Question

1. Given the PPP relationship between real exchange rates, nominal exchange rates, and relative inflation rates, which of the following would we expect to occur due to an increase in foreign prices, given fixed nominal exchange rates.
2. 1. Real appreciation, if home prices don’t change, meaning home goods are more competitive
   2. Real depreciation, if home prices don’t change, meaning home goods are more competitive
   3. Real appreciation, if home prices don’t change meaning home goods are less competitive
   4. B and C

2. Suppose the spot dollar-euro exchange rate is $1.10/€, and the 60-day forward rate is $1.14/€.
   1. The dollar is selling at a forward discount
   2. The Euro is selling at a forward discount
   3. The Euro is selling at a forward premium
   4. The dollar is selling at a forward premium
   5. A and C
   6. B and D

3. Increasing unit labor cost (dollar value of labor it takes to produce a unit) implies
   1. Increased competitiveness
   2. Reduced competitiveness
   3. A real exchange rate depreciation
   4. A nominal exchange rate appreciation
   5. None of the above

4. A policy trilemma relating to exchange rates refers to
   1. One cannot have fixed exchange rates, independent monetary policy and open capital markets
   2. One cannot have flexible exchange rates, independent monetary policy and open capital markets
   3. One cannot have fixed exchange rates, independent monetary policy and capital controls
   4. One cannot have an appreciating currency, independent monetary policy and capital controls
   5. None of the above
5. Big Mac costs $3.50 in the United States and 7.80 zlotys in Poland. If the exchange rate is 3 zlotys per dollar, purchasing power parity predicts that
   1. the dollar is undervalued, and will appreciate
   2. the dollar is overvalued, and will depreciate
   3. the zloty is overvalued, and will depreciate
   4. the currencies are correctly valued

6. PPP referring to the theory that exchange rates reflect the differences in price levels may not hold because of,
   1. Transportation costs
   2. Differences between tradable and non-tradable products
   3. Differences in inflation rates
   4. Differences in interest rates
   5. A and B
   6. All of the above

7. A growing current account deficit may be caused in the short run by_____ and in the long run by __________.
   1. Change in the exchange rate; change in competitiveness
   2. Change in the business cycle; change in FDI
   3. Change in exchange rates; change in the savings-investment imbalance
   4. All of the above
   5. None of the above

8. The Mexican financial crisis of 1994 was characterized by _______ versus the Asian crisis which was characterized by _________________
   1. Sovereign debt; contagion
   2. Large current account deficit; poor real estate loans and contagion between countries
   3. Hyperinflation; Large current account deficit
   4. None of the above

9. The J-curve refers to
   1. The phenomenon that real depreciation can first cause a current account to worsen and then to improve over time.
   2. The phenomenon that real depreciation can first cause a current account to improve and then to worsen over time.
   3. The phenomenon that interest rate increases first cause a current account to worsen and then to improve over time.
   4. The phenomenon that interest rate increases first cause a current account to improve and then to improve over time.

10. When a country takes this currency regime it will back up its domestic money supply with foreign reserves
    1. Fixed peg
    2. Crawling band
    3. Currency board
    4. Flexible exchange rate
    5. None of the above

Answer 1

Given the PPP relationship between real exchange rates, nominal exchange rates, and relative inflation rates, which of the following would we expect to occur due to an increase in foreign prices, given fixed nominal exchange rates.

1. Real appreciation, if home prices don’t change, meaning home goods are more competitive
2. Real depreciation, if home prices don’t change, meaning home goods are more competitive
3. Real appreciation, if home prices don’t change meaning home goods are less competitive
4. B and C

Correct answer is Option 3 i-e, Real appreciation, if home prices don’t change meaning home goods are less competitive,

The purchasing power parity (PPP) tells that the exchange rate are in equillibrium when the value of a goods and service betweeen two countries are same .So if the nominal exchange rates are fixed , means that the currecy exchange is fixed but there is an increase in foreign price , this will cause the real exchange rate of home country to appreciate so if the home price dont change , the home good will be less competitive.The relative inflation rate will also be lower as a result of real exchange rate . Hence option 3 is correct .