CHAPTER 12

# When the exchange rate for the euro changes from 080

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9) When the exchange rate for the euro changes from \$0.80 to \$1.00 then, holding everything else constant, A) the euro has appreciated and German cars sold in the United States become more expensive. B) the euro has appreciated and German cars sold in the United States become less expensive. C) the euro has depreciated and American wheat sold in Germany becomes more expensive. D) the euro has depreciated and American wheat sold in Germany becomes less expensive. Answer: D 10) When the exchange rate for the euro changes from \$1.00 to \$0.80, then, holding everything else constant, 152

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11) The starting point for understanding how exchange rates are determined is a simple idea called _____, which states that if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it. 12) The theory of purchasing power parity is a theory of how exchange rate are determined in 13) The _____ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A) theory of purchasing power parity B) law of one price C) theory of money neutrality D) quantity theory of money Answer: A 14) The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in 15) In the long run, a rise in a country’s price level (relative to the foreign price level) causes its currency to _____, while a fall in the country’s relative price level causes its currency to _____ 153
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