a) According to the monetary approach to the exchange rate, with real money demands being constant in Sweden and the US, if Sweden's money supply is increasing at the annual rate of 5% and the US money supply is increasing at the annual rate of 2%, then:
a. the Swedish krona should be appreciating against the US dollar at an annual rate of less than 3% to take into account overshooting.
b. the Swedish krona should be appreciating against the US dollar at the annual rate of 3%.
c. the Swedish krona should be depreciating against the US dollar at an annual rate of greater than 3% to take into account overshooting.
d. the Swedish krona should be depreciating against the US dollar at the annual rate of 3%.
e. the Swedish krona should be depreciating against the US dollar at an annual rate of less than 3% to take into account undershooting.
b) Purchasing power parity is more likely to hold true when:
a. there are a large amount of non-traded goods.
b. there are high tariffs.
c. exchange rates are fixed and stable over a reasonably long time period.
d. exchange rates are flexible.
e. there are high transportation costs.
c) Suppose the basket of goods used for calculating the national price level, P, is the same as the basket of goods used for calculating P*. The formula P = EP* represents the existence of:
a. a real exchange rate value that, based on these measures for E, P, and P*, is not equal to one.
b. relative purchasing power parity but not absolute purchasing power parity.
c. absolute purchasing power parity but not relative purchasing power parity.
d. absolute purchasing power parity and relative purchasing power parity.
e. neither absolute purchasing power parity nor relative purchasing power parity.
a) According to the monetary approach to the exchange rate, with real money demands being constant in Sweden and the US, if Sweden's money supply is increasing at the annual rate of 5% and the US money supply is increasing at the annual rate of 2%, then:
a. the Swedish krona should be appreciating against the US dollar at an annual rate of less than 3% to take into account overshooting.
b. the Swedish krona should be appreciating against the US dollar at the annual rate of 3%.
c. the Swedish krona should be depreciating against the US dollar at an annual rate of greater than 3% to take into account overshooting.
d. the Swedish krona should be depreciating against the US dollar at the annual rate of 3%.
e. the Swedish krona should be depreciating against the US dollar at an annual rate of less than 3% to take into account undershooting.
b) Purchasing power parity is more likely to hold true when:
a. there are a large amount of non-traded goods.
b. there are high tariffs.
c. exchange rates are fixed and stable over a reasonably long time period.
d. exchange rates are flexible.
e. there are high transportation costs.
c) Suppose the basket of goods used for calculating the national price level, P, is the same as the basket of goods used for calculating P*. The formula P = EP* represents the existence of:
a. a real exchange rate value that, based on these measures for E, P, and P*, is not equal to one.
b. relative purchasing power parity but not absolute purchasing power parity.
c. absolute purchasing power parity but not relative purchasing power parity.
d. absolute purchasing power parity and relative purchasing power parity.
e. neither absolute purchasing power parity nor relative purchasing power parity.
Related textbook solutions
Related questions
1.Purchasing power parity implies that
a. the real exchange rate is equal to 1.
b. the law of one price does not hold.
c. inflation rates are equal across countries.
d. the real exchange rate is equal to 0.
e. if the domestic country has low prices, then the domestic currency will depreciate until foreign citizens can buy the same amount of goods as domestic citizens.
2.Which of the following is a prediction from the PPP model of exchange rates?
A. An increase in the US money supply leads to an appreciation of the dollar in the long run.
B. An increase in US production leads to a depreciation of the dollar.
C. An increase in US production will lead to a proportional increase in the inflation rate.
D, An increase in the US money supply leads to a depreciation of the dollar in the long run.
E.An increase in the US interest rates leads to a fall in prices.
3.Relative purchasing power parity predicts that
A.the difference between the inflation rates in the two countries should equal the ratio of the interest rates in the two countries.
B. the difference between the inflation rates in two countries should equal the per cent change in the exchange rate.
C.inflation rates should be equal across countries.
D.the real exchange rate should equal one.
E.relative price levels in the two countries should be equal when expressed in the same currency.
4.Which of the following is NOT a valid explanation for the failure of purchasing power parity?
a. Differences in monetary policies across countries
b. Lack of competition
c. Transportation costs
d. Trade barriers
5.If P represents (the level of) domestic prices, P* represents (the level of) foreign prices and E represents the exchange rate as units of domestic currency per units of foreign currency, then the real exchange rate equals
|
a. EP/P* |
b. P*/EP |
|
C. E/PP* |
d. EP*/P |
|
e. P/P* |
6.The difference between nominal and real interest rates is that
A.Nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms
B.Nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output
C.Nominal interest rates can fluctuate, while real interest rates always remain fixed
D.Real interest rates can fluctuate, while nominal interest rates always remain fixed
E.Real interest rates are the same in every country, while nominal interest rates are different for every country
7.Which of the following is predicted to cause the value (or price or cost) of U.S. goods to appreciate relative to the value (or price or cost) of foreign goods in the long run?
a. An increase in the growth rate of U.S. GNP. b. A decrease in the growth rate of U.S. GNP.
c. A decline in the growth rate of the U.S. money supply.
d. An increase in the price of petroleum that reduces world demand for American cars. e. An appreciation of the dollar.
