8.16 What is the name given to the weighted average of the nominal prices of the goods and
services consumed in the economy?
a. b. c. d.
Nominal price Monetary value Price Level
Consumption bundle
The General Idea of Purchasing Power, p.260
8.17 When the price level of an economy is ________, ________ is occurring.
Conversely, when the price level is ________, ________ is occurring.
a. b. c. d.
rising, deflation, falling, inflation rising, inflation, falling, deflation falling, inflation, rising, deflation falling, deflation, rising, deflation
The General Idea of Purchasing Power, p.260
8.18 All of the following options are reasons why the prices of goods and services deviate
from the law of one price except?
a. b. c. d.
Sticky prices Speculation
Tariffs and Quotas Price index
The Perfect Market Deal, p.265
8.19 When is a currency said to be overvalued?
a. b. c. d.
When its internal purchasing power is greater than its external purchasing power When its external purchasing power is greater than its internal purchasing power When its external purchasing power is less than its internal purchasing power When its internal purchasing power is equal than its external purchasing power
Overvaluations and Undervaluations of Currencies, p. 269
8.20 All of the following options are some of the factors that cause deviations from absolute
PPP except?
a. b. c. d.
Transaction costs Non-traded goods Balance of Payments
Changes in Relative Prices
The Theory of Absolute Purchasing Power Parity, p.263
8.21 When the currency of a country is stronger in foreign exchange markets than its PPP
exchange rate, the dollar value of the country’s GDP per capita when measured by current exchange rates is ________.
a. b. c. d.
smaller than when measured by PPP exchange rates larger than when measured by PPP exchange rates the same as when measured by PPP exchange rates
slightly the same as when measured by PPP exchange rates
Absolute Purchasing Power Parity, p. 263
8.22 Because the real exchange is composed of three variables that can all move
simultaneously, many combinations of changes lead to a real appreciation of the pound (in this case). Which one of the following options is not a basic movement?
a. A decrease in the pound prices of U.S. goods, not holding the dollar prices
constant.
b. A decrease in the dollar prices of U.S. goods, holding the exchange rate and the
pound prices of goods constant.
c. An increase in the pound prices of goods, holding the exchange rate and the dollar
prices of goods constant.
d. An increase in the nominal exchange rate ($/?), holding the dollar prices and pound
prices of goods constant.
The Real Exchange Rate, p.288
DIFFICULTY LEVEL: MODERATE
8.23 Suppose annual inflation rates in the U.S. and Mexico are expected to be 6% and 80%,
respectively, over the next several years. If the current spot rate for the Mexican peso is $.005, then the best estimate of the peso's spot value in 3 years is ________.
a. b. c. d.
$.00276 $.01190 $.00321 $.00102
Comparing Prices Across Countries, p.271
8.24 If a country's freely floating currency is undervalued in terms of purchasing power parity,
its capital account is likely to be ________.
a. b. c. d.
in deficit or tending toward a deficit in surplus or tending toward a surplus
Subsidized by the International Monetary Fund a candidate for loans from the World Bank
Overvaluations and Undervaluations, p. 273
8.25 A 150% return in Brazil is higher than a 15% dollar return in the U.S. ________.
a. b. c. d.
The Purchasing Power of A Currency, p. 262
because arbitrage opportunities exist
when the inflation controls are suspended in Brazil
it depends on whether these are nominal or real returns regardless of nominal or real returns
8.26 What is more appropriate to use when attempting to find information about the
purchasing power of a currency?
a. b. c. d. 8.27
the spot exchange rate the forward rate the price levels the price indexes
The decomposition of the nominal interest rate into the sum of the expected real interest rate and the expected rate of inflation is known as the
a. b. c. d.
Fisher Effect Siegel Paradox Bid-ask Spread
Exchange rate pass-through
The ex ante real interest rate, p.337
8.28 The Fisher Effect decomposes nominal interest rates into the ________ and the expected
rate of inflation.
a. b. c. d.
expected real exchange rate expected real interest rate expected forward rate of return nominal exchange rate
The ex ante real interest rate, p.337
8.29 The covered interest rate parity, uncovered interest rate parity, and purchasing power
parity, together with the Fisher hypothesis are often referred to as the
a. b. c. d.
determinants of expected nominal exchange rates determinants of expected nominal interest rates international parity conditions international arbitrage conditions
The international parity conditions, p.339
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