Question 1

If the exchange rate is equal to the ratio of the domestic and foreign price indexes,

Accepted Answer

A)   absolute PPP holds.
B)   relative PPP holds.
C)   one currency is said to be overvalued.
D)   one currency is said to be undervalued.E) A) and B)
F) A) and C)

Question 2

Studies of PPP covering many years will be more likely to yield evidence of PPP than studies based on short-run data.

Accepted Answer

A) True 
 B)False

Question 3

The higher the inflation differential between countries, the less likely it is that relative PPP will hold.

Accepted Answer

A) True 
 B)False

Question 4

Arbitrage operations can be executed

Accepted Answer

A)   in foreign exchange markets.
B)   in goods markets.
C)   Both A and B.
D)   None of the above.E) All of the above
F) B) and C)

Question 5

Over a short-run period (i.e., week or month) , dominate exchange rate movements.

Accepted Answer

A)   short-run inflation differentials
B)   nominal price changes
C)   relative price changes
D)   None of the aboveE) C) and D)
F) B) and D)

Question 6

Which of the following statements is correct?

Accepted Answer

A)   PPP is a theory of exchange rate determination.
B)   Inflation differentials cause changes in exchange rates.
C)   PPP is an equilibrium relationship between two endogenous variables.
D)   PPP, or the law of one price, should hold well for individual goods.E) B) and D)
F) B) and C)

Question 7

Is PPP a theory of exchange rate determination? Explain why or why not?

Accepted Answer

PPP is not a theory of exchange rate det...

Question 8

The law of one price should hold well for

Accepted Answer

A)   differentiated products.
B)   any individual goods traded internationally.
C)   homogeneous goods.
D)   All of the above.E) None of the above
F) A) and D)

Question 9

If relative PPP held, then the real exchange rate must be equal to one.

Accepted Answer

A) True 
 B)False

Question 10

Endogenous variables tend to be less volatile than exogenous ones.

Accepted Answer

A) True 
 B)False

Question 11

Changes in exchange rates are due to

Accepted Answer

A)   real events only.
B)   nominal events only.
C)   both real and nominal events.
D)   None of the above.E) A) and D)
F) B) and C)

Question 12

Relative PPP indicates that

Accepted Answer

A)   the exchange rate between any two currencies is equal to the ratio of their price indexes.
B)   the same good sells for the same price internationally.
C)   the percentage change in the exchange rate is equal to the inflation differential between the domestic and foreign country.
D)   relative prices determine exchange rates.E) B) and C)
F) A) and D)

Question 13

Suppose a year ago the exchange rate between Mexican pesos and dollars was 13.5 pesos per dollar, and that according to relative PPP the exchange rate was in equilibrium. Furthermore, assume that since then, Mexican inflation has been 12 percent while the U.S. inflation has been 3 percent. If according to relative PPP the peso is now said to be overvalued, what is a possible exchange rate consistent with this assertion?

Accepted Answer

A)   13.5 pesos per dollar.
B)   14.72 pesos per dollar.
C)   15 pesos per dollar.
D)   20 pesos per dollar.E) A) and B)
F) A) and C)

Question 14

We expect that in the long run, exchange rate movements will largely reflect inflation differentials.

Accepted Answer

A) True 
 B)False

Question 15

Relative price changes indicate

Accepted Answer

A)   all prices move together.
B)   all exchange rates move together.
C)   some prices increase faster than others.
D)   exchange rates appreciate faster than prices change.E) All of the above
F) C) and D)

Question 16

Which of the following is incorrect?

Accepted Answer

A)   Exchange rates in the short run are much more variable than inflation differentials.
B)   Deviations from PPP are much more apparent for monthly data than annual.
C)   PPP holds best in the long run.
D)   None of the above.E) A) and B)
F) B) and C)

Question 17

PPP holds better for countries.

Accepted Answer

A)   low-inflation
B)   poor
C)   rich
D)   high-inflationE) A) and D)
F) All of the above

Question 18

Deviations from PPP

Accepted Answer

A)   may be due to the differential speed of adjustment between exchange rates and prices.
B)   may occur when international trade involves lags between order and delivery.
C)   may appear during periods dominated by news or unexpected events.
D)   All of the above.E) A) and C)
F) B) and C)

Question 19

Empirical studies find that exchange rates are much more variable than inflation differentials. How can we explain this empirical result?

Accepted Answer

Financial markets adjust faster than goo...

Exam 14: Prices and Exchange Rates: Purchasing Power Parity

Studies of PPP covering many years will be more likely to yield evidence of PPP than studies based on short-run data.

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

The law of one price should hold well for

Correct Answer
verified

Over a short-run period (i.e., week or month) , dominate exchange rate movements.

Correct Answer
verified

Deviations from PPP

Correct Answer
verified

Relative PPP indicates that

Correct Answer
verified

Changes in exchange rates are due to

Correct Answer
verified

Empirical studies find that exchange rates are much more variable than inflation differentials. How can we explain this empirical result?

Correct Answer
verified
Financial markets adjust faster than goo...
View Answer

Endogenous variables tend to be less volatile than exogenous ones.

Correct Answer
verified

The higher the inflation differential between countries, the less likely it is that relative PPP will hold.

Correct Answer
verified

Arbitrage operations can be executed

Correct Answer
verified

If relative PPP held, then the real exchange rate must be equal to one.

Correct Answer
verified

PPP holds better for countries.

Correct Answer
verified

Correct Answer
verified

If the exchange rate is equal to the ratio of the domestic and foreign price indexes,

Correct Answer
verified

Relative price changes indicate

Correct Answer
verified

Which of the following is incorrect?

Correct Answer
verified

We expect that in the long run, exchange rate movements will largely reflect inflation differentials.

Correct Answer
verified

Is PPP a theory of exchange rate determination? Explain why or why not?

Correct Answer
verified
PPP is not a theory of exchange rate det...
View Answer

Exam 14: Prices and Exchange Rates: Purchasing Power Parity

Studies of PPP covering many years will be more likely to yield evidence of PPP than studies based on short-run data.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

The law of one price should hold well for

Correct AnswerverifiedShow Answer

Over a short-run period (i.e., week or month) , dominate exchange rate movements.

Correct AnswerverifiedShow Answer

Deviations from PPP

Correct AnswerverifiedShow Answer

Relative PPP indicates that

Correct AnswerverifiedShow Answer

Changes in exchange rates are due to

Correct AnswerverifiedShow Answer

Empirical studies find that exchange rates are much more variable than inflation differentials. How can we explain this empirical result?

Correct AnswerverifiedFinancial markets adjust faster than goo...View AnswerShow Answer

Endogenous variables tend to be less volatile than exogenous ones.

Correct AnswerverifiedShow Answer

The higher the inflation differential between countries, the less likely it is that relative PPP will hold.

Correct AnswerverifiedShow Answer

Arbitrage operations can be executed

Correct AnswerverifiedShow Answer

If relative PPP held, then the real exchange rate must be equal to one.

Correct AnswerverifiedShow Answer

PPP holds better for countries.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the exchange rate is equal to the ratio of the domestic and foreign price indexes,

Correct AnswerverifiedShow Answer

Relative price changes indicate

Correct AnswerverifiedShow Answer

Which of the following is incorrect?

Correct AnswerverifiedShow Answer

We expect that in the long run, exchange rate movements will largely reflect inflation differentials.

Correct AnswerverifiedShow Answer

Is PPP a theory of exchange rate determination? Explain why or why not?

Correct AnswerverifiedPPP is not a theory of exchange rate det...View AnswerShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Financial markets adjust faster than goo...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
PPP is not a theory of exchange rate det...
View Answer