4.

a. Assume P

˙

Mex = 50 percent and P

˙

US = 2 percent. Calculate S

˙

(Ps/$) and S

˙

($/Ps) according to the precise and approximate dynamic PPP conditions.

b. Assume that Mexican inflation increases to 100 percent,while US inflation remains at 2 percent. Calculate S˙

(Ps/$) and S

˙

($/Ps) according to the precise and approximate PPP conditions.

c. How does the error in the approximate condition depend on whether you are measuring S

˙

(Ps/$) or S

˙

($/Ps)?

d. How would a constant percentage sales tax in Mexico affect your answers above?