1. Suppose prices are equal in Europe and the US (in dollars) at the end of 2006. In 2007, prices

increase by 1% in Europe (in euros) and 3% in the US (in dollars). According to the PPP, between

2006 and 2007 the euro should

A) appreciate

B) depreciate

C) neither appreciate nor depreciate

D) PPP doesn't have a prediction

2. A reason PPP may fail in practice is

A) Lack of a gold standard

B) Product differentiation

C) High inflation

D) A currency peg

3. Read this article on China's interest rate swap market. A swap rate is the rate of the fixed leg of an

interest rate swap contract, and a swap spread is the premium of the swap rate over corresponding

bond yields. According to this article, which one of the following is true?

A) When bond yield goes up, normally investors should increase their demand for paying the

fixed leg of the swap. Therefore, swap rates rise faster than bond yields, thus widening the

swap spread.

B) When bond yield goes up,normally investors should decrease their demand for paying the

fixed leg of the swap. Therefore, swap rates rise faster than bond yields, thus widening the

swap spread.

C) The phenomenon described in (A) was observed in China's interest rate swap market.

D) The phenomenon described in (B) was observed in China's interest rate swap market.