Question: Explain how purchasing power parity sets the exchange rate. Why does this only really hold in differences and in the long run? Explain how changesto

  1. Explain how purchasing power parity sets the exchange rate. Why does this only really hold in differences and in the long run?
  2. Explain how changesto the Federal Funds rate impacts currency markets in the short and long run (the full path of adjustment).
  3. Howcan governments get into trouble by fixing their exchange rate?Explain what a currency crisis is, how it starts, when it does and doesn't turn into a crisis, and who gets hurt.

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