Suppose the real exchange rate is 10, the domestic price level is 8, and the foreign price level is 4. (i) What is the nominal exchange rate?Use the expression: ,where ereal is real exchange rate, enor is nominalexchange rate, P is domestic price level and Pfor, is foreign price level (ii) Suppose the real exchange rate rises by 10%, the inflation rate in the domestic country is 6%, and the inflation rate in the foreign country is 4%. By what percentage does the nominal exchange rate change?

Suppose the real exchange rate is 10, the domestic price level is 8, and the foreign price level is 4. (i) What is the nominal exchange rate?Use the expression: ,where ereal is real exchange rate, enor is nominalexchange rate, P is domestic price level and Pfor, is foreign price level (ii) Suppose the real exchange rate rises by 10%, the inflation rate in the domestic country is 6%, and the inflation rate in the foreign country is 4%. By what percentage does the nominal exchange rate change?

Microeconomics

13th Edition

ISBN:9781337617406

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter21: International Finance

Section: Chapter Questions

Problem 3QP

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(b) Suppose the real exchange rate is 10, the domestic price level is 8, and the foreign price level is 4. (i) What is the nominal exchange rate? Use the expression: ereal= enor*P / Pfor where ereal is real exchange rate, enor is nominal exchange rate, P is domestic price level and Pfor is foreign price level. (ii) Suppose the real exchange rate rises by 10%, the inflation rate in the domestic country is 6%, and the inflation rate in the foreign country is 4%. By what percentage does the nominal exchange rate change?
The nominal exchange rate of the Australian dollar is 0.67. The CPI in the US is 300 and the same basket costs 430 in Australia. (a) What can you say about the purchasing power parity holding for Australia? Show calculation. Answer: 0.96 (b) The nominal Australian GDP is $1.5 trillion. Find Australia’s purchasing power parity GDP. Which one is more relevant for most purposes? What is the other one used for? Answer:1.56
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