Review of Lecture 30 Quiz and Test Questions
1. TR37 The Relative Purchasing Power Parity formula relates next year's spot price for one
unit of foreign currency to the inflation rates in the foreign and domestic economies.
Choose the statement that best describes that relation.
a. Next year's spot price for a unit of foreign currency decreases as the inflation rate
in the foreign economy decreases.
b. Next year's spot price for a unit of foreign currency decreases as the inflation rate
in the domestic economy increases.
c. When the inflation rate in the domestic and foreign economies are equal then
probably then probably next year's spot price for a unit of foreign currency remains the
same as this year's price.
d. Two choices, A and C, are correct
e. The three A-B-C choices are all correct
2. PR2 A BigMac costs 29.7 koruna in Slovakia and 239.0 yuan in China. Suppose that
business and other costs for the McDonalds in both countries are identical. Inflation over
the next year is 16% in Slovakia and 21% in China. If exchange rate movements over
the next year reestablish the Purchasing Power Parity relation, what is the exchange rate
(yuan per koruna) for next year?
a. 9.23
b. 7.63
c. 11.17
d. 8.39
e. 10.16
3. PR3b The one-year risk-free interest rate is 5.00% in China (currency is the yuan) and
3.90% in Bahrain (currency is the dinar). Today's spot exchange rate (dinar per yuan) is
8.40. and the one-year forward rate is 6.93. Choose the statement about today's
equilibrium 1-year forward exchange rate (dinar per yuan) that is most consistent with
the Interest Rate Parity relation.
a. the equilibrium forward rate is 7.23 and in the forward market the yuan is
relatively undervalued
b. the equilibrium forward rate is 9.56 and in the forward market the yuan is
relatively undervalued
c. the equilibrium forward rate is 8.31 and in the forward market the yuan is
relatively undervalued
d. the equilibrium forward rate is 8.31 and in the forward market the yuan is
relatively overvalued
e. the equilibrium forward rate is 7.23 and in the forward market the yuan is
relatively overvalued
4. PR1b Today's spot exchange rate is that 1 koruna = 5.60 yuan. Everybody correctly
knows that over the next year inflation will equal 30% in Slovakia (koruna) and 23% in
China (yuan). If exchange rate movements strictly adhere to the Purchasing Power Parity
relation (PPP), which selection best completes the following statement:
PPP implies an exchange rate next year of ____(i)_______ yuan per koruna, and the
yuan is expected to _____(ii)______ relative to the koruna.
Fill in the blanks above with the correct selection.
a. i) 5.30 and ii) appreciate
b. i) 4.01 and ii) depreciate
c. i) 4.61 and ii) appreciate
d. i) 4.01 and ii) appreciate
e. i) 5.30 and ii) depreciate
5. PR4b A BigMac costs 5.0 koruna in Slovakia and 6.5 dinar in Bahrain. Suppose that
business and other costs for the McDonalds in both countries are identical. The actual
cross-rate between the two currencies is that one dinar is worth 0.70 koruna. According
to BigMac parity, find the "intrinsic" price, measured in koruna , for one dinar and
determine whether the dinar is predicted to appreciate or depreciate.
a. the price is 0.77 koruna and the dinar should depreciate
b. the price is 0.77 koruna and the dinar should appreciate
c. the price is 1.02 koruna and the dinar should appreciate
d. the price is 1.02 koruna and the dinar should depreciate
e. the price is 0.89 koruna and the dinar should depreciate