Question

1.

The purchasing power parity predicts that if the price level in the US falls relative to Mexico,

	a.	​PPP predicts price level will normalize in the long-run
	b.	​The dollar will depreciate relative to the peso
	c.	​The dollar will appreciate relative to the peso
	d.	​There is no effect on either currency

2.

A widget costs $50 in the US and CAD$53 in Canada. The current exchange rate is 1USD=1.09CAD. At this rate,

	a.	​The good costs more in the US
	b.	​The good costs more in Canada
	c.	​The good costs the same across the two countries
	d.	​None of the above

3.

A weaker peso, relative to the US dollar, causes the demand for Mexican exports to_______ and US imports to ________

	a.	​Increase; Decrease
	b.	​Increase; Increase
	c.	​Decrease; Decrease
	d.	​Decrease; Increase

4.

John wants to buy a new television set. He can either buy it in the US and pay $1200 or buy it in Canada and pay CAD$1300. At the exchange rate of 1CA$=US$0.92, ignoring any other costs, he would

	a.	​Prefer buying in the US
	b.	​Prefer buying in Canada
	c.	​Be indifferent about where he buys his television
	d.	​None of the above

5.

​ Currency devaluations hurt consumers because they make imports ________ expensive

	a.	​Less
	b.	​More
	c.	​All of the above
	d.	​None of the above

6.

Purchasing power parity suggests that

	a.	​Given fixed prices, interest rates adjust so that a good costs the same across two countries
	b.	​Given fixed exchange rates, prices adjust such that a good costs the same across two countries
	c.	​All of the above
	d.	​None of the above

Answer 1

1) the purchasing power parity predicts that if the price level in the US falls relative to to Mexico, the dollar will appreciate related to the peso due to Decreased Inflation in US.

Hence, option c is correct.

2) 1USD= 1.09 CAD $

50 USD= 54.5 CAD $

So, the Widget cost 54.5 CAD $ in US and 53 CAD$ in Canada.

Hence, Option a is correct.

3) A weaker peso, realtive to US dollar, causes the demand for Mexican exports to increase because Mexican goods are now cheaper for US residents and US imports to increase.

Hence, option b is correct.

4) 1 CAD$= US$ 0.92

1300 CAD$= US$1196

Cost of of a new television set is lower in in Canada, so the consumer would prefer buying in Canada.

Hence, option b is correct

5) currency devaluation hurt consumers because they make imports more expensive because of the lower value of their currency.

Hence, option b is correct.

6) purchasing power parity suggests that given fixed exchange rates, prices adjust such that a good costs the same across two countries maintaining the law of One price.

Hence, Option b is correct