The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory. In July 2015, the Economist reported that the average price of a Big Mac in the United States was $4.79
In Mexico, the average price of a Big Mac at that time was 49 pesos. If the exchange rate between the dollar and the peso was 13.60 pesos per dollar, how would purchasing power parity predict the exchange rate will change in the long run? Support your answer graphically.
The dollar in this example is "overvalued" while the peso is "undervalued." The relative price ratio of 49 pesos per Big Mac to $4.79 per Big Mac (10.23 pesos per dollar) is less than the current exchange rate of 13.60 pesos per dollar. In other words, the dollar cost of a Big Mac in Mexico is only $3.60 (49/13.60). This implies that the supply of dollars will rise as more Americans trade their dollars in for pesos to buy Big Macs in Mexico. This increase in the supply of dollars (as shown below) will reduce the exchange rate (lower the value of the dollar), as shown below. (Similarly, the demand for the peso is rising, indicating an increase in the value of the peso.) Adjustments will continue until the exchange rate is equal to 10.23 pesos per dollar.
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If the average cost of the distortion created by taxes is currently $1000, and the tax rate is increased from 40% to 50%, the average cost of the distortion created by taxes will increase to A) $383.33. B) $450.00. C) $640. D) $1562.50.
In the first years of the new nation, American producers
(a) found it difficult to compete with the British in manufactured goods. (b) quickly developed agricultural technology that was more efficient than that in England. (c) did not use British manufacturing technology because England had forbidden the export of its technology. (d) began to specialize in the production of manufacturing goods, selling them to England and Europe.
Suppose that in Brazil total annual output is worth $600 million and people work 30 million hours. In Peru total annual output is worth $800 million and people work 50 million hours. Productivity is higher
a. in Brazil. Most variation in the standard of living across countries is due to differences in productivity. b. in Brazil. Differences in productivity explain very little of the variation in the standard of living across countries. c. in Peru. Most variation in the standard of living across countries is due to differences in productivity. d. in Peru. Differences in productivity explain very little of the variation in the standard of living across countries.
The fair or flat tax suggested to make the income tax system more fair to the citizens would result in
A. decreasing the impact of automatic stabilizers. B. increasing the impact of automatic stabilizers. C. generate a larger revenue to the federal government and decrease deficits. D. not affect the effectiveness of automatic stabilizers.