Consider the current peso/dollar exchange rate is 100 pesos per dollar and the current inflation rate in Mexico and the U.S. is 3 percent in each country. Assuming purchasing power parity, what will the exchange rate be if the inflation rate increases to 5 percent in Mexico and falls to 2 percent in the U.S.?
What will be an ideal response?
We can use the percentage change formula. Here the percentage change in the number of pesos per dollar will equal the Mexican inflation rate less the U.S. inflation rate, or 3 percent. If the original exchange rate was 100 pesos per dollar, the new exchange rate will be 3 percent more than this or 103 pesos per dollar.
You might also like to view...
Trade is only beneficial if a nation has an absolute advantage in producing all products
Indicate whether the statement is true or false
When externalities are present in market activity and production occurs at P = MC,
a. the market generates an optimal distribution of resources b. the market does not generate an optimal distribution of resources c. a free-rider condition always raises price d. P = ATC as well e. the firm suffers economic losses
You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you would use on your own car
a. Both examples primarily illustrate adverse selection. b. Both examples primarily illustrate moral hazard. c. The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard. d. The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection.
Giving up consumption today for consumption tomorrow accelerates economic growth by
A) having the economy produce no consumer goods.
B) increasing saving out of disposable income.
C) increasing the expected rate of inflation.
D) rapid expansion of the money supply.