ECN quiz 3

Question 1

In LR EQ, which 2 economy conditions are satisfied?

Answer 1

1: Output reaches its full employment
2: All prices in economy, including wage rate and exchange rate, reach consistent with EQ

Question 2

In LR EQ does the economic variable change?

Answer 2

No, this is why it is called LR EQ

LR is not affected dby most var because it is long term, compared to SR, which has a lot of vars (inflation) that could change stuff

Question 3

In EQ, all prices in economy change (with/against) money stock

Answer 3

With

Question 4

In LR, increase in money stock leads to
1. nominal depreciations of domestic currency
2. nominal appreciations of domestic currency

Answer 4

1. nominal depreciations of domestic currency

Question 5

The law of one price states…

Answer 5

identical goods sell for an equivalent price regardless of the currency in which the price is denominated(if you buy a burger in $, it will still cost you the same in yen respectively)

Question 6

What does an arbitrage do?

Answer 6

makes sure that with no transportation costs, barriers to trade, monopolies, or other restrictions that the law of one price holds
(makes sure law of one price is respected

Question 7

What does PPP stand for?
1. Power Price Point
2. Point of Price Perspective
3. Purchasing Power Parity

Answer 7

3.Purchasing power parity

Question 8

Suppose that the market price of a trench coat is $420 in New York, and the market price of the same coat in London is £300.

The PPP would imply that the dollar equivalent exchange rate of the pound should be…
1. $1.4/£
2. £/1.4

Answer 8

1. $1.4/£

Question 9

P and P* are the overall price level of

Answer 9

domestic and foreign goods and services
P=domestic
P*=foreign

Question 10

Exchange rate can be described as…
1. e= P x P*
2. e = P / P*
3. e = P* / P
4. e = P* x P x X

Answer 10

2. e = P / P*

Question 11

Real Exchange rate can be described as…
1. e= P x P*
2. e = P / P*
3. e x P* / P= 1

Answer 11

3. e x (P*/P) = 1

Question 12

Is relative PPP weaker/stronger than absolute PPP? Why?

Answer 12

weaker, it talks about price changes as opposed to absolute price levels

relative ppp is a short term explaination and can be affected by many vars

absolute ppp in in terms of LR which leads to no vars

Question 13

Relative PPP can be expressed as
1. %∆P/%∆P* = %∆e
2. %∆e = %∆P*-%∆P
3. %∆e= %∆P-%∆P *

Answer 13

3. %∆e= %∆P-%∆P*