CH 17 Questions Econ
Why Does PPP not hold perfectly?
1. Goods and Services sold in difference locations must be identical 2. Some Goods and Service are not tradable (ex. haircuts) 3. Trade barriers inhibit the trade of goods across some international borders (tariffs and quotas) 4. Shipping costs keep prices from completely equalizing 5. Some prices take longer to adjust than others
Long run factors that affect exchange rates
1. relative price levels 2. trade barriers 3. preferences for domestic v foreign goods 4. productivity
Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________. A. quantity supplied; does not change B. supply; decreases C. supply; increases D. quantity supplied; increases
A. quantity supplied; does not change
If the British pound appreciates from $0.50 per pound to $0.75 per pound, the U.S. dollar depreciates from ________ per dollar to ________ per dollar. A. £2;£1.33 B. £2;£2.5 C. £2;£1.25 D. £2;£1.5
A. £2;£1.33
In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the A. spot exchange rate. B. forward exchange rate. C. money exchange rate. D. fixed exchange rate.
B. forward exchange rate.
According to the Purchasing Power Parity, if one country's price level rises relative to another's by a certain percentage, then the other country's currency A. maintains its value. B. lose its value. C. depreciates by the same percentage. D. appreciates by the same percentage.
D. appreciates by the same percentage.
The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called A. the theory of foreign capital mobility. B. money neutrality. C. the purchasing power parity condition. D. the interest parity condition.
D. the interest parity condition.
"A country is always worse off when its currency is weak (falls in value)." Is this statement true, false, or uncertain? Why?
False. A weaker currency makes domestically produced goods cheaper to foreign consumers, helping export industries. A weaker currency makes foreign produced goods more expensive to domestic consumers.
Suppose the president of the United States announces a new set of reforms that includes a new anti-inflation program. Assuming the announcement is believed by the public, what will happen to the exchange rate for the U.S. dollar?
The exchange rate will appreciate
If the Japanese price level rises by 5% relative to the price level in the United States, what does the theory of purchasing power parity predict will happen to the value of the Japanese yen in terms of dollars?
The value of the yen will depreciate
When domestic real interest rates rise, the domestic currency ________.
appreciates
________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.
decrease, decrease
increase in domestic price level does what?
decreases exchange rate
increase in import demand does what?
decreases exchange rate
When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets.
dollar, foreign
If the interest rate is 7 percent on euro−denominated assets and 5 percent on dollar−denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________−denominated assets in terms of ________ percent.
euro, euros is 7%
Everything else held constant, increased demand for a country's ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate.
exports, imports
increase in productivity does what?
increases exchange rate
increase in trade barriers does what?
increases exchange rate
increase in export demand does what?
increases exchange rate?
factors that affect exchange rate in the short run
real risk adjusted interest rate