Macroeconomics
4th Edition
ISBN: 9780393602487
Author: Jones, Charles I.
Publisher: W. W. Norton & Company
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Chapter 20, Problem 1E
To determine
The appreciation or
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Suppose that yesterday, the U.S. dollar-Japanese yen exchange rate was $1=¥0.553546. The price of one Japanese yen in terms of a U.S. dollar was ___ .
Suppose that today the U.S. dollar-Japanese yen exchange rate falls to $1=¥0.533585 for one dollar. This means that between yesterday and today, the U.S. dollar has ___ against the Japanese yen. The price of a Mexican peso in terms of the U.S. dollar is now ___ .
We discussed how costs of living are different in different countries and a mere conversion of currencies using exchange rates might not give a full picture of living comparisons. For that reason, we will use the Big Mac Index that was invented by The Economist in 1986 to guide whether currencies are at their correct level using the theory of purchasing power parity. The following Table 1 reports the price of a Big Mac from five countries as of Jan 12, 2021 and the corresponding official exchange rates. Use the information provided in Table 1 to fill out the rest of the information and answer the questions below:
Table 1: PPP and Exchange Rates
Country
Price in local currency
Exchange Rate
Purchasing Power Parity (PPP)
United States
5.66
1
Britain
3.29
0.74
Sweden
52.88
8.30
Norway
52
8.54
Mexico
54
20.11
Based on your calculations in Table 1, the PPP rate for Sweden is:
9.34
1.13
6.37
0.89
Which of…
Naked Economics: Undressing the Dismal Science Book by Charles Wheelan
In chapter 11, "International Economics," of Naked Economics, Charles Wheelan discusses international exchange rates and PPPs (Purchasing Power Parity). Based on the discussion of these two ideas in this chapter which of the below statements would you consider to be INCORRECT?
A) The rate at which one currency can be exchanged for another is the exchange rate.
B) Exchage 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.
C) If $25 can purchase a bundle of goods in the U.S. and if a comparable bundle of goods wil cost 750 rubles in Russia, then the PPP between the U.S. dollar and the Russian ruble would be $25=750 Russian rubles.
D) The PPP only focuses on internationally tradable items, while the exchange rate has a…
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- How would I find the actual exchange rate to answer the bottom part of the data shown.arrow_forwardWhat do the plus signs and negative signs signify in the U.S. balance-of-payments statement? Which of the following items appear in the current account and which appear in the capital and financial account? U.S. purchases of assets abroad; U.S. services imports; foreign purchases of assets in the United States; U.S. goods exports; U.S. net investment income. Why must the current account and the capital and financial account sum to zero?arrow_forwardSuppose that yesterday, the U.S. dollar was trading on the foreign exchange market at 0.75 eurosper U.S. dollar and today the U.S. dollar is trading at 0.80 euros per U.S. dollar. Which of the twocurrencies (the U.S. dollar or the euro) has appreciated and which has depreciated today?b) Suppose that the exchange rate for the Mexican peso fell from 15 pesos per U.S. dollar to 10 pesosper U.S. dollar. What is the effect of this change on the quantity of U.S. dollars that people plan tobuy in the foreign exchange market?c) Suppose that the exchange rate rose from 80 yen per U.S. dollar to 90 yen per U.S. dollar. What isthe effect of this change on the quantity of U.S. dollars that people plan to sell in the foreignexchange market?arrow_forward
- A case study in the chapter analyzed purchasing-power parity for several countries using the price of Big Macs. Here are data for a few more countries: For each country, select the predicted exchange rate of the local currency per U.S. dollar. (Hint: Recall that the U.S. price of a Big Mac was $4.93.) Price of a Big Mac Predicted Exchange Rate Actual Exchange Rate Country Chile 2,100 pesos 715 pesos/$ 900 forints 293 forints/$ 75 korunas 25.1 korunas/$ 13.5 real 4.02 real/$ 5.84 C$ 1.41 C$/$ Hungary Czech Republic Brazil Canada According to purchasing-power parity, the predicted exchange rate between the Hungarian forint and the Canadian dollar is dollar. However, the actual exchange rate is forints per Canadian dollar. forints per Canadianarrow_forwarda ) Consider India. Holding the exchange rate and the price of a Big Mac fixed, if purchasing power parity (PPP) held perfectly, the price of a Big Mac in India should be _________ rupees (round your answers to two decimal places).arrow_forwardView the data below for the exchange rate between the US dollar and the Japanese yen. How many yen could you get per dollar at the earliest date shown on the chart? Explain. How many yen could you get per dollar at the most recent date shown on the chart? Explain. Has the dollar appreciated or depreciated in value over time? Explain.arrow_forward
- In 1992, 18.6 million Canadians visited the United States, but only 11.8 million U.S. residents visited Canada. By 2002, roles had been reversed: more U.S. residents visited Canada than vice versa. Why did the tourism reverse direction? Canada didn’t get any warmer from 1992 to 2002 – but it did get cheaper. The reason is a large change in the exchange rate: in 1992 Canadian dollar was worth $0.80, but by 2002 it had fallen in the value by 20% to about $0.65. This means that Canadian goods and services, particularly hotel rooms and meals, were about 20% cheaper for Americans in 2002 compared to 1992. American vacations had become 20% more expensive for Canadians. Canadians responded by vacationing in their own country or in other parts of the world. Foreign travel is an example of a good that has a high price elasticity of demand: elasticity=4.1. One reason is that foreign travel is a luxury good for most people – you may regret not going to Paris this year, but you can live…arrow_forwardBased on the table provided, answer the following questions: Compute the U.S. dollar–yen exchange rate E$/¥ and the U.S. dollar–Canadian dollar exchange rate E$/C$ on January 20, 2016, and January 20, 2015. What happened to the value of the U.S. dollar relative to the Japanese yen and Canadian dollar between January 20, 2015, and January 20, 2016? Compute the percentage change in the value of the U.S. dollar relative to each currency using the U.S. dollar–foreign currency exchange rates you computed in (a). Using the information in the table for January 20, 2016, compute the Danish krone–Canadian dollar exchange rate Ekrone/C$.arrow_forwardThe table below shows hypothetical prices of a tall Starbucks latte in countries around the world. Using the data, and the fact that a latte costs $2 in the United States, calculate how much a country's currency is under- or overvalued according to purchasing power. First, calculate the implied exchange rate for each country. Next, calculate the "latte index" for each country using the Big Mac index formula from the chapter. Instructions: Round your answers to two decimal places. Country Thailand Argentina United Kingdom Japan Price 50 baht 10 peso(s) 1 pound (s) 400 yen Official exchange rate 25 baht/dollar 5 pesos/dollar 0.6 pounds/dollar 70 yen/dollar Implied exchange rate if PPP holds baht/dollar pesos/dollar pounds/dollar yen/dollar Cost of U.S. latte % % % %arrow_forward
- 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.arrow_forwardThe table below shows hypothetical prices of a tall Starbucks latte in countries around the world. Using the data, and the fact that a latte costs $3 in the United States, calculate how much a country's currency is under- or overvalued according to purchasing power. First, calculate the implied exchange rate for each country. Next, calculate the "latte index" for each country using the Big Mac index formula from the chapter. Instructions: Round your answers to two decimal places. Country Thailand Argentina United Kingdom Japan Price 60 baht 15 peso (s) 2 pound (s) 450 yen Official exchange rate 30 baht/dollar. 6 pesos/dollar 0.5 pounds/dollar se yen/dollar Implied exchange rate if PPP holds baht/dollar pesos/dollar pounds/dollar yen/dollar 20.67 4.00 .67 145.00 Cost of U.S. latte *% 20.50 42.86 40.30 % % 27arrow_forwardCountry Z exports $5 million of goods and services and imports $5 million of goods and services. It also has $10 million of foreign currency denominated foreign assets and $5 million of local currency denominated foreign liabilities both of which earn a fixed 5% return in their respective currencies. If the price elasticity of exports is 0.5 and the elasticity of imports is (-)0.4 what will happen to the current account if the exchange rate depreciates by 1%? Select one: O a.itis unchanged O b. improves by $0.005 million O c. improves by $0.045 million O d. improves by $0.055 million e. worsens by $0.005 millionarrow_forward
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