ECO 339 Chapter 19

True/False The law of one price does not hold closely for most products that are traded internationally, including nearly all manufactured products

True

True/False The law of one price works well for heavily traded commodities, either at a point in time or for changes over time

True

True/False Usually, international arbitrage does not take place for non-traded products

True

Overshooting occurs when exchange rates:

adjust faster in the short run that they do in the long run

Everything else fundamental remaining unchanged, the monetary approach predicts that a 5 percent cut in the money supply by the Fed will result in:

an appreciation of the US dollar vis-a-vis other currencies

There is more empirical evidence in the literature to suggest that

the relative version of purchasing power parity holds in the long run

The asset market approach to exchange rate determination seeks to predict:

the short term pressures on exchange rates

A decrease in the foreign interest rate relative to the domestic interest rate _____ the exchange rate value of a foreign currency in the short run

lowers

The ______ approach to exchange rates emphasizes the importance of the supply and demand for money as key to understanding the determinants of exchange rates

monetary

The _________ exchange rate is the market rate between two currencies

nominal bilateral

The weighted average exchange rate value of a country's currency is called the ____ exchange rate

nominal effective

The law of _______ states that a product that is easily and freely traded in a perfectly competitive global market should cost the same everywhere once the prices at different places are expressed in the same currency

one price

The exchange rate value of a foreign currency is ________ in the short run by a rise in expected future spot exchange rate value

raised

The phenomenon of overshooting is based on the existence of:

sticky prices and the belief that PPP and the monetary approach hold in the long-run

According to the relative version of purchasing power parity, when the inflation differential between the foreign country and the home country is positive:

the domestic currency tends to appreciate

If investors expect a decrease in the value of the Thai baht vis-a-vis other currencies, their actions will cause:

the expected depreciation to occur much faster

Absolute PPP holds for a product bundle if

the law of one price holds for each of the goods in the bundle.

The quantity theory of the demand for money states that a country's money demand is proportional to:

the money value of gross domestic product

Given the combination of PPP with quantity theory equations, which of the following statements is true?

Everything else remaining unchanged, the price of the foreign currency (e) would be raised by an increase in the relative size of foreign production

What is not linked together by uncovered interest parity?

The current forward exchange rate

Which of the following is an immediate effect of an increase in money supply by the European Central Bank by 10 percent?

The expected exchnage rate value of the foreign currencies vis-a-vis the Euro will increase

Suppose that US prices rise 4 percent over the next year while prices in Mexico rise 6 percent. According to the purchasing power parity theory of exchange rates, which of the following should happen?

The peso will depreciate

__________ purchasing power parity states that a bundle of tradable products will have the same cost in different countries if the cost is stated in the same currency

Absolute

TRUE/ False The asset market approach seeks to explain exchange rates by focusing on demands and supplies of national moneys

False

True/False Economists believe that money demand determines the price level in the long run

False

True/False Exchange rates are much more volatile in the long-run than in the short-run

False

True/False Expectations are destabilizing if they are based on the belief that exchange rates eventually return to the values consistent with basic economic conditions

False

True/False If the domestic interest rate increases, while foreign interest rate and the expected spot exchange rate remain constant, the return comparison shifts in favor of investments in bonds denominated in the foreign currency

False

True/False Purchasing power parity theory is a better guide to short-run movements in exchange rates than to long-run movements in exchange rates

False

True/False The law of one price is based on the purchasing power parity theory

False

Economists believe that the _____ determines the price level in the long run.

Money supply

The ____ exchange rate incorporates both the market exchange rate and the product price levels for two countries

Real bilateral

________ purchasing power parity states that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time

Relative

True/False The concept of purchasing power parity illustrates the relationship between the national price levels and exchange rates in the long-run.

True

Suppose the average price of a big mac in the United States is $3.50 while in Japan the average price is 400 yen. If the market exchange rate is that 1 dollar is exchanged for 100 yen, the purchasing power parity model of exchange rate determination suggests that:

The yen is overvalued

True or False? If the domestic interest rate rises, there will be international financial re positioning toward domestic-currency assets, thereby causing the domestic currency to appreciate

True

True/False In the long run, a country with a relatively high inflation rate tends to have a depreciating currency

True

High income countries have a price level which is much higher than the low-income countries. What is most likely to explain this price differential?

With the development process of a nation, it's productivity in making traded goods rises much faster than that in making non-traded goods

Other things equal, an expected depreciation in the euro will lead to:

a decrease in the demand for euro dominated financial assets

If a strong persistent trend in the exchange rate appears to be inconsistent with any form of economic fundamentals, it is called:

a speculative bubble

based on PPP and the quantity theory of money, everything else remaining unchanged, if Japan's real income rises relative to real income in the U.S., there would be a(n):

appreciation of the yen

The ________ approach to exchange rate emphasizes the role of portfolio re positioning by international financial investors

asset market

The ________ effect suggests that speculations can sometimes be destabilizing as the actions of the international investors move the exchange rate away from the long-run equilibrium value consistent with fundamental economic influences

bandwagon

Exchange rate overshooting occurs:

because product prices are sticky in the short run

Everything else remaining unchanged, an increase in interest rates in the United States is most likely to result in

capital inflows into he united states

If the domestic interest rate decreases, with the foreign interest rate and the expected future spot rate remaining unchanged, the value of the domestic currency vis-a-vis the foreign currency is expected to

decrease

Exchange rate overshooting suggests that an unexpected increase in the domestic money supply by 10 percent will cause the short-run exchange rate value of the domestic currency to:

depreciate by more than 10 percent

Other things equal, the domestic currency ______ when the domestic money supply increases relative to the foreign money supply

depreciates in the long run

True?false The quantity theory of money indicates that in any country the money supply is equated to the demand for money which is inversely proportional the the money value of the gross domestic product

false

The monetary approach predicts that an increase in the money supply by 12 percent in both China and Thailand will:

have no effect on the baht per Yuan exchange rate

The law of one price works well for __________ traded commodities

heavily

If the expected future spot exchange rate value of the foreign currency decreases, with the interest rate differential unchanged, the current spot exchange rate value of the domestic currency:

increases

The law of one price works better if:

transportation costs for the product are close to zero