Question 1

Suppose that money supply growth continues to be higher in Turkey than it is in the United States. What does purchasing-power parity imply will happen to the real and to the nominal exchange rate?

Accepted Answer

Higher money growth leads to higher pric...

Question 2

Currencies depreciate and appreciate all the time. Who gains and who loses when the Russian rouble depreciates?

Accepted Answer

A)   Europeans holding Russian roubles gain, European tourists to Russia lose.
B)   European exporters to Russia gain, Europeans holding Russian roubles lose.
C)   Russian exporters gain, Russian importers lose.
D)   Russian importers gain, Russian exporters lose.E) A) and D)
F) A) and C)

Question 3

Which of the following is a statement of the purchasing power parity theory of exchange rate determination? The exchange rate will adjust in the

Accepted Answer

A)   long run until the interest rate is roughly the same in both countries.
B)   long run until real GDP is roughly the same in both countries.
C)   long run until the average price of goods is roughly the same in both countries.
D)   short run until the average price of goods is roughly the same in both countries.E) All of the above
F) C) and D)

Question 4

If UK imports total £100 billion and UK exports total £150 billion, which of the following would be true?

Accepted Answer

A)   UK net exports equal £150 billion
B)   The UK has a trade surplus of £50 billion.
C)   The UK has a trade deficit of £100 billion.
D)   The UK has a trade deficit of £50 billion.E) A) and B)
F) B) and C)

Question 5

Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is it not completely accurate?

Accepted Answer

Purchasing-power parity works well in he...

Question 6

If the UK price level is increasing by 3 per cent annually and the Swiss price level is increasing by 5 per cent annually, by what percentage would the pound sterling price of Swiss francs need to change according to purchasing power parity?

Accepted Answer

A)   depreciate by 5 per cent per year
B)   appreciate by 3 per cent per year
C)   appreciate by 5 per cent per year
D)   depreciate by 2 per cent per yearE) All of the above
F) A) and C)

Question 7

When people take advantage of differences in prices for the same good by buying it where it is cheap and selling it where it is expensive, it is known as

Accepted Answer

A)   net exports.
B)   purchasing power parity.
C)   net capital outflow.
D)   currency appreciation.
E)   arbitrage.F) B) and D)
G) B) and E)

Question 8

Which of the following products would likely be the least accurate if used to calculate purchasing power parity?

Accepted Answer

A)   Diamonds
B)   Gold
C)   Cars
D)   Wheat
E)   Dental servicesF) B) and D)
G) None of the above

Question 9

What is the logic behind the theory of purchasing-power parity?

Accepted Answer

The logic behind purchasing-power parity...

Question 10

Which of the following is equivalent to the trade deficit?

Accepted Answer

A)   imports ÷ exports
B)   net capital inflow
C)   exports + imports
D)   net exports - importsE) A) and C)
F) B) and C)

Question 11

If a case of mineral water is priced at €8 in the eurozone and 720 yen in Japan, then according to the purchasing power parity theory of exchange rates, the yen/euro exchange rate should be 5,760 yen/euro.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following would directly increase UK net capital outflow?

Accepted Answer

A)   Rolls Royce sells an aircraft engine to Boeing of the USA.
B)   The Japanese financial company Nomura buys shares in Vodafone.
C)   BP builds a new oil rig in Venezuela.
D)   Honda builds a new plant in the UK.E) All of the above
F) A) and B)

Question 13

Italy's net capital outflow measures

Accepted Answer

A)   the flow of goods and services between Italy and other countries.
B)   the flow of assets between Italy and other countries.
C)   the Italian government's budget surpluses and deficits relative to those experienced in other countries.
D)   the amount of physical capital built by Italian firms in foreign countries.E) None of the above
F) All of the above

Question 14

Arbitrage is the process of taking advantage of differences in prices of the same good by buying where the good is cheap and selling where it is expensive.

Accepted Answer

A) True 
 B)False

Question 15

The exchange rate is the

Accepted Answer

A)   value of money.
B)   quantity of euros, dollars, yen, etc., that are traded on currency markets.
C)   amount of foreign currency that is used to buy goods made in your country.
D)   number of units of a foreign currency that can be bought with one unit of your own currency.E) A) and B)
F) B) and C)

Question 16

Which of the following is a reason why exchange rates may deviate from their purchasing power parity values for many years?

Accepted Answer

A)   Some goods are not tradable.
B)   In some cases, a foreign-produced good is not a perfect substitute for a domestically produced version of the same thing.
C)   In some markets, import quotas limit the ability of firms to agree on exchange prices.
D)   Both a and b are correct.E) C) and D)
F) A) and C)

Question 17

Which of the following would be recorded as an UK merchandise export?

Accepted Answer

A)   A UK tourist spends 10,000 euros on vacation in the south of France.
B)   A machine shop in Nottingham purchases a grinder made in Italy.
C)   A UK resident receives a £50 dividend on shares she owns in a business in Germany.
D)   A French car hire firm purchases a fleet of new Honda cars built at Honda's factory in the UK.E) A) and C)
F) B) and C)

Question 18

If the yen/euro exchange rate rises, the euro has appreciated.

Accepted Answer

A) True 
 B)False

Question 19

Why are net exports and net capital outflow always equal?

Accepted Answer

Net exports and net capital outflow are ...

Question 20

If a company based in the UK prefers a strong pound (a pound with a high foreign exchange value), then the company probably exports more than it imports

Accepted Answer

A) True 
 B)False

Exam 29: Open-Economy Macroeconomics: Basic Concepts

If the UK price level is increasing by 3 per cent annually and the Swiss price level is increasing by 5 per cent annually, by what percentage would the pound sterling price of Swiss francs need to change according to purchasing power parity?

Correct AnswerverifiedShow Answer

Currencies depreciate and appreciate all the time. Who gains and who loses when the Russian rouble depreciates?

Correct AnswerverifiedShow Answer

Which of the following is a reason why exchange rates may deviate from their purchasing power parity values for many years?

Correct AnswerverifiedShow Answer

If the yen/euro exchange rate rises, the euro has appreciated.

Correct AnswerverifiedShow Answer

If a company based in the UK prefers a strong pound (a pound with a high foreign exchange value), then the company probably exports more than it imports

Correct AnswerverifiedShow Answer

Which of the following products would likely be the least accurate if used to calculate purchasing power parity?

Correct AnswerverifiedShow Answer

The exchange rate is the

Correct AnswerverifiedShow Answer

When people take advantage of differences in prices for the same good by buying it where it is cheap and selling it where it is expensive, it is known as

Correct AnswerverifiedShow Answer

Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is it not completely accurate?

Correct AnswerverifiedPurchasing-power parity works well in he...View AnswerShow Answer

If UK imports total £100 billion and UK exports total £150 billion, which of the following would be true?

Correct AnswerverifiedShow Answer

Which of the following is a statement of the purchasing power parity theory of exchange rate determination? The exchange rate will adjust in the

Correct AnswerverifiedShow Answer

Why are net exports and net capital outflow always equal?

Correct AnswerverifiedNet exports and net capital outflow are ...View AnswerShow Answer

Which of the following is equivalent to the trade deficit?

Correct AnswerverifiedShow Answer

Which of the following would directly increase UK net capital outflow?

Correct AnswerverifiedShow Answer

Arbitrage is the process of taking advantage of differences in prices of the same good by buying where the good is cheap and selling where it is expensive.

Correct AnswerverifiedShow Answer

Which of the following would be recorded as an UK merchandise export?

Correct AnswerverifiedShow Answer

What is the logic behind the theory of purchasing-power parity?

Correct AnswerverifiedThe logic behind purchasing-power parity...View AnswerShow Answer

Italy's net capital outflow measures

Correct AnswerverifiedShow Answer

If a case of mineral water is priced at €8 in the eurozone and 720 yen in Japan, then according to the purchasing power parity theory of exchange rates, the yen/euro exchange rate should be 5,760 yen/euro.

Correct AnswerverifiedShow Answer

Suppose that money supply growth continues to be higher in Turkey than it is in the United States. What does purchasing-power parity imply will happen to the real and to the nominal exchange rate?

Correct AnswerverifiedHigher money growth leads to higher pric...View AnswerShow Answer

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Purchasing-power parity works well in he...
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Net exports and net capital outflow are ...
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The logic behind purchasing-power parity...
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Higher money growth leads to higher pric...
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