ECON 1010 Lecture Notes - Speculation, Consumption Function, Keynesian Economics

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jadeplatypus42

29 Apr 2013

School

University of Manitoba

Department

Economics

Course

ECON 1010

Professor

Sarrah Vakili

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ECON 1010 Full Course Notes

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Chapter 13: purchasing power - differences in the cost of living between countries. Data on relative standards of living is normally adjusted to reflect estimates of purchasing power parity to take account of differences in the cost of living so that each unit of currency has (approximately) the same purchasing power. One euro of income in each country may not have the same real purchasing power because of differences in the average cost of living. At any given time, the current exchange rate for a country is unlikely to be at ppp levels. Currency speculation or other factors may have driven the exchange rate above or below its estimated ppp level. Ppp alignment because they are trying to manage the value of the currency. The consumption function is simply a theoretical relationship between income and consumer expenditure. The keynesian theory describes a consumption function where household spending is directly linked to people"s disposable income.

Related Questions

In the long run, exchange rates reflect purchasing power parity (PPP). This theory called the law of one price, aggregates and generalizes the idea that the same good must sell for the same price, in the same currency units, regardless of where it is produced. The following questions consider how PPP and the law of one price work and whether they can explain long-run exchange rate movements.

PPP may not hold because:

A. The law of one price applies, on average, to all goods.

B. Countries are gradually reducing trade restrictions.

C. All goods and services can trade at a relatively low cost.

D. Goods produced in different countries vary greatly in quality.

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1.Purchasing power parity implies that

a. the real exchange rate is equal to 1.

b. the law of one price does not hold.

c. inflation rates are equal across countries.

d. the real exchange rate is equal to 0.

e. if the domestic country has low prices, then the domestic currency will depreciate until foreign citizens can buy the same amount of goods as domestic citizens.

2.Which of the following is a prediction from the PPP model of exchange rates?

A. An increase in the US money supply leads to an appreciation of the dollar in the long run.

B. An increase in US production leads to a depreciation of the dollar.

C. An increase in US production will lead to a proportional increase in the inflation rate.

D, An increase in the US money supply leads to a depreciation of the dollar in the long run.

E.An increase in the US interest rates leads to a fall in prices.

3.Relative purchasing power parity predicts that

A.the difference between the inflation rates in the two countries should equal the ratio of the interest rates in the two countries.

B. the difference between the inflation rates in two countries should equal the per cent change in the exchange rate.

C.inflation rates should be equal across countries.

D.the real exchange rate should equal one.

E.relative price levels in the two countries should be equal when expressed in the same currency.

4.Which of the following is NOT a valid explanation for the failure of purchasing power parity?

a. Differences in monetary policies across countries

b. Lack of competition

c. Transportation costs

d. Trade barriers

5.If P represents (the level of) domestic prices, P* represents (the level of) foreign prices and E represents the exchange rate as units of domestic currency per units of foreign currency, then the real exchange rate equals

a. EP/P*	b. P*/EP
C. E/PP*	d. EP*/P
e. P/P*

6.The difference between nominal and real interest rates is that

A.Nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms

B.Nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output

C.Nominal interest rates can fluctuate, while real interest rates always remain fixed

D.Real interest rates can fluctuate, while nominal interest rates always remain fixed

E.Real interest rates are the same in every country, while nominal interest rates are different for every country

7.Which of the following is predicted to cause the value (or price or cost) of U.S. goods to appreciate relative to the value (or price or cost) of foreign goods in the long run?

a. An increase in the growth rate of U.S. GNP. b. A decrease in the growth rate of U.S. GNP.

c. A decline in the growth rate of the U.S. money supply.

d. An increase in the price of petroleum that reduces world demand for American cars. e. An appreciation of the dollar.

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Questions

1. Inflation is the result of:

a-an overall decline in the price level.

b-an increase in the number of manufactured goods during a given year by domestic companies.

c-a decrease in the purchasing power of money.

2* If everything else remains constant, when the price of a product rises

a-the quantity demanded falls.

b-the quantity demanded rises.

c-the amount offered goes down.

3*When the demand for a product rises

a-the price and the amount of equilibrium go down.

b-the price and quantity of equilibrium rise.

c-the equilibrium price falls and the equilibrium quantity rises.

4* In free and competitive markets, shortages (or shortages) always result in

a-lower prices.

b-higher prices.

c-no change in prices.

5* Recessions usually cause

a-inflation.

b-lower supply of money.

c-unemployment.

6*The largest component of a country's GDP is

a-private investment.

b-the trade deficit.

c-private consumption.

7*If more workers join the labor force of a country, the unemployment rate tends to

a-increase.

b-remain the same.

c-none of the above

8*If the US central bank increases the money supply at a higher rate

a-aggregate spending may increase.

b-prices may go up.

c-all previous.

9*If interest rate income taxes decrease

a-the savings would decrease.

b-the savings would increase.

c-the demand for credit would increase.

10*Suppose the price of a pair of Lee jeans costs $ 40 in the United States and $ 400 pesos in Mexico. What is the nominal exchange rate under the assumption of purchasing power parity?

a-$ 1 is changed for 4 pesos.

b-$ 1 is changed for 10 pesos.

c-$ 1 is changed for 25 pesos.

11*When economists do research:

a-they can not do experiments like those that are frequently done in Physics and Chemistry.

b-must use any data the world can give them.

c-All previous

ECON 1010 Lecture Notes - Speculation, Consumption Function, Keynesian Economics

ECON 1010 Full Course Notes

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