Question

1. The concept of Purchasing Power Parity is the result of equalization of _____.

a. price of financial assets

b. price of labor

c. price of goods

d. price of currencies

2. The concept of Interest Rate Parity is the result of equalization of _____.

a. price of financial assets

b. price of labor

c. price of goods

d. price of currencies

3. Which of these are reasons why Interest Rate Parity might not be completely valid in real life? (select one)

a. investor uncertainty

b. import tariffs

c. capital controls

d. international tax differentials

4. Which of these are reasons why Purchasing Power Parity might not be completely valid in real life? (select one)

a. investor uncertainty

b. import tariffs

c. capital controls

d. international tax differentials

5. Suppose that the Home interest rate equals 1.1% and the Foreign interest rate equals 1.2%. How much is the expected Home appreciation? (Round to one decimal place.)

6. Suppose that the Home interest rate equals 2.1% and the Foreign interest rate equals 1.8%. How much is the expected Home appreciation? (Round to one decimal place.)

7. Suppose that the Home interest rate equals 1.5% and the Home currency is expected to appreciate by 1.1%. How much is the Foreign interest rate? (Round to one decimal place.)

8. Suppose that a country's currency is worth 5.1 units of foreign currency today, and is expected to be worth 5.5 units in one year. What is the expected appreciation in this currency? (Percentage points; Round to one decimal place.)

9. Suppose that the Home country's Price level is 122.4 and the Foreign country's Price level is 89.1. Using these numbers, what should the exchange rate (units of Foreign currency per one unit of Home currency) be? (Round to two decimal places.)

10. Suppose that the U.S. dollar is worth 22 Mexican pesos. According to PPP, the dollar "should" be worth 20 pesos. We can then say that the dollar is overvalued.

a. true

b. false

11. Suppose that 1 US dollar equals 1.34 Canadian dollars. How much should a $25 U.S. book cost in Canada?

12. Suppose that 1 USD = 0.78 GBP, P(US) = 102, and P(UK) = 105. How much is the pound per dollar real exchange rate? Round to two decimal places.

Answer 1

Solution:

1. Option - c. is correct which states price of goods.

The Reason:

The concept of purchasing power parity says us that if goods are identical then their price should be the same at all locations i.e. the same price of goods in all countries.

The concept of purchasing power parity is important as if the prices of goods are different in different countries then someone may buy the goods from the cheap market and sell it for a higher price in another country. This is not sustainable.

Therefore, there is an equalization of the price of goods in the concept of purchasing power parity.

Therefore, Option - c. is correct.

Reasons for other incorrect options:

Option - a. is incorrect because purchasing power parity is concerned with prices of goods in different countries and it does have nay concern in the price of financial assets. Therefore, this option is incorrect.

Option - b. is incorrect because purchasing power parity is a concept of equalization of prices of goods and also a difference in labor costs in different countries is not considered in purchasing power parity and due to this difference in labor costs is seen in different countries. Therefore, this option is incorrect.

Option - d. is incorrect because purchasing power parity does not equalize the price of currencies and it is only concerned that the price of goods should remain the same in terms of every currency. Therefore, this option is incorrect.