[IE] Unit 14 + 16

The law of one price works under some assumptions. Which of the following is NOT an assumption for the law of one price?

• a. There is free competition.

• b. There is no transportation cost.

• c. There are no tariffs.

• d. The skill level of workers is identical in both countries.

The real exchange rate between two currencies tells us:

• a.  changes in the exchange rate over time.

• b.  how many units of one currency can be purchased with one unit of the home currency.

• c.   how much in terms of goods and services the home currency will buy in the foreign nation compared to the home nation.

• d.  how much depreciation or appreciation has occurred in the home exchange rate.

When the Chinese yuan is appreciating against the U.S. dollar, if relative PPP holds, then this suggests that the U.S. inflation rate:

• a. exceeds the Chinese inflation rate.

• b. equals the Chinese inflation rate.

• c. exceeds the Chinese interest rate.

• d. equals the Chinese interest rate.

If all else is equal, a nation with greater income will have:

• a.  lower prices.

• b.  higher prices.

• c. lower money supply.

• d. higher prices and higher money supply.

If we adjust the supply of money for changes in the price level, we get real balances. The demand for real balances is proportional to ____.

• a.  real GDP

• b.  the unemployment rate

• c.  the population

• d.  the exchange rate

Under the monetary approach to exchange rates, if both real money demand and money supply are greater at home than in foreign markets, then the exchange rate should be:

• a.  greater than 1.

• b.  equal to 1.

• c.   less than 1.

• There is not enough information provided to know what the exchange rate should be.

If the U.S. growth rate is greater than that of Canada, then the dollar will depreciate:

• a. only if the U.S. inflation rate exceeds Canada's.

• b. regardless of the relative inflation rates.

• c. only if the U.S. inflation rate is less than Canada's.

• d. only if the U.S. inflation rate is less than that of Canada's other trade partners.

An increase in money supply by 15% in the United States would cause the exchange rate to:

• a. appreciate by 15%.

• b. appreciate by 7.5%.

• c. depreciate by 15%.

• d. stay the same.

Whenever the supply of money is growing at a constant rate, if there is price flexibility and real income is constant, then:

• a. the price level is growing at a faster rate.

• b. the price level is decreasing.

• c. the price level is constant.

• d. the price level grows at the same rate.

Empirically, during the period 1975–2005, the relationship between the growth rate of money, changes in the price level, and changes in the exchange rate was:

• a. perfect.

• b. strong but not perfect.

• c. weak, but showing some correlation.

• d. completely uncorrelated, with a correlation coefficient of zero.