International Parity Conditions

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Question 1
Free
Multiple Choice

If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation of product between markets, the product's price should be the same in both markets. This is known as:

Choose correct answer/s
A

relative purchasing power parity.

B

interest rate parity.

C

the law of one price.

D

equilibrium.

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Question 2
Free
Multiple Choice

The Economist publishes annually the "Big Mac Index" by which they compare the prices of the McDonald's Corporation's Big Mac hamburger around the world. The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and therefore, the price should be the same. If a Big Mac costs $2.54 in the United States and 294 yen in Japan, what is the estimated exchange rate of yen per dollar as hypothesized by the Hamburger index?

Choose correct answer/s
A

$0.0086/¥

B

¥124/$

C

$0.0081/¥

D

¥115.75/$

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Question 3
Free
Multiple Choice

If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is:

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A

correctly priced.

B

under priced.

C

over priced.

D

There is not enough information to determine if the price is appropriate or not.

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Question 4
Free
Multiple Choice

The price of a Big Mac in the U.S. is $3.41 and the price in Mexico is Peso 29.0. What is the implied PPP of the Peso per dollar?

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A

Peso 8.50/$1

B

Peso 10.8/$1

C

Peso 11.76/$1

D

None of the above

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Question 5
Free
Multiple Choice

Assume the implied PPP rate of exchange of Mexican Pesos per U.S. dollar is 8.50 according to the Big Mac Index. Further, assume the current exchange rate is Peso 10.80/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is:

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A

overvalued.

B

undervalued.

C

correctly valued.

D

There is not enough information to answer this question.

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Question 6
Multiple Choice

According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso 10.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________ .

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A
overvalued; approximately 21%
B
overvalued; approximately 27%
C
undervalued; approximately 21%
D
undervalued; approximately 27%
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Question 7
Multiple Choice

Other things equal, and assuming efficient markets, if a Honda Accord costs $24,682 in the U.S., then at an exchange rate of $1.57/£, the Honda Accord should cost ________ in Great Britain.

Choose correct answer/s
A
£24,682
B
£38,751
C
£10,795
D
£15,721
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Question 8
Multiple Choice

One year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately:

Choose correct answer/s
A
$0.96/C$.
B
$1/C$.
C
$1.04/C$.
D
Relative PPP provides no guide for this type of question.
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Question 9
Multiple Choice

________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.

Choose correct answer/s
A
The Fisher Effect
B
The International Fisher Effect
C
Absolute Purchasing Power Parity
D
Relative Purchasing Power Parity
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Question 10
Multiple Choice

Two general conclusions can be made from the empirical tests of purchasing power parity (PPP):

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A
PPP holds up well over the short run but poorly for the long run, and the theory holds better for countries with relatively low rates of inflation.
B
PPP holds up well over the short run but poorly for the long run, and the theory holds better for countries with relatively high rates of inflation.
C
PPP holds up well over the long run but poorly for the short run, and the theory holds better for countries with relatively low rates of inflation.
D
PPP holds up well over the long run but poorly for the short run, and the theory holds better for countries with relatively high rates of inflation.
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Question 11
Multiple Choice

A country's currency that strengthened relative to another country's currency by more than that justified by the differential in inflation is said to be ________ in terms of PPP.

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A
overvalued
B
overcompensating
C
undervalued
D
undercompensating
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Question 12
Multiple Choice

If we set the real effective exchange rate index between Canada and the United States equal to 100 in 1998, and find that the U.S. dollar has risen to a value of 112.6, then from a competitive perspective the U.S. dollar is:

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A
overvalued.
B
undervalued.
C
very competitive.
D
There is not enough information to answer this question.
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Question 13
Multiple Choice

If we set the real effective exchange rate index between the United Kingdom and the United States equal to 100 in 2005, and find that the U.S. dollar has changed to a value of 91.4, then from a competitive perspective the U.S. dollar is:

Choose correct answer/s
A
overvalued.
B
undervalued.
C
equally valued.
D
There is not enough information to answer this question.
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Question 14
Multiple Choice

The government just released international exchange rate statistics and reported that the real effective exchange rate index for the U.S. dollar vs. the Japanese yen decreased from 105 last year to 95 currently and is expected to fall still further in the coming year. Other things equal, U.S. ________ to/from Japan think this is good news, and U.S. ________ to/from Japan think this is bad news.

Choose correct answer/s
A
importers; exporters
B
importers; importers
C
exporters; exporters
D
exporters; importers
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Question 15
Multiple Choice

Exchange rate pass-through may be defined as:

Choose correct answer/s
A
the bid/ask spread on currency exchange rate transactions.
B
the degree to which the prices of imported and exported goods change as a result of exchange rate changes.
C
the PPP of lesser-developed countries.
D
the practice by Great Britain of maintaining the relative strength of the currencies of the Commonwealth countries under the current floating exchange rate regime.
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Question 16
Multiple Choice

Phillips NV produces DVD players and exports them to the United States. Last year the exchange rate was $1.25/euro and Phillips charged 120 euro per player in Euroland and $150 per DVD player in the United States. Currently the spot exchange rate is $1.45/euro and Phillips is charging $160 per DVD player. What is the degree of pass through by Phillips NV on their DVD players?

Choose correct answer/s
A
92%
B
33.3%
C
41.7%
D
4.1%
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Question 17
Multiple Choice

Jaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% margin for a price of £27,363. Today these cars are available in the U.S. for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/£. Jaguar has committed to keeping the U.S. price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not hedged against currency changes, what is the amount the company will receive in pounds at the new exchange rate?

Choose correct answer/s
A
£22,803
B
£25,581
C
£27,363
D
£55,000
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Question 18
Multiple Choice

Jaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% margin for a price of £27,363. Today these cars are available in the U.S. for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/£. Jaguar has committed to keeping the U.S. price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not hedged against currency changes, what is the percentage margin the company will realize given the new exchange rate?

Choose correct answer/s
A
20.0%
B
15.3%
C
12.2%
D
7.2%
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Question 19
Multiple Choice

The price elasticity of demand for DVD players manufactured by Sony of Japan is greater than one. If the Japanese yen appreciates against the U.S. dollar by 10% and the price of the Sony DVD players in the U.S also rises by 10%, then other things equal, the total dollar sales revenues of Sony DVDs would:

Choose correct answer/s
A
decline.
B
increase.
C
stay the same.
D
insufficient information
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Question 20
True/False

If a market basket of goods cost $100 in the U.S. and €70 in France, then the PPP exchange rate would be $.70/€.

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True
False
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