Macroeconomics (7th Edition)
7th Edition
ISBN: 9780134738314
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 19, Problem 19.1.4PA
To determine
Explaining the statement “the gold standard prevents the central bank from fighting the recessions”
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Using data from The Economist's Big Mac index for 2011, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $4.07 in the United States and GBP 2.39 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.63 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows:
NOTE:
here are the options for drop down questions for when u get there
The exchange rate that would have equalized the dollar price of a Big Mac in the United States and Brazil (that is, the PPP exchange rate for Big Macs) is __________ ($0.43 per real OR $1.96 per deal OR $2.33 per real OR $2.63 per real). This change would mean that the dollar had ________ (appreciated OR depreciated) against the real.
Using data from The Economist's Big Mac Index for 2011, the following table shows the local currency price of a Big Mac in several countries as well as
the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $4.07 in the
United States and GBP 2.39 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.63 per pound. The
dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows:
S1.63
Dollar price of a Big Mac in the United Kingdom= GBP 2.39 x
GBP 1.0
= $3.90
For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over
for french fries!
Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given.
Note: Round your answers to the nearest cent.
Big Mac Index: July 25, 2011
Local…
Following on from the analysis in the previous questions, an economist comes to the conclusion that the best option for policymakers in order to influence the economy would be to fix the exchange rate, keep control of money supply and allow free movement of capital. Would you agree with such a statement and why?
Chapter 19 Solutions
Macroeconomics (7th Edition)
Ch. 19.A - Prob. 1RQCh. 19.A - Prob. 2RQCh. 19.A - Prob. 3RQCh. 19.A - Prob. 4RQCh. 19.A - Prob. 5RQCh. 19.A - Prob. 6RQCh. 19.A - Prob. 7PACh. 19.A - Prob. 8PACh. 19.A - Prob. 9PACh. 19.A - Prob. 10PA
Ch. 19.A - Prob. 11PACh. 19.A - Prob. 12PACh. 19.A - Prob. 13PACh. 19.A - Prob. 14PACh. 19.A - Prob. 15PACh. 19.A - Prob. 1RDECh. 19 - Prob. 19.1.1RQCh. 19 - Prob. 19.1.2RQCh. 19 - Prob. 19.1.3PACh. 19 - Prob. 19.1.4PACh. 19 - Prob. 19.1.5PACh. 19 - Prob. 19.1.6PACh. 19 - Prob. 19.2.1RQCh. 19 - Prob. 19.2.2RQCh. 19 - Prob. 19.2.3RQCh. 19 - Prob. 19.2.4RQCh. 19 - Prob. 19.2.5PACh. 19 - Prob. 19.2.6PACh. 19 - Prob. 19.2.7PACh. 19 - Prob. 19.2.8PACh. 19 - Prob. 19.2.9PACh. 19 - Prob. 19.2.10PACh. 19 - Prob. 19.2.11PACh. 19 - Prob. 19.2.12PACh. 19 - Prob. 19.2.13PACh. 19 - Prob. 19.2.14PACh. 19 - Prob. 19.2.15PACh. 19 - Prob. 19.2.16PACh. 19 - Prob. 19.2.17PACh. 19 - Prob. 19.2.18PACh. 19 - Prob. 19.2.19PACh. 19 - Prob. 19.2.20PACh. 19 - Prob. 19.3.1RQCh. 19 - Prob. 19.3.2RQCh. 19 - Prob. 19.3.3PACh. 19 - Prob. 19.3.4PACh. 19 - Prob. 19.3.5PACh. 19 - Prob. 19.2RDE
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- Using data from The Economist's Big Mac Index for 2019, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $5.74 in the United States and GBP 3.29 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.25 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows: Dollar price of a Big Mac in the United KingdomDollar price of a Big Mac in the United Kingdom = = GBP 3.29×$1.25GBP 1.00GBP 3.29×$1.25GBP 1.00 = = $4.11$4.11 For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over for fries! Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is…arrow_forwardYears ago when banks generated bank notes on their deposits that citizens used as currency, they were often backed by hard assets, including gold that depositors placed with the bank. How is that any different from when the US was on the "gold standard?"arrow_forwardIn July 2018 Yi Gang, Governor of the People’s Bank of China, said fluctuations in the foreign exchange market were mainly due to factors like a stronger U.S. dollar and external uncertainties. How can fluctuations in the currency exchange rate affect a country’s economyarrow_forward
- If the price of one gallon of gasoline goes down from $4.07 per gallon to $3.99 per gallon, how will that affect the value of the US dollar? Why does it affect the value of the dollar?arrow_forwardThis question concerns the mechanism of a reserve currency standard. Two countries, X and Y, have two currencies, x and y, fixed to the reserve currency, the U.S. dollar. Suppose the exchange rate between x and the U.S. dollar is 3x per dollar. Suppose the exchange rate between y and the U.S. dollar is 5y per dollar. Explain (using numbers) the mechanism if the x-y exchange rate was 0.5 x per y.arrow_forwardSuppose country A’s goods become more popular with foreign consumers, and country B’s less so. How would this affect each country, assuming that they (a) have their own independent currency and (b) share a common currency? Use the aggregate demand (AD) and aggregate supply (AS) framework to explain your answer, and comment briefly on the desirability of currency union. If you can give an example with countries that would be great.arrow_forward
- Suppose that the Federal Reserve cannot convince the public of its commitment to fight inflation in the United States in the near future. a) What would be the effect on the expected appreciation of the U.S. dollar? b) What would be the effect on the spot exchange rate for the U.S. dollar? Explain your answer using a graph.arrow_forwardThe popularity of the leader of a nation can affect the value of their currency. If the President of the United States has a good popularity rating with the citizens of the United States, does that make the US dollar stronger or weaker? Why or why not?arrow_forwardThe autonomous region of Catalonia has recently declared independence from Spain, and is looking for an exchange rate policy that would best fit their needs. The Catalans’ main goal is to stabilise the price level in the long-run, but constantly experience fluctuations in the price of foreign goods imported from Spain and other European countries. Would it be better for the Catalans to fix the exchange rate against the Euro, or to adopt a floating exchange rate? Justify your answer briefly.arrow_forward
- In April 2002, the price of a Big Mac in the UK was £1.99. Using data from The Economist's Big Mac Index for April 2002, the following table shows the local currency price of a Big Mac in several countries and the actual exchange rate. At the time, a Big Mac in the United States would have cost you 2.49 pounds. The actual exchange rate between the pound and the euro was £0.69 per British pound. The euro price of a Big Mac in the United States was, therefore, 2.49 British pounds x £0.69 per British pound = £1.71, which is less than you'd have paid in the UK. For the price you paid for a Big Mac in the UK, you could have purchased a Big Mac in the United States and had some change left over for french fries. Big Mac Index: April 2002 Country Local Price Actual Exchange Rate Argentina 2.49 pesos £0.23 per peso Brazil 3.6 reais £0.29 per real United States 2.49 pounds £0.69 per pound Euro zone 2.67 euros £0.62 per euro Poland 5.9 zloty £0.17 per zloty Switzerland 6.3 francs £0.42 per franc…arrow_forwardConsider the gold standard. What happens to the price level if gold discoveries occur?arrow_forwardThe incompatible trinity, also known as the trilemma, states that it is impossible to have all three of the following at the same time: a fixed foreign exchange rate, free capital movement (absence of capital controls), and an independent monetary policy. In this case, Brazil is sacrificing an independent monetary policy. This is because it is keeping its exchange rate fixed and allowing free capital movement, but it is not able to independently set its interest rate. arrow_forward Step 2 The real exchange rate is the purchasing power of a currency relative to another at current exchange rates and prices. It is the ratio of the price of a specific good in one country to the price of the same good in another country, expressed in the same currency. In this case, we are using the price of a Big Mac in China and the US to calculate the real exchange rate. arrow_forward Step 3 First, we need to convert the price of a Big Mac in China to US dollars using the nominal exchange rate.…arrow_forward
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