17.2 Exchange Rates in the Long Run

According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is: A) 40 pesos per real. B) 100 pesos per real. C) 25 pesos per real. D) 0.4 pesos per real.

25 pesos per real.

According to PPP, the real exchange rate between two countries will always equal ________. A) 0.0 B) 0.5 C) 1.0 D) 1.5

C) 1.0

Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States, 3% for Canada; 4% for Mexico, and 5% for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen? A) The Brazilian real will depreciate against the U.S. dollar. B) The Mexican peso will depreciate against the Brazilian real. C) The Canadian dollar will depreciate against the Mexican peso. D) The U.S. dollar will depreciate against the Canadian dollar.

The Brazilian real will depreciate against the U.S. dollar.

The theory of PPP suggests that if one countrys price level falls relative to anothers, its currency should A) depreciate. B) appreciate. C) float. D) do none of the above.

appreciate

The theory of PPP suggests that if one countrys price level falls relative to anothers, its currency should A) depreciate in the long run. B) appreciate in the long run. C) appreciate in the short run. D) depreciate in the short run.

appreciate in the long run.

Everything else held constant, increased demand for a countrys exports causes its currency to ________ in the long run, while increased demand for imports causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate

appreciate; depreciate

Higher tariffs and quotas cause a countrys currency to ________ in the ________ run, everything else held constant. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long

appreciate; long

An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant. A) depreciate; lower B) appreciate; lower C) depreciate; higher D) appreciate; higher

appreciate; lower

The theory of PPP suggests that if one countrys price level rises relative to anothers, its currency should A) depreciate. B) appreciate. C) float. D) do none of the above.

depreciate

The theory of PPP suggests that if one countrys price level rises relative to anothers, its currency should A) depreciate in the long run. B) appreciate in the long run. C) depreciate in the short run. D) appreciate in the short run.

depreciate in the long run.

In the long run, a rise in a countrys price level (relative to the foreign price level) causes its currency to ________, while a fall in the countrys relative price level causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate

depreciate; appreciate

Lower tariffs and quotas cause a countrys currency to ________ in the ________ run, everything else held constant. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long

depreciate; long

Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________, everything else held constant. A) depreciate; lower B) depreciate; higher C) appreciate; lower D) appreciate; higher

depreciate; lower

Everything else held constant, if a factor decreases the demand for ________ goods relative to ________ goods, the domestic currency will depreciate. A) foreign; domestic B) foreign; foreign C) domestic; domestic D) domestic; foreign

domestic; foreign

Everything else held constant, if a factor increases the demand for ________ goods relative to ________ goods, the domestic currency will appreciate. A) foreign; domestic B) foreign; foreign C) domestic; domestic D) domestic; foreign

domestic; foreign

Everything else held constant, increased demand for a countrys ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate. A) imports; imports B) imports; exports C) exports; imports D) exports; exports

exports; imports

If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will A) rise by 6 percent. B) rise by 2 percent. C) fall by 6 percent. D) fall by 2 percent.

fall by 2 percent.

If the real exchange rate between the United States and Japan is ________, then it is cheaper to buy goods in Japan than in the United States. A) greater than 1.0 B) greater than 0.5 C) less than 0.5 D) less than 1.0

greater than 1.0

The theory of purchasing power parity cannot fully explain exchange rate movements because A) all goods are identical even if produced in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries. D) fiscal policy differs across countries.

some goods are not traded between countries.

If the Brazilian demand for American exports rises at the same time that U.S. productivity rises relative to Brazilian productivity, then, in the long run, ________, everything else held constant. A) the Brazilian real will appreciate relative to the U.S. dollar B) the Brazilian real will depreciate relative to the U.S. dollar C) the Brazilian real will either appreciate, depreciate, or remain constant relative to the U.S. dollar D) there is no effect on the Brazilian real relative to the U.S. dollar

the Brazilian real will depreciate relative to the U.S. dollar

If, in retaliation for unfair trade practices, Congress imposes a 30 percent tariff on Japanese DVD recorders, but at the same time, U.S. demand for Japanese goods increases, then, in the long run, ________, everything else held constant A) the Japanese yen should appreciate relative to the U.S. dollar B) the Japanese yen should depreciate relative to the U.S. dollar C) there is no effect on the Japanese yen relative to the U.S. dollar D) the Japanese yen could appreciate, depreciate or remain constant relative to the U.S. dollar

the Japanese yen could appreciate, depreciate or remain constant relative to the U.S. dollar

If the U.S. Congress imposes a quota on imports of Japanese cars due to claims of unfair trade practices, and Japanese demand for American exports increases at the same time, then, in the long run ________, everything else held constant. A) the Japanese yen will appreciate relative to the U.S. dollar B) the Japanese yen will depreciate relative to the U.S. dollar C) the Japanese yen will either appreciate, depreciate or remain constant against the U.S. dollar D) there will be no effect on the Japanese yen relative to the U.S. dollar

the Japanese yen will depreciate relative to the U.S. dollar

If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico, then, in the long run, ________, everything else held constant. A) the Mexican peso will appreciate relative to the U.S. dollar B) the Mexican peso will depreciate relative to the U.S. dollar C) the Mexican peso will either appreciate, depreciate, or remain constant relative to the U.S. dollar D) there will be no effect on the Mexican peso relative to the U.S. dollar

the Mexican peso will appreciate relative to the U.S. dollar

According to the purchasing power parity theory, a rise in the United States price level of 5 percent, and a rise in the Mexican price level of 6 percent cause A) the dollar to appreciate 1 percent relative to the peso. B) the dollar to depreciate 1 percent relative to the peso. C) the dollar to depreciate 5 percent relative to the peso. D) the dollar to appreciate 5 percent relative to the peso.

the dollar to appreciate 1 percent relative to the peso.

The starting point for understanding how exchange rates are determined is a simple idea called ________, which states: if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it. A) Greshams law B) the law of one price C) purchasing power parity D) arbitrage

the law of one price

The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in A) the trade balances of the two countries. B) the current account balances of the two countries. C) fiscal policies of the two countries. D) the price levels of the two countries.

the price levels of the two countries.

The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A) theory of purchasing power parity B) law of one price C) theory of money neutrality D) quantity theory of money

theory of purchasing power parity