Suppose that the New Zealand price level is initially NZD15,000 per NZ consumption bundle, and the...

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Suppose that the New Zealand price level is initially NZD15,000 per NZ consumption bundle, and the price level in Australia is initially AUD11,000 per Australian consumption bundle. With the nominal spot exchange rate equal to NZD1.40/AUD, what is the current real exchange rate? (1 mark) c. Suppose that over the next year, there is 3% inflation in NZ, there is 2% inflation in Australia, and the nominal exchange rate changes so that relative purchasing power parity is satisfied. What is the expected nominal exchange rate after 1 year? (1 mark) d. Suppose that the AUD actually appreciates in nominal terms by 2% relative to the NZD during the year (ex post). i) What turns out to be the actual nominal exchange rate after 1 year? (1 mark) ii) What is the ex post rate of change in real exchange rate? (2 marks) iii) Has the AUD appreciated or depreciated in real terms? (1 mark) iv) What is the new real exchange rate after 1 year? (2 marks) v) Based on the real exchange rate observed over the year, is the relative purchasing power parity found to be satisfied or not and what is the reason for your answer? (2 marks) Suppose that the New Zealand price level is initially NZD15,000 per NZ consumption bundle, and the price level in Australia is initially AUD11,000 per Australian consumption bundle. With the nominal spot exchange rate equal to NZD1.40/AUD, what is the current real exchange rate? (1 mark) c. Suppose that over the next year, there is 3% inflation in NZ, there is 2% inflation in Australia, and the nominal exchange rate changes so that relative purchasing power parity is satisfied. What is the expected nominal exchange rate after 1 year? (1 mark) d. Suppose that the AUD actually appreciates in nominal terms by 2% relative to the NZD during the year (ex post). i) What turns out to be the actual nominal exchange rate after 1 year? (1 mark) ii) What is the ex post rate of change in real exchange rate? (2 marks) iii) Has the AUD appreciated or depreciated in real terms? (1 mark) iv) What is the new real exchange rate after 1 year? (2 marks) v) Based on the real exchange rate observed over the year, is the relative purchasing power parity found to be satisfied or not and what is the reason for your answer? (2 marks)

Answer rating: 100% (QA)

a The current real exchange rate can be calculated using the formula Real Exchange Rate Nominal Exch... View the full answer