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Q. Discuss the relationship between PPP and the Law of One Price.
Answer: The law of one price is applies to individual commodities while Purchasing Power Parity applies to the general price level.
Proponents of Purchasing Power Parity argue that its validity in the long run does not require the law of one price to hold exactly. When goods and services provisionally become more expensive in one country than in others the demands for its currency and its products reduce pushing the exchange rate and domestic prices back in line with Purchasing Power Parity and vice versa.
Q. Explain how the money markets of two countries are linked through the foreign exchange market. Answer: The financial policy actions by the Fed affect the U.S. interest rate
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Q. Use the fixed exchange rate DD - AA model to describe the economy's short-run equilibrium. Then, use the same figure to study an expansionary monetary policy. Show that the pol
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