The incompatible trinity, also known as the trilemma, states that it is impossible to have all three of the following at the same time: a fixed foreign exchange rate, free capital movement (absence of capital controls), and an independent monetary policy. In this case, Brazil is sacrificing an independent monetary policy. This is because it is keeping its exchange rate fixed and allowing free capital movement, but it is not able to independently set its interest rate. arrow_forward Step 2 The real exchange rate is the purchasing power of a currency relative to another at current exchange rates and prices. It is the ratio of the price of a specific good in one country to the price of the same good in another country, expressed in the same currency. In this case, we are using the price of a Big Mac in China and the US to calculate the real exchange rate. arrow_forward Step 3 First, we need to convert the price of a Big Mac in China to US dollars using the nominal exchange rate. The price in dollars is 21.2 yuan * 0.17 dollars/yuan = $3.60. arrow_forward Step 4 Next, we calculate the real exchange rate using the formula: Real Exchange Rate = (Price of Good in Foreign Currency / Price of Good in Domestic Currency). Substituting the given values, we get Real Exchange Rate = $3.60 / $6 = 0.6. arrow_forward Step 5 The units of the real exchange rate are the units of the domestic currency per units of the foreign currency. In this case, the units are dollars per yuan. arrow_forward Step 6 If the real exchange rate is less than 1, it means that the foreign currency is undervalued relative to the domestic currency. In this case, the real exchange rate is 0.6, which means that the yuan is undervalued relative to the dollar. arrow_forward In this scenario, Brazil is sacrificing an independent monetary policy as part of the incompatible trinity. The real exchange rate between the US and China, based on the price of a Big Mac, is 0.6 dollars per yuan. This indicates that the yuan is undervalued relative to the dollar. Now the price in China changes to 24 yuan. The nominal exchange rate and the US price do not react. Find the rate of real appreciation of yuan.

The incompatible trinity, also known as the trilemma, states that it is impossible to have all three of the following at the same time: a fixed foreign exchange rate, free capital movement (absence of capital controls), and an independent monetary policy. In this case, Brazil is sacrificing an independent monetary policy. This is because it is keeping its exchange rate fixed and allowing free capital movement, but it is not able to independently set its interest rate. arrow_forward Step 2 The real exchange rate is the purchasing power of a currency relative to another at current exchange rates and prices. It is the ratio of the price of a specific good in one country to the price of the same good in another country, expressed in the same currency. In this case, we are using the price of a Big Mac in China and the US to calculate the real exchange rate. arrow_forward Step 3 First, we need to convert the price of a Big Mac in China to US dollars using the nominal exchange rate. The price in dollars is 21.2 yuan * 0.17 dollars/yuan = $3.60. arrow_forward Step 4 Next, we calculate the real exchange rate using the formula: Real Exchange Rate = (Price of Good in Foreign Currency / Price of Good in Domestic Currency). Substituting the given values, we get Real Exchange Rate = $3.60 / $6 = 0.6. arrow_forward Step 5 The units of the real exchange rate are the units of the domestic currency per units of the foreign currency. In this case, the units are dollars per yuan. arrow_forward Step 6 If the real exchange rate is less than 1, it means that the foreign currency is undervalued relative to the domestic currency. In this case, the real exchange rate is 0.6, which means that the yuan is undervalued relative to the dollar. arrow_forward In this scenario, Brazil is sacrificing an independent monetary policy as part of the incompatible trinity. The real exchange rate between the US and China, based on the price of a Big Mac, is 0.6 dollars per yuan. This indicates that the yuan is undervalued relative to the dollar. Now the price in China changes to 24 yuan. The nominal exchange rate and the US price do not react. Find the rate of real appreciation of yuan.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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Step 2

The real exchange rate is the purchasing power of a currency relative to another at current exchange rates and prices. It is the ratio of the price of a specific good in one country to the price of the same good in another country, expressed in the same currency. In this case, we are using the price of a Big Mac in China and the US to calculate the real exchange rate.

arrow_forward

Step 3

First, we need to convert the price of a Big Mac in China to US dollars using the nominal exchange rate. The price in dollars is 21.2 yuan * 0.17 dollars/yuan = $3.60.

arrow_forward

Step 4

Next, we calculate the real exchange rate using the formula: Real Exchange Rate = (Price of Good in Foreign Currency / Price of Good in Domestic Currency). Substituting the given values, we get Real Exchange Rate = $3.60 / $6 = 0.6.

arrow_forward

Step 5

The units of the real exchange rate are the units of the domestic currency per units of the foreign currency. In this case, the units are dollars per yuan.

arrow_forward

Step 6

If the real exchange rate is less than 1, it means that the foreign currency is undervalued relative to the domestic currency. In this case, the real exchange rate is 0.6, which means that the yuan is undervalued relative to the dollar.

arrow_forward

In this scenario, Brazil is sacrificing an independent monetary policy as part of the incompatible trinity. The real exchange rate between the US and China, based on the price of a Big Mac, is 0.6 dollars per yuan. This indicates that the yuan is undervalued relative to the dollar.

Now the price in China changes to 24 yuan. The nominal exchange rate and the US price do not react. Find the rate of real appreciation of yuan.

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