Please ANSWER ALL questions NOT one of them with EXPLANATION: 1. A country whose
ID: 2792389 • Letter: P
Question
Please ANSWER ALL questions NOT one of them with EXPLANATION:
1. A country whose currency would need to appreciate in real terms in order for absolute PPP to hold is likely to have export industries in favorable competitive positions.
A.True
B.False
2. If a good costs $200 in U.S. and the exact same good costs €140 in Europe, what is the implied purchasing power parity value of the U.S dollar?
3. Assume that inflation in U.S. is 8%, and inflation in Mexico is 11%. If the U.S. dollar appreciates 4% nominally against the peso, in real terms the dollar has approximately?
A. Depreciates 1% versus the peso
B. Depreciates 4% versus the peso
C. Appreciates 4% versus the peso
D. Depreciates 7% versus the peso
E. Appreciates 1% versus the peso
3. Last year, the USD depreciated 2% in real terms versus the MXN. Inflation in the US was 2% and inflation in Mexico was 7%. In nominal terms, the USD approximately?
Explanation / Answer
1) True. Export industries typically bring more foreign capital, which help in appreciation of the domestic currency.
2) Implied PPP value of the dollar =140 / 200 = 0.70 euro / dollar
3) Difference in inflation of both countries is 3% with Mexico having higher inflation, which means that the peso should depreciate by 3% in nominal terms. In reality, the dollar appreciated by 4%, i.e. the peso depreciated by 4%. Hence, in real terms the dollar has appreciated by 1% versus the peso.
So, E is correct.
4) Inflation differential between two countries is 5%, so Mexican peso should depreciate by 5% against the dollar for real terms to be zero. However, the MXN appreciated by 2% against the dollar. It means in nominal terms, the USD depreciated by 2% + 5% = 7% against the peso.