ach question weighs equally and the total will be counted out of 100 Page 9 out

Question

ach question weighs equally and the total will be counted out of 100 Page 9 out of 17 38) What does the purchasing power parity theory predict about a to the power parity theory currency pair in the long run? According a) That the b) That the two currencies will be traded in equal amounts in the long run c) Both the above. d) None of the above. The purchasing power parity theory refers to adjustments of trade flows power of the two currencies will equalize in the long run between two countries 39) How does an increase in the US interest rate affect net exports? It causes demand for dollars to increase, which causes the dollar to appreciate, and thus reduces net exports. b) It causes demand for dollars to decrease, which causes the dollar to appreciate, and thus reduces net exports. c) It causes demand for dollars to increase, which causes the dollar to depreciate, and thus reduces net exports d) It causes demand for dollars to decrease, which causes the dollar to depreciate, and thas increases net exports. 40) Assume two currencies that are floating, i.e. are determined by supply and demand in the foreign exchange market. What are the two most important short run determinants of the exchange rate between the two currencies? Unemployment and interest rates in both countries b) a) Real GDP and unemployment in both countries c) Interest rates in both countries and investor expectations of the future value of currencies Investor expectations of the future value of the currencies and net exports in both countries d) a) The trade-off between the price level and real GDP b) The trade-off between the price level and employment 41) What does the Phillips curve illustrate? c) The trade-off between inflation and unemployment. d) The trade-off between unemployment and real GDP Why is there a difference in the slopes of the long run and the short run Phillips curves? a) In the short run, actual inflation and expected inflation may differ b) In the short run, actual GDP and expected GDP may differ c) In the short run, actual inflation and expected inflation are always the same d) In the short run, actual unemployment and expected unemployment may differ e) In the short run, actual inflation is determined by the level of real GDP 43) What happens if expected inflation increases? the economy moves down along the short run Phillips curve b) a) the economy moves up along the short run Phillips curve the long run Phillips curve shifts to the right the short run Phillips curve shifts upwards c) d) 44) Under what circumstances would the long run and the short run Phillips curves be the same? a) If firms and households had adaptive expectations. b) If firms and households had rational expectations. c) If firms and households had no expectations 45) What countries share the common currency the euro? a) All European countries b) All EU member countries c All EMU member countries d) All non-EMU member countries

Explanation / Answer

38) a
It means that in the long run, the purchasing power of the two currencies will equalize.

39) a
Increase in US interest rates will cause a higher demand for USD as people would want to invest more in US markets. This causes the US currency to appreciate. This makes US currency relatively expensive. Hence Exports will decline and so will the Net exports.

40) c
interest rates of both the countries and expectations of the future values of the currency, according to the interest rate parity condition.

41) c
The relation between unemployment and inflation is given by Phillip's curve.

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