17. Problems and Applications Q9 Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam. In 2020, a can of Spam cost 4 dollars in Ectenia and 24 pesos in Wiknam. The exchange rate between Ectenian dollars and Wiknamian pesos was Over the next 35 years, inflation is expected to be 2 percent per year in Ectenia and 4 percent per year in Wiknam. If this inflation comes to pass, what will happen over this period to the price of Spam and the exchange rate? 6 pesos per dollar. Over this period, the price of Spam in Ectenia will double , and the price of Spam in Wiknam will quadruple ▼ . (Hint: Recall the rule of 70 from the chapter "The Basic Tools of Finance.") The exchange rate between the two countries will__ double Wiknam will likely have a higher nominal interest rate. A friend of yours suggests a get-rich-quick scheme: borrow from the nation with the lower nominal interest rate, invest in the nation with the higher nominal interest rate, and profit from the interest-rate differential. Which of the following statements explains the flaw in your friend's logic? O The scheme would work only if there is greater inflation in one nation than in the other. Nominal exchange rates adjust for the effects of inflation. The scheme would work only if the real interest rates are the same in both nations.
17. Problems and Applications Q9 Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam. In 2020, a can of Spam cost 4 dollars in Ectenia and 24 pesos in Wiknam. The exchange rate between Ectenian dollars and Wiknamian pesos was Over the next 35 years, inflation is expected to be 2 percent per year in Ectenia and 4 percent per year in Wiknam. If this inflation comes to pass, what will happen over this period to the price of Spam and the exchange rate? 6 pesos per dollar. Over this period, the price of Spam in Ectenia will double , and the price of Spam in Wiknam will quadruple ▼ . (Hint: Recall the rule of 70 from the chapter "The Basic Tools of Finance.") The exchange rate between the two countries will__ double Wiknam will likely have a higher nominal interest rate. A friend of yours suggests a get-rich-quick scheme: borrow from the nation with the lower nominal interest rate, invest in the nation with the higher nominal interest rate, and profit from the interest-rate differential. Which of the following statements explains the flaw in your friend's logic? O The scheme would work only if there is greater inflation in one nation than in the other. Nominal exchange rates adjust for the effects of inflation. The scheme would work only if the real interest rates are the same in both nations.
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Transcribed Image Text:17. Problems and Applications Q9
Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam.
In 2020, a can of Spam cost 4 dollars in Ectenia and 24 pesos in Wiknam.
The exchange rate between Ectenian dollars and Wiknamian pesos was
Over the next 35 years, inflation is expected to be 2 percent per year in Ectenia and 4 percent per year in Wiknam. If this inflation comes to pass,
what will happen over this period to the price of Spam and the exchange rate?
Over this period, the price of Spam in Ectenia will double
and the price of Spam in Wiknam will quadruple
70 from the chapter "The Basic Tools of Finance.") The exchange rate between the two countries will double
Wiknam will likely have a higher nominal interest rate.
6 pesos per dollar.
I
Which of the following statements explains the flaw in your friend's logic?
A friend of yours suggests a get-rich-quick scheme: borrow from the nation with the lower nominal interest rate, invest in the nation with the higher
nominal interest rate, and profit from the interest-rate differential.
The scheme would work only if there is greater inflation in one nation than in the other.
(Hint: Recall the rule of
O Nominal exchange rates adjust for the effects of inflation.
O The scheme would work only if the real interest rates are the same in both nations.
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