1. When the U.S. price level increases but the nominal exchange rate remains the same, the real exchange rate will ________.
2. When the U.S. and foreign price levels remain the same but the dollar appreciates, the real exchange rate will ________.
3. The law of one price provides accurate predictions of current exchange rates. ________ (True/False)
4. The theory of ________states that the exchange rate between two countries should be determined by the price levels in those two countries.
5. The Real Exchange Rate between Germany and the United States. Consider the following data for the United States and Germany

a. By what percent did the dollar depreciate against the mark over this period?
b. Using the formula for the real exchange rate,
Real exchange rate = (exchange rate * U.S. price index)
Foreign price index
Compute the real exchange rate for 1980 and for 1990.
c. By how much did the real exchange rate change over this period?
d. Compare your answer for part (c) to your answer to part (a).
6. Tall Lattés and the Real Exchange Rate between the Euro and the Dollar. According to the Economist, in early 2004 the average price of a tall latté in Starbucks in the United States was $2.80. In the countries that use the euro, the average price was 2.93 euros. Because the exchange rate at this time was 0.79 euro per dollar, the dollar price of lattés in the euro area was $3.70.
a. At what exchange rate between the dollar and the euro would a latté cost the same in the euro area as it did in the United States?
b. Does this calculation suggest that the euro is too high or too low relative to the dollar?
7. Big Macs in Switzerland. Traditionally, the Swiss franc has been a safe currency for investors around the world. Explain how this fact might help explain why Big Macs are more expensive in Switzerland than in the United States.
8. Energizer Batteries around the World. According to the Wall Street Journal on August 5, 2008, a pack of four AA batteries sold for $2.33 in Hong Kong, $6.05 in New York, and $8.24 in Paris (prices converted to dollars). At that time, 7.80 Hong Kong dollars were equal to 1 U.S. dollar and the euro (used in Paris) cost $1.54.
a. At what exchange rates would the batteries sell in New York, Hong Kong, and Paris for the same dollar price?
b. Are the actual exchange rates too high or too low relative to thesecalculations?

Year German GDP U.S. GDP Price Market Exchange Rate 2.49 marks per dollar 2.12 marks per dollar Price Deflat Deflator 85.7 76.0 1980 1990 1134 119.6