Reading 19: Foreign Exchange Parity Relations - LOS g ～ Q Foreign, applies, respect, white, price

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Q6. The law of one price applies with respect to:

A)   both absolute and relative PPP.

B)   relative PPP, but does not apply to absolute PPP.

C)   absolute purchasing power parity (PPP), but does not apply to relative PPP.

Q7. Which of the following purchasing power concepts depends on the growth rate of prices in two countries?

A)   Absolute PPP.

B)   International Fisher relation.

C)   Relative purchasing power parity (PPP).

Q8. With respect to the relative purchasing power parity (PPP) equation, compounded inflation rates are applicable when:

A)   real interest rates are expected to hold for multiple periods over a certain stated time horizon.

B)   expected exchange rates are expected to hold for multiple periods over a certain stated time horizon.

C)   inflation rates are expected to hold for multiple periods over a certain stated time horizon.

Q9. Suppose the United States and Europe produce only one good, chocolate. The price of chocolate is $8.25/kg in the United States and

mayanfang1

答案和详解如下：

Q6. The law of one price applies with respect to:

A)   both absolute and relative PPP.

B)   relative PPP, but does not apply to absolute PPP.

C)   absolute purchasing power parity (PPP), but does not apply to relative PPP.

Correct answer is C)

The law of one price focuses on a single, clearly comparable good and states that the same good should have the same real prices in all countries. Absolute PPP is an average version of the law of one price. Rather than focusing on a single good, absolute PPP focuses on a weighted average price level of a representative basket of goods and services. Relative PPP holds that exchange rate movements reflect differences in inflation rates between countries. The relative version depends on the growth rates of prices in two countries. It is the rate of inflation (i.e., the relative rate of change in prices) that is critical here.

Q7. Which of the following purchasing power concepts depends on the growth rate of prices in two countries?

A)   Absolute PPP.

B)   International Fisher relation.

C)   Relative purchasing power parity (PPP).

Correct answer is C)

Relative PPP holds that exchange rate movements reflect differences in inflation rates between countries. The relative version depends on the growth rates of prices in two countries.

Q8. With respect to the relative purchasing power parity (PPP) equation, compounded inflation rates are applicable when:

A)   real interest rates are expected to hold for multiple periods over a certain stated time horizon.

B)   expected exchange rates are expected to hold for multiple periods over a certain stated time horizon.

C)   inflation rates are expected to hold for multiple periods over a certain stated time horizon.

Correct answer is C)

Relative PPP holds that exchange rate movements reflect differences in inflation rates between countries. The relative version depends on the growth rates of prices in two countries. It is the rate of inflation that is critical here.

It is necessary to make a slight adjustment to the relative PPP equation to account for the compounded inflation rate over the time horizon if the problem involves multiple periods:

S_t / S₀ = (1 + i_FC)^t / (1 + i_DC)^t

Q9. Suppose the United States and Europe produce only one good, chocolate. The price of chocolate is $8.25/kg in the United States and

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