国际经济学题库

InternationaIEconomics8eKrugmanChapterPriceLevelsandtheExchangeRateintheLongRun15TheLawofOnePriceWhichofthefollowingstatementsisthemostaccurateThelawofonepricestates:Aincompetitivemarketsfreeoftransportationcostsandofficialbarriertotradeidenticalgoodssoldindifferentcountriesmustsellforthesamepricewhentheirpricesareexpressedintermsofthesamecurrency.Bincompetitivemarketsfreeoftransportationcostsandofficialbarriertotradeidenticalgoodssoldinthesamecountrymustsellforthesamepricewhentheirpricesareexpressedintermsofthesamecurrency.Qincompetitivemarketsfreeoftransportationcostsandofficialbarriertotradeidenticalgoodssoldindifferentcountriesmustsellforthesameprice.Didenticalgoodssoldindifferentcountriesmustsellforthesamepricewhentheirpricesareexpressedintermsofthesamecurrency.ENoneoftheabove.AnswAer:QuestionPreviousEditionStatus:UnderPurchasingPowerParityAE$/E=PUS/PE.E$/E=PE/PES.CE$/E=Pus+PE.WhichofthefollowingstatementsisthemostaccurateAInthelongrunnationalpricelevelsplayaminorroleindeterminingbothinterestratesandtherelativepricesatwhichcountries1productsaretraded.BInthelongrunnationalpricelevelsplayakeyroleonlyindetermininginterestrates.CInthelongrunnationalpricelevelsplayakeyroleonlyindeterminingtherelativepricesatwhichcountries1productsaretraded.DInthelongrunnationalpricelevelsplayakeyroleindeterminingbothinterestratesandtherelativepricesatwhichcountries1productsaretraded.ENoneoftheabove.AnswDer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsisthemostaccurateIngeneralAthemonetaryapproachtotheexchangerateisalongruntheory.Bthemonetaryapproachtotheexchangerateisashortruntheory.Cthemonetaryapproachtotheexchangerateisbothashortandlongruntheory.Dthemonetaryapproachtotheexchangerateneitherlongrunnorshortruntheory.ENoneoftheabove.AnswAer:QuestionPreviousEditionStatus:ThemonetaryapproachmakesthegeneralpredictionthatAtheexchangeratewhichistherelativepriceofAmericanandEuropeanmoneyisfullydeterminedinthelongrunbytherelativesuppliesofthosemonies.BtheexchangeratewhichistherelativepriceofAmericanandEuropeanmoneyisfullydeterminedintheshortrunbytherelativesuppliesofthosemoniesandtherelativedemandsforthem.CtheexchangeratewhichistherelativepriceofAmericanandEuropeanmoneyisfullydeterminedintheshort-andlongrunbytherelativesuppliesofthosemoniesandtherelativedemandsforthem.DtheexchangeratewhichistherelativepriceofAmericanandEuropeanmoneyisfullydeterminedinthelongrunbytherelativesuppliesofthosemoniesandtherelativedemandsforthem.ENoneoftheabove.AnswDer:QuestionPreviousEditionStatus:UnderthemonetaryapproachtotheexchangeratetheorymoneysupplygrowthataconstantrateAeventuallyresultsinongoingpriceleveldeflationatthesameratebutchangesinthislong-rundeflationratedonotaffectthefull-employmentoutputlevelorthelong-runrelativepricesofgoodsandservices.eventuallyresultsinongoingpricelevelinflationatthesameratebutchangesinthislong-runinflationratedoaffectthefull-employmentoutputlevelandthelong-runrelativepricesofgoodsandservices.Qeventuallyresultsinongoingpricelevelinflationatthesameratebutchangesinthislong-runinflationratedonotaffectthefull-emploutputlevelorthelong-runrelativepricesofgoodsandservicesoymentDeventuallyresultsinongoingpricelevelinflationatthesameratebutchangesinthislong-runinflationratedonotaffectthefull-employmentoutputlevelonlythelong-runrelativepricesofgoodsandservices.ENoneoftheabove.AnswCer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsisthemostaccurateIngeneralunderthemonetaryapproachtotheexchangerateAtheinterestrateisnotindependentofthemoneysupplygrowthrateintheshortrun.Btheinterestrateisindependentofthemoneysupplygrowthrateinthelongrun.Ctheinterestrateisnotindependentofthemoneysupplygrowthrateinthelongrunbutindependentintheshortrun.Dtheinterestrateisnotindependentofthemoneysupplygrowthrateinthelongrun.ENoneoftheabove.AnswDer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsisthemostaccurateIngeneralunderthemonetaryapproachtotheexchangerateAwhiletheshort-runinterestratedoesnotdependontheabsolutelevelq\themoneysupplycontinuinggrowthinthemoneysupplyeventuallywillaffecttheinterestrate.whilethelong-runinterestratedoesdependontheabsolutelevelMthemoneysupplycontinuinggrowthinthemoneysupplydonotaffecttheinterestrate.Qwhilethelong-runinterestratedoesnotdependontheabsolute/ei/e/ofthemoneysupplycontinuinggrowthsthemoneysupplyeventuallywillaffecttheinterestrate.Dthelong-runinterestratedoesnotdependontheabsoluteleveledthemoneysupplyandthuscontinuinggrowthinthemoneysupplywillnotaffecttheinterestrate.ENoneoftheabove.AnswCer:QuestionPreviousEditionStatus:Whoamongthefollowinglistofpeopleisanearly20thcenturyeconomistfromYaleUniversitywhowrotethebookTheTheoryofInterestAGustavCasselIrvingFisherDavidRicardoDPaulKrugmanNoneoftheabove.AnswBer:QuestionNewStatus:IfpeopleexpectrelativePPPtoholdAthedifferencebetweentheinterestratesofferedbydollarandeurodepositswillequalthedifferencebetweentheinflationratesexpectedintheUnitedStatesandEuroperespectivelyovertherelevanthorizon.BthedifferencebetweentheinterestratesofferedbydollarandeurodepositswillequalthedifferencebetweentheinflationratesexpectedinEuropeandtheUnitedStatesrespectively.CthedifferencebetweentheinterestratesofferedbydollarandeurodepositswillequalthedifferencebetweentheinflationratesexpectedovertherelevanthorizonintheUnitedStatesandEuroperespectivelyintheshortrun.DthedifferencebetweentheinterestratesofferedbydollarandeurodepositswillbeabovethedifferencebetweentheinflationratesexpectedovertherelevanthorizonintheUnitedStatesandEuroperespectively.ENoneoftheabove.AnswAer:QuestionPreviousEditionStatus:UnderPPPandbytheFisherEffectallelseequalAariseinacountrysexpectedinflationratewilleventuallycauseamore-thanproportionalriseintheinterestratethatdepositsofitscurrencyofferinordertoaccommodateforthehigherinflation.Bafallinacountrysexpectedinflationratewilleventuallycauseanequalriseintheinterestratethatdepositsofitscurrencyoffer.Cariseinacountrysexpectedinflationratewilleventuallycauseanequalriseintheinterestratethatdepositsofitscurrencyoffer.Dariseinacountrysexpectedinflationratewilleventuallycausealessthanproportionalriseintheinterestratethatdepositsofitscurrencyoffertoaccommodatetheriseinexpectedinflation.ENoneoftheabove.AnswCer:QuestionPreviousEditionStatus:IntheshortrunAtheinterestratecanrisewhenthedomesticmoneysupplyfalls.Btheinterestratecandecreasewhenthedomesticmoneysupplyfalls.Ctheinterestratestaysconstantwhenthedomesticmoneysupplyfalls.Dtheinterestraterisesinthesameproportionasthedomesticmoneysupplyfalls.ENoneoftheabove.AnswAer:QuestionPreviousEditionStatus:Underaflexible-pricemonetaryapproachtotheexchangerateAwhenthedomesticmoneysupplyfallsthepricelevelwouldeventuallyfallincreasingtheinterestrate.Bwhenthedomesticmoneysupplyfallsthepricelevelwouldfallrightawaycausingareductionintheinterestrate.Qwhenthedomesticmoneysupplyfallsthepricelevelwouldfallrightawaycausinganincreaseintheinterestrate.DwhenthedomesticmoneysupplyfallsthepricelevelwouldeventuallyfallkeepingtheinterestrateconstantEwhenthedomesticmoneysupplyfallsthepricelevelwouldfallrightawaykeepingtheinterestrateconstantAnswEer:QuestionPreviousEditionStatus:UnderstickypricesAafallinthemoneysupplyraisestheinterestratetopreservemoneymarketequilibrium.Bafallinthemoneysupplyreducestheinterestratetopreservemoneymarketequilibrium.Cafallinthemoneysupplykeepstheinterestrateintacttopreservemoneymarketequilibrium.Dafallinthemoneysupplydoesnotaffecttheinterestrateintheshortrunonlyinthelongrun.ENoneoftheabove.AnswAer:QuestionPreviousEditionStatus:UnderstickypricesAaninterestrateriseisassociatedwithlowerexpecteddeflationandalong-runcurrencyappreciationsothecurrencyappreciatesimmediately.Baninterestrateriseisassociatedwithhigherexpectedinflationandalong-runcurrencyappreciationsothecurrencyappreciatesimmediately.Caninterestrateriseisassociatedwithlowerexpectedinflationandalong-runcurrencydepreciationsothecurrencyappreciatesimmediately.Daninterestrateriseisassociatedwithlowerexpectedinflationandalong-runcurrencydepreciationsothecurrencydepreciatesimmediately.Eaninterestrateriseisassociatedwithlowerexpectedinflationandalong-runcurrencyappreciationsothecurrencyappreciatesimmediately.AnswEer:QuestionPreviousEditionStatus:UnderthemonetaryapproachtotheexchangerateAaninterestratedecreaseisassociatedwithhigherexpectedinflationandacurrencythatwillbeweakeronallfuturedates.Baninterestrateincreaseisassociatedwithhigherexpecteddeflationandacurrencythatwillbeweakeronallfuturedates.Caninterestrateincreaseisassociatedwithhigherexpectedinflationandacurrencythatwillbestrengthenedonallfutureelates.Daninterestrateincreaseisassociatedwithhigherexpecteddeflationandacurrencythatwillbestrengthenedonallfuturedates.Eaninterestrateincreaseisassociatedwithhigherexpectedinflationandacurrencythatwillbeweakeronallfuturedates.AnswEer:QuestionPreviousEditionStatus:UnderthemonetaryapproachtotheexchangerateAareductioninthemoneysupplywillcauseimmediatecurrencydepreciation.Bariseinthemoneysupplywillcausecurrencydepreciation.Cariseinthemoneysupplywillcauseimmediatecurrencyappreciation.Dariseinthemoneysupplywillcausedepreciation.Eariseinthemoneysupplywillcauseimmediatecurrencydepreciation.AnswEer:QuestionPreviousEditionStatus:ExplainwhyexchangeratemodelbasedonPPPisalongruntheory.AnswPPPtheoryisamonetaryapproachtotheexchangerate.Itisaer:/ong-runtheorybecauseitdoesnotallowforpricerigidities.ItassumesthatpricescanadjustrightawaytomaintainfullemploymentaswellasPPP.QuestionPreviousEditionStatus:PresentandexplaintheFundamentalEquationoftheMonetaryApproach.AnswAssumee$/g二PUS/PEandthatdomesticpricelevelsdependoner:domesticmoneydemandsandsupplies:PUS=MUSS/LR$YUSDE$/E二Pus-PE.ENoneoftheabove.AnswAer:QuestionPreviousEditionStatus:3ExplaintheLawofOnePrice.Giveanexample.AnswThelawofonepricestatesthatincompetitivemarketsfreeofer:transportationcostsandtradebarriersidenticalgoodssoldindifferentcountriesmustsellforthesamepricewhenexpressedintermsofthesamecurrency.p{js=E$/£xp1forgoodi.E$/£=p{js/pukIfforexamplethepriceofthesamesweaterwascheaperinLondonthaninNewYorkU.S.importersandBritishexporterswouldhaveanincentivetobuysweatersinLondonandshipthemtoNewYorkpushingtheLondonpriceupandtheNewYorkpricedownuntilbothwereequal.QuestionPreviousEditionStatus:theexchangerateisfullydeterminedinthelongrunbytherelativePEsuppliesofthosemoniesandtherelativerealdemandsforthem.-MeS/Lr『Shiftsininterestratesandoutputlevelsaffecttheexchangerateonlythroughtheirinfluenceonmoneydemand.QuestionPreviousEditionStatus:WhatarethepredictionsforthelongrunequilibriumoftheMonetaryApproachAnswMoneysupplies:Giventheequationser:e$/£=PUS/PEPUS=MUSS/LR$YUSPE=MeS/LMYEonecanshowthatanincreaseintheU.S.moneysupplyMusScausesaproportionalincreaseintheU.S.pricelevelPuswhichinturncausesaproportionalincreaseine$/e.ThusanincreaseinU.S.moneysupplycausesaproportionallong-rundepreciationofthedollaragainsttheeuroandviceversa.Interestrates:AriseintheinterestrateR$lowersU.S.moneydemandLR$ZY|JStherebycausingariseintheU.S.pricelevelandaproportionaldepreciationofthedollaragainsttheeuro.Outputlevels:AriseinU.S.outputYusraisesrealU.S.moneydemandleadingtoafallinthelong-runU.S.pricelevelandanappreciationofthedollaragainsttheeuro.QuestionPreviousEditionStatus:DiscusstheeffectsofongoinginflationbasedonthePPPtheory.AnswOtherthingssupplygrowthbutchangesinthislong-runinflationratedonotaffectthefull-employmentoutputlevelorthelong-runrelativemoneypricesofgoodsandservices.supplyTheinterestratehoweverisaffectedbycontinuinggrowthinthegrowthatamoneysupplyinflation.ThiscanbeshownbycombiningPPPwithconstanttheinterestparityconditionrefertoCh.

13.Toshowitanalyticallyrecallthattheconditionofparitybetweendollarandeuroassetsis:R$=Re+e靛-e$/“e$/eAndaccordingtorelativePPP:E$/etE$/et-1E$/gt-1=.ust-nEtinflationat开peopleexpectrelativePPPtoholdthedifferencebetweeninterestratesofferedbydollarandeurodepositswillequalthedifferencerateasthebetweentheexpectedinflationratesovertherelativehorizoninthemoneyU.S.andEurope.QuestionPreviousEditionStatus:DescribeandexplaintherelationshipbetweenexpectedinflationratesintwocountriesandtheirinterestratedifferentialaccordingtothePPPtheory.AnswExpectedinflationisgivenbythefollowingequationer:ne=pe-P/PwherePeistheexpectedpricelevelinacountryayearfromtoday.IfrelativePPPisexpectedtoholdthen:CombinetheexpectedversionofrelativePPPwiththeinterestparitycondition:R$=Re+E艇-E$/e/e$/eRearrange:R$-RG=nus-nlIfasPPPdepreciationisexpectedtooffsetinternationalinflationdifferencepredictstheinterestratedifferencemustequaltheexpectedinflationcurrencydifference.QuestionPreviousEditionStatus:WhatistheFisherEffectProvideanexample.AnswAllelseequalariseinacountrysexpectedinflationratewiller:eventuallycauseanequalriseintheinterestratethatdepositsofitscurrencyoffer.Similarlyafallintheexpectedinflationratewilleventuallycauseafallintheinterestrate.Ex:IftheexpectedU.S.inflationweretorisepermanentlyfromntoFl+△FlcurrentdollarinterestratesR$wouldeventuallycatchuptothehigherinflationrisingbyavalue△R$=△ninaccordancewiththeMonetaryApproachthatinthelongrunpurelymonetarydevelopmentsshouldhavenoeffectonaneconomysrelativepricessincetherealrateofreturnondollarassetswouldremainunchanged.QuestionPreviousEditionStatus:Toanswerthefollowingquestionpleaserefertothefigurebelow.ConcentratingonlyatthelowerrightquadrantdiscusstheeffectsofachangeinU.S.expectedinflation.AnswLowerrightquadrantshowstheequilibriumintheU.S.Moneyer:MarketwhereAgiveninterestrateRl$correspondswithagivenU.S.realmoneysupplymL/pLConsiderariseofAninthefuturerateofU.S.moneysupplygrowthi.e.anincreaseintheexpectedrateofinflation.TheKeyPoint:Theriseinexpectedfutureinflationgeneratesexpectationsofmorerapidcurrencydepreciationinthefuture.UnderPPPthedollarnowdepreciatesatarateofn+AFl.Interestparitythereforerequiresthedollarinterestratetorisewherer|二理+△n.Point2inthefigure.Note:R$-Re=n^s-n|ThisrelationshowsachangeintheU.S.interestrateduetoanincreaseinexpectedU.S.inflationhasnoeffectontheeurointerestrate.Theriseintheinterestratefrom以tor|createsamomentaryexcesssupplyofrealU.S.moneybalancesattheprevailingpricelevelP

1.Howeversinceunderthis.MonetaryApproachpricesareassumedtobeflexiblepriceswillimmediatelyadjustfromP1toP2thuscausingthefollowingtwoeffects:OneReducingrealmoneysupplyandtwobringingU.S.moneymarketbackintoequilibrium.QuestionPreviousEditionStatus:Toanswerthefollowingquestionpleaserefertothefigurebelow.ConcentratingonlyatthelowerleftquadrantdiscusstherelationshipbetweentheU.S.realmoneysupplyandthedollar/euroexchangerateE$/E.AnswThelowerleftquadrantinthefiguredescribedthePurchasingPowerer:ParityPPPrelationship.TherelationshipbetweentheU.S.realmoneysupplyandthedollar/euroexchangerateE$/eisnegative.e$/gisequaltothepricelevelratioPUS/Peinthisderivationoftherelationshipthefollowingvariablesareassumedconstants:mreandpE.SoE$/e=m{js/PUSPUStTE$/etThusthepurchasingpowerofdollardecreasesduetotheincreaseinthepricelevel..e.zdollardepreciatesduetoPPPQuestionPreviousEditionStatus:Toanswerthefollowingquestionpleaserefertothefigurebelow.Concentratingonlyattheupperrightquadrantdiscusstheforeignexchangemarketequilibrium.AnswTheupperrightquadrantdescribestheequilibriumintheforeigner:exchangemarket.WebeginwiththeInterestParityCondition.R$=Re+E显-E$/J/E$/eIngeneraltwoeffectsarepresent:andeg—e/gAriseintheinterestratenormallycreatesanexcessdemandfordollardepositsandappreciationinthecurrencymarketHoweverinthiscasetheincreaseisduetohigherexpectedinflationorhigherexpectedmonetarygrowthintheU.S.whichimpliesafaster散欣侬/depreciationofthedollaragainsttheeuro€thuse|/ggoesupandthusreducedtheattractivenessofU.S.deposits.QuestionPreviousEditionStatus:Isadepreciationofthedollar/euroexchangeratecorrelatedwithadecreaseinthedollarreturnonU.S.depositsAnswNo.er:AssumethattheInterestParityismaintainedi.e.R$=Rg+E|/e-E$/”E$/eHoldingrgconstantonewouldexpectadepreciationofthedollar/euroexchangeratei.e.increaseinE$/etobecorrelatedwithadecreaseinR$dollarreturnsoneurodeposits.HoweverthehigherexpectedinflationintheU.S.impliesanincreaseinthee|/etheexpectedfuturedollartoeuroexchangerate.Thusthequantitye|-e$/e/e$/egoesupandincreasesdespiteadepreciationinthecurrenteuroexchangeratee$/g.dollartoQuestionPreviousEditionStatus:Doestheexistenceofnon-tradablegoodsallowfordeviationsfromPurchasingpowerParityAnswYestheexistenceofnontradablesallowsdeviationsfromPPP.Thisiser:becausethepriceofanontradableisdeterminedentirelybyitsdomesticsupplyanddemandcurvesandinturnfluctuationsindemandandsupplyforthesegoodwillaffectthepricelevel.Examplesincludehousinghaircutservicesetc.QuestionPreviousEditionStatus:Whateffectdonon-tradablegoodshaveonPPPAnswTheeffectisquitesubstantial.er:In2006theoutputofnon-tradablegoodsaccountedforabout46%ofU.S.GNP.Alongwithhaircutsnon-tradablegoodsincluderoutinemedicaltreatmenthousingetc.Forthemostpartnon-tradablegoodsarecomprisedofservicesandtheoutputoftheconstructionindustry.Non-tradablehelpexplainmuchofthewidedeparturefromPPPthatispresentinempiricaldata.QuestionPreviousEditionStatus:HowcanlongrunvaluesintherealexchangeratechangeAnswAnincreaseinworldrelativedemandforU.S.outputcausesaer:long-runrealappreciationofthedollaragainsttheeuroarealdollar/euroexchangerate.ArelativeexpansionofU.S.outputcausesalong-runrealdepreciationofthedollaragainsttheeuroarise\r\realdollar/euroexchangerate.QuestionPreviousEditionStatus:DescribethechainofeventsleadingtoexchangeratedeterminationfortheaAnIncreaseinU.S.moneysupplyfollowdIncreaseingrowthrateofU.S.moneysupplyingcIncreaseinworldrelativedemandforU.S.productscases:dIncreaseinrelativeU.S.outputsupplyAnswChainofeventsleadingtoexchangeratedetermination:er E$/e=q$/exPus/PEIncreaseinU.S.moneysupply:Pusrisesinproportiontothemoneysupply;qremainsthesame.Alldollarpriceswillriseincludingdollarpriceofeuro.IncreaseingrowthrateofU.S.moneysupply:InflationratedollarinterestratePusErisesinproportiontoPus.IncreaseinworldrelativedemandforU.S.products:Efallsandqdoesaswell.IncreaseinrelativeU.S.outputsupply:DollardepreciateslowersrelativepriceofU.S.outputriseinqzeffectonEisnotclearsinceqandPusworkinoppositedirections.QuestionPreviousEditionStatus:Constructatablethatwillsummarizetheeffectsofmoneymarketandoutputmarketchangesonthelong-runnominaldollar/euroexchangerateAnswer:QuestionPreviousEditionStatus:

15.4EmpiricalEvidenceonPPPandtheLawofOnePriceInpracticeFillinthefollowingtableassumingthelawofonepriceprevails.Answer:QuestionPreviousEditionStatus:

15.2PurchasingPowerParityUnderPurchasingPowerParityAE$/E=Pius/PE.BE$/E=PiE/PUS.QE$/E=PUS/PE.de$/e=PE/PES.ENoneoftheabove.AnswCer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsisthemostaccurateAThelawofonepriceappliesonlytothegeneralpricelevel.BThelawofonepriceappliestothegeneralpricelevelwhilePPPappliestoindividualcommodities.CThelawofonepriceappliestoindividualcommoditieswhilePPPappliestoboththegeneralpricelevelandtoindividualcommodities.DPPPappliesonlytoindividualcommodities.EThelawofonepriceappliestoindividualcommoditieswhilePPPappliestothegeneralpricelevel.AnswEer:Achangesinnationalpricelevelsoftentellusrelativelylittleaboutexchangeratemovements.Bchangesinnationalpricelevelsraisetheexchangerate.Qchangesinnationalpricelevelslowertheexchangerate.Dchangesinnationalpricelevelsoftentellusaboutexchangeratemovements.ENoneoftheabove.AnswAer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsisthemostaccurateAThepricesofidenticalcommoditybasketswhenconvertedtoasinglecurrencyarethesameacrosscountries.BThepricesofidenticalcommoditybasketswhenconvertedtoasinglecurrencydiffersubstantiallyacrosscountries.CThepricesofidenticalcommoditybasketswhenconvertedtoasinglecurrencydonotdiffersubstantiallyacrosscountries.DThepricesofidenticalcommoditybasketswhenconvertedtoasinglecurrencyareoftenthesameacrosscountries.ENoneoftheabove.AnswBer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsisthemostaccurateAThelawofonepricedoesfarewellinallrecentstudies.BThelawofonepricedoesfarewellinmanyrecentstudies.CThelawofonepricesometimesfareswellinrecentstudies.DThelawofonepricedoesnotfarewellinrecentstudies.ENoneoftheabove.AnswDer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsisthemostaccurateARelativePPPisnotareasonableapproximationtothedata.RelativePPPissometimesareasonableapproximationtothedatabutoftenperformspoorly.RelativePPPissometimesareasonableapproximationtothedata.DPPPissometimesareasonableapproximationtothedata.PPPissometimesareasonableapproximationtothedatabutusuallyperformspoorly.AnswBer:QuestionPreviousEditionStatus:WhatcanexplainthefailureofrelativePPPtoholdinrealityAnswGovernmentmeasuresofthepriceleveldifferfromcountrytoer:country.Onereasonforthesedifferencesisthatpeoplelivingindifferentcountriesspendtheirincomeindifferentways.Becauseofthisinherentdifferenceamongcountriescertainbasketswillbeaffectedmorebypricechangesgiventheirconsumptionsbasket.ForexampleconsumersincountryXeatsmorefishrelativetoanothercountry.Morethanlikelythegovernmentupondeterminingacommoditybaskettoreflectpreferencewillhaveanoverwhelmingrepresentationoffishintheirbasket.AnypricelevelchangeinthefishmarketwillbefeltparticularlybycountryXandtheiroverallpricelevelwillreflectthis.ThuschangesintherelativepricesofbasketcomponentscancauserelativePPPtobecomedistorted.QuestionPreviousEditionStatus:

15.5ExplainingtheProblemswithPPPWhichofthefollowingaretheoriesmeanttoexplainHWhyPriceLevelsareLowerinPoorerCountriesBhagwati-Kravis-LipseyBalassa-SamuelsonQGoldberg-KnetterDAandBABandCAnswDer:QuestionNewStatus:InFebruary2007theworldscheapestBigMacsweresoldinAthePhilippines.Russia.Ukraine.DChina.theCzechRepublic.AnswDer:QuestionPreviousEditionStatus:ThePPPtheoryfailsinrealitybecauseAtransportcostsandrestrictionsontrade.Bmonopolisticoroligopolisticpracticesingoodsmarkets.Ctheinflationdatareportedindifferentcountriesarebasedondifferentcommoditybaskets.DABandC.EAandBonly.AnswDer:QuestionPreviousEditionStatus:WhichoneofthefollowingstatementsisthemostaccurateAThepurchasingpowerofanygivencountrywillincreaseincountrieswherethepricesofnon-tradablegoodsrise.BThepurchasingpowerofanygivencountrywillfallincountrieswherethepricesofnon-tradablegoodsfall.CThepurchasingpowerofanygivencountrywillfallincountrieswherethepricesofnon-tradablegoodsrise.DThepurchasingpowerofanygivencountrywillremainconstantincountrieswherethepricesofnon-tradablegoodsrise.EThepurchasingpowerofanygivencountrywillfallincountrieswherethepricesofnon-tradablegoodsremainconstantAnswCer:QuestionPreviousEditionStatus:WhichoneofthefollowingstatementsisthemostaccurateRelativepricechangescouldnotleadtoPPPviolationseveniftradewerefreeandcostless.RelativepricechangescouldleadtoPPPviolationsonlyiftradewerefreeandcostless.RelativepricechangescouldleadtoPPPviolationseveniftradewerefreeandcostless.DPricechangescouldleadtoPPPviolationseveniftradewerefreeandcostless.Noneoftheabove.AnswCer:QuestionPreviousEditionStatus:WhichoneofthefollowingstatementsisthemostaccurateADeparturesfromPPParesimilarinboththeshortrunandlongrun.DeparturesfromPPPareevengreaterinthelongrunthaninthelongrun.DeparturesfromPPParealwaysgreaterintheshortrunthaninthelongrun.DItishardtotellwhetherdeparturesfromPPParegreaterintheshortrunthaninthelongrun.DeparturesfromPPPmayoftenbegreaterintheshortrunthaninthelongrun.AnswEer:QuestionPreviousEditionStatus:FloatingexchangeratesAsystematicallyleadtomuchlargerbutlessfrequentshort-rundeviationsfromtherelativePPP.systematicallyleadtomuchlargerandmorefrequentshort-rundeviationsfromtherelativePPP.Csystematicallyleadtomuchsmallerandlessfrequentshort-rundeviationsfromtherelativePPP.Dsystematicallyleadtomuchsmallerbutmorefrequentshort-rundeviationsfromtherelativePPP.ENoneoftheabove.AnswBer:QuestionPreviousEditionStatus:8Explainwhypricelevelsarelowerinpoorercountries.AnswOnetheoryexplainsthedifferenceinpricesondifferentendowmentser:ofcapitalandlaborBhagwaitKravisandLipsey.Theexplanationisasfollows:Richcountrieshavehighcapital-laborratioswhilepoorcountrieshavemuchmorelaborrelativetocapital.BecauserichcountrieshavehighcapitallaborratiostheMPLisgreaterandthustheyhaveahigherwage.Higherwagesleadtohigherdisposableincomeandcitizens1demandforgoodswillincrease.Becauselaborischeaperinpoorcountriesandisusedintensivelyinproducingnon-tradablegoods;non-tradablegoodswillbecheaperinthepoorcountriesthanintherich.Thepriceofnon-tradablegoodswillmovewiththeincreaseinwagethusincreasingthepricelevelofthegood.RichCountries:ExpensiveNon-tradablegoodsvs.PoorCountries:CheapNon-tradablegoods.QuestionPreviousEditionStatus:

15.6BeyondPurchasingPowerParity:AGeneralModelofLong-RunExchangeRatesWhichofthefollowingstatementsisthemostaccurateabouttheLawofOnePriceonScandinavianferrylinesADuetomenucoststheLawofOnePricedoesnothold.BToavoidarbitrageopportunitiestheLawofOnePricemusthold.QTransactioncostsofexchangingcurrencyallowstheLawofOnePricetofail.DTransportationcostsbetweenferrylinesleadstoaviolationoftheLawofOnePrice.ENoneoftheabove.AnswCer:QuestionNewStatus:WhichofthefollowingstatementsismostaccurateATheUnitedStatespricelevelwillplacearelativelylightweightoncommoditiesproducedandconsumedinAmericawhiletheEuropeanpricelevelwillplacearelativelyheavyweightoncommoditiesproducedandconsumedinEurope.BTheUnitedStatespricelevelwillplacearelativelylightweightoncommoditiesproducedandconsumedinAmericaandtheEuropeanpricelevelwillplacearelativelylightweightoncommoditiesproducedandconsumedinEurope.CTheUnitedStatespricelevelwillplacearelativelyheavyweightoncommoditiesproducedandconsumedinAmericaandtheEuropeanpricelevelwillplacearelativelyheavyweightoncommoditiesproducedandconsumedinEurope.DTheUnitedStatespricelevelwillplacearelativelyheavyweightoncommoditiesproducedandconsumedinEuropeandtheEuropeanpricelevelwillplacearelativelyheavyweightoncommoditiesproducedandconsumedinAmerica.ETheUnitedStatespricelevelwillplacearelativelylightweightoncommoditiesproducedandconsumedinEuropeandtheEuropeanpricelevelwillplacearelativelyheavyweightoncommoditiesproducedandconsumedinAmerica.AnswCer:QuestionPreviousEditionStatus:WhenthedomesticmoneypricesofgoodsareheldconstantAanominaldollarappreciationmakesU.S.goodscheapercomparedwithforeigngoods.BanominaldollardepreciationmakesU.S.goodscheapercomparedwithforeigngoods.CanominaldollarappreciationmakesU.S.goodsmoreexpensivecomparedwithforeigngoods.DAandConly.EBandConly.AnswEer:QuestionPreviousEditionStatus:AnincreaseintheworldrelativedemandforU.S.outputcausesAashort-runrealdepreciationofthedollaragainsttheeuro.Balong-runrealappreciationofthedollaragainsttheeuro.Calong-runrealdepreciationofthedollaragainsttheeuro.DAandBonly.ENoneoftheabove.AnswBer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsismostaccurateAArelativeexpansionofU.S.outputcausesalong-rundepreciationofthedollaragainsttheeurowhilearelativeexpansionofEuropeanoutputcausesalong-runrealappreciationofthedollaragainsttheeuro.ArelativedeclineofU.S.outputcausesalong-rundepreciationofthePreviousEditiondollartheeurowhilearelativeexpansionofEuropeanoutputcausesaagainstlong-runrealappreciationofthedollaragainsttheeuro.CArelativeexpansionofU.S.outputcausesalong-runappreciationofthedollaragainsttheeurowhilearelativeexpansionofEuropeanoutputcausesalong-runrealdepreciationofthedollaragainsttheeuro.DArelativeexpansionofU.S.outputcausesalong-rundepreciationofthedollaragainsttheeurowhilearelativedeclineofEuropeanoutputcausesalong-runrealappreciationofthedollaragainsttheeuro.EArelativedeclineofU.S.outputcausesalong-rundepreciationofthedollaragainsttheeurowhilearelativedeclineofEuropeanoutputcausesalong-runrealappreciationofthedollaragainsttheeuro.AnswAer:QuestionPreviousEditionStatus:Whenallvariablesstartoutattheirlong-runlevelsthemostimportantdeterminantoflong-runswingsisnominalexchangeratesisAashiftinrelativemoneysupplylevels.Bashiftinrelativemoneysupplygrowthrates.Cachangeinrelativeoutputdemand.Dachangeinrelativeoutputsupply.ENoneoftheabove.AnswEer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsismostaccurateAIntheoutputmarketanincreaseindemandforU.S.outputleadstoanincreaseinthelong-runnominaldollar/euroexchangerate.BIntheoutputmarketanincreaseinthedemandforEuropeanoutputleadstoanincreaseinthelong-runnominaldollar/euroexchangerate.CIntheoutputmarketadecreaseindemandforU.S.outputleadstoadecreaseinthelong-runnominaldollar/euroexchangerate.DIntheoutputmarketanincreaseinthedemandforEuropeanoutputleadstoadecreaseinthelong-runnominaldollar/euroexchangerate.ENoneoftheabove.AnswBer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsismostaccurateAInthemoneymarketanincreaseinU.S.moneysupplylevelleadstoaproportionalincreaseinthelong-runnominaldollar/euroexchangerate.BInthemoneymarketanincreaseinEuropeanmoneysupplylevelleadstoaproportionalincreaseinthelong-runnominaldollar/euroexchangerate.CInthemoneymarketanincreaseinU.S.moneysupplygrowthrateleadstoadecreaseinthelong-runnominaldollar/euroexchangerate.DInthemoneymarketanincreaseinEuropeanmoneysupplygrowthleadstoanincreaseinthelong-runnominaldollar/euroexchangerate.EInthemoneymarketanincreaseinU.S.moneysupplylevelleadstoaproportionaldecreaseinthelong-runnominaldollar/euroexchangerate.AnswAer:QuestionPreviousEditionStatus:InthelongrunAexchangeratesobeyrelativePPPwhenalldisturbancesoccurintheoutputmarkets.BexchangeratesobeyabsolutePPPwhenalldisturbancesoccurintheoutputmarkets.QexchangeratesareunlikelytoobeyrelativePPPwhenalldisturbancesoccurintheoutputmarkets.DexchangeratesareunlikelytoobeyrelativePPPwhenalldisturbancesaremonetaryinnature.EexchangeratesobeyabsolutePPPwhenalldisturbancesaremonetaryinnature.AnswCer:QuestionPreviousEditionStatus:Discussthedifferenteffectsonthedomesticinterestrateswhenpricesareassumedflexibleandwhentheyareassumedtobesticky.AnswWhenpricesareflexibleadecreaseinthedomesticmoneysupplyer:hasnoeffectontheinterestratebecauseoftheimmediatedecreaseinthepricelevel.Howeverwhenpricesareassumedtobestickyadecreaseinthedomesticmoneysupplywillcausetheinterestratetorisebecausethestickydomesticpricelevelleadstoanexcessdemandforrealmoneybalancesattheinitialinterestrate.QuestionStatus:PreviousEditionWhatarethepredictionsofthePPPtheorywithregardstotherealexchangeratesAnswTherealexchangeratebetweentwocountriesisabroadsummaryer:measureofthepricesonecountryfsgoodsandservicesrelativetotheothers.PPPpredictsthattherealexchangerateneverpermanentlychangeswhichisdifferentfromnominalexchangeratesthatdealswiththerelativepriceoftwocurrencies.QuestionPreviousEditionStatus:WhatistherealexchangeratebetweenthedollarandtheeuroequaltoAnswLeter:•Realdollar/euroexchangerate=q$/eNominalexchangerate=e$/gPriceofanunchangingbasketinUS=PusPriceofanunchangingbasketinEurope二PeThenq$/e=E$/eXPE/PusAriseintherealdollar/euroexchangerateiscalledarealdepreciationofthedollaragainsttheeuroafallinpurchasingpowerofthedollar.Afallintherealdollar/euroexchangerateiscalledarealappreciationofthedollaragainsttheeuroariseinpurchasingpowerofthedollar.QuestionPreviousEditionStatus:DiscusswhytheempiricalsupportforPPPandthelawofonepriceisweakinrecentdata.AnswThefailureofthesepropositionsintherealworldisrelatedtotradeer:barriersanddeparturesfromfreecompetitionfactorsthatcanresultinpricingtomarketbyexporters.InadditiondifferentdefinitionsofpricelevelsindifferentcountriesbedevilattemptstotestPPPusingthepriceindexesgovernmentspublish.Forsomeproductsincludingmanyservicesinternationaltransportcostsaresosteepthattheseproductsbecomenon-tradableseepage

425.QuestionPreviousEditionStatus:Definetheconceptoftherealexchangerateandexplainhowitdiffersfromthenominalexchangerate.AnswIngeneraltherealexchangeratebetweentwocountries1currencieser:isthepriceofthesecondcountryscommoditybasketintermsofthefirstcountryscurrencyrelativetothepriceofthefirstcountryscommoditybasketForexampleinthecaseofU.S.andEuropetherealdollar/euroexchangerateisthedollarvalueofEuropespriceleveldividedbytheU.S.pricelevel.Wecanthusdenotetherealdollar/euroexchangerateqe$/Eas:qe$/e=E$/eXPE/PUSwhereE$/eisthenominaldollar/euroexchangeratePeisEuropespricelevelandPusistheU.S.pricelevel.Unliketherealexchangeratewhichistherelativepriceoftwooutputbasketsthenominalexchangerateistherelativepriceoftwocurrencies.Howeveraswecanseefromtheequationaboverealexchangeratesaredefinedintermsofnominalexchangeratesseepgs.413-

414.QuestionPreviousEditionStatus:7InternationalInterestRateDifferencesandtheRealExchangeRateInterestratedifferencesbetweencountriesdependonAdifferencesinexpectedinflationbutnotonexpectedchangesintherealexchangerate.differencesinexpectedchangesintherealexchangeratebutnotonexpectedinflation.neitherdifferencesinexpectedinflationnoronexpectedchangesintherealexchangerate.Ddifferencesinexpectedinflationandnothingelse.differencesinexpectedinflationandonexpectedchangesintherealexchangerate.AnswEQuestionPreviousEditionStatus:Theexpectedrateofchangeinthenominaldollar/euroexchangerateisbestdescribedasAtheexpectedrateofchangeintherealdollar/euroexchangerateminusXheU.S.-Europeexpectedinflationdifference.Btheexpectedrateofchangeintherealdollar/euroexchangerateplustheU.S.-Europerealinterestratedifference.Ctheexpectedrateofchangeintherealdollar/euroexchangerateplustheU.S.-Europeexpectedinflationdifference.Dtheexpectedrateofchangeintherealdollar/euroexchangerateminusXheU.S.-Europerealinterestratedifference.Etheexpectedrateofchangeintherealdollar/euroexchangerateplustheEuropeanexpectedinflation.AnswCer:QuestionPreviousEditionStatus:

15.8RealInterestParityTheexpectedrealinterestrate©intermsofthenominalinterestrateRandtheexpectedinflationrateneisgivenbyre=ne+R.re=2tie+R

2.C「e=ne+R

2.Dre二R-tte.re=r2-ne.AnswDer:QuestionPreviousEditionStatus:ThedifferencebetweennominalandrealinterestratesisthatAnominalinterestratesaremeasuredintermsofacountrysoutputwhilerealinterestratesaremeasuredinmonetaryterms.nominalinterestratesaremeasuredinmonetarytermswhilerealinterestratesaremeasuredintermsofacountrysoutput.Qnominalinterestratescanfluctuatewhilerealinterestratesalwaysremainfixed.Drealinterestratescanfluctuatewhilenominalinterestratesalwaysremainfixed.Erealinterestratesarethesameineverycountrywhilenominalinterestratesaredifferentforeverycountry.AnswBer:QuestionPreviousEditionStatus:WhatistherealinterestrateparityconditionAnswThenominalinterestratesareratesofreturnmeasuredinmonetaryer:terms.Therealinterestratesareratesofreturnmeasuredinrealterms.RealInterestParityCondition:旧-rf-q$/e/q$/eQuestionPreviousEditionStatus:WhichofthefollowingstatementsisthemostaccurateAIfPPPholdstruethenthelawofonepriceholdstrueforeverycommodityaslongasthereferencebasketsusedtoreckondifferentcountries1pricelevelsarethesame.BIfthelawofonepriceholdstrueforeverycommodityPPPmustholdautomatically.CIfthelawofonepriceholdstrueforeverycommodityPPPmustautomaticallyholdaslongasthereferencebasketsusedtoreckondifferentcountries1pricelevelsarethesame.DIfthelawofonepricedoesnotholdtrueforeverycommodityPPPcannotbetrueaslongasthereferencebasketsusedtoreckondifferentcountries1pricelevelsarethesame.ENoneoftheabove.AnswCer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsisthemostaccurateAAbsolutePPPdoesnotimplyrelativePPP.BRelativePPPimpliesabsolutePPP.QThereisnocausalityrelationbetweenthetwo.DAbsolutePPPimpliesrelativePPP.ENoneoftheabove.AnswDer:QuestionPreviousEditionStatus:WhichofthefollowingstatementsisthemostaccurateARelativePPPmaybevalidevenwhenabsolutePPPisnotprovidedthecausingdeviationsfromabsolutePPParemoreorlessstableoverfactorsdifferentcommoditiesspace.AbsolutePPPmaybevalidevenwhenrelativePPPisnotprovidedthefactorscausingdeviationsfromrelativePPParemoreorlessstableovertime.RelativePPPmaybevalidevenwhenabsolutePPPisnotprovidedthefactorscausingdeviationsfromabsolutePPParemoreorlessstableovertime.DRelativePPPisnotvalidwhenabsolutePPPisnot.ENoneoftheabove.AnswCer:QuestionPreviousEditionStatus:ExplainPurchasingPowerParity.AnswPPPstatesthattheexchangeratebetweentwocountries1currencieser:equalstheratioofthecountries1pricelevels.Afallinacurrencysdomesticpurchasingpoweri.e.anincreaseinthedomesticpricelevelwillbeassociatedwithaproportionalcurrencydepreciationintheforeignexchangemarketandviceversa.e$/g-PUS/PEwherePisthepriceofareferencecommoditybasket.Rearrange:PUS=e$/gxPeThusPPPassertsthatallcountries1pricelevelsareequalwhenmeasuredintermsofthesamecurrency.QuestionPreviousEditionStatus:DiscusstherelationshipbetweenPPPandtheLawofOnePrice.AnswThelawofonepriceappliestoindividualcommoditieswhilePPPer:appliestothegeneralpricelevel.Proponentsdoesntrequirethelawofonepricetoholdexactly.WhengoodsandofPPPargueservicestemporarilybecomemoreexpensiveinonecountrythaninthatitsothersthedemandsforitscurrencyanditsproductsfallspushingvalidityintheexchangerateanddomesticpricesbackinlinewithPPPandvicethelongrunversa.QuestionPreviousEditionStatus:DiscussthedifferencesbetweenAbsolutePPPandRelativePPP.AnswAbsolutePPPstatesthattheexchangeratebetweentwocurrencieser:equalstheratiooftheirpricelevels.RelativePPPstatesthatthepercentagechangeintheexchangeratebetweentwocurrenciesoveragivenperiodequalsthedifferencebetweentheinflationratesofthosetwocurrencies.QuestionPreviousEditionStatus:ExplainwhyRelativePPPisusefulwhencomparingcountriesthatbasetheirpricelevelsondifferentproductbaskets.AnswForExample:IftheU.S.pricelevelrisesby10%overayearwhileer:Europesrisesbyonly5%zrelativePPPpredictsa5%depreciationofthedollaragainsttheeuro.Thisjustcancelsthe5%bywhichU.S.inflationexceedsEuropeanleavingtherelativedomesticandforeignpurchasingpowersofbothcurrenciesunchanged.E$/et-E$/wt-i/E$/jt-i二neust-neEtbetweendatestandt-

1.RelativePPPisusefulwhencomparingcountriesthatbasetheirpricelevelsondifferentproductbaskets.RelativePPPmaybevalidevenwhenabsolutePPPisnot.QuestionPreviousEditionStatus:SupposeRussiasinflationrateis200%overoneyearbuttheinflationrateinerlandisonly2%.AccordingtorelativePPPwhatshouldhappenovertheSwitzyeartotheSwissfrancsexchangerateagainsttheRussianrubleAnswEruble/franct-Eruble/franct-l/Eruble/franct-1=2-

0.02=

1.98er:Sotherewillbea198%depreciationoftherubleagainstthefrancorconverselya198%appreciationofthefrancagainsttheruble.QuestionPreviousEditionStatus:AssumingrelativePPPfillinthetablebelow:AnswUsingE$/et-二FlUSt-□Etonegets:e匚QuestionPreviousEditionStatus:

15.3ALong-RunExchangeRateModelBasedonPPPlInorderfortheconditionE$/HK$=Pus/PHKtoholdwhatassumptionsdoestheprincipleofpurchasingpowerparitymakeANotransportationcostsandrestrictionsontrade;commoditybasketsthatareareliableindicationofpricelevel.BMarketsareperfectlycompetitivei.e.P=MC.CThefactorsofproductionareidenticalbetweencountries.DNoarbitrageexists.EAandB.AnswEer:QuestionPreviousEditionStatus:。