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15) If the price of a burger is $2.90 Canadian in Toronto and $3 U.S. in New York, and if purchasing power parity holds, then the exchange rate is A) 103 cents U.S. per Canadian dollar. B) $3 U.S. per Canadian dollar. c) $1 U.S. per Canadian dollar. D) 97 cents U.S. per Canadian dollar. E) none of the above.

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7 Dec 2017
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Related questions

Suppose the Canadian and U.S. economies, on a flexible exchange rate, have real growth rates of 2% and a risk premium of 1% (Canada is riskier). The Canadian money growth rate is 10%, the U.S. money growth rate is 7% and the U.S. real interest rate is 3% 1)The Canadian nominal interest rate is: a) 10% or less b) 11% c) 12% d) more than 12% 2)The value of the Canadian dollar is falling each year by: a) less than 2% b) 2% c) 3% d) more than 3% please explain how you got the answer. the answer for both the parts is c)

This morning, the price of an Ikea Stockholm armchair was CAD 600 on Ikea.com/ca (Canadian website), USD 500 on Ikea.com/us (US website), and EUR 350 on Ikea.com/it (Italian website). At the same time, the nominal exchange rates between these currencies were: 1.28 CAD / 1 USD and 0.67 EUR / 1 CAD. Consider again the information for Canada and the U.S. Given the price of an Ikea Stockholm armchair in Canada and the U.S., and the nominal exchange rate 1.28 CAD / 1 USD, which of the following statements about the real exchange rate between the Canadian armchair and the U.S. armchair is correct?

(a) 1.28 Canadian Ikea Stockholm armchairs can be exchanged for 1 U.S. armchair.

(b) 1.25 Canadian Ikea Stockholm armchairs can be exchanged for 1 U.S. armchair.

(c) 1 Canadian Ikea Stockholm armchair can be exchanged for 0.833 U.S. armchairs.

(d) 1 Canadian Ikea Stockholm armchair can be exchanged for 0.9375 U.S. armchairs.

Problem 3

3.1. Suppose quotes for the dollar-euro exchange rate E$=e are as follows: in New York

$1.50 per euro, and in Tokyo $1.55 per euro. Describe how investors use arbitrage to take advantage of the difference in exchange rates. Explain how this process will affect the dollar price of the euro in New York and Tokyo.

3.2. What is covered interest rate parity?

3.3. What is uncovered interest rate parity?

3.4. Consider some good g that sells in the U.S. and Europe. What is the relative price of this good?

3.5. What is the law of one price, and if it holds, what should be true about the relative price of good g in (3.4)?

3.6. Consider a basket of goods in the U.S. and Europe. Given these baskets, determine the real exchange rate.

3.7. What is purchasing power parity, and if it holds, what would be true about the real exchange rate in (3.6)?

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