Question

(a) Define real exchange rate. (b) If the price levels (indices) in Canada and the U.S....

(a) Define real exchange rate.

(b) If the price levels (indices) in Canada and the U.S. are 125 and 110 respectively, what is the PPP rate for the U.S. dollar? If prevailing spot rate is C$1.20/$, what is the real exchange rate of the U.S. dollar? Which currency is overvalued/undervalued in PPP terms?

Homework Answers

Answer #1

A. Real exchange rate will be the exchange rate after comparing of the level of the consumption and the level of the exchange rate in the two countries. Real exchange rate will be comparing the relative price of two countries consumption basket.

B. PPP rate= (125/110)= 1.25 Canadian Dollar.

Real Exchange rate=( nominal exchange rate*price of foreign basket)/price of domestic basket)

=( 1.20*125/110)

= 1.36

United States dollars is undervalued in Canadian dollar is overvalued in in normal terms.

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
6. Assume that the current dollar-Euro exchange rate (E$/€) is equal to 1.05, the real exchange...
6. Assume that the current dollar-Euro exchange rate (E$/€) is equal to 1.05, the real exchange rate (qus/Eur) = 1.26, the price level equals 1 in the U.S. and 1.2 in Europe. Assume that relative PPP holds. a. If inflation is 4% in the U.S. but 1% in Europe, what will be the price levels in the U.S. and Europe a year from now? b. Given your answer to part a, what will be the nominal exchange rate (E$/€) a...
Suppose the spot exchange rate for the Canadian dollar is Can$1.15 and the six-month forward rate...
Suppose the spot exchange rate for the Canadian dollar is Can$1.15 and the six-month forward rate is Can$1.17. a. Which is worth more, a U.S. dollar or a Canadian dollar? b. Assuming absolute PPP holds, what is the cost in the United States of an Elkhead beer if the price in Canada is Can$3.00? (Round your answer to 3 decimal places, e.g., 32.161.) c. Is the U.S. dollar selling at a premium or a discount relative to the Canadian dollar?...
Suppose the spot exchange rate for the Canadian dollar is Can$1.06 and the six-month forward rate...
Suppose the spot exchange rate for the Canadian dollar is Can$1.06 and the six-month forward rate is Can$1.08. a. Which is worth more, a U.S. dollar or a Canadian dollar? b. Assuming absolute PPP holds, what is the cost in the United States of an Elkhead beer if the price in Canada is Can$2.89? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Is the U.S. dollar selling at a premium or a...
Suppose the spot exchange rate for the Canadian dollar is Can$1.04 and the six-month forward rate...
Suppose the spot exchange rate for the Canadian dollar is Can$1.04 and the six-month forward rate is Can$1.06.    a. Which is worth more, a U.S. dollar or a Canadian dollar?    Canadian dollar U.S. dollar    b. Assuming absolute PPP holds, what is the cost in the United States of an Elkhead beer if the price in Canada is Can$2.69? (Enter your answer as directed, but do not round intermediate calculations. Round your answer to 2 decimal places, e.g.,...
If the spot exchange rate is 0.62 euro per Canadian dollar and the three-month forward rate...
If the spot exchange rate is 0.62 euro per Canadian dollar and the three-month forward rate is 0.60 euro per Canadian dollar, then the ________ on the Canadian dollar in percentage (at an annual rate) is roughly ________. Select one: a. forward premium, 3.226% b. forward premium, 12.90% c. forward discount, 12.90% d. forward discount, 3.226% The 1-year interest rates on Canadian dollar and U.K. pound are 2 % and 5 % respectively. If the current spot rate is 2...
Assume the price of a Big Mac in the U.S. is​ $5.99 and the price in...
Assume the price of a Big Mac in the U.S. is​ $5.99 and the price in Turkey is 29 Turkish Lira​ (TRY). Thus, according to PPP and the Law of One​ Price, at the current exchange rate the TRY​ is: A. undervalued B. Insufficient information to answer this question C. correctly valued D. overvalued
The following is historical data on the U.S. dollar/Brazilian real exchange rate:                             
The following is historical data on the U.S. dollar/Brazilian real exchange rate:                                          date Brazilian reals / U.S. dollar 5/23/2018 3.63 9/13/2018 4.21 Which currency has appreciated over this period? How will this change in the exchange rate alter: U.S. exports to Brazil Brazilian exports to the U.S. The U.S. trade balance The Brazilian trade balance.
1. Suppose the initial Brazilian real to US dollar exchange rate is 4 reals (or “reais”)...
1. Suppose the initial Brazilian real to US dollar exchange rate is 4 reals (or “reais”) to 1 US dollar. The cost to buy a specified market basket of same quality products is $500,000 in the U.S. and R$1,400,000 in Brazil. Valued in U.S. dollar terms, the market basket in Brazil costs $350,000. (This market basket cost represents the combined price of thousands of products, and so also indicates an average price for those products.) (a) Consider the incentives of...
In the US, the price of a Big Mac is $3.5. In China, the price of...
In the US, the price of a Big Mac is $3.5. In China, the price of a Big Mac is ¥12. a. What is the exchange rate of Chinese Yuan under purchasing power parity? b. What is the dollar price of Big Mac in China, if the actual exchange rate is $0.15/¥? c. Is the Chinese Yuan overvalued or undervalued? By how much? d. If China’s GDP in 2018 is ¥80 Trillion, what is its Nominal GDP in USD (use...
If we set the real effective exchange rate index of Australia equal to 100 in 2009,...
If we set the real effective exchange rate index of Australia equal to 100 in 2009, and find that in 2010 the Australian dollar has fallen to a value of 95.5, then from a competitive perspective the Australian dollar is: Select one: a. overvalued. b. very competitive. c. undervalued. d. There is not enough information to answer this question.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT