Question

According to the theory of purchasing power parity, in a country with low inflation, a. nominal...

According to the theory of purchasing power parity, in a country with low inflation,

a. nominal exchange rate will depreciate in response to its relatively low rate of inflation

b. real exchange rate will adjust in response to inflation differentials.

c. nominal exchange rate will adjust in response to inflation differentials so that the value of the real exchange rate is always one.

d. has no effect on the nominal or real exchange rate what so ever.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Nominal Exchange Rate is an amount determined by how much of Currency A that Currency B can buy. Nominal Exchange Rate is the price of a foreign currency in terms of the home currency. The Real Exchange Rate (RER), on the other hand, looks at the purchasing power of one country’s currency based on the purchasing power of another country’s currency. Whereas the nominal rate isn’t adjusted for fluctuations in price levels, the real exchange rate is. A high RER implies that foreign goods are relatively cheap and domestic goods are relatively expensive. Also, currency with the lower inflation rate appreciates on the Forex market.

Answer - B; real exchange rate will adjust in response to inflation differentials.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The important implication of purchasing power parity theory (for our purposes) is in regard to nominal...
The important implication of purchasing power parity theory (for our purposes) is in regard to nominal exchange rates (and changes in these rates). If purchasing power parity theory is true, we can use price differences (or price level differences more broadly) in two countries to make a prediction of what the nominal exchange rate “should be”. If a Big Mac costs 300 yen in Japan and $3.25 in the U.S., what should be the nominal exchange rate of yen per...
Explain why, in order to preserve the purchasing power parity (PPP), a country with a higher...
Explain why, in order to preserve the purchasing power parity (PPP), a country with a higher inflation should have its currency depreciate against currencies of countries with lower inflation, all else equal (including real rates of interest in different countries).
Explain the theory of purchasing power parity. Explain the limitation of purchasing power parity in fully...
Explain the theory of purchasing power parity. Explain the limitation of purchasing power parity in fully explaining exchange rate movements.
Explain why, in order to preserve the purchasing power parity (PPP), a country with a higher...
Explain why, in order to preserve the purchasing power parity (PPP), a country with a higher inflation should have its currency depreciate against currencies of countries with lower inflation, all else equal (including real rates of interest in different countries). 3 sentences
QUESTION 9 If the purchasing power parity predicted nominal exchange rate is greater than actual nominal...
QUESTION 9 If the purchasing power parity predicted nominal exchange rate is greater than actual nominal exchange rate, then a. the real exchange rate is greater than one b. the real exchange rate equals one c. the real exchange rate is less than one d. nothing can be said about the real exchange rate QUESTION 10 If the indirect quote for the Polish zloty versus the U.S. dollar is 4 zloty per 1 dollar, then the direct quote would be...
6) Assume that U.S. and British investors require a real return of 3%. If the nominal...
6) Assume that U.S. and British investors require a real return of 3%. If the nominal U.S. interest rate is 16%, and the nominal British interest rate is 13%, then according to the Real Interest Parity (RIP) as well as the Uncovered Interest Parity (UIP), the British inflation rate is expected to be about _________ the U.S. inflation rate, and the British pound is expected to _________. A. 3 percentage points above; appreciate by about 3% B. 3 percentage points...
Purchasing Parity Expalin purchasing parity. Identify the inflation rate of your home country and some well?known...
Purchasing Parity Expalin purchasing parity. Identify the inflation rate of your home country and some well?known foreign country. Then identify the percentage change of your home currency with respect to that foreign country. Did the currency change in the direction and by the magnitude that you would have expected according to PPP? If not, offer possible reasons for this discrepancy.
Purchasing power parity (PPP) is defined to be: a) The currency exchange rate between Country A...
Purchasing power parity (PPP) is defined to be: a) The currency exchange rate between Country A and Country B b) The price of a basket of goods in a particular country c) The ratio of the price of a basket of goods in Country A to the price of the same basket in Country B d) None of the above
(a) Explain why the theory of purchasing power parity cannot fully explain exchange rate. ( 8...
(a) Explain why the theory of purchasing power parity cannot fully explain exchange rate. ( 8 marks) (b) How do the expected returns on domestic and foreign deposits affect the short-run exchange rate? Explain in terms of interest parity condition (c) How does exchange rate overshooting affect the volatility of exchange rte? ( 5 marks)
Foreign Exchange Markets Multiple-Choice: 1. The theory of purchasing-power parity indicates that if the price level...
Foreign Exchange Markets Multiple-Choice: 1. The theory of purchasing-power parity indicates that if the price level in the United States rises by 5% while the price level in Mexico rises by 6%, then a. the dollar appreciates by 1% relative to the peso. b. the dollar depreciates by 1% relative to the peso. c. the exchange rate between the dollar and the peso remains unchanged. d. the dollar appreciates by 5% relative to the peso. e. the dollar depreciates by...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT