Question

1. The iPhone Xs is sold at $1000 in the U.S. and $9000 Chinese yuan (CNY) in China. Suppose the nominal exchange rate e=7 CNY/USD, is the iPhone Xs sold more expensive or cheaper in the U.S. than in China? Show work and explain why?

2. The nominal exchange rate between Chinese Yuan and US dollar is e=7 CNY/USD. SUppose the CPI index in China is 110 while the CPI index in the U.S. is 132. What is the real exchange rate of the U.S. dollar?

3. Consider there are 2 countries in the world: US and the rest of the world. The US is a small open economy while the rest of the world is a large economy. What is the endogenous variable for the loanable funds market of the US? What is the endogenous variable for the loanable funds market of the rest of the world? What is the endogenous variable for the market of international dollar?

Answer 1

1.

Price of iPhone in USA ( in USD) = $1000

Price of iPhone in China (in USD) = 9000/7 = $1285.71

On the basis of above calculations, it is observed that iPhone is Cheaper in USA, because consumers have to pay $1000 only, but in china, consumers have to pay $1285.71 for the same iPhone model.

2.

Real exchange rate = (Nominal exchange rate of CNY/Dollar)*(CPI of USA/CPI of China)

Real exchange rate = 7*132/110

Real exchange rate = 8.4 CNY/US dollar

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