Reference no: EM1334859

purchasing-power-parity theory of exchange rates

1. "A rise in the dollar price of yen necessarily means a fall in the yen price of dollars." Do you agree? Illustrate and elaborate: "The critical thing about exchange rates is that they provide a direct link between the prices of goods and services produced in all trading nations of the world." Explain the purchasing-power-parity theory of exchange rates.

2. Explain why the U.S. demand for Mexican pesos is downward-sloping and the supply of pesos to Americans is upward-sloping. Assuming a system of flexible exchange rates between Mexico and the United States, indicate whether each of the following would cause the Mexican peso to appreciate or depreciate:
a. The United States unilaterally reduces tariffs on Mexican products.
b. Mexico encounters severe inflation.
c. Deteriorating political relations reduce American tourism in Mexico.
d. The United States' economy moves into a severe recession.
e. The U.S. engages in a high interest rate monetary policy.
f. Mexican products become more fashionable to U.S. consumers.
g. The Mexican government encourages U.S. firms to invest in Mexican oil fields.
h. The rate of productivity growth in the United States diminishes sharply.

3. "The United States can produce product X more efficiently that can Great Britain. Yet we import X from Great Britain." Explain.

4. What is offshoring of white-collar service jobs, and how does it relate to international trade? Why has it recently increased? Why do you think more than half of all of the offshored jobs have gone to India? Give an example (other than that in the textbook) of how offshoring can eliminate some U.S. jobs while creating other U.S. jobs.
Solution Summary

The purchasing-power-parity theory of exchange rates is defined.