Chapter 19 What Determines Exchange Rates

11. The __________ effect can sometimes be destabilizing because it moves the exchange rate away from its long-run equilibrium value.

a. Bandwagon

b. Bubble

c. Exchange rate

d. Arbitrage

12. The law of __________ states that a product that is easily and freely traded in a perfectly competitive global market should have the same price everywhere.

a. International trade

b. One price

c. Diminishing returns

d. Relative PPP

13. The law of one price works well for __________ traded commodities.

a. All

b. Lightly

c. Heavily

d. Domestically

14. The law of one price works better if:

a. There are no transaction costs.

b. There is complete information.

c. There are many buyers and sellers.

d. All of the above.

15. __________ purchasing power parity states that a bundle of tradable products will have the same cost in different countries if the cost is stated in the same currency.

a. Full

b. Partial

c. Relative

d. Absolute

16. ___________ purchasing power parity states that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time.

a. Full

b. Partial

c. Relative

d. Absolute

17. Economists believe that the __________ determines the price level in the long run.

a. Money supply

b. Money demand

c. Supply of government securities

d. Demand for government securities

18. Suppose the average price of a Big Mac in theUnited Statesis $3.50 while inJapanthe average price is 400 yen. If the price of a dollar is 100 yen per dollar, the purchasing power parity model of exchange rate determination suggests:

a. The yen is overvalued.

b. The yen is undervalued.

c. The price of a Big Mac inJapanwill rise.

d. The dollar will depreciate against the yen.

19. Suppose thatU.S.prices rise 4 percent over the next year while prices inMexicorise 6%. According to the purchasing power parity theory of exchange rates, what should happen to the exchange rate between the dollar and the peso?

a. The dollar should depreciate.

b. The peso should appreciate.

c. The peso should depreciate.

d. The dollar will be worth 1.5 pesos.

20. The __________ approach to exchange rates emphasizes the importance of the supply and demand for money as a key to understanding the determinants of exchange rates.

a. Purchasing-power-parity

b. Asset market

c. Monetary

d. Balance of payments