Multiple choice questions (only one answer is correct).

1) If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation of product between markets, the product's price should be the same in both markets. This is known as:

A) relative purchasing power parity.

B) interest rate parity.

C) the law of one price.

D) equilibrium.

2) If a Big Mac costs $2.54 in the United States and 294 yen in Japan, what is the estimated exchange rate of yen per dollar as hypothesized by the Hamburger index?

A) $0.0086/

B) 124/$

C) $0.0081/ D) 115.75/$

3) One year ago the spot rate between U.S. dollars and Canadian dollars was $1= C$1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate should be approximately:

A) $0.96 per one C$.

B) $1 per one C$.

C) $1.04 per one C$.

D) Relative PPP provides no guide for this type of question.

4) If we set the real effective exchange rate index between Canada and the United States equal to 100 in 1998, and find that the U.S. dollar has risen to a value of 112.6, then from a competitive perspective the U.S. dollar is:

A) overvalued.

B) undervalued.

C) very competitive.

D) There is not enough information to answer this question.

5) According to the international Fisher Effect, if an investor purchases a five-year U.S. bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%, then the investor must be expecting the ________ to ________ at a rate of at least 1% per year over the next 5 years.

A) British pound; appreciate B) British pound; revalue C) U.S. dollar; appreciate D) U.S. dollar; depreciate