Chapter 13 Flashcards
The price of one currency in terms of another is called
the exchange rate
An exchange-rate system in which the nominal exchange rate is set by the government is known as
a fixed-exchange-rate system
The Bretton Woods system relied on
a fixed-exchange-rate system
The real exchange rate is
the price of one currency in terms of another
When the domestic currency strengthens under a fixed-exchange-rate system, this is called
a revaluation
Three-wheel cars; sold for 5000 pounds; Four-wheeled cars sold for 10,000 marks; What is the nominal exchange rate?
1.50 marks / pound
Three-wheel cars; sold for 5000 pounds; Four-wheeled cars sold for 10,000 marks; What is the real exchange rate?
0.67 3-whelk cars per 4-wheel car
When the domestic currency buys fewer units of foreign currency, the
nominal exchange rate FALLS
When the nominal exchange rate falls,
the domestic currency buys FEWER units of foreign currency and the domestic currency has DEPRECIATED
From 1980 to 2000, the yen/dollar exchange rate fell from 240 yen/dollar to to 102 yen/dollar, while the dollar/pound exchange rate fell from 2.22 dollars/pound to 1.62 dollars/pound. As a result…
the dollar DEPRECIATED relative to the yen, but APPRECIATED relative to the pound
When the nominal exchange rate in terms of dollars per yen rises,
the dollar buys FEWER yen and the dollar has DEPRECIATED
A rise in the real exchange rate is called
a real APPRECIATION
For a given real exchange rate, a nominal appreciation of the domestic currency will result from
an INCREASE in the prices of FOREIGN GOODS
If the real exchange rate rises 2%, domestic inflation 3%, and the foreign inflation 1%, what is the percent change in the nominal exchange rate?
0%
If the real exchange rate rises 4%, domestic inflation 2%, and the foreign inflation 0%, what is the percent change in the nominal exchange rate?
2%
If the nominal exchange rate rises 5%, domestic inflation 2%, and the foreign inflation 3%, what is the percent change in the real exchange rate?
4%
If all countries produce the same good and goods are freely traded among countries, so that the real exchange rate equals one, then the relationship between domestic and foreign prices and the nominal exchange rate is
P = P / e
The idea that similar foreign and domestic goods, or baskets of goods, should have the same price when priced in terms of the same currency is called
purchasing power parity
Purchasing Power Parity means that
e = P(sub “for”) / P
Empirical evidence shows that in the short run, purchasing power parity _____, and in the long run, purchasing power equity ______.
does NOT hold, HOLDS
Purchasing power parity does not hold in the short to medium run because
countries produce different goods AND some goods aren’t internationally traded
Suppose purchasing power parity holds. If the price level in the US is at 100 pounds per good and the price level in Japan is 250 yen per good, then the nominal exchange rate is _______ yen per dollar.
2.5
Suppose purchasing power parity holds. If in 1997 the price level ………
100
Relative purchasing power parity occurs when
the real exchange rate is constant
