Suppose that U.S. prices rise 4 percent over the next year while prices in Mexico rise 6 percent. According to the purchasing power parity theory of exchange rates, which of the following should happen?
A. The dollar will depreciate
B. The peso will be worth 1.5 dollars in the foreign exchange market
C. The peso will depreciate
D. The dollar will be worth 1.5 pesos in the foreign exchange market
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Given the combination of PPP with quantity theory equations, which of the following statements is TURE?
A. Everything else remaining unchanged, the price of the foreign currency (e) would be reduced by an increase in the relative size of the money supply in the domestic economy.
B. Everything else remaining unchanged, the price of the foreign currency (e) would be raised by an increase in the relative size of foreign production.
C. As long as the money supplies in the two countries are the same, the exchange rate will be equal to one
D. The exchange rate would remain unaffected as long as the relative growth in productivity between the two nations remains constant, even if the relative money supply varies between the two economies.
Everything else fundamental remaining unchanged, the monetary approach predicts that a 5 percent cut in the money supply by the Fed will result in:
A. inflation in the U.economy.
B. a decrease in the market rate of interest in the U.S.
C. an increase in foreign investments by the Americans.
D. an appreciation of the U.dollar vis-à-vis other currencies.
Based on PPP and the quantity theory of money, everything else remaining unchanged, if Japan’s real income rises relative to real income in the U.S., there would be a(n):
A. appreciation of the dollar.
B. appreciation of the yen.
C. interest rate parity.
D. decrease in the demand for yen in the foreign exchange market.
Exchange rate overshooting suggests that an unexpected increase in the domestic money supply by 10 percent will cause the short-run exchange rate value of the domestic currency to:
A. depreciate by more than 10 percent.
B. depreciate by less than 10 percent.
C. appreciate by more than 10 percent.
D. appreciate by less than 10 percent.
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