a) According to the monetary approach to the exchange rate, with real money demands being constant in Sweden and the US, if Sweden's money supply is increasing at the annual rate of 5% and the US money supply is increasing at the annual rate of 2%, then:
a. the Swedish krona should be appreciating against the US dollar at an annual rate of less than 3% to take into account overshooting.
b. the Swedish krona should be appreciating against the US dollar at the annual rate of 3%.
c. the Swedish krona should be depreciating against the US dollar at an annual rate of greater than 3% to take into account overshooting.
d. the Swedish krona should be depreciating against the US dollar at the annual rate of 3%.
e. the Swedish krona should be depreciating against the US dollar at an annual rate of less than 3% to take into account undershooting.
b) Purchasing power parity is more likely to hold true when:
a. there are a large amount of non-traded goods.
b. there are high tariffs.
c. exchange rates are fixed and stable over a reasonably long time period.
d. exchange rates are flexible.
e. there are high transportation costs.
c) Suppose the basket of goods used for calculating the national price level, P, is the same as the basket of goods used for calculating P*. The formula P = EP* represents the existence of:
a. a real exchange rate value that, based on these measures for E, P, and P*, is not equal to one.
b. relative purchasing power parity but not absolute purchasing power parity.
c. absolute purchasing power parity but not relative purchasing power parity.
d. absolute purchasing power parity and relative purchasing power parity.
e. neither absolute purchasing power parity nor relative purchasing power parity.
