Assume that the dollar price level is 15,0 level is 10,000GBP/Consumption bundle, and the exchange rate is 1.1452 USD/GBP. The consumption bundle is a basket of goods and services that is identical in the US and United Kingdom. (a) Calculate the external purchasing power of 1 million USD in the United Kingdom and compare it to the internal purchasing power of that amount in the United States. Do the came calculations as in (a) for 1 million GBP.
Assume that the dollar price level is 15,0 level is 10,000GBP/Consumption bundle, and the exchange rate is 1.1452 USD/GBP. The consumption bundle is a basket of goods and services that is identical in the US and United Kingdom. (a) Calculate the external purchasing power of 1 million USD in the United Kingdom and compare it to the internal purchasing power of that amount in the United States. Do the came calculations as in (a) for 1 million GBP.
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter13: Open-economy Macroeconomics: Basic Concepts
Section: Chapter Questions
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Transcribed Image Text:6. Assume that the dollar price level is 15,000USD/Consumption bundle, the pound price
level is 10,000GBP/Consumption bundle, and the exchange rate is 1.1452 USD/GBP.
The consumption bundle is a basket of goods and services that is identical in the US
and United Kingdom.
(a) Calculate the external purchasing power of 1 million USD in the United
Kingdom and compare it to the internal purchasing power of that amount in the
United States.
(b) Do the same calculations as in (a) for 1 million GBP.
(c) Is the dollar overvalued or undervalued relative to the pound? Explain.
(d) By what percentage would the pound have to strengthen/weaken relative to the
dollar in order to correct its undervaluation/overvaluation?
(e) How does your answer to (d) change if there is US inflation of 6.5% and UK
inflation of 13%?
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