Question

11. Suppose that apples were the only good produced in the United States and Mexico. In...

11. Suppose that apples were the only good produced in the United States and Mexico. In Mexico, apples sell for 12 pesos apiece. In the Unites states, apples sell for $0.50 apiece.

a. According to the theory of Purchasing Power Parity, what is the equilibrium nominal exchange rate between the U.S. dollar and the Mexican peso? What would the real exchange rate between the U.S. and Mexico in that case?

b. Suppose the price of apples rises at a rate of 3% per year in the U.S., but at a rate of 12% per year in Mexico. According to PPP, by how much should we expect the nominal U.S dollar/Mexican peso exchange rate to change in the course of 1 year (up, or down, and by what %)?

c. Starting at the exchange rate you calculated in (a), and assuming the rates of inflation remain the same as in (b), what nominal exchange rate would you expect in 3 years?

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
3. You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14%....
3. You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14%. The nominal annual interest rate in the U.S. is 3%. You expect that annual inflation will be about 4% in Mexico and 5% in the U.S. The spot rate of the Mexican peso is $.10. Put options on pesos are available with a one-year expiration date, an exercise price of $.108, and a premium of $0.01 per unit. You will receive 12 million pesos...
You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14%. The...
You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14%. The nominal annual interest rate in the U.S. is 3%. You expect that annual inflation will be about 4% in Mexico and 5% in the U.S. The spot rate of the Mexican peso is $.10. Put options on pesos are available with a one-year expiration date, an exercise price of $.105, and a premium of $0.014 per unit. You will receive 1 million pesos in...
Consider a basket of consumer goods that costs $72 in the United States. The same basket...
Consider a basket of consumer goods that costs $72 in the United States. The same basket of goods costs MXN 224 in Mexico. Holding constant the cost of the basket in each country, compute the real exchange rates that would result from the two nominal exchange rates in the following table. Cost of Basket in U.S. Cost of Basket in Mexico Nominal Exchange Rate Real Exchange Rate (Dollars) (Pesos) (Pesos per dollar) (Baskets of Mexican goods per basket of U.S....
Suppose that on January 1 a firm in Mexico borrows $20 million from Citibank (USA) for...
Suppose that on January 1 a firm in Mexico borrows $20 million from Citibank (USA) for one year at 8.00% interest per annum. During the year U.S. inflation is 2.00% and Mexican inflation is 12.00%. The loan was taken when the spot rate was Peso 3.40/US$. At the end of the one year loan period the exchange rate was Peso 5.80/US$. 1. Based on the above information, what is the percent cost to the firm of the loan in Mexican...
2 Suppose you are a U.S. investor who is planning to invest $785,000 in Mexico. Your...
2 Suppose you are a U.S. investor who is planning to invest $785,000 in Mexico. Your Mexican investment gains 10 percent. If the exchange rate moves from 12.2 pesos per dollar to 12.5 pesos per dollar over the period, what is your total return on this investment?
1a. The nominal exchange rate between the United States dollar and the Japanese yen is which...
1a. The nominal exchange rate between the United States dollar and the Japanese yen is which of the following? -The reciprocal of the real exchange rate -The rate at which one of the currencies can be converted into the other currency -Always equal to the real effective exchange rate except when nominal interest rates within the two countries diverge -Always equal to the real effective exchange rate except when real interest rates within the two countries diverge b. If German...
"Suppose Mexico wants to fix its exchange rate relative to the US dollar. Suppose now the...
"Suppose Mexico wants to fix its exchange rate relative to the US dollar. Suppose now the Fed raises interest rates. If initially there is not a response in Mexican interest rates, what will happen initially to the nominal mexican peso (MXN) - dollar (USD) exchange rate?" "US bonds become less attractive, relative to Mexican bonds, therefore there will be an increase in demand for Mexican bonds and Mexican currency. The Mexican Central Bank (Banco de México) will buy USD at...
# exchange rate 1. Suppose the Federal Reserve Board unexpectedly decreases interest rates in the United...
# exchange rate 1. Suppose the Federal Reserve Board unexpectedly decreases interest rates in the United States. How will this action affect the value of the dollar in the international dollar market?(Will the dollar appreciate, depreciate or stay the same?) Graphically show the impact on the international dollar market. Label all curves and axis. 2) Rate Spot. 0.7570 1 month 0.7574 3 months. 0.7570 6 months. 0.7569 1 Year 0.7674 2 years. 0.7611 3 years. 0.7668 4 years. 0.7730 The...
Suppose you are a U.S. investor who is planning to invest $865,000 in Mexico. Your Mexican...
Suppose you are a U.S. investor who is planning to invest $865,000 in Mexico. Your Mexican investment gains 10.8 percent. If the exchange rate moves from 13.0 pesos per dollar to 13.3 pesos per dollar over the period, what is your total return on this investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Consider the following trade situation: The U.S. demand for imports of tomatoes from Mexico is QD...
Consider the following trade situation: The U.S. demand for imports of tomatoes from Mexico is QD = 24 - P The supply of tomatoes to the United States from Mexico is QS = 6 + P The units are million boxes and U.S. dollars per box One U.S. dollar buys 10 Mexican pesos 1. Draw a graph showing clearly the quantity of US imports of tomatoes from Mexico and their price in dollars 2. There is free trade in tomatoes...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT
Active Questions
  • Management claims the mean income for all senior-level assembly line workers at 3M equals $700 a...
    asked 30 minutes ago
  • Frederick Company has two service departments (Cafeteria Services & Maintenance). Frederick has two production departments (Assembly...
    asked 39 minutes ago
  • The number of "destination weddings" has skyrocketed in recent years. For example, many couples are opting...
    asked 44 minutes ago
  • A six-lane multilane highway (three lanes in each direction) has a peak-hour factor of 0.90, 11-ft...
    asked 46 minutes ago
  • In the sum A→+B→=C→, vector A→ has a magnitude of 13.9 m and is angled 37.5°...
    asked 1 hour ago
  • A restaurant association says the typical household spends a mean of ​$3217 per year on food...
    asked 1 hour ago
  • For the following statements, choose between: false dilemma, slippery slope, begs the question, appeals to ignorance,...
    asked 1 hour ago
  • What are the channels of distribution with foreign markets for Indian canned foods or frozen foods?...
    asked 1 hour ago
  • Question is : Sexual harassment is a claim that must be based on sex. 1. What...
    asked 1 hour ago
  • Protein concentration can be estimated by measuring the absorbance of protein-containing solutons using UV light. Give...
    asked 1 hour ago
  • A team of students opened a soda pop can underwater and collected the gas released from...
    asked 1 hour ago
  • Which of the General Principles of the American Psychological Association relates to maximizing the positive outcomes...
    asked 2 hours ago