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If the GDP deflator in the U.S. is 114,
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# Question : If the GDP deflator in the U.S. is 114, : 2158615

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

21) If the GDP deflator in the U.S. is 114, and the GDP deflator in Ukraine is 142, which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)

A) No prediction regarding changes in the demand or supply of the dollar can be made without information on the exchange rate between the U.S. and Ukraine.

B) The supply of the dollar will fall since the dollar is undervalued.

C) The demand for the dollar will rise since the dollar is undervalued.

D) The demand for the dollar will fall since the dollar is overvalued.

22) Suppose the GDP deflator in the U.S. is 125 and the GDP deflator in Japan is 100. Also assume the U.S. has trade barriers on Japanese goods in the form of quotas. What does this imply about the exchange rate of yen per dollar under the theory of purchasing power parity in the long run?

A) The exchange rate of yen per dollar will be less than .8.

B) The exchange rate of yen per dollar will be equal to 1.25.

C) The exchange rate of yen per dollar will be equal to .8.

D) The exchange rate of yen per dollar will be greater than .8.

23) If the purchasing power of the dollar is greater than the purchasing power of the euro, purchasing power parity predicts that the exchange rate will

A) not fluctuate and stay constant in the long run.

B) decrease if the exchange rate is less than 1 euro per dollar.

C) be equal to the relative purchasing power across the currencies in the long run.

D) increase if the exchange rate is greater than 1 euro per dollar.

24) Stephen Jen estimated that the euro was over valued relative to the dollar. If this is true and the currency market reacts to the overvaluation, which of the following would be true after the currency markets react?

A) European Union tourists that travel to the U.S. will benefit from the market reaction.

B) European Union consumers in who buy imported U.S. goods will benefit from the market reaction.

C) European Union firms that export goods from the U.S. to the Europe Union will benefit from the market reaction.

D) U.S. firms that export goods from the U.S to the European Union will benefit from the market reaction.

25) The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory. In December 2004, The Economist reported that the average price of a Big Mac in the U.S. was \$3.00. In Mexico, the average price of a Big Mac at that time was 24 pesos. What is the "implied exchange rate" between the peso and the dollar?

A) 8 pesos per dollar

B) 0.125 pesos per dollar

C) 10 pesos per dollar

D) 1.25 pesos per dollar

26) If, at the current exchange rate between the dollar and the Norwegian kroner of 6.65 kroner per dollar, the dollar is "overvalued," how do you expect demand and supply in the foreign exchange markets to respond?

A) The supply of the dollar will rise, while the demand for the kroner will fall.

B) The supply of the dollar will rise, while the demand for the kroner will rise.

C) The demand for the dollar will rise, while the supply of the kroner will fall.

D) The demand for the dollar will fall, while the supply of the kroner will rise.

Figure 30-1

27) Refer to Figure 30-1. Which of the following would cause the change depicted in the figure above?

A) The European Union increases its quotas on French wine.

B) Europeans decrease their preferences for U.S. goods relative to European goods.

C) U.S. productivity rises relative to European productivity.

D) an increase in the price level of U.S. goods relative to European goods

Figure 30-2

28) Refer to Figure 30-2. Which of the following would cause the change depicted in the figure above?

A) A new trade agreement with China results in the U.S. removing all tariffs on clothing imported from China.

B) An expansionary monetary policy causes an increase in the price level of U.S. goods relative to Chinese goods.

C) Lack of investment in infrastructure causes U.S. productivity to fall relative to Chinese productivity.

D) Tainted cat food from China causes U.S. consumers to decrease their preferences for Chinese goods relative to U.S. goods.

29) If the average productivity of American firms is rising more quickly than the average productivity of Indian firms, which of the following would you expect to see? (India's currency is the rupee.)

A) a decrease in the quantity demanded of Indian products relative to American products

B) an increase in the value of the rupee relative to the dollar

C) a decrease in the prices of Indian products

D) An increase in the quantity of Indian products relative to American products.

30) How will the exchange rate (foreign currency per dollar) respond to an increase in the relative rate of productivity growth in the U.S. in the long run?

A) Exchange rates will be unaffected by changes in the relative rate of productivity growth in the U.S., both in the short run and in the long run.

B) The exchange rate will be affected in the short run, but not in the long run.

C) Exchange rates will fall.

D) Exchange rates will rise.

31) If inflation in Russia is higher than it is in the U.S.,

A) the value of the ruble will rise in the long run.

B) the value of the dollar will rise in the long run.

C) the purchasing power of the ruble in buying Russian goods will rise relative to the dollar.

D) Both A and C are correct.

32) Which of the following would increase the value of the dollar in the long run?

A) an increase in the supply of dollars on the foreign exchange market

B) an increase in inflation in the U.S. relative to other countries

C) an increase in the demand for American goods relative to goods from other countries

D) a decrease in U.S. tariffs on foreign goods

33) What explains the appreciation of the Japanese yen relative to the U.S. dollar from 1970 to the early 1990s?

A) Japanese inflation rose faster than U.S. inflation.

B) Japanese productivity rose faster than U.S. productivity.

C) High tariffs and restrictive quotas in the U.S. caused the value of the dollar to decline.

D) U.S. consumers reduced their preferences for Japanese goods.

34) The central bank of the European Union is called the

A) Banco Europe.

B) Federal Reserve.

C) European Central Bank.

D) Bundesbank.

35) By 2007, how many European countries were members of the European Union?

A) 25

B) 12

C) 57

D) 15

36) Members of the European Union decided to adopt a single currency by what year?

A) 1992

B) 2008

C) 2005

D) 1999

37) Which of the following is a drawback to having a common currency across countries, as in the European Union?

A) With a common currency, individual countries are no longer able to run independent monetary policies.

B) A common currency increases barriers to trade across countries, reducing opportunities for economic growth.

C) Having a common currency implies that the prices of goods across countries must always be the same, regardless of consumer preferences for goods across countries.

D) None of the above is a drawback to a common currency.

38) Pegging a country's exchange rate to the dollar can be advantageous if

A) a country wishes to conduct independent monetary policy.

B) investors believe the dollar to be more stable than the domestic country's currency.

C) imports are not a significant fraction of the goods the country's consumers buy.

D) the country does not trade much with America.

39) Which of the following is not an advantage to a country of choosing to fix its exchange rate against a major currency, rather than choosing a floating exchange rate?

A) Pegging allows the country more flexibility in conducting monetary policy.

B) Pegging insures that interest payments stemming from foreign loans do not fluctuate with the value of the currency.

C) Pegging reduces the uncertainty caused by currency fluctuations and thereby simplifies business planning.

D) Pegging helps avoid inflation in imported goods caused by currency depreciation for countries with significant levels of imports.

40) You are made better off in which of the following situations?

A) you borrow \$10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars

B) you borrow 10,000 pesos, you earn income in dollars, the dollar depreciates against the peso, you must pay back the loan in pesos

C) you borrow \$10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars

D) you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos

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