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1、international economics, 8e (krugman)chapter 15 price levels and the exchange rate in the long run15.1 the law of one price1) which of the following statements is the most accurate? tlie law of one price states:a) iii competitive markets free of transportation costs and official barrier to trade, id

2、entical goods sold in different countries must sell for tlie same price when their prices are expressed in terms of the same currency.b) iii competitive maikets free of transportation costs and official barrier to trade, identical goods sold in tlie same country must sell for tlie same price when th

3、eir prices are expressed in terms of tlie same currency.c) iii competitive maikets free of transportation costs and official barrier to trade, identical goods sold in different countries must sell for the same price.d) identical goods sold in different countries must sell for the same price when tli

4、eir prices are expressed iii terms of the same currency.e) none of tlie above.answer: aquestion status: previous edition2) under purchasing power parity,a) es/e = pus/fe-b)es/e = pe/pes-c) es/e = pus + ped)es/e = pus - pee) none of tlie above.answer: aquestion status: previous edition3) explain the

5、law of one price. give ail example.answer: the law of one price states tliat in competitive maikets free of transportation costs and trade barriers, identical goods sold in different countries must sell for the same price when expressed in terms of tlie same currency.p. =(e$/)x(f)for good i.e$/= pus

6、/pukif, for example, tlie price of the same sweater was cheaper in london than in new york, u.s. importers and british exporters would have an incentive to buy sweaters in loiidon and ship them to new york, pushing the london price up and the new york price dowix tuitil botli were equal.question sta

7、tus: previous edition4) fill m tlie following table, assuming the law of one price prevails.price in the united states of a sweater expressed indollars,price in europeexpressed in euro, p】eexchange rate between the dollar and the euro,坳e25320.781253508333333334554650.6153846650.82278481850-882352941

8、850787037037950.871559633115139answer:price in the united states of a sweater expressed in dollars, pijsprice in europe* expressed in euro,exchange rate between the dollar and the euro,切用25320.7812535420.83333333345540.83333333355650.84615384665790.8227848175850.88235294185100.787037037951090.871559

9、6331151390.827338129question status: previous edition15.2 purchasing power parity1) under purchasing power parity,a)es/e = eus廬eb)e$/e =展廬us.c) es/e = pus/pe-d) es/e = pe/pes-e) none of the above.answer: cquestion status: previous edition2) which of the following statements is the most accurate?a) t

10、lie law of one price applies only to the general price level.b) the law of one price applies to tlie general price level wliile ppp applies to individual commodities.c) the law of one price applies to individual commodities wliile ppp applies to botli the general price level and to individual commod

11、ities.d) ppp applies only to individual commodities.e) tlie law of one price applies to individual commodities while ppp applies to tlie general price level. answer: equestion status: previous edition3) which of the following statements is the most accurate?a) if ppp holds true, tlien the law of one

12、 price holds trtie for every commodity as long as tlie reference baskets used to reckon different countries price levels are tlie same.b) if tlie law of one price holds true for every coniiiiodity, ppp must hold automatically.c) if tlie law of one price holds true for every commodity, ppp must autom

13、atically hold as long as the reference baskets used to reckon different countries price levels are the same.d) if tlie law of one price does not hold true for every commodity, ppp cannot be true as long as the reference baskets used to reckon different countries price levels are the same.e) none of

14、the above.answer: cquestion status: previous edition4) which of the following statements is the most accurate?a) absolute ppp does not imply relative ppp.b) relative ppp implies absolute ppp.c) tliere is no causality relation between the two.d) absolute ppp implies relative ppp.e) none of the above.

15、answer: dquestion status: previous edition5) which of the following statements is tlie most acciuate?a) relative ppp may be valid even when absolute ppp is not, provided tlie factors causing deviations from absolute ppp are more or less stable over different commodities space.b) absolute ppp may be

16、valid even when relative ppp is not, provided the factors causing deviations from relative ppp are more or less stable over time.c) relative ppp may be valid even when absolute ppp is not, provided tlie factors causing deviations from absolute ppp are more or less stable over time.d) relative ppp is

17、 not valid when absolute ppp is not.e) none of tlie above.answer: cquestion status: previous edition6) explain purchasing power parity.answer: ppp states that tlie exchange rate benveen two countries currencies equals tlie ratio of tlie countries, price levels.a fall in a currencys domestic purchasi

18、ng power (i.e. ail increase in the domestic price level) will be associated with a proportional currency depreciation in tlie foreign exchange market and vice versa. e$ = pus/e where p is the price of a reference commodity basket.rearrange: ?us = x (pe)tlius, ppp asserts that all countries price lev

19、els are equal when measured in terms of the same ciuxency.question status: previous edition7) discuss the relationship between ppp and tlie law of one price.answer: the law of one piice applies to individual commodities wliile ppp applies to tlie general price level. proponents of ppp argue tliat it

20、s validity in the long run doesnt require tlie law of one price to hold exactly. when goods and services temporarily become more expensive in one cotuitry than in otliers, tlie demands for its currency and its products falls, pusliiiig tlie exchange rate and domestic prices back in line with ppp and

21、 vice versa.question status: previous edition8) discuss the differences between absolute ppp and relative ppp.answer: absolute ppp states tliat tlie exchange rate betveen two currencies equals tlie ratio of tlieir price levels. relative ppp states that tlie percentage change in tlie exchange rate be

22、uveen two ctirrencies over a given peiiod equals the difference beuveen tlie inflation rates of tliose two currencies.question status: previous edition9) explain why relative ppp is useful when comparing cotmtries tliat base their price levels on different product baskets.answer: for example: if the

23、 u.s. price level rises by 10% over a year while europes rises by only 5%, relative ppp predicts a 5% depreciation of tlie dollar against the euro. tliis just cancels the 5% by wliich u.s. inflation exceeds european, leaving the relative domestic aiid foreign purchasing powers of botli ctu-rencies u

24、nchanged.(e$/e,t - die)ezt between dates t aiid t -1.relative ppp is useful when comparing countries that base their price levels on different product baskets. relative ppp may be valid even when absolute ppp is not.question status: previous edition10) suppose russia s iiiflation rate is 200% over o

25、ne year but the inflation rate iii switzerland is only 2%.according to relative ppp, what should happen over the year to the swiss francs exchange rate against the russian ruble?answer: (emble/franc, t - eruble/franc, t-1 )/emble/fraiic, t-1 = 2 - 0.02 = 1.98so tliere will be a 198% depreciation of

26、tlie ruble against tlie franc or, conversely, a 198% appreciation of tlie franc against the mble.question status: previous edition11) assuming relative ppp, fill in the table below:e$/e, te$/e, t.1“us, te, t20.03-0.081112.120.04-0.012.22.10.0023812.20.060.0145452.40.070.0265222.52.40.082.62.50.052.7

27、2.60.10.0615382.70.110.0729632.92.80.08428632.90.13answer: using (es/w,t - e$/g,m)/e$/g,m = nus, t - ne/1 one gets:e$/e, te$/e, t-1nus, tnj t21.80.03-0.081112.120.04-0.012.22.10.050.002381232.20.060.0145452.42.30.070.0265222.52.40.080.0383332.62.50.090.052.72.60.10.0615382.82.70.110.0729632.92.80.12

28、0.0x42x632.90.130.095517question status: previous edition15.3 a long-run exchange rate model based on ppp1) lit order for the condition e$/hk$ = pus/hkto hold, what assumptions does the principle of purchasing power parity make?a) no transportation costs and restrictions on trade; commodity baskets

29、that are a reliable indication of price level.b) maikets are perfectly competitive, i.e., p = mc.c) tlie factors of production are identical benveen countries.d) no arbitrage exists.e) a and b.answer: equestion status: previous edition2) which of the following statements is the most accurate?a) hi t

30、he long run, national price levels play a minor role in determining botli interest rates and tlie relative prices at which countries products are traded.b) in the long run, national price levels play a key role only in determining interest rates.c) lit the long run, national price levels play a key

31、role oiily in determining tlie relative prices at which countries products are traded.d) in the long run, national price levels play a key role in determining botli interest rates and the relative prices at wliich countries products are traded.e) none of the above.answer: dquestion status: previous

32、edition3) which of the following statements is the most accurate? in general,a) tlie monetary approadi to the exchange rate is a long run theoiy.b) tlie monetary approadi to the exchange rate is a short run tlieory.c) tlie monetary approach to the exchange rate is both a short and long run tlieory.d

33、) tlie monetary approach to the exchange rate neitlier long run nor short run tlieory.e) none of the above.answer: aquestion status: previous edition4) the monetary approach makes tlie general prediction tliata) tlie exchange rate, wliich is the relative price of american and european money, is full

34、y detennined in tlie long run by the relative supplies of tliose monies.b) tlie exchange rate, wliich is the relative price of american and european money, is fully detennined in tlie short run by tlie relative supplies of tliose monies and the relative demands for them.c) tlie exchange rate, wliich

35、 is the relative price of american and european money, is fully detennined iii tlie short- and long run by the relative supplies of tliose monies and tlie relative demands for tliem.d) tlie exchange rate, wliich is the relative price of american and european money, is fully determined in tlie long r

36、un by the relative supplies of tliose monies and the relative demands for them.e) none of tlie above.answer: dquestion status: previous edition5) under the monetaiy approach to the exchange rate theoiy, money supply growtli at a constant ratea) eventually results in ongoing price level deflation at

37、the same rate, but changes iii tliis long-mn deflation rate do not affect tlie full-employment output level or the long-nm relative prices of goods and services.b) eventually results in ongoing price level inflation at tlie same rate, btit changes in this long-rtm inflation rate do affect the full-e

38、mployment output level and tlie long-nm relative prices of goods and services.c) eventually results in ongoing price level inflation at the same rate, btit changes in this long-nm inflation rate do not affect tlie full-employment output level or tlie long-mn relative prices of goods and services.d)

39、eventually results in ongoing price level inflation at tlie same rate, but changes in tliis long-nm inflation rate do not affect tlie full-employment output level, only the long-nm relative prices of goods and sendees.e) none of the above.answer: cquestion status: previous edition6) which of the fol

40、lowing statements is the most accurate? iii general tmder the monetaiy approach to the exchange rate,a) tlie interest rate is not independent of the money supply growth rate in tlie short run.b) tlie interest rate is independent of the money supply giowth rate in the long run.c) tlie interest rate i

41、s not independent of the money supply growth rate in tlie long run, but independent iii tlie short run.d) tlie interest rate is not independent of tlie money supply growtli rate in tlie long run.e) none of tlie above.answer: dquestion status: previous edition7) which of the following statements is t

42、he most accurate? iii general, imder the monetaiy approach to the exchange rate,a) while tlie short-run interest rate does not depend on the absolute level of tlie money supply, continuing grozvth iii tlie money supply eventually will affect tlie interest rate.b) while tlie long-rtm interest rate do

43、es depend on the absolute level of the money supply, continuing grozvth iii tlie money supply do not affect the interest rate.c) while tlie long-rtm interest rate does not depend on tlie absolute level of tlie money supply, contintiing grozvth iii tlie money supply eventually will affect tlie intere

44、st rate.d) tlie long-rtm interest rate does not depend on the absolute level of tlie money supply, and thus contiiuiing groiuth in tlie money supply will not affect the interest rate.e) none of the above.answer: cquestion status: previous edition8) tvho among the following list of people is an early

45、 20tli century economist from yale university who wrote tlie book the tlieory of interest?a) gustav casselb) irving fisherc) david ricardod) paul krugmane) none of tlie above.answer: bquestion status: new9) if people expect relative ppp to hold,a) tlie difference between the interest rates offered b

46、y dollar and euro deposits will equal the difference beuveen the inflation rates expected, in tlie united states and europe, respectively, over the relevant horizon.b) tlie difference between the interest rates offered by dollar and euro deposits will equal the difference between the inflation rates

47、 expected iii europe and tlie united states, respectively.c) tlie difference between the interest rates offered by dollar and euro deposits will equal tlie difference between the inflation rates expected, over the relevant horizon, in tlie united states and europe, respectively, in the short run.d)

48、tlie difference between the interest rates offered by dollar and euro deposits will be above the difference between the inflation rates expected, over the relevant horizon, in tlie united states and europe, respectively.e) none of tlie above.answer: aquestion status: previous edition10) under ppp (a

49、nd by the fisher effect), all else equal,a) a rise in a cotmtrys expected inflation rate will eventually cause a more-tlian proportional rise in the interest rate that deposits of its ctuxency offer in order to accommodate for the liigher inflation.b) a fall iii a countrys expected inflation rate wi

50、ll eventually cause an equal rise in tlie interest rate tliat deposits of its currency offer.c) a rise in a cotmtrys expected inflation rate will eventually cause ail equal rise in the interest rate that deposits of its currency offer.d) a rise in a countrys expected inflation rate will eventually c

51、ause a less than proportional rise in the interest rate that deposits of its ctuxency offer to accommodate the rise in expected inflation.e) none of tlie above.answer: cquestion status: previous edition11) in the short run,a) tlie interest rate can rise when tlie domestic money supply falls.b) tlie

52、interest rate can decrease when the domestic money supply falls.c) tlie interest rate stays constant when tlie domestic money supply falls.d) tlie interest rate rises in tlie same proportion as tlie domestic money supply falls.e) none of tlie above.answer: aquestion status: previous edition12) under

53、 a flexible-price monetaiy approach to tlie exchange rate,a) when tlie domestic money supply falls, tlie piice level would eventually fall, increasing the interest rate.b) when the domestic money supply falls, the price level would fall right away, causing a reduction in the interest rate.c) when th

54、e domestic money supply falls, the price level would fall right away, causing ail increase in the interest rate.d) when the domestic money supply falls, the price level would eventually fall, keeping the interest rate constant.e) when the domestic money supply falls, the price level would fall right

55、 away, keeping tlie interest rate constant.answer: equestion status: previous edition13) under sticky prices,a) a fall iii the money supply raises the interest rate to preserve money market equilibrium.b) a fall iii the money supply reduces tlie interest rate to preseive money market equilibriumc) a

56、 fall iii the money supply keeps the interest rate intact to preserve money market equihbritun.d) a fall iii the money supply does not affect tlie interest rate in tlie short run, only in the long run.e) none of the above.answer: aquestion status: previous edition14) under sticky prices,a) an intere

57、st rate rise is associated with lower expected deflation and a long-run cttrrency appreciation, so tlie currency appreciates immediately.b) an interest rate rise is associated with higher expected inflation and a long-mn currency appreciation, so tlie currency appreciates immediately.c) an interest rate rise is associated with lower expected inflation and a long-run currency depreciation, so tlie currency appreciates immediately.d) an interest rate rise is ass