![]() Purchasing power parity is criticized because it does not account for trade in assets.ġ59.Critics of purchasing power parity argue that:Ī.it does not account for trade in goods.ī.it cannot explain exchange rate changes in the long run.Ĭ.it does not apply when exchange rates are flexible.ĭ.long-run equilibrium exchange rates are never attained.Ĭritics argue that short-run factors overwhelm long-run factors, implying that the long-run equilibrium exchange rate is never attained.ġ60.The actual exchange rate of the real, Brazil's currency, is 2.40 real per U.S. If the exchange rate is 600 baht per Australian dollar, purchasing power parity implies that the:ī.Australian dollar must appreciate to restore purchasing power parity.Ĭ.Australian dollar must depreciate to restore purchasing power parity.ĭ.baht must depreciate to restore purchasing power parity.Ĭonverting 5,400 baht into Australian dollars at an exchange rate of 600 baht per dollar yields 9 Australian dollars, just enough to buy the Australian basket.ġ58.Purchasing power parity is criticized because it:Ĭ.does not apply when exchange rates are flexible.ĭ.uses the wrong basket of goods to compute purchasing power parity exchange rates. If the dollar appreciates to 950 won, however, purchasing power parity will prevail.ġ57.Suppose a given basket of goods and services costs 9 dollars in the Australia and 5,400 baht in Thailand. If the exchange rate is 900 won per dollar, purchasing power parity implies that the:ĭ.won must appreciate to restore purchasing power parity.Ĭonverting 15 dollars into won at an exchange rate of 900 won per dollar yields 13,500, not enough to buy the Korean basket. If the dollar depreciates to 750 won, however, purchasing power parity will prevail.ġ56.Suppose a given basket of goods and services costs 15 dollars in the United States and 14,250 won in Korea. If the exchange rate is 900 won per dollar, purchasing power parity implies that the:Ī.exchange rate has attained its long run equilibrium value.ī.dollar must appreciate to restore purchasing power parity.Ĭ.dollar must depreciate to restore purchasing power parity.ĭ.won must depreciate to restore purchasing power parity.Ĭonverting 4,500 won into dollars at an exchange rate of 900 won per dollar yields 5 dollars, not enough to buy the U.S. Since 29 pesos are equivalent to 2.9 Canadian dollars, this is what the Big Mac should cost in Canada if purchasing power parity holds.ġ55.Suppose a given basket of goods and services costs 6 dollars in the United States and 4,500 won in Korea. According to purchasing power parity, a Canadian Big Mac should cost:Īccording to purchasing power parity, 29 pesos, when converted into Canadian dollars, should buy a Canadian Big Mac. Since a smaller quantity of pesos will buy the same basket of goods in the United States, it must cost fewer pesos to buy a dollar than is consistent with purchasing power parity.ġ54.Suppose a McDonald's Big Mac costs 29 pesos in Mexico and the exchange rate between the peso and the Canadian dollar is 10 pesos per Canadian dollar. If, at the existing exchange rate, it costs less than 60,000 pesos to buy the same basket of goods in the United States, then purchasing power parity implies that the: ![]() Since the same quantity of yen will not buy the same basket of goods in the United States, it must cost more yen to buy a dollar than is consistent with purchasing power parity.ġ53.Suppose 60,000 pesos buys a basket of goods in Mexico. If, at the existing exchange rate, it costs more than 500,000 yen to buy the same basket of goods in the United States, then purchasing power parity implies that the: Since 30 pesos is equivalent to 2 euros, this is what the Big Mac should cost in Europe if purchasing power parity holds.ġ52.Suppose 500,000 yen buys a basket of goods in Japan. According to purchasing power parity, a Big Mac in Europe should cost:Īccording to purchasing power parity, 30 pesos, when converted into euros, should buy a European Big Mac. At the same time, suppose the exchange rate between the peso and the euro is roughly 15 pesos per euro. 151.Suppose a McDonald's Big Mac costs 30 pesos in Argentina.
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