IBF301 - chapter 6

Who modernized and popularized the theory of Purchasing Power Parity in the 1920s?

• David Ricardo

• Gustav Cassel

• Scholars at the University of Salamanca, Spain

• Scholars at the University of Oxford, England

 Which version of Purchasing Power Parity uses the Big Mac index to determine exchange rate levels by comparing the price of Big Macs worldwide?

• Absolute version

• Relative version

•  Both versions

• Neither version

The maintenance of Purchasing Power Parity (PPP) and its impact on international trade is significant because:

• It leads to stable exchange rates between countries

• It does not affect international trade

• It results in fluctuating exchange rates

• It has no impact on trade balance

According to the theory of Purchasing Power Parity (PPP), what does the exchange rate between two currencies equal to?

• The ratio of the countries' GDP

• The ratio of the countries' population

• The ratio of the countries' price levels

• The ratio of the countries' inflation rates

In the formula Real Exchange Rate (q) measures the deviation from PPP, what does the unit “e” mean?

• Real exchange rate

• Domestic inflation rate

• The rate of change in the exchange rate

• Foreign inflation rate

How is the exchange rate calculated in the absolute version of Purchasing Power Parity (PPP)?

A) S = P*/P$

B) S = P$/P*

C) S = P$ P

D) S = P$ + P*

• S = P*/P$

• S = P$ + P*

• S = P$ P

• S = P$/P*

Which of the following pose barriers that cause deviations from absolute PPP?

• All of the above
• Transportation costs

• Quotas

• None of the above

 Which type of PPP is more likely to hold over the long run?

• Relative PPP for all goods

• Relative PPP for tradeable goods
• Absolute PPP
• Absolute and Relative PPP

What is the estimated rate at which PPP exchange rate errors halve?

• 3-5 years

• 5-7 years

• 2-4 years

• 1-2 months

PPP presented in “rate of change” form refers to:

• Neither version of PPP

• Absolute version of PPP

• Both versions of PPP

• Relative version of PPP