Suppose that a Big Mac sells for $4 in the United States and € 6 in the Euro area. Given an actual spot exchange rate of $1.25 per euro, the over/undervaluation of the euro with respect to the US dollar is

Suppose that a Big Mac sells for $4 in the United States and € 6 in the Euro area. Given an actual spot exchange rate of $1.25 per euro, the over/undervaluation of the euro with respect to the US dollar is

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The equation for purchasing power parity is – the domestic price should equal the exchange rate multiplied by the foreign price. Suppose your shirt sells for 10 euros in Europe. If purchasing power parity holds, what should be the price of that same shirt in the United States if it takes 1.145 dollars to get one euro?
Suppose that the U.S. dollar appreciates against the Japanese Yen. What will occur as a result? purchasing power parity will begin to hold U.S. exports to Japan will become cheaper and increase, imports from Japan to the U.S. will become more expensive and decline U.S. currency becomes over-valued relative to Japanese currency U.S. exports to Japan will become more expensive and decline, imports from Japan to the U.S. will become cheaper and increase
Suppose the exchange rate between the Euro and the Japanese Yen increases from 165 Japanese Yen per Euro to 168 Japanese Yen per Euro. It is said that the Japanese Yen appreciates against the Euro. true or false?
If the European euro were to depreciate relative to the U.S. dollar in the foreign exchange market, would it be easier or harder for the French to sell their wine in the United States? Suppose you were planning a trip to Paris. How would depreciation of the euro change the dollar cost of your trip?
Q2. The inflation rate in Japan is 1% per year, and the inflation rate in Korea is 3% per year. What can you say about the Korean won-Japanese yen exchange rate if purchasing power parity holds? Explain your answer.
If the U.S. income level rises at a much higher rate than does the Eurozone income level. Other things being equal, how should this affect the: (a) U.S. demand for Euro, (b) supply of Euro for sale, and (c) equilibrium value of Euro?
If the spot exchange rate moves from $1.60 per pound to $1.40 per pound we would say that: the dollar has appreciated relative to the pound. the dollar has depreciated relative to the pound. the dollar has lost value relative to the pound. the pound has appreciated relative to the dollar.