1. A cookie costs 1.5 dollars in the United States and 25 pesos in Mexico. What is the peso-dollar exchange rate (measured in pesos per dollar) if purchasing power parity holds? (6)
2. If a monetary expansion causes all prices in Mexico to double, so that a cookie now costs 50 pesos, what happens to the peso-dollar exchange rate? (4)
3. In a few sentences, explain the main logic behind purchasing power parity theory. (5)