1.The law of one price

a.

is a medieval law that required all producers to charge the same price for similar products.

b.

is a law that requires producers to charge the same price to all of their customers to avoid price discrimination.

c.

is an economic hypothesis postulating that in the absence of trade barriers, the price of a product must be the same in two trading countries when measured in a common currency.

d.

is an economic hypothesis postulating that the relative price of a broad basket of products in two trading countries must be the same when measured in a common currency.

e.

is an economic hypothesis postulating that the price of a broad basket of products in two trading countries must be the same when measured in a common currency.

10 points

QUESTION 2

1.Which one of the following maynotexplain the observed deviations from purchasing power parity (PPP) among the currencies of different countries?

a.

Differences in regulations and taxes across countries.

b.

Trade barriers and transportation costs.

c.

Lack of perfect competition in most markets.

d.

Differences in the prices of perfectly tradable products when measured in a common currency.

e.

None of the above.

10 points

QUESTION 3

1.The empirical data on real exchange rates shows that the relative purchasing power parity (PPP) hypothesis

a.

always holds.

b.

generally does not hold.

c.

holds in advanced countries.

d.

holds among countries that share a common currency.

10 points

QUESTION 4

1.The COVID-19 pandemic and the need to control the spread of virus through social distancing has lowered the productivity of delivering non-tradable local services in all countries. This is unlikely to be a short-term phenomenon because even if a vaccine or herd immunity for the COVID-19 is developed, concerns about other deadly viruses that may emerge in the future may prompt people to exercise social distancing indefinitely. The extent and significance of such practices will vary among countries due to factors such as differences in the composition of production and the age-structure of population. As a result, some countries will experience larger increases in the cost of delivering non-tradable local services than others. As a result of this phenomenon, we should expect the currencies in countries with higher local costs to

a.

appreciate relative to currencies of other countries.

b.

depreciate relative to currencies of other countries.

c.

remain unchanged relative to currencies of other countries.

d.

appreciate or depreciate depending on the situation.

10 points

QUESTION 5

1.Tunisia had tried to expand its exports by channeling a great deal of its fiscal and financial resources to raise the productivity of its export-oriented industries. This policy left limited resources for investment and productivity growth in the non-tradable sector of the economy. Such a policy is likely to

a.

help raise exports effectively in the short run as well as the long run.

b.

be counterproductive in raising exports because it raises the economy's real exchange rate from the start.

c.

help raise exports in the long run, but may not bear fruit in the short run due to real currency appreciation.

d.

help raise exports for some years, but eventually becomes less effective in promoting exports because it raises the economy's real exchange rate.

10 points

QUESTION 6

1.Major oil reserves were discovered in Ghana in 2007, which led to a windfall revenue for the government after 2011. The windfall has enabled the government of Ghana to increase its expenditure in the economy by a significant amount. Over the past decade, this expenditure increase

a.

could not have affected the real exchange rate of the Ghanaian currency.

b.

may have caused the real exchange rate of the Ghanaian currency to appreciate or depreciate.

c.

must have caused the real exchange rate of the Ghanaian currency to depreciate.

d.

must have caused the real exchange rate of the Ghanaian currency to appreciate.