ECON 2035 Chapter 8 And 9 Study
Guide Exam with Actual Detailed
Answers.
nominal exchange rate - Answer is the price of one currency in terms of another currency
appreciation - Answer is an increase in the value of a currency in exchange for another
currency
depreciation - Answer is a decrease in the value of a currency in exchange for another
currency
real exchange rate - Answer is the rate at which goods and services in one country can be
exchanged for goods and services in another country
•If the dollar-yen exchange rate goes from 90 yen/dollar to 100 yen/dollar, we would say the
dollar _______ and the yen _______.
-A. appreciated; appreciated
-B. appreciated; depreciated
-C. depreciated; appreciated
-D. depreciated; depreciated - Answer C
•A new laptop costs $1,000 in the US and M$10,000 in Mexico. The dollar-peso exchange rate is
20 pesos/dollar. In real terms, the laptop is ____________ because the real exchange rate is
_________.
-A. cheaper in the US; greater than 1
-B. cheaper in Mexico; greater than 1
-C. the same price in both; less than 1
-D. the same price in both; equal to 1 - Answer B
law of one price - Answer is the idea that identical products should sell for the same price
everywhere
-the law of one price is the basis for the theory of purchasing power parity (PPP)
Theory of purchasing power parity (PPP) - Answer states that exchange rates move to
equalize the purchasing power of different currencies
, Tariff - Answer is a tax a government poses on imports
Quota - Answer is a limit government imposes on the quantity of a good that can be
imported
•Assume the price of copper is $3.00 per pound in the US and ¥30.00 per pound in China and
the dollar-yuan exchange rate is 20 yuan/dollar. If these prices remain constant, according to
the Theory of Purchasing Power Parity, the dollar will _____ and the yuan will _______.
-A. appreciate; appreciate
-B. appreciate; depreciate
-C. depreciate; appreciate
-D. depreciate; depreciate - Answer
exchange rate risk - Answer is the risk that an investor or firm will suffer losses because of
fluctuations in exchange rates
interest rate parity condition - Answer holds that differences in interest rates on similar
bonds in different countries reflect expectations of future changes in exchange rates
Interest rate on domestic bond = - Answer interest on foreign bond - expected appreciation
of the domestic currency
if the expected returns from the domestic and foreign bonds are not the same, then investors
can make arbitrage profits
3 complications in interest rate parity condition - Answer 1. differences in default risk and
liquidity
2. transaction costs
3. exchange-rate risk
3 complications of purchasing power parity (PPP) - Answer 1. not all products can be traded
internationally
2. products are differentiated
3. governments impose barriers to trade such as tariffs and quotas
real exchange rate (e) = - Answer E - nominal exchange rate
pDomestic - domestic price
pForeign - foreign price
Guide Exam with Actual Detailed
Answers.
nominal exchange rate - Answer is the price of one currency in terms of another currency
appreciation - Answer is an increase in the value of a currency in exchange for another
currency
depreciation - Answer is a decrease in the value of a currency in exchange for another
currency
real exchange rate - Answer is the rate at which goods and services in one country can be
exchanged for goods and services in another country
•If the dollar-yen exchange rate goes from 90 yen/dollar to 100 yen/dollar, we would say the
dollar _______ and the yen _______.
-A. appreciated; appreciated
-B. appreciated; depreciated
-C. depreciated; appreciated
-D. depreciated; depreciated - Answer C
•A new laptop costs $1,000 in the US and M$10,000 in Mexico. The dollar-peso exchange rate is
20 pesos/dollar. In real terms, the laptop is ____________ because the real exchange rate is
_________.
-A. cheaper in the US; greater than 1
-B. cheaper in Mexico; greater than 1
-C. the same price in both; less than 1
-D. the same price in both; equal to 1 - Answer B
law of one price - Answer is the idea that identical products should sell for the same price
everywhere
-the law of one price is the basis for the theory of purchasing power parity (PPP)
Theory of purchasing power parity (PPP) - Answer states that exchange rates move to
equalize the purchasing power of different currencies
, Tariff - Answer is a tax a government poses on imports
Quota - Answer is a limit government imposes on the quantity of a good that can be
imported
•Assume the price of copper is $3.00 per pound in the US and ¥30.00 per pound in China and
the dollar-yuan exchange rate is 20 yuan/dollar. If these prices remain constant, according to
the Theory of Purchasing Power Parity, the dollar will _____ and the yuan will _______.
-A. appreciate; appreciate
-B. appreciate; depreciate
-C. depreciate; appreciate
-D. depreciate; depreciate - Answer
exchange rate risk - Answer is the risk that an investor or firm will suffer losses because of
fluctuations in exchange rates
interest rate parity condition - Answer holds that differences in interest rates on similar
bonds in different countries reflect expectations of future changes in exchange rates
Interest rate on domestic bond = - Answer interest on foreign bond - expected appreciation
of the domestic currency
if the expected returns from the domestic and foreign bonds are not the same, then investors
can make arbitrage profits
3 complications in interest rate parity condition - Answer 1. differences in default risk and
liquidity
2. transaction costs
3. exchange-rate risk
3 complications of purchasing power parity (PPP) - Answer 1. not all products can be traded
internationally
2. products are differentiated
3. governments impose barriers to trade such as tariffs and quotas
real exchange rate (e) = - Answer E - nominal exchange rate
pDomestic - domestic price
pForeign - foreign price
