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Please answer this simple questions in a clear and detailed way Thank u ! 5. (12 points) Consider two countries A and B whose currencies
Please answer this simple questions in a clear and detailed way Thank u !
5. (12 points) Consider two countries A and B whose currencies are called A dollar and B dollar. 10 can buy 10 identical apples in both A and B. The current market exchange rates for them are: 1=2 A and 1=4B. a. Does the PPP hold (assuming there is only one good in both economies)? b. Calculate the market exchange rate between A and B in terms of units of A per B dollar, namely A/B. C. Now, based on the prices of apples, calculate the PPP exchange rates between A and B in terms of units of A per B dollar, namely A/B. d. How does the market exchange rate and the PPP exchange rate differ? Is the market rate overvalued or undervalued relative to PPP? e. Now assume that domestic prices in both economies remain unchanged but A's currency depreciated significantly to 1=4B, calculate the PPP and market exchange rates now. f. How does the market rate compare with the PPP rate? Explain your intuition and contrast with the situation earlier. 5. (12 points) Consider two countries A and B whose currencies are called A dollar and B dollar. 10 can buy 10 identical apples in both A and B. The current market exchange rates for them are: 1=2 A and 1=4B. a. Does the PPP hold (assuming there is only one good in both economies)? b. Calculate the market exchange rate between A and B in terms of units of A per B dollar, namely A/B. C. Now, based on the prices of apples, calculate the PPP exchange rates between A and B in terms of units of A per B dollar, namely A/B. d. How does the market exchange rate and the PPP exchange rate differ? Is the market rate overvalued or undervalued relative to PPP? e. Now assume that domestic prices in both economies remain unchanged but A's currency depreciated significantly to 1=4B, calculate the PPP and market exchange rates now. f. How does the market rate compare with the PPP rate? Explain your intuition and contrast with the situation earlierStep by Step Solution
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