Purchasing-power parity holds between the nationsof Ectenia and Wiknam, where the only commodityis Spam.a. In 2020, a can of Spam costs 4 dollars in Ecteniaand 24 pesos in Wiknam. What is the exchange ratebetween Ectenian dollars and Wiknamian pesos?b. Over the next 20 years, inflation is expected to be3.5 percent per year in Ectenia and 7 percent peryear in Wiknam. If this inflation comes to pass,what will the price of Spam and the exchangerate be in 2040? (Hint: Recall the rule of 70 fromChapter 27.)c. Which of these two nations will likely have ahigher nominal interest rate? Why?d. A friend of yours suggests a get-rich-quickscheme: Borrow from the nation with the lowernominal interest rate, invest in the nation with thehigher nominal interest rate, and profit from theinterest-rate differential. Do you see any potentialproblems with this idea? Explain.
Purchasing-power parity holds between the nations
of Ectenia and Wiknam, where the only commodity
is Spam.
a. In 2020, a can of Spam costs 4 dollars in Ectenia
and 24 pesos in Wiknam. What is the exchange rate
between Ectenian dollars and Wiknamian pesos?
b. Over the next 20 years, inflation is expected to be
3.5 percent per year in Ectenia and 7 percent per
year in Wiknam. If this inflation comes to pass,
what will the price of Spam and the exchange
rate be in 2040? (Hint: Recall the rule of 70 from
Chapter 27.)
c. Which of these two nations will likely have a
higher nominal interest rate? Why?
d. A friend of yours suggests a get-rich-quick
scheme: Borrow from the nation with the lower
nominal interest rate, invest in the nation with the
higher nominal interest rate, and profit from the
interest-rate differential. Do you see any potential
problems with this idea? Explain.
Trending now
This is a popular solution!
Step by step
Solved in 5 steps
