Suppose a market basket of goods costs $2,000 USD in the United States and the exact...
Suppose a market basket of goods costs $2,000 USD in the United States and the exact same basket of goods costs Euro €1,500 in Germany. Make sure you set up correctly and that your answer makes logical sense. (check your work for certainty)
a) What is the purchasing power parity exchange rate? 1$=______€ Ans. Show work here:
Suppose the actual exchange rate was $1 = €1 even though the price of the same basket is indicated above..
b) What would one expect the dollar and the euro to do over a period of time relative to each other? (use A=appreciate, D=depreciate, U=unchanged/stay same) $_______ Euro______
Homework Answers
Solution:-
(a) Purchasing power parity (PPP) Exchange rate = Price of basket in Germany / Price of basket in US
= €1500 / $2000
= €0.0.75 per $
1$ = €0.0.75
(b) When actual exchange rate is 1$ = €1, Dollar price of the basket in Germany = $1500
Therefore, Arbitrageurs will buy the basket from Germany and sell in US, leading to higher demand for Euro and lower demand for dollars. As a result, Dollar will depreciate and Euro will appreciate over time.
Add Answer to:
Suppose a market basket of goods costs $2,000 USD in the United
States and the exact...
the first one Suppose a basket of goods costs $100 in the U.S. and €50 in...
the
first one
Suppose a basket of goods costs $100 in the U.S. and €50 in France. What exchange rate, in dollars per euro, would be consistent with purchasing power parity? $1 $2 $1.50 $0.50 and Suppose a country's central bank announces that it is increasing the money growth rate. The country's currency will suddenly its rate of depreciation will then appreciate; rise appreciate; fall depreciate; rise O depreciate; fall In the long run, with variable real exchange rates, if...
33. Suppose a given basket of goods and services costs 6 dollars in Canada and 4,500...
33. Suppose a given basket of goods and services costs 6 dollars in Canada and 4,500 won in Korea. If the exchange rate is 900 won per dollar, purchasing power parity implies that: A) the exchange rate has attained its long run equilibrium value. B) the dollar must appreciate to restore purchasing power parity. C) the dollar must depreciate to restore purchasing power parity. D) the won must depreciate to restore purchasing power parity.
3. Suppose a given basket of goods and services costs 15 dollars in Canada and 14,250...
3. Suppose a given basket of goods and services costs 15 dollars in Canada and 14,250 won in Korea. If the exchange rate is 900 won per dollar, purchasing power party implies that: A) the exchange rate has attained its long run equilibrium value. B) the dollar must appreciate to restore purchasing power parity, C) the dollar must depreciate to restore purchasing power party. D) the won must appreciate to restore purchasing power parity.
A market basket of goods costs $350 in the United States and 200 pounds in the...
A market basket of goods costs $350 in the United States and 200 pounds in the United Kingdom. According to the purchasing power parity theory, the exchange rate should move towards: $0.67 per British pound $1.50 per British pound $0.57 per British pound $1.75 per British pound
Suppose there is an increase in the average level of income in the United States, while...
Suppose there is an increase in the average level of income in the United States, while the average level of income stays the same in countries that use the Euro as their currency. a) Describe and illustrate with graph the impact on the exchange rate between U.S. dollars and Euros. b) Did the U.S. dollar appreciate, depreciate or neither? Did the Euro appreciate, depreciate or neither? Was the change in the exchange rate associated with a good thing or a...
1. Suppose that the price level in the United States is 135 and the price level in Germany is 234. What would absolute...
1. Suppose that the price level in the United States is 135 and the price level in Germany is 234. What would absolute purchasing power parity theory predict the dollar/euro exchange rate to be? 2. If the United States rate of inflation is 2% and the German rate of inflation is 5%, what would relative purchasing power parity predict about the value of the euro relative to the dollar, all other things equal?
Purchasing Power Parity A computer costs $620 in the United States. The same model costs 775...
Purchasing Power Parity A computer costs $620 in the United States. The same model costs 775 euros in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar? Do not round intermediate calculations. Round your answer to two decimal places.
A computer costs $560 in the United States. The same model costs 645 euros in France....
A computer costs $560 in the United States. The same model costs 645 euros in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar? Do not round intermediate calculations. Round your answer to two decimal places.
22. Suppose a market basket of goods and services costs $440 in the base year and...
22. Suppose a market basket of goods and services costs $440 in the base year and the consumer price index (CPI) is currently 125. This indicates the price of the market basket of goods is now: a. $575. b. $445. c. $550. d. $525. 23. Suppose the consumer price index (CPI) stands at 350 this year. If the inflation rate is 7.1 percent, then next year's CPI will equal: a. 350. b. 360. c. 375. d. 500.
Suppose that the price of the same basket of goods at time 0 is PC0= 100...
Suppose that the price of the same basket of goods at time 0 is PC0= 100 in country C and PD0= 90 in country D, so that the exchange rate is SCD0=10090. Inflation rates are expected to be 10% in country C and 21% in country D, over the foreseeable future. a) Does PP approximately predict an appreciation or depreciation of currency C? b) What are the expected price levels in the two countries (i.e., PC1 and PD1 ) andthe...
the
first one
Suppose a basket of goods costs $100 in the U.S. and €50 in France. What exchange rate, in dollars per euro, would be consistent with purchasing power parity? $1 $2 $1.50 $0.50 and Suppose a country's central bank announces that it is increasing the money growth rate. The country's currency will suddenly its rate of depreciation will then appreciate; rise appreciate; fall depreciate; rise O depreciate; fall In the long run, with variable real exchange rates, if...
33. Suppose a given basket of goods and services costs 6 dollars in Canada and 4,500 won in Korea. If the exchange rate is 900 won per dollar, purchasing power parity implies that: A) the exchange rate has attained its long run equilibrium value. B) the dollar must appreciate to restore purchasing power parity. C) the dollar must depreciate to restore purchasing power parity. D) the won must depreciate to restore purchasing power parity.
3. Suppose a given basket of goods and services costs 15 dollars in Canada and 14,250 won in Korea. If the exchange rate is 900 won per dollar, purchasing power party implies that: A) the exchange rate has attained its long run equilibrium value. B) the dollar must appreciate to restore purchasing power parity, C) the dollar must depreciate to restore purchasing power party. D) the won must appreciate to restore purchasing power parity.
Most questions answered within 3 hours.
-
The rise of online shopping and Amazon, in particular, has
created major dilemmas for large food/CPG...
asked 4 minutes ago -
Assuming that the wave speed varies little when sound waves are
traveling through a material that...
asked 5 minutes ago -
Is oxygen difluoride polar or nonpolar?
nonpolar
polar
ionic
none of the above
asked 16 minutes ago -
Starting from rest, a car accelerates at a constant rate of 2.6
m/s2 for a time...
asked 13 minutes ago -
A pharmaceutical company wants to answer the question whether
time for a drug in pill form...
asked 15 minutes ago -
) Assume that in the market for widgets, demand is highly
elastic compared to supply. If...
asked 26 minutes ago -
Why is a personal interview the most important step in the sales
selection process? What are...
asked 36 minutes ago -
In Python rOverlap (x1, y1, w1, h1, x2, y2, w2, h2) A rectangle
is axis-aligned if...
asked 36 minutes ago -
If we observe in a protein solution that DNA is causing a
mixture 260/280 ratio ~0.9,...
asked 46 minutes ago -
Explain the steps involved in making cDNA from mRNA, and how you
would create a cDNA...
asked 47 minutes ago -
A beta (β) particle is described by which of the following?
Select the correct answer below:...
asked 50 minutes ago -
A new machine costs $150,000, lasts 10 years, has an annual
O&M cost of $50,000, and...
asked 53 minutes ago