QUESTION 2 In the long run, an increase in the nominal exchange rate is likely to lead to Note: Multiple answers are possible. A. an increase in exports B. a decrease in exports C. an increase in imports D. a decrease in imports

If for some reason Americans desired to increase their purchases of foreign assets, then other things the same   A.  both the real exchange rate and the quantity of dollars exchanged in the market for foreign currency would rise. B.  both the real exchange rate and the quantity of dollars exchanged in the market for foreign currency would fall. C.  the real exchange rate would rise and the quantity of dollars exchanged in the market for foreign currency would fall. D.  the real exchange rate would fall and the quantity of dollars exchanged in the market for foreign currency would rise.

If the prices in the United States rise faster than in Japan, a. then interest rate parity must not hold b. the exchange rate remains the same. c. the United States dollar will depreciate. d. the Japanese yen will depreciate.

a. What is purchasing power parity and how is it related to the law of one price?b. Is it reasonable to suppose that purchasing power parity holds in the long run but not in the short run?