Introduction to Macroeconomics Exam Practice Tests
Course Introduction
Introduction to Macroeconomics offers a comprehensive overview of the fundamental concepts and principles that govern the functioning of entire economies. The course explores key topics such as national income determination, economic growth, unemployment, inflation, fiscal and monetary policy, and international trade. Students learn how economists measure economic activity, analyze aggregate demand and supply, and evaluate government interventions aimed at stabilizing and stimulating economic performance. Emphasis is placed on understanding how different sectors and agents interact within the broader economic system, equipping students with the analytical tools needed to interpret current macroeconomic issues and policy debates.
Recommended Textbook
Economics 15th Canadian Edition by Christopher
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T.S. Ragan
Chapter 1: Economic Issues and Concepts
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Sample Questions
Q1) Scarcity is likely to be
A)a problem that will be solved by the proper use of available resources.
B)unique to the twentieth century.
C)a problem that will always exist.
D)a result of the work ethic.
E)eliminated with a better understanding of economics.
Answer: C
Q2) Which of the following statements provides the best definition of economics?
A)The study of the most equitable distribution of scarce resources.
B)The study of the use of scarce resources to satisfy unlimited human wants.
C)The study of the production of goods and services.
D)The study of the productive capacity of a nation's factors of production.
E)The study of production and increasing its efficiency.
Answer: B
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3
Chapter 2: Economic Theories,Data,and Graphs
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Sample Questions
Q1) Refer to Figure 2-4.If we want to know the marginal response of "yield per acre" due to a change in "fertilizer applied per acre of wheat" at point B,then we should determine the
A)slope of a straight line tangent to point B.
B)slope of a straight line joining points B and C.
C)yield per acre at 30 units of fertilizer.
D)the slope of a straight line from the origin to point B.
E)quantity of fertilizer applied at point B.
Answer: A
Q2) Which of the following is a normative statement?
A)The higher is the level of taxes,the lower is consumption spending.
B)The higher is the level of taxes,the higher are wage demands.
C)A reduction in export taxes on petroleum would result in higher wages.
D)Tuition fees should be waived for low-income students.
E)A free-trade agreement between two countries will result in an increase in trade.
Answer: D
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Chapter 3: Demand, Supply, and Price
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Sample Questions
Q1) When deriving the market demand curve for a commodity,the only variable(s)that can change is (are)the
A)price of a related commodity.
B)income of consumers.
C)quantity of the commodity demanded.
D)price of the commodity.
E)both C and D.
Answer: E
Q2) Which of the following could lead to a rise in the quantity demanded of lemons?
A)a leftward shift in the supply curve of lemons
B)a rightward shift in the supply curve of lemons
C)a decline in the number of people drinking lemonade
D)a decrease in the price of artificial lemon flavouring
E)a cold spell which makes people want less lemonade
Answer: B
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5
Chapter 4: Elasticity
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Sample Questions
Q1) Suppose the market supply curve for some good is upward sloping.If the imposition of an excise tax causes no change in the equilibrium quantity sold in the market,the good's demand curve must be ________,meaning that the burden of the tax has fallen completely on the ________.
A)vertical; firms
B)vertical; consumers
C)horizontal; firms
D)horizontal; consumers
E)unit elastic; government
Q2) If Vicky's income increases by 8% and she increases her consumption of music downloads by 4%,then her income elasticity of demand for music downloads is
A)4.0.
B)-0.5.
C)-2.0.
D)2.0.
E)0.5.
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Chapter 5: Price Controls and Market Efficiency
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Sample Questions
Q1) With respect to some commodity,X,if government objectives are to (1)restrict production and (2)keep prices down to protect consumers,then legislated price ceilings will
A)be a dismal failure as neither goal can ever be achieved with price ceilings.
B)satisfy both goals but only if a black market develops.
C)satisfy only the second goal if a black market develops.
D)only have an effect on commodities at the international level.
E)satisfy both goals as long as a black market does not develop.
Q2) Refer to Table 5-1.Suppose the government imposed a price of $0.60 per chocolate bar.The result would be
A)excess demand of 450 chocolate bars per week.
B)excess supply of 450 chocolate bars per week.
C)excess supply of 1750 chocolate bars per week.
D)excess demand of 2200 chocolate bars per week.
E)stockpiling of unsold chocolate bars.
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Chapter 6: Consumer Behaviour
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Sample Questions
Q1) At a garage sale,Ken purchases a used bicycle for $8 when he was willing to pay $25.If the bicycle costs $75 new,Ken's consumer surplus is
A)$0.
B)$17.
C)$33.
D)$50.
E)$67.
Q2) In indifference curve analysis,the consumer's utility-maximizing point is where A)each indifference curve has the same slope as the relevant budget line.
B)the indifference curve farthest from the origin intersects with the budget line that is farthest from the origin.
C)the consumer's marginal utility curve is tangent to the relevant budget line.
D)one indifference curve is tangent to the relevant budget line.
E)the price-consumption line is tangent to the budget line.
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8
Chapter 7: Producers in the Short Run
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Sample Questions
Q1) Real capital includes
A)a firm's physical assets.
B)corporate bonds.
C)corporate stock.
D)a firm's balance in its bank account.
E)owner's equity.
Q2) Refer to Table 7-3.What is the marginal product of the 4th unit of labour hired by the firm?
A)42
B)60
C)132
D)900
E)1320
Q3) Refer to Table 7-4.The average total cost for 250 units of output is approximately A)33 cents.
B)40 cents.
C)63 cents.
D)80 cents.
E)$1.00.
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Page 9
Chapter 8: Producers in the Long Run
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Sample Questions
Q1) In the long run,decreasing returns to scale are likely to be caused by
A)diseconomies of scale associated with management problems.
B)a decrease in factor prices.
C)increasing specialization of labour.
D)diminishing returns to the variable factor.
E)decreasing costs.
Q2) Suppose a firm is using 1500 units of labour and 20 units of capital to produce 100 tonnes of mineral ore.The price of labour is $50 per unit and the price of capital is $800 per unit.The MP<sub>L</sub> equals 60 and the MP<sub>K</sub> equals 1200.In this situation,
A)the firm is minimizing its costs.
B)the firm should increase the use of both inputs.
C)the firm could lower its production costs by decreasing labour input and increasing capital input.
D)the firm could lower its production costs by increasing labour input and decreasing capital input.
E)the firm should decrease the use of both inputs.
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Page 10
Chapter 9: Competitive Markets
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Sample Questions
Q1) Refer to Table 9-1.Suppose this firm is producing 1500 mousetraps and its average total cost is $5.10 per unit.The firm will be
A)suffering losses of $7650.
B)earning profits of $7650.
C)breaking even.
D)earning profits of $150.
E)suffering losses of $150.
Q2) Refer to Table 9-1.Suppose this firm is currently selling 1750 mousetraps at the market price of $5.If the firm raises its price to $6,it's average revenue will be
A)$0.
B)$5.
C)$6.
D)between $5 and $6.
E)greater than $6.
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Chapter 10: Monopoly, cartels, and Price Discrimination
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Sample Questions
Q1) A number of firms agreeing together to restrict output and thereby raise prices is known as
A)a monopoly.
B)a natural monopoly.
C)a cartel.
D)a barrier to entry.
E)an oligopoly.
Q2) Refer to Figure 10-6.Assume this pharmaceutical firm charges a single price for its drug.At its profit-maximizing level of output,it will generate a deadweight loss to society represented by
A)areas H + I.
B)areas H + I + J + K.
C)areas I + J + K.
D)There is no deadweight loss generated.
E)It is not possible to determine with the information provided.
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12
Chapter 11: Imperfect Competition and Strategic Behaviour
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Sample Questions
Q1) Refer to Table 11-3.From the payoff matrix we can infer that
A)it is optimal for Firm A to produce 1000 units of output regardless of what Firm B is doing.
B)both firms are indifferent between an equilibrium (Produce 1000 units,Produce 1000 units)and (Produce 2000 units,Produce 2000 units).
C)it is optimal for Firm A to produce 2000 units of output regardless of what Firm B is doing.
D)it is optimal for Firm B to produce 1000 units of output regardless of what Firm A is doing.
E)there is no Nash equilibrium in the game.
Q2) A Canadian industry composed of many small firms is A)steel manufacturing.
B)automobile production.
C)gasoline retailing.
D)restaurants.
E)natural gas transmission.
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13
Chapter 12: Economic Efficiency and Public Policy
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Sample Questions
Q1) Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve.(Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month
- minimum efficient scale = 2 million units
- current output = 2.3 million units
- LRAC at current output = $10.25 per month
Suppose the firm is currently being regulated and is required to follow a marginal-cost pricing policy.The price of the service will be ________ per month.
A)lower than $9.00
B)$9.00
C)between $9.00 and $10.25
D)$10.25
E)higher than $10.25
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14
Chapter 13: How Factor Markets Work
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Sample Questions
Q1) If the supply curve for a factor is perfectly inelastic,the payments to the factor are
A)wholly economic rent.
B)wholly transfer earnings.
C)partly economic rent and partly transfer earnings.
D)neither economic rent nor transfer earnings.
E)an unnecessary tax on the factor.
Q2) Refer to Figure 13-1.Suppose this firm is facing MRP<sub>1</sub>,a wage rate of $16 per hour and is employing 100 units of labour.At this level of employment,
A)the last unit of labour is adding less to the firm's cost than it is adding to the firm's revenue,so it should increase the use of labour.
B)the last unit of labour contributes as much to the firm's costs as to the firm's revenues and so the firm should not change its use of labour.
C)the last unit of labour is adding more to the firm's cost than it is adding to the firm's revenue,so it should reduce the use of labour.
D)the firm has shifted the MRP curve to MRP<sub>2</sub>.
E)the firm has shifted the MRP curve to MRP<sub>3</sub>.
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Chapter 14: Labour Markets and Income Inequality
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Sample Questions
Q1) Refer to Figure 14-4.Suppose the workers in this town form a union to negotiate the wage rate with the firm.Economists refer to this situation as A)a monopoly.
B)a unionized monopoly.
C)a competitive labour market.
D)a monopolistic labour market.
E)a bilateral monopoly.
Q2) Consider a small,remote town with only one employer - a gold mining company.Suppose the current work force is 875 workers,each of whom is paid $6000 per month.In order to attract one additional worker,the employer must increase the wage to $6025 per month.The marginal cost of this additional worker is
A)$21 875 per month.
B)$21 900 per month.
C)$27 900 per month.
D)$5.25 million per month.
E)$5.28 million per month.
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Chapter 15: Interest Rates and the Capital Market
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Sample Questions
Q1) An increase in market interest rates will
A)increase the amount a firm is willing to pay for a machine that generates future returns.
B)decrease the amount a firm is willing to pay for a machine that generates future returns.
C)not affect the price a firm is willing to pay for a machine that generates future returns.
D)be good for all firms.
E)be bad for all firms.
Q2) Under which of the following circumstances will a competitive firm choose to own more capital,assuming that the purchase price of the capital and the interest rate remain unchanged?
A)the stock of capital in the entire economy increases
B)other firms are increasing their stock of capital
C)the lifespan of the capital is reduced
D)technological improvement has made the capital more productive
E)the price of the product the firm produces declines
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Chapter 16: Market Failures and Government Intervention
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Sample Questions
Q1) If a homeowner uses wood to heat his house,
A)he may generate an external cost if the smoke bothers his neighbours.
B)the price of the wood represents an external cost to the homeowner.
C)the price of the wood represents an external cost to the homeowner,unless he harvests the wood himself.
D)he may generate an external benefit if the smoke bothers his neighbours.
E)he may generate an external benefit if the price of heating oil goes down in his region.
Q2) Refer to Figure 16-4.Suppose the optimal amount of this good is provided,but that Individual B was only consuming Q<sub>2</sub> units of the good.What would be the marginal cost of Individual B consuming an extra unit of this good?
A)P<sub>2</sub>
B)P<sub>4</sub>
C)P<sub>4</sub>-P<sub>2</sub>
D)MB
E)zero
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Chapter 17: The Economics of Environmental Protection
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Sample Questions
Q1) Refer to Figure 17-3.On the horizontal axis,the label "Q<sup>t</sup>(100% abatement)" refers to
A)the maximum pollution abatement that is cost effective.
B)the maximum pollution abatement attainable at the lowest cost.
C)the maximum pollution abatement attainable with given technology.
D)zero remaining pollution.
E)zero pollution abatement.
Q2) In a competitive market for tradable pollution permits,the quantity of permits (for a given amount of pollution)is set by ________ and the equilibrium price is determined by ________.
A)market forces; government policy
B)government policy; the average cost of pollution abatement
C)government policy; market forces
D)market forces; market forces
E)government policy; government policy
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19
Chapter 18: Taxation and Public Expenditure
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Q1) Which of the following areas of spending account for the largest portion of total Canadian government expenditures?
A)equalization payments
B)defence spending
C)subsidies to Canadian businesses
D)social services
E)interest payments on public debt
Q2) The important debate about the appropriate balance between the public and private sectors
A)has been solved in Canada.
B)is largely about the marginal benefits of public spending versus the marginal benefits of private spending,received for the last dollar spent.
C)was solved by John Kenneth Galbraith in his book The Affluent Society.
D)was solved by James Buchanan,a Nobel laureate.
E)should be decided by economists because they know the right balance.
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Chapter 19: What Macroeconomics Is All About
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Sample Questions
Q1) How is Canada's unemployment rate determined?
A)The rate is determined by Canada Census data.
B)The rate is determined by a survey of Canadian employers.
C)The federal government department HRSDC (Human Resources and Skills Development Canada)conducts a monthly survey of the labour force.
D)Statistics Canada conducts a Labour Force Survey each month.
E)An estimate is produced by HRSDC based on the previous month's unemployment rate adjusted by the current month's job losses and job gains.
Q2) What is potential or full-employment output?
A)the maximum GDP that an economy actually achieves throughout its entire history B)achieved during periods when all of the labour force is employed
C)a goal that can never be achieved by the economy
D)the GDP that would be produced if the economy's resources were fully employed at a normal intensity of use
E)the GDP that could be produced if the economy's resources were fully employed at their maximum intensity of use
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Chapter 20: The Measurement of National Income
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Q1) One reason that real GDP tends to overstate the economic well-being of the country's residents is that it ignores
A)the costs of increased leisure time.
B)the market-based activity done from the home.
C)the economic "bads" associated with production,such as pollution.
D)non-market activities,such as teenaged-babysitting services.
E)illegal activities,such as the drug trade.
Q2) Consider the circular flow of expenditure and income in the Canadian economy.Which of the following is an injection into the circular flow?
A)Bombardier imports machine parts from Germany.
B)Bombardier exports subway cars to Mexico.
C)Loblaws pays corporate income tax to the federal government.
D)You put $500 into your TFSA (tax-free savings account).
E)You make an online purchase from a U.S.retailer.
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22
Chapter 21: The Simplest Short-Run Macro Model
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Q1) Refer to Table 21-3.At the equilibrium level of national income,desired saving ($billions)is
A)$100.
B)$300.
C)$4000.
D)$3900.
E)$1000.
Q2) Refer to Figure 21-2.The slope of the consumption function in the figure is equal to A)1.0.
B)0.67.
C)0.5.
D)-0.5.
E)-1.0.
Q3) Refer to Table 21-6.The simple multiplier in this economy is A)2.0.
B)2.5.
C)3.0.
D)4.0.
E)5.0.
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Chapter 22: Adding Government and Trade to the Simple
Macro Model
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Q1) Suppose exports (X)=100,Y=500,and imports are equal to mY,where m is the marginal propensity to import.Net exports would be equal to zero if the marginal propensity to import were
A)1%.
B)5%.
C)10%.
D)20%.
E)50%.
Q2) Refer to Figure 22-4.Autonomous expenditures ________ as the AE curve rotates from AE<sub>1</sub> to AE<sub>0 </sub>and equilibrium national income ________.
A)decrease; decreases B)increase; decreases
C)remain constant; increases
D)remain constant; decreases E)remain constant; remains constant
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24
Chapter 23: Output and Prices in the Short Run
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Q1) The economy's aggregate supply curve is drawn under two main assumptions.They are
A)firms' unit costs are constant; prices of all factors of production are constant.
B)firms' unit costs are constant; the state of technology is constant.
C)firms will produce more output only if prices rise; technology improves only if prices rise.
D)the prices of all factors of production are constant; the state of technology is constant.
E)the prices of all factors of production are constant; productivity improves as the price level rises.
Q2) The economy's aggregate supply (AS)curve shows the relationship between the A)equilibrium real GDP and marginal cost.
B)equilibrium real GDP and desired consumption.
C)price level and the marginal propensity to consume (MPC).
D)price level and the total output that firms wish to produce and sell,with technology and input prices held constant.
E)price level and the total output that firms wish to produce and sell,as technology and input prices vary.
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Chapter
24: From the Short Run to the Long Run: The Adjustment of Factor Prices
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Q1) Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap?
A)falling prices
B)increasing investment
C)declining government purchases
D)rising wages
E)increasing tax rates
Q2) "Automatic fiscal stabilization" in the economy refers to
A)the properties of government spending and taxation that cause the simple multiplier to be increased.
B)the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap.
C)the properties of government spending and taxation that cause the simple multiplier to be reduced.
D)the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap.
E)all discretionary fiscal policies.
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Chapter 25: Long-Run Economic Growth
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Q1) In 1950,when the world's population was 2.5 billion,it was unimaginable that the world could ever produce enough food to feed the present world population of 7 billion.Which of the following variables is key to having met this task (although far from perfectly)?
A)political cooperation among developed and developing economies
B)birth control
C)foreign aid
D)technological change in agricultural production
E)all of the above
Q2) Refer to Table 25-4.The production function that applies to Economies A,B,and C displays
A)increasing returns to scale.
B)increasing marginal returns to labour.
C)diminishing marginal returns to labour.
D)constant returns to scale.
E)Both C and D are correct.
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Chapter 26: Money and Banking
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Q1) Which of the following entries would appear on the liabilities side of the Bank of Canada's balance sheet?
A)Government of Canada securities
B)deposits of commercial banks
C)advances to commercial banks
D)savings deposits
E)shareholders' equity
Q2) What do we mean in our current banking system when we say that a currency is "fractionally backed"?
A)Banks have many more claims outstanding against them than they have reserves available to pay those claims.
B)The currency is partially backed by the nation's supply of gold.
C)A bank's currency is fractionally backed by its supply of gold.
D)All paper currency is convertible to gold.
E)Banks maintain a fixed fraction of their outstanding deposits as cash deposits with the central bank.
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28
Chapter 27: Money, Interest Rates, and Economic Activity
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Q1) Refer to Figure 27-1.A leftward shift in the money demand curve can be caused by by
A)an increase in the rate of interest.
B)a decrease in the rate of interest.
C)an increase in the price level.
D)a decrease in real GDP.
E)an increase in real GDP.
Q2) Consider the monetary transmission mechanism.In an open economy,such as Canada's,a decrease in the money supply leads to a rise in the interest rate.This is followed by
A)an outflow of financial capital and an appreciation of the Canadian dollar.
B)an inflow of financial capital and a depreciation of the Canadian dollar.
C)an outflow of financial capital and a depreciation of the Canadian dollar.
D)an inflow of financial capital and an appreciation of the Canadian dollar.
Q3) The opportunity cost of holding money rather than bonds is
A)the rate of interest earned on bonds.
B)the price level.
C)forgone consumption.
D)forgone liquidity.
E)zero - there is no opportunity cost of holding money.
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Page 29
Chapter 28: Monetary Policy in Canada
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Q1) When the Bank of Canada reduces the interest rate we call this an expansionary monetary policy.Why?
A)The lower interest rate leads to an increase in the level of national saving.
B)The lower interest rate causes an expansion of money demand.
C)The lower interest rate leads to a rightward shift of the aggregate demand curve.
D)The lower interest rate causes the money demand curve to shift to the right.
E)The lower interest rate causes the money supply curve to shift to the left.
Q2) Suppose Canadian real GDP is equal to potential GDP.A significant and sustained appreciation of the Canadian dollar would likely lead the Bank to engage in a contractionary monetary policy if the Bank's policy experts traced the cause of the appreciation to
A)a decrease in the overnight lending rate.
B)an increase in the desire of non-residents to purchase Canadian financial assets.
C)an increase in the desire of non-residents to purchase more Canadian goods and services.
D)a reduction in Canada's core inflation rate.
E)a recession in Canada.
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Page 30
Chapter 29: Inflation and Disinflation
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Q1) In general,the sacrifice ratio will be smaller,the
A)shorter it takes to revise inflationary expectations downwards.
B)shorter it takes to revise inflationary expectations upwards.
C)longer it takes to revise inflationary expectations upwards.
D)longer it takes to revise inflationary expectations downwards.
E)sacrifice ratio will be the same always.
Q2) If the unemployment rate is less than the NAIRU,
A)there is no pressure on the AS curve to shift.
B)there is a recessionary output gap.
C)demand forces will exert upward pressure on wages.
D)the AS curve will shift downward.
E)there will be downward pressure on wages.
Q3) Suppose the economy is currently in long-run equilibrium with real GDP equal to potential GDP.A positive demand shock,that is not validated by the Bank of Canada,will eventually result in
A)no change in the price level.
B)an ongoing inflation in the economy.
C)a lower price level and real GDP below potential output.
D)a higher price level and GDP at potential output.
E)an ongoing deflation in the economy.
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Chapter 30: Unemployment Fluctuations and the Nairu
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Q1) Other things being equal,many economists believe that more generous employment-insurance benefits would
A)lower frictional unemployment.
B)lower structural unemployment.
C)raise structural unemployment.
D)raise frictional unemployment.
E)have no effect on unemployment.
Q2) Many economists believe that the more strict rules for qualifying for employment-insurance benefits that were introduced by the federal government in the early 1990s led to
A)lower cyclical unemployment.
B)lower frictional unemployment.
C)lower structural unemployment.
D)higher structural unemployment.
E)higher frictional unemployment.
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Chapter 31: Government Debt and Deficits
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Q1) In general,the government will have ________ flexibility in implementing counter-cyclical fiscal policy when the outstanding stock of government debt is ________ relative to the size of GDP.
A)more; large
B)more; small
C)total; large
D)less; small
E)less; insignificant
Q2) The government's annual primary budget deficit is equal to the A)accumulation of government borrowing.
B)decrease in the stock of government debt during the course of a year.
C)excess of government's program expenditures over tax revenues in a given fiscal year.
D)total amount of government spending on program expenses,personnel,and capital outlays.
E)excess of current revenue over current expenditure.
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Chapter 32: The Gains From International Trade
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Q1) When opportunity costs differ between countries,
A)comparative advantages may not exist.
B)specialization and trade can lead to increases in the production of all commodities.
C)each country should produce only those goods for which it has an absolute advantage.
D)only the smaller countries will benefit from trade.
E)only the larger countries will benefit from trade.
Q2) Refer to Table 32-4.Compared with Peru,Brazil has
A)a comparative but not absolute advantage in the production of cocoa beans.
B)an absolute and a comparative advantage in the production of cocoa beans.
C)an absolute,but not a comparative,advantage in the production of cocoa beans.
D)an absolute advantage in the production of cotton.
E)an absolute and a comparative advantage in the production of cotton.
Q3) Trade,whether between individuals or nations,generally promotes
A)self-sufficiency.
B)specialization.
C)lower living standards.
D)higher product prices.
E)autarky.
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Page 34
Chapter 33: Trade Policy
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Q1) Refer to Figure 33-4.Assume there is free trade in bicycles.At a world price of $300,Canada will ________ bicycles per year.
A)import 30 000
B)import 20 000
C)export 30 000
D)export 20 000
E)export 50 000
Q2) Consider the following statement: "Without a doubt,free trade improves the lives of every Canadian citizen." This statement is ________ because ________.
A)correct; it is consistent with the idea of comparative advantage
B)correct; because Canada has long been a successful trading nation
C)incorrect; it fails to recognize that the movement to free trade involves both winners and losers
D)incorrect; we do not know much about the benefits of free trade
E)correct; there are no net costs associated with the movement to free trade
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Chapter 34: Exchange Rates and the Balance of Payments
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Q1) A country's balance of payments is sometimes incorrectly said to be "in deficit." This statement often refers to a situation where
A)total debits exceed total credits.
B)the official financing account is in surplus.
C)the official financing account is also "in deficit."
D)the government is increasing its stock of foreign-exchange reserves.
E)debits exceed credits on the capital account only.
Q2) Which of the following statements about purchasing power parity is correct? PPP
A)is an index of the average value of exchange rates.
B)is a theory that says price levels in two countries should be equal when measured in a common currency.
C)allows for both countries' currencies to appreciate at their own rates of inflation.
D)will tend to cause those currencies with lower inflation rates to depreciate.
E)holds exactly in the short run but not in the long run.
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