Chapter 5 - Study Questions For Week 11 With Answers printable pdf download

Study Questions for Week 11

1. The text lists 4 economic factors that determine the exchange rate over the long run. Briefly

describe each of these factors.

2. Examine table 2.2. What does the author mean by the phrase “US preferences increase” and

why would this lead to a depreciation of the US dollar?

3. Examine figure 12.2 on page400. Explain each of the 8 outcomes (effects) on the long run

exchange rate for the US$. For each of the 8 cases, draw the corresponding S&D diagram.

4. State the law of one price. Suppose the price of wheat in Canada is $5 (Canadian dollars) per

bushel. The price of wheat in the US is $6 (US dollars). The exchange rate is currently $

.95(Canadian) per US $. Is the price in Canada “too” high or “too low”? How much profit

could you make buying one bushel of wheat in Canada and selling it in the US? When traders

start buying Canadian wheat and selling it in the US, what will happen to the price of wheat

in Canada? , the price in the US?

5. Suppose the average price of a Big Mac in the United States is $3.50 while in Japan the

average price is 400 yen. If the price of a dollar is 100 yen per dollar, the purchasing power

parity model of exchange rate determination suggests: The yen is currently (overvalued,

undervalued) and the exchange will eventually change to a rate (greater than, less than) 100

yen per US$.

6. Inspect table 12.3. According to these data for 2005, the price of a Big Mac is highest in

(__________________) .

7. Inspect table 12.3. Which currencies are overvalued the most, the least. Now check to see

what has happened over time. Inspect the

Big Mac Index for

2008. Did things change as

predicted?

8. What is purchasing power parity? How is this related to the Big Mac index?

Examine the data which present

national income per

capita, compared to the US, using two

methods; converting by the exchange rate, and converting by “common prices” (a ppp like

method). Summarize the results for “richer” countries like Norway and Switzerland. Now

summarize the results for “poorer” countries like China and Thailand. Compare the

differences in results.

10. The chart below shows GNP per capita on the vertical axis measured using the World Bank

PPP index. Per capita GNP is on the horizontal axis. Each red dot shows the data point for one

country. The little blue circles show the 45 degree line where GNP (ppp)=GNP(not using

PPP). Countries above the 45 degree line have a GNP (ppp) higher than GNP (not ppp). Which

types of countries tend to lie above the 45 degree line? Which tend to lie below it?

Chapter 5 - Study Questions For Week 11 With Answers