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31) Thomas is planning a vacation to Country X. On a tourism Web site, he reads that the government of Country X limits the amount of money a tourist may convert into the country's currency. Country X most likely uses which of the following?

A) import deposit requirements

B) multiple exchange rates

C) import licensing

D) quantity controls

32) The purchasing power parity theory claims that a change in relative ________ between two countries must cause a change in ________ in order to keep the prices of goods in two countries fairly similar.

A) exchange rates; inflation

B) inflation; exchange rates

C) interest rates; inflation

D) interest rates; exchange rates

33) The ________ theory seeks to define the relationship between currencies based on relative inflation.

A) inflation growth rate

B) revaluation

C) purchasing power parity

D) interest rate

34) According to purchasing power parity theory, if Brazilian inflation was 6 percent and inflation in Argentina was 12 percent, the Brazilian real would be expected to ________.

A) rise by the difference in inflation rates

B) fall by the difference in inflation rates

C) rise by 4.5 percent

D) stay the same

35) Which of the following is used as an illustration of the PPP theory for estimating exchange rates?

A) the Composition of Official Foreign Exchange Reserves (COFER)

B) the black market rate

C) the import licensing ratio

D) the Big Mac Index

36) Which of the following statements best describes a limitation of the Big Mac Index?

A) Profit margins vary by the strength of competition, which affect relative prices.

B) The theory of PPP incorrectly assumes that there are barriers to trade.

C) The Big Mac represents all possible commodities and services.

D) Taxes have no effect on Big Mac prices.

37) According to purchasing power parity, if the domestic inflation rate is ________ than that in the foreign country, the domestic currency should be ________ than that of the foreign country.

A) lower; weaker

B) higher; higher

C) lower; stronger

D) higher; stronger

38) If a Big Mac costs $3.41 in the United States and $2.67 in Argentina (the price of a Big Mac in Argentine pesos converted into dollars at the spot exchange rate), which of the following is most likely true?

A) The peso is overvalued against the dollar.

B) The dollar is overvalued against the peso.

C) It should be harder for a U.S. tourist to buy a leather coat in Buenos Aires because the dollar won't go very far.

D) It will be cheap for Argentine companies to invest in the United States because the dollar is relatively weak.

39) Which of the following states that the country with the higher interest rate should have the higher inflation?

A) the Fisher Effect

B) the International Fisher Effect

C) the Interest Rate Inflation Theory

D) the Forward rate theory

40) The International Fisher Effect ________.

A) links interest rates and inflation

B) implies that the currency of the country with the lower interest rate will weaken in the future

C) implies that the country with the higher interest rate should have lower inflation

D) links interest rates and exchange rates

 

 

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