What effect does the fixing of the nominal exchange rate have on the real exchange rate?
a. The real exchange rate is fixed at the same level.
b. The nominal exchange rate is fixed, but the real exchange rate varies with relative income levels.
c. The real exchange rate still fluctuates with relative international prices.
d. None of the above.
Question 2 - Which of the following statements is correct?
a. Purchasing Power Parity occurs when nominal interest rates are the same in two countries.
b. Purchasing Power Parity means that the nominal exchange rate is 1 to 1.
c. Purchasing Power Parity means that two countries have the same standard of living.
d. Purchasing Power Parity means that the real exchange rate equals 1 to 1.
Question 3 - Which of the following statements is true about purchasing power parity (PPP)?
a. PPP is the normal state between two nations because international markets are perfectly competitive.
b. PPP is the normal state between two nations because of government regulations and central bank intervention.
c. PPP is the normal state between two nations because interest rates, the spot exchange rate, and the forward exchange rate all adjust to create this condition.
d. PPP is the normal state between two nations because arbitrageurs take advantage of any imbalances.
e. PPP is rarely the case for most nations in the short-run, but exchange rates tend to move in the direction of PPP in the long run.
Question 4 - Which of the following is a shortcoming of the nominal, effective exchange rate?
a. The nominal, effective exchange rate does not take price differences into account.
b. The nominal, effective exchange rate as a measure is too narrow because it only shows changes in the value of one currency against one other currency.
c. The nominal, effective exchange rate is not easy to calculate because there are no data to determine the currency weights.
d. The nominal, effective exchange is not a meaningful measure because the differences in inflation are over-emphasized.
Question 5 - Which exchange rate would you use to determine if the international competitiveness of a country had deteriorated or improved relative to a specific foreign country?
a. The nominal effective exchange rate.
b. The real effective exchange rate.
c. The nominal bilateral exchange rate.
d. The real bilateral exchange rate.
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