1. Time frames of exchange rate determination The determinants of exchange rate fluctuations are different in the short run, medium run, and long run. Which of the following influence medium-run exchange rates? Check all that apply. [J Transfers of assets that respond to inflation rates and investment profitability [J cyclical factors [ Business cycles The following graph presents exchange rates as simultaneously determined by long-term structural, interim cyclical, and short-term speculative forces. \fComplete the following table by indicating the exchange rate path for each graph element listed. Graph Element Exchange Rate Path Green curve AB Grey area (w) Green curve FFundamental equilibrium path Long-run equilibrium path Medium-run cyclical path Short-run overshooting pathO Supply Demand Supply EXCHANGE RATE (Dollars per yen) Demand QUANTITY (Millions of yen)3. The law of one price The law of one price states that: O 1n ideally efficient markets, the real purchasing power of a currency should be the same regardless of where it is spent O The nominal exchange rates should always be the same as the real exchange rates, both in the short run and in the long run O The cost of an individual good should be higher in countries with higher productivity Which of the following scenarios illustrates why the law of one price may not hold? Check all that apply. () The formation of the European Union creates a custom union among its member states, where internally traded goods are not subject to custom duties, tariffs, or import quotas. () stationery, such as writing paper, is relatively light and can be shipped in bulk. [ steel is very heavy, and the cost of shipping is measured by weight. Dollar Price of a Big Mac in the United Kingdom = GBP 2.89 x $1.63 GBP 1.00 = $4.71For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left to go toward fries. Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given. (Note: Round your answers to the nearest cent.) The Eurozone Switzerland United Kingdom Poland China Foreign Currency Euro Franc Pound Zloty Yuan Local Price (Foreign currency) 3.72 6.50 2.89 9.60 17.60 Big Mac Index: January 2016 Actual Exchange Rate (Dollars per unit of foreign currency) 1.10 1.02 1.63 0.36 0.16 Dollar Price (Dollars) L] 3.46 2.82 Source: "Currency Comparison, To Go,\" The Economist, last modified January 7, 2016, accessed July 8, 2016, http://www.economist.com/blogs/graphicdetail/2016/01/daily-chart- 7. The law of one price states that exchange rates would need to equalize the prices of goods in any two countries. For the dollar price of a Big Mac to be the same in both countries, a U.S. citizen would need to be able to convert $4.93 into exactly GBP 2.89. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in the United States by the price in the United Kingdom: Law of One Price Exchange Rate (U.S. Dollars per British Pound) % = $1.71 per British pound The exchange rate that would have equalized the dollar price of a Big Mac in the United States and the Eurczone (that is, the law of one price exchange rate for Big Macs) is W . For this change to happen, the eurc would have to W against the dollar. If Big Macs were a durable good that could be transported between countries at no cost, which of the following would present arbitrage opportunities? Check all that apply. O Exporting Big Macs from Switzerland to China O Exporting Big Macs from the United Kingdom to Poland O Exporting Big Macs from the Eurozone to the United States