17.2

The theory of purchasing power parity cannot fully explain exchange rate movements because

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.

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

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.

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

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

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.

the law of one price

The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.

theory of purchasing power parity

According to PPP, the real exchange rate between two countries will always equal

1.0

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

25 pesos per real

The theory of PPP suggests that if one country's price level falls relative to another's, its currency should

appreciate

The theory of PPP suggests that if one country's price level falls relative to another's, its currency should

appreciate in the long run

Everything else held constant, increased demand for a country's exports causes its currency to ________ in the long run, while increased demand for imports causes its currency to ________.

appreciate; depreciate

Higher tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant.

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.

appreciate; lower

The theory of PPP suggests that if one country's price level rises relative to another's, its currency should

depreciate in the long run

Lower tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant.

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

depreciate; lower

Everything else held constant, if a factor decreases the demand for ________ goods relative to ________ goods, the domestic currency will depreciate.

domestic; foreign

Everything else held constant, if a factor increases the demand for ________ goods relative to ________ goods, the domestic currency will appreciate.

domestic; foreign

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

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

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.

greater than 1.0

The theory of PPP suggests that if one country's price level rises relative to another's, its currency should

depreciate

In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a fall in the country's relative price level causes its currency to ________.

depreciate; appreciate

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?

the brazilian real will depreciate against 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

the dollar to appreciate 1 percent relative to the peso

The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in

the price levels of the two countries