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# Chapter 8 Problems Essay

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Ch 8 Problems

3. Suppose that the price level in Canada is CAD16,600, the price level in France is EUR20,750, and the spot exchange rate is EUR1.57/CAD.
b. What is the internal purchasing power of the euro in France? Answer: Performing a similar calculation to the one in part a., we find EUR10,000 = 0.4819 consumption bundles EUR20,750 / consumption bundle
d. Is the Canadian dollar overvalued or undervalued relative to the euro? Answer: Because the actual exchange rate of EUR1.57/CAD is greater than the PPP exchange rate, the Canadian dollar is overvalued on the foreign exchange market because it would have to weaken considerably to move from EUR1.57/CAD to EUR1.25/CAD.
e. What amount of appreciation or depreciation of the Canadian dollar would be required to return the actual exchange rate to its PPP value? Answer: The exchange rate moves from the actual value of EUR1.57/CAD to the PPP value of EUR1.25/CAD for a percentage change of 1.25/1.57 1 = - 0.2038. This is a 20.38% depreciation of the Canadian dollar.
4. Suppose that the rate of inflation in Japan is 2% in 2009. If the rate of inflation in Germany is 5% during 2009, by how much would the yen strengthen relative to the euro if relative purchasing power parity is satisfied during 2009? Answer: The approximately...

• Submitted by: Tresko
• on September 20, 2012
• Length: 790 words
• Views: 495
• Popularity Rank: 214388
• 1 rating(s)

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