Question : 16.3   A Long-Run Exchange Rate Model Based PPP 1) In order : 1303609

 

 

16.3   A Long-Run Exchange Rate Model Based on PPP

 

1) In order for the condition E$/HK$ = PUS/PHK to hold, what assumptions does the principle of purchasing power parity make?

A) Only that there are no transportation costs and restrictions on trade.

B) Only that the markets are perfectly competitive, i.e., P = MC.

C) The factors of production are identical between countries.

D) No arbitrage exists.

E) HK and the US are perfectly competitive and there are no transportation costs or restrictions on trade.

 

2) Which of the following statements is the MOST accurate?

A) In the long run, national price levels play a minor role in determining both interest rates and the relative prices at which countries’ products are traded.

B) In the long run, national price levels play a key role only in determining interest rates.

C) In the long run, national price levels play a key role only in determining the relative prices at which countries’ products are traded.

D) In the long run, national price levels play a key role in determining both interest rates and the relative prices at which countries’ products are traded.

E) In the long run, national price levels play no role in determining interest rates and the relative prices at which countries’ products are traded.

 

 

3) Which of the following statements is the MOST accurate? In general

A) the monetary approach to the exchange rate is a long run theory.

B) the monetary approach to the exchange rate is a short run theory.

C) the monetary approach to the exchange rate is both a short and long run theory.

D) the monetary approach to the exchange rate neither long run nor short run theory.

E) the monetary approach to the exchange rate is considered less practical than the law of one price.

 

 

4) The monetary approach makes the general prediction that

A) the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies.

B) the exchange rate, which is the relative price of American and European money, is fully determined in the short run by the relative supplies of those monies and the relative demands for them.

C) the exchange rate, which is the relative price of American and European money, is fully determined in the short run and long run by the relative supplies of those monies and the relative demands for them.

D) the exchange rate, which is the relative price of American and European money, is fully determined in the long run by the relative supplies of those monies and the relative demands for them.

E) the money supply in the U.S. will adjust to European monetary equilibrium.

 

5) Under the monetary approach to exchange rate theory, money supply growth at a constant rate

A) eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level or the long-run relative prices of goods and services.

B) eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do affect the full-employment output level and the long-run relative prices of goods and services.

C) eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services.

D) eventually results in ongoing price level inflation at the same rate, but changes in this long-run inflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services.

E) eventually results in ongoing price level deflation at the same rate, but changes in this long-run deflation rate do not affect the full-employment output level, only the long-run relative prices of goods and services.

 

 

6) Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate

A) the interest rate is not independent of the money supply growth rate in the short run.

B) the interest rate is independent of the money supply growth rate in the long run.

C) the interest rate is not independent of the money supply growth rate in the long run, but independent in the short run.

D) the interest rate is not independent of the money supply growth rate in the long run.

E) the interest rate is a factor of the money supply growth rate only in the short term.

 

 

7) Which of the following statements is the MOST accurate? In general, under the monetary approach to the exchange rate

A) while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.

B) while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply do not affect the interest rate.

C) while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.

D) the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate.

E) while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate.

 

8) Who among the following list of people is an early 20th century economist from Yale University who wrote the book The Theory of Interest?

A) Gustav Cassel

B) Irving Fisher

C) David Ricardo

D) Paul Krugman

E) Israel Kirzner

 

 

9) If people expect relative PPP to hold

A) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, in the United States and Europe, respectively, over the relevant horizon.

B) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected in Europe and the United States, respectively.

C) the difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively, in the short run.

D) the difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively.

E) the difference between the interest rates offered by dollar and euro deposits will be below the difference between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively.

 

 

10) Under PPP (and by the Fisher Effect), all else equal

A) a rise in a country’s expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation.

B) a fall in a country’s expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.

C) a rise in a country’s expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.

D) a rise in a country’s expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.

E) a fall in a country’s expected inflation rate will eventually cause an inversely proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.