Question

Question 1 (1 point)

Which of the following can cause relative PPP to NOT hold in the short run?

Question 1 options:

frictionless markets

state-sponsored monopolies

types of labor and unique skill sets than can only be found in one area or certain areas

shipping costs

Question 2 (1 point)

If relative PPP holds, absolute PPP must hold.

Question 2 options:

True

False

Question 3 (1 point)

In 2019, the US had the highest nominal GDP in the world, before adjusting for purchasing power. However, when adjusting for purchasing power, China had the highest GDP in the world in 2019. Given only these facts, what is true about the Chinese currency in 2019?

(Note: this question has nothing to do with population size.)

Question 3 options:

Chinese currency was overvalued in 2019

absolute PPP must have held in 2019

the real exchange rate was 1 in 2019

Chinese currency was undervalued in 2019

Question 4 (1 point)

Suppose that the growth rate in the money supply in the US is 9% while real GDP grows by 6%. What will the rate of inflation in the US be, as predicted by the monetary model? Enter your answer as a percent, but don't include the percent sign in your answer.

Your Answer:

Question 4 options:

Answer

Question 5 (1 point)

Suppose that the depreciation of EA/B was 7% over the past year, and prices in country A increased by 4% from this time last year. Assuming relative PPP holds, what was the rate of inflation in country B from this time last year? Enter your answer as a percent but do not include the percent sign in your answer.

Your Answer:

Question 5 options:

Answer

Question 6 (1 point)

If absolute PPP holds, relative PPP must hold.

Question 6 options:

True

False

Question 7 (1 point)

Calculate the relative price qgUS/EUR of a price of designer jeans if they cost €45 in Europe, $50 in the US, and the exchange rate E$/€ is 1.2.

Your Answer:

Question 7 options:

Answer

Question 8 (1 point)

The evidence shows that relative PPP _____.

Question 8 options:

doesn't holds up much at all in the long run or the short run.

holds up reasonably well in the short run, but not in the long run.

holds up very well in the long run and the short run.

holds up reasonably well in the long run, but not in the short run.

Question 9 (1 point)

Relative PPP says that, in the long run, _____.

Question 9 options:

the depreciation of a country A's currency relative to country B's currency is equal to country A's inflation rate minus country B's GDP growth rate.

the depreciation of a country A's currency relative to country B's currency is equal to country A's inflation rate plus country B's inflation rate.

the depreciation of a country A's currency relative to country B's currency is equal to country A's inflation rate minus country B's inflation rate.

the depreciation of a country A's currency relative to country B's currency is equal to country B's inflation rate minus country A's inflation rate.

Question 10 (1 point)

Suppose country W only produces one type of good (widgets) and produced the same number of widgets in 2018 and 2019. All money in country W is cold, hard cash. Suppose that, in every year, each unit of currency was spent four times per year on average, but that the nominal GDP of country W increased by 9% from 2018 to 2019. This must mean that the money supply of country W increased by ____ percent from 2018 to 2019. Do not include the percent sign in your answer

Your Answer:

Question 10 options:

Answer

Question 11 (1 point)

What is true if absolute PPP holds between the US and Canada?

(Note that USD refers to US dollars while CAD refers to Canadian dollars)

Question 11 options:

The nominal exchange rate of USD per CAD equals the US price level divided by the Canadian price level, and the real exchange rate is less than one.

The nominal exchange rate of USD per CAD equals the US price level divided by the Canadian price level, and the real exchange rate is greater than one.

The nominal exchange rate of USD per CAD equals the Canadian price level divided by the US price level, and the real exchange rate is equal to one.

The nominal exchange rate of USD per CAD equals the US price level divided by the Canadian price level, and the real exchange rate is equal to one.

Question 12 (1 point)

Suppose money supply growth rates and real GDP growth rates have been chugging along in the US and Canada at 1% per year for a long time, when suddenly, the real GDP growth rate in Canada increases to 4%. What will happen, according to the monetary model?

Question 12 options:

The US dollar will depreciate by 3% relative to the Canadian dollar

The US dollar will appreciate by 3% relative to the Canadian dollar

The US dollar will depreciate by 4% relative to the Canadian dollar

The US dollar will appreciate by 4% relative to the Canadian dollar

Question 13 (1 point)

If price levels in China and the US do not change, but the exchange rate is decreased so that it takes fewer dollars to buy one Chinese yuan than before (in other words, E$/¥ decreases), what will happen to the real exchange rate (where US is considered the home country)?

Question 13 options:

It falls and the US has experienced a real appreciation

It falls and the US has experienced a real depreciation

It rises and the US has experienced a real appreciation

It rises and the US has experienced a real depreciation

Question 14 (1 point)

If LOOP holds for all goods, absolute PPP must hold.

Question 14 options:

True

False

Question 15 (1 point)

Saved

If the law of one price applies to ounces of silver, then the ratio of the price of an ounce of silver in Chicago (which is quoted in dollars) to the price of an ounce of silver in London (which is quoted in £) will equal ______.

(If you actually look this up on the internet, you should be pleasantly surprised with how close it is to following LOOP. This parenthetical comment should not affect the question, it's just an interesting side note.)

Question 15 options:

the number of ounces per pound

the inverse exchange rate E£/$

the exchange rate E$/£

the conversion to the metric system

Click on the photo there are 15 questions

Answer 1

1) Relative Purchasing Power Parity (RPPP) may not hold in the short run as the exchange rate changes may be because of the changes in relative prices of goods, but not because of the real changes in price. So the reason for this is option 1 which is frictionless markets.

2) The law of one price is the basis of PPP theory. Relative PPP complements the Absolute PPP.

As per RPPP the difference between inflation rates of two countries and the cost of goods are the factors affecting the exchange rate. As per APPP, the exchange rate is equal to the ratio of prices of goods in two countries. With all these concepts, we can conclude that the answer for this question is option 1:TRUE

3) In 2019, both the US and China had the highest GDP. So the situation indicates that the exchange rate would have been equal to the ratio of prices of goods in two countries. So the answer is APPP might have held good in 2019.

4) For Inflation rate calculation we have to find Nominal GDP÷ Real GDP= 9÷6=1.5

So, it indicates that there was 50% increase in prices.

So, the inflation rate is 50.