1.

Choose all the statements that are correct.

Exchange rate targeting is rooted in absolute Purchasing Power Parity.

Targeting the exchange rate by keeping one currency pegged to the currency of an economy with the reputation of price stability (like the US or Britain), allows a country to benefit from this price stability.

Exchange rate targeting explains why the Italian lira is overvalued

Exchange rate targeting is rooted in relative Purchasing Power Parity.

2.

These statements pertain to the monetary approach to exchange rates.

Which of the following statements are correct?

In the monetary approach the demand for money stems from real income, which is capturing the transactions in the economy.

In the monetary approach, real interest rates adjust to bring the money market in equilibrium.

In the monetary approach, the price level adjusts to bring the money market in equilibrium.

The central bank plays no role in determining the price level in the economy.

3.

These statements pertain to the money supply in the US economy.

Choose the one answer that is correct.

The US money supply is determined by the US Treasury and the US banking system.

The US money supply is determined by the US banking systerm.

The US money supply is determined by the US Federal Reserve and the US banking system.

The US money supply is determined by Congress and the US banking system.

4.

Deviations from Purchasing Power Parity can be explained by:

Choose all the answers that are correct.

High domestic interest rates.

Transaction costs.

High inflation rates.

Non traded goods

Differentiated products and imperfect competition.

Price stickyness.