Chapter 11-IE
The primary difference between the simple quantity theory of money and one in which interest rates matter is that with the more general model: a.there are jumps in exchange rates. b.there are no effects of inflation. c.monetary policy autonomy is maintained. d.exchange rates are held constant.
A
Under the monetary approach to exchange rates, if the exchange rate has appreciated, this suggests that the foreign country's: a.money supply has fallen. b.income has risen. c.income has fallen. d.money supply has risen.
A
Under the monetary approach to exchange rates, if there is a rise in a country's home money supply and, ceteris paribus, then the exchange rate should: a.depreciate. b.hold steady. c.appreciate. d.appreciate and then remain steady.
A
Under the monetary approach to exchange rates, if there is a rise in a foreign market's income and, ceteris paribus, then the exchange rate should: a.depreciate. b.hold steady. c.appreciate. d.appreciate and then remain steady.
A
Using the relationship between expected exchange rates and inflation differentials in combination with uncovered interest parity, we find: a.changes in inflation rates are directly related to changes in nominal interest rates. b.changes in inflation rates are inversely related to changes in nominal interest rates. c.changes in inflation rates are unrelated to changes in nominal interest rates. d.changes in inflation rates are directly related to changes in real interest rates.
A
What is the situation when a home currency purchases more goods and services at home than abroad when converted to a foreign currency? a.The domestic currency is undervalued. b.The domestic currency is overvalued. c.The domestic currency is unstable. d.The domestic currency is depreciating.
A
When the Chinese yuan is appreciating against the U.S. dollar, if relative PPP holds, then this suggests that the U.S. inflation rate: a.exceeds the Chinese inflation rate. b.equals the Chinese inflation rate. c.exceeds the Chinese interest rate. d.equals the Chinese interest rate.
A
When the law of one price holds for all goods and services, the real exchange rate is always equal to: a.one. b.the nominal exchange rate. c.relative prices across countries. d.1/nominal exchange rate.
A
Which of the following statements about the relationship between money, prices, and exchange rates in the long run is NOT CORRECT? a.Since money is neutral in the long run, real income growth has no effect on inflation or the nominal exchange rate for a nation. b.The rate of growth of prices (inflation rate) = the difference between money growth and real income growth. c.The rate of depreciation of the nominal exchange rate between one nation and another is directly related to the difference in the inflation rates in the nations. d.When a nation's real income grows, its inflation rate decreases.
A
While the law of one price relates prices on individual goods to the exchange rate, the theory of PPP relates: a.the relative price level of a basket of goods to the exchange rate. b.prices of individual goods to consumer demand. c.exchange rates to interest rates. d.goods markets to the market for services.
A
With an annual inflation of 3.5%, prices will double in ___ years, and if inflation increases to 10%, prices will double in ___ year(s). a.20; 7 b.17; 20 c.35; 1 d.2; 4
A
The law of one price requires: a.trade frictions. b.perfect competition. c.trade frictions and perfect competition. d.neither trade frictions nor perfect competition.
B
The nominal exchange rate between two currencies tells us: a.changes in the exchange rate over time. b.how many units of one currency can be purchased with one unit of the home currency. c.how much in terms of goods and services the home currency will buy in the foreign nation compared to the home nation. d.how much depreciation or appreciation has occurred in the home exchange rate.
B
The real interest rate is equal to: a.the nominal interest rate plus inflation. b.the nominal interest rate minus inflation. c.inflation minus the nominal interest rate. d.inflation multiplied by the nominal interest rate.
B
The relative purchasing power of a currency is: a.the exchange rate expressed in ounces of gold. b.the value of one currency in terms of the goods and services a unit will purchase compared to an equivalent amount of another currency. c.the official value of one nation's currency compared to the official value of another currency. d.the value of the currency during an economic expansion compared to its value during a recession
B
Under the monetary approach to exchange rates, if the exchange rate has appreciated, this suggests that: a.the home country's money supply has risen. b.the foreign country's money supply has risen. c.the home country's income has fallen. d.the foreign country's money supply has fallen
B
We can use the existence of arbitrage and the idea of uncovered interest parity (UIP) to assume that any interest rate differential between two currencies must be offset by: a.the change in the quantity of money. b.an offsetting differential in the expected exchange rates. c.offsetting changes in real income. d.resulting increases in borrowing denominated in the low-interest currency.
B
What is the situation when a home currency purchases fewer goods and services at home than abroad when converted to a foreign currency? a.The domestic currency is undervalued. b.The domestic currency is overvalued. c.The domestic currency is unstable. d.The domestic currency is appreciating.
B
When real interest parity holds: a.nominal interest rates are equal all over the world. b.real interest rates are equal across nations with different currencies. c.real interest rates on dollar assets are equal but not for all currencies. d.real interest rates will follow a pattern of convergence, but equilibrium will never occur.
B
When the Japanese inflation rate is less than the Australian inflation rate, Japanese prices are: a.rising faster than Australian prices. b.rising more slowly than Australian prices. c.rising at the same rate as Australian prices. d.not rising.
B
When the price of a good in the United States is $2, in Spain is €2, and the nominal exchange rate is E$/€= 1.5, what is the relative price of the good in Spain versus the United States? a.1 b.1.5 c.2/3 d.1/2
B
Whenever the absolute purchasing power of two currencies is the same, the real exchange rate between them is equal to: a.zero. b.one. c.125. d.1/PPP.
B
Which of the following nations has NOT suffered bouts of extreme hyperinflation? a.Germany b.Japan c.Zimbabwe d.Argentina
B
Which of the following situations would exhibit relative PPP? a.Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro-yen rate depreciates by 7% b.Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro-yen rate depreciates by 2% c.Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro-yen rate appreciates by 2% d.Europe's yearly inflation rate rises from 5% to 7%,ceteris paribus, and the euro-yen rate appreciates by 5%
B
Zimbabwe's ability to limit hyperinflation was hindered by: a.price controls. b.black markets. c.foreign exchange markets. d.rampaging elephants.
B
A lesson from hyperinflationary periods is that: a.real GOP seems not to be affected. b.the price level rises but soon a period of decreasing prices ensues. c.the demand for real money balances decreases during periods of extreme instability. d.the demand for real money balances is always constant.
C
Absolute purchasing power parity implies that: a.the price of a basket of goods is cheaper in one country than in another. b.the price of a basket of goods is more expensive in one country than in another. c.the price of a basket of goods is the same in the two countries. d.the exchange rate is artificially held constant.
C
According to the long-run monetary model of the price level: a.the demand for money is always proportional to the supply of money. b.when the demand for money decreases, prices respond very slowly. c.as long as prices are flexible, a change in the supply of money or the demand for money will result in a change in the price level to restore equilibrium. d.equilibrium conditions require a change in real GDP to lower inflation.
C
An increase in money supply by 15% in the United States would cause the exchange rate to: a.appreciate by 15% b.appreciate by 7 .5% c.depreciate by 15%. d.It would stay the same.
C
Combining the concepts of uncovered interest parity (UIP) and relative purchasing power parity (PPP), the ___ shows that differences in inflation rates between two nations will be equal to the difference in their nominal rates of interest. a.Lerner theorem b.Samuelson doctrine c.Fisher effect d.Friedman dilemma
C
Even though we assume the nominal interest rate on money is zero, there is a benefit to holding money. This is generally thought to be: a.the prestige of having a large income. b.the interest earned from investing it. c.the ease of conducting transactions by having a perfectly liquid payment system. d.the depreciation of the value of the dollar as prices increase.
C
The long-run monetary model of exchange rates provides that real income changes result in a(n) ___ change in the price level and a(n) ___ change in the strength of the currency. a.corresponding; opposite b.corresponding; corresponding c.opposite; corresponding d.opposite; opposite
C
The long-run relationship between money growth, income growth, and the change in the price level in a nation is: a.money growth = real income growth -change in the price level. b.real income growth- money growth =change in the price level. c.change in the price level = money growth - real income growth. d.real income growth/change in the price level = money growth.
C
The real exchange rate between two currencies tells us: a.changes in the exchange rate over time. b.how many units of one currency can be purchased with one unit of the home currency. c.how much in terms of goods and services the home currency will buy in the foreign nation compared to the home nation. d.how much depreciation or appreciation has occurred in the home exchange rate.
C
Under the monetary approach to exchange rates, if real money demand is greater at home but relative money supply is greater in foreign markets, then the exchange rate should be: a.greater than one. b.equal to one. c.less than one. d.There is not enough information provided to answer the question.
C
What is the Big Mac index? a.It is a price index for the top 20 stocks traded internationally. b.It reflects inflation trends through trade in laptop computers and international price competition. c.It is an index of the price of McDonald's hamburgers quoted in one currency designed to measure whether absolute PPP holds for Big Macs. d.It is a measure of unemployment in the service industries of poor nations where Western retailers such as McDonalds have infiltrated.
C
When the inflation rate in any nation changes ceteris paribus: a.only absolute PPP is disturbed. b.only relative PPP is disturbed. c.both absolute and relative PPP are disturbed. d.the inflation rates in other nations will have to change as well.
C
When the relative price of a good in Germany versus the United States is 3, if the nominal exchange rate is E/€=1.5 and the U.S. price is $10, what is the German price? a.€4 b.€15 c.€20 d.€45
C
When there is a hyperinflationary period, large changes in exchange rates and price levels happen ___ during periods of more stable prices and exchange rates. a.at about the same rate as b.more slowly than c.much more rapidly than d.slightly more rapidly than
C
With relative PPP, a rise in a nation's inflation rate is always offset by an increase in the rate of ___ its currency. a.appreciation b.revaluation c.depreciation d.devaluation
C
Assume nominal GOP = PY, and k= the proportion of nominal income that the nation holds (demands) as money to cover its transactions. Because nominal money supply = nominal money demand, then: a.increases in nominal income cause an increase in the money supply. b.decreases in nominal income cause an increase in the money supply. c.price increases cause an increase in the money supply. d.an increase in the money supply causes a proportional increase in nominal income.
D
Currency is a part of which measure of money? a.M0 b.M1 b.M2 d.M0, M1, and M2
D
Currency reform refers to: a.setting new rules, so currency is more efficient to use. b.replacing paper money and coins with electronic deposits. c.more oversight for banks and other institutions handling large quantities of currency. d.replacing currency whose value has fallen with new units of higher value.
D
Data indicate that the Fisher effect: a.holds in the short run. b.holds in the long run. c.holds in the long run and the short run. d.doesn't hold in the short run but holds in the long run
D
If a nation uses one or a combination of nominal anchors, a trade-off is that it loses: a.international respect. b.control over its inflation rate. c.the ability to control its exchange rate. d.the ability to control its own monetary policy.
D
If an automobile costs $32,000 in New York and $1 = 0.8 euros, then under the condition of the law of one price, the cost of the automobile in Rome should be: a.32,000 euros. b.40,000 euros. c.35,000 euros. d.25,600 euros
D
If fewer home goods are required to buy the same amount of foreign goods, then we say that foreign currency has experienced a: a.nominal appreciation. b.nominal depreciation. c.real appreciation. d.real depreciation.
D
If more home goods are required to buy the same amount of foreign goods, then we say that foreign currency has experienced a: a.nominal appreciation. b.nominal depreciation. c.real appreciation. d. real depreciation
D
If nominal income in a nation decreases, economists would predict the: a.supply of money will rise. b.demand for money will rise. c.supply of money will decrease. d.demand for money will decrease.
D
If the prices of goods in Europe increase, while the nominal exchange rate between the euro and the U.S. dollar remains the same, we say that the U.S. dollar has experienced a: a.nominal appreciation. b.nominal depreciation. c.real appreciation. d.real depreciation.
D
In equilibrium, all traded goods sell at the same price internationally. If the same goods are expressed in their home prices, then the ratio of the prices is equal to: a.one. b.zero. c.the rate of interest. d.the nominal exchange rate between the two currencies
D
In the international goods market, prices of goods in different countries expressed in a common currency must be equalized. This concept is called ___ a.exchange rate theory b.the law of one price c.appreciation d.purchasing power parity (PPP)
D
In the long run, the demand for real balances rises whenever: a.nominal interest rates fall. b.real GDP rises. c.the exchange rate rises. d.nominal interest rates fall and real GDP rises.
D
In which decade did the use of nominal anchors and explicit targets begin to be common in many nations? a.the 1960s b.the 1970s c.the 1980s d.the 1990s
D
Money can be defined as a: a.unit of account. b.store of value. c.medium of exchange. d.unit of account, a store of value, and a medium of exchange.
D
Of the following targets or nominal anchors, which is NOT useful for controlling domestic inflation? a.nominal exchange rates b.money supply measures c.nominal interest rates d.real money demand measures
D
Other nominal anchors or targets, such as rules for monetary growth, sometimes fail to optimize economic conditions in the short run because: a.monetary growth rates are unrelated to inflation. b.it is complicated to figure out how to hold down money creation. c.corrupt politicians pay no attention and give out extra currency to political supporters. d.low monetary growth may curb inflation but may also constrain growth of real income.
D
Purchasing power parity exists when: I. there are no arbitrage opportunities. II. prices are the same when expressed in a common currency. III. the goods in question are identical. a.I b.I and II c.II and III d.I, II, and III
D
The Fisher effect creates a link between ___and ___ a.expected profits; unemployment rates b.exchange rates; expected profits c.inflation rates; unemployment rates d.inflation rates; interest rates
D
The M1 measure of money includes demand deposits but excludes: a.currency in circulation. b.Federal Reserve notes. c.travelers' checks. d.bank reserves.
D
The law of one price works under some assumptions. Which of the following is NOT an assumption for the law of one price? a.There is free competition. b.There is no transportation cost. c.There are no tariffs. d.The skill level of workers is identical in both countries.
D
Under the monetary approach to exchange rates, if both real money demand and money supply are greater at home than in foreign markets, then the exchange rate should be: a.greater than one. b.equal to one. c.less than one. d. There is not enough information provided to answer the question.
D
Under what circumstances would there be a "no-arbitrage"situation in goods markets between two nations? a.when one of the currencies is undervalued b.when one of the currencies is overvalued c.when both of the currencies are overvalued d.when the relative price of the currencies is equal to one
D
Using monetary theory, one can show that the price level (index) in an economy is equal to: a.the inflation rate minus the interest rate. b.the average change in the level of trade over the past 5 quarters. c.the velocity of money. d.the ratio of the nominal supply of money to the demand for real balances.
D
When we consider growth rates of the variables, the growth of the price level (inflation) is equal to: a.growth in nominal GDP. b.growth in real GDP. c.growth of the monetary aggregate. d.growth of the nominal supply of money minus the growth rate of real income.
D
When we incorporate a relationship between expected inflation and liquidity preference (demand for real balances) into our long-run model, it can help to explain: a.erratic shifts in exchange rates. b.how changes in expectations can move the markets quickly. c.why sometimes PPP seems not to hold in the short run. d.erratic shifts in exchange rates, how changes in expectations can move the markets quickly, and why sometimes PPP seems not to hold in the short run.
D
When we incorporate a relationship between expected inflation and liquidity preference (demand for real balances) into our long-run model, which of the following occurs? a.The exchange rate is unaffected. b.The exchange rate rises in direct proportion to the increase in the quantity of money and the price level. c.The exchange rate rises in direct proportion to the increase in the quantity of money, but inflation actually falls because of an increase in the demand for money. d.The increase in interest rates and inflation after a change in the monetary growth rate affect exchange rates but also cause secondary effects on exchange rates and price levels because of a decrease in the demand for real balances.
D
Whenever the supply of money is growing at a constant rate, if there is price flexibility and real income is constant, then the price level: a.is growing at a faster rate. b.is decreasing. c.is constant. d.grows at the same rate.
D
Whenever two nations experience inflation, and the nominal exchange rates move by the same percentage to offset, we say there is: a.absolute PPP. b.indeterminate PPP. c.inverted PPP. d.relative PPP.
D
Which of the following statements is NOT a reason for explaining the deviations from PPP? a.Some goods are not tradeable. b.Markets are imperfect and there could be legal obstacles. c.Prices can be sticky in different countries. d.There are no transportation costs.
D
The entity in any nation that accurately controls directly or indirectly the supply of money is referred to as the: a.executive branch. b.central bank. c.treasury. d.legislative branch.
B
In equilibrium, all traded goods sell at the same price internationally because of: a.government direction. b.arbitrage. c.markets in which buyers and sellers do not interact. d.the fact that the underlying value is the same everywhere.
B
A nation with greater income, ceteris paribus, will have: a.lower prices. b.higher prices. c.lower money supply. d.higher prices and higher money supply.
A
According to Sterne's article, have nominal anchors used by various nations been effective in the real world? a.Yes, for the most part. Central banks have become more independent, and inflation rates have fallen on average. b.There has been very little progress toward reducing inflation using these artificial criteria. c.Not at all. This highlights the inevitable conclusion that much more needs to be learned about the effectiveness of economic policy. d.Energy and natural resource prices have risen and, unfortunately, offset any efforts to reduce inflation worldwide.
A
During the economic crisis of 2008-2010, efforts to keep inflation pinned at 2%: a.made things more difficult, since nominal interest rates cannot fall below zero. b.made things more difficult, since nominal interest rates cannot rise above zero. c.made things easier, since nominal interest rates cannot fall below zero. d.made things easier, since nominal interest rates cannot rise above zero.
A
Economists consider central bank independence to be a key factor in keeping inflation under control. Why? a.Elected officials (legislators and the executive branch) tend to pursue policies popular with the public that may increase inflationary tendencies, whereas the Central Bank does not have such pressure. b.The central bank should be able to use stimulative monetary policy whenever it chooses without worrying about inflationary tendencies. c.Inflation is generated by legislative deficit spending-- the central bank can offset that spending and the inflation it causes. d.The central bank's directors and executives are always political appointees, and it is clear that low inflation is popular with the public.
A
Economists have developed models to predict changes in exchange rates based on inflation trends. To guide forecasts of exchange rates, economists calculate the average: a.speed of convergence. b.PPP. c.interest parity. d.price deviation.
A
Factors that could weaken the relationship between money growth rates and changes in price levels and rates of exchange include: a.national differences in variables affecting growth of real income or the demand for money. b.differences in transportation costs, making trade nearly impossible. c.differences in the willingness of government to address economic problems with fiscal versus monetary policy. d.national differences in variables, differences in transportation costs, and differences in the willingness of government to address economic problems with fiscal policy.
A
For a given level of real income, the demand for real money balances is inversely related to: a.the nominal rate of interest. b.the real rate of interest. c.nominal GDP. d.the price level.
A
How could conditions of imperfect competition explain deviations from PPP? a.Imperfect competition means that prices are higher than costs and may not converge. b.Governments often restrict trade in those goods. c.Goods sold under conditions of imperfect competition are often inferior. d.Arbitrageurs do not recognize profit opportunities in these markets.
A
The demand for real money balances is: a.proportional to nominal income. b.proportional to real income. c.disproportional to real GDP. d.determined by the real rate of interest.
B
If Europe has a real GDP growth rate of 5%, and the United States has a real GDP growth rate of 6%, while money growth in Europe is 7%, and money growth in the United States is 5%, what would the monetary exchange rate model predict for exchange rates in the long run? a.The U.S. dollar would appreciate by 3% against the euro. b.The U.S. dollar would depreciate by 3% against the euro. c.The U.S. dollar and the euro would not change against each other because the growth rates are offsetting. d.The U.S. dollar would appreciate by 1% against the euro.
A
If U.S. real income increases, then the prediction of the monetary model of exchange rates would be that the U.S. dollar would: a.become stronger. b.appreciate in the short run, but not in the long run. c.depreciate. d.depreciate in the short run, but not in the long run.
A
If a nation experiences 10% inflation and its trading partner does not, and if PPP holds, what happens to its nominal exchange rate? a.It depreciates by 10% b.It appreciates by 10% c.It does not change. d.It becomes negative.
A
If a real exchange rate depreciation occurs, which of the following results? a.It takes more home goods to purchase the same quantity of foreign goods. b.It takes fewer home goods to purchase the same quantity of foreign goods. c. The nominal exchange rate has risen as well. d.The nominal exchange rate has fallen.
A
If conditions hold for the long-run monetary exchange rate model, it can provide opportunities for nations to achieve less price-level volatility by: a.constraining policy choices to respect a nominal anchor, such as a target for a nominal exchange rate. b.allowing international organizations such as the IMF to control economic variables. c.conducting a currency reform effort. d.embarking on a campaign for dollarization.
A
If inflation in the United States is 4% per year and in the United Kingdom it is 8% per year, and interest rate in the United Kingdom is 6%, then the Fisher effect predicts that the interest rate in the United States is: a. 2% b.4% c.6% d.8%
A
If prices are flexible and PPP holds, it is possible to forecast the exchange rate in the long run whenever ___ change in a nation ceteris paribus. a.real income and nominal growth rate of the money supply b.levels of trade and financial flows c.capital controls d.short-run nominal interest rates
A
If the U.S. real GDP growth rate is greater than that of Canada, then the dollar will depreciate: a.only if the U.S. inflation rate exceeds Canada's. b.regardless of the relative inflation rates. c.only if the U.S. inflation rate is less than Canada's. d.only if the U.S. inflation rate is less than that of Canada's other trade partners.
A
If the exchange rate between the dollar and yen has risen, this would be consistent with: a.a rise in the U.S. interest rate. b.a rise in U.S. inflation. c.a rise in the Japanese interest rate. d.a fall in Japanese inflation
A
If we adjust the supply of money for changes in the price level, we get real balances. The demand for real balance is proportional to __ a.real GDP b.the unemployment rate c.the population d.the exchange rate
A
In general, monetary economic theory states that the demand for money is proportional to: a.nominal income. b.the unemployment rate. c.the population. d.the exchange rate.
A
Incorporating the liquidity preference function into the simple model changes its outcome somewhat. What is the impact? a.Changes in the growth of the money supply cause inflation and nominal interest rates to change, which affects demand for real balances and causes further discontinuous impacts on prices. b.Changes in the inflation rate no longer affect nominal interest rates: the Fisher effect is no longer operative. c.Changes in nominal interest rates have an immediate effect on the real exchange rate, bypassing the adjustment process. d.Changes in the money growth rate increase real balances, since prices are no longer flexible.
A
More realistically, the liquidity function is not ___ but a(n)___ function of the demand for real balances based on changes in the ___. a.constant; decreasing; nominal rate of interest b.increasing; constant; real rate of interest c.decreasing; increasing; level of real income d.constant; increasing; real rate of interest
A
Price stickiness refers to: a.slow movements in prices. b.the sticker price for big-ticket items. c.the price of oil. d.the price of a Big Mac across countries.
A
Short-run PPP may not hold for a variety of reasons. Which of the following is NOT cited in your textbook as one of those reasons? a.weather and other environmental conditions that affect trade b.transactions costs c.non-traded goods d.imperfect competition and price stickiness
A
The MOST restrictive measurement of money is: a.M0. b.M1. c.M2. d.M3.
A
The cost of holding money is primarily the: a.the interest given up by not investing it. b.the weight of it in your pocket. c.the inverse relationship between liquidity and prices. d.the relationship between liquidity and prices.
A
The criterion for including an asset in any measure of money is whether it is: a.used for transactions and highly liquid. b.used as a store of value. c.used as collateral for loans. d.stable and durable.
A
The data on exchange rate and price-level fluctuations in the United States and the United Kingdom from 197S to 2009 suggest that: a.absolute and relative PPP hold in the long run. b.absolute and relative PPP hold in the short run. c.absolute and relative PPP do not hold in the long run. d.It is impossible to determine the relationship between inflation and exchange rates between the two nations.
A
The monetary approach to exchange rates describes: a.long-run relationships between money, prices, and exchange rates. b.a short-run relationship between exchange rates and interest rates. c.a short-run measure of fluctuations in exchange rates. d.a theory based on the idea that exchange rates are constant in the long run.
A
The price level in the country is determined by ___ and ____ a.nominal money supply; demand for real money b.demand for real money; average tax rate c.demand for real money; growth of GDP d.supply of real money; demand for real money
A
The half-life of a PPP divergence indicates how long it takes: a.to disappear. b.for half of it to disappear. c.to appear. d.to reach half its greatest value.
B
Absolute PPP and relative PPP differ in what way? a.Absolute PPP always holds but relative PPP may not. b.Relative PPP may hold even when absolute PPP does not. c.Relative and absolute PPP always hold. d.Absolute PPP relates to changes in inflation and exchange rates, whereas relative PPP relates to their levels.
B
According to the long-run monetary model, we can rearrange terms in the money demand/supply in our long-run relationship to show that when the nominal supply of money is increased ceteris paribus: a.the demand for money is decreased. b.the price level is increased. c.real income is increased. d.the price level is decreased.
B
According to the quantity theory of money, the demand for money is equal to: a.nominal income divided by real income. b.a constant proportion of nominal income. c.the demand for money held as an asset. d.real income divided by velocity.
B
An example of a non-traded product would be: a.corn. b.haircuts. c.shoes. d.aircraft.
B
As economies adjust to inflation, there is an adjustment of exchange rates to reflect the changed price level. This adjustment is called: a.real exchange rates. b.convergence. c.adjustment costs. d.revaluation.
B
Better communication technology has made it easier to conduct ___ in international markets, thus __ exchange rate adjustments to economic conditions and inflation. a.open market operations; eliminating b.arbitrage; speeding up c.sales and purchases of currency; slowing down d.portfolio investment; fundamentally changing
B
Combining the relative PPP with the monetary model of exchange rates, we find: the rate of depreciation of a currency (relative to another nation) in the long run is equal to: a.the sum of nominal money supply growth rates in each nation. b.the difference between the nominal money supply growth rates in each nation minus the difference between growth rates of real GDP. c.the average of growth rates of real GDP in each nation. d.the sum of population growth plus technology growth.
B
Economists consider high and volatile inflation to be: a.a positive factor in economic growth, since higher prices = higher profits for firms. b.a negative factor in economic growth, as firms and workers deal with uncertainty about profitability, investments, and wages. c.neutral regarding its effect on economic growth. d.beneficial to the government, which often spends before it taxes.
B
Empirically, during the period 1975-2005, the relationship among the growth rate of money, changes in the price level, and changes in the exchange rate was: a.perfect. b.strong but not perfect. c.weak, but showing some correlation. d.completely uncorrelated, with a correlation coefficient of zero.
B
Forecasting exchange rates involves: a.knowing the history of exchange rate behavior. b.assessing data on money supply growth and potential real income growth. c.understanding the relationship between monetary policy and unemployment. d.assessing data on money supply and unemployment.
B
Globalization trends may __ the tendency for prices to converge. a.retard b.speed up c.eliminate d.render irrelevant
B
Hyperinflation is a condition described by: a.a 5% increase in price each year. b.a sustained increase in price of 50% or more per month. c.any kind of price increase. d.the rise in prices during a recession.
B
If PPP and uncovered interest parity hold, then the long-run real rate of interest in each nation: a.will never change. b.will equalize. c.will increase. d.will decrease.
B
If a pound of coffee beans costs 85 pesos in Mexico City and 10 pesos = 35 rupees, then the same pound of coffee should cost in New Delhi, under the condition of the law of one price. a.300 rupees b.297.50 rupees c.29,750 rupees d.3,500 rupees
B
If a real exchange rate appreciation occurs, which of the following results? a.It takes more home goods to purchase the same quantity of foreign goods. b.It takes fewer home goods to purchase the same quantity of foreign goods. c.The nominal exchange rate has risen as well. d.The nominal exchange rate has fallen.
B
If prices are held constant and income increases by 12%, the demand for money will by %. a.decrease; 21 b.increase; 12 c.decrease; 12 d.Not enough information is provided to answer the question
B
If the Fisher effect holds, keeping the __ fixed would force nations to keep inflation stable. a.world real interest rate b.nominal interest rate c.exchange rate d.real interest rate
B
Evidence on hyperinflationary periods indicates: a.a complete breakdown of the monetary exchange rate theory in the short run. b.that it takes longer for monetary and price level swings to show up in the exchange rate data. c.that the relationship between high inflation and exchange depreciation is much tighter even in the short run. d.that the government's inability to control monetary growth led to the currency becoming completely worthless domestically but, ironically, more valuable outside the nation.
C
Evidence on the existence of relative PPP shows that: a.the evidence for relative PPP is scanty and the theory is largely discredited. b.the evidence for relative PPP is hit or miss, and so one should exercise caution in using relative PPP to predict changes in a nation's exchange rates. c.relative PPP is an approximate guide to predicting the relationship between changes in inflation and exchange rates over long periods such as decades. d.both absolute and relative PPP hold nearly perfectly in the short and long run, and are used with great accuracy to make predictions.
C
Evidence suggests that convergence to PPP occurs: a.instantly, as arbitrageurs take advantage of profit opportunities. b.rapidly, as arbitrageurs learn of profit opportunities. c.slowly, as arbitrageurs operate, and production, prices,and exchange rates adjust. d.Convergence to PPP has never been observed.
C
For real interest parity to hold, we require: a.PPP. b.UIP. c.both PPP and UIP. d.neither PPP nor UIP.
C
If a basket of goods in the United States costs $1,000, and the same basket of goods in Japan costs ¥125,000, then for PPP to exist, $1 should trade for Japanese yen. a.4 b.50 c.125 d.125,000
C
If a nation experiences 10% inflation and its trading partner does not, and if PPP holds, what happens to its real exchange rate? a.It depreciates by 10%. b.It appreciates by 10%. c.It does not change. d.It becomes negative.
C
If a pair of Nike shoes cost $45 in New York and $65 in Berlin, then we would expect the price to: a.drop in New York and increase in Berlin. b.remain the same in both places. c.increase in New York and decrease in Berlin. d.increase in Berlin and stay constant in New York.
C
If money growth is bigger than income growth, then we can: a.expect unemployment to increase. b.expect inflation to decrease. c.expect inflation to increase. d.expect inflation and unemployment to decrease.
C
If there is an increase in the money supply in the United States, using the monetary model of the exchange rate,one would predict that the U.S. dollar would: a.become stronger. b.appreciate in the short run, but not in the long run. c.depreciate. d.depreciate in the short run, but not in the long run.
C
If we assume that prices adjust in the long run so that the nominal demand for money equals the nominal supply of money, then: a.we can determine changes in exchange rates if absolute PPP holds. b.absolute PPP will hold. c.relative PPP will hold. d.exchange rates will not change.
C
If we can accurately predict monetary growth, and if the assumption that demand for real money balances is constant, then we may predict: a.changes in exchange rates only. b.changes in price levels only. c.both changes in price levels and changes in exchange rates. d.neither changes in price levels nor changes in exchange rates.
C
In equilibrium, with purchasing power parity, the nominal exchange rate will be equal to: a.the two nations' real exchange rate. b.the ratio of the two nations' GDPs. c.the ratio of the two nations' price levels. d.1.
C
In the general model of the demand for money, the demand for real balances is based on which of the following two variables? a.the supply of money and the price level b.the demand for assets and the supply of assets c.the level of real income and the nominal rate of interest d.expectations of inflation and money velocity
C
It is not surprising to learn that, during hyperinflations, the demand for real money balances: a.accelerates because people need to hold more money to cover higher prices. b.remains constant because we are talking about real, not nominal, balances. c.decreases, as the value of the nominal money decreases. d.is unpredictable.
C
Money's function as a medium of exchange is important because: a.if there were no money, there would be no common unit of account. b.if there were no money, society's wealth would be zero. c.it eliminates the need for inefficient barter. d.if there were no money, exchanges would be impossible.
C
Nominal anchors restrain inflation and rising interest rates by: a.putting limits on trade. b.imposing capital controls. c.forcing restrictions on easy monetary policies. d.imposing price and wage controls.
C
Real interest parity indicates that, when PPP and UIP hold: a.nominal interest rates are equal across countries. b.inflation rates are equal across countries. c.real interest rates are equal across countries. d.nominal interest rates vary across countries.
C
The broad measure of money is referred to as: a.M0. b.M1. c.M2. d.M3.
C
The difference between the simple monetary model and the general monetary model of exchange rate determination in the long run is that: a.the simple model refers to only one nation, while the general model includes all nations. b.the simple model has only one equation, while the general model includes a number of simultaneous equations. c.the simple model assumes a constant demand function for real balances, while the general model assumes that the demand for real balances is a decreasing function of the nominal interest rate. d.the general model applies to increases and decreases in the relevant variables; the simple model does not allow relevant variables to decrease.
C
The half-life of PPP deviations is about: a.four months. b.four quarters. c.four years. d.four decades.
C
The idea that with frictionless trade all goods traded internationally will have the same equilibrium price no matter which currency they are priced in, is known as: a.covered interest parity. b.arbitrage. c.the law of one price. d.relativity
C
The long-run Fisher effect links rises in inflation with rises in nominal interest rates by the same proportion, resulting in the ___ demand for real money balances. a.no effect on b.an increase in c.a decrease in d.an increase in the supply of money offsetting the increase in
C