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