Homework answers / question archive / Arizona State University ECN 306 1)If the law of one price holds, then we would expect that if one dollar exchanges for four yen and if a computer costs $1,000 in the United States, then in Japan, the computer should cost: •             2000 yen

Arizona State University ECN 306 1)If the law of one price holds, then we would expect that if one dollar exchanges for four yen and if a computer costs $1,000 in the United States, then in Japan, the computer should cost: •             2000 yen

Economics

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Arizona State University

ECN 306

1)If the law of one price holds, then we would expect that if one dollar exchanges for four yen and if a computer costs $1,000 in the United States, then in Japan, the computer should cost:

•             2000 yen.

•             3000 yen.

•             250 yen.

•             4000 yen.

 

2. The market exchange rate is a(n)         way to compare average income and production levels because the purchasing power parity hypothesis        .

•             excellent; is well-suited for comparing national expenditures and production

•             acceptable; equalizes international economic differences in expenditures and production

•             good; is better than any other approach that has been developed to compare incomes and production

•             poor; is not reliable when applied to the goods and services that make up national

expenditures or domestic production

 

3. The    is based on the idea that a product that is freely traded in a competitive global market should have the same price everywhere if the prices at different places are expressed in the same currency.

•

•             law of supply and demand

•             floating exchange rate

•             role of interest rates

 

4. Which of the following statements is true?

•             If the expected future spot exchange rate value of the foreign currency decreases, there will be international financial repositioning toward foreign-currency assets, thereby causing the domestic currency to depreciate.

•             If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.

•             If foreign interest rates increase with, the domestic interest rate remaining unchanged, there

will be international financial repositioning toward domestic-currency assets and the domestic currency will appreciate.

•             If the expected future spot dollar per euro exchange rate increases, there will be international financial repositioning toward the dollar-denominated assets, thereby causing the euro to depreciate.

 

5. Purchasing power parity predicts that when the U.S. inflation rate increases relative to the inflation rate of another country, the:

•             dollar should appreciate.

•             foreign currency should appreciate.

•             foreign currency should depreciate.

•             exchange rate should not be affected.

 

6. If the British government, through tighter monetary policy, reduced the supply of British pounds by 10%, we should expect that eventually:

•             there would be a 10% higher exchange rate value of the pound.

•             there would be a 10% lower exchange rate value of the pound.

•             the pound would have to be devalued.

•             the British government would have to increase the supply of pounds.

 

7. The law of one price works well for     but does not hold for

                .

•             heavily traded commodity products; manufactured products

•             industrial countries; developing countries

•             international transactions; domestic transactions

•             theoretical comparisons; actual results

 

8. The    exchange rates recognizes that as demand for and supply of financial assets denominated in different currencies shift, the shifts place pressure on the exchange rates among the affected currencies.

•             long term view of

•             asset market approach to

•             supply-side view of

•             arbitrage approach to

 

9. If investors expect a decrease in the value of the South African rand vis-à-vis other currencies, their actions will cause:

•             a decrease in South African interest rates.

•             the expected depreciation to occur much faster.

•             the South African rand to appreciate immediately.

•             a large inflow of foreign capital into South Africa.

 

10. What implications for international financial repositioning and for the current spot exchange rate would flow from a decrease in the expected future spot rate value of a country's currency?

•             Repositioning toward this country's currency assets results in the country's currency depreciating.

•             Repositioning toward foreign currency assets results in this country's currency depreciating.

•             Repositioning toward this country's currency assets results in the country's currency appreciating.

•             Repositioning toward foreign currency assets results in this country's currency appreciating.