Suppose that beef sells for US$15 per kg in the USA and A$20 per kg in...

Suppose that beef sells for US$15 per kg in the USA and A$20 per kg in Australia. Assume the exchange rate was A$1.2 per US$1

If a lot of people behaved like you and the exchange rate between the US$ and A$ was a flexible rate, what would happen to the exchange rate? What would the equilibrium exchange rate be if the US dollar price and the Australian dollar price for beef stayed the same?

Solutions

Expert Solution

When compared to Australian dollar, it is quite evident that the US dollar is in more demand in the currency market. As the demand is more than the supply, the US dollar is more valuable than the Australian dollar. Hence making the US Currency stronger or increasing the exchange rate from A$1.2 per USD. To give more intuition, consider the real exchange rate of Australian dollar with respect to USD = 1.2*15/20 = 0.9. This gives an idea about the purchasing power.

When the US dollar and Australian dollar for beef remains the same, the exchange rate is 1. This is given by Law of one price. The law of one price is the foundation of purchasing power parity. Purchasing power parity states that the value of two currencies is equal when a basket of identical goods is priced the same in both countries. In our case the basket of identical goods is 1kg of beef. Hence the exchange rate is unity.

Hope this helps. Do hit the thumbs up. Cheers!

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Y enterprises sells is product at Rs. 20 per unit. Variable costs are Pa 15 per...

Y enterprises sells is product at Rs. 20 per unit. Variable costs are Pa 15 per st (2/3 manufacturing and 1/3non manufacturing). Fxed costs are incurred uniformly throughout the year and amount to Rs.750,000 (2/3 mamufacturing and 1/3 non-mammfactaring Required: a) The number of units that must be sold to carn an after-tax income of Ra. 100,000 assume income tax rate of 20%). Prove your answer by prepaning imcome statement to that effect b) Illustrate the role of changes in...

Hill & Scott Company sells a product for $20. Variable costs are $15 per unit, and...

Hill & Scott Company sells a product for $20. Variable costs are $15 per unit, and total fixed costs are $7,000. How many units must be sold by Hill & Scott to earn a profit of $1,000?

The US is Australia’s major export market for beef. Suppose that the mad cow disease hits...

The US is Australia’s major export market for beef. Suppose that the mad cow disease hits the US and causes a shortfall in US beef production. Using a three-panel diagram, explain the effect of the mad cow disease on the US’s and the world’s beef market. (Hint: Consider the US as a large country in this case). (10 pts.)

If the price of bananas rises from 5 SAR per kg to 15 SAR per kg,...

If the price of bananas rises from 5 SAR per kg to 15 SAR per kg, the quantity demanded decreases from 500 boxes to 450 boxes. Calculate the price elasticity of demand over this price range. Is the demand for bananas elastic or inelastic? SOLVE THE QUESTION STEP BY STEP

7) US per capita beef consumption is four times the world’s average. T/F 8) In an...

7) US per capita beef consumption is four times the world’s average. T/F 8) In an “Oligopoly” market structure the demand curve faced by an individual producer is “horizontal. T/F 9) In the US, chicken industry, contracting (between packing plants and farms) represents less than 90% of total plant purchasing of chickens. T/F 10) Currently, the largest importer of US agricultural products is China. 11) The US agricultural Trade balance is negative. T/F 12) Income is a demand shifter. T/F...

The CDC estimates that 20% of people in the US between the ages of 15 and...

The CDC estimates that 20% of people in the US between the ages of 15 and 24 have an STI. Suppose we do a test at a local college campus and find that 11 out of 117 people tested have an STI. Is this random variation or does this school have a lower than average level of infection? What test should we perform and why? What is your null and alternative hypothesis? Perform the test. What is the test statistic...

Schneider's Bakery sells cakes. At a price of $20 per cake, it sells 500 cakes per...

Schneider's Bakery sells cakes. At a price of $20 per cake, it sells 500 cakes per week. At a price of $40, it sells 300 cakes per week. (a) (2.5 points) Find a linear demand function ?(?)D(x) that models this situation. (b) (2.5 points) Find the elasticity of demand. (c) (2.5 points) Find ?(20)E(20) and ?(50)E(50), and explain what these numbers represent. (d) (2.5 points) Using the linear demand function from part (a), find the price ?x that results in...

Question 1 [20 marks] A consumer consumes beef and other goods (beef is a normal good)....

Question 1 [20 marks] A consumer consumes beef and other goods (beef is a normal good). Using the indifference curve analysis draw a graph that clearly show the forces (effects) that determines a consumer final consumption of beef when its price increases, while holding the price of all other goods constant. (20)

Question 1 Topic: Beef Production in the US and Brazil The US and Brazil both produce...

Question 1 Topic: Beef Production in the US and Brazil The US and Brazil both produce beef domestically, and the beef industries in the respective countries may have negative externalities associated with beef production. . List two major negative externalities associated with beef production in the US. List which group or groups in society (can be domestic, international or both) are affected by the externalities and explain the impact 2. List two major negative externalities associated with beef production in...

1. The US and Germany both produces beef and computers. In one day, the US can...

1. The US and Germany both produces beef and computers. In one day, the US can produce either 500 pounds of beef or 200 computers. Germany on the other hand can produce 250 pounds of beef and 500 computers Daily US Productivity Beef (lbs) Computers 500 0 375 50 250 100 125 150 0 200 Daily Germany productivity Beef (lbs) Computers 250 0 200 100 150 200 100 300 50 400 0 500 1a) what is the pre-trade (autarkic) price...

Subjects