Question

10. Given a country whose currency is undervalued as compared to what a Purchasing Power Parity...

10. Given a country whose currency is undervalued as compared to what a Purchasing Power Parity (PPP) relationship indicates, would foreign investment increase or decrease in the country over the long run? Would this bring the currency closer to PPP?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

If the currency is undervalued presently according to the purchasing power parity relationship, then their is an expectation that the currency will appreciate in the future and the foreign investments to the country will rise. It is because due to appreciation of the currency, the net returns to international investors will increase as they convert an investment into their own currency.

For instance, suppose the true value of a currency is 100 per USD

The current value is 120 per USD

If the investor invests 1 USD in the country and gets a return of 10%, his money is worth = (1.1)*120 = 132

But now if the exchange rate has appreciated and the value of the currency is 100 per USD, the investor will get back = 132/100 = 1.32 USD = 32% return

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
What is purchasing power parity? Why would a government want to keep its currency undervalued? What...
What is purchasing power parity? Why would a government want to keep its currency undervalued? What transactions does a central bank need to do to keep its currency undervalued?
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
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.
If we assume that the purchasing power parity theory holds in the long run (as most...
If we assume that the purchasing power parity theory holds in the long run (as most economists do) then an increase in the U.S. relative price level by 5% would lead to which of the following in the long run? a. No change in the amount of goods and services foreign currency could buy in the U.S. b. Appreciation of the U.S. dollar by 5% c. Increase the amount of goods and services foreign currency could buy in the U.S....
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 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
a. Write down the equation for Absolute Purchasing Power Parity b. Consider the information given in...
a. Write down the equation for Absolute Purchasing Power Parity b. Consider the information given in the following Table, and fill in cells (i) – (ix). c. Are the official exchange rates in India undervalued or overvalued? d. Evaluate if real exchange rate has appreciated or depreciated in 2012 and 2015, estimate the rate of such appreciation or depreciation, and indicate them in cells (x)-(xiii). e. What are the nominal exchange rates that would maintain Absolute PPP. Indicate them in...
Question Set 7: Purchasing Power Parity and the Law of One Price The table below contains...
Question Set 7: Purchasing Power Parity and the Law of One Price The table below contains the price of a Big Mac in different countries in the world in January 2017[1]. You will use the information in the table to explain how Big Macs would be traded between countries if Big Macs could be traded among countries. Country Big Mac Price Purchasing Power Parity Exchange Rate Actual Exchange Rate Actual Price in U.S. Dollars United States $5.10 (U.S.) 1.0 U.S....
1(a). (TRUE or FALSE?) The absolute purchasing power parity theory posits that exchange rates are determined...
1(a). (TRUE or FALSE?) The absolute purchasing power parity theory posits that exchange rates are determined by the differences in the prices of a given market basket of traded goods and services when there are no trade barriers. 1(b). (TRUE or FALSE?) In general, the diversification benefits are greater for a portfolio that contains both domestic and foreign securities, rather than domestic securities alone. 1(c). (TRUE or FALSE?) When a country’s currency weakens relative to the currencies of other countries,...
Which of the following prevents the purchasing power parity theorem from holding perfectly? Select one: a....
Which of the following prevents the purchasing power parity theorem from holding perfectly? Select one: a. goods that cannot be shipped b. transportation costs c. transportation costs, goods that cannot be shipped, and tariffs and quotas d. tariffs and quotas An exchange rate depreciation is: Select one: a. an increase in the price of one currency in terms of another currency. b. the rate at which you can exchange the goods and services of one country for the goods and...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT