QUESTION 1: 1.1) Suppose the price of US goods in dollars, P, is 10, and the price of British goods in pounds, P* = 20. Further assume that the nominal exchange rate is given by 2/3. What would be the price of US goods in pounds? Calculate the real exchange rate from this. 1.2) Calculate the price of British goods in dollars. Calculate the real exchange rate again with this (Using the prices of both goods expressed in dollars) 1.3) Suppose the inflation is higher in the US, while the nominal exchange rate does not change. Can you guess the effect on the real exchange rate?

QUESTION 1: 1.1) Suppose the price of US goods in dollars, P, is 10, and the price of British goods in pounds, P* = 20. Further assume that the nominal exchange rate is given by 2/3. What would be the price of US goods in pounds? Calculate the real exchange rate from this. 1.2) Calculate the price of British goods in dollars. Calculate the real exchange rate again with this (Using the prices of both goods expressed in dollars) 1.3) Suppose the inflation is higher in the US, while the nominal exchange rate does not change. Can you guess the effect on the real exchange rate?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter29: International Finance

Section: Chapter Questions

Problem 8P

See similar textbooks

Similar questions

Does a higher rate of return in a nations economy, all other things being equal, affect the exchange rate of its currency? If so, how?
Suppose that the US interest rate is 5.4% per annum and the interest rate in Japan is 2.8% per annum. The value of the US dollar in the spot market is ¥74 what must the forward exchange rate be (yen per US dollar) for There to be no risk less profit? (Enter the numerical value only rounding to one decimal place) The forward rate you calculate above will be different and different from the spot rate explain why it cannot be the same
Suppose the exchange rate between the Mexican peso and the U.S. dollar is 12 MXN = $1 and the exchange rate between the Hungarian forint and the U.S. dollar is 215 FNT = $1.a. Express both of these exchange rates in terms of dollars per unit of the foreign currency.b. What should the exchange rate be between the Mexican peso and the Hungarian forint? Express the exchange rate in terms of 1 peso and in terms of 1 forint.c. Suppose the exchange rate between the peso and the dollar changes to 9 MXN = $1 and the exchange rate between the forint and the dollar changes to 240 FNT = $1. For each of the three currencies, explain whether the currency has appreciated or depreciated against the other two currencies.
3. The nominal exchange rate is e=48 peso per USD. The price of a Big Mac is P=$3 in the U.S., and is P*= 72 pesos in Philippine. Required: a) What is the price of a U.S Big Mac measured in pesos? b) Calculate the real exchange rate measured as Filipino Big Mac per U.S. Big Mac?
Refer to following table, in which Qd is the quantity of yen demanded, P is the dollar price of yen, Qs is the quantity of yen supplied in year 1, and Q' is the quantity of yen supplied in year 2. All quantities are in billions. પત 80 120 160 200 Buy P 140 Foreign purchas 135 130 125 Assume that the exchange rate is fixed against the dollar at the equilibrium exchange rate that occurs in year 1. Also suppose that Japan and the Canada are the only two countries in the world. Decrease Qs 160 120 80 40 In year 2, what quantity of yen would the Japanese government have to buy or sell to balance its capital and financial account with its current account? # Qs' 240 200 billion yen In what specific account would this purchase or sale show up in Japan's balance of payments statement? 160 120 Would this transaction increase Japan's stock of official international reserves or decrease its stock?
A) Where does the market for foreign currency come from? How does this market work if we use the flexible exchange rate system? Using terms from lecture what happens to both countries currency if there is a shift of supply or demand? There were terms given that are used to describe changes in currency exchange rates, define and use these B) What is the equation used to get the U.S. price of a foreign good? If a Mexican good costs 75 pesos and the exchange rate is $2/peso what is the U.S price? C) If the demand for travel to Mexico goes down what happens to the exchange rate? Answer for the U.S. dollar and the Mexican peso. Now the demand to invest in Mexican real estate goes up, what now happens to the exchange rates?
a) Suppose a computer sells for US$1,200 in the U.S. and for £855 in London. If the exchange rate is £65 per dollar, is there any arbitrage (profit opportunity)? Explain (b) If the Canadian dollar price of one Euro was C$1.30 in 2003 and the exchange rate adjusted to 0.85 Euro per C$ in 2004, did the Canadian dollar appreciate or depreciate against the Euro. Explain.
If a Big Mac is selling in the United States for $3.57, what is the implied exchange rate between each of the currencies in the table? (Enter your responses rounded to two decimal places.) Big Mac Price Actual Exchange Rate 7.50 reais 1.58 reais per dollar 7.00 zlotys Implied Exchange Rate reais per dollar zlotys per dollar won per dollar korunas per dollar 2.03 zlotys per dollar 1,018 won per dollar 3,200 won 66.10 korunas 14.5 korunas per dollar According to your results, the U.S. dollar is Country Brazil Poland South Korea Czech Republic against the South Korean won and againt the Brazilian real.
A big Mac costs $3.35 in the U.S. and 31 Pesos in Mexico. The current exchange rate is $1 buys 11 Pesos. Then according to purchasing power parity, we can predict that the U.S. dollar should over time, and in order for ppp to hold we need Et = %3D O appreciate; 10.11 O appreciate; 9.25 O depreciate; 10.11 O depreciate; 9.25
The figure to the right shows the market for Thailand's currency, the baht Suppose market interest rates on financial assets denominated in baht decline relative to market interest rates on financial assets denominated in other nations' currencies. Moreover, assume a floating exchange rate Using the line drawing tool, show how the market for the baht is impacted by this event. Properly label this line Carefully follow the instructions above, and only draw the required objects. According to your graph, the baht has with respect to the dollar Dollars per Bart 0.000 0.054- 0.040 0.042- 0036- 0.030- 0024- 0.018 0.012 0.000 0 000- Quantity of Baht (bitions) 10
Suppose the nominal exchange rate between Russian rubles and US dollars is given as e=75 rubles. If the price level in Russia is 100 and the price level in the US is 150, what is the real exchange rate expressed in terms of a basket of Russian goods per basket of US goods? Round to two decimals.
The following table shows the nominal and real exchange rates for two countries and two years (OECD, 2020a,b). The column names are the country codes (not the currency codes) and the exchange rates are expressed as the amount of the currency per unit of US dollar. Year 1979 1984 i. DNK: O Increased ii. ISL: DNK O Increased 5.2610 10.3566 Decreased Remained unchanged Decreased Nominal a. Indicate whether the cost of goods in each country has increased, decreased, or remained unchanged, relative to the cost of goods in the United states between 1979 and 1984. Remained unchanged ISL 3.5260 31.6937 DNK 0.6621 1.1781 Real ISL 0.8612 1.3433