BUS 225 DAYONE LL
BUS 225 DAYONE LL
17th Edition
ISBN: 9781264116430
Author: BLOCK
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 21, Problem 3P
Summary Introduction

To calculate: The relative rate of inflation between the U.S (United States) and Saudi Arabia and also multiply the outcome to riyal exchange rate.

Introduction:

Relative rate of inflation:

It is an economic theory that depicts the relationship between the inflation rates of two different countries over a particular time period.

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Answer the following questions related to the foreign exchange rate and market. (1) The current exchange rate between the U.S. dollar and the Australian dollar is U.S. $1 = AUD$1.31. If the U.S. dollar is expected to appreciate by 5% relative to the Australian dollar, what is the new expected exchange rate? (2) The Argentinean peso trades at 0.06 peso per U.S. dollar. How many Argentinean pesos would you tip a taxi driver if you give her a $9 bill? (3) During the 1997 Asian financial crisis, the Thai baht was trading at $0.02475 per Thai baht. The Thai baht is trading at $0.03093 per Thai baht now. What is the percentage change in the Thai baht's value? Would you consider it an appreciation or depreciation? (4) Suppose that the U.S. Federal Reserve decides to raise interest rates to combat inflation. How will this decision affect the exchange rate between the U.S. dollar and the euro? Discuss with references or a practical example.
From the base price level of 100 in 1979, Saudi Arabian and U.S. price levels in 2008 stood at 280 and 572, respectively. Assume the 1979 $/riyal exchange rate was $0.58/riyal. Suggestion: Using purchasing power parity, adjust the exchange rate to compensate for inflation. That is, determine the relative rate of inflation between the United States and Saudi Arabia and multiply this times $/riyal of 0.58. What should the exchange rate be in 2008? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Exchange rate Iriyal
You observe the following current rates and prices today: the spot exchange rate today: AU$2.05 per U.K pound; the price level in Australia today: AU$4.00; and the price level in the U.K. today: 2.00 pounds (a) Calculate the real exchange rate of Australia against the U.K., q(AU/UK). (b) Calculate the over-/under-valuation of the Australian dollar.
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