Question

1. Purchasing Power Parity theory

	a.	means that you can profit by taking advantage of differences in exchange rates at a given point in time.
	b.	means that currencies should have the same purchasing power in different countries.
	c.	means that prices should be identical in different countries.
	d.	means that exchange rates are inverses of each other.
	e.	all of the above

2. Suppose that an ounce of gold sells for $2000 in the United States and 1000 euros in France. A euro currently trades for $1.50 . it costs $100 to ship an ounce of gold between the two countries. Assume it is legal to buy and ship gold in both countries. Then

	a.	it is not possible to profit from international arbitrage.
	b.	you can profit by buying gold in the United States and shipping it to France.
	c.	you can profit by buying gold in France and shipping it to the United States.
	d.	the price of gold will rise in the United States.
	e.	the dollar will appreciate.

3. Suppose that Laborland has a population of 100 people. Five people are under 16 years of age and five people are retired. Ten people have given up looking for work. Sixty people are actively employed and 20 people are actively seeking work. If five of those give up looking for work, then

	a.	the unemployment rate increases from 20% to 33.3%.
	b.	The unemployment rate declines from 33.3% to 25%.
	c.	The labor force declines from 60 to 55.
	d.	the unemployment rate declines from 25% to 20%.
	e.	the population increases from 100 to 105.

Answer 1

1.

Purchasing power parity theory means that different currencies should have the same purchasing power in different countries

Ans: b. means that currencies should have the same purchasing power in different countries

2. Price of an ounce of gold in the USA = $2,000

1 euro = $1.50

Price of an ounce of gold in France = 1000 euros = 1000 * $1.50 = $1,500

Cost of shipping an ounce of gold between the two countries = $100

Cost of buying an ounce of gold in France and Shipping to the USA = $1,500 + $100 = $1,600

Therefore, you can earn profit by purchasing gold in France and shipping it to the USA.

At the current exchange rate, the dollar is overvalued and hence, due to arbitrage, the dollar depreciates alongside a decrease in the price of gold in the United States due to increased supply.

Ans: c. you can profit by buying gold in France and shipping it to the United States

3. In the given country,

Employed = 60 people

Unemployed = 20 people

Labor force consists of 60 + 20 = 80 people

Initial unemployment rate = Unemployed/Labor force * 100 = 20/80 * 100 = 25%

If 5 people give up on looking for work, the unemployed = 15 people

Labor force = 60 + 15 = 75

Unemployment rate = 15/75 * 100 = 20%

Ans: d. the unemployment rate declines from 25% to 20%