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please answer all parts on a piece of paper Exercises: Parity conditions in real markets and financial markets EXERCISE 5 (Purchasing Power Parity) Suppose that
please answer all parts on a piece of paper
Exercises: Parity conditions in real markets and financial markets EXERCISE 5 (Purchasing Power Parity) Suppose that we live in a three-nut, three-country world. The following table lists prices in each country at times t and t + 1. Country A Country B Country C Cost per nut att Cost per nut at 1+1 3 $B 6 SC 4 SB 7.5 SC Coconut 1,500 SA 2,000 SA Brazil nut 750 SA 1,000 SA 1.5 SB 2 SB 3 SC 2 SC 250 SA 325 SA 0.5 SB 1.5 SB 1 SC 2 $C Pine nut Spot exchange rate att 500 250 Spot exchange rate at / +1 600 300 MacBook Air a) Does PPP hold at time t between Country A and Country B? between Country A and Country C? b) Take, as the underlying bundle, one coconut, four Brazil nuts, and four pine nuts, and calculate where the purchasing power of $A 11,000 is the highest at time t. c) Take the same underlying bundle as before, and calculate where the purchasing power of $B 44 is the highest at time t. d) Does PPP still hold at time t + 1 between Country A and Country B? between Country A and Country C? Assume, for simplicity, that the change in the relative prices across goods and across countries has not affected the composition of the basic consumption bundle. e) Compute the inflation rates (ignoring the changes in the consumption pattern that should accompany the change in the relative prices), and verify whether PPP holds between times t and t + 1 Step by Step Solution
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