Chapter 13

Question 1

The price of one currency in terms of another is called

Answer 1

the exchange rate

Question 2

An exchange-rate system in which the nominal exchange rate is set by the government is known as

Answer 2

a fixed-exchange-rate system

Question 3

The Bretton Woods system relied on

Answer 3

a fixed-exchange-rate system

Question 4

The real exchange rate is

Answer 4

the price of one currency in terms of another

Question 5

When the domestic currency strengthens under a fixed-exchange-rate system, this is called

Answer 5

a revaluation

Question 6

Three-wheel cars; sold for 5000 pounds; Four-wheeled cars sold for 10,000 marks; What is the nominal exchange rate?

Answer 6

1.50 marks / pound

Question 7

Three-wheel cars; sold for 5000 pounds; Four-wheeled cars sold for 10,000 marks; What is the real exchange rate?

Answer 7

0.67 3-whelk cars per 4-wheel car

Question 8

When the domestic currency buys fewer units of foreign currency, the

Answer 8

nominal exchange rate FALLS

Question 9

When the nominal exchange rate falls,

Answer 9

the domestic currency buys FEWER units of foreign currency and the domestic currency has DEPRECIATED

Question 10

From 1980 to 2000, the yen/dollar exchange rate fell from 240 yen/dollar to to 102 yen/dollar, while the dollar/pound exchange rate fell from 2.22 dollars/pound to 1.62 dollars/pound. As a result…

Answer 10

the dollar DEPRECIATED relative to the yen, but APPRECIATED relative to the pound

Question 11

When the nominal exchange rate in terms of dollars per yen rises,

Answer 11

the dollar buys FEWER yen and the dollar has DEPRECIATED

Question 12

A rise in the real exchange rate is called

Answer 12

a real APPRECIATION

Question 13

For a given real exchange rate, a nominal appreciation of the domestic currency will result from

Answer 13

an INCREASE in the prices of FOREIGN GOODS

Question 14

If the real exchange rate rises 2%, domestic inflation 3%, and the foreign inflation 1%, what is the percent change in the nominal exchange rate?

Answer 14

0%

Question 15

If the real exchange rate rises 4%, domestic inflation 2%, and the foreign inflation 0%, what is the percent change in the nominal exchange rate?

Answer 15

2%

Question 16

If the nominal exchange rate rises 5%, domestic inflation 2%, and the foreign inflation 3%, what is the percent change in the real exchange rate?

Answer 16

4%

Question 17

If all countries produce the same good and goods are freely traded among countries, so that the real exchange rate equals one, then the relationship between domestic and foreign prices and the nominal exchange rate is

Answer 17

P = P / e

Question 18

The idea that similar foreign and domestic goods, or baskets of goods, should have the same price when priced in terms of the same currency is called

Answer 18

purchasing power parity

Question 19

Purchasing Power Parity means that

Answer 19

e = P(sub “for”) / P

Question 20

Empirical evidence shows that in the short run, purchasing power parity _____, and in the long run, purchasing power equity ______.

Answer 20

does NOT hold, HOLDS

Question 21

Purchasing power parity does not hold in the short to medium run because

Answer 21

countries produce different goods AND some goods aren’t internationally traded

Question 22

Suppose purchasing power parity holds. If the price level in the US is at 100 pounds per good and the price level in Japan is 250 yen per good, then the nominal exchange rate is _______ yen per dollar.

Answer 22

2.5

Question 23

Suppose purchasing power parity holds. If in 1997 the price level ………

Answer 23

100

Question 24

Relative purchasing power parity occurs when

Answer 24

the real exchange rate is constant

Question 25

26. When the rate of appreciation of the nominal exchange rate equals the foreign inflation rate minus the domestic inflation rate, we say there is

Answer 25

relative purchasing power parity

Question 26

When the dollar rises relative to other currencies,

Answer 26

US goods become more expensive to foreigners