Question 1

What is more appropriate to use when attempting to find information about the purchasing power of a currency?

Accepted Answer

A)   the spot exchange rate
B)   the forward rate
C)   the price levels
D)   the price indexes

Question 2

What is the name given to the weighted average of the nominal prices of the goods and services consumed in the economy?

Accepted Answer

A)   nominal price
B)   monetary value
C)   price level
D)   consumption bundle

Question 3

Within Germany,what is the name for the power of a U.S.dollar when it is used to purchase an amount of goods and services?

Accepted Answer

A)   internal purchasing power
B)   external purchasing power
C)   absolute purchasing power parity
D)   relative purchasing power parity

Question 4

What is the name of the ratio of a price level at one point in time to the price level in a designated base year?

Accepted Answer

A)   bid-ask spread
B)   reserve requirement
C)   percent spread
D)   price index

Question 5

In the absence of pure competition,firms who segment markets may be able to charge different prices in different countries for the same good.This practice is known as ________.

Accepted Answer

A)   mark to market
B)   interest rate arbitrage
C)   pricing to market
D)   speculation

Question 6

One important reason to study the purchasing power parity theory is because

Accepted Answer

A)   investors should borrow in a foreign currency, when there is a forward discount.
B)   when inflation rates differ across international borders, PPP provides a baseline forecast of future exchange rates.
C)   forecasting exchange rates is difficult and PPP makes it easier.
D)   it provides currency dealers with a way to identify arbitrage opportunities. B

Question 7

A 150% return in Belarus is higher than a 15% dollar return in the U.S.

Accepted Answer

A)   because arbitrage opportunities exist.
B)   when the inflation controls are suspended in Belarus.
C)   it depends on whether these are nominal or real returns.
D)   regardless of nominal or real returns.

Question 8

Could fluctuations in the real exchange rate cause deviations from absolute purchasing power parity? Why?

Accepted Answer

The real exchange rate,say,of the dollar...

Question 9

What is the distinction between relative purchasing power parity and absolute purchasing power parity?

Accepted Answer

The theory of relative PPP specifies tha...

Question 10

The theory of relative purchasing power parity states that,between two nations,the ________.

Accepted Answer

A)   inflation rates are unrelated
B)   exchange rate differential reflects the inflation rate differential
C)   inflation rate is smaller in weaker currencies
D)   the interest rate is greater than the inflation rate during depreciations

Question 11

Suppose annual inflation rates in the U.S.and Mexico are expected to be 6% and 80%,respectively,over the next several years.If the current spot rate for the Mexican peso is $.005,then the best estimate of the peso's spot value in 3 years is ________.

Accepted Answer

A)   $.00276
B)   $.01190
C)   $.00321
D)   $.00102 D

Question 12

The version of purchasing power parity that states the exchange rates will adjust to equalize the internal and external purchasing power of a currency is known as the ________.

Accepted Answer

A)   relative purchasing power parity
B)   equilibrium purchasing power parity
C)   absolute purchasing power parity
D)   real exchange rate equilibrium

Question 13

When people describe what they think an exchange rate value should be,they often use a benchmark model,known as ________.

Accepted Answer

A)   purchasing power parity
B)   interest rate parity
C)   the Fisher effect
D)   the International Fisher effect

Question 14

When the price level of an economy is ________,________ is occurring.Conversely,when the price level is ________,________ is occurring.

Accepted Answer

A)   rising, deflation, falling, inflation
B)   rising, inflation, falling, deflation
C)   falling, inflation, rising, deflation
D)   falling, deflation, rising, deflation

Question 15

When the price of one commodity is the same wherever in the world the good is being sold when denominated in a particular currency,it is said the Law of ________ prevails.

Accepted Answer

A)   currency supply
B)   currency demand
C)   purchasing power parity
D)   one price

Question 16

When is a currency said to be overvalued?

Accepted Answer

A)   when its internal purchasing power is greater than its external purchasing power
B)   when its external purchasing power is greater than its internal purchasing power
C)   when its external purchasing power is less than its internal purchasing power
D)   when its internal purchasing power is equal than its external purchasing power

Question 17

When the currency of a country is stronger in foreign exchange markets than its PPP exchange rate,the dollar value of the country's GDP per capita when measured by current exchange rates is ________.

Accepted Answer

A)   smaller than when measured by PPP exchange rates
B)   larger than when measured by PPP exchange rates
C)   the same as when measured by PPP exchange rates
D)   slightly the same as when measured by PPP exchange rates

Question 18

Under what conditions could the law of one price be violated?

Accepted Answer

The law of one price says that the price...

Question 19

Within the United States,what is the name for the power of a dollar when it is used to purchase an amount of goods and services?

Accepted Answer

A)   internal purchasing power
B)   external purchasing power
C)   absolute purchasing power parity
D)   relative purchasing power parity A

Question 20

The following options are all important reasons to study the theory of PPP EXCEPT:

Accepted Answer

A)   it provides a baseline forecast of future exchange rates that is usually considered whenever it is necessary to forecast future cash flows in different currencies.
B)   deviations from PPP significantly affect the profitability of firms.
C)   it is particularly useful in assessing cost-of-living differences across countries
D)   the deviations from the theory are very small when it comes to the determination of exchange rates

Exam 8: Purchasing Power Parity and Real Exchange Rates

What is more appropriate to use when attempting to find information about the purchasing power of a currency?

Correct AnswerverifiedShow Answer

What is the name given to the weighted average of the nominal prices of the goods and services consumed in the economy?

Correct AnswerverifiedShow Answer

Within Germany,what is the name for the power of a U.S.dollar when it is used to purchase an amount of goods and services?

Correct AnswerverifiedShow Answer

What is the name of the ratio of a price level at one point in time to the price level in a designated base year?

Correct AnswerverifiedShow Answer

In the absence of pure competition,firms who segment markets may be able to charge different prices in different countries for the same good.This practice is known as ________.

Correct AnswerverifiedShow Answer

One important reason to study the purchasing power parity theory is because

Correct AnswerverifiedB

A 150% return in Belarus is higher than a 15% dollar return in the U.S.

Correct AnswerverifiedShow Answer

Could fluctuations in the real exchange rate cause deviations from absolute purchasing power parity? Why?

Correct AnswerverifiedThe real exchange rate,say,of the dollar...View AnswerShow Answer

What is the distinction between relative purchasing power parity and absolute purchasing power parity?

Correct AnswerverifiedThe theory of relative PPP specifies tha...View AnswerShow Answer

The theory of relative purchasing power parity states that,between two nations,the ________.

Correct AnswerverifiedShow Answer

Suppose annual inflation rates in the U.S.and Mexico are expected to be 6% and 80%,respectively,over the next several years.If the current spot rate for the Mexican peso is $.005,then the best estimate of the peso's spot value in 3 years is ________.

Correct AnswerverifiedD

The version of purchasing power parity that states the exchange rates will adjust to equalize the internal and external purchasing power of a currency is known as the ________.

Correct AnswerverifiedShow Answer

When people describe what they think an exchange rate value should be,they often use a benchmark model,known as ________.

Correct AnswerverifiedShow Answer

When the price level of an economy is ________,________ is occurring.Conversely,when the price level is ________,________ is occurring.

Correct AnswerverifiedShow Answer

When the price of one commodity is the same wherever in the world the good is being sold when denominated in a particular currency,it is said the Law of ________ prevails.

Correct AnswerverifiedShow Answer

When is a currency said to be overvalued?

Correct AnswerverifiedShow Answer

When the currency of a country is stronger in foreign exchange markets than its PPP exchange rate,the dollar value of the country's GDP per capita when measured by current exchange rates is ________.

Correct AnswerverifiedShow Answer

Under what conditions could the law of one price be violated?

Correct AnswerverifiedThe law of one price says that the price...View AnswerShow Answer

Within the United States,what is the name for the power of a dollar when it is used to purchase an amount of goods and services?

Correct AnswerverifiedA

The following options are all important reasons to study the theory of PPP EXCEPT:

Correct AnswerverifiedShow Answer

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The real exchange rate,say,of the dollar...
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The theory of relative PPP specifies tha...
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D

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When the price level of an economy is , is occurring.Conversely,when the price level is , is occurring.

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The law of one price says that the price...
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