What real world complications keep purchasing power parity from being a complete explanation of exchange rate fluctuations in the long run. Explain
What will be an ideal response?
1. Not all products are traded internationally. As a result, there is no way to take advantage of profit opportunities to buy in one country and sell in another country, so exchange rates will not reflect exactly the relative purchasing power of currencies.
2. Countries impose trade barriers. If there are barriers to trade, it may not be possible to take advantage of profit opportunities to buy in one country and sell in another country, so exchange rates will not reflect exactly the relative purchasing power of currencies.
3. Products differ across countries as firms adapt products to to local tastes. As a result, consumers in one country might be willing to pay different prices for products than consumers in another country, and exchange rates might not adjust for that difference in the long run.
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The uncertainty costs of inflation cause ________ because ________
A) a decrease in investment and slower growth; people focus on the long run and not the short run B) an increase in investment and faster growth; people focus on the short run and not the long run C) a decrease in investment and slower growth; people increase their demand for money D) a decrease in investment and slower growth; people focus on the short run and not the long run E) an increase in investment and faster growth; people decrease their demand for money
Missouri can produce 10,000 tons of pecans per year or 5,000 tons of pears per year. Washington can produce 12,000 tons of pecans per year or 48,000 tons of pears per year. Which of the following statements about opportunity cost is CORRECT?
A) The opportunity cost of a ton of pecans is 2 tons of pears per ton of pecans for Missouri and 1/4 ton of pears per ton of pecans for Washington. B) The opportunity cost of a ton of pears is 2 tons of pecans per ton of pears for Missouri and 1/4 ton of pecans per ton of pears for Washington. C) The opportunity cost of a ton of pecans is 1/2 ton of pears per ton of pecans for Missouri and 4 tons of pears per ton of pecans for Washington. D) Both answers B and C are correct.
Compared to the United States, the income distribution in other major industrial nations tends to be
a. more concentrated b. less concentrated c. similar d. impossible to calculate e. not comparable because tax structures differ among countries
Suppose you transfer $1,000 from your checking account to your savings account. How does this action affect the M1 and M2 money supplies?
a. M1 and M2 are both unchanged. b. M1 falls by $1,000 . and M2 rises by $1,000. c. M1 is unchanged, and M2 rises by $1,000. d. M1 falls by $1,000 . and M2 is unchanged.