A Starbucks coffee sells for 10 yuan in Beijing, China, and for $2 in Chicago. a) Calculate
Question:
A Starbucks coffee sells for 10 yuan in Beijing, China, and for $2 in Chicago.
a) Calculate the nominal exchange rate if the law of one price holds.
b) Assume that the nominal exchange rate is currently 7 yuan per dollar. What would the purchasing power parity theory predict about the future value of the nominal exchange rate? (Hint: which nominal exchange rate makes the real exchange rate equal to 1?)
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a Based on the Law of One Price the price of identical goods sold internationally should equate when ...View the full answer
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