ECO ch 13 part 1

If a cup of coffee costs 2 euros in Paris and $6 in New York and purchasing-power parity holds, what is the exchange rate?

1/3 euro per dollar

A can of soda costs $0.75 in the United States and 12 pesos in Mexico. Assume purchasing-power parity holds. The peso-dollar exchange rate is ____ pesos per dollar. Suppose a monetary expansion caused all prices in Mexico to double so that soda rose to 24 pesos. The peso-dollar exchange rate is now _____ pesos per dollar

16 32

Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam. In 2000 a can of Spam cost 2 dollars in Ectenia and 6 pesos in Wiknam. The exchange rate between Ectenian dollars and Wiknamian pesos was pesos per dollar. Over the next 20 years, inflation is 3.5 percent per year in Ectenia and 7 percent per year in Wiknam. What will happen over this period to the price of Spam and the exchange rate? Over this period, the price of Spam in Ectenia will , and the price of Spam in Wiknam will . (Hint: Recall the rule of 70 from Chapter 27.) The exchange rate between the two counties will . will likely have a higher nominal interest rate. A friend of yours suggests a get-rich-quick scheme: borrow from the nation with the lower nominal interest rate, invest in the nation with the higher nominal interest rate, and profit from the interest-rate differential. Which of the following statements explains the flaw in your friend's logic?

3 double quadruple double wiknam Nominal exchange rates adjust for the effects of inflation.

A case study in the chapter analyzed purchasing-power parity for several countries using the price of Big Macs. Here are data for a few more countries: For each country, select the predicted exchange rate of the local currency per U.S. dollar. (Hint: Recall that the U.S. price of a Big Mac was $4.37.) chile hungary czech republic brazil canada According to purchasing-power parity, the predicted exchange rate between the Hungarian forint and the Canadian dollar is forints per Canadian dollar. However, the actual exchange rate is forints per Canadian dollar.

469 190 16.0 2.57 1.24 153 217

Assume that American rice sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the nominal exchange rate is 80 yen per dollar. It turns out that you can make a profit from this situation by buying rice where it is cheap and selling it where it is expensive. The cost of American rice in yen is yen per bushel. This means you should buy rice in and sell it in . This would yield a profit of per bushel. If other people exploit the same opportunity, the American rice would rise, the price in America. Suppose that rice is the only commodity in the world. What would happen to the real exchange rate of the dollar between the United States and Japan?

8000 the united states japan 8000 yen demand for increasing It would become one in long-run equilibrium.

If the value of a nation's imports exceeds the value of its exports, which of the following is NOT true?

The nation is experiencing a net outflow of capital.

If a nation's currency doubles in value on foreign exchange markets, the currency is said to ________, reflecting a change in the ________ exchange rate

appreciate, nominal

The theory of purchasing-power parity says that higher inflation in a nation causes the nation's currency to ________, leaving the ________ exchange rate unchanged

depreciate, real

Opening a retail store in a foreign country Buying corporate stock in a retail chain in a foreign country _____ is more likely to engage in foreign direct investment, and _____ is more likely to engage in foreign portfolio investment

direct portfolio a corporation an individual investor

An American buys a Sony TV. An American buys a share of Sony stock. The Sony pension fund buys a bond from the U.S. Treasury. A worker at a Sony plant in Japan buys some Georgia peaches from an American farmer.

export decrease outflow increase outflow decrease export increase

Comparing the U.S. economy today to that of 1950, one finds that today, as a percentage of GDP

exports and imports are both higher.

Dutch pension funds holding U.S. government bonds U.S. manufacturing industries Australian tourists planning a trip to the United States An American firm trying to purchase property overseas

happy unhappy unhappy happy

The U.S. nominal exchange rate is unchanged, but prices rise faster in the United States than abroad. The U.S. nominal exchange rate is unchanged, but prices rise faster abroad than in the United States. The U.S. nominal exchange rate declines, and prices are unchanged in the United States and abroad. The U.S. nominal exchange rate declines, and prices rise faster abroad than in the United States.

increase decrease decrease decrease

An American cellular phone company establishes an office in the Czech Republic. Harrods of London sells stock to the General Electric pension fund. Honda expands its factory in Marysville, Ohio. A Fidelity mutual fund sells its Volkswagen stock to a French investor. (Note: Assume the French investor pays in U.S. dollars.)

increase direct increase portfolio decrease direct decrease portfolio

In an open economy, national saving equals domestic investment

plus the net outflow of capital abroad.

An American art professor spends the summer touring museums in Europe. Students in Paris flock to see the latest movie from Hollywood. Your uncle buys a new Volvo. The student bookstore at Oxford University in England sells a copy of this textbook. A Canadian citizen shops at a store in northern Vermont to avoid Canadian sales taxes.

unchanged, increase, decrease iui uid iui iui