.
D)
the demand for real money balances is always constant.
112.
Zimbabwe's hyperinflation reached ______in 2008.
A)
1,231,000,000%
B)
231,000,000%
C)
1,000,000%
D)
5%
113.
In the general model of the demand for money, the demand for real balances is based on
which of the following two variables?
A)
the supply of money and the price level
B)
the demand for assets and the supply of assets
C)
the level of real income and the nominal rate of interest
D)
expectations of inflation and money velocity
Page 23
114.
The cost of holding money is primarily the:
A)
interest given up by not investing it.
B)
weight of it in your pocket.
C)
inverse relationship between liquidity and prices.
D)
relationship between liquidity and prices.
115.
Even though we assume the nominal interest rate on money is zero, there is a benefit to
holding money. This is generally thought to be:
A)
the prestige of having a large income.
B)
the interest earned from investing it.
C)
the ease of conducting transactions by having a perfectly liquid payment system.
D)
the depreciation of the value of the dollar as prices increase.
116.
For a given level of real income, the demand for real money balances is inversely
related to:
A)
the nominal rate of interest.
B)
the real rate of interest.
C)
nominal GDP.
D)
the price level.
117.
More realistically, the liquidity function is not ______ but a(n) ______ function of the
demand for real balances based on changes in the ______.
A)
constant; decreasing; nominal rate of interest
B)
increasing; constant; real rate of interest
C)
decreasing; increasing; level of real income
D)
constant; increasing; real rate of interest
118.
In the long run, the demand for real balances rises whenever:
A)
nominal interest rates fall.
B)
real GDP rises.
C)
the exchange rate rises.
D)
nominal interest rates fall and real GDP rises.
119.
We can use the existence of arbitrage and the idea of uncovered interest parity (UIP) to
assume that any interest rate differential between two currencies must be offset by:
A)
the change in the quantity of money.
B)
an offsetting differential in the expected exchange rates.
C)
offsetting changes in real income.
D)
resulting increases in borrowing denominated in the low-interest currency.
Page 24
120.
Using the relationship between expected exchange rates and inflation differentials in
combination with uncovered interest parity, we find:
A)
changes in inflation rates are directly related to changes in nominal interest rates.
B)
changes in inflation rates are inversely related to changes in nominal interest rates.
C)
changes in inflation rates are unrelated to changes in nominal interest rates.
D)
changes in inflation rates are directly related to changes in real interest rates.
121.
If the exchange rate between the dollar and yen has risen, this would be consistent with:
A)
a rise in the U.S. interest rate.
B)
a rise in U.S. inflation.
C)
a rise in the Japanese interest rate.
D)
a fall in Japanese inflation
122.
The long-run Fisher effect links rises in inflation with rises in nominal interest rates by
the same proportion, resulting in ____ the demand for real money balances.
A)
no effect on
B)
an increase in
C)
a decrease in
D)
an increase in the supply of money offsetting the increase in
123.
If PPP and uncovered interest parity hold, then the long-run real rate of interest in each
nation:
A)
will never change.
B)
will equalize.
C)
will increase.
D)
will decrease.
124.
The Fisher effect creates a link between _____ and ______.
A)
expected profits; unemployment rates
B)
exchange rates; expected profits
C)
inflation rates; unemployment rates
D)
inflation rates; interest rates
Page 25
125.
If inflation in the United States is 4% per year and in the United Kingdom it is 8% per
year, and interest rate in the United Kingdom is 6%, then the Fisher effect predicts that
the interest rate in the United States is:
A)
2%.
B)
4%.
C)
6%.
D)
8%.
126.
Combining the concepts of uncovered interest parity (UIP) and relative purchasing
power parity (PPP), the ________ shows that differences in inflation rates between two
nations will be equal to the difference in their nominal rates of interest.
A)
Lerner theorem
B)
Samuelson doctrine
C)
Fisher effect
D)
Friedman dilemma
127.
The real interest rate is equal to:
A)
the nominal interest rate plus inflation.
B)
the nominal interest rate minus inflation.
C)
inflation minus the nominal interest rate.
D)
inflation multiplied by the nominal interest rate.
128.
Real interest parity indicates that, when PPP and UIP hold:
A)
nominal interest rates are equal across countries.
B)
inflation rates are equal across countries.
C)
real interest rates are equal across countries.
D)
nominal interest rates vary across countries.
129.
When real interest parity holds:
A)
nominal interest rates are equal all over the world.
B)
real interest rates are equal across nations with different currencies.
C)
real interest rates on dollar assets are equal but not for all currencies.
D)
real interest rates will follow a pattern of convergence, but equilibrium will never
occur.
130.
For real interest parity to hold, we require:
A)
PPP.
B)
UIP.
C)
both PPP and UIP.
D)
neither PPP nor UIP.
Page 26
131.
Data indicate that the Fisher effect:
A)
holds in the short run.
B)
holds in the long run.
C)
holds in the long run and the short run.
D)
doesn't hold in the short run but holds in the long run.
132.
When we incorporate a relationship between expected inflation and liquidity preference
(demand for real balances) into our long-run model, which of the following occurs?
A)
The exchange rate is unaffected.
B)
The exchange rate rises in direct proportion to the increase in the quantity of
money and the price level.
C)
The exchange rate rises in direct proportion to the increase in the quantity of
money, but inflation actually falls because of an increase in the demand for money.
D)
The increase in interest rates and inflation after a change in the monetary growth
rate affect exchange rates but also cause secondary effects on exchange rates and
price levels because of a decrease in the demand for real balances.
133.
When we incorporate a relationship between expected inflation and liquidity preference
(demand for real balances) into our long-run model, it can help to explain:
A)
erratic shifts in exchange rates.
B)
how changes in expectations can move the markets quickly.
C)
why sometimes PPP seems not to hold in the short run.
D)
erratic shifts in exchange rates, how changes in expectations can move the markets
quickly, and why sometimes PPP seems not to hold in the short run.
134.
The difference between the simple monetary model and the general monetary model of
exchange rate determination in the long run is that:
A)
the simple model refers to only one nation, while the general model includes all
nations.
B)
the simple model has only one equation, while the general model includes a
number of simultaneous equations.
C)
the simple model assumes a constant demand function for real balances, while the
general model assumes that the demand for real balances is a decreasing function
of the nominal interest rate.
D)
the general model applies to increases and decreases in the relevant variables; the
simple model does not allow relevant variables to decrease.
Page 27
135.
Incorporating the liquidity preference function into the simple model changes its
outcome somewhat. What is the impact?
A)
Changes in the growth of the money supply cause inflation and nominal interest
rates to change, which affects demand for real balances and causes further
discontinuous influences on prices.
B)
Changes in the inflation rate no longer affect nominal interest rates: the Fisher
effect is no longer operative.
C)
Changes in nominal interest rates have an immediate effect on the real exchange
rate, bypassing the adjustment process.
D)
Changes in the money growth rate increase real balances, since prices are no longer
flexible.
136.
The primary difference between the simple quantity theory of money and one in which
interest rates matter is that with the more general model:
A)
there are jumps in exchange rates.
B)
there are no effects of inflation.
C)
monetary policy autonomy is maintained.
D)
exchange rates are held constant.
137.
Economists consider high and volatile inflation to be:
A)
a positive factor in economic growth, since higher prices equal higher profits for
firms.
B)
a negative factor in economic growth, as firms and workers deal with uncertainty
about profitability, investments, and wages.
C)
neutral regarding its effect on economic growth.
D)
beneficial to the government, which often spends before it taxes.
138.
Of the following targets or nominal anchors, which is NOT useful for controlling
domestic inflation?
A)
nominal exchange rates
B)
money supply measures
C)
nominal interest rates
D)
real money demand measures
139.
Nominal anchors restrain inflation and rising interest rates by:
A)
putting limits on trade.
B)
imposing capital controls.
C)
forcing restrictions on easy monetary policies.
D)
imposing price and wage controls.
Page 28
140.
If conditions hold for the long-run monetary exchange rate model, it can provide
opportunities for nations to achieve less price-level volatility by:
A)
constraining policy choices to respect a nominal anchor, such as a target for a
nominal exchange rate.
B)
allowing international organizations such as the IMF to control economic variables.
C)
conducting a currency reform effort.
D)
embarking on a campaign for dollarization.
141.
Other nominal anchors or targets, such as rules for monetary growth, sometimes fail to
optimize economic conditions in the short run because:
A)
monetary growth rates are unrelated to inflation.
B)
it is complicated to figure out how to hold down money creation.
C)
corrupt politicians pay no attention and give out extra currency to political
supporters.
D)
low monetary growth may curb inflation but may also constrain growth of real
income.
142.
If the Fisher effect holds, keeping the ____ fixed would force nations to keep inflation
stable.
A)
world real interest rate
B)
nominal interest rate
C)
exchange rate
D)
real interest rate
143.
If a nation uses one or a combination of nominal anchors, a trade-off is that it loses:
A)
international respect.
B)
control over its inflation rate.
C)
the ability to control its exchange rate.
D)
the ability to control its own monetary policy.
144.
Have nominal anchors used by various nations been effective in the real world?
A)
Yes, for the most part. Central banks have become more independent, and inflation
rates have fallen on average.
B)
There has been very little progress toward reducing inflation using these artificial
criteria.
C)
Not at all. This highlights the inevitable conclusion that much more needs to be
learned about the effectiveness of economic policy.
D)
Energy and natural resource prices have risen and, unfortunately, offset any efforts
to reduce inflation worldwide.
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145.
In which decade did the use of nominal anchors and explicit targets begin to be common
in many nations?
A)
the 1960s
B)
the 1970s
C)
the 1980s
D)
the 1990s
146.
Economists consider central bank independence to be a key factor in keeping inflation
under control. Why?
A)
Elected officials (legislators and the executive branch) tend to pursue policies
popular with the public that may increase inflationary tendencies, whereas the
Central Bank does not have such pressure.
B)
The central bank should be able to use stimulative monetary policy whenever it
chooses without worrying about inflationary tendencies.
C)
Inflation is generated by legislative deficit spending—the central bank can offset
that spending and the inflation it causes.
D)
The central bank's directors and executives are always political appointees, and it is
clear that low inflation is popular with the public.
147.
During the economic crisis of 2008–10, efforts to keep inflation pinned at 2%:
A)
made things more difficult, since nominal interest rates cannot fall below zero.
B)
made things more difficult, since nominal interest rates cannot rise above zero.
C)
made things easier, since nominal interest rates cannot fall below zero.
D)
made things easier, since nominal interest rates cannot rise above zero.
148.
Construct an example that demonstrates the law of one price. Use specific numbers.
Page 30
149.
A basket of goods sold in the Eurozone is priced and weighted as shown in the
following table:
And the same basket for the United States is priced and weighted as shown in the
following table:
The exchange rate for $/€ is 1.25.
Does purchasing power parity hold?
150.
A basket of goods sold in the Eurozone is priced and weighted as shown in the
following table:
And the same basket for the United States is priced and weighted as shown in the
following table:
The exchange rate for $/€ is 1.25.
Is it preferable for an arbitrageur to purchase goods in the United States or in the
Eurozone? To which of them should the arbitrager resell these goods?
151.
Suppose a new car costs 210,000 Mexican pesos in Mexico, while the same car costs
$19,500 in the United States. The nominal exchange rate is currently at E$/Peso =
$.10/Peso. If we assume PPP to hold, is the dollar under or overvalued? If so, by how
much?
152.
Explain the difference between absolute and relative PPP.
Page 31
153.
Absolute PPP doesn't do a very good job explaining exchange rates in the short run.
Give and fully explain two of the three reasons for this failure.
154.
According to the simple monetary model, money is growing at 5% in the United States
and 6% in the United Kingdom, while real GDP is rising at 3% in the United States, and
at 5% in the United Kingdom. What will this do to the exchange rate?
155.
Give an intuitive explanation as to why faster money growth leads to a depreciating
currency.
156.
A basket of goods sold in the Eurozone is priced and weighted as shown in the
following table.
If one were to use the simple model to predict the U.S. dollar/euro exchange rate, what
would the expected exchange rate be?
157.
A basket of goods sold in the Eurozone is priced and weighted as shown in the
following table.
The United States is interested in maintaining a competitive effective exchange rate.
The Fed is tasked with making sure that the dollar does not appreciate relative to the
currencies of the rest of the world. Calculate the effective exchange rate, given the data,
and discuss what the Fed will have to do (if anything) to achieve its goal.
158.
Explain how PPP, UIP, and the Fisher effect lead to the insight that real interest rates
equalize across countries.
Page 32
159.
Explain how exchange rates may be used as nominal anchors.
160.
It has been abundantly demonstrated that nominal interest rates, exchange rates, and
inflation are very tightly linked. In Italy, during the 1970s and 1980s, the inflation rate
of the Italian lira was very erratic, changing each year in a range of 7% to 20% per year.
Predict the effect on Italy's nominal interest rates and its exchange rates with other
nations during that period.
161.
Discuss the benefits and drawbacks of low inflation, and describe issues in central bank
policy following the financial crisis that began in 2008.
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