Question

If the rate of growth in labor productivity in China increases relative to the rate of productivity in other countries, then

a. the RMB’s exchange value depreciates against other currencies.

b. the RMB’s exchange value remains constant against other currencies.

c. Chinese citizens are willing to pay more RMB per unit of foreign currency.

d. Chinese citizens are willing to pay fewer RMB per unit of foreign currency.

Which statement is true about the relative PPP?

a. If domestic inflation rate is higher than the foreign inflation rate, PPP predicts that the domestic currency should appreciate.

b. Countries with high rates of inflation will see their currencies depreciate against those with low rates of inflation.

c. The theory of purchasing power parity states that changes in the nominal exchange rate arise from differences in nominal interest rates among countries.

d. All of them are correct.

A relatively high rate of inflation in the United States will result in

a. an appreciation of the dollar against foreign currencies in the long run.

b. a depreciation of the dollar against foreign currencies in the long run.

c. an appreciation of the dollar against foreign currencies in the short run.

d. a depreciation of the dollar against foreign currencies in the short run

13. High real interest rates in the United States tend to

a. increase the demand for dollars, thus causing the dollar to appreciate.

b. decrease the demand for dollars, thus causing the dollar to depreciate.

c. increase the demand for dollars, thus causing the dollar to depreciate.

d. decrease the demand for dollars, thus causing the dollar to appreciate.

14. Assume you are a Chinese exporter and expect to receive 1 million pounds sterling at in 60 days. You can remove the risk of loss due to a depreciation of the pound sterling by ____________

a. entering into a forward contract to sell sterling equivalent for 60-day delivery.

b. entering into a forward contract to sell the RMB equivalent for 60-day delivery.

c. buying sterling now and selling it at the end of 60 days

d. keeping the sterling in Britain after it is delivered to you

Answer 1

10) If 1 Chinese yen now equals 0.15 US dollar. If productivity in China rises, let say assume now 1 Chinese Yen is 0.20 USD which means that Chinese currency appreciated. Thus Chinese people are willing to spend less among other currencies.

11) Relative PPP says that countries with higher inflation will get their currency deflated in future. Thus option B is true.

12) Option B is correct.

13) Higher interest rate in the US will raise the FDI into the US economy which raise the demand of currency and thus appreciate dollar. Thus option A is correct.

14) Forward contract is an agreement which helps in selling the commodity at a specified price in future. Thus exporter can buy the forward contract to sell Sterling in 60 day period to reduce the risk. Thus option A is correct.