Chapter 18: Q.10 (page 495)
If the Indian government unexpectedly announces that
it will be imposing higher tariffs on foreign goods one
year from now, what will happen to the value of the
Indian rupee today?
The indian rupee will appreciate.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
International travelers and business people frequently need to accurately convert from one currency to another. It is often easy to find the rate needed to convert the U.S. dollar into another currency. It can be more difficult to find exchange rates between two non U.S. currencies. Go to http://www.oanda.com/convert/ classic. This site lets you convert from any currency into any other currency. How many Lithuanian litas can you currently buy with one Chilean peso?
Go to the website that contains the most recent calculations of the Economist’s Big Mac Index, http://www .economist.com/content/big-mac-index.
a. Plot the relationship between the local price of a Big Mac and the actual exchange rate. Does this plot suggest that there is a close relationship between the local price and the actual exchange rate? Does this suggest that the theory of PPP has some validity? Explain why.
b. Does your evidence above indicate that PPP is a good theory for exchange rates in the short run?
c. Which country’s currency is the most overvalued in terms of purchasing power parity? Is it expensive or cheap to shop there?
d. Which country’s currency is the most undervalued in terms of purchasing power parity? Is it expensive or cheap to shop there?
If the demand for a country’s exports falls at the same time that tariffs on imports are raised, will the country’s currency tend to appreciate or depreciate in the long run?
The Mexican peso is trading at 11 pesos per dollar. If the expected U.S. inflation rate is 1% while the expected Mexican inflation rate is 15% over the next year, given PPP, what is the expected exchange rate in one year?
The New Zealand dollar to U.S. dollar exchange rate is 1.38, and the British pound to U.S. dollar exchange rate is 0.65. If you find that the British pound to New Zealand dollar is trading at 0.5, what would be the riskless profit per U.S. dollar invested?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
