Jan 29
Name:
1. A basket of consumption commodities in Canada cost C$100 in 1970 in Canada, whereas by
1990 the same had gone to C$392. In the US, the price of an identical basket rose from $100 to
$336. In 1970 the dollar/looney exchange rate was 1, whereas by 1990 the exchange rate was
1.16 C$ per US$. What would it cost a Canadian to buy the US consumption basket in 1990?
What would it cost in US $ to buy Canadian basket.
See the example in the textbook.
2. The price of a tuxedo in Paris is 1000 Euros while in NY it is $900. The exchange rate is 1.14
$/euro. How many NY tuxedos one can buy at the price of one Parisian tuxedo?
1140/900
3. What is the exchange rate implied by the Law of One Price?
0.9$/euro
4. The price of a consumption basket is 110$ in the US and 100 Euros in Germany. If the exchange
rate is 1.14$/euro, what is the US/Germany real exchange rate. By what percentage Euro must
appreciate /depreciate for the purchasing power parity (PPP) to hold?
The real exchange rate is = E$/euro P_Germany/P_US = 1.14*100/110 = 1.14/1.1. Euro
must depreciate from 1.14 $/euro to 1.1$/euro for the PPP to hold. Which means the
rate of dollar depreciation (negative sign would mean appreciation) should be (1.141.1)/1.14 = -0.04/1.14= -3.15%
5. If the US price level rises by 5% in one year while Japanese price level remains the same, what is
the PPP implication for the $/Yen exchange rate? What if the Japanese inflation is 3%?
The rate of dollar/yen exchange rate depreciation = inflation in US – inflation in
Japan. In the first case it is 5%, in the second it is 2%.
6. A Big Mac costs 28 pesos in Argentina – In US the average is 4.7$. The exchange rate is 3.25
peso/$. What should be the exchange rate predicted by PPP?
See the chart given in class.