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# tbch15 - Chapter 15 Price Levels and the Exchange Rate in...

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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? 3. Which of the following statements is the most accurate? 210

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4. Which of the following statements is the most accurate? The law of one price states: 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. E \$/E = P i E / P i US. C. E \$/E = P US / P E. D. E \$/E = P E / P ES. E. None of the above. Answer: C
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