Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Question
Chapter 13, Problem 8PA
(a)
To determine
The shape of the LM* curve.
(b)
To determine
The effect of the expansionary fiscal policy under floating exchange rate.
(c)
To determine
The effect of the increased risk premium and interest rate on exchange rate, price level, aggregate income in this model and in normal.
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Using data from The Economist's Big Mac index for 2011, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $4.07 in the United States and GBP 2.39 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.63 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows:
NOTE:
here are the options for drop down questions for when u get there
The exchange rate that would have equalized the dollar price of a Big Mac in the United States and Brazil (that is, the PPP exchange rate for Big Macs) is __________ ($0.43 per real OR $1.96 per deal OR $2.33 per real OR $2.63 per real). This change would mean that the dollar had ________ (appreciated OR depreciated) against the real.
Suppose the foreign exchange market is characterized by the following equations:
Qd = 12.5 – 1.25R
Qs = 3.5 + 1.25R
where Qd is the demand function for foreign exchange, Qs is supply function of foreign exchange, and R is exchange rate in units of domestic currency per unit of foreign currency (quantity is in million units of foreign currency).
=====================
The foreign exchange market described above is
Select one:
stable
unstable
unpredictable
none of the above
Using data from The Economist's Big Mac Index for 2011, the following table shows the local currency price of a Big Mac in several countries as well as
the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $4.07 in the
United States and GBP 2.39 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.63 per pound. The
dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows:
S1.63
Dollar price of a Big Mac in the United Kingdom= GBP 2.39 x
GBP 1.0
= $3.90
For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over
for french fries!
Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given.
Note: Round your answers to the nearest cent.
Big Mac Index: July 25, 2011
Local…
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