The theory of purchasing power parity was valid only under the gold standard. as
ID: 1191924 • Letter: T
Question
The theory of purchasing power parity
was valid only under the gold standard.
assumes that most changes in nominal exchange rates are the result of changes in real exchange rates.
assumes that inflation rates are roughly the same in most countries.
extends the law of one price to a group of goods.
Differences in price levels
only can be explained by the fact that little foreign trade actually takes place.
are not capable of explaining well actual exchange rate movements, particularly in the short run.
have been small for most countries in the post-World War II period.
explain well actual exchange rate movements.
Purchasing power parity's assumption that the real exchange is constant
is correct in nearly all instances.
would be correct were it not for the existence of trade barriers.
is not reasonable.
is correct for trade between the United States and Japan, but incorrect in most other bilateral trading relations.
International capital mobility refers to
the ease with which manufacturing equipment can be transported across countries.
the ease with cash may be transferred from one country to another without having to be converted into a foreign currency.
the ease with which investors move funds among international financial markets.
the ease with which exchange rates may be adjusted to reflect changes in the relative economic strengths of countries.
We would not expect a Japanese financial asset and a U.S. financial asset with identical risk, liquidity, and information characteristics to have different expected returns because
traders would sell the asset with the higher expected yield and buy the asset with the lower expected yield until the yields were brought into equality.
traders would buy the asset with the higher expected yield and sell the asset with the lower expected yield until the yields were brought into equality.
If the German interest rate is 4% and the U.S. interest rate is 5%, what is the expected change in the value of the dollar in terms of the euro?
1%
-1%
9%
-9%
If foreign interest rates rise
the demand for US dollars rises, causing it to appreciate.
the demand for US dollars falls, causing it to appreciate.
the demand for US dollars rises, causing it to depreciate.
the demand for US dollars falls, causing it to depreciate.
was valid only under the gold standard.
assumes that most changes in nominal exchange rates are the result of changes in real exchange rates.
assumes that inflation rates are roughly the same in most countries.
extends the law of one price to a group of goods.
Explanation / Answer
1: A
2: B
3: D
4: A
5: B
6: A
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