1. A year ago, absolute PPP held between the US and Russia. In the subsequent 12 months Russia experienced 12% inflation, while the US had 4% inflation. The ruble depreciated 5% versus the dollar over this period.

1. The ruble depreciated by more than is necessary to preserve PPP.
2. US exports to the Russia will decrease.
3. US imports from Russia will increase.
4. The US gained competitiveness.

2. Suppose that BCA + BKA > 0, and the currency is fixed. Thus, the central bank has to intervene so that BCA + BKA + BRA = 0. What must the central bank do?

1. The central bank supplies more of its currency and the BCA + BKA surplus persists.
2. The central bank supplies less of its currency and the BCA + BKA surplus persists.
3. The central bank supplies less of its currency and the BCA + BKA surplus narrows.
4. The central bank supplies more of its currency and the BCA + BKA surplus narrows.

3. Suppose there are just two countries the US and Germany. Consider the following:

US Current Account balance (BCA): -$400

US Financial Account balance (BKA): +$315

1. The balance on the US Reserve Account is +$85, and it means that US holdings of foreign currency denominated assets increased.
2. The balance on the US Reserve Account is -$85, and it means that US holdings of foreign currency denominated assets increased.
3. The balance on the US Reserve Account is +$85, and it means that US holdings of foreign currency denominated assets decreased.
4. The balance of the US Reserve Account is -$85, and it means that US holdings of foreign currency denominated assets decreased.

4. The US had a trade deficit with Germany, and the dollar and the euro are freely floating currencies. When the dollar depreciates against the euro to begin the process of narrowing the trade deficit, the first thing that happens is:

1. US exports to Germany, measured in euros, increase.
2. US imports, measured in dollars, increase.
3. Germany buys more goods, for example more cars, made in the US.
4. The US buys fewer goods, for example fewer cars made in Germany.

5. The implied PPP rate of exchange of Mexican pesos per U.S. dollar is 17.0 according to the Big Mac Index. The current exchange rate is MXN 15/$ Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is _______.

1. Appreciating versus dollar
2. Undervalued
3. Overvalued
4. Correctly valued