Consider two countries, Plenus and Terra. The exchange rate is equal to 2 Plenus pesos (PP) = 1 Terra dollar (T$). Plenus and Terra each produce two goods: tradable computers and nontradable coaching services. Plenus workers produce 2 computers each day; Terran workers produce 3 computers each day. Workers in both countries can produce 1 hour of coaching services per day. Computers currently sell for T$1,600 each. Nontraded goods account for 40% of consumption in both countries.

a. Calculate the price of computers in Plenus pesos.

b. Calculate the wages of workers in Terra and Plenus in local currency. Calculate Plenus workers’ wages in T$ terms.

c. Calculate the price of coaching services in Terra and Plenus in local currency. Calculate the price of coaching in PP terms.

d. Suppose that Plenus workers experience an increase in productivity in computer production. Productivity in this sector increases from 2 computers each day to 3 computers each day. Calculate the wage in Plenus. Calculate the price of coaching services.

e. Calculate the change in the real exchange rate implied by this change in productivity.

f. Suppose Plenus has a fixed exchange rate against the Terra dollar. Calculate the change in the inflation differential in this case.