ECO CH 19

The law of one price

States that a product should cost the same everywhere if the prices in different countries are converted into the same currency using market exchange rates

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

depreciates in the long run

A decrease in the foreign interest rate relative to the domestic 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 a key to understanding the determinants of exchange rates

monetary

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

money supply

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 ____

nominal effective

Absolute purchasing power parity holds for a product bundle if the law of ___________ holds for each of the goods in the bundle

one price

The phenomenon of _____ is based on the existence of sticky prices and the belief that PPP and the monetary approach hold in the long run

overshooting

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

raised

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

real bilateral

There is more empirical evidence in the literature to suggest that the ______ version of purchasing power parity holds in the _____ run.

relative; long

The asset market approach to exchange rate determination seeks to predict the _____ pressures on exchange rates

short term

Overshooting occurs when exchange rates adjust more in the _____ run than they do in the ____ run.

short; long

Exchange rate overshooting occurs because product prices are _____ in the short run

sticky

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

the money value of GDP

If the domestic interest rate rises, there will be international financial repositioning toward domestic currency assets, thereby causing the domestic currency to appreciate

TRUE

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

TRUE

The concept of PPP illustrates the relationship between the ratio al price levels and exchange rates in the long run

TRUE

The current forward exchange rate is not linked together by uncovered interest parity

TRUE

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

TRUE

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

TRUE

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

TRUE

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

Absolute

The law of one price is based on the PPP theory

FALSE

PPP theory is a better guide to short run movements in exchange rates than to long run movements in exchange rates

FALSE (better in long run)

The quantity theory of money indicates that in any country the money supply is equated to the demand for money, which is inversely proportional to the money value of the GDP.

FALSE (directly proportional)

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

FALSE (domestic)

The asset market approach seeks to explain exchange rates by focusing on the demand and supply of national moneys

FALSE (monetary approach)

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

FALSE (money supply)

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

FALSE (stabilizing)

______ 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

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

According to the relative version of PPP, when the inflation differential between the foreign country and the home country is positive the domestic currency tends to _____

appreciate

Everything else fundamentally remaining unchanged, the monetary approach predicts that a 5% cut in the money supply by the Fed will result in an _______ of the US dollar vis a vis other countries

appreciation

The ___ approach to exchange rates emphasizes the role of portfolio repositioning by international financially investors

asset market

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

bandwagon

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

capital inflows into the US

The law of one price works better if the transportation costs for the product are _______

close to zero

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

Other things equal, a broad shift to expecting depreciation of the euro will lead to a _____ in the demand for euro denominated financial assets

decrease

The law of one price works well for _____ traded commodities

heavily