A. If a cup of coffee costs 2 euros in Paris and $6 in New York and purchasing-power parity holds, what is the exchange rate?

a. 1/4 euro per dollar

b. 1/3 euro per dollar

c. 3 euros per dollar

d. 4 euros per dollar

B. T he theory of purchasing-power parity says that higher inflation in a nation causes the nation’s currency to _________, leaving the _________ exchange rate unchanged.

a. appreciate; nominal

b. appreciate; real

c. depreciate; nominal

d. depreciate; real

C. I n the model just developed, two markets determine two prices, which are

a. the nominal exchange rate and the nominal interest rate.

b. the nominal exchange rate and the real interest rate.

c. the real exchange rate and the nominal interest rate.

d. the real exchange rate and the real interest rate.

D. Other things equal, an increase in the U.S. net capital outflow _________ the demand for loanable funds and _________ the supply of dollars in the market for foreign currency exchange.

a. increases; increases

b. increases; decreases

c. decreases; increases

d. decreases; decreases