Question

True or False:

1) Purchasing-power parity says that the nominal exchange rate must equal the real exchange rate.

2) If prices in Mexico rise at a higher rate than prices in the U.S., then according to purchasing-power parity the U.S. nominal exchange rate with Mexico should rise.

3) If the U.S. real exchange rate with Japan is greater than 1, then U.S. goods are relatively cheap.

Answer 1

1) purchasing power parity says that the nominal exchange rate when accounted to inflation would be equal to real exchange rate and they shouldn't be equal without accounting for inflation and that is the reason why

'​​​​​​'False" is the answer to this question

2) the given statement is false because if prices in Mexico are higher then in terms of dollar/ Peso, the number of pesos you get for Dollar increases as a result of which the exchange rate decreases

Therefore 'False' is the answer to this question

3) the given statement is false and it totally depends on the price levels instance if the real exchange rate is is 440 yen per dollar then what it means is that 440 yen would be the same good as one dollar cancel the inflation in Japan could be less and the exchange rate is greater than one

Therefore 'False' is the answer to this question