1、International Economics, 8e (Krugman) 23Chapter 15 Price Levels and the Exchange Rate in the Long Run15.1 The Law of One Price1) Which of the following statements is the most accurate? The law of one price states: A) in competitive markets free of transportation costs and official barrier to trade,

2、identical goods sold in different countries must sell for the same price when their prices are expressed in terms of the same currency. B) in competitive markets free of transportation costs and official barrier to trade, identical goods sold in the same country must sell for the same price when the

3、ir prices are expressed in terms of the same currency. C) in competitive markets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price. D) identical goods sold in different countries must sell for the same price when thei

4、r prices are expressed in terms of the same currency. E) None of the above. Answer: A Question Status: Previous Edition2) Under Purchasing Power Parity, A) E$/E = PUS/PE. B) E$/E = PE/PES. C) E$/E = PUS + PE. D) E$/E = PUS - PE. E) None of the above. Answer: A Question Status: Previous Edition3) Exp

5、lain the Law of One Price. Give an example. Answer: The law of one price states that in competitive markets free of transportation costs and trade barriers, identical goods sold in different countries must sell for the same price when expressed in terms of the same currency.= (E$/£) × () f

6、or good i.E$/£ = /If, for example, the price of the same sweater was cheaper in London than in New York, U.S. importers and British exporters would have an incentive to buy sweaters in London and ship them to New York, pushing the London price up and the New York price down, until both were equ

7、al. Question Status: Previous Edition 4) Fill in the following table, assuming the law of one price prevails. Answer: Question Status: Previous Edition15.2 Purchasing Power Parity1) Under Purchasing Power Parity, A) E$/E = PiUS/PiE. B) E$/E = PiE/PiUS. C) E$/E = PUS/PE. D) E$/E = PE/PES. E) None of

8、the above. Answer: C Question Status: Previous Edition2) Which of the following statements is the most accurate? A) The law of one price applies only to the general price level. B) The law of one price applies to the general price level while PPP applies to individual commodities. C) The law of one

9、price applies to individual commodities while PPP applies to both the general price level and to individual commodities. D) PPP applies only to individual commodities. E) The law of one price applies to individual commodities while PPP applies to the general price level. Answer: E Question Status: P

10、revious Edition 3) Which of the following statements is the most accurate? A) If PPP holds true, then the law of one price holds true for every commodity as long as the reference baskets used to reckon different countries' price levels are the same. B) If the law of one price holds true for ever

11、y commodity, PPP must hold automatically. C) If the law of one price holds true for every commodity, PPP must automatically hold as long as the reference baskets used to reckon different countries' price levels are the same. D) If the law of one price does not hold true for every commodity, PPP

12、cannot be true as long as the reference baskets used to reckon different countries' price levels are the same. E) None of the above. Answer: C Question Status: Previous Edition4) Which of the following statements is the most accurate? A) Absolute PPP does not imply relative PPP. B) Relative PPP

13、implies absolute PPP. C) There is no causality relation between the two. D) Absolute PPP implies relative PPP. E) None of the above. Answer: D Question Status: Previous Edition5) Which of the following statements is the most accurate? A) Relative PPP may be valid even when absolute PPP is not, provi

14、ded the factors causing deviations from absolute PPP are more or less stable over different commodities space. B) Absolute PPP may be valid even when relative PPP is not, provided the factors causing deviations from relative PPP are more or less stable over time. C) Relative PPP may be valid even wh

15、en absolute PPP is not, provided the factors causing deviations from absolute PPP are more or less stable over time. D) Relative PPP is not valid when absolute PPP is not. E) None of the above. Answer: C Question Status: Previous Edition6) Explain Purchasing Power Parity. Answer: PPP states that the

16、 exchange rate between two countries' currencies equals the ratio of the countries' price levels.A fall in a currency's domestic purchasing power (i.e. an increase in the domestic price level) will be associated with a proportional currency depreciation in the foreign exchange market and

17、 vice versa.= PUS/PE where P is the price of a reference commodity basket.Rearrange: PUS = × (PE)Thus, PPP asserts that all countries' price levels are equal when measured in terms of the same currency. Question Status: Previous Edition7) Discuss the relationship between PPP and the Law of

18、One Price. Answer: The law of one price applies to individual commodities while PPP applies to the general price level.Proponents of PPP argue that its validity in the long run doesn't require the law of one price to hold exactly. When goods and services temporarily become more expensive in one

19、country than in others, the demands for its currency and its products falls, pushing the exchange rate and domestic prices back in line with PPP and vice versa. Question Status: Previous Edition 8) Discuss the differences between Absolute PPP and Relative PPP. Answer: Absolute PPP states that the ex

20、change rate between two currencies equals the ratio of their price levels. Relative PPP states that the percentage change in the exchange rate between two currencies over a given period equals the difference between the inflation rates of those two currencies. Question Status: Previous Edition9) Exp

21、lain why Relative PPP is useful when comparing countries that base their price levels on different product baskets. Answer: For Example: If the U.S. price level rises by 10% over a year while Europe's rises by only 5%, relative PPP predicts a 5% depreciation of the dollar against the euro. This

22、just cancels the 5% by which U.S. inflation exceeds European, leaving the relative domestic and foreign purchasing powers of both currencies unchanged.(-)/= (e)US,t - (e)E,t between dates t and t - 1.Relative PPP is useful when comparing countries that base their price levels on different product ba

23、skets. Relative PPP may be valid even when absolute PPP is not. Question Status: Previous Edition10) Suppose Russia's inflation rate is 200% over one year but the inflation rate in Switzerland is only 2%. According to relative PPP, what should happen over the year to the Swiss franc's exchan

24、ge rate against the Russian ruble? Answer: (Eruble/franc, t - Eruble/franc, t-1)/Eruble/franc, t-1 = 2 - 0.02 = 1.98So there will be a 198% depreciation of the ruble against the franc or, conversely, a 198% appreciation of the franc against the ruble. Question Status: Previous Edition 11) Assuming r

25、elative PPP, fill in the table below: Answer: Using ( - )/ = US, t - E, t one gets: Question Status: Previous Edition15.3 A Long-Run Exchange Rate Model Based on PPP1) In order for the condition E$/HK$ = Pus/PHK to hold, what assumptions does the principle of purchasing power parity make? A) No tran

26、sportation costs and restrictions on trade; commodity baskets that are a reliable indication of price level. B) Markets are perfectly competitive, i.e., P = MC. C) The factors of production are identical between countries. D) No arbitrage exists. E) A and B. Answer: E Question Status: Previous Editi

27、on 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 determin

28、ing 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&#

29、39; products are traded. E) None of the above. Answer: D Question Status: Previous Edition3) 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)

30、 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) None of the above. Answer: A Question Status: Previous Edition4) The monetary approach makes the general prediction that A) the exc

31、hange 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 tho

32、se 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- 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

33、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) None of the above. Answer: D Question Status: Previous Edition5) Under the monetary approach to the exchange rate theory, money supply growth at a consta

34、nt 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,

35、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

36、 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) None of the a

37、bove. Answer: C Question Status: Previous Edition 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

38、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) None of the above. Answer: D Question S

39、tatus: Previous Edition7) 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

40、 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 th

41、e 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) None of the above. Answer: C Question Status: Previous Edition8) Who

42、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) None of the above. Answer: B Question Status: New9) If people expect relative PPP to hold, A) th

43、e 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

44、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 an

45、d 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) None of the above. Answer: A Ques

46、tion Status: Previous Edition 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.

47、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 r

48、ise 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) None of the above. Answer: C Question Status: Previous Edition11) In the short run, A) the int

49、erest rate can rise when the domestic money supply falls. B) the interest rate can decrease when the domestic money supply falls. C) the interest rate stays constant when the domestic money supply falls. D) the interest rate rises in the same proportion as the domestic money supply falls. E) None of

50、 the above. Answer: A Question Status: Previous Edition12) Under a flexible-price monetary approach to the exchange rate, A) when the domestic money supply falls, the price level would eventually fall, increasing the interest rate. B) when the domestic money supply falls, the price level would fall

51、right away, causing a reduction in the interest rate. C) when the domestic money supply falls, the price level would fall right away, causing an increase in the interest rate. D) when the domestic money supply falls, the price level would eventually fall, keeping the interest rate constant. E) when

52、the domestic money supply falls, the price level would fall right away, keeping the interest rate constant. Answer: E Question Status: Previous Edition13) Under sticky prices, A) a fall in the money supply raises the interest rate to preserve money market equilibrium. B) a fall in the money supply r

53、educes the interest rate to preserve money market equilibrium. C) a fall in the money supply keeps the interest rate intact to preserve money market equilibrium. D) a fall in the money supply does not affect the interest rate in the short run, only in the long run. E) None of the above. Answer: A Qu

54、estion Status: Previous Edition 14) Under sticky prices, A) an interest rate rise is associated with lower expected deflation and a long-run currency appreciation, so the currency appreciates immediately. B) an interest rate rise is associated with higher expected inflation and a long-run currency a

55、ppreciation, so the currency appreciates immediately. C) an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency appreciates immediately. D) an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so the currency depreciates immediately. E) an interest rate rise is associated with lower expected inflation and a long-run currency appreciation, so the currency appreciates immediately. Answer: E Question Stat