Consider two economies A and B. Let's call their currencies also A and B. In country...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider two economies A and B. Let's call their currencies also A and B. In country A, US$100 can buy 20 cheeseburgers; in country B, US$100 can buy 25 identical cheeseburgers. Assumes 1USD=1.25A and 1USD=1.20 B. The exchange rate between A and B can be determined by the cross-rates as there is no transaction costs/arbitrage, namely: A/B=A/USD*USD/B. (a) (4 points) Does the law of one price hold for cheeseburgers in these two economies? (b) (4 points) What is the market exchange rate between A and B (expressed in terms of units of A per unit of B)? (c) (4 points) What should be the PPP exchange rate implied by the price of cheeseburgers expressed in terms of units of A per unit of B)? (d) (4 points) Is the market exchange rate between A and B overvalued or undervalued relative to PPP exchange rates? (e) (4 points) Now assume that the market rate adjusts to the PP rates. Assume that the A/USD market exchange rate does not change, what should be the B/USD market exchange rate? Assumes that the price of cheeseburger stays the same, how many cheeseburgers can you buy in buy in both economies? Consider two economies A and B. Let's call their currencies also A and B. In country A, US$100 can buy 20 cheeseburgers; in country B, US$100 can buy 25 identical cheeseburgers. Assumes 1USD=1.25A and 1USD=1.20 B. The exchange rate between A and B can be determined by the cross-rates as there is no transaction costs/arbitrage, namely: A/B=A/USD*USD/B. (a) (4 points) Does the law of one price hold for cheeseburgers in these two economies? (b) (4 points) What is the market exchange rate between A and B (expressed in terms of units of A per unit of B)? (c) (4 points) What should be the PPP exchange rate implied by the price of cheeseburgers expressed in terms of units of A per unit of B)? (d) (4 points) Is the market exchange rate between A and B overvalued or undervalued relative to PPP exchange rates? (e) (4 points) Now assume that the market rate adjusts to the PP rates. Assume that the A/USD market exchange rate does not change, what should be the B/USD market exchange rate? Assumes that the price of cheeseburger stays the same, how many cheeseburgers can you buy in buy in both economies?
Expert Answer:
Answer rating: 100% (QA)
aNo the law of one price does not hold for cheeseburgers in these two economies This is because the exchange rate between A and B indicates that US100 can buy more cheeseburgers in country B 25 than i... View the full answer
Related Book For
Posted Date:
Students also viewed these accounting questions
-
One seeming violation of the Law of One Price is the pervasive discrepancy of closed-end fund prices from their net asset values. Would you expect to observe greater discrepancies on diversified or...
-
The exchange rate between Currencies X and Y is currently Y0.05614 = X1.00. If X weakens by 1.5% relative to Y, what will be the new values for the exchange rates per unit of X and per unit of Y?
-
As of November 1, 1999, the exchange rate between the Brazilian real and U.S. dollar was R$1.95/$. The consensus forecast for the U.S. and Brazil inflation rates for the next one-year period was 2.6...
-
A 1.0-kg trash-cal lid is suspended against gravity by tennis balls thrown vertically upward at it. How many tennis balls per second must rebound from the lid elastically, assuming they have a mass...
-
The following data are derived from the 2011, 2010, and 2009 annual reports of The Coca-Cola Corporation. Dollar amounts are in millions. 1. Complete the following condensed income statements for...
-
Criminals are basically stupid, because anyone who isnt basically stupid wouldnt be a criminal. Identify the fallacies of relevance, weak induction, presumption, ambiguity, and illicit transference...
-
Under normal circumstances is the airflow though your trachea (your windpipe) laminar or turbulent? List all assumptions and show all calculations.
-
Homer Winslow and Jane Alexander are discussing various aspects of the FASBs concepts statement on the objective of financial reporting. Homer indicates that this pronouncement provides little, if...
-
Cost overruns and extraordinary spending by healthcare organizations harms the sustainability of the healthcare organization. Through activity-based costing (ABC), the healthcare industry is working...
-
1. It is clear in the first meeting that Miguel is distracted and at some points disrespectful to Pilar in not listening to what she is saying to him. Still, Pilar does not do anything to draw him...
-
The Barrington Company manufactures a high-quality plastic pipe that goes through three processing stages prior to completion. Information on work in the first department, Cutting, is given below for...
-
The force exerted on a certain object varies with the object's position according to the function \(F_{x}(x)=a x^{2}+b x^{3}\) where \(a=3.0 \mathrm{~N} / \mathrm{m}^{2}\) and \(b=-0.50 \mathrm{~N} /...
-
A radioactive sample's half-life is \(1.0 \mathrm{~min}\), so each nucleus in the sample has a \(50 \%\) chance of undergoing a decay sometime between \(t=0\) and \(t=1 \mathrm{~min}\). One...
-
You devise a wind-up car powered by a spring for trips to the grocery store. The car has an inertia of \(500 \mathrm{~kg}\) and is \(4.2 \mathrm{~m}\) long. It should be able to accelerate from rest...
-
The chemical atomic mass of hydrogen, with the two stable isotopes \({ }^{1} \mathrm{H}\) and \({ }^{2} \mathrm{H}\) (deuterium), is \(1.00798 \mathrm{u}\). Use this value to determine the natural...
-
Rounding slightly, the nucleus \({ }^{3} \mathrm{He}\) has a binding energy of \(2.5 \mathrm{MeV} /\) nucleon and the nucleus \({ }^{6} \mathrm{Li}\) has a binding energy of \(5 \mathrm{MeV} /\)...
-
Edward works for Alliance Systems in Alberta and is paid $1,217.85 semi-monthly. He contributes 3% of his regular earnings to a Registered Pension Plan each pay. Edward also pays $15.00 each for...
-
Multiple Choice Questions: 1. The largest component of aggregate demand is? a. Government purchases. b. Net exports. c. Consumption. d. Investment. 2. A reduction in personal income taxes, other...
-
At a certain point in time, a bank quoted the following exchange rates against the dollar for the Swiss franc and the Australian dollar. $:SFr = 1.5960-70 $:A$ = 1.8225-35 Simultaneously, a Swiss...
-
At a certain point in time, a bank quoted the following exchange rates against the dollar for the Swiss franc and the Australian dollar $:SFr = 1.5960-70 $:A$ = 1.8225-35 Simultaneously, an...
-
Take the case of a U.S. Firm Thai wishes to invest some funds (U.S. dollars) for a period of one year. The choice is between investing in a U.S. bond with one year to maturity, paying an interest...
-
Active-Ingredients is a company supplying baking ingredients in major hypermarkets that are facing intense competition from many local and foreign brands. Active-Ingredients is thinking of using a...
-
Nan-Clean is a newly developed cleaning liquid for milk bottles that uses special enzymes to remove dirt effectively. Nan-Clean has been positioned as a product that is made of natural ingredients...
-
Why do sample surveys have predetermined margins of error?
Study smarter with the SolutionInn App