Ch 16

Question 1

The law of one price is… ?

Answer 1

the theory of the same good should be sold at the same price in different countries

Question 2

Law of one price: ?

Answer 2

P of i in US = E ($/£) x P of i in UK

Question 3

Law of one price and PPP makes …

Answer 3

P of i = E x P* of i

Question 4

PPP stands for

Answer 4

Purchasing power parity

Question 5

PPP was made by …. and popularized by … ?

Answer 5

David Ricardo and Gustav Cassel

Question 6

P (of x country) is … that measures ….?

Answer 6

a currency (eg. $) price of a reference commodity basket sold in x country that measures money purchasing power in that country.

Question 7

PPP holds if

Answer 7

P of country i = E x P* of country x

Question 8

What is the difference between one law and PPP theory?

Answer 8

Law of one price refers to one commodity and PPP refers to a basket of goods.

Question 9

When relative PPP holds ….?

Answer 9

P of country i should = P of country x. So a change in Pi will be proportionally matched with the same change in P of country x.

Question 10

Inflation rate is written as

Answer 10

P-hat or pi

Question 11

Inflation is

Answer 11

a change in price levels

Question 12

The monotary approach is ..?

Answer 12

a long-run theory because price is takne as varied and not fixed.

Question 13

P of i =

Answer 13

Money supply of country i/ Aggregate money demand of country i

Question 14

Settting a growth rate to money supply leads to …

Answer 14

an ongoing gradual money increase and a continuing price level increasing - an ongoing inflation - which affect the intreste rate.