1. Suppose prices in Europe increase. If dollar prices are constant and with no change in the nominal exchange rate, the euro has undergone a

A) Real appreciation

B) Real depreciation

C) Nominal appreciation

D) Nominal depreciation

2. Suppose prices are equal in Europe and the US (in dollars) at the end of 2006. In 2007, prices increase by 3% in Europe (in euros) and 1% in the US (in dollars). According to the PPP, between 2006 and 2007 the euro should

A) appreciate

B) depreciate

C) neither appreciate nor depreciate

D) PPP doesn’t have a prediction.

3. A reason PPP may fail in practice is

A) Lack of a gold standard

B) Product differentiation

C) High inflation

D) A currency peg

The next two questions are based on the Balassa-Samuelson model. If Europe has the same productivity in tradables as the US but is less productive in non-tradables, then:

4. Wages in Europe relative to the US are

A) higher

B) lower

C) the same

D) The theory has no prediction.

5. European prices of non-tradables relative to the US are

A) higher

B) lower

C) the same

D) The theory has no prediction.

6. Suppose that the UIP holds. Suppose a country pegs its currency. If investors start to believe the peg will collapse and the currency is going to depreciate, then as the government defends the peg, the interest rate will

A) Not move as interest rates must remain constant in a peg

B) Increase to maintain the peg

C) Decrease to maintain the peg

D) Not sure