GDP Purchasing Power Parity (PPP) 2

Question 1

If a standard basket of goods costs $100 in the United States and ¥1,200 in Japan, what is the PPP-implied exchange rate (dollars per yen)?

Accepted Answer

$0.083 per yen

Answer

¥12 per dollar

Answer

$1.20 per yen

Answer

$12 per yen

Question 2

If the PPP-implied exchange rate is $1.25 per pound sterling but the market exchange rate is $1.50 per pound, the pound is considered to be:

Accepted Answer

Overvalued relative to PPP

Answer

Undervalued relative to PPP

Answer

At equilibrium with PPP

Answer

Correctly valued but the PPP estimate is wrong

Question 3

Which of the following is a primary reason why absolute PPP does not hold precisely in practice?

Accepted Answer

Non-tradable goods and services can have vastly different prices across countries without triggering arbitrage

Answer

Countries deliberately manipulate price statistics

Answer

Central banks prevent all international currency transactions

Answer

PPP calculations exclude services and only apply to manufactured goods

Question 4

The Balassa-Samuelson effect helps explain why richer countries tend to have higher overall price levels. Its core argument is that:

Accepted Answer

Higher productivity in tradable sectors drives up wages economy-wide, making non-tradable services more expensive

Answer

Wealthy countries impose higher tariffs on imports, raising domestic prices

Answer

Rich countries print more money, causing higher inflation across all sectors

Answer

Large populations in rich countries create excess demand that raises prices

Question 5

Relative PPP, as distinct from absolute PPP, predicts that:

Accepted Answer

Changes in exchange rates will reflect differences in inflation rates between countries over time

Answer

Identical goods will sell at the same absolute price in both countries

Answer

All countries will converge to the same income level

Answer

Exchange rates are determined solely by trade flows

Question 6

If inflation in Country A is 6% and inflation in Country B is 2%, relative PPP predicts that Country A's currency will approximately:

Accepted Answer

Depreciate by 4% against Country B's currency

Answer

Appreciate by 4% against Country B's currency

Answer

Depreciate by 8% against Country B's currency

Answer

Remain unchanged because both countries still have positive inflation

Question 7

When comparing the economic size of China to the United States, using PPP-adjusted GDP rather than nominal GDP generally results in China's economy appearing:

Accepted Answer

Larger, because China's lower domestic price levels increase its PPP-adjusted output

Answer

Smaller, because China's exchange rate is artificially suppressed

Answer

Identical in size, because PPP eliminates all currency differences

Answer

Smaller, because PPP penalizes countries with large populations