Q1. Which of the following statements regarding relative Purchasing Power Parity (PPP) is least accurate?

A)   In order for relative PPP to hold, countries with higher rates of expected inflation should see their currencies appreciate.

B)   It claims that the exchange rate movements should exactly offset any inflation differential between two countries.

C)   Because PPP holds in the long run, it is somewhat useful in exchange-rate determination in the short run.

Q2. Which of the following statements regarding relative purchasing power parity (PPP) is FALSE?

A)   To keep the relative cost of goods and services the same across borders, countries with higher rates of expected inflation should see their currencies depreciate.

B)   Short-term inflation differentials are insignificant in regards to exchange rates; only the long-run differentials are important to relative PPP.

C)   If relative PPP holds, overvalued currencies will depreciate over time, while undervalued currencies will appreciate.

Q3. The law of one price is:

A)   not dependent on the potential for arbitrage profits to hold in practice.

B)   inconsistent with purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

C)   consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

Q4. The law of one price is:

A)     not dependent on the potential for arbitrage profits to hold in practice.

B)     inconsistent with purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

C)     consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

Q5. Which of the following statements regarding purchasing power parity (PPP) is FALSE?

A)   Relative PPP states that prices for goods and services are the same whether it is for one good or for a basket of goods.

B)   Under absolute PPP the foreign price level expressed in domestic currency terms should be equal to the domestic country’s price level.

C)   Absolute PPP is similar to the law of one price, except it concerns a basket of goods rather than a single good.

答案和详解如下：

Q1. Which of the following statements regarding relative Purchasing Power Parity (PPP) is least accurate?

A)   In order for relative PPP to hold, countries with higher rates of expected inflation should see their currencies appreciate.

B)   It claims that the exchange rate movements should exactly offset any inflation differential between two countries.

C)   Because PPP holds in the long run, it is somewhat useful in exchange-rate determination in the short run.

Correct answer is A)

In order for relative PPP to hold, countries with higher rates of expected inflation should see their currencies depreciate.

Q2. Which of the following statements regarding relative purchasing power parity (PPP) is FALSE?

A)   To keep the relative cost of goods and services the same across borders, countries with higher rates of expected inflation should see their currencies depreciate.

B)   Short-term inflation differentials are insignificant in regards to exchange rates; only the long-run differentials are important to relative PPP.

C)   If relative PPP holds, overvalued currencies will depreciate over time, while undervalued currencies will appreciate.

Correct answer is B)

According to relative PPP, exchange rates will adjust to inflation differentials. However, empirical evidence indicates that relative PPP tends to hold over the longer term, but not over the short term.

Q3. The law of one price is:

A)   not dependent on the potential for arbitrage profits to hold in practice.

B)   inconsistent with purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

C)   consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

Correct answer is C)

The law of one price is consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

Q4. The law of one price is:

A)     not dependent on the potential for arbitrage profits to hold in practice.

B)     inconsistent with purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

C)     consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

Correct answer is C)

The law of one price is consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

Q5. Which of the following statements regarding purchasing power parity (PPP) is FALSE?

A)   Relative PPP states that prices for goods and services are the same whether it is for one good or for a basket of goods.

B)   Under absolute PPP the foreign price level expressed in domestic currency terms should be equal to the domestic country’s price level.

C)   Absolute PPP is similar to the law of one price, except it concerns a basket of goods rather than a single good.

Correct answer is A)

Relative PPP does not state that prices for goods and services are the same, only that the rate of change in the FX rate is a function of the inflation differentials between the two countries.