Question : 16.6   Beyond Purchasing Power Parity: A General Model of Long-Run : 1303620

16.6   Beyond Purchasing Power Parity: A General Model of Long-Run Exchange Rates

1) Which of the following statements is the MOST accurate about the Law of One Price on Scandinavian ferry lines?

A) Due to menu costs, the Law of One Price does not hold.

B) To avoid arbitrage opportunities, the Law of One Price must hold.

C) Transaction costs of exchanging currency causes the Law of One Price to fail.

D) Transportation costs between ferry lines leads to a violation of the Law of One Price.

E) The physical distance allowed the Law of One Price to hold.

2) Which of the following statements is MOST accurate?

A) The United States price level will place a relatively light weight on commodities produced and consumed in America, while the European price level will place a relatively heavy weight on commodities produced and consumed in Europe.

B) The United States price level will place a relatively light weight on commodities produced and consumed in America, and the European price level will place a relatively light weight on commodities produced and consumed in Europe.

C) The United States price level will place a relatively heavy weight on commodities produced and consumed in America, and the European price level will place a relatively heavy weight on commodities produced and consumed in Europe.

D) The United States price level will place a relatively heavy weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America.

E) The United States price level will place a relatively light weight on commodities produced and consumed in Europe, and the European price level will place a relatively heavy weight on commodities produced and consumed in America.

3) When the domestic money prices of goods are held constant

A) a nominal dollar appreciation makes U.S. goods cheaper compared with foreign goods.

B) a nominal dollar depreciation makes U.S. goods less appealing in foreign markets.

C) a nominal dollar appreciation does not affect the prices of U.S. goods.

D) a nominal dollar depreciation makes U.S. goods more expensive compared with foreign goods.

E) a nominal dollar depreciation makes U.S. goods cheaper compared with foreign goods and a nominal dollar appreciation makes U.S. goods more expensive compared with foreign goods.

4) An increase in the world relative demand for U.S. output causes

A) a short-run real depreciation of the dollar against the euro.

B) a long-run real appreciation of the dollar against the euro.

C) a long-run real depreciation of the dollar against the euro.

D) a short-run real appreciation of the euro against the dollar.

E) a long-run real appreciation of the euro against the dollar.

5) Which of the following statements is MOST accurate?

A) A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro.

B) A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real appreciation of the dollar against the euro.

C) A relative expansion of U.S. output causes a long-run appreciation of the dollar against the euro, while a relative expansion of European output causes a long-run real depreciation of the dollar against the euro.

D) A relative expansion of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.

E) A relative decline of U.S. output causes a long-run depreciation of the dollar against the euro, while a relative decline of European output causes a long-run real appreciation of the dollar against the euro.

6) When all variables start out at their long-run equilibrium levels, the most important determinant of long-run swings in nominal exchange rates is

A) a shift in relative money supply levels.

B) a shift in relative money supply growth rates.

C) a change in relative output demand.

D) a change in relative output supply.

E) a change in relative inflation rates.

7) Which of the following statements is MOST accurate?

A) In the output market, an increase in demand for U.S. output leads to an increase in the long-run nominal dollar/euro exchange rate.

B) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal dollar/euro exchange rate.

C) In the output market, a decrease in demand for U.S. output leads to a decrease in the long-run nominal dollar/euro exchange rate.

D) In the output market, an increase in the demand for European output leads to a decrease in the long-run nominal dollar/euro exchange rate.

E) In the output market, an increase in the demand for European output leads to an increase in the long-run nominal euro/dollar exchange rate.

8) Which of the following statements is MOST accurate?

A) In the money market, an increase in U.S. money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate.

B) In the money market, an increase in European money supply level leads to a proportional increase in the long-run nominal dollar/euro exchange rate.

C) In the money market, an increase in U.S. money supply growth rate leads to a decrease in the long-run nominal dollar/euro exchange rate.

D) In the money market, an increase in European money supply growth leads to an increase in the long-run nominal dollar/euro exchange rate.

E) In the money market, an increase in U.S. money supply level leads to a proportional decrease in the long-run nominal dollar/euro exchange rate.

9) In the long run

A) exchange rates obey relative PPP when all disturbances occur in the output markets.

B) exchange rates obey absolute PPP when all disturbances occur in the output markets.

C) exchange rates are unlikely to obey relative PPP when all disturbances occur in the output markets.

D) exchange rates are unlikely to obey relative PPP when all disturbances are monetary in nature.

E) exchange rates obey absolute PPP when all disturbances are monetary in nature.