chapter 15 - Chapter 15: Price Levels and the Exchange Rate...

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Chapter 15: Price Levels and the Exchange Rate in the Long Run Multiple Choice Questions 1. In order for the condition E$/HK$ = Pus/P HK to hold, what assumptions does the principle of purchasing power parity make? A. No transportation 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. All of the above. Answer: E 2. Which of the following statements is the most accurate? A. Predictions about long-run movements in exchange rates are important even in the short run. B. Predictions about long-run movements in exchange rates are not important the short run. C. Predictions about long-run movements in exchange rates are important only in the long run. D. Predictions about long-run movements in exchange rates are often not important in the short run. E. None of the above. Answer: A 3. 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 determining 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’ products are traded. E. None of the above. Answer: D
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4. 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 barriers to trade, 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 barriers to trade, identical goods sold in the same country must sell for the same price when their 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 their prices are expressed in terms of the same currency. E. None of the above. Answer: A 5. Under Purchasing Power Parity, A. E $/E = P US / P E. B. E $/E = P E / P ES. C. E $/E = P US + P E. D. E $/E = P US - P E. E. None of the above. Answer: A 6. Under Purchasing Power Parity, A. E $/E = P i US / P i E. B.
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chapter 15 - Chapter 15: Price Levels and the Exchange Rate...

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