What does purchasing-power parity imply for the exchange rate? a. that the real exchange rate is equal to one b. that the nominal exchange rate is equal to one c. that the real exchange rate is equal to the nominal exchange rate d. that the real exchange rate is equal to the difference in inflation rates between the two countries

What does purchasing-power parity imply for the exchange rate? a. that the real exchange rate is equal to one b. that the nominal exchange rate is equal to one c. that the real exchange rate is equal to the nominal exchange rate d. that the real exchange rate is equal to the difference in inflation rates between the two countries

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter22: International Finance

Section: Chapter Questions

Problem 6QP

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What is the logic behind the theory of purchasing-power parity? What does purchasing-powerparity imply about the real exchange rate?
The theory of purchasing power parity says: a. The real exchange rate is always greater than one b. The real exchange rate is always less than one c. The dollar price of a basket of goods in the U.S. should equal the yen price of a basket of goods in Japan d. A dollar should buy the same goods no matter where in the world you go
Suppose the dollar/franc exchange rate equals $0.50 per franc. According to the Purchasing Power-Parity theory, what will happen to the dollar’s exchange value under each of the following circumstances? a. The U.S. price level increases by 10 percent and the price level in Switzerland stays constant. b. The U.S. price level increases by 10 percent and the price level in Switzerland increases by 20 percent. c. The U.S. price level decreases by 10 percent and the price level in Switzerland increases by 5 percent. d. The U.S. price level decreases by 10 percent and the price level in Switzerland decreases by 15 percent.
If a "Big Mac costs $4.00 in the United States and 200 yen in Japan, then the implied "purchasing-power-parity" exchange rate using the "Big Mac" is __________. If the actual exchange rate in the market is 120 yen = $1, then an economist would say that the actual Japanese yen is __________ in comparison with its "purchasing-power-parity" rate.
Given the definition of the exchange rate , if the Canadian dollar is the domestic currency and US dollar the foreign currency, what does a nominal exchange rate of 1.15 means?
It is often believed that the value of the currency of some countries are too low, which gives the firms in those countries an unfair competitive advantage. Econometric evidence indicates that relative PPP does not hold in the short-run, while it does hold in the long-run. a. What does this imply for countries with a fixed exchange rate that is 'unfairly low'? b. Can a country maintain an 'unfair' competitive advantage in the long-run by somehow manipulating its exchange rate? Explain. c. Assume the UK and the US are the only countries in the world. Explain what will happen in the long run to the pound and the nominal interest rate in the UK as a result of a decrease in the expected inflation rate in the UK..
when the exchange rate for the British pound changes from $1.60 per pound to $1.40 per pound, then, holding everything else constant, the pound has __________, American wheat sold in Britain becomes _________ expensive, and British cars sold in the United States become __________ expensive. depreciated, less, less depreciated, more, less appreciated, more, less appreciated, more, more depreciated, more, more appreciated, less, more depreciated, less, more
Assume that the price levels in two countries are constant. In this situation, we know that:neither the real nor the nominal exchange rate can change.the real exchange rate can change, while the nominal exchange rate is constant.the nominal exchange rate can change, while the real exchange rate is constant.the real and nominal exchange rate must move together, changing by the same percentage.the nominal exchange rate will fluctuate more widely than the real exchange rate
What is purchasing power parity? Suppose a Starbucks tall latte cost $4.00 in the United States and 3.20 euros in the Euro area. Also, suppose a McDonald’s Big Mac costs $3.50 in the United States and 2.45 euros in Euro area. If the nominal exchange rate is 0.80 euros per dollar, which goods have prices that are consistent with purchasing power parity
Assuming that the Euro-U.S. dollar exchange rate is .9. If a German buys an American automobile for $30,000, then what would the automobile cost in Euros? What would the automobile cost if the dollar depreciated by 20 percent?
Suppose the average price of a Big Mac in the United States is $3.50 while in Japan the average price is 400 yen. If the market exchange rate is that 1 dollar is exchanged for 100 yen, the purchasing power parity model of exchange rate determination suggests that: a. The yen is overvalued. b. The yen is undervalued. c. The price of a Big Mac in Japan will rise. d. The dollar will depreciate against the yen.
Presently, the dollar is worth 140 Japanese yen in the spot market. The interest rate in Japan on 90-day government securities is 4 percent; it is 8 percent in the United States. a. If the interest-rate parity theorem holds, what is the implied 90-day forward exchange rate in yen per dollar? b. What would be implied if the U.S. interest rate were 6 percent?

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a.	that the real exchange rate is equal to one
b.	that the nominal exchange rate is equal to one
c.	that the real exchange rate is equal to the nominal exchange rate
d.	that the real exchange rate is equal to the difference in inflation rates between the two countries