An exchange rate is the domestic price to purchase one unit of a foreign currency. For example, how much does it cost in Canadian dollars to buy one US dollar? There are various economic theories to predict exchange rates. The simplest theory is known as the Law of One Price or also known as Absolute Purchasing Power Parity (PPP). Use absolute PPP and the price of a Big Mac in different countries to complete the table below and to predict whether the local currency is over or undervalued compared to the US dollar. Country USA Canada Saudi Arabia Brazil Italy Source: The Economist Big Mac Price in Local Currency $4.62 $5.54 SR 10 R$ 12 €3.75 Current Market Exchange Rate e 1.10 3.75 2.27 0.74 Exchange Rate Predicted by PPP and Big Mac ê According to the table above, an arbitrageur in Brazil could make money by If the Big Mac Index were accurate for other tradeable goods and services, Brazil's AD curve would Local Currency should... the US. <> + (▸ + 4)

Proponents of the fixed exchange rate system argue that a)flexible exchange rates may promote international trade, but under a fixed exchange rate system at least we know what the rates will be from day to day. b)under a flexible exchange rate system, there is too great a chance that the exchange rate will diverge from the equilibrium exchange rate. c)under a flexible exchange rate system, there is no way of knowing what the exchange rate is at any particular point in time. d)under a fixed exchange rate system, there would be only one currency. e)none of the above

Suppose that the euro is trading at $1.50 per euro in the foreign exchange market. Next, suppose that the exchange rate falls to $1.26 per euro, due to falling interest rates in the eurozone. The following graph shows the supply and demand curves for dollars in the foreign exchange market. On the following graph, shift either the supply curve for dollars or the demand curve for dollars to reflect the influence of "carry trade" (in isolation from other factors that may affect the exchange rate) on the exchange rate for dollars. (Hint: Carefully consider which price is measured on the vertical axis and which currency is being measured on the horizontal axis.) PRICE OF DOLLARS (euros per dollar) QUANTITY (dollars) Saly Dollar Solare ?

Suppose a currency is temporarily undervalued by a fixed exchange rate system, such as the international gold standard. Let that currency be the US dollar, and expressed in terms of British pounds. First show this disequilibrium using a supply and demand graph and then Clearly explain how one could profit by arbitraging in dollars using a bill of exchange.

We noted that in 1900, the fixed exchange rate between the British pound and the U.S. dollar was 1 pound equals $5. What is the exchange rate today? Whose currency has gained the most in purchasing power? What caused this dramatic change in the exchange rate?

The following paragraphs discuss the impact of various economic events on the exchange rate. Complete the paragraphs by filling in the blanks. Use any of the words from the following list (you can use each of these words as many times as you wish but choose carefully - your sentence must make grammatical sense):demand   supply left right buy sell imports exports rise fall increases decreases   What happens to the current account balance and the exchange rate when the following happens?   Suppose that New Zealand firms become more profitable relative to foreign firms and so increase their payment of dividends (everything else held constant). The value for net foreign income therefore ________ and the value of the current account balance will _______.   Payment of NZ dividends to foreign owners affects the _______ or/of $NZ while payments of foreign dividends to NZ owners of foreign companies affects the _______ for/of $NZ.   Therefore the impact of the change in profit of NZ firms is…

Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by:C = 8 + 0.6(Y - T), I = G = T = 0.Imports/ exports are given by:Q = 0.4Y, X = 0.4Y*,where an asterisk denotes a foreign variable a. Suppose that the domestic country takes foreign income Y* as given. The equilibrium output in the domestic economy is? b. Following a), if the domestic government increases spending by 6 units (i.e., G increases from 0 to 6), the equilibrium output in the domestic country will increase by ____. and the trade balance will ________ (increase/decrease) by _____. c. Assume the foreign economy has the same equations as the domestic economy. Both governments consider the impact of the other country on the domestic economy. If G=0, then the equilibrium output in both countries is ______ and the trade balance is ______. d. Following c), if the domestic government increases spending by 6 units as in b) and G=0…

Suppose the fixed exchange rate is $0.50 per mark. Suppose that a recession in the United States leads to a reduction in imports from Germany. On the following graph, shift the relevant curve or curves to illustrate the described changes. Then use the black points (cross symbol) to indicate the imbalance. 1.00 Supply for marks Demand for marks 0.75 Supply for marks 0.50 The Imbalance 0.25 Demand for marks 4 12 16 QUANTITY OF MARKS (Millions) A recession in the United States leads to a reduction in imports from Germany. As a result, the demand for German marks causing a million imbalance in the U.S. balance of payments. Under the gold standard, how is the fixed exchange rate maintained in the face of the balance-of-payments imbalance shown on the previous graph? The IMF must lend marks to the United States with which to buy dollars. The IMF must lend dollars to Germany with which to buy marks. Gold must flow from the United States to Germany. o Gold must flow from Germany to the United…

This is not a writing assignment, this is a multiple-choice question Which of the below statements about international exchange rates and PPPs (Purchasing Power Parity) would you consider to be INCORRECT?   Group of answer choices The PPP only focuses on internationally tradable items, while the exchange rate has a broader focus and includes both internationally tradable and items that are not internationally tradable.   Exchange rates include only the values of internationally tradable items, while the PPP includes both internationally tradable items as well as those which are not internationally tradable items but are used by people in different countries.   The rate at which one currency can be exchanged for another is the exchange rate.   If $25 can purchase a bundle of goods in the U.S. and if a comparable bundle of goods will cost 750 rubles in Russia, then the PPP between the U.S. dollar and the Russian ruble would be $25=750 Russian rubles.

The figure below illustrates the market for Bahamian dollars, where the price of the Bahamian dollar is valued in U.S. dollars. Assume that the Bahamian government wants to peg its currency to the U.S. dollar at a 1:1 ratio (one U.S. dollar = one Bahamian dollar). But the current exchange rate is at 90 cents (10 cents below the official peg). What must the Bahamian central bank do to return to the $1 exchange rate A. It would need to reduce the demand for the Bahamlan dollar. B. It would need to reduce the supply of the Bahamian dollar. C. It would need to Increase the supply of the Bahamian dollar. D. It would need to Increase the demand for the Bahamlan dollar. Part 2 Suppose you are a U.S. student and are thinking about visiting the Bahamas for spring break. You would rather the central bank intervened ___ (before or after) spring break. Part 3 Suppose that currently, the exchange rate is 1 Bahamian dollar for 1 U.S. dollar. The price of a Big Mac is $5 in the United States and 3.00…