ECONOMICS 353 (SECTION 2) L. Tesfatsion/Spring 01
EXERCISE SET 6: 5 POINTS TOTAL DUE: Tuesday, March 20, 2:10 P.M.
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO EXCEPTIONS*
*NOTE:* Please FILL IN YOUR NAME, BIRTH DATE, AND ID (SOC SEC) No. on Side 1
of a BROWN bubble (answer) sheet and write "353 SECTION 2-EXERCISE SET 6" in
the top margin of Side 1. Use a #2 pencil to MARK YOUR ANSWERS on Side 1 of
the bubble sheet to the following five multiple choice questions:
1-2 If the U.S. exchange rate for the Irish punt changes from 4
punts to the U.S. dollar to 2 punts to the U.S. dollar, then
A. Irish wool blankets will become cheaper for Irish residents.
B B. U.S. wheat will become cheaper for Irish residents.
C. Irish wool blankets will become cheaper for U.S. residents.
D. The U.S. dollar has appreciated relative to the Irish punt
2-2 According to the Law of One Price, if Jordanian wine is 7
dinars per bottle (750ml) and Maltesian wine is 4 lira per bottle
(750ml), the wines are of equal quality, and transport costs are
zero, then the exchange rate between the Jordanian dinar and the
Maltese lira should approximately be
A. 0.57 dinars per 1 lira
B. 1 dinar per 1 lira
C. 7 dinars per 1 lira
D D. 1.75 dinars per 1 lira
3-2 Given a world divided between HC and ROW, the Purchasing Power Parity
condition in level form asserts that
A A. the HC real exchange rate will stay constant over time
B. the HC inflation rate will equal the ROW inflation rate over time
C. the HC nominal exchange rate will stay constant over time
D. the value of HC GDP and ROW GDP will stay equal over time
4-2 Suppose the inflation rate in Portugal is 8 percent during 2000
and the inflation rate in Hungary is 12 percent during 2000. Then the
Purchasing Power Parity condition predicts that, during 2000, the value
of the Portuguese currency (escudos) measured in terms of Hungarian
currency (forints) -- i.e., the number of forints per escudo -- will
A. fall by 4 percent
B B. rise by 4 percent
C. fall by 20 percent
D. rise by 20 percent
5-2 Suppose the world is divided between the HC and ROW. According
to the Interest Parity theory, a ROW saver attempting to decide
between holding a bank deposit account in ROW and a bank deposit
account in the HC should take into account _________ as well as
differences in interest rates in order to _____________.
A. interest rate risk; maximize expected return
B. liquidity; maximize overall yield to maturity
C C. expected exchange rate movements; maximize expected return
D. default risk; minimize overall risk
