N2

1. Consider a certain type of machinery that you can buy in the USA for $60,000 and in Japan for 6,780,000 yen. The current exchange rate is 0.01 dollar per yen.

Carefully following all numeric instructions, calculate the real exchange rate. Round your final answer to two decimal places.

2. An economist makes a graph with various exchange rates against the dollar on the vertical axis. On the horizontal axis, they put the difference between each nation's inflation rate and that of the USA.

On this graph, a 45 degree line would represent:

(a) all points where arbitrage is illegal or isn't able to shift real exchange rates

(b) perfect purchasing power parity

(c) all points where changes in output (GDP) exactly mirror changes in prices (inflation)

(d) all points where two nations' exchange rates are equal