Exchange Rate Economics Quiz

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Questions and Answers

What does Absolute PPP indicate regarding exchange rates?

It does not consider inflation rates.

Only nominal exchange rates matter for purchasing power.

Exchange rates are unaffected by price levels.

Exchange rates equal the levels of relative average prices across countries. (correct)

What happens to a country's currency if it experiences a higher inflation rate?

The currency will eventually depreciate. (correct)

The currency appreciates significantly.

The currency's value remains stable.

The currency strengthens against all others.

What does the Big Mac index indicate?

The equivalence of purchasing power for luxury items.

The exchange rate at which hamburgers cost the same in different countries. (correct)

The average price of goods for consumers.

The profitability of fast food franchises worldwide.

Relative PPP holds true under which condition?

If Absolute PPP holds. Signup and view all the answers

What is the impact of an increase in money supply on price levels according to the monetary approach?

Price levels rise to restore money market equilibrium. Signup and view all the answers

If a currency is described as undervalued, what does this imply?

The market exchange rate is higher than the rate derived from the Big Mac. Signup and view all the answers

In the monetary approach, what is the focus when determining the equilibrium exchange rate?

Exogenous factors like money supply, interest rates, and income. Signup and view all the answers

Which of the following best describes Relative PPP?

It posits that changes in exchange rates correlate with changes in relative prices. Signup and view all the answers

What happens to the real money demand when the US interest rate increases?

It decreases. Signup and view all the answers

Which of the following factors affects the real exchange rate?

The nominal exchange rate. Signup and view all the answers

What is the effect of an increase in relative demand for US goods on the value of the US dollar?

It results in real appreciation of the dollar. Signup and view all the answers

What is the consequence of technological progress in Germany on the relative supply of EU goods?

The relative supply of EU goods increases. Signup and view all the answers

How do changes in the US money supply impact the long-term price level?

They increase the price level. Signup and view all the answers

What is the shape of the relative supply curve of US goods?

Vertical. Signup and view all the answers

What does a real exchange rate increase imply for US goods?

They become more expensive relative to EU goods. Signup and view all the answers

What happens when US goods become more popular in global markets?

The new equilibrium real exchange rate increases. Signup and view all the answers

What is the primary reason for prices being sticky in the short run?

Menu costs Signup and view all the answers

What happens to the domestic currency when there is an increase in the domestic money supply in the short run?

Depreciation of the domestic currency Signup and view all the answers

In the long run, what ultimately determines the levels of real output and income?

Factor endowments and technologies Signup and view all the answers

Why does the Law of One Price (LOP) often not hold true in reality?

Costly barriers to trade Signup and view all the answers

What is the outcome when prices differ across countries according to the Law of One Price?

Arbitrage trade leading to price convergence Signup and view all the answers

What does Purchasing Power Parity (PPP) extend from the Law of One Price (LOP)?

It applies to a representative basket of goods and services. Signup and view all the answers

What is the immediate effect on the exchange rate after a domestic increase in money supply?

Abrupt jump followed by a slight decrease Signup and view all the answers

How do expectations of investors influence markets in the long run following a domestic money supply change?

They amend both home and foreign markets. Signup and view all the answers

What happens to the real exchange rate and the value of a US bundle of goods if productivity in the US improves?

The real exchange rate increases and the value of a US bundle of goods decreases. Signup and view all the answers

Which of the following components is NOT part of aggregate demand?

Net exports Signup and view all the answers

What effect does a rise in nominal exchange rate have on domestic output?

It increases domestic output as domestic goods become cheaper relative to foreign goods. Signup and view all the answers

According to the real interest parity condition, why do investors not switch from US assets to EU assets?

They expect that the real depreciation of the US dollar will not be offset by interest rate differences. Signup and view all the answers

How is aggregate demand expressed mathematically?

D = C(Y - T) + I + G + CA(q, Y - T) Signup and view all the answers

What is the primary characteristic of the DD curve?

It illustrates combinations of exchange rate and income that result in goods market equilibrium. Signup and view all the answers

What role does disposable income play in private consumption?

An increase in disposable income results in consumption rising and current account lowering. Signup and view all the answers

What assumption is made regarding 'home-bias' in relation to aggregate demand?

The rise in consumption has a larger effect than the decline in the current account. Signup and view all the answers

What happens when the central bank (CB) increases the domestic supply of money without intervention?

Relative depreciation of the domestic currency Signup and view all the answers

How does fiscal policy function under a fixed exchange rate regime compared to a flexible exchange rate regime?

Demand for domestic goods increases with fiscal expansion Signup and view all the answers

What is the effect of an increase in government spending (G) on the interest rate under a fixed exchange rate?

Interest rates increase due to excess demand for domestic assets Signup and view all the answers

What does the central bank (CB) do when it intervenes to maintain a fixed exchange rate?

Sells domestic currency for foreign currency Signup and view all the answers

What happens to the demand for domestic currency when interest rates rise in a fixed exchange rate regime?

Demand for domestic currency increases Signup and view all the answers

What is the result of a devaluation under a fixed exchange rate?

It results from central bank interventions Signup and view all the answers

In the long run, what happens to overall output when nominal exchange rates remain constant but domestic prices rise?

Output decreases as demand for domestic goods falls Signup and view all the answers

What is a potential issue with fixing an exchange rate?

It can lead to financial crises and capital flight Signup and view all the answers

What is the impact of an increase in the risk premium ρ on domestic interest rates R?

R increases Signup and view all the answers

Which factor does NOT influence the risk premium for foreign investors?

Difference in inflation rates between countries Signup and view all the answers

What happens when the perceived risk of domestic assets rises?

Domestic currency depreciates Signup and view all the answers

Under a fixed exchange rate regime, what can the government prioritize?

Only one objective at the expense of another Signup and view all the answers

Which describes the Tinbergen rule?

More objectives than instruments available leads to failure in target achievement Signup and view all the answers

What is NOT a benefit of having a fixed exchange rate?

Complete freedom from monetary policy constraints Signup and view all the answers

Which of the following represents the external equilibrium in macroeconomics?

$CA = CA(G, T, E)$ Signup and view all the answers

Which is a characteristic of the gold standard era?

Exchange rate fixed to gold and domestic currency Signup and view all the answers

Study Notes

EFR Summary - International Economics

Course: International Economics, FEB12004
Academic Year: 2024-2025
Lectures: 1 to 19
Weeks: 1 to 7
Teachers: Domenico Favoino, Julian Emami Namini, Laura Hering
Publication Date: 13 December 2024

Lecture 1, Week 1 - National Income Accounting and Balance of Payments

National Income Accounts:
- National income: Income earned by a country's factors of production
- GNP (Gross National Product): Value of all final goods and services produced by a country's factors of production
- GNP components:
  - Private consumption (C): All domestic spending by private individuals
  - Investments (I): Spending by private households on capital goods
  - Government consumption (G): Government spending on goods and services
  - Current account (CA): Net expenditure of foreigners on domestic goods and services (Exports - Imports)
- Depreciation: Physical capital depreciation subtracted from GNP
- Unilateral transfers: Remittances, foreign aid, and pension payments to expatriates

Lecture 2, Week 1 - Money, Interest Rates and Exchange Rates

Money:
- Money is a means of payment: currency, checking accounts, debit cards
Interest Rate:
- The price of money in a country
Exchange Rate: The relative price of national currencies
- Exchange rate change causes a depreciation/appreciation of a specific currency

Summary Information

This document is a summary of lectures on International Economics.
Intellectual property of the Economic Faculty association Rotterdam (EFR).
The summary is not a replacement for the actual lectures or any study materials.
EFR and Erasmus School of Economics are not affiliated with this summary.
For queries, please contact [email protected]

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Description

Test your understanding of key concepts in exchange rate economics with this quiz. Explore topics like Purchasing Power Parity (PPP), the impact of inflation, and the Big Mac index. Perfect for students looking to deepen their knowledge in international finance.