In Windsor, Ontario, a Big Mac from McDonald's costs C$4.17 (Canadian dollars), and across the border in Detroit it costs $3.56 (US dollars). a. Suppose the nominal US exchange rate with Canada is US$0.74 per Canadian dollar. Does purchasing power parity hold between the two countries? O Yes, it holds because the Canadian Big Mac costs less in terms of U.S. dollars. O No, it does not hold because the Canadian Big Mac costs more in terms of U.S. dollars. O No, it does not hold because the Canadian Big Mac costs less in terms of U.S. dollars. O Yes, it holds because the Canadian Big Mac costs more in terms of U.S. dollars. b. What is the exchange rate for the US if purchasing power parity holds. Instructions: Round your answer to three decimal places. US dollar per Canadian dollar

In Windsor, Ontario, a Big Mac from McDonald's costs C$4.17 (Canadian dollars), and across the border in Detroit it costs $3.56 (US dollars). a. Suppose the nominal US exchange rate with Canada is US$0.74 per Canadian dollar. Does purchasing power parity hold between the two countries? O Yes, it holds because the Canadian Big Mac costs less in terms of U.S. dollars. O No, it does not hold because the Canadian Big Mac costs more in terms of U.S. dollars. O No, it does not hold because the Canadian Big Mac costs less in terms of U.S. dollars. O Yes, it holds because the Canadian Big Mac costs more in terms of U.S. dollars. b. What is the exchange rate for the US if purchasing power parity holds. Instructions: Round your answer to three decimal places. US dollar per Canadian dollar

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: Open-economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 7PA

See similar textbooks

Similar questions

Which of the following statement is incorrect? O Most of the answers are correct. O Diversifying investments across several countries often reduces risk. The absolute purchasing power parity theory posits that exchange rates are determined by the differences in the prices of a given market basket of traded goods and services when there are no trade barriers. O An exchange rate of two currencies found by using a common third currency is known as an interest rate. O Exchange rates can be expressed as the number of units of the domestic currency per one unit of the foreign currency.
On the foreign exchange market, an increase in a country's exchange rate O a. decreases the demand for its currency and shifts the demand curve leftward. O b. decreases the quantity demanded of its currency and leads to a movement up along the demand curve. decreases the demand for its currency and shifts the demand curve rightward. O d. increases the quantity demanded of its currency and leads to a movement down along the demand curve. O . increases the quantity demanded of its currency and leads to a movement up along the demand curve.
Which of the following statements is true of a flexible exchange rate system? O A. Market forces tend to undervalue a currency over time. O B. Market forces tend to push the exchange rate of a currency to market clearing levels over time. Market forces do not affect exchange rates between different currencies. O C. O D. Market forces tend to overvalue a currency over time. If the ratio of the dollar price of a U.S. toy to the dollar price of the same toy sold in China is greater than one, retailers in the United States should O A. should not buy the toys from both Chinese suppliers and U.S. suppliers O B. buy the toys from Chinese suppliers O C. buy the toys from both Chinese suppliers and U.S. suppliers O D. buy the toys from American suppliers Which of the following is likely to be true of the nominal and the real exchange rates in the short run and in the long run if prices in two countries do not respond to exchange rate changes? O A. The real and the nominal exchange rates between…
How will an increase in remittance flows to your country during the Christmas Season affect the market for foreign exchange? Select one: O a. Outward shift of the demand curve, real exchange rate rises and the balance of trade rises O b. Outward shift of the supply curve, real exchange rate falls and the balance of trade falls O c. Inward shift of the supply curve, real exchange rate rises and the balance of trade rises O d. Inward shift of the demand curve, real exchange rate falls and the balance of trade falls е. Inward shift of the demand curve, real exchange rate rises and the balance of trade falls
Purchasing Power Parity (PPP) theory states that Select one: O a the prices of standard commodity baskets in two countries are not related. O b. None of them. O c. as the purchasing power of a currency sharply declines (due to hyperinfiation) that currency will appreciate against stable currencies. O d the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels. 22 As of today, the spot exchange rate is C100 = $1.20, and the rate of infiation expected to prevoil for the next year in the U.S. is 2% and 3% in the eurozone. What is the one-year forward rate that should prevail? Select one: O a cL00 - S1.2379 O b S1.00 = co.8623 O c. S1.00 - €CLI883 O d e100 - S1IBB3
Say that in Miami, in Coral Gables, a big mac cost $4.25 and a large fries cost $2.50. In Japan, the total cost of a big mac and large fries is 81 Yen. The according to purchasing power parity, the exchange rate that equalizes purchasing power of this basket of goods is 8.5 О 12 O 6.5 O 10
What is the exports effect? The exports effect is the result that the lower the exchange rate, other things remaining the same, the O A. higher are the prices of Canadian-produced goods and services to foreigners and the greater is the volume of Canadian imports O B. lower are the prices of foreign-produced goods and services to Canadians and the greater is the volume of Canadian exports O C. higher are the prices of foreign-produced goods and services to Canadians and the greater is the volume of Canadian imports O D. lower are the prices of Canadian-produced goods and services to foreigners and the greater is the volume of Canadian exports Click to select your answer and then click Check Answer. All parts showing Clear All Check Answer P Type here to search 立

Which of the following would increase the current account balance of the United States? O an increase in the amount of money the U.S. government sends in foreign aid to other countries O an increase in imports an increase in the amount of income U.S. companies pay out to foreigners who own investments in the United States. O an increase in net exports
Which is an incorrect statement about the balance of payments accounts? O A. Any transaction involving a flow of funds out of a country is a negative item in the country's balance of payments. B. The balance of payments accounts consist of the current account and the financial account. c. The financial account measures a country's trade in currently produced goods and services. O D. Any transaction involving a flow of funds into a country is a positive item in the country's balance of payments.
How will an increase in remittance flows to your country during the Christmas Season affect the market for foreign exchange? Select one: O a. Inward shift of the demand curve, real exchange rate falls and the balance of trade falls Ob. Outward shift of the demand curve, real exchange rate rises and the balance of trade rises Inward shift of the demand curve, real exchange rate rises and the balance of trade falls Inward shift of the supply curve, real exchange rate rises and the balance of trade rises Outward shift of the supply curve, real exchange rate falls and the balance of trade falls pe here to search. la
The law of demand for foreign exchange tells us that other things remaining the same, Select one: O A. the higher the exchange rate, the greater is the supply of Canadian dollars. O B. the higher the exchange rate, the greater is the demand for Canadian dollars. O C. the lower the exchange rate, the greater is the supply of Canadian dollars. O D. the higher the exchange rate, the greater is the quantity of Canadian dollars demanded. O E. the higher the exchange rate, the smaller is the quantity of Canadian dollars demanded.
Determine which account of the Balance-of-Payments is affected by the following transaction: You travel to the United States for holiday and spend US$500 Select one: O a. Current Account - Imports O b. Capital Account - Portfolio Investment O c Current Account - Exports O d. Capital Account Foreign Direct Investment O e. Current Account- Transfers