Question 1

Relative purchasing power parity states that nominal exchange rate fluctuations are due to

differences in the real exchange rate between nations.

differences in inflation between two nations.

differences in the balance of trade between two nations.

differences in political risk between two nations.

Question 2

Suppose that a particular car costs $55,000 in the US. If the current exchange rate is .8 euros per dollar, the same car should cost 68,750 euros (rounded to the nearest whole euro) in Germany according to absolute PPP. True False

Question 3

The law of one price states that after accounting for differences in inflation, the value of a good or service should be the same anywhere in the world. True False

Question 4

A German citizen observes the spot rate between euros and Mexican pesos is currently MP15/. Assume the expected inflation rate over the course of the year in Germany and Mexico is 3% and 6%, respectively. Suppose the spot rates for euros and pesos at the end of the year are as follows: $1.18/, MP13/$Which of the following statements is true according to relative PPP? Round intermediate steps to four decimals.

The euro appreciated in real terms.

The peso appreciated in real terms.

Neither the euro nor the peso appreciated in real terms.

Cannot be determined.

QUESTION 5

A new Panasonic television costs 900 euros in France and 625 Canadian dollars in Canada. Suppose the current exchange rates are as follows:1.2/$, $1.25/C$ Find the arbitrage profit (in terms of euros) per television according to absolute PPP. Round intermediate steps to four decimals.

383.33

183.33

37.5

25

10 points

QUESTION 6

Use the following information to answer the next two questions.Investors expect inflation rates over the next twelve months in Japan and Australia to be 3% and 9%, respectively. The current exchange rates for the two currencies are as follows:.0085USD/, .79AUD/USDSuppose that twelve months from now, the exchange rate between Australian dollars (AUD) and yen is .0069AUD/. According to relative PPP, what be the long term impact of this new exchange rate on Australia's balance of trade? (Assume Australia is the home country.) Round intermediate steps to four decimals.

Australia's BOT will decrease

Australia's BOT will increase

Australia's BOT will be unaffected by the new exchange rate.

None of the above

10 points

QUESTION 7

What should have been the percentage change in direct quotes according to realtive PPP?

.0467

.0583

-.055

-.0411

10 points

QUESTION 8

Use the following information to answer the next two questions. A Japanese investor notices the expected one year inflation rate in Japan and Mexico is 5% and 7%, respectively. The current spot rates for yen and pesos are as follows:$.15/MP, JY111.11/$ What should be the value of pesos in terms of yen at the end of the year according to relative PPP?

16.9842

.0589

16.355

.0611

QUESTION 9

Suppose the spot rate at the end of the year is MP.07/JY. Has the yen appreciated or depreciated in real terms?

Appreciated

Depreciated

Neither appreciated or depreciated

Cannot be determined

10 points

QUESTION 10

Assume a two-country world: Country A and Country B. Which of the following is correct about relative purchasing power parity (PPP) as related to these two countries?

If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken in real terms.

If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken in nominal terms.

If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will strenghten in real terms.

If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will strenghten in nominal terms.

Please help, I have answered some an want to verify im doing them correctly and if i can get some assistance with the remaining. Thank you.