Solution-Long-run exchange rate determination model

Long-run exchange rate determination model

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Reference no: EM133056870

Problem:

Use the below table to answer the following questions:

Country	Exchange rate per dollar	Price in local currency
South Africa (rand)	8	3,500
Brazil (real)	2.2	1,200
India (rupee)	45	18,000
Mexico (peso)	10	6,000

Suppose a computer costs $500 in the United States. Assume Brazil is home. Looking at the actual prices, does the PPP hold between U.S. and Brazil? If PPP were to hold at the nominal exchange rate provided, what would be the price of a computer in Brazil?
Suppose a computer costs $500 in the United States. Assume the U.S. is home. With the price of the computer given in local currency in India, is the Indian rupee overvalued or undervalued? By how much (in percent)?

Country	Exchange Rate	Money Growth	Real Income Growth
United States		4%	2.5%
Mexico	0.25 $/peso	6%	5%
UK	1.5 $/GBP	2%	2%
France	1.2 $/euro	7%	4.5%

Use the table above and the long-run exchange rate determination model.
1. If you were to predict the future $ per euro exchange rate, what would the expected exchange rate be?
2. If the Federal Reserve wants the dollar to depreciate against the euro in the long run, what monetary policy should they implement to ensure that?

Reference no: EM133056870

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Long-run exchange rate determination model

Reference no: EM133056870

Reference no: EM133056870

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