ECO 410 Week 5 Quiz – Strayer
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Week 5 Quiz 4 Chapter 7 and 8
Chapter 7
International Parity Conditions
7.1 Prices and Exchange Rates
Multiple Choice
1) If an
identical product can be sold in two different markets, and no restrictions
exist on the sale or transportation costs, the product's price should be the
same in both markets. This is known as:
A)
relative purchasing power parity.
B)
interest rate parity.
C) the
law of one price.
D)
equilibrium.
2) The
Economist publishes annually the "Big Mac Index" by which they
compare the prices of the McDonald's Corporation's Big Mac hamburger around the
world. The index estimates the exchange rates for currencies based on the
assumption that the burgers in question are the same across the world and
therefore, the price should be the same. If a Big Mac costs $2.54 in the United
States and 294 yen in Japan, what is the estimated exchange rate of yen per
dollar as hypothesized by the Hamburger index?
A)
$0.0086/¥
B)
¥124/$
C)
$0.0081/¥
D)
¥115.75/$
3) If
the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a
Big Mac hamburger in the United States is $3.41, and the price of a Big Mac
hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger
in Japan is:
A)
correctly priced.
B) under
priced.
C) over
priced.
D) There
is not enough information to determine if the price is appropriate or not.
4) The
price of a Big Mac in the U.S. is $3.41 and the price in Mexico is Peso 29.0.
What is the implied PPP of the Peso per dollar?
A) Peso
8.50/$1
B) Peso
10.8/$1
C) Peso
11.76/$1
D) None
of the above
5)
Assume the implied PPP rate of exchange of Mexican Pesos per U.S. dollar is
8.50 according to the Big Mac Index. Further, assume the current exchange rate
is Peso 10.80/$1. Thus, according to PPP and the Law of One Price, at the
current exchange rate the peso is:
A)
overvalued.
B)
undervalued.
C)
correctly valued.
D) There
is not enough information to answer this question.
6)
According to the Big Mac Index, the implied PPP exchange rate is Mexican peso
8.50/$1 but the actual exchange rate is peso10.80/$1. Thus, at current exchange
rates the peso appears to be ________ by ________.
A)
overvalued; approximately 21%
B)
overvalued; approximately 27%
C)
undervalued; approximately 21%
D)
undervalued; approximately 27%
7) Other
things equal, and assuming efficient markets, if a Honda Accord costs $24,682
in the U.S., then at an exchange rate of $1.57/£, the Honda Accord should cost
________ in Great Britain.
A)
£24,682
B)
£38,751
C)
£10,795
D)
£15,721
8) One
year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since
that time the rate of inflation in the U.S. has been 4% greater than that in
Canada. Based on the theory of Relative PPP, the current spot exchange rate of
U.S. dollars for Canadian dollars should be approximately:
A)
$0.96/C$
B) $1/C$
C)
$1.04/C$
D)
Relative PPP provides no guide for this type of question.
9)
________ states that differential rates of inflation between two countries tend
to be offset over time by an equal but opposite change in the spot exchange
rate.
A) The
Fisher Effect
B) The
International Fisher Effect
C)
Absolute Purchasing Power Parity
D)
Relative Purchasing Power Parity
10) Two
general conclusions can be made from the empirical tests of purchasing power
parity (PPP):
A) PPP
holds up well over the short run but poorly for the long run, and the theory
holds better for countries with relatively low rates of inflation.
B) PPP
holds up well over the short run but poorly for the long run, and the theory
holds better for countries with relatively high rates of inflation.
C) PPP
holds up well over the long run but poorly for the short run, and the theory
holds better for countries with relatively low rates of inflation.
D) PPP
holds up well over the long run but poorly for the short run, and the theory
holds better for countries with relatively high rates of inflation.
11) A
country's currency that strengthened relative to another country's currency by
more than that justified by the differential in inflation is said to be
________ in terms of PPP.
A)
overvalued
B) over
compensating
C)
undervalued
D) under
compensating
12) If
we set the real effective exchange rate index between Canada and the United
States equal to 100 in 1998, and find that the U.S. dollar has risen to a value
of 112.6, then from a competitive perspective the U.S. dollar is:
A)
overvalued.
B)
undervalued.
C) very
competitive.
D) There
is not enough information to answer this question.
13) If
we set the real effective exchange rate index between the United Kingdom and
the United States equal to 100 in 2005, and find that the U.S. dollar has
changed to a value of 91.4, then from a competitive perspective the U.S. dollar
is:
A)
overvalued.
B)
undervalued.
C)
equally valued.
D) There
is not enough information to answer this question.
14) The
government just released international exchange rate statistics and reported
that the real effective exchange rate index for the U.S. dollar vs the Japanese
yen decreased from 105 last year to 95 currently and is expected to fall still
further in the coming year. Other things equal U.S. ________ to/from Japan
think this is good news and U.S. ________ to/from Japan think this is bad news.
A)
importers; exporters
B)
importers; importers
C)
exporters; exporters
D)
exporters; importers
True/False
1) If a
market basket of goods cost $100 is the US and €70 in France, then the PPP
exchange rate would be $.70/€.
2) The
assumptions for relative PPP are more rigid than the assumptions for absolute PPP.
3)
Empirical tests prove that PPP is an accurate predictor of future exchange
rates.
4)
Consider the price elasticity of demand. If a product has price elasticity less
than one it is considered to have relatively elastic demand.
Essay
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