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Economics
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21 Oct 2020

If a Happy Meal costs $3 in the United States and In Ireland is €4.50. What is the nominal exchange rate as per the PPP? Is it the same as the exchange rate in the market?

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Macroeconomics
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Foreign Exchange
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Darryn D'Souza
Darryn D'SouzaLv10
21 Oct 2020

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Related questions

You are given the following information. The current dollar-pound exchange rate is $2 per pound. A U.S basket that costs $100 would cost $120 in the United Kingdom. For the next year, the Fed is predicted to keep U.S. inflation at 2% and the Bank of England is predicted to keep U.K inflation at 3%. The speed of convergence to absolute PPP is 15% per year.

a What is the expected U.S minus U.K. inflation differential for the coming year?

b What is the current U.S real exchange rate qUS/UK with the United Kingdom?

c How much is the dollar overvalued / undervalued?

d What do you predict the U.S. real exchange rate with the United Kingdom will be in one year's time?

e What is the expected rate of real depreciation for the United States(versus the United Kingdom)?

f What is the expected rate of nominal depreciation for the United States(versus the United Kingdom)?

g What do you predict will be the dollar price of one pound a year from now?

a. According to the purchasing power parity (PPP) condition, what is the relationship between changes in price levels between two countries and changes in their nominal exchange rates?

Assume that American rice sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the nominal exchange rate is 80 yen per dollar.

(a) Explain how you could make a profit from this situation. What would be your profit per bushel of rice? If other people exploit the same opportunity, what would happen to the price of rice in Japan and the price of rice in the United States

(b) Suppose that rice is the only commodity in the world. What would happen to the real exchange rate between the United States and Japan?

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